<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 21, 1997
REGISTRATION NO. 333-16499
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 4
TO
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>
<C> <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. [ ]
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.
================================================================================
<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 1,639,836 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) (the "Management
Group"), 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 and the Management Group 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
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 PROXY STATEMENT/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.
ESIF LETTERHEAD
March , 1997
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. For a discussion
of the effects of the Conversion on certain members of ESIF's management, see
the section of the Proxy Statement/Prospectus captioned "THE
OFFERINGS -- Subscription Offering -- Interests of Certain Persons."
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
9:00 a.m. Eastern Time on , March , 1997, at Holiday Inn Lakeside, 910
East Memorial Blvd., Lakeland, Florida. Holders of indemnity agreements issued
by ESIF and in effect on January 31, 1997 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 Series A 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 or if you have
questions about the Series A Preferred Stock or about the Common Stock offered
in the subscription offering hereby.
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
ESIF LETTERHEAD (BOTTOM)
<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 Holiday Inn
Lakeside, 910 East Memorial Blvd., Lakeland, Florida, on , March , 1997,
at 9:00 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 January 31, 1997. "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
March , 1997
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
MARCH , 1997
PROXY STATEMENT
FOR A SPECIAL MEETING OF MEMBERS OF
EMPLOYERS SELF INSURERS FUND
---------------------
PROSPECTUS
RELATED TO 1,639,836 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 to serve as a holding company for the new stock
insurance company, of: (i) 1,639,836 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 currently 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"). The Subscription Offering and the Public Offering 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." Each Eligible Policyholder will receive in exchange for
its membership interests in ESIF ("MEMBERSHIP INTERESTS") the number of shares
of the Series A Preferred Stock indicated on the Policyholder Record Card
furnished to each Eligible Policyholder with this Proxy Statement/Prospectus and
rights to subscribe for shares of the Common Stock in an amount up to the
Purchase Limit as defined below. 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. 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 as set forth below.
"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 January 31, 1997 (the "ELIGIBILITY PERIOD"). 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 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. In accordance
with the Plan of Conversion, each Eligible Policyholder will be issued (a) 10
shares of Series A Preferred Stock, plus (b) an additional number of shares of
Series A Preferred Stock based on the Eligible Policyholder's contribution to
ESIF's
<PAGE> 6
premiums during the Eligibility Period, as defined herein, plus (c) a number of
shares based on the Eligible Policyholder's premium volume and loss experience
during the Eligibility Period. For a more detailed description of the formulae
used for determining the number of shares of Series A Preferred Stock to be
issued to Eligible Policyholders, and an example of how such calculation will be
determined, see "THE CONVERSION -- Consideration -- Allocation of Series A
Preferred Stock."
With respect to the purchase of Common Stock, 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 immediately following 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). Notwithstanding the foregoing, Summit will
permit any "investment company" as defined in Section 3 of the Investment
Company Act of 1940, as amended, and may, in its discretion, permit any other
purchaser in the Offerings, to purchase a number of shares of Common Stock
exceeding the Purchase Limit, subject to each such purchaser obtaining any
required approval of the Florida Department of Insurance (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. See "RISK
FACTORS -- Potential Control by Limited Number of Shareholders; Possible
Depressive Effect on the Price of Summit's Securities." Each purchaser in the
Subscription Offering must subscribe for a minimum of 100 shares of Common
Stock.
The price of the Common Stock in the Subscription Offering (the
"SUBSCRIPTION PRICE") is $11.00 per share, subject to adjustment as described
herein. Summit, in consultation with its financial advisers, and not based on an
appraisal or any other objective factors, has estimated a price range for the
Common Stock of $11.00 to $13.00 per share (the "PRICE RANGE"). The Subscription
Price is the lowest per share price within the Price Range.
If the Public Offering is to be effected, Summit will determine, after
consultation with its financial advisers, the price per share at which the
shares of Common Stock are to be sold to the public (the "PUBLIC OFFERING
PRICE"). If the Public Offering Price is within the Price Range, so that such
price is not less than $11.00 nor more than $13.00, then the effective price per
share paid by subscribers in the Subscription Offering shall be adjusted to the
Public Offering Price. Such adjustment will be effected by reducing the number
of shares of Common Stock that each subscriber will receive relative to the
number of shares that such subscriber would have received based on a
Subscription Price of $11.00. No subscriber will be required to pay any
additional money for its subscription. No fractional shares of Common Stock will
be issued under any circumstances, but in lieu thereof, the value of such
fractional shares will be refunded to subscribers in cash without interest
within 60 days after the Effective Date.
IN THE EVENT THAT THE PUBLIC OFFERING PRICE IS NOT WITHIN THE PRICE RANGE
(EITHER LESS THAN $11.00 OR MORE THAN $13.00), OR IN THE EVENT THAT ALL SHARES
OF COMMON STOCK OFFERED HEREBY ARE NOT SUBSCRIBED FOR AND NO PUBLIC OFFERING IS
EFFECTED, SUMMIT WILL TERMINATE THE SUBSCRIPTION OFFERING, CANCEL ALL
SUBSCRIPTIONS RECEIVED, AND REFUND ALL SUBSCRIPTION MONIES RECEIVED WITH
INTEREST THEREON AT AN ANNUAL SIMPLE INTEREST RATE OF 3.25% (THE "REFUND
INTEREST RATE"). SEE "THE OFFERINGS -- SUBSCRIPTION OFFERING -- SUBSCRIPTION
PRICE."
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. HOWEVER, THE CONVERSION IS CONTINGENT UPON THE RECEIPT BY SUMMIT OF
NET PROCEEDS FROM THE OFFERINGS SUFFICIENT TO CAPITALIZE BRIDGEFIELD IN
ACCORDANCE WITH ALL APPLICABLE REQUIREMENTS OF THE FLORIDA INSURANCE CODE AS OF
THE EFFECTIVE DATE. SUMMIT'S CURRENT ESTIMATE OF THE AMOUNT NECESSARY TO
CAPITALIZE BRIDGEFIELD IS APPROXIMATELY $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.
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
(ii)
<PAGE> 7
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.
THE TERM OF THE SUBSCRIPTION OFFERING WILL RUN FROM THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS THROUGH 5:00 P.M. EASTERN TIME ON MARCH , 1997 (THE
"SUBSCRIPTION EXPIRATION DATE"). ALL SUBSCRIPTION RIGHTS IN THE SUBSCRIPTION
OFFERING ARE NONTRANSFERABLE AND WILL EXPIRE UNLESS THE ACCOMPANYING
SUBSCRIPTION ORDER FORM, TOGETHER WITH FULL PAYMENT AT THE SUBSCRIPTION PRICE,
BY CHECK OR MONEY ORDER MADE PAYABLE TO MELLON BANK, N.A. (THE "ESCROW AGENT"),
IS RECEIVED BY THE ESCROW AGENT, C/O CHASEMELLON SHAREHOLDER SERVICES, L.L.C.,
120 BROADWAY, 13TH FLOOR, NEW YORK, NEW YORK 10271, BY 5:00 P.M., EASTERN TIME,
ON 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 January 31, 1997 (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 9:00 a.m. Eastern Time on ,
March , 1997, at Holiday Inn Lakeside, 910 East Memorial Blvd., 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 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.
A VOTING POLICYHOLDER THAT DID NOT OWN AN IN-FORCE POLICY DURING THE
ELIGIBILITY PERIOD IS NOT AN ELIGIBLE POLICYHOLDER. SUCH A VOTING POLICYHOLDER
WILL NOT RECEIVE ANY SHARES OF SERIES A PREFERRED STOCK OR RIGHTS TO SUBSCRIBE
FOR SHARES OF COMMON STOCK.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 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.
(iii)
<PAGE> 8
<TABLE>
<CAPTION>
=========================================================================================================================
ESTIMATED EXPENSES ESTIMATED NET TOTAL ESTIMATED
COMMON STOCK NUMBER OF SHARES PER SHARE(1) PROCEEDS PER SHARE(2) NET PROCEEDS(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum Price Per Share:
$11.00................... 5,000,000 $1.00 $10.00 $50,000,000
- ------------------------------------------------------------------------------------------------------------------------
Maximum Price Per Share:
$13.00................... 5,000,000 $1.12 $11.88 $59,400,000
========================================================================================================================
</TABLE>
(1) Consists of estimated expenses of ESIF and Summit incurred in connection
with the Conversion, including the Offerings, but does not include expenses
already paid. See "USE OF PROCEEDS."
(2) The Conversion is contingent upon the receipt by Summit of net proceeds from
the Offerings sufficient to capitalize Bridgefield in accordance with all
applicable requirements of the Florida Insurance Code as of the Effective
Date. Summit's current estimate of such amount is approximately
$50,000,000. See "USE OF PROCEEDS."
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 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
COVERAGES 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.
(iv)
<PAGE> 9
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.
(v)
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
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<S> <C>
SUMMARY
The Company............................................... 1
The Conversion............................................ 2
Interests of Certain Persons in the Offerings............. 5
The Offerings............................................. 7
Summary Pro Forma Financial and Other Data................ 10
Summary Historical Financial and Other Data............... 11
RISK FACTORS
Highly Competitive Florida Workers' Compensation Market... 12
Government Regulation..................................... 12
Possible Underfunding of Florida Special Disability Trust
Fund................................................... 13
Competition............................................... 13
Concentration in a Single State........................... 14
Possible Inadequacy of Loss Reserves...................... 14
Renewal Risks; Quarterly Fluctuations in Operating
Results................................................ 14
Possible Inability to Service Debt........................ 15
Need for Capital.......................................... 15
Reliance on Independent Insurance Agencies................ 15
Reliance Upon Key Personnel............................... 16
Dependence Upon Reinsurance............................... 16
Absence of Prior Market................................... 16
Shares Eligible for Future Sale; Possible Volatility of
Stock Price............................................ 17
Effect of Partial Subscription for Common Stock;
Withdrawal............................................. 18
Dilution.................................................. 18
Obstacles to Changes in Control; Certain Anti-Takeover
Effects................................................ 18
Benefits of Conversion to an Officer and Director......... 19
Potential Control by Limited Number of Shareholders;
Possible Depressive
Effect on the Price of Summit's Securities............. 19
Director and Officer Indemnification and Exculpation...... 19
Effect of Holding Company Structure; Dividends............ 19
THE COMPANY................................................. 20
THE SPECIAL MEETING
General................................................... 21
Voting Rights and Vote Required for Approval.............. 22
Proxies................................................... 22
THE CONVERSION
General................................................... 23
Reasons for the Conversion................................ 23
Determination of Conversion Terms......................... 25
Conditions to Effectiveness............................... 25
Identification of Eligible and Voting Policyholders....... 26
Extinguishment of Membership Interests.................... 26
Consideration............................................. 27
Amendments to or Withdrawal of the Plan of Conversion;
Effects of Failure to Consummate....................... 30
Interpretation of the Plan of Conversion.................. 30
Fairness Opinion.......................................... 30
</TABLE>
(vi)
<PAGE> 11
<TABLE>
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<S> <C>
THE OFFERINGS
Subscription Offering..................................... 32
Public Offering........................................... 36
MARKET FOR STOCK
Series A Preferred Stock.................................. 37
Common Stock.............................................. 37
DIVIDEND POLICY
Series A Preferred Stock.................................. 37
Common Stock.............................................. 37
USE OF PROCEEDS............................................. 38
CAPITALIZATION.............................................. 38
SELECTED FINANCIAL DATA..................................... 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview.................................................. 49
Results of Operations..................................... 50
Liquidity and Capital Resources........................... 57
Losses and Loss Adjustment Expenses....................... 58
BUSINESS
Overview.................................................. 64
Industry.................................................. 64
Strategy.................................................. 65
Managed Care.............................................. 65
Products and Services..................................... 66
Reinsurance............................................... 70
Investment Portfolio...................................... 71
Competition............................................... 72
A.M. Best Rating.......................................... 73
Regulation................................................ 73
Disposal of Business...................................... 76
Information Technology Systems............................ 76
Employees................................................. 77
Properties................................................ 77
Legal Proceedings......................................... 77
MANAGEMENT OF THE COMPANY
General................................................... 78
Compensation Committee Interlocks and Insider
Participation.......................................... 80
Executive Compensation.................................... 81
Employment Agreements..................................... 81
401(k) Plan............................................... 82
Incentive Plan............................................ 82
CERTAIN TRANSACTIONS........................................ 84
PRINCIPAL SHAREHOLDERS...................................... 85
DESCRIPTION OF CAPITAL STOCK
Preferred Stock........................................... 86
Common Stock.............................................. 87
Other Characteristics of Capital Stock.................... 87
Anti-Takeover Provisions.................................. 87
Transfer Agent............................................ 89
</TABLE>
(vii)
<PAGE> 12
<TABLE>
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General Discussion........................................ 89
Taxpayer Identification Number............................ 90
Ordinary Income and Capital Gains Tax Rate Differential... 90
SHARES ELIGIBLE FOR FUTURE SALE............................. 91
LEGAL MATTERS............................................... 92
EXPERTS..................................................... 92
CHANGE IN ACCOUNTANTS....................................... 92
ADDITIONAL INFORMATION...................................... 92
INDEX TO FINANCIAL STATEMENTS............................... F-1
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 TAXPAYER
IDENTIFICATION CARD.................................... G-1
</TABLE>
(viii)
<PAGE> 13
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 a newly formed holding company, 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 December 31, 1996, the
Company's insurance products and administrative services are provided to
approximately 15,800 employers representing approximately $217.4 million in
premiums, including approximately $101.0 million in premiums attributable to the
Funds and $116.4 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. Following the Conversion, the Company will be able to
offer both self-insurance and traditional indemnity products, which will improve
its ability to serve its markets. In addition, as a stock corporation, the
Company may have access to additional capital to finance growth by acquisition
and to expand into other geographic markets (subject to any necessary regulatory
approvals). 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
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<PAGE> 14
results; (iii) proactive implementation of managed care; (iv) leveraging of
administrative services capabilities; and (v) emphasis on excellent customer
service. See "BUSINESS -- Strategy."
The Company's business was started in 1977, when Summit Consulting, Inc.
("SCI") was formed to establish and administer workers' compensation
self-insurance programs for group self-insurance funds that are sponsored and
formed by trade associations. The Company's primary Insurance Subsidiary, ESIF
(which pursuant to the Conversion will become Bridgefield), was formed in 1978
as a group self-insurance fund under Florida law and SCI became its
administrator at that time. Between 1979 and 1982, SCI assisted with the
formation of, and became the administrator of, three of the Funds, located in
Florida and Louisiana, and in 1995, SCI became the administrator of the fourth
Fund, located in Kentucky. See "BUSINESS -- Products and Services." None of the
Funds are related to the Company, except that certain of the directors of Summit
are trustees of certain of the Funds, as described in "MANAGEMENT OF THE
COMPANY -- Compensation Committee Interlocks and Insider Participation" and
"CERTAIN TRANSACTIONS." Until January 16, 1996, ESIF was also unrelated to SCI.
Effective on that date, ESIF acquired SCI, its holding company, Summit Holding
Corporation ("SHC"), and all of their affiliates (the "ACQUISITION"). Pursuant
to the Conversion, Summit will become a holding company for ESIF (which will be
Bridgefield after the Conversion) and the other Company subsidiaries. Summit is
a Florida corporation formed in November 1996 solely for this purpose at the
direction of the ESIF Board of Trustees. Prior to the Conversion, Summit has not
commenced operations and has nominal assets and no liabilities. See "THE
COMPANY."
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. See "THE
CONVERSION -- Reasons for the Conversion."
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, the right to receive any dividends
declared by the ESIF Board 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
2
<PAGE> 15
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."
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 insurance 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)
in order to avoid the expense and inconvenience of issuing shares of the new
stock insurance company to Policyholders, which shares would then be exchanged
for Summit's Series A Preferred Stock in the transaction described below, an
exchange mechanism will be employed to evidence that the Policyholders are
entitled to receive shares of the new stock insurance company but will receive
in lieu thereof shares of Summit's Series A Preferred Stock; (v) 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 (vi) 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 , 1997,
ESIF filed the amended 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 from The Chicago Corporation, which as
of January 2, 1997 was merged with ABN AMRO Securities (USA), Inc. to form ABN
AMRO 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.
(updated by an opinion dated January 23, 1997) 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. The Company has also
retained Chicago Corp. as an underwriter and sales agent in connection with the
Offerings. The Company does not believe that Chicago Corp.'s engagement to
render the fairness opinion, and its engagement as an underwriter and sales
agent subsequent to the initial delivery of the fairness opinion, raises any
potential conflict of interest. See "THE CONVERSION -- Fairness Opinion."
Special Meeting of Members. The Special Meeting will be held at Holiday
Inn Lakeside, 910 East Memorial Blvd., Lakeland, Florida, at 9:00 a.m. on
March , 1997, for the purpose of considering and voting upon a
proposal to approve the Plan of Conversion and the transactions contemplated
3
<PAGE> 16
thereby, including the adoption and approval of the Articles and 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 POLICYHOLDER" generally means a
person whose name appears on ESIF's records as of January 31, 1997 (the "RECORD
DATE") 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.
(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.
Currently, the Company estimates that it must receive net proceeds from the
offerings of at least $50.0 million in order for Bridgefield to satisfy the
minimum surplus requirement under the Florida Insurance Code.
(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").
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 in ESIF. Pursuant to the Conversion, each
member of ESIF will retain all ownership rights and coverage with respect to its
In-Force Policy, but will automatically relinquish its Membership Interests,
including the right to vote for the election of trustees, the right to receive
any dividends that may be declared by the ESIF Board of Trustees, and the right
to participate in any distribution of the surplus of ESIF in the event of its
liquidation. Following the Conversion, Summit, as the holder of 100% of
Bridgefield's common stock, will be the only person entitled to vote for
Bridgefield's directors and to receive a distribution of assets upon any
liquidation of Bridgefield. The holders of the Common Stock of Summit,
including, without limitation, any Eligible Policyholders who purchase shares in
the Subscription Offering, will be entitled to vote for the election of Summit's
directors and to share in any distribution of assets in the event of a
liquidation of Summit.
Certain Federal Income Tax Consequences. It is intended that the
Conversion, the Subscription Offering and the Public 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 an
assessable
4
<PAGE> 17
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 of
cash for Common Stock, are intended to be treated as 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 LLP, 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 and the Public Offering 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 Taxpayer
Identification 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 shows the number of
shares of Series A Preferred Stock that such Eligible Policyholder will receive
if the Plan of Conversion becomes effective; (ii) a Subscription Order Form for
the Eligible Policyholder's use in subscribing for shares of Common Stock; and
(iii) a Taxpayer Identification 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 shows the number of In-Force Policies held by the Voting
Policyholder on the Record Date (and, therefore, the number of votes that such
Voting Policyholder is entitled to cast). This Proxy Card allows such Voting
Policyholder to cast its vote(s) on the Plan of Conversion without attending the
Special Meeting. The Board of Trustees urges each Voting Policyholder to mark,
sign, date and return its Proxy Card as soon as possible, so that it will be
received by ESIF no later than 5:00 p.m. Eastern Time on ,
1997, to ensure that its vote will be counted, even if such Voting Policyholder
is not eligible to or 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. The Board of Trustees of ESIF determined subjectively
that it would be appropriate and in the best interests of the shareholders of
the Company to make such shares of Common Stock available to the Management
Group to enhance the Management Group's commitment to the Company, provide
incentive to the Management Group and encourage management continuity. No
additional consideration or contributions were provided by the Management Group
in exchange for the right to purchase
5
<PAGE> 18
such shares. 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, subject to the same adjustment to the number of shares
purchased in the event the Public Offering Price or Revised Subscription Price
is higher but within the Price Range. It is expected that the Management Group
will purchase at least 241,000 shares (approximately $2.6 million aggregate
subscription amount). See "THE OFFERINGS -- Subscription Offering" and
"PRINCIPAL SHAREHOLDERS."
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.
In connection with the Acquisition, the Florida DOI issued a consent order
(the "JANUARY CONSENT ORDER") requiring that William B. Bull, who currently is
the President, Chief Executive Officer and a director of the Company and at that
time was a principal shareholder as well as President and Chief Executive
Officer of SHC, personally indemnify ESIF up to a maximum of $5.0 million for
certain loss, injury or damage (if any) to ESIF that may result from the
Acquisition. Pursuant to the Order issued by the Florida DOI, Mr. Bull may be
relieved of such personal indemnification obligations if the Conversion becomes
effective; conversely, 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."
6
<PAGE> 19
THE OFFERINGS
<TABLE>
<S> <C>
Series A Preferred Stock Offered by Summit........... 1,639,836 shares
Common Stock Offered by Summit....................... 5,000,000 shares
Series A Preferred Stock to be Outstanding After the
Effective Date..................................... 1,639,836 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 Eligible 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, 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, which is the current estimate of the
amount necessary to capitalize Bridgefield. 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 cumulate 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 cumulated 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 cumulated but unpaid dividends on the
Series A Preferred Stock. See "DIVIDEND POLICY --
Common Stock."
7
<PAGE> 20
Subscription Price......... $11.00 per share of Common Stock, subject to
adjustment as described herein. If the Public
Offering Price is higher than the Subscription
Price but not more than $13.00 so that it is
within the Price Range, the effective price per
share of Common Stock in the Subscription
Offering will be adjusted to the Public Offering
Price by decreasing the number of shares to be
issued in exchange for full payment at the
Subscription Price. In such event, the number of
shares to be issued will be determined by
dividing the full payment at the Subscription
Price by the Public Offering Price. No fractional
shares will be issued and instead cash will be
refunded (without interest) in an amount equal to
the value of any fractional share owed to a
subscriber.
If the Public Offering Price is less than $11.00 or
more than $13.00, the Subscription Offering will
be terminated, all subscriptions received will be
canceled, and all subscription monies received
will be refunded with interest thereon at the
Refund Interest Rate. 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
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; provided,
however, that Summit will permit certain
institutional investors, and may permit other
purchasers, to purchase more than such number of
shares, subject to any such purchaser obtaining
any required approval of the Florida DOI.
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. Notwithstanding the
foregoing, Summit has agreed that any "investment
company," as defined in Section 3 of the
Investment Company Act of 1940, as amended, may
purchase up to 10% of the Post Offering
Outstanding Shares, subject to such investor
obtaining any required approval of the Florida
DOI. With respect to all other purchasers, Summit
will have complete discretion to approve or
reject any request to exceed the Purchase Limit.
Any such approval by Summit will be made prior to
the Effective Date and will be subject to any
approval required by the Florida DOI. As a
result, a single shareholder or group of
shareholders could acquire a sufficient number of
shares of Common Stock to
8
<PAGE> 21
control election of Summit's Board of Directors.
Except to the extent required by the Florida DOI,
Summit will not be obligated to notify any
subscriber of the waiver of the Purchase Limit
for any purchaser. 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 Limited Number of
Shareholders; Possible Depressive Effect on the
Price of the Company's Securities" and "THE
OFFERINGS -- Subscription Offering -- Limitations
on Common Stock Purchases."
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
Mellon Bank, N.A. c/o ChaseMellon Shareholder
Services, L.L.C. not later than 5:00 p.m. Eastern
Time on March , 1997. Payment for the shares
may be made only by check or money order in
United States dollars made payable to Mellon
Bank, N.A. 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
(March , 1997) 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 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 $50,000,000; 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."
Subscription and Transfer
Agent.................... ChaseMellon Shareholder Services, L.L.C., New York,
New York. See "THE OFFERINGS -- Subscription
Offering -- Payment for Shares" and "DESCRIPTION
OF CAPITAL STOCK -- Transfer Agent."
Escrow Agent............... Mellon Bank, N.A.
9
<PAGE> 22
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 year ended March 31, 1996 reflect the Acquisition and
Conversion as if they had been completed as of April 1, 1995. The pro forma
Statement of Income data for the nine-month period ended December 31, 1995
reflects 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 nine-month period
ended December 31, 1996 reflects the Conversion as if it had occurred on April
1, 1996. The pro forma Balance Sheet data at December 31, 1996 reflects the
Conversion as if it had been completed as of December 31, 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>
ASSUMING CONVERSION AND
ISSUANCE OF 5,000,000 SHARES
OF COMMON STOCK AT $11.00 PER SHARE
--------------------------------------------
YEAR NINE MONTHS ENDED
ENDED DECEMBER 31, 1996
MARCH 31, ---------------------------
1996 1995(7) 1996(7)
--------- ---------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Statement of Income Data:
Total revenue............................................. $ 169,174 $ 130,757 $ 110,697
Losses and loss adjustment expenses....................... 94,844 67,043 50,236
Other underwriting, general and administrative expenses... 63,008 46,725 45,162
Total losses and operating expenses....................... 157,852 113,768 95,398
Interest expense.......................................... 3,978 3,017 2,719
Amortization and depreciation............................. 5,340 4,074 3,704
Net income before taxes................................... 2,004 9,898 8,876
Net income................................................ 1,696 6,651 5,620
Preferred dividends....................................... 656 492 492
Net income available to common shareholders............... $ 1,040 $ 6,159 $ 5,128
========= ========== =========
Net income per common share............................... $ 0.21 $ 1.23 $ 1.03
========= ========== =========
Weighted average common shares outstanding................ 5,000,000 5,000,000 5,000,000
========= ========== =========
Other Data(1):
Insurance Subsidiaries:
Net loss ratio(2)....................................... 82.5% 74.7% 67.4%
Expense ratio(3)........................................ 34.1% 31.8% 33.4%
Combined ratio(4)....................................... 116.6% 106.5% 100.8%
Administrative Subsidiaries:
EBITDA(5)............................................... $ 11,804 10,005 6,204
Coverage Ratio(6):
Ratio of earnings to fixed charges and preferred stock
dividends............................................... 1.17 3.20 3.12
</TABLE>
<TABLE>
<CAPTION>
ASSUMING CONVERSION AND
ISSUANCE OF 5,000,000 SHARES
OF COMMON STOCK AT $11.00 PER SHARE
------------------------------------
AS OF DECEMBER 31, 1996
------------------------------------
(IN THOUSANDS)
<S> <C>
Balance Sheet Data:
Cash and invested assets.................................. $275,319
Total assets.............................................. 526,972
Loss and loss adjustment expenses......................... 376,923
Debt...................................................... 33,000
Total shareholders' equity................................ 77,378
</TABLE>
- ---------------
(1) Excludes inter-company eliminations.
(2) Net loss ratio is the ratio of losses and loss adjustment expenses incurred
to premiums earned.
(3) Expense ratio is the ratio of underwriting, general and administrative
expenses to premiums earned.
(4) Combined ratio is the sum of the net loss ratio and the expense ratio.
(5) EBITDA represents earnings before interest, income taxes, depreciation and
amortization.
(6) Preferred stock dividend amounts included in the calculation of this ratio
represent the pre-tax earnings amounts necessary to cover the dividends.
(7) The pro forma Statement of Income data does not include investment earnings
on the net Offering proceeds of the issuance of 5,000,000 shares of Common
Stock. Assuming that $50.0 million of net Offering proceeds (the minimum
amount to be received in the Offerings) were invested in 180-day U.S.
Treasury Bills, the pro forma amounts would be as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
YEAR ENDED --------------------
MARCH 31, 1996 1995 1996
-------------- ------- -------
<S> <C> <C> <C>
Net income before taxes..................................... $4,929 $12,066 $10,861
Net income.................................................. $3,520 $ 8,004 $ 6,857
Net income available for common shareholders................ $2,864 $ 7,512 $ 6,365
Net income per common share................................. $ 0.57 $ 1.50 $ 1.27
</TABLE>
10
<PAGE> 23
SUMMARY HISTORICAL FINANCIAL AND OTHER DATA
The following summary 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
ended March 31, 1996 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. ESIF's consolidated financial
statements as of December 31, 1995 and 1996 and for the nine months ended
December 31, 1995 and 1996, as well as the summary financial data provided as of
and for the fiscal years ended March 31, 1992 and 1993, 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. The summary historical financial data
includes the operations of SHC from January 16, 1996, the effective date of the
Acquisition.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
---------------------------------------------------------- -------------------------
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 $103,086 $110,811
Losses and loss adjustment expenses.... 103,657 149,177 108,411 69,116 94,844 67,043 50,236
Other underwriting, general and
administrative expenses.............. 32,787 40,145 37,121 41,546 43,657 28,548 45,837
Interest expense....................... -- -- -- -- 847 -- 2,719
Amortization and depreciation.......... -- -- -- -- 1,103 -- 3,729
Income (loss) from continuing
operations before income taxes....... 7,306 2,745 13,419 30,153 (123) 7,495 8,290
Loss from discontinued operations...... -- -- -- -- (197) -- (1,250)
Net income............................. $ 6,844 $ 2,953 $ 8,885 $ 19,163 $ 185 $ 5,172 $ 3,198
======== ======== ======== ======== ======== ======== ========
Other Data(1):
Net loss ratio(2)...................... 78.5% 82.3% 73.0% 53.8% 82.5% 74.7% 67.4%
Expense ratio(3)....................... 24.8% 22.1% 25.0% 32.3% 34.1% 32.3% 33.4%
Combined ratio(4)...................... 103.3% 104.4% 98.0% 86.1% 116.6% 107.3% 100.8%
Coverage Ratio:
Ratio of earnings to fixed charges and
preferred stock dividends
Historic(5)(6)....................... 0.87 -- 3.75
Pro forma(7)(8)...................... .41 9.45 10.42
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31, DECEMBER 31,
---------------------------------------------------------- -------------------------
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 $236,421 $225,319
Total assets........................... 307,345 373,069 405,765 425,206 491,844 437,932 476,972
Loss and loss adjustment expenses...... 304,205 360,425 368,000 367,391 387,632 372,786 376,923
Debt................................... -- -- -- -- 44,000 -- 33,000
Total equity (deficit)................. (9,458) (6,485) 2,480 20,065 23,154 31,238 27,378
</TABLE>
- ---------------
(1) Ratios for Insurance Subsidiaries.
(2) Net loss ratio is the ratio of losses and loss adjustment expenses incurred
to premiums earned.
(3) Expense ratio is the ratio of underwriting, general and administrative
expenses to premiums earned.
(4) Combined ratio is the sum of the net loss ratio and the expense ratio.
(5) ESIF had no fixed charges or preferred stock dividends prior to the year
ended March 31, 1996.
(6) For the year ended March 31, 1996, the Company's earnings were insufficient
to cover fixed charges by $123,000.
(7) The pro forma ratio of earnings to fixed charges and preferred stock
dividends only gives pro forma effect to preferred stock dividends. Such
preferred stock dividend amounts represent the pre-tax earnings necessary to
cover the dividend amounts.
(8) For the year ended March 31, 1996, the Company's earnings were insufficient
to cover fixed charges and pro forma preferred stock dividends by $1,181,000
after giving pro forma effect only to preferred stock dividends.
11
<PAGE> 24
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.
HIGHLY COMPETITIVE 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. In particular, decreases in Florida workers' compensation
rates, such as the 11.2% premium rate reduction effective January 1, 1997, could
have a material adverse effect upon the Company. 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."
12
<PAGE> 25
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.
POSSIBLE UNDERFUNDING OF 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 $4.5
million, $5.7 million and $5.6 million, respectively, and paid assessments of
$5.5 million, $4.7 million and $5.6 million, respectively. In addition, the
Company's consolidated balance sheet as of December 31, 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. If the SDTF is discontinued, the Company believes that the
existing reimbursement obligations of the SDTF would become general obligations
of the State of Florida although there is no assurance that a reviewing court
would adopt that view. The SDTF has made no acknowledgment with regard to the
enforceability of its reimbursement obligations to insurers such as the Company.
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
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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.
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.
POSSIBLE INADEQUACY 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. As
discussed in "MANAGEMENT'S DISCUSSION AND ANALYSIS -- Losses and Loss Adjustment
Expense," the Company has experienced considerable reserve deficiencies in years
prior to 1993 and has adjusted its reserves in response to development trends.
There can be no assurance that there will not be deficiencies or adjustments in
the future, resulting from numerous factors including, for example, any
instability in the regulatory environment and loss data inadequacies.
Among other risks relating to loss reserves is the possibility that the
Company may under-accrue for refunds relating to retrospective policies in the
event that a substantial number of the Company's insureds have less than
expected losses during a claims period. Throughout the fiscal years ended March
31, 1994, 1995 and 1996, and the nine months ended December 31, 1996, the
Company established and maintained gross aggregate accruals for retrospective
refunds in amounts of $6.4 million, $9.2 million, $10.6 million and $10.4
million, respectively. Between March 31, 1994 and December 31, 1996, the Company
paid an aggregate of $0.9 million in excess of these refund accruals. 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
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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."
POSSIBLE INABILITY TO SERVICE DEBT
In connection with the Acquisition, SHC borrowed $44.0 million from First
Union National Bank of North Carolina and certain other participating banks
(collectively, the "BANK"), with $36.0 million pursuant to a term loan and $8.0
million pursuant to a revolving line of credit. The outstanding principal
balance of such debt at December 31, 1996 was $33.0 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
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"). The Company has executed a new credit agreement with the Bank
pursuant to which, upon consummation of the Conversion, the existing debt will
be restructured. Under such new credit facility, as of the Effective Date the
term loan will be $33.0 million and the revolving line of credit will be $5.0
million, and the interest rate will be prime plus 1%. The annual principal
payments (which are payable in quarterly installments) will be $2.3 million,
$5.0 million, $5.6 million, $7.6 million, $9.1 million and $3.4 million in each
of calendar years 1997, 1998, 1999, 2000, 2001 and 2002, respectively.
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, and the Company will not
be able to complete the Conversion without the receipt of net proceeds from the
offerings of a minimum of approximately $50.0 million. 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 December 31, 1996, ESIF's
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top ten independent agencies accounted for approximately 21% 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
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
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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 approximately 241,000 shares of Common
Stock (4.8% of the Post Offering Outstanding Shares) and 500 shares of Series A
Preferred Stock, equal to less than 0.1% of the Preferred Stock to be
outstanding after the Effective Date, 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." Shares
beneficially owned by affiliates of Summit 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. Because there is expected to be no public
trading market for the Series A Preferred Stock, affiliates of Summit who desire
to sell shares of Series A Preferred Stock must do so in reliance upon an
exemption from registration other than Rule 144 or in compliance with the
registration requirements of the Securities Act. Additionally, all shares of
Common Stock 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 stock,
or the perception that such sales could occur, could adversely affect prevailing
market prices for the stock and could impair the Company's future ability to
obtain capital through an offering of equity securities. See "SHARES ELIGIBLE
FOR FUTURE SALE."
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
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companies but which are unrelated to the operating performance of such
companies. See "-- Renewal Risks; Quarterly Fluctuations in Operating Results."
EFFECT OF PARTIAL SUBSCRIPTION FOR COMMON STOCK; WITHDRAWAL
Following a partial subscription for Common Stock in the Subscription
Offering, 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; provided, however, the Conversion is contingent upon the
receipt by Summit of net proceeds from the Offerings of a minimum of
approximately $50.0 million, which is the current estimate of the amount
necessary to capitalize Bridgefield. 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. 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.
DILUTION
As of December 31, 1996 on a historical basis, ESIF had a net tangible
deficit of approximately $26.1 million. As of December 31, 1996 on a pro forma
basis, after giving effect to the Conversion and the Offerings, and assuming
that 5,000,000 shares of Common Stock are sold in the Offerings at the
Subscription Price of $11.00 per share, the Company's net tangible book value
would be approximately $23.9 million, which includes approximately $16.4 million
from the Series A Preferred Stock, resulting in net tangible book value of $1.50
per share of Common Stock. Both the historical and pro forma net tangible book
value amounts include a deferred tax asset of approximately $15.7 million as
discussed in note 7 to the financial statements included elsewhere in this Proxy
Statement/Prospectus. Based upon such pro forma net tangible book value amount,
purchasers of Common Stock in the Offerings will experience immediate and
substantial dilution, equal to the difference between the effective purchase
price paid for such stock and $1.50. Thus, if the effective purchase price of a
share of Common Stock in the Offerings is the Subscription Price of $11.00, the
immediate dilution in net tangible asset value will be $9.50 per share. See
"SELECTED FINANCIAL DATA" and the financial statements and notes thereto
presented elsewhere in this Proxy Statement/Prospectus.
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 1,639,836 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."
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BENEFITS OF CONVERSION TO AN OFFICER AND DIRECTOR
In connection with the Acquisition, the Florida DOI issued the January
Consent Order requiring that Mr. Bull, who at that time was a principal
shareholder as well as President and Chief Executive Officer of SHC, personally
indemnify ESIF up to a maximum of $5.0 million for certain loss, injury or
damage to ESIF that may result from the Acquisition. Pursuant to the Order
issued by the Florida DOI, Mr. Bull may be relieved of such personal
indemnification obligations if the Conversion becomes effective; conversely, 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 LIMITED NUMBER OF SHAREHOLDERS; POSSIBLE DEPRESSIVE EFFECT
ON THE PRICE OF SUMMIT'S SECURITIES
The sale of blocks of shares of Common Stock in excess of the Purchase
Limit to one or a small number of purchasers in the Public Offering could vest
effective control of the Company in such single purchaser or small number of
purchasers 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. In addition, the Company has agreed
that certain institutional investors may purchase up to 10% of the Post Offering
Outstanding Shares, subject to any required approval of the Florida DOI. The
Company has complete discretion with respect to all other purchasers; therefore,
all subscribers who request to exceed the Purchase Limit may not have that
opportunity and may be treated disparately.
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 cumulated but unpaid dividends on the Series A Preferred Stock. See
"DIVIDEND POLICY" and "BUSINESS -- Regulation -- Financial and Investment
Restrictions."
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THE COMPANY
The Company's business was started in 1977, when SCI was formed to
establish and administer workers' compensation self-insurance programs for group
self-insurance funds that are sponsored and formed by trade associations. Since
1977, SCI has formed three subsidiaries to assist it in providing certain
specialized administrative services, including loss control consulting, claims
management and reinsurance brokerage. These subsidiaries, together with SCI,
comprise the Company's Administrative Subsidiaries. Pursuant to written
contracts, the Administrative Subsidiaries currently provide administrative
services for the four Funds, which are unrelated to the Company, and for the
Company's Insurance Subsidiaries and certain municipalities. See "BUSINESS."
The Company's Insurance Subsidiaries include Bridgefield (ESIF prior to the
Conversion) and Bridgefield Casualty, which write workers' compensation
insurance coverages. The Company also includes a reinsurance subsidiary, U.S.
Employers Insurance, Inc., a group of healthcare-related companies that were
formed to provide such services as managed care in North Carolina and healthcare
provider network access in Florida, and Employers Safety Group Association,
Inc., the sponsoring trade association for ESIF.
The Company's primary Insurance Subsidiary, ESIF (which will be Bridgefield
after the Conversion), was formed in 1978 as a group self-insurance fund in
Florida. Until January 1996, ESIF was unrelated to the Company and was managed
by the Administrative Subsidiaries pursuant to a written contract. Effective
January 16, 1996, ESIF acquired all of the stock of SHC, a holding company that
had been formed to own, directly or indirectly, all of the other corporations
comprising the Company at that time. The following chart sets forth the
organizational structure of the Company immediately prior to the Conversion:
PRIOR TO THE CONVERSION
(ESIF ORGANIZATIONAL CHART)
* Discontinued operations.
In November 1996, in connection with the pending Conversion, Summit was
incorporated for the purpose of becoming a holding company for ESIF and its
subsidiaries. Prior to the Conversion, Summit will not engage in any operations
and has nominal assets and no liabilities. Summit currently has seven shares of
Common Stock issued and outstanding, which are owned one share each by the
directors of Summit. Each director paid $11.00 to purchase his share and has
executed a written agreement agreeing to sell such share back to Summit on the
Effective Date for the same price of $11.00. Pursuant to the Conversion, Summit
will issue all of its Common Stock in the Offerings, and ESIF will issue all of
its common stock to Summit, thereby becoming a direct wholly owned subsidiary of
Summit. Also pursuant to the Conversion, the Company's corporate
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structure will be simplified to reflect two groups, one comprised primarily of
the Administrative Subsidiaries, and one comprised primarily of the Insurance
Subsidiaries. The following chart sets forth the organizational structure of the
Company following the Conversion:
FOLLOWING THE CONVERSION
(SUMMIT ORGANIZATIONAL CHART)
* Discontinued operations.
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 Holiday Inn Lakeside, 910 East
Memorial Blvd., Lakeland, Florida 33801, on , March , 1997 at 9:00 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. 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 as
set forth herein if the Public Offering 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
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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.
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 ESIF at its main office, 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 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 is not eligible to or does
not intend to purchase Common Stock, so that it will be received by ESIF no
later than 5:00 p.m. Eastern Time on , 1997, to ensure that its vote
will be counted.
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<PAGE> 35
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) ESIF's current Constitution and Bylaws will be replaced with the Articles
and Bylaws, containing provisions appropriate for a stock insurance company;
(iv) in order to avoid the expense and inconvenience of issuing shares of the
new stock insurance company to Policyholders, which shares would then be
exchanged for Summit's Series A Preferred Stock in the transaction described
below, an exchange mechanism will be employed to evidence that Eligible
Policyholders are entitled to receive shares of the new stock insurance company
but will receive in lieu thereof shares of Summit's Series A Preferred Stock;
(v) 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 (vi) Summit will issue its Series A
Preferred Stock to Eligible Policyholders and its Common Stock to purchasers in
the Offerings. The Conversion will not affect the insurance coverage under
ESIF's policies. The Plan of Conversion provides that no member of ESIF shall be
entitled to any dissenters, appraisal or other similar rights in connection with
the transactions contemplated by the Plan of Conversion. 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
ESIF was formed in 1978 to provide a means for Florida employers, primarily
in the construction, manufacturing, wholesale and retail, and service
industries, to self-insure for workers' compensation risks. The business
objective and mission of ESIF was, and continues to be, to provide its
Policyholders a workers' compensation solution that minimizes workplace losses,
helps return injured employees to work quickly and helps protect against large
financial loss at a low total cost to the employer.
During the past several years, the Board of Trustees of ESIF has observed
significant changes in the Florida workers' compensation market, due in part to
Florida legislation effective January 1, 1994 (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 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 that 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
23
<PAGE> 36
insurance entities; and (iii) loss portfolio transfers by self-insured groups to
insurance companies. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Overview."
These changes have made membership in ESIF less attractive to Policyholders
(which are members of ESIF automatically by virtue of their ownership of
Policies) relative to other workers' compensation products available in the
market, particularly with respect to the ongoing contingent liability for all
fund losses associated with membership in ESIF. With the increased availability
in the Florida market of traditional workers' compensation insurance products
offered on more favorable terms, employers have become less willing to assume
the risks of self-insurance.
In response to these market changes, the Board reviewed ESIF's strategic
and financial alternatives. Consistent with ESIF's business objective and
mission, the Board's primary objective was to develop a strategy that would
provide ESIF's members with an attractive workers' compensation solution in view
of the changing market conditions. Also, central to the Board's analysis was its
determination that large numbers of Policyholders viewed as unacceptable the
potential liability for fund losses, due to the increasing availability of
traditional workers' compensation products in the Florida market.
The Board considered three available alternatives. First, ESIF could
discontinue operations and distribute net assets, if any, to the members. Under
this alternative, ESIF would remain liable under its in-force policies for
paying workers' compensation claims incurred through the end of the then-current
coverage period under those policies (for most ESIF policies, this would be the
March 31 following the date upon which ESIF discontinued operations). Therefore,
the members of ESIF would continue to be subject to assessments as funds were
needed by ESIF to pay those "run-off" liabilities, some of which claims might
not be reported to ESIF for some time after discontinuance. In addition, this
alternative would result in members receiving only the liquidation value of
ESIF, with no consideration for ESIF's potential value as a going concern.
The second alternative considered by the Board was for ESIF to transfer its
business to a third party insurance company. In such a transaction, the
acquiring insurance company will rarely accept responsibility for paying the
incurred but not reported claims of the selling insurer, and the members of ESIF
would continue to be subject to assessments to pay such liabilities of ESIF.
The third alternative that the Board considered was for ESIF to convert
from a self-insurance fund to a stock insurance company and raise capital
through sales of securities. This approach would eliminate the potential for
Policyholder assessments. The Board did not associate valuations with each of
the alternatives, but based on ESIF's past results, the Board concluded that a
continuation of ESIF's current business practices and management would be in the
best interests of ESIF's members. As a result, the Board concluded that the
conversion of ESIF to a stock insurance company was the best alternative for
continuing to provide ESIF's members with an attractive workers' compensation
solution while eliminating the Policyholders' ongoing liability for fund losses.
Pursuant to the Conversion, the Policies held by members of ESIF will be
converted from assessable Policies to non-assessable Policies. As a consequence,
Policyholders will no longer be subject to any assessment for the liabilities of
ESIF arising either before or after the Effective Date. Further, Eligible
Policyholders 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.
Additionally, the Conversion offers a number of advantages that could be
important to the future growth and performance of the Company. 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
24
<PAGE> 37
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.
DETERMINATION OF CONVERSION TERMS
The terms of the Conversion were established by the Board of Trustees of
ESIF after consultation with its legal, financial and actuarial advisors. A key
consideration of the Board in determining the terms of the Conversion was the
need to raise sufficient capital to capitalize adequately the stock insurance
company and complete the Conversion. Under statutory accounting rules applicable
to stock insurance companies, ESIF would have reported negative surplus of
approximately $26.3 million as of March 31, 1996. To complete the Conversion,
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. A minimum of approximately
$50.0 million in new capital must be contributed to ESIF in order for it to
satisfy these requirements.
Notwithstanding the need for significant capital to complete the
Conversion, the Board determined to grant value to the Eligible Policyholders.
The Board determined to use a preferred stock security of a new holding company
to effectuate this goal. The aggregate par value of the Series A Preferred Stock
is approximately equivalent to the statutory surplus of ESIF, reported as a
self-insurance fund, as of March 31, 1996. The formula reflects the Trustees'
effort to allocate equitably the value of ESIF to Eligible Policyholders based
on each Eligible Policyholder's contribution to ESIF's premiums and its loss
experience. See "-- Consideration -- Allocation of Series A Preferred Stock."
The terms of the Subscription Offering were determined so that Eligible
Policyholders would also have a priority right to provide the capital needed to
complete the Conversion. In the Subscription Offering, Eligible Policyholders as
a group will receive subscription rights to purchase up to 90% of the Company's
Common Stock and the Management Group will receive subscription rights to
purchase up to 10% of the Common Stock. The reservation of up to 10% of the
Common Stock of the Company for subscriptions by the Management Group at a price
equal to the Subscription Price offered to Eligible Policyholders is intended to
provide for management continuity and incentive, to provide a portion of the
funds needed for the Conversion and to demonstrate the Management Group's
commitment to the future of the Company. In accordance with the requirements of
the Florida Insurance Code and the Florida DOI, no person alone or in
conjunction with any affiliated person may purchase in the Offerings more than
4.99% of the Post Offering Outstanding Shares without the prior approval of the
Florida DOI (and the permission of the Company).
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.
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<PAGE> 38
(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.
Currently, the Company estimates that it must receive net proceeds from the
Offerings of at least $50.0 million in order for Bridgefield to satisfy the
minimum surplus requirement under the Florida Insurance Code.
(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 January 31, 1997 (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 it is the holder of an In-Force Policy
that was in effect on January 31, 1997. 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 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.
A Voting Policyholder that did not own an In-Force Policy during the
Eligibility Period is not an Eligible Policyholder. Such a Voting Policyholder
will not receive any shares of Series A Preferred Stock or rights to subscribe
for shares of Common Stock.
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
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<PAGE> 39
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. See
"DESCRIPTION OF CAPITAL STOCK."
Changes in Rights to Receive Dividends
Before the Conversion, members of ESIF are eligible to receive dividends of
the earnings and profits of ESIF, if and when declared at the discretion of the
Board of Trustees. Upon the Conversion, members will no longer be eligible to
receive such dividends. To the extent Eligible Policyholders receive Series A
Preferred Stock and/or purchase Common Stock pursuant to the Conversion, they
will be eligible to receive dividends from Summit, if and when any are declared
by Summit's Board of Directors. See "DIVIDEND POLICY" and "DESCRIPTION OF
CAPITAL STOCK."
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.
See "DESCRIPTION OF CAPITAL STOCK."
CONSIDERATION
Pursuant to the Plan of Conversion, 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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<PAGE> 40
Series A Preferred Stock
Holders of Series A Preferred Stock will have no voting rights, except as
are required by the Florida Act, no preemptive right to purchase or subscribe
for any unissued or additional authorized stock or any securities of Summit and
no rights to convert their Series A Preferred Stock into Common Stock or any
other securities. 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, which shall cumulate whether or not
declared by the Board of Directors, but shall be payable only as and when
declared by the Board. The Series A Preferred Stock shall be redeemable by
Summit at any time and from time to time, in whole or in part. The redemption
price shall be $10.00 per share, together with an amount equal to all cumulated
but unpaid dividends thereon to the date of redemption. For a more detailed
description of the Series A Preferred Stock, see "DESCRIPTION OF CAPITAL
STOCK -- Preferred Stock -- Series A Preferred Stock."
Common Stock
Holders of Common Stock will be entitled to one vote for each share held of
record at all shareholder meetings. Holders of Common Stock shall have no
preemptive or preferential right to purchase or subscribe for any unissued or
additional authorized stock or any securities of Summit and no rights to convert
their Common Stock into any other securities. 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. For a more detailed description of
the Common Stock, see "DESCRIPTION OF CAPITAL STOCK -- Common Stock."
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 1,639,836 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, determined in accordance with the
following formula:
(y) divide the premiums of the Eligible Policyholder for the
Eligibility Period by ESIF's total premiums for that period, and
(z) then multiply the resulting number by 468,597, 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 of such person during the
Eligibility Period, and
(x) calculate the Eligible Policyholder's "capital" premiums by
subtracting the loss ratio calculated in (w) above from 70% and
multiplying the result by the premiums of such person during the
Eligibility Period, and
(y) then divide the Eligible Policyholder's "capital" premium
amount determined in (x) above by the total "capital" premiums for all
Eligible Policyholders, and
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<PAGE> 41
(z) then multiply the amount determined in (y) by 1,093,393, 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 share that is otherwise calculated to be due
pursuant to the above formulae. Partial shares due for each component of the
calculation 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.
The following example illustrates the calculation of the number of shares
of Series A Preferred Stock that would be allocated to an Eligible Policyholder,
assuming the following facts:
<TABLE>
<S> <C>
Assumptions:
(1) Premiums of the Eligible Policyholder during the
Eligibility Period.................................... $ 100,000
(2) Total premiums of ESIF during the Eligibility
Period................................................ $40,000,000
(3) Incurred losses by the Eligible Policyholder during
the Eligibility Period................................ $ 50,000
(4) Total "capital" premiums for all Eligible
Policyholders......................................... $10,000,000
</TABLE>
<TABLE>
<CAPTION>
NO. SHARES
----------
<S> <C>
Calculations:
(i) Minimum number of shares............................. 10
(ii) Based on premiums:
(y) 100,000 / 40,000,000 = 0.0025
(z) 0.0025 X 468,597 = 1,171.49
Rounded........................................... 1,171
-----
(iii) Based on premium volume and loss experience:
(w) 50,000 / 100,000 = 0.50
(x) 0.70 - 0.50 = 0.20
0.20 X 100,000 = 20,000
(y) 20,000 / 10,000,000 = 0.002
(z) 0.002 X 1,093,393 = 2,186.77
Rounded........................................... 2,187
-----
Total Shares Issued............................... 3,368
=====
</TABLE>
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.
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
29
<PAGE> 42
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,
1997, 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 its initial written opinion 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. Chicago Corp. subsequently confirmed its opinion by delivering an
updated opinion dated January 23, 1997. 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.
In arriving at its opinion, Chicago Corp.: (i) reviewed the terms and
conditions of the Plan of Conversion; (ii) reviewed audited and unaudited
historical financial and other information about ESIF which was provided to it
by ESIF; (iii) reviewed certain financial projections prepared by management of
ESIF; (iv) reviewed assumptions as to trends in ESIF's prospective financial
results; (v) interviewed senior management of ESIF and its professional advisors
and discussed with them their estimates of ESIF's existing business prospects
and their outlook as to the future of ESIF's business and the workers'
compensation industry in ESIF's markets; (vi) reviewed actuary reports and
information prepared by or at the direction of ESIF; (vii) reviewed certain
financial, stock market and other information of publicly traded companies that
it considered similar to ESIF; (viii) reviewed information on certain conversion
and subscription offering transactions that it considered relevant; and (ix)
made such other financial analyses and investigations as it deemed appropriate.
In addition
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<PAGE> 43
to the foregoing, Chicago Corp. considered such other financial, economic and
market criteria as it deemed appropriate in arriving at its fairness opinion.
A summary of the principal factors considered by Chicago Corp. is set forth
in the following six paragraphs, which are presented in the order of importance
assigned to such factors by Chicago Corp.
In presenting its opinion, Chicago Corp. considered that Policyholder
Membership Interests are transitory and exist only so long as a Policy remains
in force. Membership Interests are not transferable, and prior to the
Conversion, members have no opportunity to convert such Membership Interests
into liquid value. Accordingly, in the view of Chicago Corp., Membership
Interests cannot be fully equated to ownership of stock in a corporation, and
cannot be appropriately valued using methodologies typically applied to common
stock ownership.
Chicago Corp. also considered, based on its review of indemnification
certificates, that Policyholders are jointly and severally liable for all
liabilities of ESIF, which liabilities totaled over $385.0 million as of March
31, 1996 based on actuarial estimates. Chicago Corp. estimated that if actual
claim payments exceeded the estimated liability by 4.3% or greater, ESIF
Policyholders could be subject to future assessments.
Chicago Corp.'s analysis gave weight to each element of consideration
received by Eligible Policyholders, including the extinguishment of contingent
liabilities and possible future assessments, the Series A Preferred Stock with
an aggregate par value of approximately $16.4 million, and non-transferable
subscription rights to acquire at least 90% of the Common Stock of the Company.
In arriving at its opinion, Chicago Corp. compared this consideration to the
value of Policyholders' Membership Interests.
Chicago Corp.'s analysis also considered that under accounting standards
used for stock insurance companies, ESIF would have reported negative statutory
surplus of $26.3 million as of March 31, 1996 and that ESIF would be unable to
convert and operate as a stock insurance company without raising at least $50
million of capital. Because ESIF lacked sufficient capital to meet the minimum
statutory requirements to operate as a stock insurance company, Chicago Corp.
deemed it inappropriate to value ESIF using methodologies commonly applied in
the valuation of stock insurance companies.
Chicago Corp. also reviewed two transactions in which Florida
self-insurance funds were converted to assessable mutual insurance companies and
subsequently to stock insurance companies. In January 1995, Commerce Mutual
Insurance Company, an assessable mutual (formerly Florida Chamber of Commerce
Workers' Compensation Commercial Insurance Fund) was converted to a stock
company and acquired by RISCORP, Inc. In November 1995, Pinnacle Assurance
Corporation, an assessable mutual (formerly Florida Air Conditioning Contractors
Association Self Insurance Fund) was converted to a stock insurance company and
acquired by Amcomp Incorporated. These transactions were comparable to the
Conversion in that the mutual companies' operations were similar to ESIF's, they
were converted under the laws of Florida, and they lacked the sufficient capital
to meet the minimum requirements to operate as stock insurance companies. In
each transaction, the acquiror provided the capital needed to operate as a stock
insurance company. In these conversions, eligible policyholders received no
consideration other than the extinguishment of contingent liability for future
assessments. Both comparable transactions were approved by policyholder members
and approved by the Florida DOI.
Chicago Corp. also reviewed the terms of mutual to stock conversions of
savings and loans institutions where depositor members received subscription
rights similar to those rights to be granted in the Conversion. Many mutual
savings and loan conversions are comparable to the conversion of ESIF in that
these institutions lacked adequate capital to meet regulatory guidelines prior
to the conversion. In these conversions, depositor members received no
consideration other than subscription rights.
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
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<PAGE> 44
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 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.
The Company has also engaged Chicago Corp. to serve as one of the
underwriters and sales agents in connection with the Offerings, for which
Chicago Corp. will receive a portion of the sales fees paid by the Company.
Chicago Corp. had not been engaged in this capacity at the time that it
initially delivered the fairness opinion. Several months after initial delivery
of the fairness opinion, the Company interviewed potential underwriters and
sales agents and, based upon such interviews, selected Chicago Corp. to serve as
one of the underwriters and sales agents, although not serving in the lead
capacity. Based upon these facts, the Company does not believe that Chicago
Corp.'s services as an underwriter and sales agent raises a potential conflict
of interest.
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
Offerings 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 attributable to the policies of which such Eligible
Policyholder was the owner of record during the Eligibility Period to (ii) the
total premiums of 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, if the
Management Group does not fully subscribe for such 10%, any portion not
subscribed for will be made available to satisfy subscriptions from the Eligible
Policyholders. 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
than 4.99% of the Post Offering Outstanding Shares, which is 249,999 shares, if
all shares offered in the Offerings are sold.
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<PAGE> 45
Notwithstanding the foregoing, Summit will permit any "investment company" as
defined in the Investment Company Act of 1940, as amended, to purchase up to
10%, and may, in its discretion, permit any other purchaser in the Offerings, to
purchase any number of shares of Common Stock, even exceeding the Purchase
Limit, subject to such purchaser's obtaining any required 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 Limited Number of 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. 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 5:00 p.m.
Eastern Time on March , 1997, and 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 Subscription Order Forms. Any eligible Policyholder 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 c/o ChaseMellon Shareholder Services, L.L.C., 120 Broadway, 13th Floor,
New York, New York, 10271, a properly executed and completed Subscription Order
Form, together with full payment of the Subscription Price for all shares for
which subscription is made. An executed Subscription 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 or unless the Public Offering Price or Revised
Subscription Price is more than $13.00 per share or less than $11.00 per share.
See "-- Subscription Price."
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. Summit in consultation with its financial advisers,
Raymond James & Associates, inc. ("RAYMOND JAMES") and Chicago Corp., has
estimated a price range for the Common Stock of $11.00 to $13.00 per share. This
Price Range is not based on an appraisal or any other objective factors. Using
the lowest per share price within the Price Range, Summit has set the
Subscription Price at $11.00, which is the per share amount that each Eligible
Policyholder must pay in order to subscribe for shares of Common Stock in the
Subscription Offering, subject to adjustment as described below.
If the Public Offering is to be effected, Summit will determine, after
consultation with its financial advisers, the price per share at which the
shares of Common Stock are to be sold to the public. If the Public Offering
Price is within the Price Range, so that such price is not less than $11.00 nor
more than $13.00, then the effective price per share paid by subscribers in the
Subscription Offering shall be adjusted to the Public Offering Price. Such
adjustment will be effected by reducing the number of shares of Common Stock
that each subscriber will receive relative to the number of shares that such
subscriber would have received based on a Subscription Price of $11.00. No
subscriber will be required to pay any additional money for its subscription.
To illustrate this potential price adjustment, if an Eligible Policyholder
subscribed for 100 shares of Common Stock, paying the Subscription Price of
$11.00 per share, such subscriber would pay a total subscription amount of
$1,100.00. If the Public Offering Price were determined to be $13.00, the
subscribing Eligible Policyholder would not pay any additional amounts, but
would receive the number of shares of Common Stock at a price of $13.00 per
share that could be purchased with the $1,100.00 that such Eligible Policyholder
had already paid. The computation would be $1,100.00 divided by $13.00, for a
total number of shares of 84.6154, rather than 100.
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<PAGE> 46
No fractional shares of Common Stock will be issued under any
circumstances, but in lieu thereof, the value of such fractional shares will be
refunded to subscribers in cash without interest within 60 days after the
Effective Date. Thus, the Eligible Policyholder in the above example would
receive 84 shares of Common Stock, and a refund of cash in an amount equal to
the fraction of a share multiplied by the effective purchase price (in the above
example, the Eligible Policyholder would receive 0.6154 multiplied by $13.00,
for a refund of $8.00).
IN THE EVENT THAT THE PUBLIC OFFERING PRICE IS NOT WITHIN THE PRICE RANGE
(EITHER LESS THAN $11.00 OR MORE THAN $13.00), OR IN THE EVENT THAT ALL SHARES
OF COMMON STOCK OFFERED HEREBY ARE NOT SUBSCRIBED FOR AND NO PUBLIC OFFERING IS
EFFECTED, SUMMIT WILL TERMINATE THE SUBSCRIPTION OFFERING, CANCEL ALL
SUBSCRIPTIONS RECEIVED, AND PROMPTLY REFUND ALL SUBSCRIPTION MONIES RECEIVED
WITH INTEREST THEREON AT THE REFUND INTEREST RATE. IN SUCH EVENT, IF SUMMIT
ELECTS TO RECOMMENCE THE SUBSCRIPTION OFFERING, IT WILL DO SO ONLY BY SENDING
EACH ELIGIBLE POLICYHOLDER A NEW PROSPECTUS CONTAINING THE NEW PRICE AND OTHER
SUBSCRIPTION TERMS.
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
are, in addition to prevailing market conditions, the historical performance of
ESIF, estimates of the business potential and earnings 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.
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
only by check or money order and must be in U.S. dollars. 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.
ChaseMellon Shareholder Services, L.L.C. has been appointed as Transfer
Agent for the Common Stock and Mellon Bank, N.A. has been appointed 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:
Mellon Bank, N.A. Mellon Bank, N.A.
c/o ChaseMellon Shareholder Services, c/o ChaseMellon Shareholder Services,
L.L.C. L.L.C.
P.O. Box 938, Midtown Station 120 Broadway, 13th Floor
New York, New York 10138-0738 New York, New York 10271
</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 upon completion of the Offerings, and 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 Public Offering Price is not within
the Price Range or the Board of Trustees of ESIF withdraws the Plan of
Conversion. In the event that the Subscription Offering is canceled,
subscriptions for Common Stock
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<PAGE> 47
will be canceled 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.
Notwithstanding the foregoing, Summit has agreed that any "investment
company" as defined in Section 3 of the Investment Company Act of 1940, as
amended, may purchase up to 10% of the Post Offering Outstanding Shares, subject
to such investor obtaining any required approval of the Florida DOI. With
respect to all other purchasers, Summit will have complete discretion to approve
or reject any request to exceed the Purchase Limit. Any such approval will be
made by Summit prior to the Effective Date and will be subject to any approval
required by the Florida DOI. Except to the extent required by the Florida DOI,
Summit will not be obligated to notify any subscriber of the waiver of the
Purchase Limit for any purchaser. See "THE OFFERINGS -- Public Offering" below.
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 advisor 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 10% of the Post
Offering Outstanding Shares. The Board of Trustees of ESIF determined
subjectively that it would be appropriate and in the best interests of the
shareholders of the Company to make such shares of Common Stock available to the
Management Group to enhance the Management Group's commitment to the Company,
provide incentive to the Management Group and encourage management continuity.
No additional consideration or contributions were provided by the Management
Group in exchange for the right to purchase such 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,
subject to the same adjustment to the number of shares purchased in the event
the Public Offering Price is higher but within the Price Range.
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<PAGE> 48
It is expected that the Management Group will collectively purchase in the
Subscription Offering not less than approximately 241,000 shares (approximately
$2.7 million aggregate subscription amount) or approximately 4.8% 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.
In addition, 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. See "PRINCIPAL SHAREHOLDERS."
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."
In connection with the Acquisition, the Florida DOI issued the January
Consent Order requiring that William B. Bull, who currently is the President,
Chief Executive Officer and a director of the Company and who was at that time
President and Chief Executive Officer and a principal shareholder of SHC,
personally indemnify ESIF up to a maximum of $5.0 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 $1.0 million for every
$4.0 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, Mr. Bull may be
relieved of such personal indemnification obligations if the Conversion becomes
effective; conversely, 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.
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 Subscription Offering, the Company may, in its
sole discretion, offer all or a portion of such remaining shares in the Public
Offering, which will close on 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 other than certain institutional
investors are subject to the Purchase Limit, but purchasers in the Public
Offering will not be required to purchase any minimum number of shares. Summit
has agreed that any "investment company" as defined in Section 3 of the
Investment Company Act of 1940, as amended, may purchase up to 10% of the Post
Offering Outstanding Shares, subject to such investor obtaining any required
approval of the Florida DOI. Summit may, in its discretion, permit any purchaser
in the Public Offering to purchase any number of shares of Common Stock in
excess of the Purchase Limit, subject to such purchaser's obtaining the prior
approval of the Florida DOI. Any such purchase in excess of the Purchase Limit
could result in a controlling interest being owned by a single shareholder or a
small group of shareholders. See "RISK FACTORS -- Potential Control by Limited
Number of Shareholders; Possible Depressive Effect on the Price of Summit's
Securities."
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<PAGE> 49
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 cumulate 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 cumulated 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 cumulated 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."
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<PAGE> 50
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 $3.7 million. 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. Upon contribution of proceeds to Bridgefield, such funds will be
invested in fixed income securities as permitted by the Florida Insurance Code.
In the event that the shares are sold at a price higher than the Subscription
Price, any net proceeds to the Company that are not needed to capitalize
Bridgefield will be retained by Summit for general corporate purposes. The
Conversion is contingent upon the receipt by Summit of net proceeds of a minimum
of approximately $50.0 million which is the current estimate of the amount
necessary to satisfy applicable provisions of the Florida Insurance Code.
CAPITALIZATION
The following table presents the consolidated capitalization at December
31, 1996 of: (i) ESIF and its subsidiaries on a historical basis, and (ii) the
Company as adjusted to reflect the Conversion and the sale of 5,000,000 shares
of Common Stock at the minimum and maximum per share prices within the Price
Range, $11.00 and $13.00, respectively, 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>
DECEMBER 31, 1996
----------------------------------------------------------------
ASSUMING CONVERSION AND ASSUMING CONVERSION AND
ISSUANCE OF 5,000,000 ISSUANCE OF 5,000,000
ESIF SHARES OF COMMON STOCK SHARES OF COMMON STOCK
HISTORICAL AT $11.00 PER SHARE AT $13.00 PER SHARE
---------- ----------------------- -----------------------
(A) (B)
----------------------- -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long term debt......................... $33,000 $ 33,000 $ 33,000
Equity:
Preferred stock, $10.00 par value,
5,000,000 shares authorized; no
shares issued and outstanding,
1,639,836 shares as adjusted...... -- 16,398 16,398
Common stock, $.01 par value,
20,000,000 shares authorized; 7
shares issued and outstanding,
5,000,000 shares as adjusted(C)... -- 50 50
Additional paid-in capital(C)........ -- 49,950 59,350
Retained earnings.................... 24,857 8,459 8,459
Unrealized appreciation on available
for sale securities............... 2,521 2,521 2,521
------- -------- --------
Total equity...................... 27,378 77,378 86,778
------- -------- --------
Total capitalization.............. $60,378 $110,378 $119,778
======= ======== ========
</TABLE>
- ---------------
(A) Assumes the issuance of 1,639,836 shares (par value $10 per share) of Series
A Preferred Stock to Eligible Policyholders in connection with the
Conversion and 5,000,000 shares of Common Stock (par value $0.01 per share)
issued at $11.00 per share.
(B) Assumes the issuance of 1,639,836 shares (par value $10 per share) of Series
A Preferred Stock to Eligible Policyholders in connection with the
Conversion and 5,000,000 shares of Common Stock (par value $0.01 per share)
at $13.00 per share.
(C) 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
"EXECUTIVE COMPENSATION -- Incentive Plan" and "-- 401(k) Plan."
38
<PAGE> 51
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 September 30,
1996, and for the year ended March 31, 1996, and for the six months ended
September 30, 1996, 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. ESIF's consolidated financial
statements as of December 31, 1996 and for the nine months ended December 31,
1996, as well as the selected financial data provided as of and for the fiscal
years ended March 31, 1992 and 1993, as of and for the six months ended
September 30, 1995, and as of and for the nine months ended December 31, 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)
(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................. 121 206 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(3)............ 78.5% 82.3% 73.0% 53.8% 82.5% 67.1% 65.5%
Expense ratio(4)............. 24.8% 22.1% 25.0% 32.3% 34.1% 34.2% 33.0%
Combined ratio(5)............ 103.3% 104.4% 98.0% 86.1% 116.6% 101.3% 98.5%
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Income Statement Data:
Premiums earned.............. $ 89,713 $ 74,509
Net investment income........ 10,522 9,606
Administrative fees.......... -- 25,762
Realized investment gains.... 2,726 366
Other income................. 125 568
-------- --------
Total revenue................ 103,086 110,811
Losses and loss adjustment
expenses................... 67,043 50,236
Other underwriting, general
and administrative
expenses................... 28,548 45,837
Interest expense............. -- 2,719
Amortization and
depreciation............... -- 3,729
-------- --------
Income (loss) from continuing
operations before income
taxes...................... 7,495 8,290
Loss from discontinued
operations................. -- (1,250)
Net income................... $ 5,172 $ 3,198
======== ========
Other Data:(2)
Net loss ratio(3)............ 74.7% 67.4%
Expense ratio(4)............. 31.8% 33.4%
Combined ratio(5)............ 106.5% 100.8%
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31, SEPTEMBER 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996(1) 1995 1996
----------- ----------- -------- -------- -------- ----------- -----------
(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 95,851 110,141 111,519 107,451 103,861
Recoverable from
SDTF............. 5,632 6,745 9,929 15,879 20,060 17,775 21,138
Total assets....... 307,345 373,069 405,765 425,206 $491,844 456,012 $502,167
Loss and loss
adjustment
expenses......... 304,205 360,425 368,000 367,391 387,632 364,210 378,196
Debt............... -- -- -- -- 44,000 -- 36,500
Total equity
(deficit)........ (9,458) (6,485) 2,480 20,065 23,154 31,087 24,993
<CAPTION>
AS OF
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Balance Sheet Data:
Cash and invested
assets........... $236,421 $225,319
Premiums
receivable....... 48,922 39,828
Reinsurance
recoverable...... 112,734 107,058
Recoverable from
SDTF............. 16,827 21,138
Total assets....... 437,932 476,972
Loss and loss
adjustment
expenses......... 372,786 376,923
Debt............... -- 33,000
Total equity
(deficit)........ 31,238 27,378
</TABLE>
- ---------------
(1) Includes the Acquisition as of January 16, 1996.
(2) Ratio for Insurance Subsidiaries.
(3) Net loss ratio is the ratio of losses and loss adjustment expenses incurred
to premiums earned.
(4) Expense ratio is the ratio of underwriting, general and administrative
expenses to premiums earned.
(5) Combined ratio is the sum of the net loss ratio and the expense ratio.
39
<PAGE> 52
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
Interest income......................................... 149 377 738 1,071
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(2)............................................... $11,662 $15,887 $18,747 $12,904
Cash flow from:
Operations........................................... $ 9,411 $11,991 $12,591 $ 7,713
Investing activities................................. 3,359 (966) (6,636) (281)
Financing activities................................. (14,047) (4,510) (1,200) (600)
------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................... $(1,277) $ 6,515 $ 4,755 $ 6,832
======= ======= ======= =======
</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................................ $ 238 $ 6,754 $17,072 $22,198
Total assets............................................ 32,066 35,672 41,372 43,683
Current liabilities..................................... 20,118 28,503 20,802 18,038
Debt.................................................... 4,510 -- -- --
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.
(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization.
40
<PAGE> 53
PRO FORMA FINANCIAL DATA
The following pro forma financial data present the historical financial
data of ESIF and its subsidiaries on a consolidated basis adjusted to reflect
the pro forma effects of the following transactions:
(1) January 1996 Acquisition of SHC by ESIF;
(2) Conversion of ESIF from a group self-insurance fund to a stock
insurance company; and
(3) Issuance of Common Stock and Series A Preferred Stock in the
Offerings.
The pro forma financial statements presented are:
Balance Sheet as of December 31, 1996
The unaudited pro forma consolidated balance sheet as of December 31, 1996
presents the historical balance sheet of ESIF. Pro forma adjustments, as
described in the related notes, give effect to the Conversion and the Offerings
as if they had been effective at December 31, 1996.
The pro forma balance sheet assumes the issuance of 1,639,836 shares (par
value $10.00 per share) of Series A Preferred Stock to Eligible Policyholders in
connection with the Conversion and the issuance of 5,000,000 shares of Common
Stock (par value $0.01 per share) in the Offerings at $11.00 per share, the
minimum per share price within the Price Range.
Statement of Income for the Year Ended March 31, 1996
The unaudited pro forma consolidated statement of income for the year ended
March 31, 1996 presents the historical operating results of ESIF (including
operating results of SHC from its Acquisition date of January 16, 1996) and the
historic operating results of SHC for the period April 1, 1995 to January 15,
1996. Pro forma adjustments give effect to the Acquisition of SHC, the
Conversion and the Offerings as if they had occurred on April 1, 1995.
Statement of Income for the Nine Months Ended December 31, 1995
The unaudited pro forma consolidated statement of income for the nine
months ended December 31, 1995 presents the historical operating results of ESIF
and SHC. Pro forma adjustments give effect to the Acquisition of SHC, the
Conversion and the Offerings as if they had occurred on April 1, 1995.
Statement of Income for the Nine Months Ended December 31, 1996
The unaudited pro forma consolidated statement of income for the nine
months ended December 31, 1996 presents the historical operating results of
ESIF. Pro forma adjustments give effect to the Conversion and the Offerings as
if they had occurred on April 1, 1995.
41
<PAGE> 54
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA ASSUMING
CONVERSION AND 5,000,000
COMMON SHARES ISSUED AT
EMPLOYERS $11.00 PER SHARE
SELF INSURERS --------------------------
FUND ADJUSTMENTS(A) PRO FORMA
------------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Investments............................................. $217,886 $ 50,000(B) $267,886
Cash and cash equivalents............................... 7,433 7,433
Premiums receivable..................................... 39,828 39,828
Accounts receivable..................................... 3,184 3,184
Reinsurance recoverable................................. 107,058 107,058
Recoverable from Florida Special Disability Trust
Fund.................................................. 21,138 21,138
Excess of cost over net assets of business acquired..... 47,489 47,489
Deferred income taxes................................... 15,656 15,656
Other assets............................................ 17,300 17,300
-------- -------- --------
Total assets.................................. $476,972 $ 50,000 $526,972
======== ======== ========
LIABILITIES AND SHAREHOLDERS EQUITY
Liabilities:
Loss and loss adjustment expenses..................... $376,923 $376,923
Debt.................................................. 33,000 33,000
Unallocated policyholder remittances.................. 23,506 23,506
Accounts payable...................................... 11,229 11,229
Other liabilities..................................... 4,936 4,936
-------- -------- --------
Total liabilities............................. 449,594 449,594
Equity:
Preferred stock....................................... -- 16,398(C) 16,398
Common stock.......................................... -- 50(B) 50
Additional paid-in capital............................ -- 49,950(B) 49,950
Retained earnings..................................... 24,857 (16,398)(C) 8,459
Unrealized appreciation on available for sale
securities......................................... 2,521 2,521
-------- -------- --------
Total equity.................................. 27,378 50,000 77,378
-------- -------- --------
Total liabilities and shareholders' equity.... $476,972 $ 50,000 $526,972
======== ======== ========
</TABLE>
See notes to pro forma condensed consolidated balance sheet.
42
<PAGE> 55
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(A) Assumes that the Conversion of ESIF from a group self-insurance fund to a
stock insurance company occurred as of December 31, 1996.
(B) Assumes that $50.0 million in net proceeds (minimum amount expected to be
received) from the issuance of 5,000,000 shares of Common Stock at $11.00
per share (the minimum price within the Price Range) is received as of
December 31, 1996.
(C) Adjustment relates to the issuance of 1,639,836 shares (par value $10.00
per share) of Series A Preferred Stock to Eligible Policyholders in
connection with the Conversion.
43
<PAGE> 56
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1996(A)
<TABLE>
<CAPTION>
ASSUMING CONVERSION AND ISSUANCE OF
5,000,000 SHARES OF COMMON STOCK AT
(B) (C) $11.00 PER SHARE
EMPLOYERS SUMMIT -----------------------------------
SELF HOLDING PRO FORMA
INSURERS FUND CORPORATION ADJUSTMENTS(D)(E) 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 (1,855)(F) 12,374
(7)(G)
Realized investment gains.................. 4,354 -- -- 4,354
Administrative fees........................ 7,665 49,040 (19,358)(H) 37,347
Other income............................... 206 921 (921)(G) 206
-------- -------- -------- ----------
Total revenue...................... 140,328 50,987 (22,141) 169,174
-------- -------- -------- ----------
Expenses:
Losses and loss adjustment expenses........ 94,844 -- -- 94,844
Other underwriting, general, and
administrative expenses................. 43,657 40,489 (19,358)(H) 63,008
(1,780)(G)
Interest expense........................... 847 30 3,101(I) 3,978
Amortization and depreciation.............. 1,103 4,033 341(J) 5,340
(137)(G)
-------- -------- -------- ----------
Total expenses..................... 140,451 44,552 (17,833) 167,170
-------- -------- -------- ----------
Income from continuing operations before
income taxes............................ (123) 6,435 (4,308) 2,004
Income taxes (benefit)..................... (505) 2,356 (1,543) 308
-------- -------- -------- ----------
Income from continuing operations............ $ 382 $ 4,079 $ (2,765) $ 1,696
======== ======== ======== ==========
Income from continuing operations per common
share...................................... $ 0.21
==========
Weighted average common shares outstanding... 5,000,000
</TABLE>
See notes to pro forma condensed consolidated statement of income.
44
<PAGE> 57
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1996
(A) Assumes the Acquisition and the Conversion occurred on April 1, 1995.
(B) 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.
(C) Includes SHC for the period April 1, 1995 through January 15, 1996.
(D) Upon Conversion to a stock property and casualty insurer, Bridgefield will
be subject to guaranty fund assessments by the Florida Insurance Guaranty
Association; however, there were no such assessments during the year ended
March 31, 1996. Accordingly, the pro forma data does not include any
adjustments for the effect of guaranty fund assessments.
(E) The pro forma condensed consolidated statement of income for the year ended
March 31, 1996 does not include investment earnings on the net proceeds of
the Offerings. Assuming that $50.0 million of net Offering proceeds
(minimum amount expected to be received for the issuance of 5,000,000
shares of Common Stock at $11.00 per share) are invested in 180 day U.S.
Treasury Bills yielding 6.1% for the six months ended September 30, and
5.6% for the six months ended March 31, 1996, pro forma net income would be
increased by $1.8 million to $3.5 million and pro forma earnings per share
would be increased by $0.36 to $0.57.
(F) Adjustment relates to the effect on investment income of foregone
investment earnings on $26.0 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% (which approximates
ESIF's actual investment earnings rate during the period).
(G) Adjustment relates to a decrease in revenue and operating expenses
attributable to the disposition of Carolina Summit Healthcare, Inc.
("CAROLINA SUMMIT") and discontinued operations of Meritec.
(H) Adjustment relates to elimination of administrative fees paid by ESIF to
SHC.
(I) Adjustment relates to interest expense from the financed portion of the
Acquisition assuming scheduled interest rates ranging from 7% to 9.5%.
(J) 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. The components of the
amortization adjustment are as follows:
<TABLE>
<CAPTION>
AMORTIZATION EXPENSE
-----------------------------------
HISTORICAL PRO FORMA ADJUSTMENT
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill............................................ $ 297 $1,572 $ 1,275
Customer contracts.................................. 1,821 523 (1,298)
Developed software.................................. 633 997 364
------ ------ -------
$2,751 $3,092 $ 341
====== ====== =======
</TABLE>
(K) Adjustment relates to the total income tax effect of adjustments (F)
through (J).
45
<PAGE> 58
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995(A)
<TABLE>
<CAPTION>
ASSUMING CONVERSION AND ISSUANCE OF
5,000,000 SHARES OF COMMON STOCK AT
(D) $11.00 PER SHARE
(C) SUMMIT ------------------------------------
EMPLOYERS SELF HOLDING PRO FORMA
INSURERS FUND CORPORATION ADJUSTMENTS(E)(F) PRO FORMA
-------------- ----------- ------------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned.......................... $89,713 $ -- $ -- $ 89,713
Net investment income.................... 10,522 745 (1,758)(H) 9,509
Realized investment gains................ 2,726 -- -- 2,726
Administrative fees...................... -- 47,162 (18,713)(G) 28,449
Other income............................. 125 1,138 (903)(K) 360
------- ------- -------- ---------
Total revenue.................... 103,086 49,045 (21,374) 130,757
Expenses:
Losses and loss adjustment expenses...... 67,043 -- -- 67,043
Other underwriting, general and
administrative expenses............... 28,548 38,372 (18,713)(G) 46,725
(1,482)(K)
Interest expense......................... -- 30 2,987(J) 3,017
Amortization and depreciation............ -- 3,873 323(I) 4,074
(122)(K)
------- ------- -------- ---------
Total expenses................... 95,591 42,275 (17,007) 120,859
------- ------- -------- ---------
Income from continuing operations before
income taxes.......................... 7,495 6,770 (4,367) 9,898
Income taxes............................. 2,323 2,484 (1,560)(L) 3,247
------- ------- -------- ---------
Income from continuing operations.......... $ 5,172 $ 4,286 $ (2,807) $ 6,651
======= ======= ======== =========
Income from continuing operations per
common share............................. $ 1.23
=========
Weighted average common shares
outstanding.............................. 5,000,000
</TABLE>
See notes to pro forma condensed consolidated statement of income.
46
<PAGE> 59
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996(B)
<TABLE>
<CAPTION>
ASSUMING CONVERSION AND
ISSUANCE OF 5,000,000 SHARES AT
$11.00 PER SHARE
(C) --------------------------------
EMPLOYERS SELF PRO FORMA
INSURERS FUND ADJUSTMENTS(E)(F) PRO FORMA
-------------- ------------------ ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Premiums earned...................................... $ 74,509 $ -- $ 74,509
Net investment income................................ 9,606 (109)(K) 9,497
Realized investment gains............................ 366 -- 366
Administrative fees.................................. 25,762 -- 25,762
Other income......................................... 568 (5)(K) 563
-------- ------- ---------
Total revenue................................ 110,811 (114) 110,697
-------- ------- ---------
Expenses:
Losses and loss adjustment expenses.................. 50,236 -- 50,236
Other underwriting, general, and administrative
expenses.......................................... 45,837 (675)(K) 45,162
Interest expense..................................... 2,719 -- 2,719
Amortization and depreciation........................ 3,729 (25)(K) 3,704
-------- ------- ---------
Total expenses............................... 102,521 (700) 101,821
-------- ------- ---------
Income from continuing operations before income
taxes............................................. 8,290 586 8,876
Income taxes......................................... 3,057 199(L) 3,256
-------- ------- ---------
Income from continuing operations...................... $ 5,233 $ 387 $ 5,620
======== ======= =========
Income from continuing operations per common share..... $ 1.03
=========
Weighted average common shares outstanding............. 5,000,000
</TABLE>
See notes to pro forma condensed consolidated statement of income.
47
<PAGE> 60
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTH PERIODS ENDED DECEMBER 31, 1995 AND 1996
(A) Assumes the Acquisition and the Conversion occurred on April 1, 1995.
(B) Assumes the Conversion occurred on April 1, 1995.
(C) Includes historical information for ESIF and subsidiaries for the nine
months ended December 31, 1995 and 1996, respectively, on a consolidated
basis.
(D) Includes SHC for the period April 1, 1995 through December 31, 1995.
(E) Upon the Conversion to a stock property and casualty insurer, Bridgefield
will be subject to guaranty fund assessments by the Florida Insurance
Guaranty Association; however, there were no such assessments during the
nine months ended December 31, 1995 and 1996. Accordingly, the pro forma
data does not include any adjustments for the effect of guaranty fund
assessments.
(F) The pro forma condensed consolidated statements of income for the nine
month periods ended December 31, 1995 and 1996 do not include investment
earnings on the net proceeds of the Offerings. Assuming that $50.0 million
of net Offering proceeds (minimum amount expected to be received for the
issuance of 5,000,000 shares of Common Stock at $11.00 per share) are
invested in 180-day U.S. Treasury Bills yielding 6.10% and 5.15% for the
six months and three months ended September 30, 1995 and December 31, 1995,
respectively, and 5.18% and 5.51% for the six months and three months ended
September 30, 1996 and December 31, 1996, respectively. Pro forma net
income for the nine-months ended December 31, 1995 and 1996 would be $8.0
million and $6.9 million, respectively, and the pro forma earnings per
share would be $1.50 and $1.27 for the nine-months ended December 31, 1995
and 1996, respectively.
(G) Adjustment relates to elimination of fees paid by ESIF to SHC.
(H) Adjustment relates to the effect on investment income of foregone
investment earnings on $26.0 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% (which approximates
ESIF's actual investment earnings rate during the period).
(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. The components of the
amortization adjustment are as follows:
<TABLE>
<CAPTION>
AMORTIZATION EXPENSE
-----------------------------------
HISTORICAL PRO FORMA ADJUSTMENT
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill............................................ $ 282 $1,489 $ 1,207
Customer contracts.................................. 1,725 496 (1,229)
Developed software.................................. 600 945 345
------ ------ -------
$2,607 $2,930 $ 323
====== ====== =======
</TABLE>
(J) Adjustment relates to interest expense from the financed portion of the
Acquisition assuming scheduled interest rates ranging from 7% to 9.5%.
(K) Adjustment relates to decrease in revenue and operating expenses
attributable to the disposition of Carolina Summit and Meritec.
(L) Adjustment relates to the total income tax effect of adjustments (G)
through (K).
48
<PAGE> 61
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 therefore 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),
the New Florida Law 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 rate-making 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
49
<PAGE> 62
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; and (v) emphasis on excellent customer service.
The Company is in the process of disposing of two subsidiaries whose
businesses are unrelated to workers' compensation and no longer fit within the
Company's overall business strategy. The Company has reached an agreement to
sell for cash its health maintenance organization subsidiary, Carolina Summit.
The purchase price will be net book value, approximately $745,000, and the sale
is expected to be consummated in the first quarter of 1997. The Company has
discontinued all operations of its computer software subsidiary, Meritec, and is
in the process of liquidating that entity. See "BUSINESS -- Disposal of
Business" and notes 17 and 18 of the notes to the consolidated financial
statements. Neither the sale of Carolina Summit nor the liquidation of Meritec
is expected to have a material effect on the Company's results of operation.
Historically, ESIF was not operated for the purpose of generating profits,
but it retained a portion of its earnings and profits to avoid making
assessments against its members. ESIF occasionally during its operating history
paid distributions of profits to its members, but it never made an assessment
against its members. ESIF's indemnity agreements indemnified the member
employers against loss or liability relating to workers' compensation insurance
risk.
The discussion below in "Results of Operations" is divided into four
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; (iii) comparison of the nine-month periods ended December
31, 1995 and 1996 for ESIF on a consolidated basis; and (iv) a comparison of
fiscal years ended December 31, 1993, 1994 and 1995 for SHC. ESIF's audited
consolidated financial statements for the six-month period ended September 30,
1996, and accompanying comparative discussion and analysis, have been included
herein to provide additional financial data about the Company.
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 $7.7 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) an adjustment 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
more fully in "-- Losses and Loss Adjustment Expenses" below.
50
<PAGE> 63
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 was greater than 80% as of December 31, 1996. In January 1997, the 10%
managed care program credit was eliminated and an 11.2% premium rate reduction
for new and renewal policies became effective.
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 ESIF'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 ESIF; and (iii)
regulatory requirements. Losses and LAE incurred for the fiscal year ended March
31, 1994 were
51
<PAGE> 64
$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
reserves in excess of reserve levels required by actuarial reports because the
actuarial estimates for fund years 1991 and earlier had a history of increasing
(or "adversely developing") as the fund years matured and more actual loss data
became known. During the fiscal year ended March 31, 1995, ESIF began to record
reserves at levels primarily supported by actuarial reviews since the actuarial
estimates had by that time evidenced a trend of less adverse development with
the maturity of the fund years. This adverse development trend and management's
response are discussed more fully in "-- Losses and Loss Adjustment Expenses"
below. Management's determination that the excess reserves were no longer
needed, together with a reduction in premiums earned and a lower actuarial loss
ratio, resulted in a $39.3 million decrease in losses and LAE expenses 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%. A table showing the development of certain actuarial net loss ratio
trends is included in "-- Losses and Loss Adjustment Expenses" below.
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.
52
<PAGE> 65
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 premium credit programs, which premium
credits totaled $8.2 million for the six months ended September 30, 1996 as
compared to $7.0 million for the six months ended September 30, 1995. As noted,
the percentage of ESIF's covered employers participating in the managed care
credit program was greater than 80% as of December 31, 1996. In January 1997,
the 10% managed care program credit was eliminated and an 11.2% premium rate
reduction for new and renewal policies became effective.
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. SHC 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
SHC'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 million 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.
53
<PAGE> 66
The insurance operations expense ratio decreased slightly from 34.2% on
September 30, 1995 to 33.0% 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 HISTORICAL RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 AND 1996 FOR ESIF
REVENUE. Revenue for the nine months ended December 31, 1995 was $103.1
million as compared with $110.8 million for the nine months ended December 31,
1996. SHC generated $25.8 million in administrative fees in the nine months
ended December 31, 1996. The following table analyzes the composition and change
in revenues.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
----------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Premiums earned............................................. $ 89,713 $ 74,509
Net investment income....................................... 10,522 9,606
Realized investment gains................................... 2,726 366
Administrative fees......................................... -- 25,762
Other income................................................ 125 568
-------- --------
Total revenue..................................... $103,086 $110,811
======== ========
</TABLE>
Premiums Earned. Premiums earned for the nine months ended December 31,
1996 decreased by $15.2 million to $74.5 million. This loss in premium was due
to the market's increased preference for non-assessable products and the
increase in participation in mandated premium credit programs, which premium
credits totaled $12.3 million for the nine months ended December 31, 1996 as
compared to $10.5 million for the nine months ended December 31, 1995. As noted,
the percentage of ESIF's covered employers participating in the managed care
credit program was greater than 80% as of December 31, 1996. In January 1997,
the 10% managed care program credit was eliminated and an 11.2% premium rate
reduction for new and renewal policies became effective.
Net Investment Income. Net investment income decreased by $0.9 million
primarily due to the reduction in invested assets related to the Acquisition.
Administrative Fees. SHC generated $25.8 million in administrative fees
through its contracts with administrative clients for the nine months ended
December 31, 1996. Administrative fees represent 23.2% of total revenue for the
nine-month period and are expected to provide additional future revenues through
SHC's contracts with clients in Florida, Louisiana and Kentucky.
54
<PAGE> 67
LOSSES AND EXPENSES. ESIF's losses and expenses increased from $95.6
million for the nine months ended December 31, 1995 to $102.5 million for the
nine months ended December 31, 1996. Set forth below is a discussion of the
expenses for the period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
---------------------
1995 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Losses and loss adjustment expenses......................... $67,043 $ 50,236
Underwriting, general and administrative expenses........... 28,548 45,837
Interest expense............................................ -- 2,719
Amortization and depreciation............................... -- 3,729
------- --------
Total losses and expenses......................... $95,591 $102,521
======= ========
</TABLE>
Losses and Loss Adjustment Expenses. Losses and LAE incurred for the nine
months ended December 31, 1995 were $67.0 million compared to $50.2 million for
the nine months ended December 31, 1996. The loss ratio decreased from 74.7% for
the nine months ended December 31, 1995 to 67.4% for the nine months ended
December 31, 1996. This decrease was the result of favorable loss development.
Underwriting, General and Administrative Expenses. Underwriting, general
and administrative expenses increased by $17.3 million primarily due to the
Acquisition. The SHC portion of underwriting, general and administrative
expenses was $21.2 million, which indicates a reduction of $3.9 million in
underwriting, general and administrative expenses for ESIF.
The insurance operations expense ratio increased slightly from 31.8% on
December 31, 1995 to 33.4% on December 31, 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, while production expenses increased
2.1%.
Interest Expense. Interest expense increased $2.7 million for the nine
months ended December 31, 1996 from zero for the nine months ended December 31,
1995. Interest expense resulted from the $44.0 million of debt incurred by SHC
to fund the Acquisition.
Amortization and Depreciation. For the nine months ended December 31,
1996, amortization and depreciation expense was recorded of $3.7 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 nine months ended
December 31, 1995 and 1996 was $5.2 million and $5.2 million, respectively. ESIF
had $2.0 million of non-recurring charges during the nine-month period ending
December 31, 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
55
<PAGE> 68
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 years 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 was completed by December
31, 1996.
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.
56
<PAGE> 69
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, 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. Due to the uncertainty regarding settlement of unpaid claims, the
liquidity requirements of the Company vary, and the Company has attempted to
structure its investment portfolio to take into account its historical payout
patterns. See "BUSINESS -- Investment Portfolio." The Company purchases
reinsurance to mitigate the effect of large claims and help stabilize demands on
its liquidity. See "BUSINESS -- Reinsurance."
As part of the Acquisition, SHC incurred debt which, at December 31, 1996,
consisted of a term loan in the amount of $33.0 million, and no balance 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 has executed a credit agreement with the Bank pursuant to
which, upon consummation of the Conversion, the existing debt will be
restructured. Under such new credit facility, as of the Effective Date, the term
loan will be $33.0 million and the revolving line of credit will be $5.0
million, and the interest rate will be the prime rate plus 1%. The annual
principal payments (which are payable in quarterly installments) will be $2.3
million, $5.0 million, $5.6 million, $7.6 million, $9.1 million and $3.4 million
in each of calendar years 1997, 1998, 1999, 2000, 2001 and 2002, respectively.
The Company anticipates that its debt obligations will be satisfied from
the cash flow generated by the Administrative Subsidiaries.
For the years ended March 31, 1995 and 1996, net cash provided by operating
activities was $13.3 million and $13.3 million, respectively, while net cash
used in investing activities was $12.3 million and $49.6 million, respectively.
The increase in cash used in investing activities is related to the Acquisition
and the assumption of debt in connection therewith.
The Company's balance sheets as of March 31, 1996 and December 31, 1996
reflect $20.1 million and $21.1 million, respectively, of recoverables from the
SDTF. The Company received $5.6 million and $6.5 million in actual recoveries
from the SDTF for the fiscal year ended March 31, 1996 and the nine months ended
December 31, 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. If the SDTF is discontinued, the Company believes that the
existing reimbursement obligations of the SDTF would become general obligations
of the State of Florida although there is no assurance that a reviewing court
would adopt that view. The SDTF has made no acknowledgment with regard to the
enforceability of its reimbursement obligations to insurers such as the Company.
See "BUSINESS -- Regulation -- Special Disability Trust Fund."
As a self-insurance fund, ESIF recorded for statutory reporting an asset of
$42.9 million, $47.3 million and $45.0 million at March 31, 1995, March 31, 1996
and December 31, 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, $4.7 million and $4.2
million at March 31, 1995, March 31, 1996 and December 31, 1996, respectively.
ESIF's statutory basis surplus as a self-insurance fund was approximately $20.1
million at December 31, 1996. Upon conversion to a stock insurance company, and
assuming $50.0 million of estimated net proceeds from the Offerings, plus $5.5
million of additional statutory capital which will result from reorganization,
Bridgefield's statutory basis surplus as a stock insurance company would be
approximately
57
<PAGE> 70
$35.1 million at December 31, 1996. Such capital and surplus is considered
adequate 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 EXPENSES
The Company's consolidated balance sheet includes an estimated reserve for
unpaid losses and LAE. This reserve represents management's best estimate of the
ultimate cost of the losses and LAE that are unpaid at the balance sheet date,
including incurred but not reported ("IBNR") claims. Such reserve is established
by management based upon (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. Such reserve is continually reviewed and, as
adjustments become necessary, such adjustments are included in the results of
current operations.
The following table shows changes in the historical loss and LAE reserve
for ESIF for the ten fiscal years beginning with the year ended March 31, 1987.
The top line shows the reserve recorded at each fiscal year end. Such amount
represents an estimate of unpaid losses and LAE occurring in that year as well
as future payments on claims occurring in prior years. The upper portion of the
table (cumulative paid) presents the cumulative amounts paid during subsequent
years on those losses for which reserves were carried as of each specific year.
The lower portion (reserves re-estimated) shows the re-estimated amounts of the
previously recorded reserve based on experience as of the end of each succeeding
year. The re-estimate changes as more information becomes known about the actual
losses for which the initial reserve was 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
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<PAGE> 71
cumulative change in estimates since the initial reserve was established. It is
equal to the difference between the initial reserve and the latest re-estimated
reserve amount.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
<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............. $ 37,002 $ 57,488 $125,065 $169,004 $209,605 $169,474 $257,977 $271,321 $258,951 $280,540
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..... $ 47,332 $101,593 $141,132 $184,334 $202,489 $233,631 $237,988 $244,956 $267,751
Two years later.... 68,254 112,663 156,080 178,786 237,767 214,381 238,684 254,221
Three years
later............ 70,441 126,297 161,652 214,630 231,823 225,238 247,998
Four years later... 75,980 132,163 182,010 209,894 239,113 235,163
Five years later... 78,117 148,221 178,810 209,196 248,352
Six years later.... 86,683 145,937 178,042 215,984
Seven years
later............ 85,476 143,905 184,986
Eight years
later............ 83,430 148,783
Nine years later... 87,400
Cumulative redundancy (deficiency)
Dollars............ $(50,398) $(91,295) $(59,921) $(46,980) $(38,747) $(65,689) $ 9,979 $ 17,100 $ (8,800)
Percentage......... -136.20% -158.81% -47.91% -27.80% -18.49% -38.76% 3.87% 6.30% -3.40%
Net reserves.......................................................................... 257,977 271,321 258,951 280,540
Ceded reserves........................................................................ 103,118 95,850 108,440 107,092
-------- -------- -------- --------
Gross reserves........................................................................ 361,095 367,171 367,391 387,632
Net reserves re-estimated............................................................. 247,998 254,221 267,751 --
Ceded reserves re-estimated........................................................... 94,271 102,247 101,161 --
-------- -------- -------- --------
Gross reserves re-estimated........................................................... 342,269 356,468 368,912 --
Gross cumulative redundancy (deficiency)
Dollars............................................................................. 18,826 10,703 (1,521)
Percentage.......................................................................... 5.21% 2.92% -0.41%
</TABLE>
As seen in the above table, ESIF's reserve estimates for fiscal years ended
March 31, 1992 and earlier had a history of increasing (or "adversely
developing") as those years matured and more data became available. In addition,
as discussed in "-- Results of Operations" above comparing the years ended March
31, 1994, 1995 and 1996, for the fiscal year ended March 31, 1995 ESIF reduced
its net reserve by approximately 4.6%, and subsequently increased the net
reserve in fiscal year 1996 by approximately 8.3%. The adverse development trend
and the recent reserve adjustments are due to several internal and external
factors, as discussed below.
Although ESIF began operations in 1979, prior to 1985 it was not necessary
for ESIF to maintain detailed claims data for the purpose of projecting ultimate
loss reserves because its losses over a specified amount were fully reinsured.
Also, at that time self-insurance funds in Florida, including ESIF, were
regulated by the Florida Department of Labor (the "DOL"), which did not require
actuarial verification or the recording of IBNR reserves. Beginning in 1985, due
primarily to changes in the reinsurance market, ESIF no longer had access to
full reinsurance, and ESIF for the first time engaged an independent actuary to
assist it in computing ultimate reserve estimates.
Prior to 1989, ESIF's claims were adjusted and managed by Adjustco, Inc.
("ADJUSTCO"), an independent claims adjusting company, under contract to SCI.
Adjustco was responsible for establishing, monitoring
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<PAGE> 72
and updating case-based loss reserves used to set the reserves for ESIF's
financial statements. In January 1989, SCI discontinued the contract with
Adjustco and began performing such claims management functions through its
wholly owned subsidiary, Summit Claims Management, Inc. ("SCM"). This change has
increased ESIF's control over the handling of each claim and has permitted ESIF
to collect detailed claims data. Also, due to improved data collection and
computer databases, ESIF is now able to sort the data into smaller subsets that
support more individualized actuarial assumptions, and ESIF is able to perform
more sophisticated analysis of the data.
In 1985, when ESIF first began establishing meaningful loss and LAE
reserves, there was not a substantial volume of company-specific claims data
available. The actuaries relied more heavily on industry data and assumptions.
Management elected to record ESIF's reserves each year at an amount in excess of
the actuarial estimates, a practice which proved to result in a more accurate
reserve amount. As reflected in the table above, even with the excess (or
"management") reserves added to the actuarial estimates, ESIF's total reserves
still experienced adverse development until 1993.
By 1993, ESIF's business had grown significantly, and it was beginning to
accumulate a much larger volume of company-specific data. Also, the data
regarding claims incurred in prior years and paid in later years was becoming
more reliable as this data aged and matured. The use of this data enabled ESIF's
actuaries to begin estimating more accurate reserve amounts.
In addition, in or around 1994, several external changes occurred which
have improved ESIF's ability to establish more accurate reserve estimates. In
January 1994, the New Florida Law went into effect. For ESIF, one of the most
important reforms implemented by this law was that it permitted workers'
compensation insurers in Florida to settle and close all portions of outstanding
claims, whereas previously they had been permitted to settle and close only the
wage loss portions. This has significantly improved ESIF's ability to predict
the ultimate loss on a claim. Also, because ESIF has been able to settle and
close claims that were still outstanding from prior years, it has been able to
reduce the adverse development of prior years as those years continue to mature.
ESIF's loss ratios have declined over the years and have become more stable.
Another factor that has contributed to ESIF's improved actuarial estimates
is the lessening of medical cost inflation. Prior to 1994, ESIF's experience
showed significant annual inflation in medical expenses, which made estimating
loss reserves with respect to medical costs uncertain. However, with managed
care and other actual or proposed healthcare reforms limiting this rate of
inflation in medical expenses, ESIF has been better able to estimate loss
reserves with respect to such costs.
Also in 1994, the Florida legislature transferred regulatory oversight of
self-insurance funds from the DOL to the Florida DOI. The Florida DOI placed
substantially more emphasis on the actuarial reports and requested that
self-insurance funds record reserves only at amounts that had been agreed upon
by the funds' actuaries.
As a consequence of these factors that had been taking place in the early
1990s, in 1995 ESIF determined that it no longer needed to add the management
reserves to the actuarial estimates. ESIF's management believed that the
actuarial estimates were beginning to show a trend of redundancy or only small
deficiencies, as reflected in the table above. As a result, for the fiscal year
ended March 31, 1995, ESIF reduced the aggregate loss and LAE reserve by
approximately $25.4 million, or 9.8% of net reserves. The following table, which
presents the development of actuarial net loss ratios for the same ten-year
period that is set forth above, illustrates how the actuarial estimates have
improved over time. This table shows net loss ratios that have been computed
using only the actuarially estimated reserve amounts, and excludes any
management reserves. The top line of the table shows the net loss ratio for each
year, and each succeeding line shows how that ratio has
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<PAGE> 73
developed with each succeeding year. The ratios for each succeeding year are for
only that original accident year and are not cumulative.
DEVELOPMENT OF ACTUARIAL NET LOSS RATIOS(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
----- ----- ----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Actuarial loss & loss adjustment expense
ratios................................... 86.0% 89.8% 77.0% 66.8% 67.0% 59.8% 55.8% 59.8% 60.4%
One year later............................. 86.0% 89.4 85.8 77.0 67.1 64.8 56.2 53.8 58.7
Two years later............................ 92.0 98.9 91.5 77.2 66.9 61.6 61.0 54.3
Three years later.......................... 98.7 97.8 93.4 84.5 70.3 64.2 60.7
Four years later........................... 98.2 100.9 103.1 87.2 75.3 64.7
Five years later........................... 101.3 110.7 103.1 89.9 76.8
Six years later............................ 108.7 110.7 104.3 92.5
Seven years later.......................... 108.1 110.8 106.2
Eight years later.......................... 107.7 111.7
Nine years later........................... 111.6
</TABLE>
- ---------------
(1) Actuarial net loss ratios are actuarial losses net of specific reinsurance
divided by estimated billable premiums without regard for the type of
premium payment plan. This table does not reflect the impact of aggregate
reinsurance.
As shown in this table, the net loss ratios for fiscal years prior to 1992
have steadily increased as those accident years have developed. The net loss
ratios for years 1992 and later have remained relatively stable. These trends
correlate to the trend of the actuarially estimated reserves for years prior to
1992 to develop adversely as those years mature, and for years 1992 and later to
be more accurate and experience less adverse development. By 1995, when
management of ESIF determined that it would not need to record reserves in
excess of the actuarial estimates, these net loss ratios had begun to evidence
the trend toward less adverse development. For example, the net loss ratio for
1987 was 86.0% in that year, and by the end of 1994 the 1987 net loss ratio had
developed to 108.1%. In contrast, the net loss ratio for fiscal year 1992 was
67.0% in that year, but it had positively developed to 61.6% by the end of 1994.
Years subsequent to fiscal year 1992 continued to evidence this trend.
The improved quality and quantity of ESIF's claims data also resulted in
two adjustments in fiscal year 1996, an increase of the loss and LAE reserve and
a decrease of accrued billable premiums relating to ESIF's retrospective rated
insurance policies (the "RETRO PLANS"). For the fiscal year ended March 31,
1996, the actuarial estimate of the aggregate loss and LAE reserve increased due
to the emergence of greater than expected incremental increases in paid losses
relating to prior accident years, primarily in accident years prior to 1992.
ESIF's independent actuaries determined that the total increase in the reserve
for fiscal year 1996 should be approximately $11.0 milion, which was 3.9% of net
revenues.
With respect to retrospective premiums, the actuaries reduced their
estimate of accrued retrospective premiums by approximately $9.3 million. The
establishment of an estimate of accrued retrospective premiums requires an
analysis of both the overall losses for all Retro Plan participants (the mean
loss ratio) as well as an estimate of the dispersion of individual participant
loss ratios around the overall mean (the variance of the loss ratios). Prior to
March 31, 1996, the actuaries had developed an estimate of the variance using
only a limited amount of information about the individual participants' actual
loss experience. To a large extent, the model was based on industry information
regarding the dispersion of workers' compensation loss ratios around the mean.
The annual review of the amount of accrued retrospective premiums reflected
revised estimates of the participants' mean loss ratio, but did not re-estimate
the variance assumption.
During 1995, ESIF's actuaries reviewed the aggregate information for
participants in the Retro Plans. For years 1986 through 1988, a majority of the
losses had already been paid so that the actuaries were able to evaluate the
actual dispersion of individual participants' losses around the mean. The
actuaries concluded from this review that the earlier assumption of the variance
tended to underestimate the proportion of the insureds that would experience
losses in excess of the Retro Plans cap. The estimate of the variance was
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<PAGE> 74
revised to better match the actual experience of the Retro Plans participants
for these earlier years and applied the same assumptions to more recent years.
Thus, although the reserving model remain unchanged, revised assumptions
regarding variance using more individualized data caused the estimates of
retrospective premiums receivable to be reduced.
The following table contains summary reconciliations of the beginning and
ending insurance reserves, displayed individually for each of the three most
recent fiscal years and for the six months and nine months ended September 30,
1996 and December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, FOR THE SIX MONTHS FOR THE NINE MONTHS
-------------------------------- ENDED ENDED
1994 1995 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996
--------- -------- --------- ------------------ -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loss & LAE Reserves,
beginning of period --
GAAP basis............. 360,425 368,000 367,391 387,632 387,632
Less: Reinsurance
recoverables (exclusive
of recoverables on paid
losses)................ (103,118) (95,851) (108,440) (107,092) (107,092)
--------- -------- --------- --------- ---------
257,307 272,149 258,951 280,540 280,540
Less: Recoverable from
Florida SDTF........... (6,745) (9,929) (15,879) (20,060) (20,060)
--------- -------- --------- --------- ---------
Net reserves for losses
and LAE at beginning of
year................... 250,562 262,220 243,072 260,480 260,480
Add provision for claims
occurring in:
The current year....... 118,889 94,520 84,058 35,663 57,289
Prior years............ (10,478) (25,404) 10,786 (3,528) (7,053)
--------- -------- --------- --------- ---------
Incurred losses during
the current year....... 108,411 69,116 94,844 32,135 50,236
Deduct payments for
claims occurring in:
The current year....... 17,704 16,857 15,432 3,565 8,378
Prior years............ 79,049 71,407 62,004 34,443 50,682
--------- -------- --------- --------- ---------
Claim payments during the
current year........... 96,753 88,264 77,436 38,008 59,060
Net reserves for losses
and LAE at end of
year................... 262,220 243,072 260,480 254,607 251,656
Add: Impact of
reinsurance for FASB
113................. 95,851 108,440 107,092 102,451 104,129
Recoverable from
SDTF............... 9,929 15,879 20,060 21,138 21,138
--------- -------- --------- --------- ---------
Gross reserves for losses
and LAE at end of
period (GAAP basis).... $ 368,000 $367,391 $ 387,632 $ 378,196 $ 376,923
========= ======== ========= ========= =========
</TABLE>
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A reconciliation of the loss and LAE reserves determined on a GAAP basis
with the reserves recorded on the Statutory basis financial statements provided
to state regulatory authorities is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------- SEPTEMBER 30, DECEMBER 31,
1994 1995 1996 1996 1996
-------- -------- --------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
GAAP basis loss and LAE
reserves..................... $368,000 $367,391 $ 387,632 $ 378,196 $ 376,923
Reinsurance recoverables
included in GAAP loss and LAE
reserves..................... (96,680) (108,440) (107,033) (102,396) (103,508)
Adjustment for the effect of
computing GAAP basis loss
reserves using paid losses
gross of SDTF recoveries..... (15,530) (24,836) (31,376) (28,832) (28,832)
Discounting of indemnity
portion of permanent
disability claims............ 4,730 4,875 4,667 4,235 4,235
-------- -------- --------- --------- ---------
Statutory basis loss and LAE
Reserves..................... 260,520 238,990 253,890 251,201 248,818
======== ======== ========= ========= =========
</TABLE>
The Company's GAAP basis balance sheet also includes the following amounts
related to the Florida SDTF:
<TABLE>
<CAPTION>
MARCH 31,
------------------------------ SEPTEMBER 30, DECEMBER 31,
1994 1995 1996 1996 1996
------ ------- ------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Recoverable from SDTF... $9,929 $15,878 $20,060 $21,138 $21,138
Reinsurance recoverable
related to SDTF....... 7,235 10,317 11,781 8,445 8,445
</TABLE>
The recoverable from SDTF asset has been recorded based on ESIF's
historical collection experience and the amount of claims identified as subject
to SDTF recovery. The SDTF reinsurance recoverable results from calculating such
recoverables using loss and LAE reserves computed using paid losses gross of
SDTF recoveries.
The Company received $3.2 from SDTF million for the nine months ended
December 31, 1995 and $6.5 million for the nine months ended December 31, 1996.
In order to quantify the amounts recoverable from the SDTF, ESIF reviewed its
claims that have been identified as subject to SDTF recovery considering ESIF's
historical recovery experience on claims submitted to the SDTF. In addition,
ESIF estimated the amount of claims it expects to recover over the next four
years based on actual collection experience for the most recent two years, and
discounted the expected recoveries using an appropriate interest rate. The
amounts reflected as recoverables from the SDTF were based on the discounted
expected collection amounts rather than on the total claims identified as
subject to SDTF recovery. Accordingly, there is an implicit valuation allowance
of approximately $8.0 million reflected in the recorded SDTF recoverable
amounts. ESIF believes it will be reimbursed over a number of years. See "RISK
FACTORS -- Possible Underfunding of Florida Special Disability Trust Fund."
Although during the 40 year history of the SDTF it has paid reimbursements it
has determined were eligible for reimbursement, there can be no assurance that
reimbursements will continue to be made. If the SDTF were to discontinue, ESIF
believes the most likely run-off procedure would be for it not to accept new
claims after some date certain. If this should occur, ESIF believes that because
of the backlog of filed and accepted claims already in the system, the impact on
the Balance Sheet would be manageable. However, discontinuation of the SDTF, or
changes in its operations which decrease the availability of recoveries from the
SDTF, increase the SDTF assessments payable by ESIF, prohibit ESIF 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 ESIF's
business, financial condition or results of operations. If the SDTF is
discontinued, the Company believes that the existing reimbursement obligations
of the SDTF would become general obligations of the State of Florida, although
there is no assurance that a reviewing court would adopt that view. The SDTF has
made no acknowledgment with regard to the enforceability of its reimbursement
obligations to insurers such as the Company.
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<PAGE> 76
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 December 31, 1996, the Company's insurance products and administrative
services are provided to approximately 15,800 employers representing
approximately $217.4 million in premiums, including approximately $101.0 million
in premiums attributable to the Funds and $116.4 million in premiums
attributable to the Insurance Subsidiaries ($108.3 million in the case of
Bridgefield and $8.1 million in the case of Bridgefield Casualty).
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.
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<PAGE> 77
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 62% 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. Following the Conversion, the Company will be able to
offer both self-insurance and traditional indemnity products, which will improve
its ability to serve its markets. In addition, as a stock corporation, the
Company may have access to additional capital to finance growth by acquisition
and to expand into other geographic markets (subject to any necessary regulatory
approvals). 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.
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
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<PAGE> 78
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 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
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<PAGE> 79
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.
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
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Retailers Association Self Insurers Fund ("LRA"), and the Kentucky Retail
Federation Self Insurers Fund ("KRF"). SCI assisted with the formation of and
became the administrator for FRF, LRA and LESA in 1979, 1980 and 1982,
respectively. SCI became the administrator of KRF in 1995. None of the Funds are
related to the Company, except that certain of the directors of Summit are
trustees of certain of the Funds, as described in "MANAGEMENT OF THE
COMPANY -- Compensation Committee Interlocks and Insider Participation" and
"CERTAIN TRANSACTIONS." Each of the Funds was formed at the direction of a
particular trade association, and each is a trust organized and operated under
provisions of applicable state law. Each Fund has a board of trustees, but no
officers or employees, and the board of trustees of each Fund has contracted
with SCI to perform most aspects of the daily operations of such Fund.
Each Fund has executed a written administrator's contract with SCI which
defines the services to be performed by SCI and the fee to be paid by the Fund.
These contracts are intended to be (i) long-term in nature, with initial terms
of between two and five years and provisions for automatic renewal, and (ii)
terminable by the Funds for "good cause," which is generally defined to mean a
failure by SCI to perform its obligations under the contract or SCI's fraud or
bankruptcy, with such default by SCI not being cured within a 90-180 day period
after notice from the Fund. For these reasons and because the Funds have no
employees and the Company manages all aspects of their relationships with agents
and members, the Company believes that it would be difficult for the Funds to
cancel their contracts with the Company or move the business to a new
administrator. The Company intends to continue providing the administrative
services that it currently provides, and it has no reason to believe that its
relationships with any of the Funds will be adversely affected by the
Conversion. The Funds have no equity or other type of ownership interest in the
Company and, therefore, are not entitled to participate in the Conversion.
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 December 31, 1996, FRF had approximately 7,250 member
employers and annual premiums in excess of $77.2 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 December 31, 1996, LESA had annual premiums
of approximately $12.0 million. LESA memberships renew each year on April
1. LESA's members have voted in favor of converting the fund to a
nonassessable mutual insurance company. If such conversion is approved by
the applicable insurance regulators and is effected, upon the approval of
SCI, LESA would replace its current administrator's agreement with a
managing general agent agreement, pursuant to which SCI would continue
without interruption to manage the day-to-day operations of LESA, as
converted to an insurance company.
Louisiana Retailers Association Self Insurers Fund. LRA was
established in 1980 as a workers' compensation self-insurance fund
specifically targeting wholesalers and retail-related businesses in
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<PAGE> 81
Louisiana. As of December 31, 1996, LRA had over 1,250 retail member
employers and annual premiums of approximately $8.9 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 August 1995. As of December 31,
1996, KRF had over 1,200 members and annual premiums of approximately $2.9
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 4,760
member employers and approximately $108.4 million in annual premiums as of
December 31, 1996. ESIF's policies renew each year on April 1.
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 December 31, 1996 had written approximately
520 such policies representing approximately $8.1 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 rated
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. If a client's losses during a claims period are
better than expected, the Company may be required to refund a portion of the
premium previously paid. Throughout the fiscal years ended March 31, 1994, 1995
and 1996, and the nine months ended December 31, 1996, the Company established
and maintained gross aggregate accruals for retrospective refunds in amounts of
$6.4 million, $9.2 million, $10.6 million and $10.4 million, respectively.
Between March 31, 1994 and December 31, 1996, the Company paid an aggregate of
$0.9 million in excess of these refund accruals. Retrospective
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rated policies accounted for 33%, 32%, 30% and 31%, respectively, of total
premiums during the fiscal years ended March 31, 1994, 1995 and 1996 and the
nine months ended December 31, 1996. 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, to stabilize
its underwriting results and to increase its underwriting capacity. In exchange
for reinsurance, the Company pays to its reinsurers a portion of the premiums
that the Company receives.
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, for the current fund year 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."
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Certain detailed information regarding the Company's total reinsurance
recoverable is provided in the following table (dollars in thousands):
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996 AS OF DECEMBER 31, 1996
----------------------------- -----------------------------
REINSURANCE PAID UNPAID PAID UNPAID
CARRIER RATING(1) CLAIMS CLAIMS TOTAL CLAIMS CLAIMS TOTAL
----------- --------- ------ -------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
American Re.......... A+/XII $ -- $ 286 $ 286 $ -- $ 734 $ 734
Cigna................ A-/XIII 297 -- 297 -- -- --
Continental
Casualty........... A/XV -- 10,531 10,531 -- 9,245 9,245
Crossroads(2)........ N/R 917 9,375 10,292 1,847 9,276 11,123
Employers Re......... A++/XV 595 6,805 7,400 808 5,150 5,958
Federal Ins. Co...... A++/XV -- 9,626 9,626 -- 8,417 8,417
INA.................. A-/XIII -- 5,678 5,678 223 5,792 6,015
Lloyds of London..... N/R -- 12,274 12,274 -- 16,856 16,856
National Union....... A++/XV -- -- -- -- 2,385 2,385
Old Republic......... A+/IX 53 17,242 17,295 41 15,132 15,173
Transamerica......... A/XI 20 37,820 37,840 10 31,142 31,152
------ -------- -------- ------ -------- --------
Total...... $1,882(3) $109,637 $111,519 $2,929(4) $104,129 $107,058
====== ======== ======== ====== ======== ========
</TABLE>
- ---------------
(1) 1996 Best's Key Rating Guide -- Property-Casualty Edition.
(2) Based on filings with the Florida DOI, Crossroads maintains trust fund
assets sufficient to fund its reinsurance obligations, although no specific
recoverable from Crossroads is directly secured by such trust fund assets.
(3) All recoverables are less than 90 days old, except $3,000 owed by Employers
Re which is more than 120 days old.
(4) All recoverables are less than 90 days old.
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 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.
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.
The Company has not experienced any material difficulties in collecting
reinsurance recoverables from any of its reinsurers, including, without
limitation, Crossroads and Lloyds of London. However, no assurance can be given
as to the future ability of any of the Company's reinsurers to meet their
obligations. In recent years, Lloyds of London has reported substantial
aggregate losses which have had adverse effects on it in general and on the
underwriting capacity of its syndicates in particular. These losses and other
adverse developments could affect the ability of certain Lloyds of London
syndicates to continue to trade and the ability of insureds to continue to place
business with particular syndicates. To the Company's knowledge, the Lloyds of
London syndicates with which the Company has contractual relationships have not
experienced any inability to pay their reinsurance obligations as and when due.
However, it is not possible for the Company to predict what effects the
circumstances described above may have on Lloyds of London and the Company's
contractual relationship with Lloyds of London syndicates in future years.
INVESTMENT PORTFOLIO
In general, the Company's investment policy focuses on (i) safety of
principal, (ii) timing of maturities to match assets and liabilities, and (iii)
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.
The Company's primary investment objective is to minimize risk while
matching portfolio and liabilities duration. The average fixed-income duration
of the portfolio is approximately four years. This duration, when
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coupled with the Company's cash and cash equivalents, matches the historical
claims liability duration of three years. A secondary objective is to maximize
total return, within the regulatory constraints of the Florida Insurance Code
and quality constraints of NAIC Class I requirements.
In the fiscal year ended March 31, 1996, the Company's investment
activities included an unusually high portfolio turnover due to portfolio
restructuring which consisted of: (i) a $50.0 million portfolio allocation to a
new investment manager; (ii) the $26.0 million Acquisition of SHC; and (iii)
approximately $85.0 million of general securities trades designed to take
advantage of market interest rate movements. This $85.0 million of trades
included $15.0 million in yield swaps, $20.0 million to reduce intangible tax
exposure, and a $50.0 million shift to corporate bonds to increase yields. The
Company expects future portfolio activity to return to pre-1996 levels. The
Company does not use any derivatives for interest rate hedging or other
purposes.
As of December 31, 1996, approximately 73% of the bonds in the Company's
investment portfolio were rated AA or above by Standard & Poor's ("S&P") and
approximately 96% were either rated A- or better by S&P or are considered Class
I under the NAIC's classification system. The composition of the investment
portfolio as of December 31, 1995 and 1996 is depicted in the following table.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------
1995 1996
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Government bonds........................................... $ 88,715 37.5% $ 61,267 27.2%
Municipal bonds............................................ 60,365 25.5% 83,803 37.2%
Corporate bonds............................................ 32,106 13.6% 39,612 17.6%
Preferred stock............................................ 3,215 1.4% 4,568 2.0%
Common stock............................................... 11,228 4.7% 14,100 6.3%
Short-term investments..................................... 36,344 15.4% 14,536 6.4%
Cash and cash equivalents.................................. 4,448 1.9% 7,433 3.3%
-------- ----- -------- -----
Total cash and invested assets................... $236,421 100.0% $225,319 100.0%
======== ===== ======== =====
</TABLE>
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."
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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."
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.
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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.
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
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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 for the
fiscal years ended March 31, 1994, 1995 and 1996, respectively. The Company's
SDTF assessments were approximately $5.5 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 December 31, 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. If the
SDTF is discontinued, the Company believes that the existing reimbursement
obligations of the SDTF would become general obligations of the State of Florida
although there is no assurance that a reviewing court would adopt that view. The
SDTF has made no acknowledgment with regard to the enforceability of its
reimbursement obligations to insurers such as the Company. 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 -- Possible Underfunding
of 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 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.
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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 Regulation."
DISPOSAL OF BUSINESS
The Company is in the process of disposing of two subsidiaries whose
businesses are unrelated to workers' compensation and no longer fit within the
Company's overall business strategy. 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. The Company was unable to find a
purchaser for this business and, effective October 31, 1996, the Company
terminated all employees and began winding down the operations. Prior to
December 31, 1996, the Company sold all of Meritec's fixed assets for a nominal
value, and Meritec's only remaining liability is under a lease for office space
in Atlanta. The Company is currently seeking to sublease this space or terminate
the lease. The Company does not expect this liquidation of Meritec to have a
material effect on the Company's financial condition or results of operations.
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 $3.0 million, and the North Carolina Department
of Insurance granted Carolina Summit an HMO license, but Carolina Summit has
never conducted any business. Prior to December 31, 1996, the Company liquidated
Carolina Summit's approximately $2.0 million of invested assets. The Company has
also reached an agreement to sell for cash all of the stock of Carolina Summit
to an unrelated third party for a price equal to the aggregate net book value of
Carolina Summit, approximately $745,000. The sale is expected to close in the
first quarter of 1997. The Company continues to own another North Carolina
subsidiary, Carolina Med Summit, Inc. ("Carolina Med"), which was formed in
conjunction with Carolina Summit and to facilitate its North Carolina licensing
application. Carolina Med has no assets or liabilities.
See notes 17 and 18 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 department's programming staff averages 10 years of experience. The
department's personnel include full-time programmers, quality-control engineers
and operational support specialists.
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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 and Chief Financial
Officer
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..................... 48 Vice President of Operations of -- --
SCI
Ricky T. Hodges........................... 43 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
1986 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 as 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 of 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 of 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 of Production Group of Continental Risk Management Services,
a property and casualty insurance company located in New York, New York, where
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 at 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, $7.1 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 an 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 Company's consolidated net income after taxes
exceeds $6.0 million. 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
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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 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 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 50% of such options will vest 180 days after the
Effective Date and the remaining 50% of such options will vest on the first
anniversary of such initial vesting date, 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"), which is the sponsoring trade association for FRF, one of the
Funds administered by SCI. Pursuant to a written arrangement between SCI and the
Association, the Association, as the fund sponsor, is entitled to a fee equal to
1% of such Fund's premiums earned in each year, and SCI is obligated to pay such
fee out of the administrative fee it receives from FRF. 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. 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.
Mr. Bull is also the sole shareholder of Louisiana Employers Safety
Association, Inc., the sponsoring association for LESA, one of the funds managed
by SCI, and Mr. Bull has been nominated to be on the Board of Directors of LESA
if it completes a currently proposed conversion to a nonassessable mutual
insurance company.
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 principal shareholder of SHC,
personally indemnify ESIF up to a maximum of $5.0 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
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obligations will decrease by $1.0 million for every $4.0 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."
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
anticipated beneficial ownership of Common Stock and the Series A Preferred
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 such person will
beneficially own more than 4.99% of the shares of Common Stock or Series A
Preferred Stock as of the Effective Date. The number of shares of Series A
Preferred 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>
SERIES A
COMMON STOCK PREFERRED STOCK
----------------------- -----------------------
SHARES SHARES
BENEFICIALLY PERCENT BENEFICIALLY PERCENT
NAME OWNED OWNED OWNED OWNED
---- ------------ ------- ------------ -------
<S> <C> <C> <C> <C>
William B. Bull....................................... 100,000 2.0% 0
Russell L. Wall....................................... 22,727 * 0
Greg C. Branch........................................ 50,000(1) 1.0 287 *
C. C. Dockery......................................... 45,455 * 35 *
John A. Gray.......................................... 4,545 * 0
Robert L. Noojin, Sr.................................. 4,545 * 0
Thomas S. Petcoff..................................... 9,091 * 9 *
Robert Siegel......................................... 4,545 * 169 *
All directors and executive officers as a group (8
persons)............................................ 240,908(1) 4.8% 500 *
</TABLE>
- ---------------
* Less than one percent.
(1) Includes 4,545 shares to be held by trusts for which Mr. Branch is the
trustee.
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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 1,639,836 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 cumulate
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
cumulated 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 cumulated 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.
(v) The redemption price shall be $10 per share, together with an
amount equal to all cumulated but unpaid dividends thereon to the date of
redemption.
(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 cumulated but unpaid dividends.
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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
ratably receive 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 cumulated 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 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
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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 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 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 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
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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 ChaseMellon Shareholder Services, L.L.C., New York, New York.
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 LLP, 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.
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
89
<PAGE> 102
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 and
the Public Offering 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 could be treated as "Section 306 Stock"
under applicable provisions of the Tax Code. The sale of "Section 306 stock"
could generate ordinary income that does not entitle a holder to a dividends
received deduction. A redemption by the Company of Section 306 stock could be
treated as a dividend. In addition, whether or not the Series A Preferred Stock
is treated as Section 306 Stock, a redemption of the Series A Preferred Stock
could be treated as a dividend when an Eligible Policyholder disposes of his
Series A Preferred Stock. The answers to these issues in part will depend upon
whether the Eligible Policyholder holds Common Stock and whether the sale or
redemption is of all of such holder's shares or only a portion of them. Eligible
Policyholders should consult their tax advisors when considering a sale or
redemption of Series A Preferred Stock to determine whether such sale or
redemption results in capital gain or ordinary income and, if ordinary, whether
or not a dividends received deduction is available.
Under current law, whether or not the dividends on the Series A Preferred
Stock are declared and paid as they accrue, shareholders will only recognize
income when, depending on their method of accounting, the dividends are declared
or are paid. The IRS, however, has the authority to draft regulations,
potentially with retroactive effect, that would require holders to include
dividend income on the Series A Preferred Stock as such dividend income
economically accrues, regardless of when dividends are actually declared or
paid. If the Company defers payment of dividends on the Series A Preferred Stock
beyond the time they economically accrue and if such regulations are drafted and
become effective, it is possible that at some future time holders of the Series
A Preferred Stock would be required to include dividend income on the Series A
Preferred Stock prior to the declaration or payment of such dividends. Eligible
Policyholders should consult their tax advisors to assess the impact of such
possible future change in the law.
TAXPAYER IDENTIFICATION NUMBER
It is important that each Eligible Policyholder complete, sign and return
the Taxpayer Identification 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
TAXPAYER IDENTIFICATION 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 SERIES A PREFERRED STOCK OR 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 Taxpayer Identification Card
are included in this Proxy Statement/Prospectus. The Taxpayer Identification
Card must be received by the Transfer Agent no later than 5:00 p.m. Eastern Time
on March , 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 gains from
the sale of capital assets held for more than one year reduced by any net loss
from 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.
90
<PAGE> 103
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Conversion, Summit will have outstanding 5,000,000
shares of Common Stock and 1,639,836 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 those shares held by "affiliates" (as defined in Rule 144
promulgated under the Securities Act) of Summit will not be freely tradable even
though they will have been registered under the Securities Act. Based on
information provided to Summit by its affiliates, Summit believes that
approximately 241,000 shares of Common Stock, equal to 4.8% of the Post-Offering
Outstanding Shares, and 500 shares of Series A Preferred Stock, equal to less
than 0.1% of the Series A Preferred Stock to be outstanding after the Effective
Date, will be beneficially owned by affiliates of Summit. Shares beneficially
owned by affiliates of Summit 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 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 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.
91
<PAGE> 104
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 LLP,
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 as of September 30, 1996 and for the
six months 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 thereon
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, 1994 and
1995 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, 1994 and 1995 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 Statement/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 of 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
92
<PAGE> 105
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.
93
<PAGE> 106
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
Report of Independent Auditors............................ F-28
Consolidated Balance Sheets as of September 30, 1995
(unaudited) and 1996................................... F-29
Consolidated Statements of Income for the six months ended
September 30, 1995 (unaudited) and 1996................ F-30
Consolidated Statements of Changes in Equity for the six
months ended September 30, 1995 and 1996............... F-31
Consolidated Statements of Cash Flows for the six months
ended September 30, 1995 (unaudited) and 1996.......... F-32
Notes to Consolidated Financial Statements................ F-33
Consolidated Balance Sheets as of December 31, 1995
(unaudited) and 1996 (unaudited)....................... F-53
Consolidated Statements of Income for the nine months
ended December 31, 1995 (unaudited) and 1996
(unaudited)............................................ F-54
Consolidated Statements of Changes in Equity for the nine
months ended December 31, 1995 (unaudited) and 1996
(unaudited)............................................ F-55
Consolidated Statements of Cash Flows for the nine months
ended December 31, 1995 (unaudited) and 1996
(unaudited)............................................ F-56
Notes to Consolidated Financial Statements................ F-57
SUMMIT HOLDING CORPORATION AND SUBSIDIARIES
Report of Independent Auditors............................ F-77
Consolidated Statements of Income for the years ended
December 31, 1993, 1994 and 1995....................... F-78
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1992, 1993, 1994 and 1995..... F-79
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995....................... F-80
Notes to Consolidated Financial Statements................ F-81
FINANCIAL STATEMENT SCHEDULES
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
Reports of Independent Auditors on Financial Statement
Schedules.............................................. F-86
Schedule I -- Summary of Investments as of March 31, 1996
and September 30, 1996................................. F-87
Schedule IV -- Reinsurance for the years ended March 31,
1994, 1995 and 1996 and for the six months ended
September 30, 1995 and 1996............................ F-88
Schedule VI -- Supplemental Information Concerning
Insurance Operations for the years ended March 31,
1994, 1995 and 1996 and for the six months ended
September 30, 1995 and 1996............................ F-89
</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> 107
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> 108
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> 109
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
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
-------- --------
Total invested assets............................. 221,972 212,839
Cash and cash equivalents................................... 2,984 7,427
Premiums receivable (net of $2,100 and $1,500 allowance for
doubtful accounts, respectively).......................... 50,391 38,093
Accounts receivable......................................... -- 3,157
Reinsurance recoverable, including $10,800 and $9,400 at
March 31, 1995 and 1996, respectively, from related party
reinsurers................................................ 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...................................... -- 2,448
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 1,837
Net assets of healthcare subsidiary, held for disposition... -- 2,456
Net assets of discontinued operations....................... -- 612
-------- --------
Total assets...................................... $425,206 $491,844
======== ========
LIABILITIES AND EQUITY
Liabilities:
Loss and loss adjustment expenses......................... $367,391 $387,632
Debt...................................................... -- 44,000
Unearned premium and unallocated policyholder
remittances............................................ 18,234 14,635
Accounts payable and accrued expenses..................... 12,690 13,546
Taxes, licenses and fees.................................. 1,861 1,493
Deferred revenue.......................................... 87 7,384
Federal income taxes payable.............................. 4,878 --
-------- --------
Total liabilities................................. 405,141 468,690
Equity:
Retained earnings......................................... 21,474 21,659
Net unrealized appreciation (depreciation) on
available-for-sale securities.......................... (1,409) 1,495
-------- --------
Total equity...................................... 20,065 23,154
-------- --------
Total liabilities and equity...................... $425,206 $491,844
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 110
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
(including administrative service fees paid to Summit
Holding Corporation of $26,001, $26,512 and $19,358 for
the years ended March 31, 1994 and 1995 and for the
period April 1, 1995 to January 16, 1996,
respectively).......................................... 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> 111
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> 112
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)
Decrease in discontinued operations....................... -- -- (588)
Increase in loss and loss adjustment expense.............. 39,754 9,677 20,240
Increase (decrease) in unearned premium and 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 13,286
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 7,718
Beginning cash and cash equivalents......................... 57,089 1,984 2,984
-------- -------- --------
Ending cash and cash equivalents
Continuing operations..................................... 1,984 2,984 7,427
Operations held for disposition........................... -- -- 3,251
Discontinued operations................................... -- -- 24
-------- -------- --------
Total ending cash and cash equivalents............ $ 1,984 $ 2,984 $ 10,702
======== ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE> 113
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994, 1995 AND 1996
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Employers Self Insurers Fund ("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 formed in 1978 for the stated purpose of providing statutory
workers' compensation coverage for certain Florida employers. ESIF's wholly
owned subsidiary, Employers Safety Group Association, Inc. ("ESGA"), is a trade
association primarily for employers in the construction, manufacturing,
wholesale and retail, and service industries, and any employer that is a member
of ESGA may obtain coverage from ESIF. An indemnity agreement issued by ESIF
indemnifies the member employer against loss or liability relating to workers'
compensation insurance risk. Any employer that obtains workers' compensation
coverage from ESIF automatically becomes a member of ESIF with certain rights,
including the right to vote for the election of ESIF's Trustees, the right to
receive any distribution of profits that may be authorized by the Trustees and
the right to participate in the distribution of the surplus of ESIF in the event
of its liquidation. However, all members of ESIF are subject to joint and
several liability for the obligations of ESIF. ESIF has historically not been
operated for the purpose of generating profits, but it has retained a portion of
its earnings and profits to avoid making assessments against its members. ESIF
has occasionally during its operating history paid a distribution of profits to
its members, but it has never made an assessment against its members.
ESIF is a trust with a Board comprised of six Trustees, but no employees or
officers. ESIF's bylaws specifically direct the Board to engage an
administrator, and ESIF's administrator since its inception has been Summit
Consulting, Inc. ("SCI"). SCI performs all daily operational activities for
ESIF, including premium and claims processing, pursuant to a written agreement.
SCI also performs similar functions for four other group self-insurance funds
located in Florida, Louisiana and Kentucky.
SCI owns several subsidiaries formed to assist it in providing specialized
administrative services, and SCI is wholly owned by a holding company, Summit
Holding Corporation ("SHC"). Effective January 16, 1996, ESIF purchased all of
the outstanding stock of SHC (see Note 14 for a further discussion of this
acquisition). In addition to SHC and its subsidiaries, ESIF also owns a
reinsurance subsidiary, U.S. Employers Insurance, Inc. ("USEI").
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. In such transaction, ESIF will become
wholly owned by a newly formed holding company, and ESIF's members will receive
preferred stock of the holding company in exchange for the membership interests.
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.
F-8
<PAGE> 114
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 unearned premiums established for the unexpired
portion of the premiums applicable to those policies. For retrospectively rated
policies, the ultimate premium for a period is determined on the basis of the
insured's actual losses for that period. If the actual losses are less than
expected, ESIF may be required to refund a portion of the premiums previously
paid. ESIF considers loss development experience through the date of the
financial statements in estimating the ultimate premium and, as adjustments to
premiums become necessary as a result of loss development, such adjustments are
included in current operations. 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. Fees for administrative 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 premiums of the contract.
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.
F-9
<PAGE> 115
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- 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") 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.
Such reserve is established by management based upon (i) results of actuarial
reviews which incorporate ESIF'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. Such reserve 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.
Prior to the January 16, 1996 acquisition of SHC, certain unallocated LAE
of ESIF were provided by SHC under the administrative agreement between ESIF and
SHC. Subsequent to the acquisition, ESIF has included the liability for such
unallocated LAE in the loss and LAE liability.
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. This type of guaranty fund is separate from the Florida Special
Disability Trust Fund (the "SDTF"), which is designed to pay insurers for
certain benefits paid to previously injured workers, as discussed in Note 13.
F-10
<PAGE> 116
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Florida statutes limit the assessment to a maximum of 2% of direct written
premiums annually, but 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 million, 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 allows 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.
As further described in Note 6, ESIF has significant amounts of reinsurance
recoverables as a result of ceding reinsurance under specific and aggregate
reinsurance treaties.
Intangible Assets
Cost in excess of net assets of businesses acquired totaling $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.
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.
At the balance sheet date, ESIF evaluates the recoverability of the cost in
excess of net assets acquired and the cost associated with customer listings
through a comparison of forecasted undiscounted cash flows of SHC and the
remaining asset balances.
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.
F-11
<PAGE> 117
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<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.
<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.
F-12
<PAGE> 118
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 statutory basis loss reserves and the 1986-1995 fund
years aggregate reserve plans. The aggregate plans approved by the Florida 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, consisting
of $23.8 million related to 10% of statutory basis loss reserves and $26.8
million for the 1986-1995 fund year aggregate reserves.
F-13
<PAGE> 119
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $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-14
<PAGE> 120
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 $0.4 million.
6. REINSURANCE
In accordance with general practice in the insurance industry, ESIF's
insurance subsidiaries are engaged in reinsurance transactions to cede risk to
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 retained by ESIF or its subsidiaries on any one occurrence is
$500,000 with a $750,000 deductible for each of the fiscal years ended March 31,
1995 and 1996. ESIF currently has the following coverages under specific and
aggregate reinsurance agreements:
F-15
<PAGE> 121
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SPECIFIC REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL
YEAR SPECIFIC
ENDED SPECIFIC OCCURRENCE
MARCH 31, CARRIER ATTACHMENT LIMIT
- --------- ------- ---------- ----------
<C> <S> <C> <C>
1982 INA $ 100 $ 2,000
Employers Re 2,100 3,000
1983 INA 125 2,000
Employers Re 2,125 3,000
1984 Employers Re 125 2,000
INA 2,125 Statutory
1985 Employers Re 125 2,000
INA 2,125 Statutory
1986 Employers Re 225 20,000
1987 Safety Mutual(1) 1,000 5,000
Old Republic(2) 1,000 1,000
National Union(2) 2,000 8,000
1988 Old Republic 1,000 5,000
1989 Old Republic 1,000 5,000
1990 Transamerica 1,000 15,000
1991 Transamerica 1,000 15,000
1992 Transamerica 1,000 25,000
1993 Transamerica 1,000 25,000
1994 Lloyd's 500 500
Transamerica 1,000 Statutory
1995 Lloyd's 500 500
Continental Casualty 1,000 Statutory
1996 Federal Insurance Co. 500 500
Federal Insurance Co. 1,000 1,000
Continental Casualty 2,000 Statutory
</TABLE>
- ---------------
(1) 4/1/86 - 5/31/86
(2) 6/1/86 - 3/31/87
F-16
<PAGE> 122
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AGGREGATE REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL
YEAR
ENDED AGGREGATE AGGREGATE
MARCH 31 CARRIER ATTACHMENT LIMIT
- --------- ------- ---------- ---------
<C> <S> <C> <C>
1982 INA $ 11,542 $ 2,000
Employers Re 13,542 3,000
INA 16,542 Statutory
1983 INA 11,365 2,000
Employers Re 13,365 3,000
INA 16,365 Statutory
1984 Employers Re 14,341 2,000
INA 16,341 Statutory
1985 Employers Re 17,814 3,000
INA 20,814 Statutory
1986 Employers Re 40,091 301
1987 N/A N/A N/A
1988 N/A N/A N/A
1989 Crossroads 90,648 19,000
1990 Crossroads 110,973 25,000
1991 Crossroads 130,726 31,000
1992 Crossroads 113,015 31,000
1993 Crossroads 141,956 33,401
1994 Crossroads 146,016 34,357
1995 Crossroads 133,800 31,482
1996 Crossroads 115,970 27,287
</TABLE>
Insurance premiums for the fiscal years ended March 31, 1994, 1995 and 1996
are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<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>
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross premiums written................................. $166,370 $153,844 $130,528
Ceded premiums written................................. 10,284 9,417 9,232
-------- -------- --------
Net premiums written................................... $156,086 $144,427 $121,296
======== ======== ========
</TABLE>
F-17
<PAGE> 123
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Losses and LAE incurred for the fiscal years ended March 31, 1994, 1995 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<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 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, 1993, 1994
and 1995 is also ceded to Crossroads. At March 31, 1995 and 1996, loss and LAE
reserves recoverable of approximately $10.8 million and $9.4 million,
respectively (net of amounts retroceded to USEI), are attributable to excess
reinsurance agreements with Crossroads. For the fiscal years 1986, 1987, 1990,
1991 and 1992, effective aggregate excess reinsurance is not currently in place
because these years have been self-funded or because the coverages have expired.
Exposure to significant adverse development for these years is considered
minimal due to the maturity of the loss development for these years.
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 remains obligated for amounts ceded in the event that the
reinsurers do not meet their obligations.
ESIF's reinsurance recoverable asset at March 31, 1996 is comprised of
amounts related to reinsurance agreements with the following companies (in
thousands):
<TABLE>
<CAPTION>
PAID UNPAID
REINSURANCE CARRIER CLAIMS CLAIMS TOTAL
------------------- ------ -------- --------
<S> <C> <C> <C>
American Re.............................................. $ -- $ 286 $ 286
Cigna.................................................... 297 -- 297
Continental Casualty..................................... -- 10,531 10,531
Crossroads............................................... 917 9,375 10,292
Employers Re............................................. 595 6,805 7,400
Federal Ins. Co.......................................... -- 9,626 9,626
INA...................................................... -- 5,678 5,678
Lloyds of London......................................... -- 12,274 12,274
Old Republic............................................. 53 17,242 17,295
Transamerica............................................. 20 37,820 37,840
------ -------- --------
Total.......................................... $1,882 $109,637 $111,519
====== ======== ========
</TABLE>
Substantially all of the recoverable amounts related to paid claims have
been outstanding less than ninety days at the balance sheet date. The
reinsurance recoverable amounts related to unpaid claims are calculated
considering the provisions of the specific and aggregate reinsurance agreements
and using ultimate losses by accident year consistent with the reported loss and
LAE liabilities.
F-18
<PAGE> 124
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $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.
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.
F-19
<PAGE> 125
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-20
<PAGE> 126
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
Loss and LAE Reserves, beginning of period (GAAP
basis)............................................ $ 360,425 $ 368,000 $ 367,391
Less: Reinsurance recoverables
(exclusive of recoverables on paid losses).... (103,118) (95,851) (108,440)
--------- --------- ---------
257,307 272,149 258,951
Less: Recoverable from Florida SDTF................. (6,745) (9,929) (15,879)
--------- --------- ---------
Net reserves for losses and LAE at beginning of
year.............................................. 250,562 262,220 243,072
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....................................... 79,049 71,407 62,004
--------- --------- ---------
Claim payments during the current year.............. 96,753 88,264 77,436
Net reserves for losses and LAE at end of year...... 262,220 243,072 260,480
Add: Impact of reinsurance for FASB 113............. 95,851 108,440 107,092
Recoverable from SDTF......................... 9,929 15,879 20,060
--------- --------- ---------
Gross reserves for losses and LAE at end of
year (GAAP basis)............................. $ 368,000 $ 367,391 $ 387,632
========= ========= =========
</TABLE>
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.
Statutory basis loss reserves were determined using paid loss data net of
historic SDTF recoveries; GAAP basis loss reserves were determined using paid
loss data gross of SDTF recoveries. This adjustment increased loss reserves by
$15.5 million, $24.8 million and $31.4 million at March 31, 1994, 1995 and 1996,
respectively, and increased reinsurance recoverables by $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 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 $9.9 million, $15.9 million and $20.1 million, respectively.
In order to quantify the amounts recoverable from the SDTF, ESIF reviews its
claims that have been identified as subject to SDTF recovery considering ESIF's
historical recovery experience on claims submitted to the SDTF. In addition,
ESIF estimates the amount of claims it expects to recover over the next four
years based on actual collection experience for the most recent two years, and
discounts the expected recoveries using an appropriate interest rate. The
amounts reflected as recoverables from the SDTF were based on the discounted
expected collection amounts rather than on the total claims identified as
subject to SDTF recovery. Accordingly, there is an implicit valuation allowance
of approximately $8.0 million reflected in the recorded SDTF recoverable
amounts.
F-21
<PAGE> 127
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAE assumed in the acquisition of SHC represents unallocated LAE reserves
established by ESIF that were, prior to the acquisition, accrued by SHC under
the administrator's contract between ESIF and SHC.
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, $1.6 million of ESIF's
statutory net assets of $16.3 million could be transferred from the insurance
entities subject to regulatory approval.
Equity and net income as determined in accordance with statutory accounting
practices for self-insurance funds as of and for the three fiscal years ended
March 31, 1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
NET INCOME
MARCH 31, EQUITY (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 $4.9 million and $4.7 million at March 31, 1995 and 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
F-22
<PAGE> 128
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
conversion and recapitalization, ESIF's insurance subsidiaries intend to
maintain statutory basis equity in excess of the amount required by Florida law.
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. Prior to the 1996 fiscal year, ESIF
estimated the accrued retrospective premiums using aggregate premium and loss
data. The estimation methodology was revised in 1996 such that individual member
premium and loss data was utilized in the calculation. The refinement to using
more detailed data to perform the estimation was implemented by management in
order to more accurately estimate the accrued retrospective premium amounts.
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. SDTF
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. If the SDTF is discontinued, ESIF believes that the existing
reimbursement obligations of the SDTF would become general obligations of the
State of Florida, although there is no assurance that a reviewing court would
adopt that view. The SDTF has made no acknowledgment with regard to the
enforceability of its reimbursement obligations to insurers such as ESIF.
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.
ESIF has recorded an SDTF recoverable of $15.8 million 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, $5.7 million and $5.6 million, respectively.
Assessments paid by ESIF to the SDTF were $5.5 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.
F-23
<PAGE> 129
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. ACQUISITION OF SHC
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 pro forma 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 $5.0 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 bank term
loan with rates based on LIBOR plus 3%. The balance as of March 31, 1996 for SHC
was $36.0 million. Also, a revolving bank 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.
Maturities for the term loan and reductions in the availability of the
revolving credit facility are as follows:
<TABLE>
<CAPTION>
REDUCTION IN THE
AVAILABILITY OF
TERM THE REVOLVING
LOAN CREDIT FACILITY
------- ----------------
(IN THOUSANDS)
<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................................................ 6,600 1,480
Thereafter.......................................... 4,950 1,110
------- -------
$36,000 8,000
======= =======
</TABLE>
F-24
<PAGE> 130
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (the
"401(k)") covering substantially all employees of SHC. Under the 401(k), 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
401(k) 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:
<TABLE>
<CAPTION>
MARCH 31, 1995 MARCH 31, 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Reinsurance recoverable....................... $110,141 $110,141 $111,519 $111,519
</TABLE>
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 $0.9 million on the disposition of
this operation (including operating results for periods subsequent to March 31,
1996).
F-25
<PAGE> 131
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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................ 788
------
Net assets.................................................. $ 612
======
</TABLE>
The operating results of the computer software development subsidiary for
the period January 16, 1996 to March 31, 1996 were as follows (in thousands):
<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
by a sale of its stock is expected to be completed during the first quarter of
1997. ESIF expects to recognize an after tax loss of approximately $0.4 million
on the disposition of this subsidiary (including losses from operations
subsequent to March 31, 1996). 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>
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>
F-26
<PAGE> 132
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
WORKERS'
COMPENSATION INSURANCE INTERCOMPANY
TOTAL INSURANCE ADMINISTRATION ELIMINATION
-------- ------------ -------------- ------------
(IN THOUSANDS)
<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.
21. RELATED PARTY TRANSACTIONS
As more fully described in Note 5, ESIF has entered into office premises
lease agreements with certain Trustees of ESIF.
As more fully described in Note 6, ESIF has entered into reinsurance
agreements with an insurance company in which a Trustee of ESIF has an ownership
interest.
As more fully described in Note 14, to comply with requirements of the
Florida DOI, SHC's president and chief executive officer has personally
indemnified ESIF up to a maximum of $5.0 million for certain loss, injury, or
damage to ESIF, if any, which may result from the acquisition of SHC.
Entities in which SHC's president and chief executive officer held
ownership interests have provided certain transportation related services to
SHC. Fees paid by SHC to these entities aggregate approximately $0.08 million
and $0.4 million for the years ended March 31, 1995 and 1996, respectively.
SHC's president and chief executive officer is also a member of the Board
of Directors of Florida Retail Federation (the "Association"), which is the
sponsoring trade association for Florida Retail Federation Self Insurers Fund
("FRF"), one of the group self-insurance funds administered by SHC. The
Association, as the fund sponsor, is entitled to a fee equal to 1% of FRF's
premiums earned in each year, and SHC is obligated to pay such fee out of the
administrative fee it receives from FRF. During the fiscal years ended March 31,
1994, 1995 and 1996, SHC paid approximately $1.0 million, $1.0 million and $0.9
million to the Association for such fees. During the years ended March 31, 1994,
1995 and 1996, FRF paid to SHC fees for administrative services of approximately
$32.7 million, $30.5 million and $27.7 million, respectively.
F-27
<PAGE> 133
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 September 30, 1996,
and the related consolidated statements of income, changes in equity, and cash
flows for the six months 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, consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and its
subsidiaries at September 30, 1996, and the results of their operations and
their cash flows for the six months then ended, in conformity with generally
accepted accounting principles.
The accompanying financial statements for 1995 were not audited by us and,
accordingly, we do not express an opinion on them.
ERNST & YOUNG LLP
Jacksonville, Florida
November 21, 1996
F-28
<PAGE> 134
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1995 1996
-------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
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
-------- --------
Total invested assets............................. 226,623 206,218
Cash and cash equivalents................................... 4,665 7,055
Premiums receivable (net of $2,000 and $2,000 allowance for
doubtful accounts, respectively).......................... 78,229 67,179
Accounts receivable......................................... -- 3,102
Reinsurance recoverable, including $8,000 and $10,000 at
September 30, 1995 and September 30, 1996, respectively,
from related party reinsurers............................. 107,451 103,861
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...................................... -- 2,215
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 1,200
Net assets of healthcare subsidiary, held for disposition... -- 2,862
Net assets of discontinued operations....................... -- 678
-------- --------
Total assets...................................... $456,012 $502,167
======== ========
LIABILITIES AND EQUITY
Liabilities:
Loss and loss adjustment expenses......................... $364,210 $378,196
Debt...................................................... -- 36,500
Unearned premium and unallocated policyholder
remittances............................................ 51,208 46,000
Accounts payable and accrued expenses..................... 7,100 10,389
Taxes, licenses and fees.................................. 2,076 1,471
Deferred revenue.......................................... 34 4,618
Federal income taxes payable.............................. 297 --
-------- --------
Total liabilities................................. 424,925 477,174
Equity:
Retained earnings......................................... 26,848 24,045
Net unrealized appreciation (depreciation) on
available-for-sale securities.......................... 4,239 948
-------- --------
Total equity...................................... 31,087 24,993
-------- --------
Total liabilities and equity...................... $456,012 $502,167
======== ========
</TABLE>
See accompanying notes.
F-29
<PAGE> 135
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
(including administrative service fees paid to Summit
Holding Corporation of $12,573 for the six months ended
September 30, 1995).................................... 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 in
1996).................................................. -- (412)
Loss from disposition (net of income tax benefit of $289
in 1996)............................................... -- (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 in 1996).................................. -- (375)
------- -------
Net income.................................................. $ 5,374 $ 2,386
======= =======
</TABLE>
See accompanying notes.
F-30
<PAGE> 136
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION) OF
AVAILABLE-FOR-SALE
RETAINED SECURITY
EARNINGS INVESTMENTS TOTAL
-------- ------------------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at March 31, 1995 (unaudited)....................... $21,474 $(1,409) $20,065
Net income (unaudited)...................................... 5,374 -- 5,374
Change in net unrealized investment gains (unaudited)....... -- 5,648 5,648
------- ------- -------
Balance at September 30, 1995 (unaudited)................... $26,848 $ 4,239 $31,087
======= ======= =======
Balance at March 31, 1996................................... $21,659 $ 1,495 $23,154
Net income.................................................. 2,386 -- 2,386
Change in net unrealized investment gains................... -- (547) (547)
------- ------- -------
Balance at September 30, 1996............................... $24,045 $ 948 $24,993
======= ======= =======
</TABLE>
See accompanying notes.
F-31
<PAGE> 137
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)
Decrease in discontinued operations....................... -- 24
Decrease in loss and loss adjustment expense.............. (3,182) (13,661)
Increase in unearned premium and 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 (1,781)
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 (2,976)
Beginning cash and cash equivalents......................... 2,984 10,702
--------- ---------
Ending cash and cash equivalents
Continuing operations..................................... 4,665 7,055
Operations held for disposition........................... -- 556
Discontinued operations................................... -- 115
--------- ---------
Total ending cash and cash equivalents............ $ 4,665 $ 7,726
========= =========
</TABLE>
See accompanying notes.
F-32
<PAGE> 138
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 (UNAUDITED) AND SEPTEMBER 30, 1996
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Employers Self Insurers Fund ("ESIF") is domiciled in Florida as a
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 ("Florida DOI").
ESIF was formed in 1978 for the stated purpose of providing statutory
workers' compensation coverage for certain Florida employers. ESIF's wholly
owned subsidiary, Employers Safety Group Association, Inc. ("ESGA"), is a trade
association primarily for employers in the construction, manufacturing,
wholesale and retail, and service industries and any employer that is a member
of ESGA may obtain coverage from ESIF. An indemnity agreement issued by ESIF
indemnifies the member employee against loss or liability relating to workers'
compensation insurance risk. Any employer that obtains workers' compensation
coverage from ESIF automatically becomes a member of ESIF with certain rights,
including the right to vote for the election of ESIF's Trustees, the right to
receive any distribution of profits that may be authorized by the Trustees and
the right to participate in the distribution of the surplus of ESIF in the event
of its liquidation. However, all members of ESIF are subject to joint and
several liability for the obligations of ESIF. ESIF has historically not been
operated for the purpose of generating profits, but it has retained a portion of
its earnings and profits to pay its obligations and avoid making assessments
against its members. ESIF has occasionally during its operating history paid a
distribution of profits to its members, but it has never made an assessment
against its members.
ESIF is a trust with a Board comprised of six Trustees, but no employees or
officers. ESIF's bylaws specifically direct the Board to engage an
administrator, and ESIF's administrator since its inception has been Summit
Consulting, Inc. ("SCI"). SCI performs all daily operational activities for
ESIF, including premium and claims processing, pursuant to a written agreement.
SCI also performs similar functions for four other group self-insurance funds
located in Florida, Louisiana and Kentucky.
SCI owns several subsidiaries formed to assist it in providing specialized
administrative services, and SCI is wholly owned by a holding company, Summit
Holding Corporation ("SHC"). Effective January 16, 1996, ESIF purchased all of
the outstanding stock of SHC (see Note 14 for a further discussion of this
acquisition). In addition to SHC and its subsidiaries, ESIF also owns a
reinsurance subsidiary, U.S. Employers Insurance, Inc. ("USEI").
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. In such transaction, ESIF will become
wholly owned by a newly formed holding company and ESIF's members will receive
preferred stock of the holding company in exchange for their membership
interests.
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.
The financial statements as of September 30, 1995 and for the six months
then ended are unaudited. In the opinion of management, these unaudited
financial statements have been prepared in accordance with generally accepted
accounting principles and all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation have been included.
F-33
<PAGE> 139
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 unearned premiums established for the unexpired
portion of the premiums applicable to those policies. For retrospectively rated
policies, the ultimate premium for a period is determined on the basis of the
insured's actual losses for that period. If the actual losses are less than
expected, ESIF may be required to refund a portion of the premiums previously
paid. ESIF considers loss development experience through the date of the
financial statements in estimating the ultimate premium and, as adjustments to
premiums become necessary as a result of loss development, such adjustments are
included in current operations.
Administrative fee revenue is recognized in proportion to the recognition
of earned premiums 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. Fees for administrative 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 premiums of the contract.
Income Taxes
Income taxes have been provided using the liability method in accordance
with Financial Accounting Standards Board ("FASB") Statement No. 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 No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Statement No. 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, the 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.
F-34
<PAGE> 140
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- 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") 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.
Such reserve is established by management based upon: (i) results of actuarial
reviews which incorporate ESIF'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. Such reserve 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 and $4.2 million at September 30, 1995 and 1996,
respectively.
Prior to the January 16, 1996 acquisition of SHC, certain unallocated LAE
of ESIF were provided by SHC under the administrative agreement between ESIF and
SHC. Subsequent to the acquisition, ESIF has included the liability for such
unallocated LAE in the loss and LAE liability.
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 funds from solvent
self-insurance funds to cover certain losses to policyholders of insolvent
self-insurance funds, after assessment of such policyholders of the insolvent
funds. This type of guaranty fund is separate from the Florida Special
Disability Trust Fund (the "SDTF"), which is designed to pay insurers for
certain benefits paid to previously injured workers, as discussed in Note 13.
F-35
<PAGE> 141
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Florida law limits the assessment to a maximum of 2% of direct written
premiums annually, but 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 September 30, 1996, ESIF was not able to
reasonably estimate 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 six
months ended September 30, 1995 and 1996 were $0.8 million and $0.7 million,
respectively. Such assessments are credited against ESIF'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 allows the Company to write policies only in the State of
Florida. Therefore, all of ESIF's premium revenues for the six months ended
September 30, 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 amount 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.
As further described in Note 6, ESIF has significant amounts of reinsurance
recoverables as a result of ceding reinsurance under specific and aggregate
reinsurance treaties.
Intangible Assets
Cost in excess of net assets of businesses acquired totaling $49.0 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.
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.
At the balance sheet date, ESIF evaluates the recoverability of the cost in
excess of net assets acquired and the cost associated with customer listings
through a comparison of forecasted undiscounted cash flows of SHC and the
remaining asset balances.
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.
F-36
<PAGE> 142
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AT SEPTEMBER 30, 1995 (UNAUDITED)
U.S. Treasury and government agencies....... $ 61,796 $1,047 $ 125 $ 62,718
States and political subdivisions........... 66,216 1,346 345 67,217
Industrial and miscellaneous................ 29,277 405 520 29,162
Mortgage-backed securities:
U.S. government agencies................. 31,057 1,120 11 32,166
-------- ------ ------ --------
Total debt securities available-for-sale...... $188,346 $3,918 $1,001 $191,263
======== ====== ====== ========
AT SEPTEMBER 30, 1996
U.S. Treasury............................... $ 49,286 $ 214 $ 875 $ 48,625
States and political subdivisions........... 67,799 950 401 68,348
Industrial and miscellaneous................ 42,875 566 535 42,906
Mortgage-backed securities:
U.S. government agencies................. 13,603 134 196 13,541
-------- ------ ------ --------
Total debt securities available-for-sale...... $173,563 $1,864 $2,007 $173,420
======== ====== ====== ========
</TABLE>
The amortized cost and estimated fair value of debt securities at September
30, 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.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less............................................... $ 3,005 $ 3,008
After one through five.................................... 62,368 62,316
After five through ten.................................... 78,234 77,983
After ten................................................. 16,353 16,572
-------- --------
159,960 159,879
Mortgage-backed securities................................ 13,603 13,541
-------- --------
Total....................................................... $173,563 $173,420
======== ========
</TABLE>
Proceeds from the sales of investments in debt securities during the six
months ending September 30, 1996 were $45.8 million. Gross gains of $0.3 million
and gross losses of $0.7 million were realized on those sales. Proceeds from the
sales of investments in debt securities during the six months ending September
30, 1995 were $83.5 million. No gains or losses were realized on those sales.
F-37
<PAGE> 143
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 SEPTEMBER 30, 1995 (UNAUDITED)
Preferred stocks.............................. $ 2,890 $ 71 $ 5 $ 2,956
Common stocks................................. 13,387 1,958 117 15,228
------- ------ ---- -------
Total........................................... $16,277 $2,029 $122 $18,184
======= ====== ==== =======
AT SEPTEMBER 30, 1996
Preferred stocks.............................. $ 3,759 $ 53 $ 25 $ 3,787
Common stocks................................. 10,663 1,844 209 12,298
------- ------ ---- -------
Total........................................... $14,422 $1,897 $234 $16,085
======= ====== ==== =======
</TABLE>
Major categories of ESIF's investment income are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------
1995 1996
----------- ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Income:
Bonds..................................................... $6,585 $5,159
Preferred stocks.......................................... 79 133
Common stocks............................................. 181 145
Short-term investments and cash........................... 753 926
------ ------
Net investment income....................................... $7,598 $6,363
====== ======
</TABLE>
The Florida DOI requires cash and investments to be held in trust for the
Florida DOI for 10% of statutory basis loss reserves and the 1986-1995 fund
years aggregate reserve plans. The aggregate plans approved by the Florida 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 September 30, 1995 and 1996, the amount
in trust is approximately $61.0 million and $52.0 million, respectively.
F-38
<PAGE> 144
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
The major components of equipment and software at September 30, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
Furniture, fixtures and equipment........................... $ 914
Data processing equipment................................... 757
Airplane.................................................... 968
Leasehold improvements...................................... 122
Software.................................................... 189
Automobiles................................................. 24
------
2,974
Less accumulated depreciation............................... 616
------
$2,358
======
</TABLE>
Depreciation expense for the period ended September 30, 1996 was $0.4
million. Substantially all equipment and software was acquired in the January
1996 acquisition of SHC.
4. INTANGIBLES
The majority of the 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 September 30, 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............................... 3,241
-------
$60,069
=======
</TABLE>
5. LEASES
SHC leases office premises and automobiles under noncancelable 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-39
<PAGE> 145
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual payments at September 30, 1996 for all noncancelable
leases are (in thousands):
<TABLE>
<S> <C>
Six Months Ended March 31:
1997...................................................... $ 903
Years Ended March 31:
1998...................................................... 1,578
1999...................................................... 1,547
2000...................................................... 1,180
2001...................................................... 103
------
Total minimum future lease payments......................... 5,311
Income from subleases....................................... (118)
------
Net minimum future lease payments........................... $5,193
======
</TABLE>
In excess of 80% of the future lease commitments relates to rented office
premises from certain trustees of ESIF.
Rental expense for the six months ended September 30, 1996 for operating
leases totaled $0.9 million.
F-40
<PAGE> 146
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. REINSURANCE
In accordance with general practice in the insurance industry, the ESIF's
insurance subsidiaries are engaged in reinsurance transactions to cede risk to
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 retained by ESIF or its Subsidiaries on any one occurrence is
$500,000 with a $750,000 deductible in the six months ended September 30, 1995
and $500,000 with a $500,000 deductible in the six months ended September 30,
1996. Reinsurance agreements are in force with certain maximum limits, as well
as excess of loss reinsurance agreements.
SPECIFIC REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL
YEAR SPECIFIC
ENDED SPECIFIC OCCURRENCE
MARCH 31, CARRIER ATTACHMENT LIMIT
- --------- ------- ---------- ----------
<S> <C> <C> <C>
1982 INA $ 100 $ 2,000
Employers Re 2,100 3,000
1983 INA 125 2,000
Employers Re 2,125 3,000
1984 Employers Re 125 2,000
INA 2,125 Statutory
1985 Employers Re 125 2,000
INA 2,125 Statutory
1986 Employers Re 225 20,000
1987 Safety Mutual(1) 1,000 5,000
Old Republic(2) 1,000 1,000
National Union(2) 2,000 8,000
1988 Old Republic 1,000 5,000
1989 Old Republic 1,000 5,000
1990 Transamerica 1,000 15,000
1991 Transamerica 1,000 15,000
1992 Transamerica 1,000 25,000
1993 Transamerica 1,000 25,000
1994 Lloyd's 500 500
Transamerica 1,000 Statutory
1995 Lloyd's 500 500
Continental Casualty 1,000 Statutory
1996 Federal Insurance Co. 500 500
Federal Insurance Co. 1,000 1,000
Continental Casualty 2,000 Statutory
1997 Lloyd's 500 1,500
National Union 2,000 Statutory
</TABLE>
- ---------------
(1) 4/1/86-5/31/86
(2) 6/1/86-3/31/87
F-41
<PAGE> 147
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AGGREGATE REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL
YEAR
ENDED AGGREGATE AGGREGATE
MARCH 31 CARRIER ATTACHMENT LIMIT
- -------- ------- ---------- ---------
<S> <C> <C> <C>
1982 INA $11,542 $ 2,000
Employers Re 13,542 3,000
INA 16,542 Statutory
1983 INA 11,365 2,000
Employers Re 13,365 3,000
INA 16,365 Statutory
1984 Employers Re 14,341 2,000
INA 16,341 Statutory
1985 Employers Re 17,814 3,000
INA 20,814 Statutory
1986 Employers Re 40,091 301
1987 N/A N/A N/A
1988 N/A N/A N/A
1989 Crossroads 90,648 19,000
1990 Crossroads 110,973 25,000
1991 Crossroads 130,726 31,000
1992 Crossroads 113,015 31,000
1993 Crossroads 141,956 33,401
1994 Crossroads 146,016 34,357
1995 Crossroads 133,800 31,482
1996 Crossroads 115,970 27,287
1997 N/A N/A N/A
</TABLE>
Insurance premiums for the six months ended September 30, 1995 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Direct premiums earned...................................... $66,351 $52,402
Reinsurance ceded........................................... 3,206 3,373
------- -------
Net premiums earned......................................... $63,145 $49,029
======= =======
</TABLE>
<TABLE>
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross premiums written...................................... $124,643 $107,274
Ceded premiums written...................................... 6,820 4,096
-------- --------
Net premiums written........................................ $117,823 $103,178
======== ========
</TABLE>
F-42
<PAGE> 148
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Losses and LAE incurred for the six months ended September 30, 1995 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Direct losses and LAE....................................... $42,435 $36,122
Reinsurance ceded........................................... 70 3,987
------- -------
Net losses and LAE incurred................................. $42,365 $32,135
======= =======
</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 six months ended September 30,
1996, premiums of $-0-, losses and LAE of $1.9 million, are attributable to
reinsurance agreements with Crossroads a Bermuda domiciled insurance company,
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, 1993, 1994 and 1995 is also ceded to
Crossroads. At September 30, 1995 and 1996 loss and LAE reserves recoverable of
approximately $8.0 million and $10.0 million, respectively (net of amounts
retroceded to USEI), are attributable to excess reinsurance agreements with
Crossroads. For the fiscal years 1986, 1987, 1990, 1991 and 1992, effective
aggregate excess reinsurance is not currently in place because these years have
been self-funded or because the coverages have expired. Exposure to significant
adverse development for these years is considered minimal due to the maturity of
the loss development for these years.
In the six months ended September 30, 1995 and 1996, ESIF did not commute
any ceded reinsurance nor did it enter into or engage in any loss portfolio
transfers.
ESIF remains obligated for amounts ceded in the event that the reinsurers
do not meet their obligations.
ESIF's reinsurance recoverable asset at September 30, 1996 is comprised of
amounts related to reinsurance agreements with the following companies (in
thousands):
<TABLE>
<CAPTION>
PAID UNPAID
REINSURANCE CARRIER CLAIMS CLAIMS TOTAL
------------------- ------ -------- --------
<S> <C> <C> <C>
American Re.............................................. $ -- $ 380 $ 380
Cayzer Steel............................................. 2 -- 2
Cigna.................................................... 189 -- 189
Continental Casualty..................................... -- 9,245 9,245
Crossroads............................................... 653 10,305 10,958
Employers Re............................................. 505 6,406 6,911
Federal Ins. Co.......................................... -- 8,417 8,417
INA...................................................... -- 5,156 5,156
Lloyds of London......................................... -- 14,595 14,595
National Union........................................... -- 1,590 1,590
Old Republic............................................. 37 15,172 15,209
Transamerica............................................. 25 31,185 31,210
------ -------- --------
Total.......................................... $1,411 $102,451 $103,862
====== ======== ========
</TABLE>
F-43
<PAGE> 149
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All of the recoverable amounts related to paid claims have been outstanding
less than ninety days at the balance sheet date. The reinsurance recoverable
amounts related to unpaid claims are calculated considering the provisions of
the specific and aggregate reinsurance agreements and using ultimate losses by
accident year consistent with the reported loss and LAE liabilities.
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.
Federal income taxes of $6.9 million and $12.2 million for the years ended
March 31, 1995 and 1996, respectively, would be subject to recovery in the event
that the Company incurs net operating losses within three years of the years for
which such taxes were paid. State taxes paid was $0.8 million and $0.7 million
for the six months ended September 30, 1995 and 1996, respectively.
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.
Significant components of the ESIF's deferred tax liabilities and assets as
of September 30, as calculated in accordance with FASB Statement No. 109 are as
follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Unrealized investment gains............................... $ 641 $ 572
Special Disability Trust Fund recoverables................ 177 283
Intangible assets......................................... -- 3,124
Other..................................................... -- 209
------- -------
Total deferred tax liabilities.............................. 818 4,188
Deferred tax assets:
Discount on loss and LAE reserves......................... 16,207 19,780
Unallocated remittances................................... 1,372 1,101
Uncollectible premiums.................................... 753 753
------- -------
18,332 21,634
Valuation allowance for deferred tax assets............... -- --
------- -------
Total deferred tax assets................................... 18,332 21,634
------- -------
Net deferred tax assets..................................... $17,514 $17,446
======= =======
</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
F-44
<PAGE> 150
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 September 30,
is summarized as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current..................................................... $ 297 $ (6,234)
Deferred.................................................... (17,514) (17,446)
-------- --------
Total net asset............................................. $(17,217) $(23,680)
======== ========
</TABLE>
Significant components of the provision for income taxes for the six months
ended September 30, attributable to continuing operations are as follows:
<TABLE>
<CAPTION>
1995 1996
------ -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current tax expense......................................... $2,292 $ 3,213
Deferred taxes (benefit).................................... 98 (813)
------ -------
Total income tax expense on income.......................... $2,390 $ 2,400
====== =======
</TABLE>
Income taxes paid by ESIF totaled $6.4 million and $3.3 million for the six
months ended September 30, 1995 and 1996, respectively.
The reconciliation of income tax expense for the six months ended September
30, attributable to continuing operations computed at the U.S. federal statutory
tax rate of 35%, to income tax expense is as follows:
<TABLE>
<CAPTION>
1995 1996
------ -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Income tax (at 35% of pretax income or loss)................ $2,717 $ 2,118
Tax-exempt investment income................................ (588) (575)
Non taxable/deductible expenses............................. 22 40
Goodwill amortization....................................... -- 291
State income taxes.......................................... 484 448
Other items, net............................................ (245) 78
------ -------
Provision for federal income tax expense.................... $2,390 $ 2,400
====== =======
</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.
F-45
<PAGE> 151
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides a reconciliation of the beginning and ending
reserve balances for losses and LAE for the six months ended September 30, 1995
and 1996:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Loss & LAE Reserves, beginning of period -- GAAP
basis........................................... $ 367,391 $ 387,632
Less: Reinsurance recoverables (exclusive of
recoverables on paid losses)................ (108,440) (107,092)
--------- ---------
258,951 280,540
Less: Recoverable from Florida SDTF............... (15,879) (20,060)
--------- ---------
Net reserves for losses and LAE at beginning of
year............................................ 243,072 260,480
Add provision for claims occurring in:
The current year................................ 42,198 35,663
Prior years..................................... 167 (3,528)
--------- ---------
Incurred losses during the current year........... 42,305 32,135
Deduct payments for claims occurring in:
The current year................................ 3,753 3,565
Prior years..................................... 41,200 34,443
--------- ---------
Claim payments during the current year............ 44,953 38,008
--------- ---------
Net reserves for losses and LAE at end of year.... 240,484 254,607
Add: Impact of reinsurance for FASB 113........... 105,951 102,451
Recoverable from SDTF............................. 17,775 21,138
--------- ---------
Gross reserves for losses and LAE at end of
period (GAAP basis)....................... $ 364,210 $ 378,196
========= =========
</TABLE>
The foregoing reconciliation also shows that a $3.5 million reserve
redundancy emerged during the six month period ended September 30, 1996. This
amount represents the release of certain loss reserves previously carried which
were determined, based on comparisons to actuarially projected amounts, to be
redundant.
Statutory basis loss reserves were determined using paid loss data net of
historic SDTF recoveries; GAAP basis loss reserves were determined using paid
loss data gross of SDTF recoveries. This adjustment increased loss reserves by
$27.9 million and $28.8 million at September 30, 1995 and 1996, respectively,
and increased reinsurance recoverables by $10.6 million and $8.4 million at
September 30, 1995 and 1996, respectively. In addition, ESIF has recorded, as an
asset, amounts recoverable from the SDTF based upon ESIF's historical collection
experience and the amount of claims identified as subject to SDTF recovery. The
recoverable amount recorded at September 30, 1995 and 1996 was $17.8 million and
$21.1 million, respectively.
In order to quantify the amounts recoverable from the SDTF, ESIF reviews
its claims that have been identified as subject to SDTF recovery considering
ESIF's historical recovery experience on claims submitted to the SDTF. In
addition, ESIF estimates the amount of claims it expects to recover over the
next four years based on actual collection experience for the most recent two
years, and discounts the expected recoveries using an appropriate interest rate.
The amounts reflected as recoverables from the SDTF were based on the discounted
expected collection amounts rather than on the total claims identified as
subject to SDTF recovery. Accordingly, there is an implicit valuation allowance
of approximately $8.0 million reflected in the recorded SDTF recoverable
amounts.
F-46
<PAGE> 152
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAE assumed in the acquisition of SHC represents unallocated LAE reserves
established by ESIF that were, prior to the acquisition, provided by SHC under
the administrator's contract between ESIF and SHC.
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>
SEPTEMBER 30,
-----------------
1995 1996
------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Accrued retrospective premium............................... $43,440 $23,990
</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 surplus
or profits and limit the amount of certain investments to specified percentages
of statutory admitted assets. At September 30, 1996, under regulations
applicable to stock property and casualty insurance companies, $2.0 million of
ESIF's statutory net assets of $20.4 million can be transferred from the
insurance entities without regulatory approval.
Equity and net income as determined in accordance with statutory accounting
practices for self-insurance funds as of and for the six months ended September
30, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, EQUITY NET INCOME
------------- ------- ----------
(IN THOUSANDS)
<S> <C> <C>
1995 (unaudited)............................................ $49,738 $3,076
1996........................................................ 20,465 4,824
</TABLE>
As a self-insurance fund, ESIF recorded for statutory reporting an asset of
$46.9 million at September 30, 1996 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 $4.2 million at September 30, 1996.
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 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 will maintain statutory basis equity in excess of
the amount required by Florida law.
F-47
<PAGE> 153
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. SDTF
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 SDTF's
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. If
the SDTF is discontinued, ESIF believes that the existing reimbursement
obligations of the SDTF would become general obligations of the State of
Florida, although there is no assurance that a reviewing court would adopt that
view. The SDTF has made no acknowledgement with regard to the enforceability of
its reimbursement obligations to insurers such as ESIF.
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.
ESIF has recorded an SDTF recoverable of $17.8 million and $21.1 million at
September 30, 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 six months ended September 30, 1995 and
1996 were $2.2 million and $4.3 million, respectively. Assessments paid by ESIF
to the SDTF were $5.0 million and $2.5 million for the six months ended
September 30, 1995 and 1996, respectively.
ESIF has not recorded a liability for future assessments from SDTF. Such
future assessments will be based on future premium amounts.
13. ACQUISITION OF SHC
On January 16, 1996, ESIF and its subsidiaries purchased all of the
outstanding capital stock of SHC. The purchase price consisted of $26.0 million
paid in cash from the Company, $11.5 million in cash distributed by Summit and
$44.0 million in assumption of debt by SHC (see Note 14). 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
F-48
<PAGE> 154
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 pro forma information as of the six months ended
September 30, 1995 presents the consolidated results of operations of ESIF and
SHC as if the acquisition had been effective at April 1, 1995 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 (in thousands):
<TABLE>
<S> <C>
Total revenues.............................................. $91,226
Income before income tax expense............................ 9,732
Net income.................................................. 6,573
</TABLE>
To comply with requirements of the Florida DOI, SHC's chairman has
personally indemnified ESIF up to a maximum of $5.0 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.
14. NOTES PAYABLE
In connection with the purchase of SHC by ESIF, SHC utilized a bank term
loan with rates based on LIBOR plus 3%. The balance as of September 30, 1996 for
SHC was $34.5 million. Also, a revolving bank credit facility with rates
approximating the prime rate was entered into as part of the agreement. The
balance as of September 30, 1996 for SHC for this agreement was $2.0 million.
Interest expense incurred as of September 30, 1996 was $1.7 million.
Subsequent to September 30, 1996, the term loan and revolving credit
facility agreements were amended.
Maturities for the combined term loan and revolving credit facility (as
amended) are as follows:
<TABLE>
<CAPTION>
REDUCTION IN THE
TERM AVAILABILITY OF THE
LOAN REVOLVING CREDIT FACILITY
------- -------------------------
(IN THOUSANDS)
<S> <C> <C>
For the Six Months Ending March 31:
1997.......................................... $ 1,825 $ --
For the Years Ending March 31:
1998.......................................... 2,300 --
1999.......................................... 3,925 --
2000.......................................... 5,500 --
2001.......................................... 9,500 1,500
Thereafter.................................... 11,450 3,500
------- -------
$34,500 $5,000
======= =======
</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.
F-49
<PAGE> 155
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. EMPLOYEE BENEFIT PLANS
ESIF's subsidiary, SHC, has a deferred savings and profit-sharing plan (the
"401(k)") covering substantially all employees. Under the 401(k), 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 401(k)
totaled $0.2 million for the period April 1, 1996 to September 30, 1996.
16. 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 $36.5 million of notes payable at
September 30, 1996 that approximates its fair value.
ESIF's fair value of reinsurance recoverable approximates its carrying
value for September 30, 1995 and 1996, respectively, as summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Reinsurance recoverable....................... $107,451 $107,451 $103,861 $103,861
</TABLE>
17. DISCONTINUED OPERATIONS
Effective July 31, 1996, ESIF decided to discontinue its computer software
development. 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 has recognized an after tax loss of
approximately $0.5 million on the disposition of this operation (including
estimated operating losses to the disposition date).
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
September 30, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
Assets:
Cash and equivalents...................................... $115
Equipment................................................. 396
Other assets.............................................. 164
Software.................................................. 67
----
Total assets................................................ 742
Liabilities:
Accounts payable and operating liabilities................ 64
----
Net assets.................................................. $678
====
</TABLE>
F-50
<PAGE> 156
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The operating results of the computer software development operations for
the six month period ended September 30, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
Revenue..................................................... $ 839
Expenses.................................................... 1,463
------
Loss before income taxes.................................... (624)
Income tax (benefit)........................................ (212)
------
Net loss.................................................... $ (412)
======
</TABLE>
18. 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
by a sale of its stock is expected to be completed during the first quarter of
1997. 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 September 30, 1996 (in thousands):
<TABLE>
<S> <C>
Assets:
Cash and equivalents...................................... $ 556
Equipment................................................. 143
Other Assets.............................................. 2,306
------
Total Assets................................................ 3,005
Liabilities:
Accounts payable and operating liabilities................ 143
------
Net Assets.................................................. $2,862
======
</TABLE>
The operating results for the healthcare subsidiary (including a $0.2
million pre-tax provision for loss on disposition) for the six month period
ending September 30, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
Revenue..................................................... $ 80
Expenses.................................................... 703
-----
Loss before income taxes.................................... (623)
Income benefit.............................................. (212)
-----
Net loss.................................................... $(411)
=====
</TABLE>
19. 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:
<TABLE>
<CAPTION>
WORKERS'
COMPENSATION INSURANCE INTERCOMPANY
TOTAL INSURANCE ADMINISTRATION ELIMINATION
-------- ------------ -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Six Months Ended September 30, 1995
(unaudited):
Revenues............................. $ 71,752 $ 71,752 -- --
Income before income taxes........... 7,764 7,764 -- --
Identifiable assets.................. 456,012 456,012 -- --
Six Months Ended September 30, 1996:
Revenues............................. 73,048 54,667 $28,891 $(10,510)
Income before from continuing
operations before income taxes.... 6,051 7,528 $(1,477) --
Identifiable assets.................. $498,085 $498,085 -- --
</TABLE>
Depreciation expense and capital expenditures are not considered material.
F-51
<PAGE> 157
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The preceding financial information does not include the computer software
operations which are presented as discontinued operations in the accompanying
financial statements.
20. EXTRAORDINARY CHARGE
During the six months ended September 30, 1996 ESIF incurred $0.6 million
of expenses directly related to its conversion from a group self-insurance fund
to a stock insurance company. These expenses are principally professional
service fees paid to attorneys, investment advisors, and accountants related to
obtaining regulatory approval for the conversion, advising the Board of Trustees
as to the fairness of the transaction and auditing ESIF's GAAP basis financial
statements. These costs, net of income tax benefits of $0.2 million, are
presented as an extraordinary charge on ESIF's Statement of Operations for the
six months ended September 30, 1996.
21. RELATED PARTY TRANSACTIONS
As more fully described in Note 5, ESIF has entered into office premises
lease agreements with certain Trustees of ESIF.
As more fully described in Note 6, ESIF has entered into reinsurance
agreements with an insurance company in which a Trustee of ESIF has an ownership
interest.
As more fully described in Note 14, to comply with requirements of the
Florida DOI, SHC's president and chief executive officer has personally
indemnified ESIF up to a maximum of $5.0 million for certain loss, injury, or
damage to ESIF, if any, which may result from the acquisition of SHC.
Entities in which SHC's president and chief executive officer held
ownership interests have provided certain transportation related services to
SHC. Fees paid by SHC to these entities aggregated approximately $0.4 million
and $0.02 million for the six months ended September 30, 1995 and 1996,
respectively.
SHC's president and chief executive officer is also a member of the Board
of Directors of Florida Retail Federation (the "Association") which is the
sponsoring trade association for Florida Retail Federation Self Insurers Fund
("FRF"), one of the group self-insurance funds administered by SHC. The
Association, as the fund sponsor, is entitled to a fee equal to 1% of FRF's
premiums earned in each year, and SHC is obligated to pay such fee out of the
administrative fee it receives from FRF. During the six months ended September
30, 1995 and 1996, SHC paid approximately $0.5 million and $0.4 million to the
Association for such fees. During the six months ended September 30, 1995 and
1996, FRF paid SHC fees for administrative services of approximately $14.2
million and $12.8 million, respectively.
F-52
<PAGE> 158
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Invested assets:
Fixed maturities, available-for-sale...................... $181,186 $184,682
Preferred stock........................................... 3,215 4,568
Common stock.............................................. 11,228 14,100
Short-term investments.................................... 36,344 14,536
-------- --------
Total invested assets............................. 231,973 217,886
Cash and cash equivalents................................... 4,448 7,433
Premiums receivable (net of $2,000 and $2,514 allowance for
doubtful accounts, respectively).......................... 48,922 39,828
Accounts receivable......................................... 668 3,184
Reinsurance recoverable, including $9,606 and $11,123 from
related party reinsurers, respectively.................... 112,734 107,058
Recoverable from Florida Special Disability Trust Fund...... 16,827 21,138
Accrued investment income................................... 3,050 3,036
Income taxes recoverable.................................... 2,123 --
Equipment and software...................................... -- 1,448
Capitalized computer software costs......................... -- 5,092
Value assigned to future administration of insurance
contracts................................................. -- 5,975
Unamortized debt acquisition costs.......................... -- 542
Excess of cost over net assets of business acquired......... -- 47,489
Deferred income taxes....................................... 17,150 15,656
Other assets................................................ 37 1,207
-------- --------
Total assets...................................... $437,932 $476,972
======== ========
LIABILITIES AND EQUITY
Liabilities:
Loss and loss adjustment expenses......................... $372,786 $376,923
Debt...................................................... -- 33,000
Unearned premium and unallocated policyholder
remittances............................................ 25,437 23,506
Accounts payable and accrued expenses..................... 7,018 11,229
Taxes, licenses and fees.................................. 1,453 620
Deferred revenue.......................................... -- 4,013
Federal income taxes payable.............................. -- 303
-------- --------
Total liabilities................................. 406,694 449,594
Equity:
Retained earnings......................................... 26,646 24,857
Net unrealized appreciation on available-for-sale
securities............................................. 4,592 2,521
-------- --------
Total equity...................................... 31,238 27,378
-------- --------
Total liabilities and equity...................... $437,932 $476,972
======== ========
</TABLE>
See accompanying notes.
F-53
<PAGE> 159
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Revenue:
Premiums earned........................................... $ 89,713 $ 74,509
Net investment income..................................... 10,522 9,606
Realized investment gains................................. 2,726 366
Administrative fees....................................... -- 25,762
Other income.............................................. 125 568
-------- --------
Total revenue..................................... 103,086 110,811
Losses and expenses:
Losses and loss adjustment expenses....................... 67,043 50,236
Other underwriting, general and administrative expenses
(including administrative service fees paid to Summit
Holding Corporation of $18,802 for the nine months
ended December 31, 1995)............................... 28,548 45,837
Amortization and depreciation............................. -- 3,729
Interest expense.......................................... -- 2,719
-------- --------
Total losses and expenses......................... 95,591 102,521
-------- --------
Income from continuing operations before income taxes....... 7,495 8,290
Income tax expense.......................................... 2,323 3,057
-------- --------
Income from continuing operations........................... 5,172 5,233
-------- --------
Discontinued operations:
Loss from operation (net of income tax benefit of $460 in
1996).................................................. -- (893)
Loss from disposition (net of income tax benefit of $184
in 1996)............................................... -- (357)
-------- --------
Loss from discontinued operations.................... -- (1,250)
-------- --------
Income before extraordinary charge.......................... 5,172 3,983
Extraordinary charge for conversion costs (net of income tax
benefit of $474 in 1996).................................. -- (785)
-------- --------
Net income.................................................. $ 5,172 $ 3,198
======== ========
</TABLE>
See accompanying notes.
F-54
<PAGE> 160
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
NINE MONTHS ENDED DECEMBER 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION) OF
AVAILABLE-FOR-
RETAINED SALE SECURITY
EARNINGS INVESTMENTS TOTAL
-------- ----------------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at March 31, 1995................................... $21,474 $(1,409) $20,065
Net income.................................................. 5,172 -- 5,172
Change in net unrealized investment gains................... -- 6,001 6,001
------- ------- -------
Balance at December 31, 1995................................ $26,646 $ 4,592 $31,238
======= ======= =======
Balance at March 31, 1996................................... $21,659 $ 1,495 $23,154
Net income.................................................. 3,198 -- 3,198
Change in net unrealized investment gains................... -- 1,026 1,026
------- ------- -------
Balance at December 31, 1996................................ $24,857 $ 2,521 $27,378
======= ======= =======
</TABLE>
See accompanying notes.
F-55
<PAGE> 161
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net income.................................................. $ 5,172 $ 3,198
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and depreciation............................. (427) 3,729
Amortization of bond premium/discount..................... 110
Net realized investment gains............................. (1,733) (366)
Gain on sale of equipment................................. (278)
Bad debt allowance........................................ -- 1,014
Decrease (increase) in premiums receivable................ 1,573 (2,749)
Increase in accounts receivable........................... (100) (26)
(Increase) decrease in reinsurance recoverable............ (2,428) 4,460
Increase in Special Disability Trust Fund recoverable..... (948) (1,078)
(Increase) decrease in accrued investment income.......... 360 (100)
(Increase) decrease in federal income tax recoverable..... (2,123) 9,690
Decrease in deferred income taxes......................... 1,950 699
Decrease in other assets.................................. 459 701
Decrease in discontinued operations....................... -- 588
Increase (decrease) in loss and loss adjustment
expenses............................................... 5,395 (10,709)
Increase in unearned premium and unallocated policyholder
remittances............................................ 7,202 8,872
Decrease in accounts payable and accrued expenses......... (5,671) (3,263)
Decrease in taxes, licenses, and fees..................... (407) (874)
Decrease in deferred revenue.............................. (2,531) (3,371)
Increase (decrease) in federal income taxes payable....... (4,878) 303
--------- --------
Net cash provided by operating activities................... 865 10,550
Investing activities:
Purchase of investments securities.......................... (253,732) (201,739)
Disposal and maturity of investment securities.............. 255,336 198,093
Purchase of equipment and software.......................... -- (518)
Proceeds from sale of equipment and software................ -- 1,345
--------- --------
Net cash provided by (used in) investing activities......... 1,604 (2,819)
Financing activities:
Decrease in notes payable................................... -- (11,000)
--------- --------
Net cash used in financing activities....................... -- (11,000)
--------- --------
Net increase (decrease) in cash and cash equivalents........ 2,469 (3,269)
Beginning cash and cash equivalents......................... 1,979 10,702
--------- --------
Ending cash and cash equivalents............................ $ 4,448 $ 7,433
========= ========
</TABLE>
See accompanying notes.
F-56
<PAGE> 162
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Employers Self Insurers Fund ("ESIF") is domiciled in Florida as a
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 ("Florida DOI").
ESIF was formed in 1978 for the stated purpose of providing statutory
workers' compensation coverage for certain Florida employers. ESIF's wholly
owned subsidiary, Employers Safety Group Association, Inc. ("ESGA"), is a trade
association primarily for employers in the construction, manufacturing,
wholesale and retail, and service industries, and any employer that is a member
of ESGA may obtain coverage from ESIF. An indemnity agreement issued by ESIF
indemnifies the member employee against loss or liability relating to workers'
compensation insurance risk. Any employer that obtains workers' compensation
coverage from ESIF automatically becomes a member of ESIF with certain rights,
including the right to vote for the election of ESIF's Trustees, the right to
receive any distribution of profits that may be authorized by the Trustees and
the right to participate in the distribution of the surplus of ESIF in the event
of its liquidation. However, all members of ESIF are subject to joint and
several liability for the obligations for ESIF. ESIF has historically not been
operated for the purpose of generating profits, but it has retained a portion of
its earnings and profits to pay its obligations and avoid making assessments
against its members. ESIF has occasionally during its operating history paid a
distribution of profits to its members, but it has never made an assessment
against its members.
ESIF is a trust with a Board comprised of six Trustees, but no employees or
officers. ESIF's bylaws specifically direct the Board to engage an
administrator, and ESIF's administrator since its inception has been Summit
Consulting, Inc. ("SCI"). SCI performs all daily operational activities for
ESIF, including premium and claims processing, pursuant to a written agreement.
SCI also performs similar functions for four other group self-insurance funds
located in Florida, Louisiana and Kentucky.
SCI owns several subsidiaries formed to assist it in providing specialized
administrative services, and SCI is wholly owned by a holding company, Summit
Holding Corporation ("SHC"). Effective January 16, 1996, ESIF purchased all of
the outstanding stock of SHC (see Note 13 for a further discussion of this
acquisition). In addition to SHC and its subsidiaries, ESIF also owns a
reinsurance subsidiary, U.S. Employers Insurance, Inc. ("USEI").
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. In such transaction, ESIF will become
wholly owned by a newly formed holding company and ESIF's members will receive
preferred stock of the holding company in exchange for their membership
interests.
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.
These financial statements as of December 31, 1995 and 1996 and for the
nine months then ended are unaudited. In the opinion of management, these
unaudited financial statements have been prepared in
F-57
<PAGE> 163
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
accordance with generally accepted accounting principles and all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair
presentation have been included.
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 unearned premiums established for the unexpired
portion of the premiums applicable to those policies. For retrospectively rated
policies, the ultimate premium for a period is determined on the basis of the
insured's actual losses for that period. If the actual losses are less than
expected, ESIF may be required to refund a portion of the premiums previously
paid. ESIF considers loss development experience through the date of the
financial statements in estimating the ultimate premium and, as adjustments to
premiums become necessary as a result of loss development, such adjustments are
included in current operations.
Administrative fee revenue is recognized in proportion to the recognition
of earned premiums 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. Fees for administrative 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 premiums of the contract.
Income Taxes
Income taxes have been provided using the liability method in accordance
with Financial Accounting Standards Board ("FASB") Statement No. 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 No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Statement No. 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.
F-58
<PAGE> 164
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 reflected as unrealized appreciation or depreciation directly in
equity, after applicable deferred 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") 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.
Such reserve is established by management based upon: (i) results of actuarial
reviews which incorporate ESIF'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. Such reserve 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 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 $4.6 million and $4.2 million at December 31, 1995 and 1996, respectively.
Prior to the January 16, 1996 acquisition of SHC, certain unallocated LAE
of ESIF were provided by SHC under the administrative agreement between ESIF and
SHC. Subsequent to the acquisition, ESIF has included the liability for such
unallocated LAE in the loss and LAE liability.
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.
F-59
<PAGE> 165
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 funds from solvent
self-insurance funds to cover certain losses to policyholders of insolvent
self-insurance funds, after assessment of such policyholders of the insolvent
funds. This type of guaranty fund is separate from the Florida Special
Disability Trust Fund (the "SDTF"), which is designed to pay insurers for
certain benefits paid to previously injured workers, as discussed in Note 12.
Florida law limits the assessment to a maximum of 2% of direct written
premiums annually, but 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 December 31, 1996, ESIF was not able to
reasonably estimate 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 nine
months ended December 31, 1995 and 1996 were $1.1 million and $1.0 million,
respectively. Such assessments are credited against ESIF'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 allows ESIF to write policies only in the State of Florida.
Therefore, all of ESIF's premium revenues for the nine months ended December 31,
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 amount of revenues 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.
As further described in Note 6, ESIF has significant amounts of reinsurance
recoverables as a result of ceding reinsurance under specific and aggregate
reinsurance treaties.
Intangible Assets
Cost in excess of net assets of businesses acquired totaling $49.0 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.
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.
At the balance sheet date, ESIF evaluates the recoverability of the cost in
excess of net assets acquired and the cost associated with customer listings
through a comparison of the forecasted undiscounted cash flows of SHC and the
remaining asset balances.
F-60
<PAGE> 166
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1995:
U.S. Treasury and government agencies....... $ 58,131 $1,805 $ 6 $ 59,930
States and political subdivisions........... 58,816 1,606 57 60,365
Industrial and miscellaneous................ 30,092 2,014 -- 32,106
Mortgage-backed securities:
U.S. government agencies................. 28,415 501 131 28,785
-------- ------ ------ --------
Total debt securities
available-for-sale................ $175,454 $5,926 $ 194 $181,186
======== ====== ====== ========
At December 31, 1996:
U.S. Treasury and government agencies....... $ 50,423 $ 335 $ 495 $ 50,263
States and political subdivisions........... 82,937 1,272 406 83,803
Industrial and miscellaneous................ 38,354 795 169 38,980
Mortgage-backed securities:
U.S. government agencies................. 10,902 193 91 11,004
Industrial and miscellaneous............. 619 13 -- 632
-------- ------ ------ --------
Total debt securities
available-for-sale................ $183,235 $2,608 $1,161 $184,682
======== ====== ====== ========
</TABLE>
The amortized cost and estimated fair value of debt securities at December
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-61
<PAGE> 167
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less............................................... $ 1,518 $ 1,513
After one through five.................................... 64,128 64,620
After five through ten.................................... 90,476 91,046
After ten................................................. 15,592 15,867
-------- --------
171,714 173,046
Mortgage-backed securities................................ 11,521 11,636
-------- --------
Total............................................. $183,235 $184,682
======== ========
</TABLE>
Proceeds from the sales of investments in debt securities during the nine
months ending December 31, 1995 were $135.4 million. Gross gains of $2.1 million
and gross losses of $0.4 million were realized on those sales. Proceeds from the
sales of investments in debt securities during the nine months ended December
31, 1996 were $66.8 million. Gross gains of $0.7 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 December 31, 1995:
Preferred stocks.............................. $ 3,106 $ 109 $ -- $ 3,215
Common stocks................................. 9,583 1,745 100 11,228
------- ------ ---- -------
Total................................. $12,689 $1,854 $100 $14,443
======= ====== ==== =======
At December 31, 1996:
Preferred stocks.............................. $ 4,452 $ 133 $ 17 $ 4,568
Common stocks................................. 11,620 2,718 238 14,100
------- ------ ---- -------
Total................................. $16,072 $2,851 $255 $18,668
======= ====== ==== =======
</TABLE>
Major categories of ESIF's investment income are summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
---------------------
1995 1996
----------- ------
(IN THOUSANDS)
<S> <C> <C>
Income:
Bonds..................................................... $ 8,945 $7,805
Preferred stocks.......................................... 133 205
Common stocks............................................. 246 229
Short-term investments and cash........................... 1,198 1,367
------- ------
Net investment income....................................... $10,522 $9,606
======= ======
</TABLE>
The Florida DOI requires cash and investments to be held in trust for the
Florida DOI for 10% of statutory basis loss reserves and the 1986-1995 fund
years aggregate reserve plans. The aggregate plans
F-62
<PAGE> 168
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
approved by the Florida 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 December 31, 1995
and 1996, the amount in trust is approximately $61.7 million and $52.7 million,
respectively.
3. PROPERTY AND EQUIPMENT
The major components of equipment and software at December 31, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
Furniture, fixtures and equipment........................... $ 987
Data processing equipment................................... 835
Leasehold improvements...................................... 103
Software.................................................... 163
Automobiles................................................. 13
------
2,101
Less accumulated depreciation............................... 653
------
$1,448
======
</TABLE>
Depreciation expense for the nine months ended December 31, 1996 was $0.6
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 December 31, 1996 (in
thousands):
<TABLE>
<S> <C>
Unamortized debt acquisition costs.......................... $ 757
Purchased software.......................................... 6,300
Goodwill.................................................... 49,702
Customer accounts and contracts............................. 6,608
-------
63,367
Less accumulated amortization............................... 4,269
-------
$59,098
=======
</TABLE>
5. LEASES
SHC leases office premises and automobiles under noncancelable 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-63
<PAGE> 169
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Future minimum annual payments at December 31, 1996 for all noncancelable
leases are (in thousands):
<TABLE>
<S> <C>
Three Months Ended March 31:
1997...................................................... $ 449
Years ended March 31:
1998...................................................... 1,581
1999...................................................... 1,547
2000...................................................... 1,180
2001...................................................... 103
------
Total minimum future lease payments......................... 4,860
Income from subleases....................................... (121)
------
Net minimum future lease payments........................... $4,739
======
</TABLE>
In excess of 80% of the future lease commitments relates to rented office
premises from certain trustees of ESIF.
Rental expense for the nine months ended December 31, 1996 for operating
leases totaled $1.3 million.
F-64
<PAGE> 170
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
6. REINSURANCE
In accordance with general practice in the insurance industry, ESIF and its
insurance subsidiaries are engaged in reinsurance transactions to cede risk to
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 retained by ESIF or its subsidiaries on any one occurrence is
$500,000 with a $750,000 deductible in the nine months ended December 31, 1995
and $500,000 with a $500,000 deductible in the nine months ended December 31,
1996. Reinsurance agreements are in force with certain maximum limits, as well
as excess of loss reinsurance agreements.
SPECIFIC REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR SPECIFIC
ENDED SPECIFIC OCCURRENCE
MARCH 31, CARRIER ATTACHMENT LIMIT
- ----------- ------- ---------- ----------
<C> <S> <C> <C>
1982 INA $ 100 $ 2,000
Employers Re 2,100 3,000
1983 INA 125 2,000
Employers Re 2,125 3,000
1984 Employers Re 125 2,000
INA 2,125 Statutory
1985 Employers Re 125 2,000
INA 2,125 Statutory
1986 Employers Re 225 20,000
1987 Safety Mutual(1) 1,000 5,000
Old Republic(2) 1,000 1,000
National Union(2) 2,000 8,000
1988 Old Republic 1,000 5,000
1989 Old Republic 1,000 5,000
1990 Transamerica 1,000 15,000
1991 Transamerica 1,000 15,000
1992 Transamerica 1,000 25,000
1993 Transamerica 1,000 25,000
1994 Lloyd's 500 500
Transamerica 1,000 Statutory
1995 Lloyd's 500 500
Continental Casualty 1,000 Statutory
1996 Federal Insurance Co. 500 500
Federal Insurance Co. 1,000 1,000
Continental Casualty 2,000 Statutory
1997 Lloyd's 500 1,500
National Union 2,000 Statutory
</TABLE>
- ---------------
(1) 4/1/86 -- 5/31/86
(2) 6/1/86 -- 3/31/87
F-65
<PAGE> 171
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
AGGREGATE REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL
YEAR
ENDED AGGREGATE AGGREGATE
MARCH 31, CARRIER ATTACHMENT LIMIT
- --------- ------- ---------- ----------
<C> <S> <C> <C>
1982 INA $ 1,542 $ 2,000
Employers Re 13,542 3,000
INA 16,542 Statutory
1983 INA 11,365 2,000
Employers Re 13,365 3,000
INA 16,365 Statutory
1984 Employers Re 14,341 2,000
INA 16,341 Statutory
1985 Employers Re 17,814 3,000
INA 20,814 Statutory
1986 Employers Re 40,091 301
1987 N/A N/A N/A
1988 N/A N/A N/A
1989 Crossroads 90,648 19,000
1990 Crossroads 110,975 25,000
1991 Crossroads 130,413 31,000
1992 Crossroads 111,548 31,000
1993 Crossroads 141,956 33,401
1994 Crossroads 146,016 34,357
1995 Crossroads 133,800 31,482
1996 Crossroads 115,178 27,287
1997 N/A N/A N/A
</TABLE>
Insurance premiums for the nine months ended December 31, 1995 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -------
(IN THOUSANDS)
<S> <C> <C>
Direct premiums earned...................................... $94,493 $79,201
Reinsurance ceded........................................... 4,780 4,692
------- -------
Net premiums earned......................................... $89,713 $74,509
======= =======
</TABLE>
<TABLE>
<CAPTION>
1995 1996
----------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross premiums written...................................... $120,442 $113,369
Ceded premiums written...................................... 6,317 5,060
-------- --------
Net premiums written........................................ $114,125 $108,309
======== ========
</TABLE>
F-66
<PAGE> 172
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Losses and LAE incurred for the nine months ended December 31, 1995 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -------
(IN THOUSANDS)
<S> <C> <C>
Direct losses and LAE....................................... $71,019 $59,298
Reinsurance ceded........................................... 3,976 9,062
------- -------
Net losses and LAE incurred................................. $67,043 $50,236
======= =======
</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 the nine months ended December
31, 1996, premiums of $-0-, and losses and LAE of $2.1 million, are attributable
to reinsurance agreements with Crossroads, a Bermuda domiciled insurance
company, 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, 1993, 1994 and 1995 is also
ceded to Crossroads. At December 31, 1995 and 1996 loss and LAE reserves
recoverable of approximately $9.6 million and $11.1 million, respectively (net
of amounts retroceded to USEI), are attributable to excess reinsurance
agreements with Crossroads. For the fiscal years 1986, 1987, 1988, 1990, 1991
and 1992, effective aggregate excess reinsurance is not currently in place
because these years have been self-funded or because the coverages have expired.
Exposure to significant adverse development for these years is considered
minimal due to the maturity of the loss development for these years.
In the nine months ended December 31, 1995 and 1996, ESIF did not commute
any ceded reinsurance nor did it enter into or engage in any loss portfolio
transfers.
ESIF remains obligated for amounts ceded in the event that the reinsurers
do not meet their obligations.
ESIF's reinsurance recoverable asset at December 31, 1996 is comprised of
amounts related to reinsurance agreements with the following companies (in
thousands):
<TABLE>
<CAPTION>
PAID UNPAID
CLAIMS CLAIMS TOTAL
------ -------- --------
<S> <C> <C> <C>
Reinsurance Carrier
American Re............................................ $ -- $ 734 $ 734
Continental Casualty................................... -- 9,245 9,245
Crossroads............................................. 1,847 9,276 11,123
Employers Re........................................... 808 5,150 5,958
Federal Ins. Co........................................ -- 8,417 8,417
INA.................................................... 223 5,792 6,015
Lloyd's of London...................................... -- 16,856 16,856
National Union......................................... -- 2,385 2,385
Old Republic........................................... 41 15,132 15,173
Transamerica........................................... 10 31,142 31,152
------ -------- --------
Total.......................................... $2,929 $104,129 $107,058
====== ======== ========
</TABLE>
F-67
<PAGE> 173
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
All of the recoverable amounts related to paid claims have been outstanding
less than ninety days at the balance sheet date. The reinsurance recoverable
amounts related to unpaid claims are calculated considering the provisions of
the specific and aggregate reinsurance agreements and using ultimate losses by
accident year consistent with the reported loss and LAE liabilities.
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 expense discounting and unearned premium reserves
for tax and financial reporting purposes.
Federal income taxes of $6.9 million and $12.2 million for the years ended
March 31, 1995 and 1996, 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 was $0.9 million and $0.7 million for the
nine months ended December 31, 1995 and 1996, respectively.
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.
Significant components of ESIF's deferred tax liabilities and assets as of
December 31, as calculated in accordance with FASB Statement No. 109, are as
follows:
<TABLE>
<CAPTION>
1995 1996
----------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Unrealized investment gains............................... $ 2,771 $ 1,521
Special Disability Trust Fund recoverables................ 302 283
Intangible assets......................................... -- 4,050
Other..................................................... -- 740
------- -------
Total deferred tax liabilities.................... 3,073 6,594
Deferred tax assets:
Discount on loss and LAE reserves......................... 18,098 19,237
Unearned premium.......................................... 1,372 1,141
Uncollectible premiums.................................... 753 941
Other..................................................... -- 931
------- -------
20,223 22,250
Valuation allowance for deferred tax assets............... -- --
------- -------
Total deferred tax assets......................... 20,223 22,250
------- -------
Net deferred tax assets..................................... $17,150 $15,656
======= =======
</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
F-68
<PAGE> 174
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 December 31, is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
----------- --------
(IN THOUSANDS)
<S> <C> <C>
Current..................................................... $ (2,123) $ 303
Deferred.................................................... (17,150) (15,656)
-------- --------
Total net asset................................... $(19,273) $(15,353)
======== ========
</TABLE>
Significant components of the provision for income taxes for the nine
months ended December 31, attributable to continuing operations, are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ------
(IN THOUSANDS)
<S> <C> <C>
Current tax expense......................................... $ 3,994 $3,006
Deferred taxes (benefit).................................... (1,671) 51
------- ------
Total income tax expense on income................ $ 2,323 $3,057
======= ======
</TABLE>
Income taxes paid by ESIF totaled $10.4 million and $3.3 million for the
nine months ended December 31, 1995 and 1996, respectively.
The reconciliation of income tax expense for the nine months ended December
31, attributable to continuing operations computed at the U.S. federal statutory
tax rate of 35%, to income tax expense is as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ------
(IN THOUSANDS)
<S> <C> <C>
Income tax (at 35% of pretax income or loss)................ $2,623 $2,819
Tax-exempt investment income................................ (802) (905)
Non deductible expenses..................................... 17 60
Goodwill amortization....................................... -- 438
State income taxes.......................................... 463 336
Other items, net............................................ 22 309
------ ------
Provision for federal income tax expense.................... $2,323 $3,057
====== ======
</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.
F-69
<PAGE> 175
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following table provides a reconciliation of the beginning and ending
reserve balances for losses and LAE for the nine months ended December 31, 1995
and 1996:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
----------------------
1995 1996
----------- --------
<S> <C> <C>
(IN THOUSANDS)
Loss & LAE Reserves, beginning of period -- GAAP basis...... 367,391 387,632
Less: Reinsurance recoverables (exclusive of recoverables on
paid losses).............................................. (108,440) (107,092)
-------- --------
258,951 280,540
Less: Recoverable from Florida SDTF......................... (15,879) (20,060)
-------- --------
Net reserves for losses and LAE at beginning of year........ 243,072 260,480
Add provision for claims occurring in:
The current year.......................................... 61,955 57,289
Prior years............................................... 5,088 (7,053)
-------- --------
Incurred losses during the current year..................... 67,043 50,236
Deduct payments for claims occurring in:
The current year.......................................... 8,274 8,378
Prior years............................................... 55,938 50,682
-------- --------
Claim payments during the current year...................... 64,212 59,060
-------- --------
Net reserves for losses and LAE at end of year.............. 245,903 251,656
Add: Impact of reinsurance for FASB 113..................... 110,056 104,129
Recoverable from SDTF....................................... 16,827 21,138
-------- --------
Gross reserves for losses and LAE at end of period (GAAP
basis).................................................... 372,786 376,923
======== ========
</TABLE>
The foregoing reconciliation also shows that a $7.0 million reserve
redundancy emerged during the nine month period ended December 31, 1996. This
amount represents the release of certain loss reserves previously carried which
were determined, based on comparisons to actuarially projected amounts, to be
redundant.
Statutory basis loss reserves were determined using paid loss data net of
historic SDTF recoveries; GAAP basis loss reserves were determined using paid
loss data gross of SDTF recoveries. This adjustment increased loss reserves by
$26.4 million and $28.8 million at December 31, 1995 and 1996, respectively, and
increased reinsurance recoverables by $10.5 million and $8.4 million at December
31, 1995 and 1996, respectively. In addition, ESIF has recorded, as an asset,
amounts recoverable from the SDTF based upon ESIF's historical collection
experience and the amount of claims identified as subject to SDTF recovery. The
recoverable amount recorded at December 31, 1995 and 1996 was $16.8 million and
$21.1 million, respectively.
In order to quantify the amounts recoverable from the SDTF, ESIF reviews
its claims that have been identified as subject to SDTF recovery considering
ESIF's historical recovery experience on claims submitted to the SDTF. In
addition, ESIF estimates the amount of claims it expects to recover over the
next four years based on actual collection experience for the most recent two
years, and discounts the expected recoveries using an appropriate interest rate.
The amounts reflected as recoverables from the SDTF were based on the discounted
expected collection amounts rather than on the total claims identified as
subject to SDTF recovery. Accordingly, there is an implicit valuation allowance
of approximately $8.0 million reflected in the recorded SDTF recoverable
amounts.
LAE assumed in the acquisition of SHC represents unallocated LAE reserves
established by ESIF that were, prior to the acquisition, provided by SHC under
the administrator's contract between ESIF and SHC.
F-70
<PAGE> 176
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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>
DECEMBER 31,
---------------------
1995 1996
----------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued retrospective premium............................... $43,440 $23,990
</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 surplus
or profits and limit the amount of certain investments to specified percentages
of statutory admitted assets. At December 31, 1996, under regulations applicable
to stock property and casualty insurance companies, $2.0 million of ESIF's
statutory net assets of $20.4 million can be transferred from the insurance
entities without regulatory approval.
Equity and net income as determined in accordance with statutory accounting
practices for self-insurance funds as of and for the nine months ended December
31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, EQUITY NET INCOME
- ------------ ------- ----------
(IN THOUSANDS)
<S> <C> <C>
1995........................................................ $49,275 $2,674
1996........................................................ $20,434 $5,108
</TABLE>
As a self-insurance fund, ESIF recorded for statutory reporting an asset of
$44.9 million at December 31, 1996, 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 $4.2 million at December 30, 1996.
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 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 will maintain statutory basis equity in excess of
the amount required by Florida law.
F-71
<PAGE> 177
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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. SDTF
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 net 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 SDTF's
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. If
the SDTF is discontinued, ESIF believes that the existing reimbursement
obligations of the SDTF would become general obligations of the State of
Florida, although there is no assurance that a reviewing court would adopt that
view. The SDTF has made no acknowledgement with regard to the enforceability of
its reimbursement obligations to insurers such as ESIF.
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.
ESIF has recorded an SDTF recoverable of $16.8 million and $21.1 million at
December 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 nine months ended December 31, 1995 and
1996 were $3.2 million and $6.5 million, respectively. The assessment expensed
by ESIF to the SDTF were $5.6 million and $3.9 million for the nine months ended
December 31, 1995 and 1996, respectively.
ESIF has not recorded a liability for future assessments from SDTF. Such
future assessments will be based on future premium amounts.
13. ACQUISITION OF SHC
On January 16, 1996, ESIF and its subsidiaries purchased all of the
outstanding capital stock of SHC. The purchase price consisted of $26.0 million
paid in cash from the Company, $11.5 million in cash distributed by Summit and
$44.0 million in assumption of debt by SHC (see Note 14). 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
F-72
<PAGE> 178
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 for the nine months ended
December 31, 1995 presents the consolidated results of operations of ESIF and
SHC as if the acquisition had been effective at April 1, 1995 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 (in thousands):
<TABLE>
<S> <C>
Total revenues.............................................. $131,661
Income before income tax expense............................ 9,198
Net income.................................................. 6,189
</TABLE>
To comply with requirements of the Florida DOI, SHC's chairman has
personally indemnified ESIF up to a maximum of $5.0 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.
14. NOTES PAYABLE
In connection with the purchase of SHC by ESIF, SHC utilized a bank term
loan with rates based on LIBOR plus 3%. The balance as of December 31, 1996 for
SHC was $33.0 million. Also, a revolving bank credit facility with rates
approximating the prime rate was entered into as part of the agreement. As of
December 31, 1996, there was no balance outstanding for SHC for this agreement.
Interest expense incurred as of December 31, 1996 was $2.6 million.
Prior to December 31, 1996, the term loan and revolving credit facility
agreements were amended.
Maturities for the combined term loan and revolving credit facility (as
amended) are as follows:
<TABLE>
<CAPTION>
REDUCTION IN THE
TERM AVAILABILITY OF THE
LOAN REVOLVING CREDIT FACILITY
------- -------------------------
(IN THOUSANDS)
<S> <C> <C>
For the Three Months Ending March 31:
1997................................................ $ 325 $ --
For the Years Ending March 31:
1998................................................ 2,300 --
1999................................................ 3,925 --
2000................................................ 5,500 --
2001................................................ 9,500 1,500
Thereafter.......................................... 11,450 3,500
------- -------
$33,000 $5,000
======= =======
</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.
F-73
<PAGE> 179
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
15. EMPLOYEE BENEFIT PLANS
ESIF's subsidiary, SHC, has a deferred savings and profit-sharing plan (the
"401(k)") covering substantially all employees. Under the 401(k), 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 401(k)
totaled approximately $0.3 million for the period April 1, 1996 to December 31,
1996.
16. 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 $33.0 million of notes payable at
December 31, 1996 that approximates its fair value.
ESIF's fair value of reinsurance recoverable approximates its carrying
value for December 31, 1995 and 1996, respectively, as summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
---------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Reinsurance recoverable..................... $112,734 $112,734 $107,058 $107,058
</TABLE>
17. DISCONTINUED OPERATIONS
Effective July 31, 1996, ESIF decided to discontinue its computer software
development. This business was acquired in the January 1996 acquisition of SHC.
As of December 31, 1996 all assets have been disposed and ESIF has recognized an
after tax loss of approximately $1.2 million on the disposition of this
operation (including estimated operating losses to the disposition date).
The operating results of the computer software development operations for
the nine month period ended December 31, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
Revenue..................................................... $ 660
Expenses.................................................... 2,013
-------
Loss before income taxes.................................... (1,353)
Income tax (benefit)........................................ (460)
-------
Net loss.................................................... $ (893)
=======
</TABLE>
18. 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
F-74
<PAGE> 180
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
this subsidiary by a sale of its stock is expected to be completed during the
first quarter of 1997. The consolidated financial statements include the
operating results and assets and liabilities of this subsidiary.
The operating results for the healthcare subsidiary for the nine month
period ending December 31, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
Revenue..................................................... $ 114
Expenses.................................................... 701
-----
Loss before income taxes.................................... (587)
Income tax (benefit)........................................ (200)
-----
Net loss.................................................... $(387)
=====
</TABLE>
19. 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:
<TABLE>
<CAPTION>
WORKERS'
COMPENSATION INSURANCE INTERCOMPANY
TOTAL INSURANCE ADMINISTRATION ELIMINATION
-------- ------------ -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Nine Months Ended December 31, 1995:
Revenues............................. $103,086 $103,086 -- --
Income before income taxes........... $ 7,495 $ 7,495 -- --
Identifiable assets.................. $437,932 $437,932 -- --
Nine Months Ended December 31, 1996:
Revenues............................. $110,811 $ 83,245 $43,517 $(15,951)
Income from continuing operations
before income taxes............... $ 8,290 $ 9,023 $ (733) --
Identifiable assets.................. $472,388 $472,388 -- --
</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.
20. EXTRAORDINARY CHARGE
During the nine months ended December 31, 1996 ESIF incurred $1.3 million
of expenses directly related to its conversion from a group self-insurance fund
to a stock insurance company. These expenses are principally professional
service fees paid to attorneys, investment advisors, and accountants related to
obtaining regulatory approval for the conversion, advising the Board of Trustees
as to the fairness of the transaction and auditing ESIF's GAAP basis financial
statements. These costs, net of income tax benefits of $0.5 million, are
presented as an extraordinary charge on ESIF's Statement of Operations for the
nine months ended December 31, 1996.
F-75
<PAGE> 181
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
21. RELATED PARTY TRANSACTIONS
As more fully described in Note 5, ESIF has entered into office premises
lease agreements with certain Trustees of ESIF.
As more fully described in Note 6, ESIF has entered into reinsurance
agreements with an insurance company in which a Trustee of ESIF has an ownership
interest.
As more fully described in Note 13, to comply with requirements of the
Florida DOI, SHC's president and chief executive officer has personally
indemnified ESIF up to a maximum of $5.0 million for certain loss, injury, or
damage to ESIF, if any, which may result from the acquisition of SHC.
Entities in which SHC's president and chief executive officer held
ownership interests have provided certain transportation related services to
SHC. Fees paid by SHC to these entities aggregated approximately $0.4 million
and $0.02 million for the nine months ended December 31, 1995 and 1996,
respectively.
SHC's president and chief executive officer is also a member of the Board
of Directors of Florida Retail Federation (the "Association") which is the
sponsoring trade association for Florida Retail Federation Self Insurers Fund
("FRF"), one of the group self-insurance funds administered by SHC. The
Association, as the fund sponsor, is entitled to a fee equal to 1% of FRF's
premiums earned in each year, and SHC is obligated to pay such fee out of the
administrative fee it receives from FRF. During the nine months ended December
31, 1995 and 1996, SHC paid approximately $0.7 million and $0.6 million,
respectively, to the Association for such fees. During the nine months ended
December 31, 1995 and 1996, FRF paid SHC fees for administrative services of
approximately $21.1 million and $19.0 million, respectively.
F-76
<PAGE> 182
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 and its subsidiaries.
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-77
<PAGE> 183
SUMMIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gross service fees (including $25,336,689,
$26,829,023 and $24,867,269 for the years ended
December 31, 1993, 1994 and 1995, respectively,
from Employers Self Insurers Fund)............. $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-78
<PAGE> 184
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-79
<PAGE> 185
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-80
<PAGE> 186
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-81
<PAGE> 187
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.
Deferred Income
SHC defers a portion of its fees from Employers Self Insurers Fund ("ESIF")
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, 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.
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.
F-82
<PAGE> 188
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 temporary
differences between financial reporting and income tax reporting of
depreciation, aggregate reserves, deferred income and certain start-up costs.
F-83
<PAGE> 189
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-84
<PAGE> 190
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 as of September 30, 1996 and for the six months then ended and have
issued our reports thereon dated July 31, 1996 and November 21, 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
November 21, 1996
F-85
<PAGE> 191
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-86
<PAGE> 192
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
SCHEDULE I -- SUMMARY OF INVESTMENTS
<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>
MARCH 31, 1996
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
======== ======== ========
SEPTEMBER 30, 1996
Securities available for sale:
Fixed maturities:
U.S. Government:
Non-mortgage backed.................................. $ 49,286 $ 48,625 $ 48,625
Mortgage backed...................................... 13,603 13,541 13,541
States, municipalities and political subdivisions...... 67,799 68,348 68,348
Corporate obligations.................................. 42,875 42,906 42,906
-------- -------- --------
Total fixed maturities............................ 173,563 173,420 173,420
Equity securities:
Common stocks:
Public utilities..................................... 1,786 2,312 2,312
Banks, trusts and insurance companies................ 579 650 650
Industrial and miscellaneous......................... 8,298 9,336 9,336
-------- -------- --------
Total common stocks............................... 10,665 12,298 12,298
Non redeemable preferred stock......................... 3,759 3,757 3,787
-------- -------- --------
Total equity securities........................... 14,422 16,085 16,085
Short-term investments...................................... 16,713 16,713 16,713
-------- -------- --------
Total investments................................. $204,698 $206,218 $206,218
======== ======== ========
</TABLE>
F-87
<PAGE> 193
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
SCHEDULE I -- SUMMARY OF INVESTMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
AMOUNT AT
WHICH SHOWN
IN THE
TYPE OF INVESTMENT COST MARKET BALANCE SHEET
COLUMN A COLUMN B COLUMN C COLUMN D
------------------ -------- -------- -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Securities available for sale:
Fixed maturities:
U.S. Government
Non-mortgage backed.................................. $ 50,423 $ 50,263 $ 50,263
Mortgaged backed..................................... 10,902 11,004 11,004
States, municipalities and political subdivisions...... 82,937 83,803 83,803
Corporate obligations.................................. 38,973 39,612 39,612
-------- -------- --------
Total fixed maturities............................ $183,235 $184,682 $184,682
Equity securities:
Common stocks:
Public utilities....................................... 402 430 430
Banks, trusts and insurance companies.................. 1,255 1,771 1,771
Industrial and miscellaneous........................... 9,963 11,899 11,899
-------- -------- --------
Total common stocks............................... 11,620 14,100 14,100
Non-redeemable preferred stock......................... 4,452 4,568 4,568
-------- -------- --------
Total equity securities........................... 16,072 18,668 18,668
Short-term investments...................................... 14,536 14,536 14,536
-------- -------- --------
Total investments................................. $213,843 $217,886 $217,886
======== ======== ========
</TABLE>
F-88
<PAGE> 194
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%
Six Months Ended September 30, 1995
Premiums -- Workers' Compensation...... 66,351 3,207 0 63,145 0%
Six Months Ended September 30, 1996
Premiums -- Workers' Compensation...... 52,402 3,373 0 49,029 0%
Nine Months Ended December 31, 1995
(unaudited)
Premiums -- Workers' Compensation...... 94,493 4,780 0 89,713 0%
Nine Months Ended December 31, 1996
(unaudited)
Premiums -- Workers' Compensation...... 79,201 4,692 0 74,509 0%
</TABLE>
F-89
<PAGE> 195
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
SCHEDULE VI -- SUPPLEMENTAL INFORMATION CONCERNING INSURANCE OPERATIONS
<TABLE>
<CAPTION>
RESERVES
FOR UNPAID
DEFERRED CLAIMS AND
POLICY CLAIM DISCOUNT NET
ACQUISITION SETTLEMENT DEDUCTED UNEARNED NET EARNED INVESTMENT
SEGMENT COSTS EXPENSES IN COL C PREMIUMS PREMIUMS INCOME
YEAR ENDED COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
---------- -------- ----------- ---------- -------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1994.......... Workers' $0 $392,784 $4,730 $ 0 $148,441 $10,510
Compensation
Insurance
March 31, 1995.......... Workers' 0 367,391 4,875 0 128,489 12,205
Compensation
Insurance
March 31, 1996.......... Workers' 0 387,632 4,668 0 114,893 13,209
Compensation
Insurance
SIX MONTHS ENDED
- ------------------------
September 30, 1995...... Workers' $0 $364,210 $4,775 $51,208 $ 63,145 $ 7,598
Compensation
Insurance
September 30, 1996...... Workers' 0 367,971 4,235 46,000 49,029 6,363
Compensation
Insurance
NINE MONTHS ENDED
- ------------------------
December 31, 1995
(Unaudited)............ Workers' 0 $372,786 $4,618 $25,437 $ 89,713 $10,522
Compensation
Insurance
December 31, 1996
(Unaudited)........... Workers' 0 376,923 4,235 23,506 74,509 9,606
Compensation
Insurance
<CAPTION>
CLAIMS & CLAIMS
SETTLEMENT EXPENSES AMORTIZATION NET PAID
INCURRED RELATED TO OF DEFERRED CLAIMS &
-------------------- POLICY CLAIMS NET
PRIOR ACQUISITION SETTLEMENT PREMIUMS
CURRENT YEARS COSTS EXPENSES WRITTEN
YEAR ENDED YEAR COLUMN H COLUMN I COLUMN J COLUMN K
---------- --------- -------- ------------ ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
March 31, 1994.......... $118,889 $10,478 $10,664 $96,753 $156,086
March 31, 1995.......... 94,520 25,404 10,078 88,264 144,427
March 31, 1996.......... 84,058 10,786 9,707 77,436 121,296
SIX MONTHS ENDED
- ------------------------
September 30, 1995...... $ 42,198 $ 167 $ 4,236 $44,953 $117,823
September 30, 1996...... 35,663 (3,528) 4,839 38,008 103,178
NINE MONTHS ENDED
- ------------------------
December 31, 1995
(Unaudited)............ $ 61,955 $ 5,088 $ 6,350 $64,212 $114,125
December 31, 1996
(Unaudited)........... 57,289 (7,053) 7,250 59,060 108,309
</TABLE>
F-90
<PAGE> 196
EXHIBIT A
AMENDED
PLAN OF CONVERSION
AND RECAPITALIZATION
OF
EMPLOYERS SELF INSURERS FUND
<PAGE> 197
AMENDED
PLAN OF CONVERSION
AND RECAPITALIZATION
OF
EMPLOYERS SELF INSURERS FUND
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Background................................................................ 1
Purpose of Conversion..................................................... 1
Article I Definitions................................................. 2
Article II Regulatory Approval......................................... 3
Article III Policyholder Voting......................................... 4
Article IV Process of Conversion....................................... 4
Article V Reorganization.............................................. 5
Article VI Consideration for Membership Interests...................... 5
Article VII Allocation of Policyholder Consideration.................... 6
Article VIII Allocation of Additional Subscription Rights................ 7
Article IX Subscription and Public Offerings........................... 8
Article X Stock Incentive Plan for Employees and Directors............ 9
Article XI Policyholder Interests...................................... 10
Article XII Federal Tax Consequences.................................... 10
Article XIII Conditions to Effectiveness................................. 10
Article XIV Failure of Plan to Become Effective......................... 11
Article XV Miscellaneous Provisions.................................... 11
</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> 198
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 , 1997, 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.
Later in 1996, 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 (the "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, through
the ownership of capital stock of the Holding
<PAGE> 199
Company, Policyholders may be able to realize an economic benefit for 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, $.01 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 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.
1.8 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.
1.9 Holding Company. "Holding Company" shall mean Summit Holding
Southeast, Inc., a Florida 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.
1.10 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.
2
<PAGE> 200
1.11 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.
1.12 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).
1.13 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.
1.14 Mutual Company. "Mutual Company" shall mean the interim assessable
mutual company resulting from the conversion of ESIF.
1.15 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.
1.16 Plan. "Plan" shall mean this Amended Plan of Conversion and
Recapitalization, as it may be amended from time to time.
1.17 Policies. "Policies" shall mean the indemnity agreements issued by
ESIF.
1.18 Policyholders. "Policyholders" shall mean the owners of Policies.
1.19 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.
1.20 Stock Company. "Stock Company" shall mean the stock company resulting
from the conversion of Mutual Company pursuant to the Plan.
1.21 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.
1.22 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.
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
3
<PAGE> 201
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.
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 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 or by proxy and (2) not less than a majority of the votes eligible to be
cast by Voting Policyholders, are cast in favor of the Plan. No member of ESIF
shall be entitled to any dissenters', appraisal or other similar rights in
connection with the transactions contemplated by this 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> 202
ARTICLE V
REORGANIZATION
5.1 Conversion of the Mutual Company. On the Effective Date, the Mutual
Company will convert from an assessable mutual insurer to a non-assessable stock
insurer, pursuant to Section 628.6017 of the Florida Statutes.
5.2 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.
5.3 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 Interests for Preferred Stock in the Holding Company
and Subscription Rights as described in Sections 6.1 and 6.2 below, pursuant to
the Recapitalization Agreement attached hereto as Exhibit F and this Plan. Such
exchange shall occur by conversion of Mutual Company to the Stock Company and by
the effective exchange of rights to stock in the Stock Company for Preferred
Stock of the Holding Company. In order to avoid the expense and inconvenience of
issuing shares of Stock Company to Eligible Policyholders, which shares would
then be exchanged for shares of Preferred Stock, an exchange mechanism will be
employed to evidence that the Eligible Policyholders are entitled to receive
shares of Stock Company but will receive in lieu thereof shares of the Holding
Company's Preferred Stock. 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. Upon conversion of Mutual Company to Stock
Company, Policyholders will no longer be subject to assessment for liabilities
of ESIF or Mutual Company arising either before or after the Effective Date.
Upon the further exchange for their interests in Stock Company, Eligible
Policyholders will receive that number of shares of Preferred Stock determined
in accordance with Section 7.1 below and receive subscription rights to purchase
that number of shares of Common Stock determined in accordance with Section 7.2.
6.1 Preferred Stock. Pursuant to the complete consummation of the Plan, 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 1,639,836 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
Series 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 up to ninety percent
(90%) 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
5
<PAGE> 203
control of the Stock Company and its subsidiaries through their ownership of the
Common Stock. The remaining ten percent (10%) of the Aggregate Common Shares
shall be reserved for subscription by all officers and directors and certain
other management employees (the "Management Group") 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, or the Management Group shall be, at
the discretion of the Holding Company, 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), (ii) and (iii) below.
(i) Ten (10) shares.
(ii) A number of shares based on the Eligible Policyholder's
contribution to ESIF's premiums, determined in accordance with the
following formula:
(y) divide the premiums of the Eligible Policyholder for the
Eligibility Period by ESIF's total premiums for that period, and
(z) then multiply the resulting number by 468,597, which is 30%
of the remaining shares of the 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 of such person during the
Eligibility Period, and
(x) calculate the Eligible Policyholder's "capital" premiums by
subtracting the loss ratio calculated in (w) above from 70% and
multiplying the result by the premiums of such person during the
Eligibility Period, and
(y) then divide the Eligible Policyholder's "capital" premium
amount determined in (x) above by the total "capital" premiums for
all Eligible Policyholders, and
(z) then multiply the amount determined in (y) by 1,093,393,
which is 70% of the remaining shares of the 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 10 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 share that is otherwise calculated to be
due pursuant to the above formulae. Partial shares due for each component of the
calculation will be rounded up or down to the nearest whole share. Holding
Company will issue 1,639,836 total shares of its Preferred Stock, plus the
number of shares of Preferred Stock necessary for the rounding. No shares of
Preferred Stock will be issued to any person other than an Eligible
Policyholder.
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7.2 Subscription Rights. Each Eligible Policyholder shall receive
Subscription 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 Directors or a committee of the Board of Directors of the
Holding 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 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 Directors of the Holding
Company. A further description of the determination of the Per Share
Offering Price is set forth in Section 9.6.
(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 one hundred percent (100%) of the
Aggregate Common Shares, less the shares subscribed for by the Management
Group, which shall not exceed ten percent (10%) of the Aggregate Common
Shares. In the event that the Eligible Policyholders collectively subscribe
to more than the ninety percent (90%) of the Aggregate Common Shares that
has been initially allocated to them, such ninety percent (90%) of the
Aggregate Common Shares, plus any additional shares that are not subscribed
for by the Management Group, shall be allocated among individual Eligible
Policyholders by multiplying the ratio of the premium attributable to
Policies of which each Policyholder was the owner of record during the
Eligibility Period to the total premium during the Eligibility Period by
the total number of shares representing the allocation to Eligible
Policyholders.
(c) No Person shall be permitted, individually or in conjunction with
any affiliated Person, to acquire directly or indirectly pursuant to the
Subscription Rights or in any public offering more than 4.99 percent of the
Common Stock; provided, however, that the Holding Company may, in its
discretion, permit any purchaser to purchase more than such amount, subject
to each such purchaser's obtaining any required approval of the Department.
ARTICLE VIII
ALLOCATION OF ADDITIONAL SUBSCRIPTION RIGHTS
8.1 In order to provide incentives to the directors, officers and certain
other management employees of the Holding Company and its subsidiaries,
including the Stock Company, in a manner comparable to other publicly-owned
companies, ten percent (10%) of the Aggregate Common Shares shall be set aside
for subscription by or on behalf of those individuals, as follows:
The Holding Company shall grant Subscription Rights to 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 indirectly be granted Subscription Rights in accordance with Section
7.2 because they are affiliates of 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 or
in any related stock offering.
Any shares of the Aggregate Common Shares that are not subscribed to by the
Management Group, 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.
7
<PAGE> 205
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
"Proxy/Prospectus"), pursuant to which each Voting Policyholder will be asked to
vote on the Conversion and other matters set forth in this Plan and pursuant to
which the Holding Company will offer its shares of Preferred Stock to Eligible
Policyholders, and pursuant to which the Holding Company will offer for sale
shares of its Common Stock pursuant to exercise of the Subscription Rights (the
"Subscription Offering"). As soon as practicable after the Department has
approved this Plan and the Proxy/Prospectus has been declared effective by the
Securities and Exchange Commission, the Proxy/Prospectus will be delivered to
each Voting and Eligible Policyholder, and the Special Meeting will be held not
less than 20 calendar days thereafter. If the requisite number of 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. Each Proxy Statement/Prospectus will be accompanied by an order
form (the "Order Form") for use in exercising Subscription Rights for Common
Stock. Such documents 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) A per share offering price, subject to adjustment as described in
the Proxy Statement/ Prospectus;
(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 Proxy Statement/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 pursuant to
timely delivery to the escrow agent designated by the Holding Company (the
"Escrow Agent") of a properly completed and executed Order Form, together
with 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 Escrow Agent, 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.
(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. If for any reason the Conversion is
not consummated, all payments made by subscribers shall be refunded to them
(with interest at an annual simple interest rate of 3.25%) as soon as
practicable after the determination that no such consummation shall occur.
8
<PAGE> 206
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 Escrow Agent or are received by the
Escrow Agent 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 and the Management Group. At the Holding
Company's discretion, all shares of the Aggregate Common Shares not subscribed
for in the Subscription Offering may be sold in a public offering (the "Public
Offering") as described below, subject to such terms, conditions and procedures
as may be determined by the Holding Company. In such Public 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, 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. 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 Purchase Limits. The Holding Company will permit any "investment
company" as defined in Section 3 of the Investment Company Act of 1940, as
amended, to purchase up to 10% of the Aggregate Common Stock, subject to such
investor obtaining any required approval of the Department. In addition, the
Holding Company may, in its discretion, permit any purchaser to purchase more
than 4.99% of the Aggregate Common Stock, subject to such person obtaining any
required approval of the Department. Any such purchase could result in a
controlling interest of the Holding Company's Common Stock being owned by a
single shareholder or a small group of shareholders. In such event, such
controlling shareholder or shareholders would have the power to elect the
directors of the Holding Company and determine the outcome of corporate actions
requiring shareholder approval. In addition, in such event there can be no
assurance that a public market will be established or, if established,
maintained because the number of shares traded publicly would potentially be
small. If the Voting Policyholders approve the Conversion at the Special
Meeting, the Voting Policyholders will also be deemed to have approved any such
potential sale.
9.6 Per Share Offering Price. All shares of Common Stock sold pursuant to
the Subscription Offering and the Public Offering shall be sold for a uniform
price. The final 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 the Effective Date.
ARTICLE X
STOCK INCENTIVE PLAN FOR EMPLOYEES AND DIRECTORS
10.1 It is anticipated that the Holding Company will implement the Summit
Holding Southeast, Inc. 1996 Long-Term Incentive Plan (the "Incentive Plan"),
providing for stock and stock-based incentive awards to be granted to directors
and certain key employees of the Holding Company and its subsidiaries, including
the Stock Company. The purpose of the Incentive Plan is to promote the success,
and enhance the value, of the Holding Company, by linking the personal interests
of the Holding Company's directors and key employees to those of Holding Company
shareholders and by providing the Holding Company's directors and key employees
with an incentive for outstanding performance. Subject to the terms and
conditions set forth in
9
<PAGE> 207
the Incentive Plan, a committee of the Holding Company's Board of Directors,
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 all awards granted to employees and directors.
ARTICLE XI
POLICYHOLDER INTERESTS
Upon the Conversion of Mutual Company to Stock Company, the Policies held
by Policyholders will be converted from assessable Policies to non-assessable
Policies, without any endorsement or modification thereto. Policyholders will no
longer be subject to any assessment for liabilities of ESIF or Mutual Company
arising either before or after the Effective Date. 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 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
Management Group and the purchasers in the Public Offering 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
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newly-licensed 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 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, ESIF 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 choices 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.
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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 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.
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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> 211
EXHIBITS TO PLAN OF CONVERSION AND RECAPITALIZATION
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
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 Organizational Chart (after conversion)
</TABLE>
<PAGE> 212
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> 213
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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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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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.
<TABLE>
<S> <C>
- -------------------------------------------- --------------------------------------------
Director Director
- -------------------------------------------- --------------------------------------------
Director Director
- -------------------------------------------- --------------------------------------------
Director Director
</TABLE>
Attest:
-------------------------------------------------------------
Secretary
(SEAL)
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)
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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.
<PAGE> 217
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
Corporations 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.
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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.
8
<PAGE> 233
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.
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<PAGE> 234
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> 235
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> 236
EXHIBIT E
ABN AMRO CHICAGO CORPORATION
January 23, 1997
The Board of Trustees
Employers Self Insurers Fund
2310 A-Z Park Road
Lakeland, Florida 33801
Trustees:
We understand that, pursuant to the Amended Plan of Conversion and
Recapitalization (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 10% 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 Amended Plan;
(ii) reviewed the audited statutory financial statements of ESIF for
the years ended March 31, 1995 and 1996 and audited GAAP financial
statements for the years ended March 31, 1996 and the six months ended
September 30, 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 Proxy/Prospectus and the related exhibits to the S-1
Registration Statement filed with the Securities and Exchange Commission on
January 8, 1997;
(v) 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");
<PAGE> 237
(vi) 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;
(vii) 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;
(viii) 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;
(ix) reviewed the financial terms of recent sales of selected workers'
compensation insurance companies; and
(x) 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 September 30, 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,
ABN AMRO CHICAGO CORPORATION
2
<PAGE> 238
EXHIBIT F
ALSTON & BIRD
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-34
404-881-7000
Fax: 404-881-7777
January , 1997
Employers Self Insurers Fund
2310 A-Z Park Road
Lakeland, Florida 33801
Re: Opinions Regarding Demutualization of ESIF
Ladies and Gentlemen:
We have acted as counsel to Employers Self Insurers Fund ("ESIF"), a
Florida workers' compensation group self insurance fund, in connection with its
conversion into a Florida stock insurance company and the creation of a newly
formed holding company, Summit Holding Southeast, Inc. ("New Holding"), that
will own all of the outstanding stock of ESIF following its conversion to a
stock company. The transaction will occur pursuant to the proposed Amended Plan
of Conversion and Recapitalization of ESIF (the "Plan" or the "Plan of
Conversion").
The following steps will occur as part of one transaction to be effected on
the same day: (1) the conversion of ESIF from a group self-insurance fund to an
assessable mutual insurance company (the "Mutual Company")(the "First
Conversion"); (2) the conversion of the Mutual Company into a stock insurance
company (the "Stock Company") (the "Second Conversion")(the First Conversion and
the Second Conversion are referred to collectively as the "Conversions"); and
(3) the transfer of property (including a deemed transfer of the stock of Stock
Company and an actual transfer of cash) by members of ESIF ("Policyholders"),
certain employees of New Holding and its subsidiaries ("Management"), and the
public pursuant to a subscription offering and/or an initial public offering in
exchange for stock of New Holding (the "Exchange"). The above transferors in the
Exchange are collectively referred to as the "Transferors." You have requested
our opinion with respect to the federal income tax consequences of the above
transactions.
All capitalized terms used herein without definition shall have the
respective meanings specified in the Plan of Conversion and all section
references herein are to the Internal Revenue Code of 1986, as amended (the
"Code").
601 Pennsylvania Avenue, N.W.
North Building, Suite 250
Washington, D.C. 20004-2601
<PAGE> 239
INFORMATION RELIED UPON
In rendering the opinions expressed herein, we have examined such documents
as we have deemed appropriate, including the Plan, the Form S-1 Registration
Statement, and such additional documents as we have considered relevant.
In our examination of such documents, we have assumed, with your consent,
that all documents submitted to us as photocopies faithfully reproduce the
originals thereof, that such originals are authentic, that all such documents
have been or will be duly executed to the extent required, and that all
statements set forth in such documents are accurate.
We also have obtained such additional information and representations that
we have deemed relevant and necessary through consultation with various officers
and representatives of ESIF and certain of its wholly-owned subsidiaries.
You have informed us that the Board of Trustees of ESIF believes that the
Conversions and the Exchange will provide several important benefits to
Policyholders. Pursuant to the Conversions, the indemnity agreements
("Policies") held by Policyholders will be converted from assessable Policies to
non-assessable Policies, so that the Policyholders will no longer be subject to
assessment for any liabilities of ESIF arising before or after the effective
date of the Conversions. In addition, the Board of Trustees believes that the
conversion to a stock company that is wholly-owned by a publicly traded holding
company will 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 assessable mutual company. The Board also believes that
having New Holding own all of the outstanding stock of the Stock Company will
provide greater flexibility than ESIF would otherwise have to finance and
diversify its business activities through existing or newly formed subsidiaries
or through strategic partnerships that could enhance its financial security and
diversity. Furthermore, the Board believes that Policyholders, by owning stock
of New Holding, will be able to realize an economic benefit for their membership
interests that is currently not available to them, in addition to their being
relieved of contingent liabilities as discussed above. To achieve these goals,
the following will occur pursuant to the Plan:
ESIF will convert to an assessable mutual insurance company under
sec. 628.6013 of the Florida Statutes. As a second step of the Plan, the Mutual
Company will convert to a stock insurance company under sec. 628.6017 of the
Florida Statutes, and become a wholly-owned subsidiary of New Holding.
Policyholders will receive preferred stock of New Holding in exchange for their
interests in Stock Company. Subscription rights to purchase shares of common
stock of New Holding (the "Subscription Rights") will be offered to
Policyholders and Management. The Subscription Rights will entitle all such
persons to purchase common stock on the same terms as such stock will be offered
to the public in the initial stock offering outlined below. Only those
Policyholders who satisfy certain criteria will receive New Holding preferred
stock and Subscription Rights. An eligible Policyholder includes any person who
owned a Policy issued by ESIF at any time during the period from August 20, 1993
through and including August 20, 1996 (the "Eligibility Period"). (As used
herein, the term "Policyholder" shall refer to only eligible Policyholders.)
Policyholders will receive Subscription Rights to purchase 90% of the New
Holding common stock, and Management will receive Subscription Rights to
purchase 10% of the New Holding common stock. Any shares of common stock of New
Holding allocated to, but not issued to, Policyholders and Management will be
offered for sale to the public. Underwriters may purchase such common stock of
New Holding and sell it in an initial public offering.
The transaction will be effected, subject to the approval of the Florida
Commissioner of Insurance, pursuant to the following steps:
1. New Holding will be formed by seven individuals.
2. ESIF will convert from a group self-insurance fund to Mutual
Company, an interim step required to satisfy the Florida Insurance Code.
3. Mutual Company will convert to Stock Company and will be renamed
Bridgefield Employers Insurance Company.
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<PAGE> 240
4. The Policyholders' membership interests will be extinguished, and
the Policyholders of Stock Company will no longer be subject to any
assessment for the liabilities of ESIF or Mutual Company.
5. In order to avoid the expense and inconvenience of issuing Stock
Company shares to Policyholders, which shares would then be exchanged for
New Holding preferred stock in the transaction described below, an exchange
mechanism will be employed to evidence that the Policyholders are entitled
to receive shares of Stock Company, but will receive in lieu thereof shares
of New Holding Series A Preferred Stock ("Series A Preferred Stock").
6. Policyholders will exchange the stock of Stock Company they were
deemed to have received in the Second Conversion for Series A Preferred
Stock. Stock Company will become a wholly-owned subsidiary of New Holding.
7. Policyholders and Management will receive rights to subscribe for
shares of the common stock of New Holding.
8. New Holding will offer for sale to the public any unsubscribed
shares of New Holding common stock.
Each of the above steps will occur as part of one transaction in the order
indicated. No Policyholder will have a right to proceed with regard to less than
all of the proposed steps. Following the transaction, New Holding will
contribute all or a portion of the net proceeds of the Offerings to Stock
Company.
DESCRIPTION OF COMPANIES AND STOCK
BUSINESS OF NEW HOLDING
New Holding was incorporated in November 1996 at the direction of the Board
of Trustees of ESIF for the purpose of becoming a holding company to acquire and
hold all of the outstanding stock of Stock Company, following the Conversions
and the Exchange. Upon the completion of the planned transactions, Stock Company
will become a wholly-owned subsidiary of New Holding. New Holding currently is a
non-operating company.
BUSINESS OF ESIF
In 1978, ESIF was formed as the Associated Industries of Florida Self
Insurers Fund and, in 1985, changed its name to Employers Self Insurers Fund.
ESIF currently files a consolidated federal tax return as a property and
casualty insurance company with Employers Safety Group Association. It is
assumed for purposes of this opinion letter that ESIF is properly treated for
federal income tax purposes as a mutual insurance company, taxable as a
corporation.
DESCRIPTION OF CAPITAL STOCK
The following is a summary description of New Holding's capital stock.
PREFERRED STOCK
New Holding 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.
Series A Preferred Stock. In connection with the Conversions and the
Exchange, New Holding will issue 1,639,836 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.
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<PAGE> 241
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 New Holding 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 New Holding (the "Series A Designation").
In summary:
(i) The Series A Preferred Stock shall, with respect to dividend
rights and rights on liquidation, dissolution and winding up of New
Holding, rank prior to all classes or series of equity securities of New
Holding, 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 four percent (4%) per annum. Such dividends shall
cumulate 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
cumulated but unpaid dividends shall be paid upon any redemption of the
Series A Preferred Stock or any liquidation.
(iii) In the event of any liquidation of New Holding, after payment or
provision for payment of the debts and other liabilities of New Holding,
and before any payment or distribution of New Holding'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 cumulated but unpaid dividends thereon.
(iv) The Series A Preferred Stock shall be redeemable by New Holding
at any time and from time to time, in whole or in part.
(v) The redemption price shall be $10 per share, together with an
amount equal to all cumulated but unpaid dividends thereon to the date of
redemption.
(vi) In the event that New Holding enters into any Business
Combination (as defined in the Series A Designation), New Holding 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 cumulated but
unpaid dividends.
COMMON STOCK
New Holding is authorized to issue up to 20,000,000 shares of common stock,
par value $.01 per share. Immediately before the planned transaction, New
Holding will have 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 Bylaws
of New Holding require that a majority of the issued and outstanding shares of
New Holding 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 New Holding and have no rights to convert their common stock into
any other securities.
Subject to the prior rights of any series of preferred stock that from time
to time may be outstanding, holders of common stock are entitled to receive
dividends ratably 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 New Holding, 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.
4
<PAGE> 242
SHARES OF NEW HOLDING EXCHANGED FOR MEMBERSHIP INTERESTS
In connection with the Conversions and the Exchange, New Holding will issue
the Series A Preferred Stock to the Policyholders in exchange for their rights
to common stock of Stock Company. The aggregate number of shares of Series A
Preferred Stock that is being offered hereby is 1,639,836, for an aggregate par
value of $16,398,360. In approving the Plan of Conversion, the Florida
Department of Insurance determined that all the terms of the Plan of Conversion,
including the value of the Series A Preferred Stock proposed to be issued to the
Policyholders, is equitable to the policyholders of ESIF.
Each Policyholder will receive a total number of shares of Series A
Preferred Stock that includes a fixed number of shares for each Policy of which
such Policyholder was the owner of record during the Eligibility Period, plus a
variable number of shares depending upon certain factors, including earned
premium attributable to policies of which such Policyholder was the owner of
record during the Eligibility Period. No fractional shares of Series A Preferred
Stock will be issued, and no cash will be paid in lieu of any fraction of a
share that is otherwise calculated to be due pursuant to the above formulae. No
shares of Series A Preferred Stock will be issued to any person other than a
Policyholder.
SUBSCRIPTION OFFERING
In connection with the Conversions and the Exchange, Policyholders shall
have the right to subscribe for up to ninety percent of the shares of common
stock of New Holding. In addition to the shares of common stock that may be
subscribed for by Policyholders, Management may 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 a Policyholder or as a member of Management, shall be permitted
to acquire directly or indirectly more than 4.99% of the Post Offering
Outstanding Shares except with the approval of the Florida Department of
Insurance. In the event of an over subscription by Policyholders of their
allocated amount, the Plan provides a mechanism for allotting shares among
Policyholders. In the event the shares are undersubscribed, such shares will be
offered to the public through an underwritten offering on the same terms
available to Policyholders and/or possibly to private investors.
New Holding will not be required to offer shares in the Subscription
Offering to any Policyholder who resides in a foreign country or who resides in
a jurisdiction of the United States with respect to which such compliance would,
in the opinion of New Holding, be onerous and impractical for reasons of cost or
otherwise.
REPRESENTATIONS
The following representations are made with respect to the First
Conversion:
1. All liabilities and assets of ESIF will be assumed by and
transferred to Mutual Company in exchange for the membership interests in
Mutual Company.
2. The fair market value of the Mutual Company membership interests
received by each ESIF Policyholder will be approximately equal to the fair
market value of the ESIF membership interests surrendered in the exchange.
3. There is no plan or intention by the Policyholders of ESIF who own
one percent or more of the ESIF membership interests, and to the best of
the knowledge of Management of ESIF, there is no plan or intention on the
part of the remaining Policyholders of ESIF, to sell, exchange or otherwise
dispose of any of the Mutual Company membership interests received in the
transaction, except for transfers occurring pursuant to the Second
Conversion and the Exchange.
4. Immediately following the First Conversion, the Policyholders of
ESIF will own all of the outstanding Mutual Company membership interests
and will own such membership interests solely by reason of their ownership
of ESIF membership interests immediately prior to the transaction.
5. Mutual Company has no plan or intention to issue additional
membership interests following the transaction.
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<PAGE> 243
6. Immediately following consummation of the First Conversion, Mutual
Company will possess the same assets and liabilities as those possessed by
ESIF immediately prior to the transaction.
7. At the time of the transaction, ESIF will not have outstanding any
warrants, options, convertible securities, or any other type of right
pursuant to which any person could acquire membership interests in ESIF.
8. Mutual Company has no plan or intention to reacquire any of its
membership interests issued in the transaction.
9. Mutual Company has no plan or intention to sell or otherwise
dispose of any of the assets of ESIF acquired in the transaction, except
for dispositions made in the ordinary course of business, and except as
planned pursuant to the Second Conversion.
10. The liabilities of ESIF assumed by Mutual Company plus the
liabilities, if any, to which the transferred assets are subject were
incurred by ESIF in the ordinary course of its business and are associated
with the assets transferred.
11. Following the transaction, Mutual Company (in the form of Stock
Company) will continue the historic business of ESIF or use a significant
portion of ESIF's historic business assets in a business.
12. The Policyholders will pay their respective expenses, if any,
incurred in connection with the transaction.
13. ESIF is not under the jurisdiction of a case under Title 11 of the
United States Code or receivership, foreclosure, or similar proceeding in a
federal or state court.
The following representations are made with respect to the Second
Conversion:
1. Stock Company will issue only voting common stock in the conversion
of Mutual Company into Stock Company.
2. The fair market value of Stock Company stock deemed to be issued by
it in exchange for the termination of the Policyholders' Mutual Company
membership interests approximately equals the fair market value of the
membership interests surrendered in exchange therefor. Although there is
not a market for the membership interests, the Commissioner of Insurance of
Florida is required by state law to determine that the consideration paid
to the Policyholders is equitable.
3. Stock Company has no plan to redeem or otherwise reacquire any of
the stock to be issued in the Second Conversion.
4. At the time of the Second Conversion, Mutual Company will not have
outstanding any stock, options, warrants, convertible securities, or any
other right that is convertible into any interest of Mutual Company.
5. Stock Company will continue to conduct Mutual Company's insurance
business operations after the Second Conversion.
6. The Second Conversion is not part of a plan to periodically
increase the proportionate interest of any Policyholder in the assets or
earnings and profits of either Mutual Company or Stock Company.
7. The Second Conversion will occur under a plan of reorganization
agreed upon before the transaction.
8. Each of the parties to the transaction will pay its own expenses,
if any, incurred in connection with the Second Conversion.
9. Mutual Company is not under the jurisdiction of a case under Title
11 of the United States Code or receivership, foreclosure, or similar
proceeding in a federal or state court.
10. Following its conversion to a stock company, Stock Company will be
treated under state law as the same corporation that existed as a mutual
company.
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11. The Second Conversion will not result in any fractional share
interests in Stock Company.
12. Policyholders will not retain any rights to the proprietary
interests in Mutual Company transferred pursuant to the Plan.
The following representations are made with respect to the Exchange:
1. The equity interests in Stock Company will be exchanged solely for
New Holding preferred stock. No other property of any type will be issued
by New Holding to Policyholders in exchange for their equity interests.
2. No stock or securities have been or will be issued to the
Transferors for services rendered to, or for the benefit of, New Holding in
connection with the proposed transaction.
3. No stock or securities will be issued for indebtedness of New
Holding that is not evidenced by a security or for interest on indebtedness
of New Holding.
4. The Transferors will not retain any rights in property (including
the Policyholders' equity interests) transferred to New Holding.
5. No unreported income items, such as accounts receivable or
commissions due, are being transferred to New Holding.
6. No partnership interests or partnership assets are being
transferred in connection with the transaction.
7. No patents, patent applications, copyrights, franchises,
trademarks, trade names, licenses or leases are being transferred in the
Exchange.
8. The transaction does not involve an agreement that purports to
furnish technical "know-how" in exchange for stock.
9. No property will be transferred to New Holding that will be leased
back to a Transferor or a related party.
10. New Holding will not assume any indebtedness of the Transferors in
connection with the proposed transaction, and to the best of the knowledge
of Stock Company, transferred property (including stock of Stock Company)
will not be subject to any indebtedness.
11. There is no indebtedness between New Holding and the Transferors,
and no indebtedness will be created in favor of the Transferors in exchange
for transferred property as a result of the proposed transaction, except
that New Holding will replace Summit Holding Corporation as the borrower
with regard to a bank loan (subject to certain amendments) for which the
stock of ESIF will be pledged as of the time of the Exchange.
12. The transfers and exchanges will occur under a plan, adopted and
approved before the transaction in which the rights of the parties are
defined.
13. All exchanges will occur on approximately the same day.
14. There is no plan or intention on the part of New Holding to redeem
or otherwise reacquire any stock to be issued in the proposed transaction
for a period of at least five (5) years following consummation of the
Exchange.
15. The Transferors will own at least 80 percent of the total combined
voting power of all classes of stock of New Holding entitled to vote and at
least 80 percent of the total number of shares of all other classes of
stock of the corporation immediately after the Exchange taking into account
any anticipated issuance of additional shares of New Holding stock; any
anticipated issuance of New Holding stock for services; the exercise of any
New Holding stock rights, warrants or subscriptions; and any additional
public offerings of New Holding stock.
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16. Each Transferor will receive New Holding preferred and/or common
stock approximately equal to the fair market value of the property
(including cash) transferred or deemed transferred to New Holding.
17. New Holding will remain in existence after the Exchange and there
is no plan or intention for New Holding to sell or otherwise dispose of the
transferred property other than in the normal course of its continuing
business operations (except that New Holding may contribute part or all of
the cash to Stock Company).
18. Following the Exchange, Stock Company will continue the same
business conducted by it prior to the Exchange.
19. To the best of the knowledge of Stock Company there is no plan or
intention on the part of the Transferors to sell or otherwise dispose of
any of the New Holding stock to be received by them in connection with the
proposed transaction. It is expected that there will be a public market for
New Holding common stock following the effective date of the Plan and Stock
Company and/or New Holding may, pursuant to the Plan, facilitate the
creation of such a market.
20. Each of the parties to the transaction will pay its own expenses,
if any, incurred in connection with the proposed transaction.
21. New Holding will not be (a) a regulated investment company, (b) a
real estate investment trust, or (c) a corporation more than 80 percent of
the value of whose assets (excluding cash and nonconvertible debt
obligations) are held for investment and are readily marketable stocks or
securities or interests in regulated investment companies or real estate
investment trusts. Stocks and securities are considered to be held for
investment unless they are held primarily for sale to customers in the
ordinary course of business or used in the trade or business of banking,
insurance, brokerage, or a similar trade or business. A holding company
will be deemed to own for these purposes the assets held by its
subsidiaries.
22. To the best of the knowledge of Stock Company, none of the
Transferors is under the jurisdiction of a case under Title 11 of the
United States Code or receivership, foreclosure, or similar proceeding in a
federal or state court.
23. New Holding will not be a "personal service corporation." For
purposes hereof, a "personal service corporation" is a corporation the
principal activity of which is the performance of personal services and
such services are substantially performed by employee-owners.
24. Policyholders will be entitled to purchase common stock of New
Holding pursuant to rights that are the same as those available to
purchasers in the public offering.
25. The purchase price of Policyholders for shares of common stock in
New Holding will be equal to the fair market value of such common stock at
the time of such purchase.
DISCUSSION
SECTION 368(A)(1)(F)
The Code defines a sec. 368(a)(1)(F) reorganization as "a mere change in
identity, form, or place of organization of one corporation, however effected."
The regulations provide no further guidance as to the meaning of this term. The
Internal Revenue Service (the "Service") has held that a reincorporation of a
corporation in another state is a reorganization within the meaning of
sec. 368(a)(1)(F). In addition, the Service generally requires that more than 99
percent of the shareholdings remain unchanged in order to receive a ruling that
a transaction qualifies as a sec. 368(a)(1)(F) reorganization.
The Service has provided some guidance on what types of transactions
qualify as reorganizations within the meaning of sec. 368(a)(1)(F). In PLR
8904040 (November 1, 1988), the Service determined that a change in form of a
reciprocal interinsurance exchange, which although not incorporated was taxable
as a corporation under sections 821 and 831 of the Code, to a mutual insurance
corporation was a change in form within the
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meaning of sec. 368(a)(1)(F). This holding applied notwithstanding the fact that
the mutual insurance corporation immediately converted into a stock insurance
corporation following its incorporation and became a subsidiary of a
newly-formed holding company. See also PLR 9131031(conversion of a mutual
savings bank into a stock savings bank that became a subsidiary of a holding
company that was publicly owned held to be a sec. 368(a)(1)(F) reorganization).
The conversion of ESIF to Mutual Company should be treated as a
sec. 368(a)(1)(F) reorganization. Specifically, we note that the First
Conversion should not be "stepped together" with the Second Conversion and the
Exchange because the step transaction doctrine generally will not apply to a
sec. 368(a)(1)(F) reorganization followed by further transactions where the
"economic motivation supporting each transaction is sufficiently meaningful on
its own account." Rev. Rul. 96-29, 1996-24 I.R.B. 5 (change in state of
incorporation followed by a planned public offering of stock is a valid
sec. 368(a)(1)(F) reorganization even though ownership of historic shareholders
diluted by planned offering); Rev. Rul. 79-250, 1979-2 C.B. 156.
SECTION 368(A)(1)(E)
A sec. 368(a)(1)(E) recapitalization has been described as a "reshuffling
of a capital structure within the framework of an existing corporation." SM
3710, IV-1 CB 4 (1925). Unlike a sec. 368(a)(1)(F) reorganization, there is no
continuity of shareholder interest requirement in a sec. 368(a)(1)(E)
reorganization. Rev. Rul. 77-415, 1977-2 C.B. 311.
Numerous private letter rulings have held that a conversion of a mutual
company to a stock company is a sec. 368(a)(1)(E) reorganization. See PLR
9540004, PLR 9512021, PLR 9106049, PLR 8901035 and PLR 8904040. The Second
Conversion will qualify as a sec. 368(a)(1)(E) reorganization since it is a mere
change in the capital structure of the company.
SECTION 351
Section 351 provides that gain or loss will not be recognized if property
is transferred to a corporation solely for stock in such corporation, and
immediately after the exchange, the transferors of such property are in
"control" of the corporation. sec. 351(a). "Control" for these purposes means
ownership of at least 80% of the total combined voting power of all classes of
stock entitled to vote and at least 80% of the total number of shares of all
other classes of stock of the corporation. sec. 368(c). In order for transferors
to be considered part of the "control group" the transfers to a corporation do
not need to be simultaneous, but the rights of the parties must have been
previously defined. Treas. Reg. sec. 1.351-1(a)(1). Transferors must be in
control immediately after the exchange, but they are free to dispose of their
newly acquired stock so long as there is not a binding commitment to do so
before the sec. 351 transaction occurs. See American Bantam Car Co. v.
Commissioner, 11 T.C. 397 (1948). Under newly finalized regulations, an
underwriter will be disregarded and the public will be deemed to be part of the
control group if the underwriter is an agent of the issuing corporation or the
underwriter's ownership is transitory. Treas. Reg. sec. 1.351-1(a)(3).
Several private letter rulings have held that a demutualization that
includes the formation of a new holding company will qualify as a sec. 351
transaction. Policyholders and any other persons receiving stock of the new
holding company will be considered part of the control group if they all acquire
the stock pursuant to the same plan. For example, in PLR 9106049 (February 8,
1991), a mutual insurance company converted to a stock company in a transaction
where the policyholders of the insurance company received stock of a newly-
formed holding company in exchange for their surplus interests. The Service held
that the conversion qualified as a sec. 368(a)(1)(E) reorganization and the
exchange of shares qualified as a sec. 351 transaction. The Service has also
held that an exchange of membership rights by policyholders and cash by
underwriters qualified under sec. 351. PLR 9540004 (April 18, 1995). The
exchange of cash by the Transferors for New Holding common stock likewise will
qualify as a sec. 351 transaction.
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OPINION
Based solely on the information submitted and the representations set forth
above, we are of the opinion that:
1. For federal income tax purposes, the demutualization and
restructuring will be treated as (a) an exchange by Policyholders of their
membership interests in ESIF for membership interests in Mutual Company;
(b) an exchange by Policyholders of their membership interests in Mutual
Company for stock of Stock Company; and (c) a transfer of such stock of
Stock Company to New Holding in exchange for newly issued preferred stock
of New Holding.
2. The change in form of operation of ESIF from a group insurance fund
to an assessable mutual insurance company and the deemed exchange by
Policyholders of their membership interests in ESIF for membership
interests in Mutual Company will constitute a reorganization within the
meaning of sec. 368(a)(1)(F). ESIF will be "a party to the reorganization"
within the meaning of sec. 368(b).
3. No gain or loss will be recognized by the Policyholders on the
deemed exchange of their membership interests in ESIF for membership
interests in Mutual Company. (sec. 354(a)(1)).
4. Each Policyholder's basis in its membership interests in ESIF is
zero. Rev. Rul. 71-233, 1971-1 C.B. 113; see Rev. Rul. 74-277, 1974-1 C.B.
88. The basis of the membership interests of Mutual Company deemed to have
been received in the hands of each Policyholder will be zero, the same as
its basis in the membership interests in ESIF surrendered in exchange
therefor (sec. 358(a)(1)).
5. The holding period of the Mutual Company membership interests
deemed to have been received by each Policyholder will include the period
during which the membership interests in ESIF exchanged therefor were held,
provided that the membership interests in ESIF are held as a capital asset
on the date of the exchange (sec. 1223(1)).
6. No gain or loss will be recognized by Mutual Company on the deemed
receipt of the assets and liabilities of ESIF in exchange for Mutual
Company membership interests (sec. 1032).
7. No gain or loss will be recognized by ESIF on the deemed transfer
of its assets to Mutual Company in exchange for membership interests of
Mutual Company and the assumption by Mutual Company of the liabilities of
ESIF (sec.sec. 361(a) and 357(c)).
8. The conversion of Mutual Company from a mutual insurance company to
a stock insurance company and the deemed exchange by Policyholders of their
membership interests in Mutual Company for stock of Stock Company will
constitute a recapitalization within the meaning of sec. 368(a)(1)(E) of
the Code. Mutual Company and Stock Company each will be "a party to the
reorganization" within the meaning of sec. 368(b).
9. No gain or loss will be recognized by the Policyholders on the
deemed exchange of their membership interests in Mutual Company for stock
of Stock Company (sec. 354(a)(1)).
10. The basis of each Policyholder in its membership interests in
Mutual Company is zero. Rev. Rul. 71-233, 1971-1 C.B. 113; see Rev. Rul.
74-277, 1974-1 C.B. 88. The basis of the Stock Company common stock deemed
to have been received in the hands of each Policyholder will be zero, the
same as its basis in the membership interests in Mutual Company surrendered
in exchange therefor (sec. 358(a)(1)).
11. The holding period of the Stock Company stock deemed to have been
received by each Policyholder will include the period during which the
membership interests in Mutual Company exchanged therefor were held,
provided that the membership interests are held as a capital asset on the
date of the exchange (sec. 1223(1)).
12. No gain or loss will be recognized by Stock Company on its deemed
issuance of stock in exchange for the Mutual Company membership interests
of Policyholders (sec. 1032).
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13. The conversion of Mutual Company from an assessable mutual
insurance company to a stock insurance company will not cause Mutual
Company to realize income and Mutual Company's basis in its assets, holding
period for its assets, net operating loss carryovers, capital loss
carryovers, earnings and profits and accounting methods will not be
affected by the recapitalization (sec.sec. 362(b), 1223(2) and 381(a)(2)).
14. The deemed transfer by Policyholders of Stock Company stock to New
Holding in exchange for newly-issued shares of New Holding preferred stock,
and the transfer of cash by Policyholders, Management and public investors
to New Holding in exchange for shares of common stock of New Holding will
be treated together as an exchange described in sec. 351.
15. No gain or loss shall be recognized by the Transferors on their
transfer of property to New Holding solely in exchange for New Holding
stock as described above (sec. 351(a)).
16. The basis of the shares of New Holding stock received by each
Transferor will be the same as their basis in the property exchanged
therefore (sec. 358(a)). Policyholders will have a zero basis in their New
Holding preferred stock.
17. The holding period of each share of New Holding preferred stock
received by a Policyholder will include the period during which the
Policyholder held its membership interests in ESIF, provided the membership
interests were held as a capital asset on the date of the exchange
(sec. 1223(1)).
18. No gain or loss will be recognized by New Holding on the issuance
of its common stock and preferred stock in exchange for common stock of
Stock Company and cash (sec. 1032).
19. New Holding's basis in the Stock Company stock received from the
Policyholders will be zero, the same as the Policyholders' basis in such
stock (sec. 362(a)).
20. The receipt of Subscription Rights to purchase New Holding common
stock by Policyholders and Management will be tax-free so long as the terms
of purchase in the public offering are the same as those under the
Subscription Rights, and the purchase price of both represents the fair
market value of the New Holding common stock.
21. We have participated in the preparation of the Form S-1
Registration Statement for New Holding. In particular, we have drafted the
section entitled "Certain Federal Income Tax Consequences" and the summary
of that section. We are of the opinion that the discussion contained in the
Form S-1 in all material respects is an accurate summary description of the
significant federal income tax consequences associated with the Conversions
and the Exchange.
The opinions expressed herein are based upon the existing statutory,
regulatory, and judicial authority, any of which may be changed at any time with
retroactive effect. In addition, our opinions are based solely on the documents
that we have examined, the additional information obtained, and the statements
set out herein, which we have assumed and you have confirmed to be true on the
date hereof and will be true on the date(s) that the proposed transaction is
consummated. Our opinions cannot be relied upon if any of the facts contained in
such documents or if such additional information is, or later becomes,
inaccurate. Our opinions are limited to the tax matters specifically covered
thereby, and we have not been asked to address, nor have we addressed, any other
tax consequences of the proposed transaction.
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<PAGE> 249
We consent to the use of this opinion letter as an exhibit to the Form S-1
Registration Statement filed by New Holding and to the references to our firm in
the Proxy Statement/ Prospectus included in New Holding's Registration
Statement. This opinion is being provided solely for the use of ESIF and the
policyholders of ESIF. No other party or persons shall be entitled to rely on
this opinion.
Very truly yours,
ALSTON & BIRD
By: /s/ PINNEY L. ALLEN
------------------------------------
Pinney L. Allen
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<PAGE> 250
EXHIBIT G
INSTRUCTIONS FOR COMPLETING THE
TAXPAYER IDENTIFICATION CARD
PLEASE SIGN AND RETURN THIS CARD EVEN IF THE TAXPAYER IDENTIFICATION NUMBER*
SHOWN BELOW IS CORRECT. If you do not return the card, you may be subject to a
$50 Internal Revenue Service penalty and we may be required to withhold and pay
to the IRS 31% of any cash payment to which you may be entitled.
* For individuals, your taxpayer identification number is your social security
number. For other entities, it is your employer identification number.
ALL PERSONS ARE REQUIRED TO SIGN AND RETURN THIS CERTIFICATION.
IS THIS YOUR CORRECT TAXPAYER IDENTIFICATION NUMBER?
- -------------------------------------------------------------------------
IF NOT PLEASE CORRECT IN THE SPACE PROVIDED.
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); and
(2) I am not subject to backup withholding because (i) I am exempt from backup
withholding, or (ii) I have not been notified by the IRS that I am subject
to backup withholding as a result of a failure to report all interest or
dividends, or (iii) the IRS has notified me that I am no longer subject to
backup withholding. [Cross out item 2 if you are subject to backup
withholding.]
Signature of
Taxpayer _______________________________________ Date _____________ , 1997
Please sign exactly as your name appears above. If a corporation, please sign by
the president or other authorized officer and include title. If a partnership,
please sign, by an authorized person and include title.
Under the federal income tax law, a person surrendering its membership
interest in ESIF must provide Summit Holding Southeast, Inc. ("Summit") with its
correct taxpayer identification number ("TIN") on this Substitute Form W-9. 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 this Substitute Form W-9 is that of the
Eligible Policyholder. The TIN for an individual is his/her social security
number, and the TIN for a corporation or other business entity is its employer
identification number. If the Eligible Policyholder has not been issued a TIN
and has applied for a number or intends to apply for a number in the near
future, such Eligible Policyholder 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 dividends, if any, made thereafter
with respect to Summit stock held by you until a TIN is provided to Summit.
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 IRS 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 THIS SUBSTITUTE FORM W-9.
<PAGE> 251
REVOCABLE PROXY APPENDIX
EMPLOYERS SELF INSURERS FUND
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES FOR
A SPECIAL MEETING OF MEMBERS.
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 Members of Employers Self Insurers
Fund ("ESIF"), to be held at Holiday Inn Lakeside, 910 East Memorial Blvd.,
Lakeland, Florida on , , 1997 at 9:00 a.m.,
local time, and at any and all adjournments thereof, as indicated below.
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 an authorized
representative 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.
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> 252
(Continued from other side)
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL.
Approval and adoption of the Amended Plan of Conversion and Recapitalization
of ESIF (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 corporation with the name Bridgefield
Employers Insurance Company ("Bridgefield"), and Summit Holding Southeast, Inc.
(the "Holding Company"), 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 Holding Company's Series A Preferred
Stock to eligible members of ESIF and subscription rights to purchase shares of
the Holding Company's Common Stock to eligible members of ESIF and certain other
persons. The approval of the Plan by the members 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
<PAGE> 253
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.
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 $13.00 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 March , 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 from Summit 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. ABN AMRO CHICAGO CORPORATION
The date of this Prospectus is , 1997
<PAGE> 254
[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> 255
PROSPECTUS SUMMARY
Pursuant to the Plan of Conversion, and upon approval of the Conversion by
the members of ESIF at a Special Meeting of Policyholders on ,
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 a
newly formed holding company, 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 December 31, 1996, in the
aggregate, the Company's insurance products and administrative services are
provided to approximately 15,800 employers representing approximately $217.4
million in premiums, including approximately $101.0 million in premiums
attributable to the Funds and $116.4 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." 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. Following the Conversion, the Company will be able to
offer both self-insurance and traditional indemnity products, which will improve
its ability to service its markets. In addition, as a stock corporation, the
Company may have access to additional capital to finance growth by acquisition
and to expand into other geographic markets (subject to any necessary regulatory
approvals). Key aspects of the Company's business strategy following the
Conversion include:
3
<PAGE> 256
(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; and (v) emphasis
on excellent customer service. See "BUSINESS -- Strategy."
The Company's business was started in 1977, when Summit Consulting, Inc.
("SCI") was formed to establish and administer workers' compensation
self-insurance programs for group self-insurance funds that are sponsored and
formed by trade associations. The Company's primary Insurance Subsidiary, ESIF
(which pursuant to the Conversion will become Bridgefield), was formed in 1978
as a group self-insurance fund under Florida law and SCI became its
administrator at that time. Between 1979 and 1982, SCI assisted with the
formation of, and became the administrator of, three of the Funds, located in
Florida and Louisiana, and in 1995, SCI became the administrator of the fourth
Fund, located in Kentucky. See "BUSINESS -- Products and Services." None of the
Funds are related to the Company, except that certain of the directors of Summit
are trustees of certain of the Funds, as described in "MANAGEMENT OF THE
COMPANY -- Compensation Committee Interlocks and Insider Participation" and
"CERTAIN TRANSACTIONS." Until January 16, 1996, ESIF was also unrelated to SCI.
Effective on that date, ESIF acquired SCI, its holding company, Summit Holding
Corporation ("SHC"), and all of their affiliates (the "ACQUISITION"). Pursuant
to the Conversion, Summit will become a holding company for ESIF (which will be
Bridgefield after the Conversion) and the other Company subsidiaries. Summit is
a Florida corporation formed in November 1996 solely for this purpose at the
direction of the ESIF Board of Trustees. Prior to the Conversion, Summit has not
commenced operations and has nominal assets and no liabilities. See "THE
COMPANY."
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. See "THE CONVERSION -- Reasons for the Conversion."
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,
$10.00 par value per share (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 (the "SUBSCRIPTION PRICE") equal to the price
per share of the Common Stock being offered for sale to the public in the Public
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. 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."
4
<PAGE> 257
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% (the "PURCHASE LIMIT") of the shares of Common
Stock to be outstanding after the Conversion (the "POST OFFERING OUTSTANDING
SHARES"). Notwithstanding the foregoing, Summit will permit any "investment
company" as defined in Section 3 of the Investment Company Act of 1940, as
amended, and may, in its discretion, permit any other purchaser in the
Offerings, to purchase a number of shares of Common Stock exceeding the Purchase
Limit, subject to each such purchaser obtaining any required approval of the
Florida DOI. 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.
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.............................. 1,639,836 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 Eligible for Future Sale; Possible Volatility of
Stock Price." See "MANAGEMENT OF THE COMPANY -- Incentive Plan" and
"-- 401(k) Plan."
(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, cumulating from the date of issue but payable only as and when
declared by the Board of Directors of Summit; provided, however, that all
cumulated 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."
5
<PAGE> 258
SUMMARY PRO FORMA FINANCIAL AND OTHER DATA
The following unaudited pro forma financial data reflect the acquisition by
ESIF of SHC and its affiliates on January 16, 1996 (the "ACQUISITION") and all
of the transactions constituting the Conversion. The pro forma Statement of
Income data for the fiscal year ended March 31, 1996 reflect the Acquisition and
Conversion as if they had been completed as of April 1, 1995. The pro forma
Statement of Income data for the nine-month period ended December 31, 1995
reflects 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 nine-month period
ended December 31, 1996 reflects the Conversion as if it had occurred on April
1, 1996. The pro forma Balance Sheet data at December 31, 1996 reflect the
Conversion as if it had been completed as of December 31, 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>
ASSUMING CONVERSION AND
ISSUANCE OF 5,000,000 SHARES
OF COMMON STOCK AT $11.00 PER SHARE
--------------------------------------------
YEAR NINE MONTHS ENDED
ENDED DECEMBER 31,
MARCH 31, ---------------------------
1996 1995(6) 1996(6)
--------- ---------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Statement of Income Data:
Total revenue............................................. $ 169,174 $ 130,757 $ 110,697
Losses and loss adjustment expenses....................... 94,844 67,043 50,236
Other underwriting, general and administrative expenses... 63,008 46,725 45,162
Total losses and operating expenses....................... 157,852 113,768 95,398
Interest expense.......................................... 3,978 3,017 2,719
Amortization and depreciation............................. 5,340 4,074 3,704
Net income before taxes................................... 2,004 9,898 8,876
Net income................................................ 1,696 6,651 5,620
Preferred dividends....................................... 656 492 492
Net income available to common shareholders............... $ 1,040 $ 6,159 $ 5,128
========= ========== =========
Net income per common share............................... $ 0.21 $ 1.23 $ 1.03
========= ========== =========
Weighted average common shares outstanding................ 5,000,000 5,000,000 5,000,000
Other Data(1):
Insurance Subsidiaries:
Net loss ratio(2)....................................... 82.5% 74.7% 67.4%
Expense ratio(3)........................................ 34.1% 31.8% 33.4%
Combined ratio(4)....................................... 116.6% 106.5% 100.8%
Administrative Subsidiaries:
EBITDA(5)............................................... $ 11,804 10,005 6,204
</TABLE>
<TABLE>
<CAPTION>
ASSUMING CONVERSION AND
ISSUANCE OF 5,000,000 SHARES OF
COMMON STOCK AT $11.00 PER SHARE
------------------------------------
AS OF DECEMBER 31, 1996
------------------------------------
(IN THOUSANDS)
<S> <C>
Balance Sheet Data:
Cash and invested assets.................................. $275,319
Total assets.............................................. 526,972
Loss and loss adjustment expenses......................... 376,923
Debt...................................................... 33,000
Total shareholders' equity................................ 77,378
</TABLE>
- ---------------
(1) Excludes inter-company eliminations.
(2) Net loss ratio is the ratio of losses and loss adjustment expenses incurred
to premiums earned.
(3) Expense ratio is the ratio of underwriting, general and administrative
expenses to premiums earned.
(4) Combined ratio is the sum of the net loss ratio and the expense ratio.
(5) EBITDA represents earnings before interest, income taxes, depreciation and
amortization.
(6) The pro forma Statement of Income data does not include investment earnings
on the net Offering proceeds of the issuance of 5,000,000 shares of Common
Stock. Assuming that $50.0 million of net proceeds (the minimum amount to be
received in the Offerings) were invested in 180-day U.S. Treasury Bills, the
pro forma amounts would be as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
YEAR ENDED --------------------
MARCH 31, 1996 1995 1996
-------------- ------- -------
<S> <C> <C> <C>
Net income before taxes..................................... $4,929 $12,066 $10,861
Net income.................................................. 3,520 8,004 6,857
Net income available for common shareholders................ 2,864 7,512 6,365
Net income per common share................................. $ 0.57 $ 1.50 $ 1.27
</TABLE>
6
<PAGE> 259
SUMMARY HISTORICAL FINANCIAL AND OTHER DATA
The following summary 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
ended March 31, 1996 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.
ESIF's consolidated financial statements as of December 31, 1995 and 1996 and
for the nine months ended December 31, 1995 and 1996, as well as the summary
financial data provided as of and for the fiscal years ended March 31, 1992 and
1993 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 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. The summary historical financial data includes the operations of SHC
from January 16, 1996, the effective date of the Acquisition.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
---------------------------------------------------------- -------------------------
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 $103,086 $110,811
Losses and loss adjustment
expenses................ 103,657 149,177 108,411 69,116 94,844 67,043 50,236
Other underwriting,
general and
administrative
expenses................ 32,787 40,145 37,121 41,546 43,657 28,548 45,837
Interest expense.......... -- -- -- -- 847 -- 2,719
Amortization and
depreciation............ -- -- -- -- 1,103 -- 3,729
Income (loss) from
continuing operations
before income taxes..... 7,306 2,745 13,419 30,153 (123) 7,495 8,290
Loss from discontinued
operations.............. -- -- -- -- (197) -- (1,250)
Net income................ $ 6,844 $ 2,953 $ 8,885 $ 19,163 $ 185 $ 5,172 $ 3,198
======== ======== ======== ======== ======== ======== ========
Other Data(1):
Net loss ratio(2)......... 78.5% 82.3% 73.0% 53.8% 82.5% 74.7% 67.4%
Expense ratio(3).......... 24.8% 22.1% 25.0% 32.3% 34.1% 32.3% 33.4%
Combined ratio(4)......... 103.3% 104.4% 98.0% 86.1% 116.6% 107.3% 100.8%
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31, DECEMBER 31,
---------------------------------------------------------- -------------------------
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 $236,421 $225,319
Total assets.............. 307,345 373,069 405,765 425,206 491,844 437,932 476,972
Loss and loss adjustment
expenses................ 304,205 360,425 368,000 367,391 387,632 372,786 376,923
Debt...................... -- -- -- -- 44,000 -- 33,000
Total equity (deficit).... (9,458) (6,485) 2,480 20,065 23,154 31,238 27,378
</TABLE>
- ---------------
(1) Ratios for Insurance Subsidiaries.
(2) Net loss ratio is the ratio of losses and loss adjustment expenses incurred
to premiums earned.
(3) Expense ratio is the ratio of underwriting, general and administrative
expenses to premiums earned.
(4) Combined ratio is the sum of the net loss ratio and the expense ratio.
7
<PAGE> 260
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.
HIGHLY COMPETITIVE 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. In particular, decreases in Florida workers' compensation
rates, such as the 11.2% premium rate reduction effective January 1, 1997, could
have a material adverse effect upon the Company. 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> 261
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.
POSSIBLE UNDERFUNDING OF 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 $4.5
million, $5.7 million and $5.6 million, respectively, and paid assessments of
$5.5 million, $4.7 million and $5.6 million, respectively. In addition, the
Company's consolidated balance sheet as of December 31, 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. If the SDTF is discontinued, the Company believes that the
existing reimbursement obligations of the SDTF would become general obligations
of the State of Florida, although there is no assurance that a reviewing court
would adopt that view. The SDTF has made no acknowledgment with regard to the
enforceability of its reimbursement obligations to insurers such as the Company.
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
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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.
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.
POSSIBLE INADEQUACY 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. As
discussed in "MANAGEMENT'S DISCUSSION AND ANALYSIS -- Losses and Loss Adjustment
Expense," the Company has experienced considerable reserve deficiencies in years
prior to 1993 and has adjusted its reserves in response to development trends.
There can be no assurance that there will not be deficiencies or adjustments in
the future, resulting from numerous factors including, for example, any
instability in the regulatory environment and loss data inadequacies.
Among other risks relating to loss reserves is the possibility that the
Company may under-accrue for refunds relating to retrospective policies in the
event that a substantial number of the Company's insureds have less than
expected losses during a claims period. Throughout the fiscal years ended March
31, 1994, 1995 and 1996, and the nine months ended December 31, 1996, the
Company established and maintained gross aggregate accruals for retrospective
refunds in amounts of $6.4 million, $9.2 million, $10.6 million and $10.4
million, respectively. Between March 31, 1994 and December 31, 1996, the Company
paid an aggregate of $0.9 million in excess of these refund accruals. 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
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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."
POSSIBLE INABILITY TO SERVICE DEBT
In connection with the Acquisition, SHC borrowed $44.0 million from First
Union National Bank of North Carolina and certain other participating banks
(collectively, the "BANKS"), with $36.0 million pursuant to a term loan and $8.0
million pursuant to a revolving line of credit. The outstanding principal
balance of such debt at December 31, 1996 was approximately $33.0 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 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"). The Company has executed a credit agreement with
the Bank pursuant to which, upon consummation of the Conversion, the existing
debt will be restructured. Under such new credit facility, as of the Effective
Date, the term loan will be $33.0 million and the revolving line of credit will
be $5.0 million, and the interest rate will be prime plus 1%. The annual
principal payments (which are payable in quarterly installments) will be $2.3
million, $5.0 million, $5.6 million, $7.6 million, $9.1 million and $3.4 million
in each of calendar years 1997, 1998, 1999, 2000, 2001 and 2002, respectively.
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, and the Company will not
be able to complete the Conversion without the receipt of net proceeds from the
Offerings of a minimum of approximately $50.0 million. 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."
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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 December 31, 1996, ESIF's top ten
independent agencies accounted for approximately 21% 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
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."
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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
approximately 241,000 shares of Common Stock (4.8% of the Post Offering
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." Shares beneficially owned by
affiliates of Summit may not be sold except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, such as the exemption provided by Rule 144. Additionally, 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."
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
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companies but which are unrelated to the operating performance of such
companies. See "-- Renewal Risks; Quarterly Fluctuations in Operating Results."
DILUTION
As of December 31, 1996 on a historical basis, ESIF had a net tangible
deficit of approximately $26.1 million. As of December 31, 1996 on a pro forma
basis, after giving effect to the Conversion of the Offerings, and assuming that
5,000,000 shares of Common Stock are sold in the Offerings at the Subscription
Price of $11.00 per share, the Company's net tangible book value would be
approximately $23.9 million, which includes approximately $16.4 million from the
Series A Preferred Stock, resulting in net tangible book value of $1.50 per
share of Common Stock. Both the historical and pro forma net tangible book value
amounts include a deferred tax asset of approximately $15.7 million as discussed
in note 7 to the financial statements included elsewhere in this Prospectus.
Based upon such pro forma net tangible book value amount, purchasers of Common
Stock in the Offerings will experience immediate and substantial dilution, equal
to the difference between the effective purchase price paid for such stock and
$1.50. Thus, if the effective purchase price of a share of Common Stock in the
Offerings is the Subscription Price of $11.00, the immediate dilution in net
tangible asset value will be $9.50 per share. See "SELECTED FINANCIAL DATA" and
the financial statements and notes thereto presented elsewhere in this
Prospectus.
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 1,639,836 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
In connection with the Acquisition on January 16, 1996, the Florida DOI
issued a consent order (the "JANUARY CONSENT ORDER") requiring that William B.
Bull, who currently is the President, Chief Executive Officer and a director of
the Company and at that time was a principal shareholder as well as President
and Chief Executive Officer of SHC, personally indemnify ESIF up to a maximum of
$5.0 million for certain loss, injury or damage to ESIF that may result from the
Acquisition. Pursuant to the Order issued by the Florida DOI, Mr. Bull may be
relieved of such personal indemnification obligations if the Conversion becomes
effective; conversely, 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
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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 LIMITED NUMBER OF SHAREHOLDERS; POSSIBLE DEPRESSIVE EFFECT
ON THE PRICE OF SUMMIT'S SECURITIES
The sale of blocks of shares of Common Stock in excess of the Purchase
Limit to one or a small number of purchasers in the Public Offering could vest
effective control of the Company in such single purchaser or small number of
purchasers 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. In addition, the Company has agreed
that certain institutional investors may purchase up to 10% of the Post Offering
Outstanding Shares, subject to any required approval of the Florida DOI. The
Company has complete discretion with respect to all other purchasers; therefore,
all subscribers who request to exceed the Purchase Limit may not have that
opportunity and may be treated disparately.
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 cumulated but unpaid dividends on the Series A Preferred Stock. See
"DIVIDEND POLICY" and "BUSINESS -- Regulation -- Financial and Investment
Restrictions."
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THE COMPANY
The Company's business was started in 1977, when SCI was formed to
establish and administer workers' compensation self-insurance programs for group
self-insurance funds that are sponsored and formed by trade associations. Since
1977, SCI has formed three subsidiaries to assist it in providing certain
specialized administrative services, including loss control consulting, claims
management and reinsurance brokerage. These subsidiaries, together with SCI,
comprise the Company's Administrative Subsidiaries. Pursuant to written
contracts, the Administrative Subsidiaries currently provide administrative
services for the four Funds, which are unrelated to the Company, and for the
Company's Insurance Subsidiaries and certain municipalities. See "BUSINESS."
The Company's Insurance Subsidiaries include Bridgefield (ESIF prior to the
Conversion) and Bridgefield Casualty, which write workers' compensation
insurance coverages. The Company also includes a reinsurance subsidiary, U.S.
Employers Insurance, Inc., a group of healthcare-related companies that were
formed to provide such services as managed care in North Carolina and healthcare
provider network access in Florida, and Employers Safety Group Association,
Inc., the sponsoring trade association for ESIF.
The Company's primary Insurance Subsidiary, ESIF (which will be Bridgefield
after the Conversion), was formed in 1978 as a group self-insurance fund in
Florida. Until January 1996, ESIF was unrelated to the Company and was managed
by the Administrative Subsidiaries pursuant to a written contract. Effective
January 16, 1996, ESIF acquired all of the stock of SHC, a holding company that
had been formed to own, directly or indirectly, all of the other corporations
comprising the Company at that time. The following chart sets forth the
organizational structure of the Company immediately prior to the Conversion:
PRIOR TO THE CONVERSION
ESIF ORGANIZATIONAL CHART
* Discontinued operations.
In November 1996, in connection with the pending Conversion, Summit was
incorporated for the purpose of becoming a holding company for ESIF and its
subsidiaries. Prior to the Conversion, Summit will not engage in any operations
and has nominal assets and no liabilities. Summit currently has seven shares of
Common Stock issued and outstanding, which are owned one share each by the
directors of Summit. Each director paid $11.00 to purchase his share and has
executed a written agreement agreeing to sell such share back to Summit on the
Effective Date for the same price of $11.00. Pursuant to the Conversion, Summit
will issue all of its Common Stock in the Offerings, and ESIF will issue all of
its common stock to Summit, thereby becoming a direct wholly owned subsidiary of
Summit. Also pursuant to the Conversion, the Company's corporate
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structure will be simplified to reflect two groups, one comprised primarily of
the Administrative Subsidiaries, and one comprised primarily of the Insurance
Subsidiaries. The following chart sets forth the organizational structure of the
Company following the Conversion:
FOLLOWING THE CONVERSION
ESIF ORGANIZATIONAL CHART
* Discontinued operations.
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. Raymond James & Associates, Inc. and ABN AMRO
Chicago Corporation, as representatives of the underwriters of the Public
Offering (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
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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 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."
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 cumulate 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 cumulated 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 cumulated 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."
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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 $3.7 million. 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. Upon contribution of proceeds to Bridgefield, such funds will be
invested in fixed income securities as permitted by the Florida Insurance Code.
The Conversion is contingent upon the receipt by Summit of net proceeds of a
minimum of approximately $50.0 million which is the current estimate of the
amount necessary to satisfy applicable provisions of the Florida Insurance Code.
CAPITALIZATION
The following table presents the consolidated capitalization at December
31, 1996 of: (i) ESIF and its subsidiaries on a historical basis, and (ii) the
Company 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>
DECEMBER 31, 1996
----------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------
ESIF CONVERSION OFFERINGS
HISTORICAL (A) (B) AS ADJUSTED
---------- ---------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Long term debt................................... $33,000 $ 33,000
Equity:
Preferred stock, $10.00 par value, 5,000,000
shares authorized; no shares issued and
outstanding, 1,639,836 shares as adjusted... -- 16,398 16,398
Common stock, $.01 par value, 20,000,000 shares
authorized; 7 shares issued and outstanding,
5,000,000 shares as adjusted(C)............. -- 50 50
Additional paid-in capital(C).................. -- 49,950 49,950
Retained earnings.............................. 24,857 (16,398) 8,459
Unrealized appreciation on available for sale
securities.................................. 2,521 2,521
------- ------- ------ --------
Total equity................................ 27,378 -- 50,000 77,378
------- ------- ------ --------
Total capitalization........................ $60,378 -- 50,000 $110,378
======= ======= ====== ========
</TABLE>
- ---------------
(A) Assumes the issuance of 1,639,836 shares (par value $10.00 per share) of
Series A Preferred Stock to Eligible Policyholders in connection with the
Conversion.
(B) Assumes the receipt of $50.0 million in net proceeds from the issuance of
5,000,000 shares of Common Stock (par value $0.01 per share) at $11.00 per
share.
(C) 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
"EXECUTIVE COMPENSATION -- Incentive Plan" and "-- 401(k) Plan."
19
<PAGE> 272
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 September 30,
1996, and for the year ended March 31, 1996 and for the six months ended
September 30, 1996, 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.
ESIF's consolidated financial statements as of December 31, 1996 and for the
nine months ended December 31, 1996, as well as the selected financial data
provided as of and for the fiscal years ended March 31, 1992 and 1993, as of and
for the six months ended September 30, 1996 and as of and for the nine months
ended December 31, 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)
(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................. 121 206 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(3)............ 78.5% 82.3% 73.0% 53.8% 82.5% 67.1% 65.5%
Expense ratio(4)............. 24.8% 22.1% 25.0% 32.3% 34.1% 34.2% 33.0%
Combined ratio(5)............ 103.3% 104.4% 98.0% 86.1% 116.6% 101.3% 98.5%
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Income Statement Data:
Premiums earned.............. $ 89,713 $ 74,509
Net investment income........ 10,522 9,606
Administrative fees.......... -- 25,762
Realized investment gains.... 2,726 366
Other income................. 125 568
-------- --------
Total revenue................ 103,086 110,811
Losses and loss adjustment
expenses................... 67,043 50,236
Other underwriting, general
and administrative
expenses................... 28,548 45,837
Interest expense............. -- 2,719
Amortization and
depreciation............... -- 3,729
-------- --------
Income (loss) from continuing
operations before income
taxes...................... 7,495 8,290
Loss from discontinued
operations................. -- (1,250)
Net income................... $ 5,172 $ 3,198
======== ========
Other Data:(2)
Net loss ratio(3)............ 74.7% 67.4%
Expense ratio(4)............. 31.8% 33.4%
Combined ratio(5)............ 106.5% 100.8%
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31, SEPTEMBER 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1995 1996
----------- ----------- -------- -------- -------- ----------- -----------
(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 95,851 110,141 111,519 107,451 103,861
Recoverable from SDTF........ 5,632 6,745 9,929 15,879 20,060 17,775 21,138
Total assets................. 307,345 373,069 405,765 425,206 491,844 456,012 502,167
Loss and loss adjustment
expenses................... 304,205 360,425 368,000 367,391 387,632 364,210 378,196
Debt......................... -- -- -- -- 44,000 -- 36,500
Total equity (deficit)....... (9,458) (6,485) 2,480 20,065 23,154 31,087 24,993
<CAPTION>
AS OF
SEPTEMBER 30,
-------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Balance Sheet Data:
Cash and invested assets..... $236,421 $225,319
Premiums receivable.......... 48,922 39,828
Reinsurance recoverable...... 112,734 107,058
Recoverable from SDTF........ 16,827 21,138
Total assets................. 437,932 476,972
Loss and loss adjustment
expenses................... 372,786 376,923
Debt......................... -- 33,000
Total equity (deficit)....... 31,238 27,378
</TABLE>
- ---------------
(1) Includes the Acquisition as of January 16, 1996.
(2) Ratio for Insurance Subsidiaries.
(3) Net loss ratio is the ratio of losses and loss adjustment expenses incurred
to premiums earned.
(4) Expense ratio is the ratio of underwriting, general and administrative
expenses to premiums earned.
(5) Combined ratio is the sum of the net loss ratio and the expense ratio.
20
<PAGE> 273
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
Interest income...................................... 149 377 738 1,071
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(2)............................................ $11,662 $15,887 $18,747 $12,904
Cash flow from:
Operations........................................... $ 9,411 $11,991 $12,591 $ 7,713
Investing activities................................. 3,359 (966) (6,636) (281)
Financing activities................................. (14,047) (4,510) (1,200) (600)
------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................ $(1,277) $ 6,515 $ 4,755 $ 6,832
======= ======= ======= =======
</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............................. $ 238 $ 6,754 $17,072 $22,198
Total assets......................................... 32,066 35,672 41,372 43,683
Current liabilities.................................. 20,118 28,503 20,802 18,038
Debt................................................. 4,510 -- -- --
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.
(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization.
21
<PAGE> 274
PRO FORMA FINANCIAL DATA
The following pro forma financial data present the historical financial
data of ESIF and its subsidiaries on a consolidated basis adjusted to reflect
the pro forma effects of the following transactions:
(1) January 1996 Acquisition of SHC by ESIF;
(2) Conversion of ESIF from a group self-insurance fund to a stock
insurance company; and
(3) Issuance of Common Stock and Series A Preferred Stock in the
Offerings.
The pro forma financial statements presented are:
Balance Sheet as of December 31, 1996
The unaudited pro forma consolidated balance sheet as of December 31, 1996
presents the historical balance sheet of ESIF. Pro forma adjustments, as
described in the related notes, give effect to the Conversion and the Offerings
as if they had been effective at December 31, 1996.
The pro forma balance sheet assumes the issuance of 1,639,836 shares (par
value $10.00 per share) of Series A Preferred Stock to Eligible Policyholders in
connection with the Conversion and the issuance of 5,000,000 shares of Common
Stock (par value $0.01 per share) at $11.00 per share.
Statement of Income for the Year Ended March 31, 1996
The unaudited pro forma consolidated statement of income for the year ended
March 31, 1996 presents the historical operating results of ESIF (including
operating results of SHC from its Acquisition date of January 16, 1996) and the
historic operating results of SHC for the period April 1, 1995 to January 15,
1996. Pro forma adjustments give effect to the Acquisition of SHC, the
Conversion and the Offerings as if they had occurred on April 1, 1995.
Statement of Income for the Nine Months Ended December 31, 1995
The unaudited pro forma consolidated statement of income for the six months
ended September 30, 1995 presents the historical operating results of ESIF and
SHC. Pro forma adjustments give effect to the Acquisition of SHC, the Conversion
and the Offerings as if they had occurred on April 1, 1995.
Statement of Income for the Nine Months Ended December 31, 1996
The unaudited pro forma consolidated statement of income for the six months
ended September 30, 1996 presents the historical operating results of ESIF. Pro
forma adjustments give effect to the Conversion and the Offerings as if they had
occurred on April 1, 1995.
22
<PAGE> 275
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
EMPLOYERS -----------------------
SELF INSURERS CONVERSION OFFERING
FUND (A) (B) PRO FORMA
------------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Investments..................................... $217,886 $ -- $50,000(D) $267,886
Cash and cash equivalents....................... 7,433 -- -- 7,433
Premiums receivable............................. 39,828 -- -- 39,828
Accounts receivable............................. 3,184 -- -- 3,184
Reinsurance recoverable......................... 107,058 -- -- 107,058
Recoverable from Florida Special Disability
Trust Fund.................................... 21,138 -- -- 21,138
Excess of cost over net assets of business
acquired...................................... 47,489 -- -- 47,489
Deferred income taxes........................... 15,656 -- -- 15,656
Other assets.................................... 17,300 -- -- 17,300
-------- -------- ------- --------
Total assets.......................... $476,972 $ -- $50,000 $526,972
======== ======== ======= ========
LIABILITIES AND SHAREHOLDERS EQUITY
Liabilities:
Loss and loss adjustment expenses............. $376,923 -- -- $376,923
Debt.......................................... 33,000 -- -- 33,000
Unallocated policyholder remittances.......... 23,506 -- -- 23,506
Accounts payable.............................. 11,229 -- -- 11,229
Other liabilities............................. 4,936 -- -- 4,936
-------- -------- ------- --------
Total liabilities..................... 449,594 -- -- 449,594
Equity:
Preferred stock............................... -- 16,398(C) -- 16,398
Common stock.................................. -- -- 50(D) 50
Additional paid-in capital.................... -- -- 49,950(D) 49,950
Retained earnings............................. 24,857 (16,398)(C) -- 8,459
Unrealized appreciation on available for sale
securities................................. 2,521 -- -- 2,521
-------- -------- ------- --------
Total equity.......................... 27,378 -- 50,000 77,378
-------- -------- ------- --------
Total liabilities and shareholders
equity.............................. $476,972 $ -- $50,000 $526,972
======== ======== ======= ========
</TABLE>
See notes to pro forma condensed consolidated balance sheet.
23
<PAGE> 276
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(A) Assumes that the Conversion of ESIF from a group self-insurance fund to a
stock insurance company occurred as of December 31, 1996.
(B) Assumes that $50.0 million in net proceeds (minimum amount expected to be
received) from the issuance of 5,000,000 shares of Common Stock at $11.00
per share is received as of December 31, 1996.
(C) Adjustment relates to the issuance of 1,639,836 shares (par value $10.00
per share) of Series A Preferred Stock to Eligible Policyholders in
connection with the Conversion.
24
<PAGE> 277
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1996(A)
<TABLE>
<CAPTION>
(B) (C) (D)(E)
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 -- 12,374
(1,855)(F)
(7)(G)
Realized investment gains................... 4,354 -- -- 4,354
Administrative fees......................... 7,665 49,040 (19,358)(H) 37,347
Other income................................ 206 921 (921)(G) 206
-------- ------- -------- ---------
Total revenue....................... 140,328 50,987 (22,141) 169,174
-------- ------- -------- ---------
Expenses:
Losses and loss adjustment expenses......... 94,844 -- -- 94,844
Other underwriting, general, and
administrative expenses.................. 43,657 40,489 (19,358)(H) 63,008
(1,780)(G)
Interest expense............................ 847 30 3,101(I) 3,978
Amortization and depreciation............... 1,103 4,033 341(J) 5,340
(137)(G)
-------- ------- -------- ---------
Total expenses...................... 140,451 44,552 (17,833) 167,170
-------- ------- -------- ---------
Income from continuing operations before
income taxes................................ (123) 6,435 (4,308) 2,004
Income taxes (benefit)........................ (505) 2,356 (1,543)(K) 308
-------- ------- -------- ---------
Income from continuing operations............. $ 382 $ 4,079 $ (2,765) $ 1,696
======== ======= ======== =========
Income from continuing operations per common
share....................................... $ 0.21
=========
Weighted average common shares outstanding.... 5,000,000
</TABLE>
See notes to pro forma condensed consolidated statement of income.
25
<PAGE> 278
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1996
(A) Assumes the Acquisition and the Conversion occurred on April 1, 1995.
(B) 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.
(C) Includes SHC for the period April 1, 1995 through January 15, 1996.
(D) Upon Conversion to a stock property and casualty insurer, Bridgefield will
be subject to guaranty fund assessments by the Florida Insurance Guaranty
Association; however, there were no such assessments during the year ended
March 31, 1996. Accordingly, the pro forma data does not include any
adjustments for the effect of guaranty fund assessments.
(E) The pro forma condensed consolidated statement of income for the year ended
March 31, 1996 does not include investment earnings on the net proceeds of
the Offerings. Assuming that $50.0 million of net Offering proceeds
(minimum amount expected to be received for the issuance of 5,000,000
shares of Common Stock at $11.00 per share) are invested in 180 day U.S.
Treasury Bills yielding 6.1% for the six months ended September 30, and
5.6% for the six months ended March 31, 1996, pro forma net income would be
increased by $1.8 million to $3.5 million and pro forma earnings per share
would be increased by $0.36 to $0.57.
(F) Adjustment relates to the effect on investment income of foregone
investment earnings on $26.0 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% (which approximates ESIF's
actual investment earnings rate during the period).
(G) Adjustment relates to a decrease in revenue and operating expenses
attributable to the disposition of Carolina Summit Healthcare, Inc.
("CAROLINA SUMMIT") and discontinued operations of Meritec.
(H) Adjustment relates to elimination of administrative fees paid by ESIF to
SHC.
(I) Adjustment relates to interest expense from the financed portion of the
Acquisition assuming scheduled interest rates ranging from 7% to 9.5%.
(J) 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. The components of the
amortization adjustment are as follows:
<TABLE>
<CAPTION>
AMORTIZATION EXPENSE
-----------------------------------
HISTORICAL PRO FORMA ADJUSTMENT
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill............................................ $ 297 $1,572 $ 1,275
Customer contracts.................................. 1,821 523 (1,298)
Developed software.................................. 633 997 364
------ ------ -------
$2,751 $3,092 $ 341
====== ====== =======
</TABLE>
(K) Adjustment relates to the total income tax effect of adjustments (F)
through (J).
26
<PAGE> 279
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995(A)
<TABLE>
<CAPTION>
ASSUMING CONVERSION AND
ISSUANCE OF 5,000,000 SHARES
OF COMMON STOCK AT
(D) $11.00 PER SHARE
(C) SUMMIT ---------------------------------
EMPLOYERS SELF HOLDING PRO FORMA
INSURERS FUND CORPORATION ADJUSTMENTS(E)(F) PRO FORMA
-------------- ----------- ----------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned....................... $89,713 $ -- $ -- $ 89,713
Net investment income................. 10,522 745 (1,178)(H) 9,509
Realized investment gains............. 2,726 -- -- 2,726
Administrative fees................... -- 47,162 (18,713)(G) 28,449
Other income.......................... 125 1,138 (903)(K) 360
------- ------- -------- ---------
Total revenue................. 103,086 49,045 (21,374) 130,757
Expenses:
Losses and loss adjustment expenses... 67,043 -- -- 67,043
Other underwriting, general and
administrative expenses............ 28,548 38,372 (18,713)(G) 46,725
(1,482)(K)
Interest expense...................... -- 30 2,987(J) 3,017
Amortization and depreciation......... -- 3,873 323(I) 4,074
(122)(K)
------- ------- -------- ---------
Total expenses................ 95,591 42,275 (17,007) 120,859
------- ------- -------- ---------
Income from continuing operations
before income taxes................ 7,495 6,770 (4,367) 9,898
Income taxes.......................... 2,323 2,484 (1,560)(L) 3,247
------- ------- -------- ---------
Income from continuing operations....... $ 5,172 $ 4,286 $ (2,807) $ 6,651
======= ======= ======== =========
Income from continuing operations per
common share.......................... $ 1.23
=========
Weighted average common shares
outstanding........................... 5,000,000
</TABLE>
See notes to pro forma condensed consolidated statement of income.
27
<PAGE> 280
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995(B)
<TABLE>
<CAPTION>
ASSUMING CONVERSION AND
ISSUANCE OF 5,000,000 SHARES
OF COMMON STOCK
AT $11.00 PER SHARE
(C) ---------------------------------
EMPLOYERS SELF PRO FORMA
INSURERS FUND ADJUSTMENTS(E)(F) PRO FORMA
-------------- ----------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Premiums earned.................................. $74,509 $ -- $ 74,509
Net investment income............................ 9,606 (109)(K) 9,497
Realized investment gains........................ 366 -- 366
Administrative fees.............................. 25,762 -- 25,762
Other income..................................... 568 (5)(K) 563
------- ------- ---------
Total revenue............................ 110,811 (114) 110,697
------- ------- ---------
Expenses:
Losses and loss adjustment expenses.............. 50,236 -- 50,236
Other underwriting, general, and administrative
expenses...................................... 45,837 (675)(K) 45,162
Interest expense................................. 2,719 2,719
Amortization and depreciation.................... 3,729 (25)(K) 3,704
------- ------- ---------
Total expenses........................... 102,521 (700) 101,821
------- ------- ---------
Income from continuing operations before income
taxes......................................... 8,290 586 8,876
Income taxes..................................... 3,057 199(L) 3,256
------- ------- ---------
Income from continuing operations.................. $ 5,233 $ 387 $ 5,620
======= ======= =========
Income from continuing operations per common
share............................................ $ 1.03
=========
Weighted average common shares outstanding......... 5,000,000
</TABLE>
See notes to pro forma condensed consolidated statement of income.
28
<PAGE> 281
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTH PERIODS ENDED DECEMBER 31, 1995 AND 1996
(A) Assumes the Acquisition and the Conversion occurred on April 1, 1995.
(B) Assumes the Conversion occurred on April 1, 1995.
(C) Includes historical information for ESIF and subsidiaries for the nine
months ended December 31, 1995 and 1996, respectively, on a consolidated
basis.
(D) Includes SHC for the period April 1, 1995 through December 31, 1995.
(E) Upon the Conversion to a stock property and casualty insurer, Bridgefield
will be subject to guaranty fund assessments by the Florida Insurance
Guaranty Association; however, there were no such assessments during the
nine months ended December 31, 1995 and 1996. Accordingly, the pro forma
data does not include any adjustments for the effect of guaranty fund
assessments.
(F) The pro forma condensed consolidated statements of income for the nine
month ended December 31, 1995 and 1996 do not include investment earnings
on the net proceeds of the Offerings. Assuming that $50.0 million of net
Offering proceeds (minimum amount expected to be received for the issuance
of 5,000,000 shares of Common Stock at $11.00 per share) are invested in
180-day U.S. Treasury Bills yielding 6.10% and 5.15% for the six months and
three months ended September 30, 1995 and December 31, 1995, respectively,
and 5.18% and 5.51% for the six months and three months ended September 30,
1996 and December 31, 1996, respectively. Pro forma net income for the nine
months ended December 31, 1995 and 1996 would be $8.0 million and $6.9
million, respectively, and the pro forma earnings per share would be $1.50
and $1.27 for the nine months ended December 31, 1995 and 1996,
respectively.
(G) Adjustment relates to elimination of fees paid by ESIF to SHC.
(H) Adjustment relates to the effect on investment income of foregone
investment earnings on $26.0 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% (which approximates
ESIF's actual investment earnings rate during the period).
(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. The components of the
amortization adjustment are as follows:
<TABLE>
<CAPTION>
AMORTIZATION EXPENSE
-----------------------------------
HISTORICAL PRO FORMA ADJUSTMENT
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill............................................ $ 187 $ 993 $ 806
Customer contracts.................................. 1,150 330 (820)
Developed software.................................. 400 630 230
------ ------ -----
$1,737 $1,953 $ 216
====== ====== =====
</TABLE>
(J) Adjustment relates to interest expense from the financed portion of the
Acquisition assuming scheduled interest rates ranging from 7% to 9.5%.
(K) Adjustment relates to decrease in revenue and operating expenses
attributable to the disposition of Carolina Summit and Meritec.
(L) Adjustment relates to the total income tax effect of adjustments (G)
through (K).
29
<PAGE> 282
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 therefore 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 rate-making 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
30
<PAGE> 283
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.
The Company is in the process of disposing of two subsidiaries whose
businesses are unrelated to workers' compensation and no longer fit within the
Company's overall business strategy. The Company has reached an agreement to
sell for cash its health maintenance organization, Carolina Summit. The purchase
price will be net book value, approximately $745,000, and the sale is expected
to be consummated in the first quarter of 1997. The Company has discontinued all
operations of its computer software subsidiary, Meritec, and is in the process
of liquidating that entity. See "BUSINESS -- Disposal of Business" and notes 17
and 18 of the notes to the consolidated financial statements. Neither the sale
of Carolina Summit nor the liquidation of Meritec is expected to have a material
effect on the Company's results of operations.
Historically, ESIF was not operated for the purpose of generating profits,
but it retained a portion of its earnings and profits to avoid making
assessments against its members. ESIF occasionally during its operating history
paid distributions of profits to its members, but it never made an assessment
against its members. ESIF's indemnity agreements indemnified the member
employers against loss or liability relating to workers' compensation insurance
risk.
The discussion below in "Results of Operations" is divided into four
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; (iii) comparison of the nine-month periods ended December
31, 1995 and 1996 for ESIF on a consolidated basis; and (iv) a comparison of
fiscal years ended December 31, 1993, 1994 and 1995 for SHC. ESIF's audited
consolidated financial statements for the six-month period ended September 30,
1996, and accompanying comparative discussion and analysis, have been included
herein to provide additional financial data about the Company.
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) an adjustment in
estimation of accrued retrospective premiums which reduced
31
<PAGE> 284
reported premiums for the fiscal year ended March 31, 1996 by approximately $9.3
million, a discussed more fully in "-- Losses and Loss Adjustment Expenses"
below.
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 was greater than 80% as of December 31, 1996. In January 1997, the 10%
managed care premium credit was eliminated and a 11.2% premium rate reduction
for new and renewal policies became effective.
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 ESIF'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 ESIF; and (iii)
regulatory requirements. Losses and LAE incurred for the fiscal year ended March
31, 1994 were
32
<PAGE> 285
$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
reserves in excess of reserve levels required by actuarial reports because the
actuarial estimates fund years 1991 and earlier had a history of increasing (or
"adversely developing") as the fund years matured and more actual loss data
became known. During the fiscal year ended March 31, 1995, ESIF began to record
reserves at levels primarily supported by actuarial reviews. Since the actuarial
estimates had by that time evidenced a trend of loss adverse development with
the maturity of the fund years. This adverse development trend and management's
response are discussed more fully in "-- Losses and Loss Adjustment Expenses"
below. Management's determination that the excess reserves were no longer
needed, together with a reduction in premiums earned and a lower actuarial loss
ratio, resulted in a $39.3 million decrease in losses and LAE expenses 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%. A table showing the development of certain actuarial net loss ratio
trends is included in "-- Losses and Loss Adjustment Expenses" below.
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.
33
<PAGE> 286
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 premium credit programs, which premium
credits totaled $8.2 million for the six months ended September 30, 1996 as
compared to $7.0 million for the six months ended September 30, 1995. As noted,
the percentage of ESIF's covered employers participating in the managed care
credit program was greater than 80% as of December 31, 1996. In January 1997,
the 10% managed care premium credit was eliminated and a 11.2% premium rate
reduction for new and renewal policies became effective.
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. SHC 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
SHC'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 million 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.
34
<PAGE> 287
The insurance operations ratio decreased slightly from 34.2% on September
30, 1995 to 33.0% 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 HISTORICAL RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 AND 1996 FOR ESIF
REVENUE. Revenue for the nine months ended December 31, 1995 was $103.1
million as compared with $110.8 million for the nine months ended December 31,
1996. SHC generated $25.8 million in administrative fees in the nine months
ended December 31, 1996. The following table analyzes the composition and change
in revenues.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
----------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Premiums earned............................................. $ 89,713 $ 74,509
Net investment income....................................... 10,522 9,606
Realized investment gains................................... 2,726 366
Administrative fees......................................... -- 25,762
Other income................................................ 125 568
-------- --------
Total revenue..................................... $103,086 $110,811
======== ========
</TABLE>
Premiums Earned. Premiums earned for the nine months ended December 31,
1996 decreased by $15.2 million to $74.5 million. This loss in premium was due
to the market's increased preference for non-assessable products and the
increase in participation in mandated premium credit programs, which premium
credits totaled $12.3 million for the nine months ended December 31, 1996 as
compared to $10.5 million for the nine months ended December 31, 1995. As noted,
the percentage of ESIF's covered employers participating in the managed care
credit program was greater than 80% as of December 31, 1996. In January 1997,
the 10% managed care program credit was eliminated and an 11.2% premium rate
reduction for new and renewal policies became effective.
Net Investment Income. Net investment income decreased by $0.9 million
primarily due to the reduction in invested assets related to the Acquisition.
Administrative Fees. SHC generated $25.8 million in administrative fees
through its contracts with administrative clients for the nine months ended
December 31, 1996. Administrative fees represent 23.2% of total revenue for the
nine-month period and are expected to provide additional future revenues through
SHC's contracts with clients in Florida, Louisiana and Kentucky.
35
<PAGE> 288
LOSSES AND EXPENSES. ESIF's losses and expenses increased from $95.6
million for the nine months ended December 31, 1995 to $102.5 million for the
nine months ended December 31, 1996. Set forth below is a discussion of the
expenses for the period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
---------------------
1995 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Losses and loss adjustment expenses......................... $67,043 $ 50,236
Underwriting, general and administrative expenses........... 28,548 45,837
Interest expense............................................ -- 2,719
Amortization and depreciation............................... -- 3,729
------- --------
Total losses and expenses......................... $95,591 $102,521
======= ========
</TABLE>
Losses and Loss Adjustment Expenses. Losses and LAE incurred for the nine
months ended December 31, 1995 were $67.0 million compared to $50.2 million for
the nine months ended December 31, 1996. The loss ratio decreased from 74.7% for
the nine months ended December 31, 1995 to 67.4% for the nine months ended
December 31, 1996. This decrease was the result of favorable loss development.
Underwriting, General and Administrative Expenses. Underwriting, general
and administrative expenses increased by $17.3 million primarily due to the
Acquisition. The SHC portion of underwriting, general and administrative
expenses was $21.2 million, which indicates a reduction of $3.9 million in
underwriting, general and administrative expenses for ESIF.
The expense ratio increased slightly from 31.8% on December 31, 1995 to
33.4% on December 31, 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, while production expenses increased 2.1%.
Interest Expense. Interest expense increased $2.7 million for the nine
months ended December 31, 1996 from zero for the nine months ended December 31,
1995. Interest expense resulted from the $44.0 million of debt incurred by SHC
to fund the Acquisition.
Amortization and Depreciation. For the nine months ended December 31,
1996, amortization and depreciation expense was recorded of $3.7 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 nine months ended
December 31, 1995 and 1996 was $5.2 million and $5.2 million, respectively. ESIF
had $2.0 million of non-recurring charges during the nine-month period ending
December 31, 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
36
<PAGE> 289
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 years 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 was completed by December
31, 1996.
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.
37
<PAGE> 290
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, 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. Due to the uncertainty regarding settlement of unpaid claims, the
liquidity requirements of the Company vary, and the Company has attempted to
structure its investment portfolio to take into account the historical payout
patterns. See "BUSINESS -- Investment Portfolio." The Company purchases
reinsurance to mitigate the effect of large claims and help stabilize demands on
its liquidity. See "BUSINESS -- Reinsurance."
As part of the Acquisition, SHC incurred debt of which, at December 31,
1996, consisted of a term loan in the amount of $33.0 million, and no balance
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 has executed a credit agreement with the Bank pursuant to
which, upon consummation of the Conversion, the existing debt will be
restructured. Under such new credit facility, as of the Effective Date, the term
loan will be $33.0 million and the revolving line of credit will be $5.0
million, and the interest rate will be the prime rate plus 1%. The annual
principal payments (which are payable in quarterly installments) will be $2.3
million, $5.0 million, $5.6 million, $7.6 million, $9.1 million and $3.4 million
in each of calendar years 1997, 1998, 1999, 2000, 2001 and 2002, respectively.
The Company anticipates that its debt obligations will be satisfied from the
cash flow generated by the Administrative Subsidiaries.
For the years ended March 31, 1995 and 1996, net cash provided by operating
activities was $13.3 million and $13.3 million, respectively, while net cash
used in investing activities was $12.3 million and $49.6 million, respectively.
The increase in cash used in investing activities is related to the Acquisition
and the assumption of debt in connection therewith. The Company expects to
redeem the Series A Preferred Stock from future surpluses in excess of
statutorily required capital.
The Company's balance sheets as of March 31, 1996 and December 31, 1996
reflect $20.1 million and $21.1 million, respectively, of recoverables from the
SDTF. The Company received $5.6 million and $6.5 million in actual recoveries
from the SDTF for the fiscal year ended March 31, 1996 and the nine months ended
December 31, 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. If the SDTF is discontinued, the Company believes that the
existing reimbursement obligations of the SDTF would become general obligations
of the State of Florida, although there is no assurance that a reviewing court
would adopt that view. The SDTF has made no acknowledgment with regard to the
enforceability of its reimbursement obligations to insurers such as the Company.
See "BUSINESS -- Regulation -- Special Disability Trust Fund."
As a self-insurance fund, ESIF recorded for statutory reporting an asset of
$42.9 million, $47.3 million and $45.0 million at March 31, 1995, March 31, 1996
and December 31, 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, $4.7 million and $4.2
million at March 31, 1995, March 31, 1996 and December 31, 1996, respectively.
ESIF's statutory basis surplus as a self-insurance fund was approximately $20.1
million at December 31, 1996. Upon conversion to a stock insurance company, and
assuming $50.0 million of estimated net proceeds from the Offerings, plus $5.5
million of additional statutory capital which will result from reorganization,
Bridgefield's statutory basis surplus as a stock insurance company would be
approximately
38
<PAGE> 291
$35.1 million at December 31, 1996. Such capital and surplus is considered
adequate 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 EXPENSES
The Company's consolidated balance sheet includes an estimated reserve for
unpaid losses and LAE. This reserve represents management's best estimate of the
ultimate cost of the losses and LAE that are unpaid at the balance sheet date,
including incurred but not reported ("IBNR") claims. Such reserve is established
by management based upon (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. Such reserve is continually reviewed and, as
adjustments become necessary, such adjustments are included in the results of
current operations.
The following table shows changes in the historical loss and LAE reserve
for ESIF for the ten fiscal years beginning with the year ended March 31, 1987.
The top line shows the reserve recorded at each fiscal year end. Such amount
represents an estimate of unpaid losses and LAE occurring in that year as well
as future payments on claims occurring in prior years. The upper portion of the
table (cumulative paid) presents the cumulative amounts paid during subsequent
years on those losses for which reserves were carried as of each specific year.
The lower portion (reserves re-estimated) shows the re-estimated amounts of the
previously recorded reserve based on experience as of the end of each succeeding
year. The re-estimate changes as more information becomes known about the actual
losses for which the initial reserve was 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 re-estimated reserve amount.
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<PAGE> 292
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
<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............. $ 37,002 $ 57,488 $125,065 $169,004 $209,605 $169,474 $257,977 $271,321 $258,951 $280,540
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..... $ 47,332 $101,593 $141,132 $184,334 $202,489 $233,631 $237,988 $244,956 $267,751
Two years later.... 68,254 112,663 156,080 178,786 237,767 214,381 238,684 254,221
Three years
later............ 70,441 126,297 161,652 214,630 231,823 225,238 247,998
Four years later... 75,980 132,163 182,010 209,894 239,113 235,163
Five years later... 78,117 148,221 178,810 209,196 248,352
Six years later.... 86,683 145,937 178,042 215,984
Seven years
later............ 85,476 143,905 184,986
Eight years
later............ 83,430 148,783
Nine years later... 87,400
Cumulative redundancy (deficiency)
Dollars............ $(50,398) $(91,295) $(59,921) $(46,980) $(38,747) $(65,689) $ 9,979 $ 17,100 $ (8,800)
Percentage......... -136.20% -158.81% -48.91% -27.80% -18.49% -38.76% 3.87% 6.30% -3.40%
Net reserves.......................................................................... 257,977 271,321 258,951 280,540
Ceded Reserves........................................................................ 103,118 95,850 108,440 107,092
-------- -------- -------- --------
Gross reserves........................................................................ 361,095 367,171 367,391 387,632
Net reserves re-estimated............................................................. 247,998 254,221 267,751 --
Ceded reserves re-estimated........................................................... 94,271 102,247 101,161 --
-------- -------- -------- --------
Gross reserves re-estimated........................................................... 342,269 356,468 368,912 --
Gross cumulative redundancy (deficiency)
Dollars............................................................................. 18,826 10,703 (1,521)
Percentage.......................................................................... 5.21% 2.92% -0.41%
</TABLE>
As seen in the above table, ESIF's reserve estimates for fiscal years ended
March 31, 1992 and earlier had a history of increasing (or "adversely
developing") as those years matured and more data became available. In addition,
as discussed in "-- Results of Operations" above comparing the years ended March
31, 1994, 1995 and 1996, for the fiscal year ended March 31, 1995 ESIF reduced
its net reserve by approximately 4.6%, and subsequently increased the net
reserve in fiscal year 1996 by approximately 8.3%. The adverse development trend
and the recent reserve adjustments are due to several internal and external
factors, as discussed below.
Although ESIF began operations in 1979, prior to 1985 it was not necessary
for ESIF to maintain detailed claims data for the purpose of projecting ultimate
loss reserves because its losses over a specified amount were fully reinsured.
Also, at that time self-insurance funds in Florida, including ESIF, were
regulated by the Florida Department of Labor (the "DOL"), which did not require
actuarial verification or the recording of IBNR claims reserves. Beginning in
1985, due primarily to changes in the reinsurance market, ESIF no longer had
access to full reinsurance, and ESIF for the first time engaged an independent
actuary to assist it in computing ultimate reserve estimates.
Prior to 1989, ESIF's claims were adjusted and managed by Adjustco, Inc.
("ADJUSTCO"), an independent claims adjusting company, under contract to SCI.
Adjustco was responsible for establishing, monitoring and updating case-based
loss reserves used to set the reserves for ESIF's financial statements. In
January 1989, SCI discontinued the contract with Adjustco and began performing
such claims management functions through its wholly owned subsidiary, Summit
Claims Management, Inc. ("SCM"). This change has
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<PAGE> 293
increased ESIF's control over the handling of each claim and has permitted ESIF
to collect detailed claims data. Also, due to improved data collection and
computer databases, ESIF is now able to sort the data into smaller subsets that
support more individualized actuarial assumptions, and ESIF is able to perform
more sophisticated analysis of the data.
In 1985, when ESIF first began establishing meaningful loss and LAE
reserves, there was not a substantial volume of company-specific claims data
available. The actuaries relied more heavily on industry data and assumptions.
Management elected to record ESIF's reserves each year at an amount in excess of
the actuarial estimates, a practice which proved to result in a more accurate
reserve amount. As reflected in the table above, even with the excess (or
"management") reserves added to the actuarial estimates, ESIF's total reserves
still experienced adverse development until 1993.
By 1993, ESIF's business had grown significantly, and it was beginning to
accumulate a much larger volume of company-specific data. Also, the data
regarding claims incurred in prior years and paid in later years was becoming
more reliable as this data aged and matured. The use of this data enabled ESIF's
actuaries to begin estimating more accurate reserve amounts.
In addition, in or around 1994, several external changes occurred which
have improved ESIF's ability to establish more accurate reserve estimates. In
January 1994, the New Florida Law went into effect. For ESIF, one of the most
important reforms implemented by this law was that it permitted workers'
compensation insurers in Florida to settle and close all portions of outstanding
claims, whereas previously they had been permitted to settle and close only the
wage loss portions. This has significantly improved ESIF's ability to predict
the ultimate loss on a claim. Also, because ESIF has been able to settle and
close claims that were still outstanding from prior years, it has been able to
reduce the adverse development of prior years as those years continue to mature.
ESIF's loss ratios have declined over the years and have become more stable.
Another factor that has contributed to ESIF's improved actuarial estimates
is the lessening of medical cost inflation. Prior to 1994, ESIF's experience
showed significant annual inflation in medical expenses, which made estimating
loss reserves with respect to medical costs uncertain. However, with managed
care and other actual or proposed healthcare reforms limiting this rate of
inflation in medical expenses, ESIF has been better able to estimate loss
reserves with respect to such costs.
Also in 1994, the Florida legislature transferred regulatory oversight of
self-insurance funds from the DOL to the Florida DOI. The Florida DOI placed
substantially more emphasis on the actuarial reports and requested that
self-insurance funds record reserves only at amounts that had been agreed upon
by the funds' actuaries.
As a consequence of these factors that had been taking place in the early
1990s, in 1995 ESIF determined that it no longer needed to add the management
reserves to the actuarial estimates. ESIF's management believed that the
actuarial estimates were beginning to show a trend of redundancy or only small
deficiencies, as reflected in the table above. As a result, for the fiscal year
ended March 31, 1995, ESIF reduced the aggregate loss and LAE reserve by
approximately $25.4 million, or 9.8% of net reserves. The following table, which
presents the development of actuarial net loss ratios for the same ten-year
period that is set forth above, illustrates how the actuarial estimates have
improved over time. This table shows net loss ratios that have been computed
using only the actuarially estimated reserve amounts, and excludes any
management reserves. The top line of the table shows the net loss ratio for each
year, and each succeeding line shows how that ratio has
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<PAGE> 294
developed with each succeeding year. The ratios for each succeeding year are for
only that original accident year and are not cumulative.
DEVELOPMENT OF ACTUARIAL NET LOSS RATIOS(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
----- ----- ----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Actuarial loss & loss adjustment expense
ratios................................... 86.0% 89.8% 77.0% 66.8% 67.0% 59.8% 55.8% 59.8% 60.4%
One year later............................. 86.0% 89.4 85.8 77.0 67.1 64.8 56.2 53.8 58.7
Two years later............................ 92.0 98.9 91.5 77.2 66.9 61.6 61.0 54.3
Three years later.......................... 98.7 97.8 93.4 84.5 70.3 64.2 60.7
Four years later........................... 98.2 100.9 103.1 87.2 75.3 64.7
Five years later........................... 101.3 110.7 103.1 89.9 76.8
Six years later............................ 108.7 110.7 104.3 92.5
Seven years later.......................... 108.1 110.8 106.2
Eight years later.......................... 107.7 111.7
Nine years later........................... 111.6
</TABLE>
- ---------------
(1) Actuarial net loss ratios are estimated billable premium regardless of the
payment plan net of specific reinsurance. This table does not reflect the
impact of aggregate reinsurance.
As shown in this table, the net loss ratios for fiscal years prior to 1992
have steadily increased as those accident years have developed. The net loss
ratios for years 1992 and later have remained relatively stable. These trends
correlate to the trend of the actuarially estimated reserves for years prior to
1992 to develop adversely as those years mature, and for years 1992 and later to
be more accurate and experience less adverse development. By 1995, when
management of ESIF determined that it would not need to record reserves in
excess of the actuarial estimates, these net loss ratios had begun to evidence
the trend toward less adverse development. For example, the net loss ratio for
1987 was 86.0% in that year, and by the end of 1994 the 1987 net loss ratio had
developed to 108.1%. In contrast, the net loss ratio for fiscal year 1992 was
67.0% in that year, but it had positively developed to 61.6% by the end of 1994.
Years subsequent to fiscal year 1992 continued to evidence this trend.
The improved quality and quantity of ESIF's claims data also resulted in
two adjustments in fiscal year 1996, an increase of the loss and LAE reserve and
a decrease of accrued billable premiums relating to ESIF's retrospective rated
insurance policies (the "RETRO PLANS"). For the fiscal year ended March 31,
1996, the actuarial estimate of the aggregate loss and LAE reserve increased due
to the emergence of greater than expected incremental increases in paid losses
relating to prior accident years, primarily in accident years prior to 1992.
ESIF's independent actuaries determined that the total increase in the reserve
for fiscal year 1996 should be approximately $11.0 million, which was 3.9% of
net reserves.
With respect to retrospective premiums, the actuaries reduced their
estimate of accrued retrospective premiums by approximately $9.3 million. The
establishment of an estimate of accrued retrospective premiums requires an
analysis of both the overall losses for all Retro Plan participants (the mean
loss ratio) as well as an estimate of the dispersion of individual participant
loss ratios around the overall mean (the variance of the loss ratios). Prior to
March 31, 1996, the actuaries had developed an estimate of the variance using
only a limited amount of information about the individual participants' actual
loss experience. To a large extent, the model was based on industry information
regarding the dispersion of workers' compensation loss ratios around the mean.
The annual review of the amount of accrued retrospective premiums reflected
revised estimates of the participants' mean loss ratio, but did not re-estimate
the variance assumption.
During 1995, ESIF's actuaries reviewed the aggregate information for
participants in the Retro Plans. For years 1986 through 1988, a majority of the
losses had already been paid so that the actuaries were able to evaluate the
actual dispersion of individual participants' losses around the mean. The
actuaries concluded from this review that the earlier assumption of the variance
tended to underestimate the proportion of the insureds that would experience
losses in excess of the Retro Plans cap. The estimate of the variance was
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<PAGE> 295
revised to better match the actual experience of the Retro Plans participants
for these earlier years and applied the same assumptions to more recent years.
Thus, although the reserving model remain unchanged, revised assumptions
regarding variance using more individualized data caused the estimates of
retrospective premiums receivable to be reduced.
The following table contains summary reconciliations of the beginning and
ending insurance reserves, displayed individually for each of the three most
recent fiscal years and for the six months and nine months ended September 30,
1996 and December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, FOR THE SIX MONTHS FOR THE NINE MONTHS
-------------------------------- ENDED ENDED
1994 1995 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996
--------- -------- --------- ------------------ -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loss & LAE Reserves,
beginning of period --
GAAP basis............. 360,425 368,000 367,391 387,632 387,632
Less: Reinsurance
recoverables (exclusive
of recoverables on paid
losses)................ (103,118) (95,851) (108,440) (107,092) (107,092)
--------- -------- --------- --------- ---------
257,307 272,149 258,951 280,540 280,540
Less: Recoverable from
Florida SDTF........... (6,745) (9,929) (15,879) (20,060) (20,060)
--------- -------- --------- --------- ---------
Net reserves for losses
and LAE at beginning of
year................... 250,562 262,220 243,072 260,480 260,480
Add provision for claims
occurring in:
The current year....... 118,889 94,520 84,058 35,663 57,289
Prior years............ (10,478) (25,404) 10,786 (3,528) (7,053)
--------- -------- --------- --------- ---------
Incurred losses during
the current year....... 108,411 69,116 94,844 32,135 50,236
Deduct payments for
claims occurring in:
The current year....... 17,704 16,857 15,432 3,565 8,378
Prior years............ 79,049 71,407 62,004 34,443 50,682
--------- -------- --------- --------- ---------
Claim payments during the
current year........... 96,753 88,264 77,436 38,008 59,060
Net reserves for losses
and LAE at end of
year................... 262,220 243,072 260,480 254,607 251,656
Add: Impact of
reinsurance for FASB
113................. 95,851 108,440 107,092 102,451 104,129
Recoverable from
SDTF............... 9,929 15,879 20,060 21,138 21,138
--------- -------- --------- --------- ---------
Gross reserves for losses
and LAE at end of
period (GAAP basis).... $ 368,000 $367,391 $ 387,632 $ 378,196 $ 376,923
========= ======== ========= ========= =========
</TABLE>
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<PAGE> 296
A reconciliation of the loss and LAE reserves determined on a GAAP basis
with the reserves recorded on the Statutory basis financial statements provided
to state regulatory authorities is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------- SEPTEMBER 30, DECEMBER 31,
1994 1995 1996 1996 1996
-------- -------- --------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
GAAP basis loss and LAE
reserves..................... $368,000 $367,391 $ 387,632 $ 378,196 $ 376,923
Reinsurance recoverables
included in GAAP loss and LAE
reserves..................... (96,680) (108,440) (107,033) (102,396) (103,508)
Adjustment for the effect of
computing GAAP basis loss
reserves using paid losses
gross of SDTF recoveries..... (15,530) (24,836) (31,376) (28,832) (28,832)
Discounting of indemnity
portion of permanent
disability claims............ 4,730 4,875 4,667 4,235 4,235
-------- -------- --------- --------- ---------
Statutory basis loss and LAE
Reserves..................... 260,520 238,990 253,890 251,201 248,818
======== ======== ========= ========= =========
</TABLE>
The Company's GAAP basis balance sheet also includes the following amounts
related to the Florida SDTF:
<TABLE>
<CAPTION>
MARCH 31,
------------------------------ SEPTEMBER 30, DECEMBER 31,
1994 1995 1996 1996 1996
------ ------- ------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Recoverable from SDTF... $9,929 $15,878 $20,060 $21,138 $21,138
Reinsurance recoverable
related to SDTF....... 7,235 10,317 11,781 8,445 8,445
</TABLE>
The recoverable from SDTF asset has been recorded based on ESIF's
historical collection experience and the amount of claims identified as subject
to SDTF recovery. The SDTF reinsurance recoverable results from calculating such
recoverables using loss and LAE reserves computed using paid losses gross of
SDTF recoveries.
The Company received $3.2 from SDTF million for the nine months ended
December 31, 1995 and $6.5 million for the nine months ended December 31, 1996.
In order to quantify the amounts recoverable from the SDTF, ESIF reviewed its
claims that have been identified as subject to SDTF recovery considering ESIF's
historical recovery experience on claims submitted to the SDTF. In addition,
ESIF estimated the amount of claims it expects to recover over the next four
years based on actual collection experience for the most recent two years, and
discounted the expected recoveries using an appropriate interest rate. The
amounts reflected as recoverables from the SDTF were based on the discounted
expected collection amounts rather than on the total claims identified as
subject to SDTF recovery. Accordingly, there is an implicit valuation allowance
of approximately $8.0 million reflected in the recorded SDTF recoverable
amounts. ESIF believes it will be reimbursed over a number of years. See "RISK
FACTORS -- Possible Underfunding of Florida Special Disability Trust Fund."
Although during the 40 year history of the SDTF it has paid reimbursements it
has determined were eligible for reimbursement, there can be no assurance that
reimbursements will continue to be made. If the SDTF were to discontinue, ESIF
believes the most likely run-off procedure would be for it not to accept new
claims after some date certain. If this should occur, ESIF believes that because
of the backlog of filed and accepted claims already in the system, the impact on
the Balance Sheet would be manageable. However, discontinuation of the SDTF, or
changes in its operations which decrease the availability of recoveries from the
SDTF, increase the SDTF assessments payable by ESIF, prohibit ESIF 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 ESIF's
business, financial condition or results of operations. If the SDTF is
discontinued, the Company believes that the existing reimbursement obligations
of the SDTF would become general obligations of the State of Florida, although
there is no assurance that a reviewing court would adopt that view. The SDTF has
made no acknowledgment with regard to the enforceability of its reimbursement
obligations to insurers such as the Company.
44
<PAGE> 297
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 December 31, 1996, the Company's insurance products and administrative
services are provided to approximately 15,800 employers representing
approximately $217.4 million in premiums, including approximately $101.0 million
in premiums attributable to the Funds and $116.4 million in premiums
attributable to the Insurance Subsidiaries ($108.3 million in the case of
Bridgefield and $8.1 million in the case of Bridgefield Casualty).
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.
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<PAGE> 298
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 62% 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. Following the Conversion, the Company will be able to
offer both self-insurance and traditional indemnity products, which will improve
its ability to service its markets. In addition, as a stock corporation, the
Company may have access to additional capital to finance growth by acquisition
and to expand into other geographic markets (subject to any necessary regulatory
approvals). 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 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.
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
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<PAGE> 299
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 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
47
<PAGE> 300
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.
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
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<PAGE> 301
Retailers Association Self Insurers Fund ("LRA"), and the Kentucky Retail
Federation Self Insurers Fund ("KRF"). SCI assisted with the formation of and
became the administrator for FRF, LRA and LESA in 1979, 1980 and 1982,
respectively. SCI became the administrator of KRF in 1995. None of the Funds are
related to the Company, except that certain of the directors of Summit are
trustees of certain of the Funds, as described in "MANAGEMENT OF THE
COMPANY -- Compensation Committee Interlocks and Insider Participation" and
"CERTAIN TRANSACTIONS." Each of the Funds was formed at the direction of a
particular trade association, and each is a trust organized and operated under
provisions of applicable state law. Each Fund has a board of trustees, but no
officers or employees, and the board of trustees of each Fund has contracted
with SCI to perform most aspects of the daily operations of such Fund.
Each Fund has executed a written administrator's contract with SCI which
defines the services to be performed by SCI and the fee to be paid by the Fund.
These contracts are intended to be (i) long-term in nature, with initial terms
of between two and five years and provisions for automatic renewal, and (ii)
terminable by the Funds for "good cause," which is generally defined to mean a
failure by SCI to perform its obligations under the contract or SCI's fraud or
bankruptcy, with such default by SCI not being cured within a 90-180 day period
after notice from the Fund. For these reasons and because the Funds have no
employees and the Company manages all aspects of their relationships with agents
and members, the Company believes that it would be difficult for the Funds to
cancel their contracts with the Company or move the business to a new
administrator. The Company intends to continue providing the administrative
services that it currently provides, and it has no reason to believe that its
relationships with any of the Funds will be adversely affected by the
Conversion. The Funds have no equity or other type of ownership interest in the
Company and, therefore, are not entitled to participate in the Conversion.
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 December 31, 1996, FRF had approximately 7,250 member
employers and annual premiums in excess of $77.2 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 December 31, 1996, LESA had annual premiums
of approximately $12.0 million. LESA memberships renew each year on April
1. LESA's members have voted in favor of converting the Fund to a
nonassessable mutual insurance company. If such conversion is approved by
the applicable insurance regulators and effected, upon the approval of SCI,
LESA would replace its current administrator's agreement with a managing
general agent agreement, pursuant to which SCI would continue without
interruption to manage the day-to-day operations of LESA, as converted to
an insurance company.
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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 December 31, 1996, LRA had over 1,250 retail member
employers and annual premiums of approximately $8.9 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 August 1995. As of December 31,
1996, KRF had over 1,200 members and annual premiums of approximately $2.9
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 4,760
member employers and approximately $108.4 million in annual premiums as of
December 31, 1996. ESIF's policies renew each year on April 1.
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 December 31, 1996 had written approximately
520 such policies representing approximately $8.1 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 rated
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. If a client's losses during a claims period are
better than expected, the Company may be required to refund a portion of the
premium previously paid. Throughout the fiscal years ended March 31, 1994, 1995
and 1996, and the nine months ended December 31, 1996, the
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Company established and maintained gross aggregate accruals for retrospective
refunds in amounts of $6.4 million, $9.2 million, $10.6 million and $10.4
million, respectively. Between March 31, 1994 and December 31, 1996, the Company
paid an aggregate of $0.9 million in excess of these refund accruals.
Retrospective rated policies accounted for 33%, 32%, 30% and 31%, respectively
of total premiums during the fiscal years ended March 31, 1994, 1995 and 1996
and the nine months ended December 31, 1996. 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, to stabilize
its underwriting results and to increase its underwriting capacity. In exchange
for reinsurance, the Company pays to its reinsurers a portion of the premiums
that the Company receives.
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, for the current fund year 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."
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Certain detailed information regarding the Company's total reinsurance
recoverable is provided in the following table (dollars in thousands):
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996 AS OF DECEMBER 31, 1996
----------------------------- -----------------------------
REINSURANCE PAID UNPAID PAID UNPAID
CARRIER RATING(1) CLAIMS CLAIMS TOTAL CLAIMS CLAIMS TOTAL
----------- --------- ------ -------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
American Re.......... A+/XII $ -- $ 286 $ 286 $ -- $ 734 $ 734
Cigna................ A-/XIII 297 -- 297 -- -- --
Continental
Casualty........... A/XV -- 10,531 10,531 -- 9,245 9,245
Crossroads(2)........ N/R 917 9,375 10,292 1,847 9,276 11,123
Employers Re......... A++/XV 595 6,805 7,400 808 5,150 5,958
Federal Ins. Co...... A++/XV -- 9,626 9,626 -- 8,417 8,417
INA.................. A-/XIII -- 5,678 5,678 223 5,792 6,015
Lloyds of London..... N/R -- 12,274 12,274 -- 16,856 16,856
National Union....... A++/XV -- -- -- -- 2,385 2,385
Old Republic......... A+/IX 53 17,242 17,295 41 15,132 15,173
Transamerica......... A/XI 20 37,820 37,840 10 31,142 31,152
------ -------- -------- ------ -------- --------
Total...... $1,882(3) $109,637 $111,519 $2,929(4) $104,129 $107,058
====== ======== ======== ====== ======== ========
</TABLE>
- ---------------
(1) 1996 Best's Key Rating Guide -- Property-Casualty Edition.
(2) Based on filings with the Florida DOI, Crossroads maintains trust fund
assets sufficient to fund its reinsurance obligations, although no specific
recoverable from Crossroads is directly secured by such trust fund assets.
(3) All recoverables are less than 90 days old, except $3,000 owed by Employers
Re which is more than 120 days old.
(4) All recoverables are less than 90 days old.
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 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.
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.
The Company has not experienced any material difficulties in collecting
reinsurance recoverables from any of its reinsurers, including, without
limitation, Crossroads and Lloyds of London. However, no assurance can be given
as to the future ability of any of the Company's reinsurers to meet their
obligations. In recent years, Lloyds of London has reported substantial
aggregate losses which have had adverse effects on it in general and on the
underwriting capacity of its syndicates in particular. These losses and other
adverse developments could affect the ability of certain Lloyds of London
syndicates to continue to trade and the ability of insureds to continue to place
business with particular syndicates. To the Company's knowledge, the Lloyds of
London syndicates with which the Company has contractual relationships have not
experienced any inability to pay their reinsurance obligations as and when due.
However, it is not possible for the Company to predict what effects the
circumstances described above may have on Lloyds of London and the Company's
contractual relationship with Lloyds of London syndicates in future years.
INVESTMENT PORTFOLIO
In general, the Company's investment policy focuses on: (i) safety of
principal; (ii) timing of maturities to match assets and liabilities; and (iii)
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.
The Company's primary investment objective is to minimize risk while
matching portfolio and liabilities duration. The average fixed-income duration
of the portfolio is approximately four years. This duration, when coupled with
the Company's cash and cash equivalents, matches the historical claims liability
duration of
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<PAGE> 305
three years. A secondary objective is to maximize total return, within the
regulatory constraints of the Florida Insurance Code and quality constraints of
NAIC Class I requirements.
In the fiscal year ended March 31, 1996, the Company's investment
activities reflected an unusually high portfolio turnover due to portfolio
restructuring which consisted of: (i) a $50.0 million portfolio allocation to a
new investment manager; (ii) the $26.0 million Acquisition of SHC; and (iii)
approximately $85.0 million of general securities trades designed to take
advantage of market interest rate movements. This $85.0 million of trades
included $15.0 million in yield swaps, $20.0 million to reduce intangible tax
exposure, and a $50.0 million shift to corporate banks to increase yields. The
Company expects future portfolio activity to return to pre-1996 levels. The
Company does not use any derivatives for interest rate hedging or other
purposes.
As of December 31, 1996, approximately 73% of the bonds in the Company's
investment portfolio were rated AA or above by Standard & Poor's ("S&P") and
approximately 96% were either rated A- or better by S&P or are considered Class
I under the NAIC's classification system. The composition of the portfolio as of
December 31, 1995 and 1996 is depicted in the following table.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------
1995 1996
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Government bonds........................................... $ 88,715 37.5% $ 61,267 27.2%
Municipal bonds............................................ 60,365 25.5% 83,803 37.2%
Corporate bonds............................................ 32,106 13.6% 39,612 17.6%
Preferred stock............................................ 3,215 1.4% 4,568 2.0%
Common stock............................................... 11,228 4.7% 14,100 6.3%
Short-term investments..................................... 36,344 15.4% 14,536 6.4%
Cash and cash equivalents.................................. 4,448 1.9% 7,433 3.3%
-------- ----- -------- -----
Total cash and invested assets................... $236,421 100.0% $225,319 100.0%
======== ===== ======== =====
</TABLE>
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
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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."
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.
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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.
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 for the fiscal years
ended March 31, 1994, 1995 and 1996, respectively. The Company's SDTF
assessments were approximately $5.5 million, $4.7 million and $5.6 million for
the fiscal years ended March 31, 1994, 1995 and
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1996, respectively. In addition, the Company's consolidated balance sheet as of
December 31, 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. If the
SDTF is discontinued, the Company believes that the existing reimbursement
obligations of the SDTF would become general obligations of the State of
Florida, although there is no assurance that a reviewing court would adopt that
view. The SDTF has made no acknowledgment with regard to the enforceability of
its reimbursement obligations to insurers such as the Company. 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 -- Possible Underfunding
of 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 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,
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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 Regulation."
DISPOSAL OF BUSINESS
The Company is in the process of disposing of two subsidiaries whose
businesses are unrelated to workers' compensation and no longer fit within the
Company's overall business strategy. 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. The Company was unable to find a
purchaser for this business and, effective October 31, 1996, the Company
terminated all employees and began winding down the operations. Prior to
December 31, 1996, the Company sold all of Meritec's fixed assets for a nominal
value,and Meritec's only remaining liability is under a lease for office space
in Atlanta. The Company is currently seeking to sublease this space or terminate
the lease. The Company does not expect this liquidation of Meritec to have a
material effect on its financial condition or results of operations.
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 $3.0 million, and the North Carolina Department
of Insurance granted Carolina Summit an HMO license, but Carolina Summit has
never conducted any business. Prior to December 31, 1996, the Company liquidated
Carolina Summit's approximately $2.0 million of invested assets. The Company has
also reached an agreement to sell for cash all of the stock of Carolina Summit
to an unrelated third party for a price equal to the aggregate net book value of
Carolina Summit, approximately $745,000. The sale is expected to close in the
first quarter of 1997. The Company continues to own another North Carolina
subsidiary, Carolina Med Summit, Inc. ("CAROLINA MED"), which was formed in
conjunction with Carolina Summit and to facilitate its North Carolina licensing
application. Carolina Med has no assets or liabilities.
See notes 17 and 18 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 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
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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 and Chief Financial
Officer
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..................... 48 Vice President of Operations of -- --
SCI
Ricky T. Hodges........................... 43 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
1986 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 as 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 of 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 of 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 of Production Group of Continental Risk Management Services,
a property and casualty insurance company located in New York, New York, where
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 at 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 $16.4
million, $7.1 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 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, 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 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 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 $6.0 million. 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
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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 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 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 50% of such options will vest 180 days after the
Effective Date and the remaining 50% of such options will vest on the first
anniversary of such initial vesting date, 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.
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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"), which is the sponsoring trade association for FRF, one of the
Funds administered by SCI. Pursuant to a written arrangement between SCI and the
Association, the Association, as the Fund sponsor, is entitled to a fee equal to
1% of such Fund's premiums earned in each year, and SCI is obligated to pay such
fee out of the administrative fee it receives from FRF. 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. 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.
Mr. Bull is also the sole shareholder of Louisiana Employers Safety
Association, Inc., the sponsoring association for LESA, one of the Funds managed
by SCI, and Mr. Bull has been nominated to be on the Board of Directors of LESA
if it completes a currently proposed conversion to a nonassessable mutual
insurance company.
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 principal 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 $1.0
million for every $4.0 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 and the Series A Preferred
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 such person will
beneficially own more than 4.99% of the shares of Common Stock or Series A
Preferred Stock as of the Effective Date. The number of shares of Series A
Preferred 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>
SERIES A
COMMON STOCK PREFERRED STOCK
------------------------ ------------------------
SHARES SHARES
BENEFICIALLY PERCENT BENEFICIALLY PERCENT
NAME OWNED OWNED OWNED OWNED
---- ------------ ------- ------------ -------
<S> <C> <C> <C> <C>
William B. Bull................................... 100,000 2.0% 0
Russell L. Wall................................... 22,727 * 0
Greg C. Branch.................................... 50,000(1) 1.0% 287 *
C. C. Dockery..................................... 45,455 * 35 *
John A. Gray...................................... 4,545 * 0
Robert L. Noojin, Sr.............................. 4,545 * 0
Thomas S. Petcoff................................. 9,091 * 9 *
Robert Siegel..................................... 4,545 * 169 *
All directors and executive officers as a group (8
persons)........................................ 240,908(1) 4.8% 500 *
</TABLE>
- ---------------
* Less than one percent.
(1) Includes 4,545 shares to be held by trusts for which Mr. Branch is the
trustee.
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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 of which
this 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) 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; (iv) in order
to avoid the expense and inconvenience of issuing shares of the new stock
insurance company to Policyholders, which shares would then be exchanged for
Summit's Series A Preferred Stock in the transaction described below, an
exchange mechanism will be employed to evidence that the Policyholders are
entitled to receive shares of the new stock insurance company but will receive
in lieu thereof share of Summit's Series A Preferred Stock; (v) 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 (vi) Summit will issue its Series A Preferred
Stock to Eligible Policyholders and its Common Stock to purchasers in the
Offerings. 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
ESIF was formed in 1978 to provide a means for Florida employers, primarily
in the construction, manufacturing, wholesale and retail, and service
industries, to self-insure for workers' compensation risks. The business
objective and mission of ESIF was, and continues to be, to provide its
Policyholders a workers' compensation solution that minimizes workplace losses,
helps return injured employees to work quickly and helps protect against large
financial loss at a low total cost to the employer.
During the past several years, the Board of Trustees of ESIF has observed
significant changes in the Florida workers' compensation market, due in part to
the New Florida Law which 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 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 that 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. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Overview."
These changes have made membership in ESIF less attractive to Policyholders
(which are members of ESIF automatically by virtue of their ownership of
Policies) relative to other workers' compensation products available in the
market, particularly with respect to the ongoing contingent liability for all
fund losses associated with membership in ESIF. With the increased availability
in the Florida market of traditional
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workers' compensation insurance products offered on more favorable terms,
employers have become less willing to assume the risks of self-insurance.
In response to these market changes, the Board reviewed ESIF's strategic
and financial alternatives. Consistent with ESIF's business objective and
mission, the Board's primary objective was to develop a strategy that would
provide ESIF's members with an attractive workers' compensation solution in view
of the changing market conditions. Also, central to the Board's analysis was its
determination that large numbers of Policyholders viewed as unacceptable the
potential liability for fund losses, due to the increasing availability of
traditional workers' compensation products in the Florida market.
The Board considered three available alternatives. First, ESIF could
discontinue operations and distribute net assets, if any, to the members. Under
this alternative, ESIF would remain liable under its in-force policies for
paying workers' compensation claims incurred through the end of the then-current
coverage period under those policies (for most ESIF policies, this would be the
March 31 following the date upon which ESIF discontinued operations). Therefore,
the members of ESIF would continue to be subject to assessments as funds were
needed by ESIF to pay those "run-off" labilities, some of which claims might not
be reported to ESIF for some time after discontinuance. In addition, this
alternative would result in members receiving only the liquidation value of
ESIF, with no consideration for ESIF's potential value as a going concern.
The second alternative considered by the Board was for ESIF to transfer its
business to a third party insurance company. In such a transaction, the
acquiring insurance company will rarely accept responsibility for paying the
incurred but not reported claims of the selling insurer, and the members of ESIF
would continue to be subject to assessments to pay such liabilities of ESIF.
The third alternative that the Board considered was for ESIF to convert
from a self-insurance fund to a stock insurance company and raise capital
through sales of securities. This approach would eliminate the potential for
Policyholder assessments. The Board did not associate valuations with each of
the alternatives, but based on ESIF's past results, the Board concluded that a
continuation of ESIF's current business practices and management would be in the
best interests of ESIF's members. As a result, the Board concluded that the
conversion of ESIF to a stock insurance company was the best alternative for
continuing to provide ESIF's members with an attractive workers' compensation
solution while eliminating the Policyholders' ongoing liability for fund losses.
Pursuant to the Conversion, the Policies held by members of ESIF will be
converted from assessable Policies to non-assessable Policies. As a consequence,
Policyholders will no longer be subject to any assessment for the liabilities of
ESIF arising either before or after the Effective Date. Further, Eligible
Policyholders 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.
The Conversion offers a number of advantages that could be important to the
future growth and performance of the Company. 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.
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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 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 1,639,836 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 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 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
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).
Notwithstanding the foregoing, Summit has agreed that any "investment
company," as defined in Section 3 of the Investment Company Act of 1940, as
amended, may purchase up to 10% of the Post Offering Outstanding Shares, subject
to such investor obtaining any required approval of the Florida DOI. With
respect to all other purchasers, Summit will have complete discretion to approve
or reject any request to exceed the Purchase Limit. Any such approval by Summit
will be made prior to the Effective Date and will be subject to any approval
required by the Florida DOI. Except to the extent required by the Florida DOI,
Summit will not be obligated to notify any subscriber of the waiver of the
Purchase Limit for any purchaser.
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The Subscription Offering will expire at 5:00 p.m. Eastern Time on March
, 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, subject to certain adjustments
to ensure that the subscribers pay the same per share price as the purchasers in
the Public Offering. Summit, after consultation with Raymond James & Associates,
Inc. and ABN AMRO Chicago Corporation, and not based on an appraisal or any
other objective factors, estimated a price range for the Common Stock of $11.00
to $13.00 per share (the "PRICE RANGE"). The Subscription Price was set at the
lowest per share price within the Price Range. If the Public Offering closes on
the Effective Date, and the Public Offering Price is more than $11.00 per share
but not more than $13.00 per share, the effective price per share paid by
subscribers in the Subscription Offering shall be adjusted to the Public
Offering Price. Such adjustment will be effected by reducing the number of
shares of Common Stock that each subscriber will receive relative to the number
of shares that such subscriber would have received based on a Subscription Price
of $11.00. No subscriber will be required to pay any additional money for its
subscription. No fractional shares of Common stock will be issued under any
circumstances, but in lieu thereof, the value of such fractional shares will be
refunded to subscribers in cash without interest within 60 days after the
Effective Date. In the event that the Public Offering Price is less than $11.00
or more than $13.00, Summit will terminate the Subscription Offering, cancel all
subscriptions, and refund all subscription monies received with interest thereon
at an annual simple interest rate of 3.25%. The Public Offering Price will be
determined by negotiation between the Representatives and Summit.
While it is currently the intention of Summit to offer and sell 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 and determine not to sell any shares in the Public Offering.
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, which will close on 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 1,639,836 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 cumulate
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
cumulated 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 cumulated 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.
(v) The redemption price shall be $10 per share, together with an
amount equal to all cumulated but unpaid dividends thereon to the date of
redemption.
(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 cumulated but unpaid dividends.
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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
ratably receive 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 cumulated 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 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
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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 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 a written or unwritten
agreement or understanding with the interested shareholder; (v) a
reclassification of securities or
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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 ChaseMellon Shareholder Services, L.L.C., New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Conversion, Summit will have outstanding 5,000,000
shares of Common Stock, all of which will have been registered under the
Securities Act and will be freely tradable without restriction or further
registration under the Securities Act, except that those shares held by
"affiliates" (as defined in Rule 144 promulgated under the Securities Act) of
Summit will not be freely tradable even though they will have been registered
under the Securities Act. Based on information provided to Summit by its
affiliates, Summit believes that approximately 241,000 shares of Common Stock,
equal to 4.8% of the Post-Offering Outstanding Shares, will be beneficially
owned by affiliates of Summit. Shares of Common Stock beneficially owned by
affiliates of Summit may not be sold except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, such as 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 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
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.
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 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 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 could adversely affect prevailing
market prices for such stock.
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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 ABN AMRO Chicago
Corporation are acting as 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. ...........................
ABN AMRO 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 750,000 shares of
Common Stock from Summit, in addition to the 5,000,000 shares of Common Stock
offered hereby, 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 Public
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 the Offerings, 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 Representatives 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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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 LLP,
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 and as of September 30, 1996 and
for the six months 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, 1994 and
1995 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, 1994 and 1995 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 of 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
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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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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
Report of Independent Auditors............................ F-28
Consolidated Balance Sheets as of September 30, 1995
(unaudited) and 1996................................... F-29
Consolidated Statements of Income for the six months ended
September 30, 1995 (unaudited) and 1996................ F-30
Consolidated Statements of Changes in Equity for the six
months ended September 30, 1995 and 1996............... F-31
Consolidated Statements of Cash Flows for the six months
ended September 30, 1995 (unaudited) and 1996.......... F-32
Notes to Consolidated Financial Statements................ F-33
Consolidated Balance Sheets as of December 31, 1995
(unaudited) and 1996 (unaudited)....................... F-53
Consolidated Statements of Income for the nine months
ended December 31, 1995 (unaudited) and 1996
(unaudited)............................................ F-54
Consolidated Statements of Changes in Equity for the nine
months ended December 31, 1995 (unaudited) and 1996
(unaudited)............................................ F-55
Consolidated Statements of Cash Flows for the nine months
ended December 31, 1995 (unaudited) and 1996
(unaudited)............................................ F-56
Notes to Consolidated Financial Statements................ F-57
SUMMIT HOLDING CORPORATION AND SUBSIDIARIES
Report of Independent Auditors............................ F-77
Consolidated Statements of Income for the years ended
December 31, 1993, 1994 and 1995....................... F-78
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1992, 1993, 1994 and 1995..... F-79
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995....................... F-80
Notes to Consolidated Financial Statements................ F-81
FINANCIAL STATEMENT SCHEDULES
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
Reports of Independent Auditors on Financial Statement
Schedules.............................................. F-86
Schedule I -- Summary of Investments as of March 31, 1996
and September 30, 1996................................. F-87
Schedule IV -- Reinsurance for the years ended March 31,
1994, 1995 and 1996 and for the six months ended
September 30, 1995 and 1996............................ F-88
Schedule VI -- Supplemental Information Concerning
Insurance Operations for the years ended March 31,
1994, 1995 and 1996 and for the six months ended
September 30, 1995 and 1996............................ F-89
</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> 332
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> 333
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> 334
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
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
-------- --------
Total invested assets............................. 221,972 212,839
Cash and cash equivalents................................... 2,984 7,427
Premiums receivable (net of $2,100 and $1,500 allowance for
doubtful accounts, respectively).......................... 50,391 38,093
Accounts receivable......................................... -- 3,157
Reinsurance recoverable, including $10,800 and $9,400 at
March 31, 1995 and 1996, respectively, from related party
reinsurers................................................ 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...................................... -- 2,448
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 1,837
Net assets of healthcare subsidiary, held for disposition... -- 2,456
Net assets of discontinued operations....................... -- 612
-------- --------
Total assets...................................... $425,206 $491,844
======== ========
LIABILITIES AND EQUITY
Liabilities:
Loss and loss adjustment expenses......................... $367,391 $387,632
Debt...................................................... -- 44,000
Unearned premium and unallocated policyholder
remittances............................................ 18,234 14,635
Accounts payable and accrued expenses..................... 12,690 13,546
Taxes, licenses and fees.................................. 1,861 1,493
Deferred revenue.......................................... 87 7,384
Federal income taxes payable.............................. 4,878 --
-------- --------
Total liabilities................................. 405,141 468,690
Equity:
Retained earnings......................................... 21,474 21,659
Net unrealized appreciation (depreciation) on
available-for-sale securities.......................... (1,409) 1,495
-------- --------
Total equity...................................... 20,065 23,154
-------- --------
Total liabilities and equity...................... $425,206 $491,844
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 335
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
(including administrative service fees paid to Summit
Holding Corporation of $26,001, $26,512 and $19,358 for
the years ended March 31, 1994 and 1995 and for the
period April 1, 1995 to January 16, 1996,
respectively).......................................... 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> 336
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> 337
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)
Decrease in discontinued operations....................... -- -- (588)
Increase in loss and loss adjustment expense.............. 39,754 9,677 20,240
Increase (decrease) in unearned premium and 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 13,286
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 7,718
Beginning cash and cash equivalents......................... 57,089 1,984 2,984
-------- -------- --------
Ending cash and cash equivalents
Continuing operations..................................... 1,984 2,984 7,427
Operations held for disposition........................... -- -- 3,251
Discontinued operations................................... -- -- 24
-------- -------- --------
Total ending cash and cash equivalents............ $ 1,984 $ 2,984 $ 10,702
======== ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE> 338
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994, 1995 AND 1996
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Employers Self Insurers Fund ("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 formed in 1978 for the stated purpose of providing statutory
workers' compensation coverage for certain Florida employers. ESIF's wholly
owned subsidiary, Employers Safety Group Association, Inc. ("ESGA"), is a trade
association primarily for employers in the construction, manufacturing,
wholesale and retail, and service industries, and any employer that is a member
of ESGA may obtain coverage from ESIF. An indemnity agreement issued by ESIF
indemnifies the member employer against loss or liability relating to workers'
compensation insurance risk. Any employer that obtains workers' compensation
coverage from ESIF automatically becomes a member of ESIF with certain rights,
including the right to vote for the election of ESIF's Trustees, the right to
receive any distribution of profits that may be authorized by the Trustees and
the right to participate in the distribution of the surplus of ESIF in the event
of its liquidation. However, all members of ESIF are subject to joint and
several liability for the obligations of ESIF. ESIF has historically not been
operated for the purpose of generating profits, but it has retained a portion of
its earnings and profits to avoid making assessments against its members. ESIF
has occasionally during its operating history paid a distribution of profits to
its members, but it has never made an assessment against its members.
ESIF is a trust with a Board comprised of six Trustees, but no employees or
officers. ESIF's bylaws specifically direct the Board to engage an
administrator, and ESIF's administrator since its inception has been Summit
Consulting, Inc. ("SCI"). SCI performs all daily operational activities for
ESIF, including premium and claims processing, pursuant to a written agreement.
SCI also performs similar functions for four other group self-insurance funds
located in Florida, Louisiana and Kentucky.
SCI owns several subsidiaries formed to assist it in providing specialized
administrative services, and SCI is wholly owned by a holding company, Summit
Holding Corporation ("SHC"). Effective January 16, 1996, ESIF purchased all of
the outstanding stock of SHC (see Note 14 for a further discussion of this
acquisition). In addition to SHC and its subsidiaries, ESIF also owns a
reinsurance subsidiary, U.S. Employers Insurance, Inc. ("USEI").
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. In such transaction, ESIF will become
wholly owned by a newly formed holding company, and ESIF's members will receive
preferred stock of the holding company in exchange for the membership interests.
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.
F-8
<PAGE> 339
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 unearned premiums established for the unexpired
portion of the premiums applicable to those policies. For retrospectively rated
policies, the ultimate premium for a period is determined on the basis of the
insured's actual losses for that period. If the actual losses are less than
expected, ESIF may be required to refund a portion of the premiums previously
paid. ESIF considers loss development experience through the date of the
financial statements in estimating the ultimate premium and, as adjustments to
premiums become necessary as a result of loss development, such adjustments are
included in current operations. 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. Fees for administrative 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 premiums of the contract.
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.
F-9
<PAGE> 340
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- 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") 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.
Such reserve is established by management based upon (i) results of actuarial
reviews which incorporate ESIF'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. Such reserve 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.
Prior to the January 16, 1996 acquisition of SHC, certain unallocated LAE
of ESIF were provided by SHC under the administrative agreement between ESIF and
SHC. Subsequent to the acquisition, ESIF has included the liability for such
unallocated LAE in the loss and LAE liability.
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. This type of guaranty fund is separate from the Florida Special
Disability Trust Fund (the "SDTF"), which is designed to pay insurers for
certain benefits paid to previously injured workers, as discussed in Note 13.
F-10
<PAGE> 341
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Florida statutes limit the assessment to a maximum of 2% of direct written
premiums annually, but 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 million, 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 allows 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.
As further described in Note 6, ESIF has significant amounts of reinsurance
recoverables as a result of ceding reinsurance under specific and aggregate
reinsurance treaties.
Intangible Assets
Cost in excess of net assets of businesses acquired totaling $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.
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.
At the balance sheet date, ESIF evaluates the recoverability of the cost in
excess of net assets acquired and the cost associated with customer listings
through a comparison of forecasted undiscounted cash flows of SHC and the
remaining asset balances.
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.
F-11
<PAGE> 342
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<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.
<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.
F-12
<PAGE> 343
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 statutory basis loss reserves and the 1986-1995 fund
years aggregate reserve plans. The aggregate plans approved by the Florida 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, consisting
of $23.8 million related to 10% of statutory basis loss reserves and $26.8
million for the 1986-1995 fund year aggregate reserves.
F-13
<PAGE> 344
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $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-14
<PAGE> 345
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 $0.4 million.
6. REINSURANCE
In accordance with general practice in the insurance industry, ESIF's
insurance subsidiaries are engaged in reinsurance transactions to cede risk to
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 retained by ESIF or its subsidiaries on any one occurrence is
$500,000 with a $750,000 deductible for each of the fiscal years ended March 31,
1995 and 1996. ESIF currently has the following coverages under specific and
aggregate reinsurance agreements:
F-15
<PAGE> 346
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SPECIFIC REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL
YEAR SPECIFIC
ENDED SPECIFIC OCCURRENCE
MARCH 31, CARRIER ATTACHMENT LIMIT
- --------- ------- ---------- ----------
<C> <S> <C> <C>
1982 INA $ 100 $ 2,000
Employers Re 2,100 3,000
1983 INA 125 2,000
Employers Re 2,125 3,000
1984 Employers Re 125 2,000
INA 2,125 Statutory
1985 Employers Re 125 2,000
INA 2,125 Statutory
1986 Employers Re 225 20,000
1987 Safety Mutual(1) 1,000 5,000
Old Republic(2) 1,000 1,000
National Union(2) 2,000 8,000
1988 Old Republic 1,000 5,000
1989 Old Republic 1,000 5,000
1990 Transamerica 1,000 15,000
1991 Transamerica 1,000 15,000
1992 Transamerica 1,000 25,000
1993 Transamerica 1,000 25,000
1994 Lloyd's 500 500
Transamerica 1,000 Statutory
1995 Lloyd's 500 500
Continental Casualty 1,000 Statutory
1996 Federal Insurance Co. 500 500
Federal Insurance Co. 1,000 1,000
Continental Casualty 2,000 Statutory
</TABLE>
- ---------------
(1) 4/1/86 - 5/31/86
(2) 6/1/86 - 3/31/87
F-16
<PAGE> 347
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AGGREGATE REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL
YEAR
ENDED AGGREGATE AGGREGATE
MARCH 31 CARRIER ATTACHMENT LIMIT
- --------- ------- ---------- ---------
<C> <S> <C> <C>
1982 INA $ 11,542 $ 2,000
Employers Re 13,542 3,000
INA 16,542 Statutory
1983 INA 11,365 2,000
Employers Re 13,365 3,000
INA 16,365 Statutory
1984 Employers Re 14,341 2,000
INA 16,341 Statutory
1985 Employers Re 17,814 3,000
INA 20,814 Statutory
1986 Employers Re 40,091 301
1987 N/A N/A N/A
1988 N/A N/A N/A
1989 Crossroads 90,648 19,000
1990 Crossroads 110,973 25,000
1991 Crossroads 130,726 31,000
1992 Crossroads 113,015 31,000
1993 Crossroads 141,956 33,401
1994 Crossroads 146,016 34,357
1995 Crossroads 133,800 31,482
1996 Crossroads 115,970 27,287
</TABLE>
Insurance premiums for the fiscal years ended March 31, 1994, 1995 and 1996
are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<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>
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross premiums written................................. $166,370 $153,844 $130,528
Ceded premiums written................................. 10,284 9,417 9,232
-------- -------- --------
Net premiums written................................... $156,086 $144,427 $121,296
======== ======== ========
</TABLE>
F-17
<PAGE> 348
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Losses and LAE incurred for the fiscal years ended March 31, 1994, 1995 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<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 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, 1993, 1994
and 1995 is also ceded to Crossroads. At March 31, 1995 and 1996, loss and LAE
reserves recoverable of approximately $10.8 million and $9.4 million,
respectively (net of amounts retroceded to USEI), are attributable to excess
reinsurance agreements with Crossroads. For the fiscal years 1986, 1987, 1990,
1991 and 1992, effective aggregate excess reinsurance is not currently in place
because these years have been self-funded or because the coverages have expired.
Exposure to significant adverse development for these years is considered
minimal due to the maturity of the loss development for these years.
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 remains obligated for amounts ceded in the event that the
reinsurers do not meet their obligations.
ESIF's reinsurance recoverable asset at March 31, 1996 is comprised of
amounts related to reinsurance agreements with the following companies (in
thousands):
<TABLE>
<CAPTION>
PAID UNPAID
REINSURANCE CARRIER CLAIMS CLAIMS TOTAL
------------------- ------ -------- --------
<S> <C> <C> <C>
American Re.............................................. $ -- $ 286 $ 286
Cigna.................................................... 297 -- 297
Continental Casualty..................................... -- 10,531 10,531
Crossroads............................................... 917 9,375 10,292
Employers Re............................................. 595 6,805 7,400
Federal Ins. Co.......................................... -- 9,626 9,626
INA...................................................... -- 5,678 5,678
Lloyds of London......................................... -- 12,274 12,274
Old Republic............................................. 53 17,242 17,295
Transamerica............................................. 20 37,820 37,840
------ -------- --------
Total.......................................... $1,882 $109,637 $111,519
====== ======== ========
</TABLE>
Substantially all of the recoverable amounts related to paid claims have
been outstanding less than ninety days at the balance sheet date. The
reinsurance recoverable amounts related to unpaid claims are calculated
considering the provisions of the specific and aggregate reinsurance agreements
and using ultimate losses by accident year consistent with the reported loss and
LAE liabilities.
F-18
<PAGE> 349
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $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.
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.
F-19
<PAGE> 350
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-20
<PAGE> 351
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
Loss and LAE Reserves, beginning of period (GAAP
basis)............................................ $ 360,425 $ 368,000 $ 367,391
Less: Reinsurance recoverables
(exclusive of recoverables on paid losses).... (103,118) (95,851) (108,440)
--------- --------- ---------
257,307 272,149 258,951
Less: Recoverable from Florida SDTF................. (6,745) (9,929) (15,879)
--------- --------- ---------
Net reserves for losses and LAE at beginning of
year.............................................. 250,562 262,220 243,072
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....................................... 79,049 71,407 62,004
--------- --------- ---------
Claim payments during the current year.............. 96,753 88,264 77,436
Net reserves for losses and LAE at end of year...... 262,220 243,072 260,480
Add: Impact of reinsurance for FASB 113............. 95,851 108,440 107,092
Recoverable from SDTF......................... 9,929 15,879 20,060
--------- --------- ---------
Gross reserves for losses and LAE at end of
year (GAAP basis)............................. $ 368,000 $ 367,391 $ 387,632
========= ========= =========
</TABLE>
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.
Statutory basis loss reserves were determined using paid loss data net of
historic SDTF recoveries; GAAP basis loss reserves were determined using paid
loss data gross of SDTF recoveries. This adjustment increased loss reserves by
$15.5 million, $24.8 million and $31.4 million at March 31, 1994, 1995 and 1996,
respectively, and increased reinsurance recoverables by $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 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 $9.9 million, $15.9 million and $20.1 million, respectively.
In order to quantify the amounts recoverable from the SDTF, ESIF reviews its
claims that have been identified as subject to SDTF recovery considering ESIF's
historical recovery experience on claims submitted to the SDTF. In addition,
ESIF estimates the amount of claims it expects to recover over the next four
years based on actual collection experience for the most recent two years, and
discounts the expected recoveries using an appropriate interest rate. The
amounts reflected as recoverables from the SDTF were based on the discounted
expected collection amounts rather than on the total claims identified as
subject to SDTF recovery. Accordingly, there is an implicit valuation allowance
of approximately $8.0 million reflected in the recorded SDTF recoverable
amounts.
F-21
<PAGE> 352
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAE assumed in the acquisition of SHC represents unallocated LAE reserves
established by ESIF that were, prior to the acquisition, accrued by SHC under
the administrator's contract between ESIF and SHC.
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, $1.6 million of ESIF's
statutory net assets of $16.3 million could be transferred from the insurance
entities subject to regulatory approval.
Equity and net income as determined in accordance with statutory accounting
practices for self-insurance funds as of and for the three fiscal years ended
March 31, 1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
NET INCOME
MARCH 31, EQUITY (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 $4.9 million and $4.7 million at March 31, 1995 and 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
F-22
<PAGE> 353
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
conversion and recapitalization, ESIF's insurance subsidiaries intend to
maintain statutory basis equity in excess of the amount required by Florida law.
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. Prior to the 1996 fiscal year, ESIF
estimated the accrued retrospective premiums using aggregate premium and loss
data. The estimation methodology was revised in 1996 such that individual member
premium and loss data was utilized in the calculation. The refinement to using
more detailed data to perform the estimation was implemented by management in
order to more accurately estimate the accrued retrospective premium amounts.
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. SDTF
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. If the SDTF is discontinued, ESIF believes that the existing
reimbursement obligations of the SDTF would become general obligations of the
State of Florida, although there is no assurance that a reviewing court would
adopt that view. The SDTF has made no acknowledgment with regard to the
enforceability of its reimbursement obligations to insurers such as ESIF.
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.
ESIF has recorded an SDTF recoverable of $15.8 million 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, $5.7 million and $5.6 million, respectively.
Assessments paid by ESIF to the SDTF were $5.5 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.
F-23
<PAGE> 354
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. ACQUISITION OF SHC
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 pro forma 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 $5.0 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 bank term
loan with rates based on LIBOR plus 3%. The balance as of March 31, 1996 for SHC
was $36.0 million. Also, a revolving bank 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.
Maturities for the term loan and reductions in the availability of the
revolving credit facility are as follows:
<TABLE>
<CAPTION>
REDUCTION IN THE
AVAILABILITY OF
TERM THE REVOLVING
LOAN CREDIT FACILITY
------- ----------------
(IN THOUSANDS)
<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................................................ 6,600 1,480
Thereafter.......................................... 4,950 1,110
------- -------
$36,000 8,000
======= =======
</TABLE>
F-24
<PAGE> 355
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (the
"401(k)") covering substantially all employees of SHC. Under the 401(k), 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
401(k) 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:
<TABLE>
<CAPTION>
MARCH 31, 1995 MARCH 31, 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Reinsurance recoverable....................... $110,141 $110,141 $111,519 $111,519
</TABLE>
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 $0.9 million on the disposition of
this operation (including operating results for periods subsequent to March 31,
1996).
F-25
<PAGE> 356
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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................ 788
------
Net assets.................................................. $ 612
======
</TABLE>
The operating results of the computer software development subsidiary for
the period January 16, 1996 to March 31, 1996 were as follows (in thousands):
<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
by a sale of its stock is expected to be completed during the first quarter of
1997. ESIF expects to recognize an after tax loss of approximately $0.4 million
on the disposition of this subsidiary (including losses from operations
subsequent to March 31, 1996). 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>
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>
F-26
<PAGE> 357
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
WORKERS'
COMPENSATION INSURANCE INTERCOMPANY
TOTAL INSURANCE ADMINISTRATION ELIMINATION
-------- ------------ -------------- ------------
(IN THOUSANDS)
<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.
21. RELATED PARTY TRANSACTIONS
As more fully described in Note 5, ESIF has entered into office premises
lease agreements with certain Trustees of ESIF.
As more fully described in Note 6, ESIF has entered into reinsurance
agreements with an insurance company in which a Trustee of ESIF has an ownership
interest.
As more fully described in Note 14, to comply with requirements of the
Florida DOI, SHC's president and chief executive officer has personally
indemnified ESIF up to a maximum of $5.0 million for certain loss, injury, or
damage to ESIF, if any, which may result from the acquisition of SHC.
Entities in which SHC's president and chief executive officer held
ownership interests have provided certain transportation related services to
SHC. Fees paid by SHC to these entities aggregate approximately $0.08 million
and $0.4 million for the years ended March 31, 1995 and 1996, respectively.
SHC's president and chief executive officer is also a member of the Board
of Directors of Florida Retail Federation (the "Association"), which is the
sponsoring trade association for Florida Retail Federation Self Insurers Fund
("FRF"), one of the group self-insurance funds administered by SHC. The
Association, as the fund sponsor, is entitled to a fee equal to 1% of FRF's
premiums earned in each year, and SHC is obligated to pay such fee out of the
administrative fee it receives from FRF. During the fiscal years ended March 31,
1994, 1995 and 1996, SHC paid approximately $1.0 million, $1.0 million and $0.9
million to the Association for such fees. During the years ended March 31, 1994,
1995 and 1996, FRF paid to SHC fees for administrative services of approximately
$32.7 million, $30.5 million and $27.7 million, respectively.
F-27
<PAGE> 358
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 September 30, 1996,
and the related consolidated statements of income, changes in equity, and cash
flows for the six months 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, consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and its
subsidiaries at September 30, 1996, and the results of their operations and
their cash flows for the six months then ended, in conformity with generally
accepted accounting principles.
The accompanying financial statements for 1995 were not audited by us and,
accordingly, we do not express an opinion on them.
ERNST & YOUNG LLP
Jacksonville, Florida
November 21, 1996
F-28
<PAGE> 359
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1995 1996
-------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
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
-------- --------
Total invested assets............................. 226,623 206,218
Cash and cash equivalents................................... 4,665 7,055
Premiums receivable (net of $2,000 and $2,000 allowance for
doubtful accounts, respectively).......................... 78,229 67,179
Accounts receivable......................................... -- 3,102
Reinsurance recoverable, including $8,000 and $10,000 at
September 30, 1995 and September 30, 1996, respectively,
from related party reinsurers............................. 107,451 103,861
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...................................... -- 2,215
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 1,200
Net assets of healthcare subsidiary, held for disposition... -- 2,862
Net assets of discontinued operations....................... -- 678
-------- --------
Total assets...................................... $456,012 $502,167
======== ========
LIABILITIES AND EQUITY
Liabilities:
Loss and loss adjustment expenses......................... $364,210 $378,196
Debt...................................................... -- 36,500
Unearned premium and unallocated policyholder
remittances............................................ 51,208 46,000
Accounts payable and accrued expenses..................... 7,100 10,389
Taxes, licenses and fees.................................. 2,076 1,471
Deferred revenue.......................................... 34 4,618
Federal income taxes payable.............................. 297 --
-------- --------
Total liabilities................................. 424,925 477,174
Equity:
Retained earnings......................................... 26,848 24,045
Net unrealized appreciation (depreciation) on
available-for-sale securities.......................... 4,239 948
-------- --------
Total equity...................................... 31,087 24,993
-------- --------
Total liabilities and equity...................... $456,012 $502,167
======== ========
</TABLE>
See accompanying notes.
F-29
<PAGE> 360
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
(including administrative service fees paid to Summit
Holding Corporation of $12,573 for the six months ended
September 30, 1995).................................... 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 in
1996).................................................. -- (412)
Loss from disposition (net of income tax benefit of $289
in 1996)............................................... -- (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 in 1996).................................. -- (375)
------- -------
Net income.................................................. $ 5,374 $ 2,386
======= =======
</TABLE>
See accompanying notes.
F-30
<PAGE> 361
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION) OF
AVAILABLE-FOR-SALE
RETAINED SECURITY
EARNINGS INVESTMENTS TOTAL
-------- ------------------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at March 31, 1995 (unaudited)....................... $21,474 $(1,409) $20,065
Net income (unaudited)...................................... 5,374 -- 5,374
Change in net unrealized investment gains (unaudited)....... -- 5,648 5,648
------- ------- -------
Balance at September 30, 1995 (unaudited)................... $26,848 $ 4,239 $31,087
======= ======= =======
Balance at March 31, 1996................................... $21,659 $ 1,495 $23,154
Net income.................................................. 2,386 -- 2,386
Change in net unrealized investment gains................... -- (547) (547)
------- ------- -------
Balance at September 30, 1996............................... $24,045 $ 948 $24,993
======= ======= =======
</TABLE>
See accompanying notes.
F-31
<PAGE> 362
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)
Decrease in discontinued operations....................... -- 24
Decrease in loss and loss adjustment expense.............. (3,182) (13,661)
Increase in unearned premium and 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 (1,781)
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 (2,976)
Beginning cash and cash equivalents......................... 2,984 10,702
--------- ---------
Ending cash and cash equivalents
Continuing operations..................................... 4,665 7,055
Operations held for disposition........................... -- 556
Discontinued operations................................... -- 115
--------- ---------
Total ending cash and cash equivalents............ $ 4,665 $ 7,726
========= =========
</TABLE>
See accompanying notes.
F-32
<PAGE> 363
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 (UNAUDITED) AND SEPTEMBER 30, 1996
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Employers Self Insurers Fund ("ESIF") is domiciled in Florida as a
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 ("Florida DOI").
ESIF was formed in 1978 for the stated purpose of providing statutory
workers' compensation coverage for certain Florida employers. ESIF's wholly
owned subsidiary, Employers Safety Group Association, Inc. ("ESGA"), is a trade
association primarily for employers in the construction, manufacturing,
wholesale and retail, and service industries and any employer that is a member
of ESGA may obtain coverage from ESIF. An indemnity agreement issued by ESIF
indemnifies the member employee against loss or liability relating to workers'
compensation insurance risk. Any employer that obtains workers' compensation
coverage from ESIF automatically becomes a member of ESIF with certain rights,
including the right to vote for the election of ESIF's Trustees, the right to
receive any distribution of profits that may be authorized by the Trustees and
the right to participate in the distribution of the surplus of ESIF in the event
of its liquidation. However, all members of ESIF are subject to joint and
several liability for the obligations of ESIF. ESIF has historically not been
operated for the purpose of generating profits, but it has retained a portion of
its earnings and profits to pay its obligations and avoid making assessments
against its members. ESIF has occasionally during its operating history paid a
distribution of profits to its members, but it has never made an assessment
against its members.
ESIF is a trust with a Board comprised of six Trustees, but no employees or
officers. ESIF's bylaws specifically direct the Board to engage an
administrator, and ESIF's administrator since its inception has been Summit
Consulting, Inc. ("SCI"). SCI performs all daily operational activities for
ESIF, including premium and claims processing, pursuant to a written agreement.
SCI also performs similar functions for four other group self-insurance funds
located in Florida, Louisiana and Kentucky.
SCI owns several subsidiaries formed to assist it in providing specialized
administrative services, and SCI is wholly owned by a holding company, Summit
Holding Corporation ("SHC"). Effective January 16, 1996, ESIF purchased all of
the outstanding stock of SHC (see Note 14 for a further discussion of this
acquisition). In addition to SHC and its subsidiaries, ESIF also owns a
reinsurance subsidiary, U.S. Employers Insurance, Inc. ("USEI").
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. In such transaction, ESIF will become
wholly owned by a newly formed holding company and ESIF's members will receive
preferred stock of the holding company in exchange for their membership
interests.
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.
The financial statements as of September 30, 1995 and for the six months
then ended are unaudited. In the opinion of management, these unaudited
financial statements have been prepared in accordance with generally accepted
accounting principles and all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation have been included.
F-33
<PAGE> 364
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 unearned premiums established for the unexpired
portion of the premiums applicable to those policies. For retrospectively rated
policies, the ultimate premium for a period is determined on the basis of the
insured's actual losses for that period. If the actual losses are less than
expected, ESIF may be required to refund a portion of the premiums previously
paid. ESIF considers loss development experience through the date of the
financial statements in estimating the ultimate premium and, as adjustments to
premiums become necessary as a result of loss development, such adjustments are
included in current operations.
Administrative fee revenue is recognized in proportion to the recognition
of earned premiums 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. Fees for administrative 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 premiums of the contract.
Income Taxes
Income taxes have been provided using the liability method in accordance
with Financial Accounting Standards Board ("FASB") Statement No. 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 No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Statement No. 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, the 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.
F-34
<PAGE> 365
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- 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") 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.
Such reserve is established by management based upon: (i) results of actuarial
reviews which incorporate ESIF'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. Such reserve 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 and $4.2 million at September 30, 1995 and 1996,
respectively.
Prior to the January 16, 1996 acquisition of SHC, certain unallocated LAE
of ESIF were provided by SHC under the administrative agreement between ESIF and
SHC. Subsequent to the acquisition, ESIF has included the liability for such
unallocated LAE in the loss and LAE liability.
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 funds from solvent
self-insurance funds to cover certain losses to policyholders of insolvent
self-insurance funds, after assessment of such policyholders of the insolvent
funds. This type of guaranty fund is separate from the Florida Special
Disability Trust Fund (the "SDTF"), which is designed to pay insurers for
certain benefits paid to previously injured workers, as discussed in Note 13.
F-35
<PAGE> 366
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Florida law limits the assessment to a maximum of 2% of direct written
premiums annually, but 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 September 30, 1996, ESIF was not able to
reasonably estimate 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 six
months ended September 30, 1995 and 1996 were $0.8 million and $0.7 million,
respectively. Such assessments are credited against ESIF'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 allows the Company to write policies only in the State of
Florida. Therefore, all of ESIF's premium revenues for the six months ended
September 30, 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 amount 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.
As further described in Note 6, ESIF has significant amounts of reinsurance
recoverables as a result of ceding reinsurance under specific and aggregate
reinsurance treaties.
Intangible Assets
Cost in excess of net assets of businesses acquired totaling $49.0 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.
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.
At the balance sheet date, ESIF evaluates the recoverability of the cost in
excess of net assets acquired and the cost associated with customer listings
through a comparison of forecasted undiscounted cash flows of SHC and the
remaining asset balances.
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.
F-36
<PAGE> 367
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AT SEPTEMBER 30, 1995 (UNAUDITED)
U.S. Treasury and government agencies....... $ 61,796 $1,047 $ 125 $ 62,718
States and political subdivisions........... 66,216 1,346 345 67,217
Industrial and miscellaneous................ 29,277 405 520 29,162
Mortgage-backed securities:
U.S. government agencies................. 31,057 1,120 11 32,166
-------- ------ ------ --------
Total debt securities available-for-sale...... $188,346 $3,918 $1,001 $191,263
======== ====== ====== ========
AT SEPTEMBER 30, 1996
U.S. Treasury............................... $ 49,286 $ 214 $ 875 $ 48,625
States and political subdivisions........... 67,799 950 401 68,348
Industrial and miscellaneous................ 42,875 566 535 42,906
Mortgage-backed securities:
U.S. government agencies................. 13,603 134 196 13,541
-------- ------ ------ --------
Total debt securities available-for-sale...... $173,563 $1,864 $2,007 $173,420
======== ====== ====== ========
</TABLE>
The amortized cost and estimated fair value of debt securities at September
30, 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.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less............................................... $ 3,005 $ 3,008
After one through five.................................... 62,368 62,316
After five through ten.................................... 78,234 77,983
After ten................................................. 16,353 16,572
-------- --------
159,960 159,879
Mortgage-backed securities................................ 13,603 13,541
-------- --------
Total....................................................... $173,563 $173,420
======== ========
</TABLE>
Proceeds from the sales of investments in debt securities during the six
months ending September 30, 1996 were $45.8 million. Gross gains of $0.3 million
and gross losses of $0.7 million were realized on those sales. Proceeds from the
sales of investments in debt securities during the six months ending September
30, 1995 were $83.5 million. No gains or losses were realized on those sales.
F-37
<PAGE> 368
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 SEPTEMBER 30, 1995 (UNAUDITED)
Preferred stocks.............................. $ 2,890 $ 71 $ 5 $ 2,956
Common stocks................................. 13,387 1,958 117 15,228
------- ------ ---- -------
Total........................................... $16,277 $2,029 $122 $18,184
======= ====== ==== =======
AT SEPTEMBER 30, 1996
Preferred stocks.............................. $ 3,759 $ 53 $ 25 $ 3,787
Common stocks................................. 10,663 1,844 209 12,298
------- ------ ---- -------
Total........................................... $14,422 $1,897 $234 $16,085
======= ====== ==== =======
</TABLE>
Major categories of ESIF's investment income are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------
1995 1996
----------- ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Income:
Bonds..................................................... $6,585 $5,159
Preferred stocks.......................................... 79 133
Common stocks............................................. 181 145
Short-term investments and cash........................... 753 926
------ ------
Net investment income....................................... $7,598 $6,363
====== ======
</TABLE>
The Florida DOI requires cash and investments to be held in trust for the
Florida DOI for 10% of statutory basis loss reserves and the 1986-1995 fund
years aggregate reserve plans. The aggregate plans approved by the Florida 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 September 30, 1995 and 1996, the amount
in trust is approximately $61.0 million and $52.0 million, respectively.
F-38
<PAGE> 369
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
The major components of equipment and software at September 30, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
Furniture, fixtures and equipment........................... $ 914
Data processing equipment................................... 757
Airplane.................................................... 968
Leasehold improvements...................................... 122
Software.................................................... 189
Automobiles................................................. 24
------
2,974
Less accumulated depreciation............................... 616
------
$2,358
======
</TABLE>
Depreciation expense for the period ended September 30, 1996 was $0.4
million. Substantially all equipment and software was acquired in the January
1996 acquisition of SHC.
4. INTANGIBLES
The majority of the 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 September 30, 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............................... 3,241
-------
$60,069
=======
</TABLE>
5. LEASES
SHC leases office premises and automobiles under noncancelable 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-39
<PAGE> 370
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual payments at September 30, 1996 for all noncancelable
leases are (in thousands):
<TABLE>
<S> <C>
Six Months Ended March 31:
1997...................................................... $ 903
Years Ended March 31:
1998...................................................... 1,578
1999...................................................... 1,547
2000...................................................... 1,180
2001...................................................... 103
------
Total minimum future lease payments......................... 5,311
Income from subleases....................................... (118)
------
Net minimum future lease payments........................... $5,193
======
</TABLE>
In excess of 80% of the future lease commitments relates to rented office
premises from certain trustees of ESIF.
Rental expense for the six months ended September 30, 1996 for operating
leases totaled $0.9 million.
F-40
<PAGE> 371
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. REINSURANCE
In accordance with general practice in the insurance industry, the ESIF's
insurance subsidiaries are engaged in reinsurance transactions to cede risk to
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 retained by ESIF or its Subsidiaries on any one occurrence is
$500,000 with a $750,000 deductible in the six months ended September 30, 1995
and $500,000 with a $500,000 deductible in the six months ended September 30,
1996. Reinsurance agreements are in force with certain maximum limits, as well
as excess of loss reinsurance agreements.
SPECIFIC REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL
YEAR SPECIFIC
ENDED SPECIFIC OCCURRENCE
MARCH 31, CARRIER ATTACHMENT LIMIT
- --------- ------- ---------- ----------
<S> <C> <C> <C>
1982 INA $ 100 $ 2,000
Employers Re 2,100 3,000
1983 INA 125 2,000
Employers Re 2,125 3,000
1984 Employers Re 125 2,000
INA 2,125 Statutory
1985 Employers Re 125 2,000
INA 2,125 Statutory
1986 Employers Re 225 20,000
1987 Safety Mutual(1) 1,000 5,000
Old Republic(2) 1,000 1,000
National Union(2) 2,000 8,000
1988 Old Republic 1,000 5,000
1989 Old Republic 1,000 5,000
1990 Transamerica 1,000 15,000
1991 Transamerica 1,000 15,000
1992 Transamerica 1,000 25,000
1993 Transamerica 1,000 25,000
1994 Lloyd's 500 500
Transamerica 1,000 Statutory
1995 Lloyd's 500 500
Continental Casualty 1,000 Statutory
1996 Federal Insurance Co. 500 500
Federal Insurance Co. 1,000 1,000
Continental Casualty 2,000 Statutory
1997 Lloyd's 500 1,500
National Union 2,000 Statutory
</TABLE>
- ---------------
(1) 4/1/86-5/31/86
(2) 6/1/86-3/31/87
F-41
<PAGE> 372
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AGGREGATE REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL
YEAR
ENDED AGGREGATE AGGREGATE
MARCH 31 CARRIER ATTACHMENT LIMIT
- -------- ------- ---------- ---------
<S> <C> <C> <C>
1982 INA $11,542 $ 2,000
Employers Re 13,542 3,000
INA 16,542 Statutory
1983 INA 11,365 2,000
Employers Re 13,365 3,000
INA 16,365 Statutory
1984 Employers Re 14,341 2,000
INA 16,341 Statutory
1985 Employers Re 17,814 3,000
INA 20,814 Statutory
1986 Employers Re 40,091 301
1987 N/A N/A N/A
1988 N/A N/A N/A
1989 Crossroads 90,648 19,000
1990 Crossroads 110,973 25,000
1991 Crossroads 130,726 31,000
1992 Crossroads 113,015 31,000
1993 Crossroads 141,956 33,401
1994 Crossroads 146,016 34,357
1995 Crossroads 133,800 31,482
1996 Crossroads 115,970 27,287
1997 N/A N/A N/A
</TABLE>
Insurance premiums for the six months ended September 30, 1995 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Direct premiums earned...................................... $66,351 $52,402
Reinsurance ceded........................................... 3,206 3,373
------- -------
Net premiums earned......................................... $63,145 $49,029
======= =======
</TABLE>
<TABLE>
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross premiums written...................................... $124,643 $107,274
Ceded premiums written...................................... 6,820 4,096
-------- --------
Net premiums written........................................ $117,823 $103,178
======== ========
</TABLE>
F-42
<PAGE> 373
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Losses and LAE incurred for the six months ended September 30, 1995 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Direct losses and LAE....................................... $42,435 $36,122
Reinsurance ceded........................................... 70 3,987
------- -------
Net losses and LAE incurred................................. $42,365 $32,135
======= =======
</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 six months ended September 30,
1996, premiums of $-0-, losses and LAE of $1.9 million, are attributable to
reinsurance agreements with Crossroads a Bermuda domiciled insurance company,
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, 1993, 1994 and 1995 is also ceded to
Crossroads. At September 30, 1995 and 1996 loss and LAE reserves recoverable of
approximately $8.0 million and $10.0 million, respectively (net of amounts
retroceded to USEI), are attributable to excess reinsurance agreements with
Crossroads. For the fiscal years 1986, 1987, 1990, 1991 and 1992, effective
aggregate excess reinsurance is not currently in place because these years have
been self-funded or because the coverages have expired. Exposure to significant
adverse development for these years is considered minimal due to the maturity of
the loss development for these years.
In the six months ended September 30, 1995 and 1996, ESIF did not commute
any ceded reinsurance nor did it enter into or engage in any loss portfolio
transfers.
ESIF remains obligated for amounts ceded in the event that the reinsurers
do not meet their obligations.
ESIF's reinsurance recoverable asset at September 30, 1996 is comprised of
amounts related to reinsurance agreements with the following companies (in
thousands):
<TABLE>
<CAPTION>
PAID UNPAID
REINSURANCE CARRIER CLAIMS CLAIMS TOTAL
------------------- ------ -------- --------
<S> <C> <C> <C>
American Re.............................................. $ -- $ 380 $ 380
Cayzer Steel............................................. 2 -- 2
Cigna.................................................... 189 -- 189
Continental Casualty..................................... -- 9,245 9,245
Crossroads............................................... 653 10,305 10,958
Employers Re............................................. 505 6,406 6,911
Federal Ins. Co.......................................... -- 8,417 8,417
INA...................................................... -- 5,156 5,156
Lloyds of London......................................... -- 14,595 14,595
National Union........................................... -- 1,590 1,590
Old Republic............................................. 37 15,172 15,209
Transamerica............................................. 25 31,185 31,210
------ -------- --------
Total.......................................... $1,411 $102,451 $103,862
====== ======== ========
</TABLE>
F-43
<PAGE> 374
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All of the recoverable amounts related to paid claims have been outstanding
less than ninety days at the balance sheet date. The reinsurance recoverable
amounts related to unpaid claims are calculated considering the provisions of
the specific and aggregate reinsurance agreements and using ultimate losses by
accident year consistent with the reported loss and LAE liabilities.
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.
Federal income taxes of $6.9 million and $12.2 million for the years ended
March 31, 1995 and 1996, respectively, would be subject to recovery in the event
that the Company incurs net operating losses within three years of the years for
which such taxes were paid. State taxes paid was $0.8 million and $0.7 million
for the six months ended September 30, 1995 and 1996, respectively.
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.
Significant components of the ESIF's deferred tax liabilities and assets as
of September 30, as calculated in accordance with FASB Statement No. 109 are as
follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Unrealized investment gains............................... $ 641 $ 572
Special Disability Trust Fund recoverables................ 177 283
Intangible assets......................................... -- 3,124
Other..................................................... -- 209
------- -------
Total deferred tax liabilities.............................. 818 4,188
Deferred tax assets:
Discount on loss and LAE reserves......................... 16,207 19,780
Unallocated remittances................................... 1,372 1,101
Uncollectible premiums.................................... 753 753
------- -------
18,332 21,634
Valuation allowance for deferred tax assets............... -- --
------- -------
Total deferred tax assets................................... 18,332 21,634
------- -------
Net deferred tax assets..................................... $17,514 $17,446
======= =======
</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
F-44
<PAGE> 375
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 September 30,
is summarized as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current..................................................... $ 297 $ (6,234)
Deferred.................................................... (17,514) (17,446)
-------- --------
Total net asset............................................. $(17,217) $(23,680)
======== ========
</TABLE>
Significant components of the provision for income taxes for the six months
ended September 30, attributable to continuing operations are as follows:
<TABLE>
<CAPTION>
1995 1996
------ -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current tax expense......................................... $2,292 $ 3,213
Deferred taxes (benefit).................................... 98 (813)
------ -------
Total income tax expense on income.......................... $2,390 $ 2,400
====== =======
</TABLE>
Income taxes paid by ESIF totaled $6.4 million and $3.3 million for the six
months ended September 30, 1995 and 1996, respectively.
The reconciliation of income tax expense for the six months ended September
30, attributable to continuing operations computed at the U.S. federal statutory
tax rate of 35%, to income tax expense is as follows:
<TABLE>
<CAPTION>
1995 1996
------ -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Income tax (at 35% of pretax income or loss)................ $2,717 $ 2,118
Tax-exempt investment income................................ (588) (575)
Non taxable/deductible expenses............................. 22 40
Goodwill amortization....................................... -- 291
State income taxes.......................................... 484 448
Other items, net............................................ (245) 78
------ -------
Provision for federal income tax expense.................... $2,390 $ 2,400
====== =======
</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.
F-45
<PAGE> 376
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides a reconciliation of the beginning and ending
reserve balances for losses and LAE for the six months ended September 30, 1995
and 1996:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Loss & LAE Reserves, beginning of period -- GAAP
basis........................................... $ 367,391 $ 387,632
Less: Reinsurance recoverables (exclusive of
recoverables on paid losses)................ (108,440) (107,092)
--------- ---------
258,951 280,540
Less: Recoverable from Florida SDTF............... (15,879) (20,060)
--------- ---------
Net reserves for losses and LAE at beginning of
year............................................ 243,072 260,480
Add provision for claims occurring in:
The current year................................ 42,198 35,663
Prior years..................................... 167 (3,528)
--------- ---------
Incurred losses during the current year........... 42,305 32,135
Deduct payments for claims occurring in:
The current year................................ 3,753 3,565
Prior years..................................... 41,200 34,443
--------- ---------
Claim payments during the current year............ 44,953 38,008
--------- ---------
Net reserves for losses and LAE at end of year.... 240,484 254,607
Add: Impact of reinsurance for FASB 113........... 105,951 102,451
Recoverable from SDTF............................. 17,775 21,138
--------- ---------
Gross reserves for losses and LAE at end of
period (GAAP basis)....................... $ 364,210 $ 378,196
========= =========
</TABLE>
The foregoing reconciliation also shows that a $3.5 million reserve
redundancy emerged during the six month period ended September 30, 1996. This
amount represents the release of certain loss reserves previously carried which
were determined, based on comparisons to actuarially projected amounts, to be
redundant.
Statutory basis loss reserves were determined using paid loss data net of
historic SDTF recoveries; GAAP basis loss reserves were determined using paid
loss data gross of SDTF recoveries. This adjustment increased loss reserves by
$27.9 million and $28.8 million at September 30, 1995 and 1996, respectively,
and increased reinsurance recoverables by $10.6 million and $8.4 million at
September 30, 1995 and 1996, respectively. In addition, ESIF has recorded, as an
asset, amounts recoverable from the SDTF based upon ESIF's historical collection
experience and the amount of claims identified as subject to SDTF recovery. The
recoverable amount recorded at September 30, 1995 and 1996 was $17.8 million and
$21.1 million, respectively.
In order to quantify the amounts recoverable from the SDTF, ESIF reviews
its claims that have been identified as subject to SDTF recovery considering
ESIF's historical recovery experience on claims submitted to the SDTF. In
addition, ESIF estimates the amount of claims it expects to recover over the
next four years based on actual collection experience for the most recent two
years, and discounts the expected recoveries using an appropriate interest rate.
The amounts reflected as recoverables from the SDTF were based on the discounted
expected collection amounts rather than on the total claims identified as
subject to SDTF recovery. Accordingly, there is an implicit valuation allowance
of approximately $8.0 million reflected in the recorded SDTF recoverable
amounts.
F-46
<PAGE> 377
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAE assumed in the acquisition of SHC represents unallocated LAE reserves
established by ESIF that were, prior to the acquisition, provided by SHC under
the administrator's contract between ESIF and SHC.
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>
SEPTEMBER 30,
-----------------
1995 1996
------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Accrued retrospective premium............................... $43,440 $23,990
</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 surplus
or profits and limit the amount of certain investments to specified percentages
of statutory admitted assets. At September 30, 1996, under regulations
applicable to stock property and casualty insurance companies, $2.0 million of
ESIF's statutory net assets of $20.4 million can be transferred from the
insurance entities without regulatory approval.
Equity and net income as determined in accordance with statutory accounting
practices for self-insurance funds as of and for the six months ended September
30, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, EQUITY NET INCOME
------------- ------- ----------
(IN THOUSANDS)
<S> <C> <C>
1995 (unaudited)............................................ $49,738 $3,076
1996........................................................ 20,465 4,824
</TABLE>
As a self-insurance fund, ESIF recorded for statutory reporting an asset of
$46.9 million at September 30, 1996 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 $4.2 million at September 30, 1996.
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 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 will maintain statutory basis equity in excess of
the amount required by Florida law.
F-47
<PAGE> 378
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. SDTF
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 SDTF's
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. If
the SDTF is discontinued, ESIF believes that the existing reimbursement
obligations of the SDTF would become general obligations of the State of
Florida, although there is no assurance that a reviewing court would adopt that
view. The SDTF has made no acknowledgement with regard to the enforceability of
its reimbursement obligations to insurers such as ESIF.
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.
ESIF has recorded an SDTF recoverable of $17.8 million and $21.1 million at
September 30, 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 six months ended September 30, 1995 and
1996 were $2.2 million and $4.3 million, respectively. Assessments paid by ESIF
to the SDTF were $5.0 million and $2.5 million for the six months ended
September 30, 1995 and 1996, respectively.
ESIF has not recorded a liability for future assessments from SDTF. Such
future assessments will be based on future premium amounts.
13. ACQUISITION OF SHC
On January 16, 1996, ESIF and its subsidiaries purchased all of the
outstanding capital stock of SHC. The purchase price consisted of $26.0 million
paid in cash from the Company, $11.5 million in cash distributed by Summit and
$44.0 million in assumption of debt by SHC (see Note 14). 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
F-48
<PAGE> 379
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 pro forma information as of the six months ended
September 30, 1995 presents the consolidated results of operations of ESIF and
SHC as if the acquisition had been effective at April 1, 1995 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 (in thousands):
<TABLE>
<S> <C>
Total revenues.............................................. $91,226
Income before income tax expense............................ 9,732
Net income.................................................. 6,573
</TABLE>
To comply with requirements of the Florida DOI, SHC's chairman has
personally indemnified ESIF up to a maximum of $5.0 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.
14. NOTES PAYABLE
In connection with the purchase of SHC by ESIF, SHC utilized a bank term
loan with rates based on LIBOR plus 3%. The balance as of September 30, 1996 for
SHC was $34.5 million. Also, a revolving bank credit facility with rates
approximating the prime rate was entered into as part of the agreement. The
balance as of September 30, 1996 for SHC for this agreement was $2.0 million.
Interest expense incurred as of September 30, 1996 was $1.7 million.
Subsequent to September 30, 1996, the term loan and revolving credit
facility agreements were amended.
Maturities for the combined term loan and revolving credit facility (as
amended) are as follows:
<TABLE>
<CAPTION>
REDUCTION IN THE
TERM AVAILABILITY OF THE
LOAN REVOLVING CREDIT FACILITY
------- -------------------------
(IN THOUSANDS)
<S> <C> <C>
For the Six Months Ending March 31:
1997.......................................... $ 1,825 $ --
For the Years Ending March 31:
1998.......................................... 2,300 --
1999.......................................... 3,925 --
2000.......................................... 5,500 --
2001.......................................... 9,500 1,500
Thereafter.................................... 11,450 3,500
------- -------
$34,500 $5,000
======= =======
</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.
F-49
<PAGE> 380
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. EMPLOYEE BENEFIT PLANS
ESIF's subsidiary, SHC, has a deferred savings and profit-sharing plan (the
"401(k)") covering substantially all employees. Under the 401(k), 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 401(k)
totaled $0.2 million for the period April 1, 1996 to September 30, 1996.
16. 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 $36.5 million of notes payable at
September 30, 1996 that approximates its fair value.
ESIF's fair value of reinsurance recoverable approximates its carrying
value for September 30, 1995 and 1996, respectively, as summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Reinsurance recoverable....................... $107,451 $107,451 $103,861 $103,861
</TABLE>
17. DISCONTINUED OPERATIONS
Effective July 31, 1996, ESIF decided to discontinue its computer software
development. 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 has recognized an after tax loss of
approximately $0.5 million on the disposition of this operation (including
estimated operating losses to the disposition date).
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
September 30, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
Assets:
Cash and equivalents...................................... $115
Equipment................................................. 396
Other assets.............................................. 164
Software.................................................. 67
----
Total assets................................................ 742
Liabilities:
Accounts payable and operating liabilities................ 64
----
Net assets.................................................. $678
====
</TABLE>
F-50
<PAGE> 381
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The operating results of the computer software development operations for
the six month period ended September 30, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
Revenue..................................................... $ 839
Expenses.................................................... 1,463
------
Loss before income taxes.................................... (624)
Income tax (benefit)........................................ (212)
------
Net loss.................................................... $ (412)
======
</TABLE>
18. 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
by a sale of its stock is expected to be completed during the first quarter of
1997. 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 September 30, 1996 (in thousands):
<TABLE>
<S> <C>
Assets:
Cash and equivalents...................................... $ 556
Equipment................................................. 143
Other Assets.............................................. 2,306
------
Total Assets................................................ 3,005
Liabilities:
Accounts payable and operating liabilities................ 143
------
Net Assets.................................................. $2,862
======
</TABLE>
The operating results for the healthcare subsidiary (including a $0.2
million pre-tax provision for loss on disposition) for the six month period
ending September 30, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
Revenue..................................................... $ 80
Expenses.................................................... 703
-----
Loss before income taxes.................................... (623)
Income benefit.............................................. (212)
-----
Net loss.................................................... $(411)
=====
</TABLE>
19. 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:
<TABLE>
<CAPTION>
WORKERS'
COMPENSATION INSURANCE INTERCOMPANY
TOTAL INSURANCE ADMINISTRATION ELIMINATION
-------- ------------ -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Six Months Ended September 30, 1995
(unaudited):
Revenues............................. $ 71,752 $ 71,752 -- --
Income before income taxes........... 7,764 7,764 -- --
Identifiable assets.................. 456,012 456,012 -- --
Six Months Ended September 30, 1996:
Revenues............................. 73,048 54,667 $28,891 $(10,510)
Income before from continuing
operations before income taxes.... 6,051 7,528 $(1,477) --
Identifiable assets.................. $498,085 $498,085 -- --
</TABLE>
Depreciation expense and capital expenditures are not considered material.
F-51
<PAGE> 382
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The preceding financial information does not include the computer software
operations which are presented as discontinued operations in the accompanying
financial statements.
20. EXTRAORDINARY CHARGE
During the six months ended September 30, 1996 ESIF incurred $0.6 million
of expenses directly related to its conversion from a group self-insurance fund
to a stock insurance company. These expenses are principally professional
service fees paid to attorneys, investment advisors, and accountants related to
obtaining regulatory approval for the conversion, advising the Board of Trustees
as to the fairness of the transaction and auditing ESIF's GAAP basis financial
statements. These costs, net of income tax benefits of $0.2 million, are
presented as an extraordinary charge on ESIF's Statement of Operations for the
six months ended September 30, 1996.
21. RELATED PARTY TRANSACTIONS
As more fully described in Note 5, ESIF has entered into office premises
lease agreements with certain Trustees of ESIF.
As more fully described in Note 6, ESIF has entered into reinsurance
agreements with an insurance company in which a Trustee of ESIF has an ownership
interest.
As more fully described in Note 14, to comply with requirements of the
Florida DOI, SHC's president and chief executive officer has personally
indemnified ESIF up to a maximum of $5.0 million for certain loss, injury, or
damage to ESIF, if any, which may result from the acquisition of SHC.
Entities in which SHC's president and chief executive officer held
ownership interests have provided certain transportation related services to
SHC. Fees paid by SHC to these entities aggregated approximately $0.4 million
and $0.02 million for the six months ended September 30, 1995 and 1996,
respectively.
SHC's president and chief executive officer is also a member of the Board
of Directors of Florida Retail Federation (the "Association") which is the
sponsoring trade association for Florida Retail Federation Self Insurers Fund
("FRF"), one of the group self-insurance funds administered by SHC. The
Association, as the fund sponsor, is entitled to a fee equal to 1% of FRF's
premiums earned in each year, and SHC is obligated to pay such fee out of the
administrative fee it receives from FRF. During the six months ended September
30, 1995 and 1996, SHC paid approximately $0.5 million and $0.4 million to the
Association for such fees. During the six months ended September 30, 1995 and
1996, FRF paid SHC fees for administrative services of approximately $14.2
million and $12.8 million, respectively.
F-52
<PAGE> 383
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Invested assets:
Fixed maturities, available-for-sale...................... $181,186 $184,682
Preferred stock........................................... 3,215 4,568
Common stock.............................................. 11,228 14,100
Short-term investments.................................... 36,344 14,536
-------- --------
Total invested assets............................. 231,973 217,886
Cash and cash equivalents................................... 4,448 7,433
Premiums receivable (net of $2,000 and $2,514 allowance for
doubtful accounts, respectively).......................... 48,922 39,828
Accounts receivable......................................... 668 3,184
Reinsurance recoverable, including $9,606 and $11,123 from
related party reinsurers, respectively.................... 112,734 107,058
Recoverable from Florida Special Disability Trust Fund...... 16,827 21,138
Accrued investment income................................... 3,050 3,036
Income taxes recoverable.................................... 2,123 --
Equipment and software...................................... -- 1,448
Capitalized computer software costs......................... -- 5,092
Value assigned to future administration of insurance
contracts................................................. -- 5,975
Unamortized debt acquisition costs.......................... -- 542
Excess of cost over net assets of business acquired......... -- 47,489
Deferred income taxes....................................... 17,150 15,656
Other assets................................................ 37 1,207
-------- --------
Total assets...................................... $437,932 $476,972
======== ========
LIABILITIES AND EQUITY
Liabilities:
Loss and loss adjustment expenses......................... $372,786 $376,923
Debt...................................................... -- 33,000
Unearned premium and unallocated policyholder
remittances............................................ 25,437 23,506
Accounts payable and accrued expenses..................... 7,018 11,229
Taxes, licenses and fees.................................. 1,453 620
Deferred revenue.......................................... -- 4,013
Federal income taxes payable.............................. -- 303
-------- --------
Total liabilities................................. 406,694 449,594
Equity:
Retained earnings......................................... 26,646 24,857
Net unrealized appreciation on available-for-sale
securities............................................. 4,592 2,521
-------- --------
Total equity...................................... 31,238 27,378
-------- --------
Total liabilities and equity...................... $437,932 $476,972
======== ========
</TABLE>
See accompanying notes.
F-53
<PAGE> 384
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Revenue:
Premiums earned........................................... $ 89,713 $ 74,509
Net investment income..................................... 10,522 9,606
Realized investment gains................................. 2,726 366
Administrative fees....................................... -- 25,762
Other income.............................................. 125 568
-------- --------
Total revenue..................................... 103,086 110,811
Losses and expenses:
Losses and loss adjustment expenses....................... 67,043 50,236
Other underwriting, general and administrative expenses
(including administrative service fees paid to Summit
Holding Corporation of $18,802 for the nine months
ended December 31, 1995)............................... 28,548 45,837
Amortization and depreciation............................. -- 3,729
Interest expense.......................................... -- 2,719
-------- --------
Total losses and expenses......................... 95,591 102,521
-------- --------
Income from continuing operations before income taxes....... 7,495 8,290
Income tax expense.......................................... 2,323 3,057
-------- --------
Income from continuing operations........................... 5,172 5,233
-------- --------
Discontinued operations:
Loss from operation (net of income tax benefit of $460 in
1996).................................................. -- (893)
Loss from disposition (net of income tax benefit of $184
in 1996)............................................... -- (357)
-------- --------
Loss from discontinued operations.................... -- (1,250)
-------- --------
Income before extraordinary charge.......................... 5,172 3,983
Extraordinary charge for conversion costs (net of income tax
benefit of $474 in 1996).................................. -- (785)
-------- --------
Net income.................................................. $ 5,172 $ 3,198
======== ========
</TABLE>
See accompanying notes.
F-54
<PAGE> 385
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
NINE MONTHS ENDED DECEMBER 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION) OF
AVAILABLE-FOR-
RETAINED SALE SECURITY
EARNINGS INVESTMENTS TOTAL
-------- ----------------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at March 31, 1995................................... $21,474 $(1,409) $20,065
Net income.................................................. 5,172 -- 5,172
Change in net unrealized investment gains................... -- 6,001 6,001
------- ------- -------
Balance at December 31, 1995................................ $26,646 $ 4,592 $31,238
======= ======= =======
Balance at March 31, 1996................................... $21,659 $ 1,495 $23,154
Net income.................................................. 3,198 -- 3,198
Change in net unrealized investment gains................... -- 1,026 1,026
------- ------- -------
Balance at December 31, 1996................................ $24,857 $ 2,521 $27,378
======= ======= =======
</TABLE>
See accompanying notes.
F-55
<PAGE> 386
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net income.................................................. $ 5,172 $ 3,198
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and depreciation............................. (427) 3,729
Amortization of bond premium/discount..................... 110
Net realized investment gains............................. (1,733) (366)
Gain on sale of equipment................................. (278)
Bad debt allowance........................................ -- 1,014
Decrease (increase) in premiums receivable................ 1,573 (2,749)
Increase in accounts receivable........................... (100) (26)
(Increase) decrease in reinsurance recoverable............ (2,428) 4,460
Increase in Special Disability Trust Fund recoverable..... (948) (1,078)
(Increase) decrease in accrued investment income.......... 360 (100)
(Increase) decrease in federal income tax recoverable..... (2,123) 9,690
Decrease in deferred income taxes......................... 1,950 699
Decrease in other assets.................................. 459 701
Decrease in discontinued operations....................... -- 588
Increase (decrease) in loss and loss adjustment
expenses............................................... 5,395 (10,709)
Increase in unearned premium and unallocated policyholder
remittances............................................ 7,202 8,872
Decrease in accounts payable and accrued expenses......... (5,671) (3,263)
Decrease in taxes, licenses, and fees..................... (407) (874)
Decrease in deferred revenue.............................. (2,531) (3,371)
Increase (decrease) in federal income taxes payable....... (4,878) 303
--------- --------
Net cash provided by operating activities................... 865 10,550
Investing activities:
Purchase of investments securities.......................... (253,732) (201,739)
Disposal and maturity of investment securities.............. 255,336 198,093
Purchase of equipment and software.......................... -- (518)
Proceeds from sale of equipment and software................ -- 1,345
--------- --------
Net cash provided by (used in) investing activities......... 1,604 (2,819)
Financing activities:
Decrease in notes payable................................... -- (11,000)
--------- --------
Net cash used in financing activities....................... -- (11,000)
--------- --------
Net increase (decrease) in cash and cash equivalents........ 2,469 (3,269)
Beginning cash and cash equivalents......................... 1,979 10,702
--------- --------
Ending cash and cash equivalents............................ $ 4,448 $ 7,433
========= ========
</TABLE>
See accompanying notes.
F-56
<PAGE> 387
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Employers Self Insurers Fund ("ESIF") is domiciled in Florida as a
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 ("Florida DOI").
ESIF was formed in 1978 for the stated purpose of providing statutory
workers' compensation coverage for certain Florida employers. ESIF's wholly
owned subsidiary, Employers Safety Group Association, Inc. ("ESGA"), is a trade
association primarily for employers in the construction, manufacturing,
wholesale and retail, and service industries, and any employer that is a member
of ESGA may obtain coverage from ESIF. An indemnity agreement issued by ESIF
indemnifies the member employee against loss or liability relating to workers'
compensation insurance risk. Any employer that obtains workers' compensation
coverage from ESIF automatically becomes a member of ESIF with certain rights,
including the right to vote for the election of ESIF's Trustees, the right to
receive any distribution of profits that may be authorized by the Trustees and
the right to participate in the distribution of the surplus of ESIF in the event
of its liquidation. However, all members of ESIF are subject to joint and
several liability for the obligations for ESIF. ESIF has historically not been
operated for the purpose of generating profits, but it has retained a portion of
its earnings and profits to pay its obligations and avoid making assessments
against its members. ESIF has occasionally during its operating history paid a
distribution of profits to its members, but it has never made an assessment
against its members.
ESIF is a trust with a Board comprised of six Trustees, but no employees or
officers. ESIF's bylaws specifically direct the Board to engage an
administrator, and ESIF's administrator since its inception has been Summit
Consulting, Inc. ("SCI"). SCI performs all daily operational activities for
ESIF, including premium and claims processing, pursuant to a written agreement.
SCI also performs similar functions for four other group self-insurance funds
located in Florida, Louisiana and Kentucky.
SCI owns several subsidiaries formed to assist it in providing specialized
administrative services, and SCI is wholly owned by a holding company, Summit
Holding Corporation ("SHC"). Effective January 16, 1996, ESIF purchased all of
the outstanding stock of SHC (see Note 13 for a further discussion of this
acquisition). In addition to SHC and its subsidiaries, ESIF also owns a
reinsurance subsidiary, U.S. Employers Insurance, Inc. ("USEI").
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. In such transaction, ESIF will become
wholly owned by a newly formed holding company and ESIF's members will receive
preferred stock of the holding company in exchange for their membership
interests.
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.
These financial statements as of December 31, 1995 and 1996 and for the
nine months then ended are unaudited. In the opinion of management, these
unaudited financial statements have been prepared in
F-57
<PAGE> 388
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
accordance with generally accepted accounting principles and all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair
presentation have been included.
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 unearned premiums established for the unexpired
portion of the premiums applicable to those policies. For retrospectively rated
policies, the ultimate premium for a period is determined on the basis of the
insured's actual losses for that period. If the actual losses are less than
expected, ESIF may be required to refund a portion of the premiums previously
paid. ESIF considers loss development experience through the date of the
financial statements in estimating the ultimate premium and, as adjustments to
premiums become necessary as a result of loss development, such adjustments are
included in current operations.
Administrative fee revenue is recognized in proportion to the recognition
of earned premiums 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. Fees for administrative 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 premiums of the contract.
Income Taxes
Income taxes have been provided using the liability method in accordance
with Financial Accounting Standards Board ("FASB") Statement No. 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 No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Statement No. 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.
F-58
<PAGE> 389
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 reflected as unrealized appreciation or depreciation directly in
equity, after applicable deferred 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") 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.
Such reserve is established by management based upon: (i) results of actuarial
reviews which incorporate ESIF'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. Such reserve 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 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 $4.6 million and $4.2 million at December 31, 1995 and 1996, respectively.
Prior to the January 16, 1996 acquisition of SHC, certain unallocated LAE
of ESIF were provided by SHC under the administrative agreement between ESIF and
SHC. Subsequent to the acquisition, ESIF has included the liability for such
unallocated LAE in the loss and LAE liability.
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.
F-59
<PAGE> 390
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 funds from solvent
self-insurance funds to cover certain losses to policyholders of insolvent
self-insurance funds, after assessment of such policyholders of the insolvent
funds. This type of guaranty fund is separate from the Florida Special
Disability Trust Fund (the "SDTF"), which is designed to pay insurers for
certain benefits paid to previously injured workers, as discussed in Note 12.
Florida law limits the assessment to a maximum of 2% of direct written
premiums annually, but 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 December 31, 1996, ESIF was not able to
reasonably estimate 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 nine
months ended December 31, 1995 and 1996 were $1.1 million and $1.0 million,
respectively. Such assessments are credited against ESIF'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 allows ESIF to write policies only in the State of Florida.
Therefore, all of ESIF's premium revenues for the nine months ended December 31,
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 amount of revenues 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.
As further described in Note 6, ESIF has significant amounts of reinsurance
recoverables as a result of ceding reinsurance under specific and aggregate
reinsurance treaties.
Intangible Assets
Cost in excess of net assets of businesses acquired totaling $49.0 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.
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.
At the balance sheet date, ESIF evaluates the recoverability of the cost in
excess of net assets acquired and the cost associated with customer listings
through a comparison of the forecasted undiscounted cash flows of SHC and the
remaining asset balances.
F-60
<PAGE> 391
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1995:
U.S. Treasury and government agencies....... $ 58,131 $1,805 $ 6 $ 59,930
States and political subdivisions........... 58,816 1,606 57 60,365
Industrial and miscellaneous................ 30,092 2,014 -- 32,106
Mortgage-backed securities:
U.S. government agencies................. 28,415 501 131 28,785
-------- ------ ------ --------
Total debt securities
available-for-sale................ $175,454 $5,926 $ 194 $181,186
======== ====== ====== ========
At December 31, 1996:
U.S. Treasury and government agencies....... $ 50,423 $ 335 $ 495 $ 50,263
States and political subdivisions........... 82,937 1,272 406 83,803
Industrial and miscellaneous................ 38,354 795 169 38,980
Mortgage-backed securities:
U.S. government agencies................. 10,902 193 91 11,004
Industrial and miscellaneous............. 619 13 -- 632
-------- ------ ------ --------
Total debt securities
available-for-sale................ $183,235 $2,608 $1,161 $184,682
======== ====== ====== ========
</TABLE>
The amortized cost and estimated fair value of debt securities at December
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-61
<PAGE> 392
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less............................................... $ 1,518 $ 1,513
After one through five.................................... 64,128 64,620
After five through ten.................................... 90,476 91,046
After ten................................................. 15,592 15,867
-------- --------
171,714 173,046
Mortgage-backed securities................................ 11,521 11,636
-------- --------
Total............................................. $183,235 $184,682
======== ========
</TABLE>
Proceeds from the sales of investments in debt securities during the nine
months ending December 31, 1995 were $135.4 million. Gross gains of $2.1 million
and gross losses of $0.4 million were realized on those sales. Proceeds from the
sales of investments in debt securities during the nine months ended December
31, 1996 were $66.8 million. Gross gains of $0.7 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 December 31, 1995:
Preferred stocks.............................. $ 3,106 $ 109 $ -- $ 3,215
Common stocks................................. 9,583 1,745 100 11,228
------- ------ ---- -------
Total................................. $12,689 $1,854 $100 $14,443
======= ====== ==== =======
At December 31, 1996:
Preferred stocks.............................. $ 4,452 $ 133 $ 17 $ 4,568
Common stocks................................. 11,620 2,718 238 14,100
------- ------ ---- -------
Total................................. $16,072 $2,851 $255 $18,668
======= ====== ==== =======
</TABLE>
Major categories of ESIF's investment income are summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
---------------------
1995 1996
----------- ------
(IN THOUSANDS)
<S> <C> <C>
Income:
Bonds..................................................... $ 8,945 $7,805
Preferred stocks.......................................... 133 205
Common stocks............................................. 246 229
Short-term investments and cash........................... 1,198 1,367
------- ------
Net investment income....................................... $10,522 $9,606
======= ======
</TABLE>
The Florida DOI requires cash and investments to be held in trust for the
Florida DOI for 10% of statutory basis loss reserves and the 1986-1995 fund
years aggregate reserve plans. The aggregate plans
F-62
<PAGE> 393
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
approved by the Florida 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 December 31, 1995
and 1996, the amount in trust is approximately $61.7 million and $52.7 million,
respectively.
3. PROPERTY AND EQUIPMENT
The major components of equipment and software at December 31, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
Furniture, fixtures and equipment........................... $ 987
Data processing equipment................................... 835
Leasehold improvements...................................... 103
Software.................................................... 163
Automobiles................................................. 13
------
2,101
Less accumulated depreciation............................... 653
------
$1,448
======
</TABLE>
Depreciation expense for the nine months ended December 31, 1996 was $0.6
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 December 31, 1996 (in
thousands):
<TABLE>
<S> <C>
Unamortized debt acquisition costs.......................... $ 757
Purchased software.......................................... 6,300
Goodwill.................................................... 49,702
Customer accounts and contracts............................. 6,608
-------
63,367
Less accumulated amortization............................... 4,269
-------
$59,098
=======
</TABLE>
5. LEASES
SHC leases office premises and automobiles under noncancelable 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-63
<PAGE> 394
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Future minimum annual payments at December 31, 1996 for all noncancelable
leases are (in thousands):
<TABLE>
<S> <C>
Three Months Ended March 31:
1997...................................................... $ 449
Years ended March 31:
1998...................................................... 1,581
1999...................................................... 1,547
2000...................................................... 1,180
2001...................................................... 103
------
Total minimum future lease payments......................... 4,860
Income from subleases....................................... (121)
------
Net minimum future lease payments........................... $4,739
======
</TABLE>
In excess of 80% of the future lease commitments relates to rented office
premises from certain trustees of ESIF.
Rental expense for the nine months ended December 31, 1996 for operating
leases totaled $1.3 million.
F-64
<PAGE> 395
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
6. REINSURANCE
In accordance with general practice in the insurance industry, ESIF and its
insurance subsidiaries are engaged in reinsurance transactions to cede risk to
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 retained by ESIF or its subsidiaries on any one occurrence is
$500,000 with a $750,000 deductible in the nine months ended December 31, 1995
and $500,000 with a $500,000 deductible in the nine months ended December 31,
1996. Reinsurance agreements are in force with certain maximum limits, as well
as excess of loss reinsurance agreements.
SPECIFIC REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR SPECIFIC
ENDED SPECIFIC OCCURRENCE
MARCH 31, CARRIER ATTACHMENT LIMIT
- ----------- ------- ---------- ----------
<C> <S> <C> <C>
1982 INA $ 100 $ 2,000
Employers Re 2,100 3,000
1983 INA 125 2,000
Employers Re 2,125 3,000
1984 Employers Re 125 2,000
INA 2,125 Statutory
1985 Employers Re 125 2,000
INA 2,125 Statutory
1986 Employers Re 225 20,000
1987 Safety Mutual(1) 1,000 5,000
Old Republic(2) 1,000 1,000
National Union(2) 2,000 8,000
1988 Old Republic 1,000 5,000
1989 Old Republic 1,000 5,000
1990 Transamerica 1,000 15,000
1991 Transamerica 1,000 15,000
1992 Transamerica 1,000 25,000
1993 Transamerica 1,000 25,000
1994 Lloyd's 500 500
Transamerica 1,000 Statutory
1995 Lloyd's 500 500
Continental Casualty 1,000 Statutory
1996 Federal Insurance Co. 500 500
Federal Insurance Co. 1,000 1,000
Continental Casualty 2,000 Statutory
1997 Lloyd's 500 1,500
National Union 2,000 Statutory
</TABLE>
- ---------------
(1) 4/1/86 -- 5/31/86
(2) 6/1/86 -- 3/31/87
F-65
<PAGE> 396
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
AGGREGATE REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL
YEAR
ENDED AGGREGATE AGGREGATE
MARCH 31, CARRIER ATTACHMENT LIMIT
- --------- ------- ---------- ----------
<C> <S> <C> <C>
1982 INA $ 1,542 $ 2,000
Employers Re 13,542 3,000
INA 16,542 Statutory
1983 INA 11,365 2,000
Employers Re 13,365 3,000
INA 16,365 Statutory
1984 Employers Re 14,341 2,000
INA 16,341 Statutory
1985 Employers Re 17,814 3,000
INA 20,814 Statutory
1986 Employers Re 40,091 301
1987 N/A N/A N/A
1988 N/A N/A N/A
1989 Crossroads 90,648 19,000
1990 Crossroads 110,975 25,000
1991 Crossroads 130,413 31,000
1992 Crossroads 111,548 31,000
1993 Crossroads 141,956 33,401
1994 Crossroads 146,016 34,357
1995 Crossroads 133,800 31,482
1996 Crossroads 115,178 27,287
1997 N/A N/A N/A
</TABLE>
Insurance premiums for the nine months ended December 31, 1995 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -------
(IN THOUSANDS)
<S> <C> <C>
Direct premiums earned...................................... $94,493 $79,201
Reinsurance ceded........................................... 4,780 4,692
------- -------
Net premiums earned......................................... $89,713 $74,509
======= =======
</TABLE>
<TABLE>
<CAPTION>
1995 1996
----------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross premiums written...................................... $120,442 $113,369
Ceded premiums written...................................... 6,317 5,060
-------- --------
Net premiums written........................................ $114,125 $108,309
======== ========
</TABLE>
F-66
<PAGE> 397
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Losses and LAE incurred for the nine months ended December 31, 1995 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -------
(IN THOUSANDS)
<S> <C> <C>
Direct losses and LAE....................................... $71,019 $59,298
Reinsurance ceded........................................... 3,976 9,062
------- -------
Net losses and LAE incurred................................. $67,043 $50,236
======= =======
</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 the nine months ended December
31, 1996, premiums of $-0-, and losses and LAE of $2.1 million, are attributable
to reinsurance agreements with Crossroads, a Bermuda domiciled insurance
company, 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, 1993, 1994 and 1995 is also
ceded to Crossroads. At December 31, 1995 and 1996 loss and LAE reserves
recoverable of approximately $9.6 million and $11.1 million, respectively (net
of amounts retroceded to USEI), are attributable to excess reinsurance
agreements with Crossroads. For the fiscal years 1986, 1987, 1988, 1990, 1991
and 1992, effective aggregate excess reinsurance is not currently in place
because these years have been self-funded or because the coverages have expired.
Exposure to significant adverse development for these years is considered
minimal due to the maturity of the loss development for these years.
In the nine months ended December 31, 1995 and 1996, ESIF did not commute
any ceded reinsurance nor did it enter into or engage in any loss portfolio
transfers.
ESIF remains obligated for amounts ceded in the event that the reinsurers
do not meet their obligations.
ESIF's reinsurance recoverable asset at December 31, 1996 is comprised of
amounts related to reinsurance agreements with the following companies (in
thousands):
<TABLE>
<CAPTION>
PAID UNPAID
CLAIMS CLAIMS TOTAL
------ -------- --------
<S> <C> <C> <C>
Reinsurance Carrier
American Re............................................ $ -- $ 734 $ 734
Continental Casualty................................... -- 9,245 9,245
Crossroads............................................. 1,847 9,276 11,123
Employers Re........................................... 808 5,150 5,958
Federal Ins. Co........................................ -- 8,417 8,417
INA.................................................... 223 5,792 6,015
Lloyd's of London...................................... -- 16,856 16,856
National Union......................................... -- 2,385 2,385
Old Republic........................................... 41 15,132 15,173
Transamerica........................................... 10 31,142 31,152
------ -------- --------
Total.......................................... $2,929 $104,129 $107,058
====== ======== ========
</TABLE>
F-67
<PAGE> 398
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
All of the recoverable amounts related to paid claims have been outstanding
less than ninety days at the balance sheet date. The reinsurance recoverable
amounts related to unpaid claims are calculated considering the provisions of
the specific and aggregate reinsurance agreements and using ultimate losses by
accident year consistent with the reported loss and LAE liabilities.
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 expense discounting and unearned premium reserves
for tax and financial reporting purposes.
Federal income taxes of $6.9 million and $12.2 million for the years ended
March 31, 1995 and 1996, 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 was $0.9 million and $0.7 million for the
nine months ended December 31, 1995 and 1996, respectively.
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.
Significant components of ESIF's deferred tax liabilities and assets as of
December 31, as calculated in accordance with FASB Statement No. 109, are as
follows:
<TABLE>
<CAPTION>
1995 1996
----------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Unrealized investment gains............................... $ 2,771 $ 1,521
Special Disability Trust Fund recoverables................ 302 283
Intangible assets......................................... -- 4,050
Other..................................................... -- 740
------- -------
Total deferred tax liabilities.................... 3,073 6,594
Deferred tax assets:
Discount on loss and LAE reserves......................... 18,098 19,237
Unearned premium.......................................... 1,372 1,141
Uncollectible premiums.................................... 753 941
Other..................................................... -- 931
------- -------
20,223 22,250
Valuation allowance for deferred tax assets............... -- --
------- -------
Total deferred tax assets......................... 20,223 22,250
------- -------
Net deferred tax assets..................................... $17,150 $15,656
======= =======
</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
F-68
<PAGE> 399
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 December 31, is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
----------- --------
(IN THOUSANDS)
<S> <C> <C>
Current..................................................... $ (2,123) $ 303
Deferred.................................................... (17,150) (15,656)
-------- --------
Total net asset................................... $(19,273) $(15,353)
======== ========
</TABLE>
Significant components of the provision for income taxes for the nine
months ended December 31, attributable to continuing operations, are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ------
(IN THOUSANDS)
<S> <C> <C>
Current tax expense......................................... $ 3,994 $3,006
Deferred taxes (benefit).................................... (1,671) 51
------- ------
Total income tax expense on income................ $ 2,323 $3,057
======= ======
</TABLE>
Income taxes paid by ESIF totaled $10.4 million and $3.3 million for the
nine months ended December 31, 1995 and 1996, respectively.
The reconciliation of income tax expense for the nine months ended December
31, attributable to continuing operations computed at the U.S. federal statutory
tax rate of 35%, to income tax expense is as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ------
(IN THOUSANDS)
<S> <C> <C>
Income tax (at 35% of pretax income or loss)................ $2,623 $2,819
Tax-exempt investment income................................ (802) (905)
Non deductible expenses..................................... 17 60
Goodwill amortization....................................... -- 438
State income taxes.......................................... 463 336
Other items, net............................................ 22 309
------ ------
Provision for federal income tax expense.................... $2,323 $3,057
====== ======
</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.
F-69
<PAGE> 400
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following table provides a reconciliation of the beginning and ending
reserve balances for losses and LAE for the nine months ended December 31, 1995
and 1996:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
----------------------
1995 1996
----------- --------
<S> <C> <C>
(IN THOUSANDS)
Loss & LAE Reserves, beginning of period -- GAAP basis...... 367,391 387,632
Less: Reinsurance recoverables (exclusive of recoverables on
paid losses).............................................. (108,440) (107,092)
-------- --------
258,951 280,540
Less: Recoverable from Florida SDTF......................... (15,879) (20,060)
-------- --------
Net reserves for losses and LAE at beginning of year........ 243,072 260,480
Add provision for claims occurring in:
The current year.......................................... 61,955 57,289
Prior years............................................... 5,088 (7,053)
-------- --------
Incurred losses during the current year..................... 67,043 50,236
Deduct payments for claims occurring in:
The current year.......................................... 8,274 8,378
Prior years............................................... 55,938 50,682
-------- --------
Claim payments during the current year...................... 64,212 59,060
-------- --------
Net reserves for losses and LAE at end of year.............. 245,903 251,656
Add: Impact of reinsurance for FASB 113..................... 110,056 104,129
Recoverable from SDTF....................................... 16,827 21,138
-------- --------
Gross reserves for losses and LAE at end of period (GAAP
basis).................................................... 372,786 376,923
======== ========
</TABLE>
The foregoing reconciliation also shows that a $7.0 million reserve
redundancy emerged during the nine month period ended December 31, 1996. This
amount represents the release of certain loss reserves previously carried which
were determined, based on comparisons to actuarially projected amounts, to be
redundant.
Statutory basis loss reserves were determined using paid loss data net of
historic SDTF recoveries; GAAP basis loss reserves were determined using paid
loss data gross of SDTF recoveries. This adjustment increased loss reserves by
$26.4 million and $28.8 million at December 31, 1995 and 1996, respectively, and
increased reinsurance recoverables by $10.5 million and $8.4 million at December
31, 1995 and 1996, respectively. In addition, ESIF has recorded, as an asset,
amounts recoverable from the SDTF based upon ESIF's historical collection
experience and the amount of claims identified as subject to SDTF recovery. The
recoverable amount recorded at December 31, 1995 and 1996 was $16.8 million and
$21.1 million, respectively.
In order to quantify the amounts recoverable from the SDTF, ESIF reviews
its claims that have been identified as subject to SDTF recovery considering
ESIF's historical recovery experience on claims submitted to the SDTF. In
addition, ESIF estimates the amount of claims it expects to recover over the
next four years based on actual collection experience for the most recent two
years, and discounts the expected recoveries using an appropriate interest rate.
The amounts reflected as recoverables from the SDTF were based on the discounted
expected collection amounts rather than on the total claims identified as
subject to SDTF recovery. Accordingly, there is an implicit valuation allowance
of approximately $8.0 million reflected in the recorded SDTF recoverable
amounts.
LAE assumed in the acquisition of SHC represents unallocated LAE reserves
established by ESIF that were, prior to the acquisition, provided by SHC under
the administrator's contract between ESIF and SHC.
F-70
<PAGE> 401
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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>
DECEMBER 31,
---------------------
1995 1996
----------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued retrospective premium............................... $43,440 $23,990
</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 surplus
or profits and limit the amount of certain investments to specified percentages
of statutory admitted assets. At December 31, 1996, under regulations applicable
to stock property and casualty insurance companies, $2.0 million of ESIF's
statutory net assets of $20.4 million can be transferred from the insurance
entities without regulatory approval.
Equity and net income as determined in accordance with statutory accounting
practices for self-insurance funds as of and for the nine months ended December
31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, EQUITY NET INCOME
- ------------ ------- ----------
(IN THOUSANDS)
<S> <C> <C>
1995........................................................ $49,275 $2,674
1996........................................................ $20,434 $5,108
</TABLE>
As a self-insurance fund, ESIF recorded for statutory reporting an asset of
$44.9 million at December 31, 1996, 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 $4.2 million at December 30, 1996.
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 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 will maintain statutory basis equity in excess of
the amount required by Florida law.
F-71
<PAGE> 402
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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. SDTF
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 net 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 SDTF's
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. If
the SDTF is discontinued, ESIF believes that the existing reimbursement
obligations of the SDTF would become general obligations of the State of
Florida, although there is no assurance that a reviewing court would adopt that
view. The SDTF has made no acknowledgement with regard to the enforceability of
its reimbursement obligations to insurers such as ESIF.
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.
ESIF has recorded an SDTF recoverable of $16.8 million and $21.1 million at
December 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 nine months ended December 31, 1995 and
1996 were $3.2 million and $6.5 million, respectively. The assessment expensed
by ESIF to the SDTF were $5.6 million and $3.9 million for the nine months ended
December 31, 1995 and 1996, respectively.
ESIF has not recorded a liability for future assessments from SDTF. Such
future assessments will be based on future premium amounts.
13. ACQUISITION OF SHC
On January 16, 1996, ESIF and its subsidiaries purchased all of the
outstanding capital stock of SHC. The purchase price consisted of $26.0 million
paid in cash from the Company, $11.5 million in cash distributed by Summit and
$44.0 million in assumption of debt by SHC (see Note 14). 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
F-72
<PAGE> 403
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 for the nine months ended
December 31, 1995 presents the consolidated results of operations of ESIF and
SHC as if the acquisition had been effective at April 1, 1995 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 (in thousands):
<TABLE>
<S> <C>
Total revenues.............................................. $131,661
Income before income tax expense............................ 9,198
Net income.................................................. 6,189
</TABLE>
To comply with requirements of the Florida DOI, SHC's chairman has
personally indemnified ESIF up to a maximum of $5.0 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.
14. NOTES PAYABLE
In connection with the purchase of SHC by ESIF, SHC utilized a bank term
loan with rates based on LIBOR plus 3%. The balance as of December 31, 1996 for
SHC was $33.0 million. Also, a revolving bank credit facility with rates
approximating the prime rate was entered into as part of the agreement. As of
December 31, 1996, there was no balance outstanding for SHC for this agreement.
Interest expense incurred as of December 31, 1996 was $2.6 million.
Prior to December 31, 1996, the term loan and revolving credit facility
agreements were amended.
Maturities for the combined term loan and revolving credit facility (as
amended) are as follows:
<TABLE>
<CAPTION>
REDUCTION IN THE
TERM AVAILABILITY OF THE
LOAN REVOLVING CREDIT FACILITY
------- -------------------------
(IN THOUSANDS)
<S> <C> <C>
For the Three Months Ending March 31:
1997................................................ $ 325 $ --
For the Years Ending March 31:
1998................................................ 2,300 --
1999................................................ 3,925 --
2000................................................ 5,500 --
2001................................................ 9,500 1,500
Thereafter.......................................... 11,450 3,500
------- -------
$33,000 $5,000
======= =======
</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.
F-73
<PAGE> 404
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
15. EMPLOYEE BENEFIT PLANS
ESIF's subsidiary, SHC, has a deferred savings and profit-sharing plan (the
"401(k)") covering substantially all employees. Under the 401(k), 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 401(k)
totaled approximately $0.3 million for the period April 1, 1996 to December 31,
1996.
16. 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 $33.0 million of notes payable at
December 31, 1996 that approximates its fair value.
ESIF's fair value of reinsurance recoverable approximates its carrying
value for December 31, 1995 and 1996, respectively, as summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
---------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Reinsurance recoverable..................... $112,734 $112,734 $107,058 $107,058
</TABLE>
17. DISCONTINUED OPERATIONS
Effective July 31, 1996, ESIF decided to discontinue its computer software
development. This business was acquired in the January 1996 acquisition of SHC.
As of December 31, 1996 all assets have been disposed and ESIF has recognized an
after tax loss of approximately $1.2 million on the disposition of this
operation (including estimated operating losses to the disposition date).
The operating results of the computer software development operations for
the nine month period ended December 31, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
Revenue..................................................... $ 660
Expenses.................................................... 2,013
-------
Loss before income taxes.................................... (1,353)
Income tax (benefit)........................................ (460)
-------
Net loss.................................................... $ (893)
=======
</TABLE>
18. 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
F-74
<PAGE> 405
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
this subsidiary by a sale of its stock is expected to be completed during the
first quarter of 1997. The consolidated financial statements include the
operating results and assets and liabilities of this subsidiary.
The operating results for the healthcare subsidiary for the nine month
period ending December 31, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
Revenue..................................................... $ 114
Expenses.................................................... 701
-----
Loss before income taxes.................................... (587)
Income tax (benefit)........................................ (200)
-----
Net loss.................................................... $(387)
=====
</TABLE>
19. 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:
<TABLE>
<CAPTION>
WORKERS'
COMPENSATION INSURANCE INTERCOMPANY
TOTAL INSURANCE ADMINISTRATION ELIMINATION
-------- ------------ -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Nine Months Ended December 31, 1995:
Revenues............................. $103,086 $103,086 -- --
Income before income taxes........... $ 7,495 $ 7,495 -- --
Identifiable assets.................. $437,932 $437,932 -- --
Nine Months Ended December 31, 1996:
Revenues............................. $110,811 $ 83,245 $43,517 $(15,951)
Income from continuing operations
before income taxes............... $ 8,290 $ 9,023 $ (733) --
Identifiable assets.................. $472,388 $472,388 -- --
</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.
20. EXTRAORDINARY CHARGE
During the nine months ended December 31, 1996 ESIF incurred $1.3 million
of expenses directly related to its conversion from a group self-insurance fund
to a stock insurance company. These expenses are principally professional
service fees paid to attorneys, investment advisors, and accountants related to
obtaining regulatory approval for the conversion, advising the Board of Trustees
as to the fairness of the transaction and auditing ESIF's GAAP basis financial
statements. These costs, net of income tax benefits of $0.5 million, are
presented as an extraordinary charge on ESIF's Statement of Operations for the
nine months ended December 31, 1996.
F-75
<PAGE> 406
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
21. RELATED PARTY TRANSACTIONS
As more fully described in Note 5, ESIF has entered into office premises
lease agreements with certain Trustees of ESIF.
As more fully described in Note 6, ESIF has entered into reinsurance
agreements with an insurance company in which a Trustee of ESIF has an ownership
interest.
As more fully described in Note 13, to comply with requirements of the
Florida DOI, SHC's president and chief executive officer has personally
indemnified ESIF up to a maximum of $5.0 million for certain loss, injury, or
damage to ESIF, if any, which may result from the acquisition of SHC.
Entities in which SHC's president and chief executive officer held
ownership interests have provided certain transportation related services to
SHC. Fees paid by SHC to these entities aggregated approximately $0.4 million
and $0.02 million for the nine months ended December 31, 1995 and 1996,
respectively.
SHC's president and chief executive officer is also a member of the Board
of Directors of Florida Retail Federation (the "Association") which is the
sponsoring trade association for Florida Retail Federation Self Insurers Fund
("FRF"), one of the group self-insurance funds administered by SHC. The
Association, as the fund sponsor, is entitled to a fee equal to 1% of FRF's
premiums earned in each year, and SHC is obligated to pay such fee out of the
administrative fee it receives from FRF. During the nine months ended December
31, 1995 and 1996, SHC paid approximately $0.7 million and $0.6 million,
respectively, to the Association for such fees. During the nine months ended
December 31, 1995 and 1996, FRF paid SHC fees for administrative services of
approximately $21.1 million and $19.0 million, respectively.
F-76
<PAGE> 407
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 and its subsidiaries.
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-77
<PAGE> 408
SUMMIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gross service fees (including $25,336,689,
$26,829,023 and $24,867,269 for the years ended
December 31, 1993, 1994 and 1995, respectively,
from Employers Self Insurers Fund)............. $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-78
<PAGE> 409
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-79
<PAGE> 410
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-80
<PAGE> 411
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-81
<PAGE> 412
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.
Deferred Income
SHC defers a portion of its fees from Employers Self Insurers Fund ("ESIF")
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, 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.
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.
F-82
<PAGE> 413
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 temporary
differences between financial reporting and income tax reporting of
depreciation, aggregate reserves, deferred income and certain start-up costs.
F-83
<PAGE> 414
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-84
<PAGE> 415
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 as of September 30, 1996 and for the six months then ended and have
issued our reports thereon dated July 31, 1996 and November 21, 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
November 21, 1996
F-85
<PAGE> 416
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-86
<PAGE> 417
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
SCHEDULE I -- SUMMARY OF INVESTMENTS
<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>
MARCH 31, 1996
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
======== ======== ========
SEPTEMBER 30, 1996
Securities available for sale:
Fixed maturities:
U.S. Government:
Non-mortgage backed.................................. $ 49,286 $ 48,625 $ 48,625
Mortgage backed...................................... 13,603 13,541 13,541
States, municipalities and political subdivisions...... 67,799 68,348 68,348
Corporate obligations.................................. 42,875 42,906 42,906
-------- -------- --------
Total fixed maturities............................ 173,563 173,420 173,420
Equity securities:
Common stocks:
Public utilities..................................... 1,786 2,312 2,312
Banks, trusts and insurance companies................ 579 650 650
Industrial and miscellaneous......................... 8,298 9,336 9,336
-------- -------- --------
Total common stocks............................... 10,665 12,298 12,298
Non redeemable preferred stock......................... 3,759 3,757 3,787
-------- -------- --------
Total equity securities........................... 14,422 16,085 16,085
Short-term investments...................................... 16,713 16,713 16,713
-------- -------- --------
Total investments................................. $204,698 $206,218 $206,218
======== ======== ========
</TABLE>
F-87
<PAGE> 418
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
SCHEDULE I -- SUMMARY OF INVESTMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
AMOUNT AT
WHICH SHOWN
IN THE
TYPE OF INVESTMENT COST MARKET BALANCE SHEET
COLUMN A COLUMN B COLUMN C COLUMN D
------------------ -------- -------- -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Securities available for sale:
Fixed maturities:
U.S. Government
Non-mortgage backed.................................. $ 50,423 $ 50,263 $ 50,263
Mortgaged backed..................................... 10,902 11,004 11,004
States, municipalities and political subdivisions...... 82,937 83,803 83,803
Corporate obligations.................................. 38,973 39,612 39,612
-------- -------- --------
Total fixed maturities............................ $183,235 $184,682 $184,682
Equity securities:
Common stocks:
Public utilities....................................... 402 430 430
Banks, trusts and insurance companies.................. 1,255 1,771 1,771
Industrial and miscellaneous........................... 9,963 11,899 11,899
-------- -------- --------
Total common stocks............................... 11,620 14,100 14,100
Non-redeemable preferred stock......................... 4,452 4,568 4,568
-------- -------- --------
Total equity securities........................... 16,072 18,668 18,668
Short-term investments...................................... 14,536 14,536 14,536
-------- -------- --------
Total investments................................. $213,843 $217,886 $217,886
======== ======== ========
</TABLE>
F-88
<PAGE> 419
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%
Six Months Ended September 30, 1995
Premiums -- Workers' Compensation...... 66,351 3,207 0 63,145 0%
Six Months Ended September 30, 1996
Premiums -- Workers' Compensation...... 52,402 3,373 0 49,029 0%
Nine Months Ended December 31, 1995
(unaudited)
Premiums -- Workers' Compensation...... 94,493 4,780 0 89,713 0%
Nine Months Ended December 31, 1996
(unaudited)
Premiums -- Workers' Compensation...... 79,201 4,692 0 74,509 0%
</TABLE>
F-89
<PAGE> 420
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
SCHEDULE VI -- SUPPLEMENTAL INFORMATION CONCERNING INSURANCE OPERATIONS
<TABLE>
<CAPTION>
RESERVES
FOR UNPAID
DEFERRED CLAIMS AND
POLICY CLAIM DISCOUNT NET
ACQUISITION SETTLEMENT DEDUCTED UNEARNED NET EARNED INVESTMENT
SEGMENT COSTS EXPENSES IN COL C PREMIUMS PREMIUMS INCOME
YEAR ENDED COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
---------- -------- ----------- ---------- -------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1994.......... Workers' $0 $392,784 $4,730 $ 0 $148,441 $10,510
Compensation
Insurance
March 31, 1995.......... Workers' 0 367,391 4,875 0 128,489 12,205
Compensation
Insurance
March 31, 1996.......... Workers' 0 387,632 4,668 0 114,893 13,209
Compensation
Insurance
SIX MONTHS ENDED
- ------------------------
September 30, 1995...... Workers' $0 $364,210 $4,775 $51,208 $ 63,145 $ 7,598
Compensation
Insurance
September 30, 1996...... Workers' 0 367,971 4,235 46,000 49,029 6,363
Compensation
Insurance
NINE MONTHS ENDED
- ------------------------
December 31, 1995
(Unaudited)............ Workers' 0 $372,786 $4,618 $25,437 $ 89,713 $10,522
Compensation
Insurance
December 31, 1996
(Unaudited)........... Workers' 0 376,923 4,235 23,506 74,509 9,606
Compensation
Insurance
<CAPTION>
CLAIMS & CLAIMS
SETTLEMENT EXPENSES AMORTIZATION NET PAID
INCURRED RELATED TO OF DEFERRED CLAIMS &
-------------------- POLICY CLAIMS NET
PRIOR ACQUISITION SETTLEMENT PREMIUMS
CURRENT YEARS COSTS EXPENSES WRITTEN
YEAR ENDED YEAR COLUMN H COLUMN I COLUMN J COLUMN K
---------- --------- -------- ------------ ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
March 31, 1994.......... $118,889 $10,478 $10,664 $96,753 $156,086
March 31, 1995.......... 94,520 25,404 10,078 88,264 144,427
March 31, 1996.......... 84,058 10,786 9,707 77,436 121,296
SIX MONTHS ENDED
- ------------------------
September 30, 1995...... $ 42,198 $ 167 $ 4,236 $44,953 $117,823
September 30, 1996...... 35,663 (3,528) 4,839 38,008 103,178
NINE MONTHS ENDED
- ------------------------
December 31, 1995
(Unaudited)............ $ 61,955 $ 5,088 $ 6,350 $64,212 $114,125
December 31, 1996
(Unaudited)........... 57,289 (7,053) 7,250 59,060 108,309
</TABLE>
F-90
<PAGE> 421
======================================================
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>
Prospectus Summary.................... 3
Risk Factors.......................... 8
The Company........................... 16
Market for Stock...................... 17
Dividend Policy....................... 17
Use of Proceeds....................... 19
Capitalization........................ 19
Selected Financial Data............... 20
Pro Forma Financial Data.............. 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 30
Business.............................. 45
Management of the Company............. 59
Certain Transactions.................. 66
Principal Shareholders................ 67
The Conversion........................ 68
Description of Capital Stock.......... 72
Shares Eligible for Future Sale....... 75
Underwriting.......................... 76
Legal Matters......................... 77
Experts............................... 77
Change in Accountants................. 77
Additional Information................ 77
Index to Financial Statements......... F-1
</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.
ABN AMRO CHICAGO CORPORATION
, 1997
======================================================
<PAGE> 422
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
Nasdaq listing fee.......................................... 30,000
Accountants' fee and expense................................ **
Legal fees and expenses..................................... **
Printing and engraving costs................................ **
Blue sky fees and expenses.................................. **
Transfer Agent, Subscription Agent and Escrow Agent fees.... **
Miscellaneous............................................... **
----------
Total............................................. $
==========
</TABLE>
- ---------------
* Excludes the portion of such expenses that have already been paid.
** 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
II-1
<PAGE> 423
the right of a shareholder. Article Eight of Summit's Bylaws provides that
Summit shall indemnify any 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
- ------- -----------------------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement between Summit and Raymond
James & Associates, Inc. and ABN AMRO Chicago Corporation,
as Representatives of the several underwriters.
1.2 -- Form of Subscription Agency Agreement between Summit and
Raymond James & Associates, Inc. and ABN AMRO Chicago
Corporation.
2.1 -- Amended Plan of Conversion and Recapitalization of Employers
Self Insurers Fund.+
2.2 -- Recapitalization Agreement between Summit and Employers Self
Insurers 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.+
3.3 -- Form of Certificate of Designation, Preferences and Rights
of Series A Preferred Stock 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)
(contained in Exhibit F to Proxy Statement/Prospectus).+
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 -- Credit Agreement among Summit, the Lenders named therein and
First Union National Bank of North Carolina.+
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.+
10.8 -- Florida Retail Federation Self Insurers Fund Administrator's
Contract, with Assignment and Addendum.+
10.9 -- Louisiana Employers Safety Association Self Insurers Fund
Administrator's Contract, with Addendum.+
10.10 -- Louisiana Retailers Association Self Insurers Fund
Administrator's Contract, with Addendum.+
10.11 -- Kentucky Retail Federation Self Insurers Fund
Administrator's Contract.+
12.1 -- Statement regarding computation of earnings to combined
fixed charges and preferred stock dividends.
</TABLE>
II-2
<PAGE> 424
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S> <C>
16.1 -- Letter from Brinton & Mendez relating to change in
Accountants.+
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+
</TABLE>
- ---------------
+ Previously filed.
(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 post-effective 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
II-3
<PAGE> 425
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 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> 426
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Tampa, State of Florida, on February 21, 1997.
SUMMIT HOLDING SOUTHEAST, INC.
By: /s/ WILLIAM B. BULL
------------------------------------
Title: President and Chief Executive
Officer
-----------------------------------
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the Registration Statement has been signed by the following persons in
the capacities indicated on February 21, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM B. BULL President, Chief Executive February 21, 1997
- ----------------------------------------------------- Officer, and Director
William B. Bull (principal executive
officer)
/s/ GREG C. BRANCH* Chairman of the Board of February 21, 1997
- ----------------------------------------------------- Directors
Greg C. Branch
/s/ C. C. DOCKERY* Director February 21, 1997
- -----------------------------------------------------
C. C. Dockery
/s/ JOHN A. GRAY* Director February 21, 1997
- -----------------------------------------------------
John A. Gray
/s/ ROBERT L. NOOJIN, SR.* Director February 21, 1997
- -----------------------------------------------------
Robert L. Noojin, Sr.
/s/ THOMAS S. PETCOFF* Director February 21, 1997
- -----------------------------------------------------
Thomas S. Petcoff
/s/ ROBERT SIEGEL* Director February 21, 1997
- -----------------------------------------------------
Robert Siegel
/s/ RUSSELL L. WALL* Vice President of Finance February 21, 1997
- ----------------------------------------------------- (principal financial and
Russell L. Wall accounting officer)
*By: /s/ WILLIAM B. BULL
----------------------------------------------
As attorney-in-fact
</TABLE>
II-5
<PAGE> 427
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGE
- ------- ----------------------- ------------
<C> <S> <C> <C>
1.1 -- Form of Underwriting Agreement between Summit and Raymond
James & Associates, Inc. and ABN AMRO Chicago Corporation,
as Representatives of the several underwriters.
1.2 -- Form of Subscription Agency Agreement between Summit and
Raymond James & Associates, Inc. and ABN AMRO Chicago
Corporation.
2.1 -- Amended Plan of Conversion and Recapitalization of Employers
Self Insurers Fund.+
2.2 -- Recapitalization Agreement between Summit and Employers Self
Insurers 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.+
3.3 -- Form of Certificate of Designation, Preferences and Rights
of Series A Preferred Stock 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)
(contained in Exhibit F to Proxy Statement/Prospectus).+
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 -- Credit Agreement among Summit, the Lenders named therein and
First Union National Bank of North Carolina.+
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.+
10.8 -- Florida Retail Federation Self Insurers Fund Administrator's
Contract, with Assignment and Addendum.+
10.9 -- Louisiana Employers Safety Association Self Insurers Fund
Administrator's Contract, with Addendum.+
10.10 -- Louisiana Retailers Association Self Insurers Fund
Administrator's Contract, with Addendum.+
10.11 -- Kentucky Retail Federation Self Insurers Fund
Administrator's Contract.+
12.1 -- Statement regarding computation of earnings to combined
fixed charges and preferred stock dividends.
16.1 -- Letter from Brinton & Mendez relating to change in
Accountants.+
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+
</TABLE>
- ---------------
+ Previously filed.
<PAGE> 1
EXHIBIT 1.1
SUMMIT HOLDING SOUTHEAST, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
March __, 1997
RAYMOND JAMES & ASSOCIATES, INC.
ABN AMRO Chicago Corporation
as Representatives of the Several
Underwriters (the "Representatives")
c/o Raymond James & Associates, Inc.
880 Carillon Parkway
St. Petersburg, FL 33716
Dear Sirs:
Subject to the terms and conditions stated herein, Summit Holding
Southeast, Inc., a Florida corporation (the "Company"), proposes to issue and
sell shares of its common stock, par value $.01 per share ("Common Stock"), in
connection with the Amended Plan of Conversion and Recapitalization (the
"Plan") of Employers Self Insurers Fund ("ESIF"), pursuant to which ESIF will
simultaneously convert from a Florida group self-insurance fund to a Florida
stock insurance company under the name Bridgefield Employers Insurance Company
("Bridgefield") and become a wholly owned subsidiary of the Company (the
"Conversion"). Pursuant to the Plan, the Company proposes: (1) to issue to
Eligible Policyholders (as defined in the Plan) of ESIF shares of Series A
Preferred Stock, par value $10 per share (the "Preferred Stock"), in partial
exchange for their membership interests in ESIF; (2) to offer to issue and sell
shares of Common Stock to Eligible Policyholders, as well as to certain
directors, officers and employees of the Company and its subsidiaries (the
"Management Group"), pursuant to nontransferable subscription rights (the
"Subscription Offering"); and (3) to issue and sell shares of Common Stock not
subscribed and paid for pursuant to the Subscription Offering ("Firm Shares")
to the Underwriters named in Schedule I (the "Underwriters"), as provided in
this Agreement (the "Public Offering"). Furthermore, at the election of the
Underwriters and subject to the terms and conditions stated herein, the Company
proposes to sell to the Underwriters up to 750,000 additional shares of Common
Stock (the "Optional Shares"). The Firm Shares and the Optional Shares that
the Underwriters elect to purchase pursuant to Section 2 hereof are
collectively called the "Shares." As used in this Agreement, unless the
context requires otherwise, the term "Subsidiaries" refers to ESIF and its
subsidiaries, whether before or after the Company's acquisition of the Common
Stock of ESIF in connection with the Conversion.
1. REPRESENTATIONS AND WARRANTIES.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to, and agrees with, each of the Underwriters
that:
(i) A registration statement on Form S-1 (File
No. 333-16499) with respect to the Preferred Stock and Common
Stock, including a prospectus subject to completion, has been
filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of
1933, as amended (the Act"), and one or more amendments,
including one or more post-effective amendments, to such
registration statement may have been so filed. After the
execution of this Agreement, the Company will file with the
Commission, if such registration
<PAGE> 2
statement, as it may have been amended, has become effective
under the Act and information has been omitted therefrom (or
from any post-effective amendment thereto) in accordance with
Rule 430A under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if
no such amendment shall have been filed, in such registration
statement) with such changes or insertions as are required by
Rule 430A or permitted by Rule 424(b) under the Act and as have
been provided to and approved by the Underwriters. As used in
this Agreement, the term "Registration Statement" means such
registration statement, as amended at the time when it (or the
most recent post-effective amendment thereto) was or is
declared effective, including all financial statement schedules
and exhibits thereto and including any information omitted
therefrom pursuant to Rule 430A under the Act and included in
the Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion
included in such Registration Statement or any amendment or
post-effective amendment thereto (including the prospectus
subject to completion, if any, included in the Registration
Statement (or the most recent post-effective amendment thereto)
at the time it was or is declared effective); and the term
"Prospectus" means the prospectus first filed with the
Commission pursuant to Rule 424(b) under the Act or, if no
prospectus is required to be so filed, such term means the
prospectus included in the Registration Statement. For
purposes of the following representations and warranties, to
the extent reference is made to the Prospectus and at the
relevant time the Prospectus is not yet in existence, such
reference shall be deemed to be to the most recent Preliminary
Prospectus.
(ii) No order preventing or suspending the use of
any Preliminary Prospectus or the Prospectus has been issued
and no proceeding for that purpose has been instituted or
threatened by the Commission or the securities authority of any
state or other jurisdiction. No stop order suspending the
effectiveness of the Registration Statement or any part thereof
has been issued and no proceeding for that purpose has been
instituted or, to the knowledge of the Company, threatened or
contemplated by the Commission or the securities authority of
any state or other jurisdiction.
(iii) When any Preliminary Prospectus was filed with
the Commission it (A) contained all statements required to be
stated therein in accordance with, and complied in all material
respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder, and (B) did not
include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading. When the Registration
Statement or any amendment thereto was or is declared
effective, and at each Time of Delivery (as hereinafter
defined), it (A) contained or will contain all statements
required to be stated therein in accordance with, and complied
or will comply in all material respects with the requirements
of, the Act and the rules and regulations of the Commission
thereunder, and (B) did not or will not include any untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When
the Prospectus or any amendment or supplement thereto is filed
with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or such amendment or supplement is not required to
be so filed, when the Registration Statement or the amendment
thereto containing such amendment or supplement to the
Prospectus was or is declared effective) and at each Time of
Delivery, the Prospectus, as amended or supplemented at any
such time, (A) contained or will contain all statements
required to be stated therein in accordance with, and complied
or will comply in all material respects with the requirements
of, the Act and the rules and regulations of the Commission
thereunder, and (B) did not or will not include any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not
misleading. The foregoing provisions of this paragraph (iii)
do not apply to statements or omissions made in any Preliminary
Prospectus, the Registration Statement or any amendment thereto
or the
2
<PAGE> 3
Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with written information furnished to
the Company by any of the Underwriters specifically for use
therein.
(iv) The descriptions in the Registration Statement
and the Prospectus of statutes, legal and governmental
proceedings or contracts and other documents are accurate and
fairly present the information required to be shown; and there
are no statutes or legal or governmental proceedings required
to be described in the Registration Statement or the Prospectus
that are not described as required and no contracts or
documents of a character that are required to be described in
the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described
and filed as required.
(v) The Company and its Subsidiaries each has
been duly incorporated, is validly existing as a corporation
in good standing under the laws of its jurisdiction of
incorporation and has full power and authority (corporate and
other) to own or lease its properties and conduct its business
as described in the Prospectus. The Company has full power
and authority (corporate and other) to enter into this
Agreement and to perform its obligations hereunder. The
Company and each of its Subsidiaries is duly qualified to
transact business as a foreign corporation and is in good
standing under the laws of each other jurisdiction in which it
owns or leases properties, or conducts any business, so as to
require such qualification, except where the failure to so
qualify would not have a material adverse effect on the
financial position, results of operations or business of the
Company (a "Material Adverse Effect").
(vi) The Company's authorized, issued and
outstanding capital stock is as set forth in the Prospectus
under the caption "Capitalization." All of the issued shares
of capital stock of the Company and each of its Subsidiaries
have been duly authorized and validly issued, are fully paid
and nonassessable and the Common Stock conforms to the
description of the Common Stock contained in the Prospectus.
None of the issued shares of capital stock of the Company and
its Subsidiaries each has been issued or is owned or held in
violation of any preemptive rights of shareholders, and no
person or entity has any preemptive or other rights to
subscribe for any of the Shares.
(vii) The Plan has been duly adopted by the
required vote of ESIF's Board of Trustees and policyholders
and is in compliance with the insurance laws of the State of
Florida applicable to the reorganization of group
self-insurance funds into stock property and casualty insurance
companies. On August 20, 1996, ESIF submitted an application,
including an initial Plan of Conversion and Recapitalization,
to the Department of Insurance of the State of Florida (the
"Florida DOI") for permission to convert from a group
self-insurance fund to a stock insurance company. On or before
September 30, 1996, ESIF gave notice of a public hearing
regarding the Plan by publication in the publications set forth
on Schedule II hereto. The Florida DOI held a public hearing
on October 10, 1996, and issued a consent order dated November
15, 1996 (the "Order") approving the Conversion, subject to the
satisfaction of certain conditions [UPDATE FOR AMENDMENT].
Other than the conditions to effectiveness set forth in the
Order or in the Plan, no other approvals are required to be
obtained under the Florida Insurance Code for the effectiveness
of the Plan. Prior to or contemporaneously with each Time of
Delivery (as hereinafter defined), each of the actions required
to occur prior to the effectiveness of the Plan pursuant to the
Order or the Plan will have occurred.
(viii) The Company does not own, directly or
indirectly, any capital stock or other equity securities of
any other corporation or any ownership interest in any
partnership, joint venture or other entity or association
other than those listed on Exhibit 21.1 to the Registration
Statement.
3
<PAGE> 4
(ix) Except as disclosed in the Prospectus, there
are no outstanding (A) securities or obligations of the
Company convertible into or exchangeable for any capital stock
of the Company, (B) warrants, rights or options to subscribe
for or purchase from the Company any such capital stock or any
such convertible or exchangeable securities or obligations, or
(C) obligations of the Company to issue any shares of capital
stock, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or options.
(x) Since the date of the most recent audited
financial statements included in the Prospectus, neither the
Company nor any of its Subsidiaries has sustained any material
loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance,
or from any labor dispute or court or governmental action,
order or decree, otherwise than as disclosed in or
contemplated by the Prospectus.
(xi) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (A) the Company has not incurred any liabilities
or obligations, direct or contingent, or entered into any
transactions, not in the ordinary course of business, that are
material to the Company, (B) the Company has not purchased any
of its outstanding capital stock or declared, paid or
otherwise made any dividend or distribution of any kind on its
capital stock, (C) there has not been any change in the
capital stock, or any material increase or decrease in the
long-term debt or short-term debt of the Company, and (D)
there has not been any material adverse change, or any
development involving a prospective material adverse change,
in or affecting the financial position, results of operations
or business of the Company, in each case other than as
disclosed in or contemplated by the Prospectus.
(xii) The Shares to be issued and sold by the
Company have been duly authorized and, when issued and
delivered against payment therefor as provided herein, will be
validly issued and fully paid and nonassessable and will
conform to the description of the Common Stock contained in
the Prospectus; and the certificates evidencing the Shares
will comply with all applicable requirements of Florida law.
(xiii) Except as disclosed in the Prospectus, there
are no contracts, agreements or understandings between the
Company and any person granting such person the right to
require the Company to file a registration statement under the
Act with respect to any securities of the Company owned or to
be owned by such person or to require the Company to include
such securities in the securities registered pursuant to the
Registration Statement (unless an such right has been
exercised or effectively waived) or any securities being
registered pursuant to any other registration statement filed
by the Company under the Act.
(xiv) All offers and sales of the Company's capital
stock prior to the date hereof were at all relevant times duly
registered under the Act or exempt from the registration
requirements of the Act and were duly registered or the
subject of an available exemption from the registration
requirements of the applicable state securities or blue sky
laws.
(xv) The Company and its Subsidiaries each is not,
nor with the giving of notice or passage of time or both would
be, in violation of its Certificate of Incorporation or Bylaws
or in default under any indenture, mortgage, deed of trust,
loan agreement, lease, or other agreement or instrument to
which the Company or any of its Subsidiaries is a party or to
which any of their respective properties or assets is subject,
which default would have a Material Adverse Effect.
(xvi) Subject to the satisfaction of the conditions
to the effectiveness of the Conversion set forth in the Plan,
the issue and sale of the Shares to be issued and sold by the
Company and the performance of this Agreement and the
consummation of the transactions herein contemplated
4
<PAGE> 5
will not conflict with, or (with or without the giving of
notice or the passage of time or both) result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which the
Company or any of its Subsidiaries is a party or to which its
properties or assets is subject, nor will such action conflict
with or violate any provision of the Certificate of
Incorporation or Bylaws of the Company or any statute, rule or
regulation (assuming compliance with all applicable state
securities or blue sky laws) or any order, judgment or decree
of any court or governmental agency or body having jurisdiction
over the Company or any of its properties or assets.
(xvii) The Company and its Subsidiaries each has good
title to all personal property owned by it free and clear of
all liens, security interests, pledges, charges, encumbrances,
mortgages, and defects, except such as are disclosed in the
Prospectus or such as do not materially and adversely affect
the value of such property and do not interfere with the use
made or proposed to be made of such property by the Company;
and any real property and buildings held under lease by the
Company are held under valid, subsisting and enforceable
leases, with such exceptions as are disclosed in the
Prospectus or are not material and do not interfere with the
use made or proposed to be made of such property and
buildings by the Company.
(xviii) No consent, approval, authorization, order or
declaration of or from, or registration, qualification or
filing with, any court or governmental agency or body is
required for the sale of the Shares or the consummation of the
transactions contemplated by this Agreement, except: (1) the
approval by the Florida DOI of the Plan, ESIF's Certificate of
Incorporation and by-laws, and ESIF's application to convert to
a stock insurance company, and (2) the registration of the
Shares under the Act and as may be required by the National
Association of Securities Dealers, Inc. or under state
securities or blue sky laws in connection with the offer, sale
and distribution of the Shares by the Underwriters.
(xix) Other than as disclosed in the Prospectus,
there is no litigation, arbitration, claim, proceeding (formal
or informal) or investigation pending or, to the knowledge of
the Company, threatened (or any basis therefor) in which the
Company is a party or of which any of its properties or assets
is the subject which, if determined adversely to the Company,
would individually or in the aggregate have a Material Adverse
Effect. The Company is not in violation of, or in default with
respect to, any statute, rule, regulation, order, judgment or
decree, except as described in the Prospectus or such as do not
and will not individually or in the aggregate have a Material
Adverse Effect.
(xx) Ernst & Young LLP and Brinton & Mendez, who
have certified certain financial statements of ESIF and its
Subsidiaries for the fiscal years ended March 31, 1994, 1995
and 1996, and Ernst & Young LLP who has certified certain
financial statements of Summit Holding Corporation and its
Subsidiaries (collectively, "SHC") for the fiscal years ended
December 31, 1993, 1994 and 1995 are, and were at all times,
during the periods covered by their reports included in the
Registration Statement and the Prospectus, independent public
accountants as required by the Act and the rules and
regulations of the Commission thereunder.
(xxi) The financial statements and schedules
(including the related notes) of ESIF and SHC and their
respective Subsidiaries included in the Registration
Statement, the Prospectus or any Preliminary Prospectus were
prepared in accordance with generally accepted accounting
principles consistently applied (or, if not consistently
applied, as applied on the basis stated in such financial
statements and schedules or the related notes thereto)
throughout the periods involved and fairly present the
financial position and results of operations of ESIF and SHC
and their respective Subsidiaries at the dates and for the
periods presented. The selected financial data set forth
under
5
<PAGE> 6
the caption "Selected Financial Data" in the Prospectus fairly
present, on the basis stated in the Prospectus, the information
included therein.
(xxii) This Agreement has been duly authorized,
executed and delivered by the Company.
(xxiii) None of the Company, any of its Subsidiaries,
or, to the knowledge of the Company, their respective officers,
directors or affiliates, has (A) taken, directly or indirectly,
any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares or
(B) since the filing of the Registration Statement (1) sold,
bid for, purchased or paid anyone any compensation for
soliciting purchases of the Shares or (2) paid or agreed to pay
to any person any compensation for soliciting another to
purchase any other securities of the Company.
(xxiv) The Company has obtained for the benefit of
the Company and the Underwriters from each of the directors and
executive officers of the Company a written agreement that for
a period of 180 days from the date of the Conversion, such
director or executive officer will not, without the prior
written consent of Raymond James & Associates, Inc. on behalf
of the Underwriters, offer, pledge, sell, contract to sell,
grant any option for the sale of, or otherwise dispose of (or
announce any offer, pledge, sale, grant of an option to
purchase, or other disposition), directly or indirectly, any
shares of Common Stock or securities convertible into,
exercisable, or exchangeable for, shares of Common Stock.
(xxv) Neither the Company nor any of its
Subsidiaries, nor, to the knowledge of the Company or any of
its Subsidiaries, any other director, officer, agent, employee
or other person associated with or acting on behalf of the
Company or any of its Subsidiaries has, directly or indirectly,
used any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political
activity; made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds; violated
any provision of the Foreign Corrupt Practices Act of 1977, as
amended; or made any bribe, rebate, payoff, influence payment
kickback or other payment, unlawful under the laws of the
United States or any foreign jurisdiction.
(xxvi) The Company and its Subsidiaries each is in
compliance in all material respects with all foreign, federal,
state, and local laws, ordinances, rules, and regulations
(collectively, "Laws"), and the Company and its Subsidiaries
each has all licenses, permits, and authorizations necessary
to operate under all Laws, except where the failure to have
such license, permit, or authorization would not (individually
or in the aggregate with respect to all such failures) have a
Material Adverse Effect and are in compliance in all material
respects with all terms and conditions of such licenses,
permits, and authorizations; neither the Company nor any of
its Subsidiaries has authorized, conducted, or has knowledge
of the generation, transportation, storage, use, treatment,
disposal or release of any hazardous substance, hazardous
waste, hazardous material, hazardous constituent, toxic
substance, pollutant, contaminant, petroleum product, natural
gas, liquefied gas or synthetic gas defined or regulated under
any environmental law; and there is no pending or, to the
knowledge of the Company and each of its Subsidiaries,
threatened claim, litigation or any administrative agency
proceeding, nor has the Company or any of its Subsidiaries
received any written or oral notice from any governmental
entity or third party, that: (A) alleges a violation of any
Laws by the Company or any of its Subsidiaries; (B) alleges
the Company or any of its Subsidiaries is a liable party under
the Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. Section 9602 et seq. or any state
superfund law;
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or (C) alleges possible contamination of the environment by
the Company or any of its Subsidiaries.
(xxvii) The Company owns or has the right to use all
patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights,
franchises, trade secrets, proprietary or other confidential
information and intangible properties and assets (collectively,
"Intellectual Property Rights") necessary to conduct its
business as presently conducted and as described in the
Prospectus, and as the Prospectus indicates the Company
proposes to conduct its business, except where the failure to
own or have such rights would not have a Material Adverse
Effect; and to the knowledge of the Company, the Company has
not infringed and is not infringing, and the Company has not
received notice of infringement with respect to, asserted
Intellectual Property Rights of others and there is no
infringement by others of Intellectual Property Rights of the
Company, in either case which might result in a Material
Adverse Effect.
(xxviii) The Company is insured by insurers of
recognized financial responsibility against such losses and
risks and in such amounts as management of the Company deems
prudent and in the best interests of the Company and its
shareholders; and the Company has no reason to believe that it
will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its
business at a comparable cost, except as disclosed in the
Prospectus.
(xxix) The Company and its Subsidiaries each makes
and keeps accurate books and records reflecting its assets and
maintains internal accounting controls which provide
reasonable assurance that (A) transactions are executed in
accordance with management's authorization, (B) transactions
are recorded as necessary to permit preparation of the
Company's financial statements in accordance with generally
accepted accounting principles and to maintain accountability
for the assets of the Company, (C) access to the assets of the
Company is permitted only in accordance with management's
authorization, and (D) the recorded accountability for assets
of the Company is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any
differences.
(xxx) The Company and its Subsidiaries each has
filed all foreign, federal, state and local tax returns that
are required to be filed by it and has paid all taxes shown as
due on such returns as well as all other taxes, assessments
and governmental charges that are due and payable; and no
deficiency with respect to any such return has been assessed
or, to the knowledge of the Company, proposed.
(xxxi) The Company is not and will not become as a
result of the transactions contemplated hereby, and does not
intend to conduct its business in a manner that would cause it
to become, an "investment company" or a company "controlled"
by an "investment company" within the meaning of the
Investment Company Act of 1940.
(xxxii) The Company and its Subsidiaries each has
complied with all provisions of Section 517.075, Florida
Statutes, relating to doing business with the Government of
Cuba and certain other persons and entities.
(xxxiii) As of the date of this Agreement, the
Company is not required to be licensed as an insurance company
in any state. ESIF, U.S. Employers Insurance, Inc. and
Bridgefield Casualty Insurance Company (together, the
"Insurance Subsidiaries") are the only Subsidiaries of the
Company that are insurance companies. Each of the Insurance
Subsidiaries holds all licenses, certificates and permits
from insurance departments and all other governmental
authorities
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<PAGE> 8
(collectively, the "Insurance Licenses") necessary or desirable
to conduct its business as presently conducted or the Company
presently contemplates it will conduct its business in the
future. Each of the Insurance Subsidiaries has fulfilled and
performed all material obligations necessary to maintain its
Insurance Licenses, and no event or events have occurred which
would result in the impairment, modification, termination, or
revocation of such Insurance Licenses. The Company and the
Insurance Subsidiaries each have filed all material reports,
registrations and statements, together with any amendments
required to be made with respect thereto, that they were
required to file with any state insurance commission, agency or
authority. As of their respective dates, such reports,
registrations and statements complied in all material respects
with all the laws, statutes, rules, and regulations of each
such jurisdiction, including, without limitation, those rules
and regulations promulgated by the applicable insurance
commission, agency, or authority in any such state.
(xxxiv) Except as set forth in the Prospectus, no
loss experience has occurred that would require or make it
necessary or appropriate for the Company to change, alter,
modify or amend the Company's methodology or assumptions
relating to losses.
(xxxv) All reinsurance treaties, contracts,
agreements, and arrangements to which the Company or any of
its Subsidiaries is a party and as to which any of them
reported recoverables, premiums due or other amounts in its
financial statements are in full force and effect and neither
the Company nor any of the Insurance Subsidiaries is in
violation of, or in default in the performance, observance or
fulfillment of, any material obligation, agreement, covenant
or condition contained therein, which violation or default
would, singularly or in the aggregate, have a Material Adverse
Effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company
and the Insurance Subsidiaries taken as a whole. Neither the
Company nor any of the Insurance Subsidiaries has any reason
to believe that any other party to such treaties, contracts,
agreements or arrangements will not or cannot perform in any
material respect its duties or obligations under such treaty,
contract, agreement, or arrangement, except where the failure
to perform would not have a Material Adverse Effect on the
condition (financial or other), business, properties, net
worth or results of operations of the Company and its
Subsidiaries taken as a whole.
2. PURCHASE AND SALE OF SHARES. Subject to the terms and
conditions herein set forth, (a) the Company agrees to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly,
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<PAGE> 9
to purchase from the Company, at a purchase price of $______ per share, the
number of the Firm Shares set forth opposite the name of each Underwriter on
Schedule I.
The Company hereby grants to the Underwriters the right to purchase at
their election in whole or in part up to 750,000 Optional Shares at the
purchase price per share set forth in clause (a) in the paragraph above for the
sole purpose of covering over-allotments in the sale of Firm Shares. If the
option granted hereby is exercised in part, then the respective number of
Optional Shares to be purchased by each of the Underwriters shall be determined
by multiplying the total number of Optional Shares as to which such election
shall have been exercised by the Underwriters by a fraction, the numerator of
which is the maximum number of Optional Shares such Underwriter is entitled to
purchase as set forth opposite the name of such Underwriter in Schedule I
hereto and the denominator of which is the maximum number of Optional Shares
that all Underwriters are entitled to purchase hereunder (with the resulting
number to be adjusted by the Underwriters so as to eliminate fractional
shares). Any such election to purchase Optional Shares may be exercised by
written notice from the Underwriters to the Company, given one time within a
period of 30 calendar days after the date of this Agreement and setting forth
the aggregate number of Optional Shares to be purchased and the date on which
such Optional Shares are to be delivered, which date shall not be less than
three or more than ten business days after such notice is given, as determined
by the Underwriters, but in no event earlier than the First Time of Delivery.
The Company shall furnish or cause to be furnished to the Underwriters the
certificates, letters, and opinions, and to satisfy all conditions, set forth
in Section 7 hereof at the Subsequent Time of Delivery (as such term is defined
in Section 4, below).
3. OFFERING BY THE UNDERWRITERS. Upon the authorization by the
Underwriters of the release of the Shares, the several Underwriters propose to
offer the Shares for sale upon the terms and conditions disclosed in the
Prospectus.
4. DELIVERY OF SHARES; CLOSING. Certificates in definitive form
for the Shares to be purchased by each Underwriter hereunder, and in such
denominations and registered in such names as Raymond James & Associates, Inc.
may request upon at least 48 hours prior notice to the Company, shall be
delivered by or on behalf of the Company to the Underwriters for the respective
account of each such Underwriter, against payment by such Underwriter on its
behalf as provided herein. Payment shall be made (i) with respect to the
purchase price for the Firm Shares and any Optional Shares purchased from the
Company if any Optional Shares are purchased hereunder, to the Company by
official bank check or checks payable to the order of, or by wire transfer to
the account of, the Company, in same day available funds against delivery of
the certificates for the Firm Shares or Optional Shares purchased from the
Company, as the case may be. The closing of the sale and purchase of the
Shares shall be held at the offices of Raymond James & Associates, Inc., 880
Carillon Parkway, St. Petersburg, Florida 33716, except that physical delivery
of certificates for the Shares shall be made at the office of ChaseMellon
Shareholder Services, L.L.C., 120 Broadway, 13th Floor, New York, New York
10271, or at such other location designated by Raymond James & Associates, Inc.
The time and date of such delivery and payment shall be, with respect to the
Firm Shares, at 10:00 a.m., local time, on the third (or if the Firm Shares are
priced as contemplated by Rule 15c6-1(c) of the Commission, after 4:30 p.m.,
Washington, D.C. time, the fourth) full business day after this Agreement is
executed or at such other time and date as the Underwriters and the Company may
agree upon in writing, and, with respect to the Optional Shares, 10:00 a.m.,
local time, on the date specified by the Underwriters in the written notice
given by the Underwriters of the Underwriters' election to purchase all or part
of such Optional Shares, or at such other time and date as the Underwriters and
the Company may agree upon in writing. Such time and date for delivery of the
Firm Shares is herein called the "First Time of Delivery," and such time and
date for delivery of any Optional Shares, if not the First Time of Delivery, is
herein called the "Subsequent Time of Delivery," and each such time and date
for delivery is herein called a "Time of Delivery." The Company will make
certificates for the Shares available for checking and packaging at least 24
hours prior to each Time of Delivery at the office of The Depository Trust
Company, 55 Water Street, New York, New York 10041 or at such other location in
New York, New York specified by the Underwriters in writing at least 48 hours
prior to such Time of Delivery.
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<PAGE> 10
5. COVENANTS.
(a) COVENANTS OF THE COMPANY. The Company covenants and
agrees with each of the Underwriters:
(i) If required by the rules and regulations of
the Commission, the Company will file the Prospectus with the
Commission pursuant to and in accordance with subparagraph (1)
(or, if applicable and if consented to by the Underwriters,
subparagraph (4)) of Rule 424(b) not later than the earlier of
(A) the second business day following the execution and
delivery of this Agreement or (B) the fifth business day after
the date on which a post-effective amendment to the
Registration Statement is declared effective. The Company will
advise the Underwriters promptly of any such filing.
(ii) The Company will not file with the Commission
the Prospectus or the amendment referred to in the second
sentence of Section 1(i) hereof, any amendment or supplement
to the Prospectus or any amendment to the Registration
Statement unless the Underwriters have received a reasonable
period of time to review any such proposed amendment or
supplement and consented to the filing thereof, such consent
not to be unreasonably delayed or withheld. The Company will
use its best efforts to cause any such amendment to the
Registration Statement to be declared effective as promptly as
possible. Upon the reasonable request of the Underwriters or
counsel for the Underwriters, the Company will promptly prepare
and file with the Commission, in accordance with the rules and
regulations of the Commission, any amendments to the
Registration Statement or amendments or supplements to the
Prospectus that may be necessary or advisable in connection
with the distribution of the Shares by the several Underwriters
and will use its best efforts to cause any such amendment to
the Registration Statement to be declared effective as promptly
as possible. If required, the Company will file any amendment
or supplement to the Prospectus with the Commission in the
manner and within the time period required by Rule 424(b) under
the Act. The Company will advise the Underwriters, promptly
after receiving notice thereof, of the time when any amendment
to the Registration Statement has been filed or declared
effective or the Prospectus or any amendment or supplement
thereto has been filed and will provide evidence to the
Underwriters of each such filing or effectiveness.
(iii) The Company will advise the Underwriters
promptly after receiving notice or obtaining knowledge of (A)
the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or any part
thereof or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto (B) the suspension of the qualification of
the Shares for offer or sale in any jurisdiction or of the
initiation or threatening of any proceeding for any such
purpose, or (C) any request made by the Commission or any
securities authority of any other jurisdiction for amending
the Registration Statement, for amending or supplementing the
Prospectus or for additional information. The Company will
use its best efforts to prevent the issuance of any such stop
order and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
(iv) If during the period when the delivery of a
prospectus relating to the Shares is required under the Act,
any events have occurred as a result of which the Prospectus
as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not
misleading, or if for any reason it is necessary during such
same period to amend or supplement the Prospectus to comply
with the Act or the rules and regulations thereunder, the
Company will promptly notify the Underwriters and upon their
request (but at the Company's expense) prepare and file with
the Commission an amendment or supplement to the
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<PAGE> 11
Prospectus that corrects such statement or omission or effects
such compliance and will furnish without charge to each
Underwriter and to any dealer in securities as many copies of
such amended or supplemented Prospectus as the Underwriters may
from time to time reasonably request. If an Underwriter is
required to deliver a prospectus relating to the Shares at any
time after the period when delivery of a prospectus is required
under the Act, upon request of the Underwriters but at the
expense of the Underwriters, the Company will prepare and
deliver to the Underwriters as many copies as the Underwriters
may request of an amended or supplemented Prospectus complying
with Section 10(a)(3) of the Act. Neither the Underwriters'
consent to, nor the Underwriters' delivery of, any such
amendment or supplement shall constitute a waiver of any of the
conditions set forth in Section 7.
(v) The Company promptly from time to time will
take such action as the Underwriters may reasonably request to
qualify the Shares for offering and sale under the securities
or blue sky laws of such jurisdictions as the Underwriters may
request and will continue such qualification in effect for as
long as may be necessary to complete the distribution of the
Shares, provided that in connection therewith the Company
shall not be required to qualify as a foreign corporation or
to file a general consent to service of process in any
jurisdiction.
(vi) The Company will promptly provide the
Underwriters, without charge, (A) two manually executed copies
of the Registration Statement as originally filed with the
Commission and of each amendment thereto, (B) for each other
Underwriter a conformed copy of the Registration Statement as
originally filed and of each amendment thereto, without
exhibits, and (C) so long as a prospectus relating to the
Shares is required to be delivered under the Act, as many
copies of each Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto as the Underwriters may
reasonably request.
(vii) As soon as practicable, but in any event not
later than the 45th day following the end of the fiscal
quarter in which occurs the first anniversary of the effective
date of the Registration Statement (except such date shall be
the 90th day rather than the 45th day if such quarter is then
the fourth fiscal quarter of the Company's fiscal year) after
the effective date of the Registration Statement, the Company
will make generally available to its security holders an
earnings statement of the Company covering a period of at
least 12 months beginning after the effective date of the
Registration Statement (which need not be audited) complying
with Section 11(a) of the Act and the rules and regulations
thereunder.
(viii) During the period beginning from the date
hereof and continuing to and including the date 180 days after
the date of the Conversion, the Company will not, without the
prior written consent of Raymond James & Associates, Inc.,
offer, pledge, issue, sell, contract to sell, grant any option
for the sale of, or otherwise dispose of (or announce any
offer, pledge, sale, grant of an option to purchase or other
disposition), directly or indirectly, any shares of Common
Stock or securities convertible into, exercisable or
exchangeable for, shares of Common Stock, except (a) as
provided in Section 2 and except for the issuance of Common
Stock upon the exercise of stock options or warrants
outstanding on the date of this Agreement to the extent that
such stock options or warrants were issued pursuant to plans
or agreements which are disclosed in the Prospectus, (b) the
grant of options to employees or directors under existing
stock option plans and the issuance of Common Stock upon the
exercise thereof, or (c) as otherwise disclosed or
contemplated by the Prospectus.
(ix) During a period of five years from the
effective date of the Registration Statement, the Company will
furnish to the Underwriters, without charge, (A) copies of all
reports or other communications (financial or other) furnished
to shareholders generally, (B) as soon as they are available,
copies of any reports and financial statements furnished to or
filed with the
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<PAGE> 12
Commission or the National Association of Securities Dealers,
Inc. or any national securities exchange upon which trading in
shares of the Common Stock is listed or reported, and (C) such
additional information concerning the business and financial
condition of the Company as the Underwriters may reasonably
request subject to appropriate confidentiality provisions with
respect to material non-public information.
(x) The Company will not (A) take, directly or
indirectly, prior to the termination of the underwriting
syndicate contemplated by this Agreement, any action designed
to cause or to result in, or that might reasonably be expected
to constitute, the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or
resale of any of the Shares, (B) sell, bid for, purchase or
pay anyone any compensation for soliciting purchases of, the
Shares, or (C) pay or agree to pay to any person any
compensation for soliciting another to purchase any other
securities of the Company.
(xi) The Company will apply the net proceeds from
the offering in the manner set forth under "Use of Proceeds"
in the Prospectus.
(xii) The Company will use its best efforts to cause
the Shares to be listed on the Nasdaq National Market at each
Time of Delivery and maintain such listing on a continuous
basis for at least one year from the date hereof.
(xiii) If at any time during the period beginning on
the date the Registration Statement becomes effective and
ending on the later of (A) the date 25 days after such
effective date (or if the Underwriter's option granted pursuant
to Section 2 hereof has not been exercised by such date, then
35 days after such effective date) and (B) the date that is the
earlier of (1) the date on which the Company first files with
the Commission a Quarterly Report on Form 10-Q after such
effective date and (2) the date on which the Company first
issues a quarterly financial report to shareholders after such
effective date, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in the
reasonable opinion of the Underwriters the market price of the
Common Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event
necessitates an amendment of or supplement to the Prospectus),
the Company will, after written notice from the Underwriters
advising the Company to the effect set forth above, forthwith
prepare, consult with the Underwriters concerning the substance
of, and consult with Company counsel to determine whether or
not it is advisable, under the circumstances, to disseminate a
press release or other public statement, reasonably
satisfactory to the Underwriters, responding to or commenting
on such rumor, publication or event.
6. EXPENSES. The Company will pay all costs and expenses
incident to the performance of its respective obligations under this Agreement,
whether or not the transactions contemplated hereby are consummated or this
Agreement is terminated pursuant to Section 10 hereof, including, without
limitation, all costs and expenses incident to (i) the fees, disbursements and
expenses of the Company's counsel and accountants in connection with the
registration of the Shares under the Act and all other expenses in connection
with the preparation, printing and, if applicable, filing of the Registration
Statement (including all amendments thereto), any Preliminary Prospectus, the
Prospectus and any amendments and supplements thereto, and any blue sky
memoranda; (ii) the delivery of copies of the foregoing documents and this
Agreement to the Underwriters; (iii) the filing fees of the Commission and the
National Association of Securities Dealers, Inc. relating to the Shares; (iv)
the preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Shares, including transfer agent's and registrar's fees; (v) the
qualification of the Shares for offering and sale under state securities and
blue sky laws, including filing fees and the reasonable fees and disbursements
of counsel for the Underwriters relating thereto; (vi) any listing of the
Shares on the Nasdaq National Market and (vii) any expenses for travel, lodging
and meals incurred by the
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Company and any of its officers, directors and employees in connection with any
meetings with prospective investors in the Shares.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters hereunder to purchase and pay for the Shares to
be delivered at each Time of Delivery shall be subject, in their discretion, to
the accuracy of the representations and warranties of the Company contained
herein as of the date hereof and as of such Time of Delivery, to the accuracy
of the statements of Company officers made pursuant to the provisions hereof,
to the performance by the Company of their respective covenants and agreements
hereunder, and to the following additional conditions precedent:
(a) If the registration statement as amended to date has
not become effective prior to the execution of this Agreement, such
registration statement shall have been declared effective not later than 5:30
p.m., St. Petersburg time, on the date of this Agreement or such later date
and/or time as shall have been consented to by the Underwriters in writing. If
required, the Prospectus and any amendment or supplement thereto shall have
been filed with the Commission pursuant to Rule 424(b) within the applicable
time period prescribed for such filing and in accordance with Section 5(a) of
this Agreement; no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceedings for
that purpose shall have been instituted, or to the knowledge of the Company and
the Underwriters, threatened or contemplated by the Commission; and all
requests for additional information on the part of the Commission shall have
been complied with to the reasonable satisfaction of the Underwriters.
(b) Holland & Knight, counsel for the Underwriters, shall
have furnished to the Underwriters such opinion or opinions, dated such Time of
Delivery, with respect to the incorporation of the Company, the validity of the
Shares being delivered at such Time of Delivery, the Registration Statement,
the Prospectus, and other related matters as the Underwriters may reasonably
request, and the Company shall have furnished to such counsel such documents as
such counsel or the Underwriters request prior to such Time of Delivery for the
purpose of enabling them to pass upon such matters.
(c) The Underwriters shall have received an opinion,
dated at each Time of Delivery, of Alston & Bird LLP, to the effect that:
(i) The Company and each of its Subsidiaries is
duly qualified to transact business as a foreign corporation
and is in good standing under the laws of each other
jurisdiction other than Florida in which it owns or leases
property, or conducts any business, so as to require such
qualification, except where the failure to so qualify would
not have a Material Adverse Effect.
(ii) The Company has no subsidiaries other than
those listed on Exhibit 21.1 to the Registration Statement
and, to the knowledge of such counsel, does not have any
ownership interest in any partnership, joint venture, or other
entity or association.
(iii) Except as disclosed in the Prospectus, to the
knowledge of such counsel there are no outstanding (A)
securities or obligations of the Company convertible into or
exchangeable for any capital stock of the Company, (B)
warrants, rights or options to subscribe for or purchase from
the Company any such capital stock or any such convertible or
exchangeable securities or obligations, or (C) obligations of
the Company to issue any shares of capital stock, any such
convertible or exchangeable securities or obligations, or any
such warrants, rights, or options.
(iv) Except as disclosed in the Prospectus, to the
knowledge of such counsel there are no contracts, agreements,
or understandings between the Company and any person granting
such person the right to require the Company to file a
registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person
or to require the
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<PAGE> 14
Company to include such securities in the securities registered
pursuant to the Registration Statement (or any such right has
been effectively exercised or waived) or in any securities
being registered pursuant to any other registration statement
filed by the Company under the Act.
(v) All offers and sales of the Company's capital
stock prior to the date hereof were at all relevant times duly
registered under the Act or exempt from the registration
requirements of the Act.
(vi) The Company is not, nor with the giving of
notice or passage of time or both, will it be, in violation of
its Articles of Incorporation or Bylaws or in default under
any indenture, mortgage, deed of trust, loan agreement, lease,
or other agreement or instrument to which the Company is a
party or to which any of its properties or assets is subject
and which in each instance is an exhibit to the Registration
Statement.
(vii) The issue and sale of the Shares being issued
at such Time of Delivery and the performance of this Agreement
and the consummation of the transactions herein contemplated
will not conflict with, or (with or without the giving of
notice or the passage of time or both) result in a breach or
violation of any of the terms or provisions of, or constitute
a default under, any material indenture, mortgage, deed of
trust, loan agreement, lease, or other agreement or instrument
known to such counsel to which the Company is party or to
which any of its properties or assets is subject, nor will
such action conflict with or violate any provision of the
Articles of Incorporation or Bylaws of the Company or any
federal statute, rule or regulation normally applicable to
transactions of the type herein contemplated, or to the
knowledge of such counsel, any other statute, rule or
regulation (assuming compliance with all applicable state
securities or blue sky laws) or, to the extent known to such
counsel, any order, judgment, or decree of any court or
governmental agency or body having jurisdiction over the
Company or any of its properties or assets (it being
understood that such counsel need not express any opinion with
regard to insurance regulatory matters or, under this
paragraph, compliance with federal securities laws).
(viii) No consent, approval, authorization, order,
or declaration of or from, or registration, qualification or
filing with, any federal court or governmental agency or body,
or to the knowledge of such counsel, any other court or
governmental agency or body, is required for the issue and
sale of the Shares or the consummation of the transactions
contemplated by this Agreement, except such as have been
obtained under the Act and the rules and regulations
thereunder and such as may be required by the National
Association of Insurance Dealers, Inc. or under state
securities or blue sky laws in connection with the offer,
sale, and distribution of the Shares by the Underwriters (it
being understood that such counsel need not express any
opinion with regard to insurance regulatory matters).
(ix) To such counsel's knowledge and other than as
disclosed in or contemplated by the Prospectus, (A) there is
no litigation, arbitration, claim, proceeding (formal or
informal) or investigation pending or threatened (or any
reasonable basis therefor) in which the Company or any of its
Subsidiaries is a party or of which any of its properties or
assets is the subject which, if determined adversely to the
Company or any of its Subsidiaries, would, individually or in
the aggregate, reasonably be expected to have a Material
Adverse Effect; and (B) neither the Company nor any of its
Subsidiaries is in violation of, or in default with respect
to, any foreign or domestic statute, rule, regulation, order,
judgment or decree, (excluding any insurance law, rule,
regulation, order, judgment or decree).
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(x) This Agreement has been duly authorized,
executed and delivered by the Company.
(xi) The Registration Statement and the Prospectus
and each amendment or supplement thereto (other than the
financial statements and related schedules and other financial
and statistical data therein and the section therein entitled
"Underwriting," as to which such counsel need express no
opinion), as of their respective effective or issue dates,
complied as to form in all material respects with the
requirements of the Act and the rules and regulations
thereunder. The descriptions in the Registration Statement and
the Prospectus of statutes, legal and governmental proceedings
(excluding insurance and Florida laws, regulations, and
governmental proceedings, as to which such counsel need not
express an opinion), or contracts and other documents are
accurate in all material respects and fairly present
the information required to be shown, and such counsel does
not know of any statutes or legal or governmental proceedings
required to be described in the Registration Statement or
Prospectus that are not described as required or of any
contracts or documents of a character required to be described
in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not described
and filed as required.
(xii) The Registration Statement is effective under
the Act, any required filing of the Prospectus pursuant to
Rule 424(b) has been made in the manner and within the time
period required by Rule 424(b), and no stop order suspending
the effectiveness of the Registration Statement or any part
thereof has been issued and, to such counsel's knowledge, no
proceedings for that purpose have been instituted or
threatened or are contemplated by the Commission.
(xiii) The Company is not, and will not be as a
result of the consummation of the transactions contemplated by
this Agreement, an "investment company," or a company
"controlled" by an "investment company," within the meaning of
the Investment Company Act of 1940.
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deem proper, on warranties,
representations and certificates of responsible officers of the Company and
public officials and, as to matters involving the application of laws of any
jurisdiction other than Georgia or the United States, to the extent satisfactory
in form and scope to counsel for the Underwriters, upon the opinion of local
counsel satisfactory to counsel for the Underwriters, provided that such counsel
states such counsel believes that the Underwriters are justified in relying upon
such opinion and copies of such opinion are delivered to the Underwriters and
counsel for the Underwriters.
In addition, such counsel shall state that (i) based solely
upon a letter from The Nasdaq Stock Market to the Company attached to such
counsel's opinion, the Firm Shares and the Optional Shares have been approved
for quotation on The Nasdaq National Market upon issuance, (ii) based solely
upon a certificate of officers of the Company, no securities of the Company have
previously been offered or sold to any person who is not a Florida resident,
except in connection with the transactions contemplated by this Agreement and
(iii) such counsel has participated in conferences with officers and other
representatives of the Company and the Underwriters and their counsel during
which the contents of the Registration Statement and the Prospectus and related
matters were discussed and reviewed, and, although such counsel has not
independently verified and is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus, on the basis of the
information that such counsel developed in the course of the performance of the
services referred to above, considered in the light of such counsel's
understanding of the applicable law, nothing came to their attention that
caused them to believe that the Registration Statement or the Prospectus (other
than the financial statements and schedules and the other financial and
statistical data therein, as to which such counsel need express no belief), on
such effective date, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
to make the statements therein not misleading.
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<PAGE> 16
(d) The Underwriters shall have received an opinion,
dated at each Time of Delivery, of McConnaughhay, Roland, Maida & Cherr, P.A.,
to the effective that:
(i) The Company and each of its Subsidiaries has
been duly incorporated, is validly existing as a corporation
in good standing under the laws of Florida and has the
corporate power and authority to own or lease its properties
and conduct its business as described in the Registration
Statement and the Prospectus. The Company has the corporate
power and authority to enter into this Agreement and perform
its obligations hereunder.
(ii) The Company's authorized, issued and
outstanding capital stock is set forth in the Prospectus. All
of the issued shares of Common Stock of the Company have been
duly authorized and validly issued, are fully paid and
nonassessable and conform to the description of the Common
Stock contained in the Prospectus. None of the issued shares
of capital stock of the Company has been issued or is owned or
held in violation of any preemptive rights of shareholders,
and no person or entity (including any holder of outstanding
shares of capital stock of the Company) has any statutory
preemptive or, to the knowledge of such counsel, other rights
to subscribe for any of the Shares. All offers and sales of
the Company's capital stock outstanding prior to the date
hereof were the subject of an available exemption from the
registration or qualification requirements of the Florida
securities or blue sky laws (to the extent such offers and
sales were subject to such Florida laws).
(iii) The Shares to be issued and sold by the
Company have been duly authorized and, when issued and
delivered against payment therefor as provided herein, will be
validly issued and fully paid and nonassessable and will
conform to the description of the Common Stock contained in
the Prospectus, and the certificates evidencing the Shares
comply with all requirements of applicable law.
(iv) ESIF holds such insurance licenses,
certificates and permits from governmental authorities
(including, without limitation, Insurance Licenses) which are
necessary to the conduct of its business as described in the
Prospectus, and the Company and ESIF have fulfilled and
performed all obligations necessary to maintain the Insurance
Licenses. Neither the Company nor ESIF has received any
notice of, and such counsel has no knowledge of, any action,
suit, proceeding, or investigation, and to the best knowledge
of such counsel there has been no threatened action, suit,
proceeding or investigation, that could reasonably be expected
to result in the revocation, termination or suspension of any
Insurance Licenses.
(v) The issue and sale of the Shares being issued
at such Time of Delivery and the performance of this Agreement
and the consummation of the transactions herein contemplated
will not violate any Florida statute, rule, or regulation,
or to the extent known to such counsel, any order, judgment,
or decree of any court or governmental agency or body having
jurisdiction over the Company or any of its properties or
assets related to insurance regulatory matters.
(vi) No consent, approval, authorization, order, or
declaration of or from, or registration, qualification or
filing with, any Florida court or Florida governmental agency
or body or to the knowledge of such counsel from any other
court, governmental agency or body related to insurance
regulatory matters is required for the issue and sale of the
Shares or the consummation of the transactions contemplated by
this Agreement, except such as have been obtained under the
Florida Insurance Code and the rules and regulations
thereunder.
(vii) The Plan has been duly adopted by the
required vote of ESIF's Board of Trustees and members and is
in compliance with the insurance laws of the State of Florida
applicable to the
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<PAGE> 17
reorganization of group self-insurance funds into stock
property and casualty insurance companies. Other than the
conditions to effectiveness set forth in the Order or in the
Plan, no other approvals are required to be obtained under the
Florida Insurance Code for the effectiveness of the Plan.
Prior to or contemporaneously with the First Time of Delivery
(as hereinafter defined) each of the actions required to occur
prior to the effectiveness of the Plan pursuant to the Order
or the Plan will have occurred.
(viii) To such counsel's knowledge and other than as
disclosed in or contemplated by the Prospectus, neither the
Company nor any of its Subsidiaries is in violation of, or in
default with respect to, any Florida statute, rule, regulation,
order, judgment or decree, or as to insurance regulatory
matters, any other statute, rule, regulation, order, judgment
or decree.
(ix) The descriptions in the Registration Statement
and the Prospectus of insurance-related and Florida laws and
regulations and governmental proceedings are accurate and
fairly present the information required to be shown, and such
counsel does not know of any insurance related or Florida laws
or regulations or governmental proceedings required to be
described in the Registration Statement or Prospectus that are
not described as required.
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deem proper, on warranties,
representations and certificates of responsible officers of the Company and
public officials.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company and the Underwriters and their counsel during which the contents of the
Registration Statement and the Prospectus and related matters were discussed
and reviewed, and, although such counsel has not independently verified and is
not passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus, on the basis of the information that such counsel
developed in the course of the performance of the services referred to above,
considered in the light of such counsel's understanding of the applicable law,
nothing came to their attention that caused them to believe that the
Registration Statement or the Prospectus, on such effective date, contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(e) The Underwriters shall have received from Ernst &
Young LLP and Brinton & Mendez letters as of the date hereof and as of the
Effective Date and each Time of Delivery, in form and substance satisfactory to
the Underwriters, to the effect set forth in Annex I and Annex II hereto,
respectively. In the event that the letters referred to in this Section 7(e)
set forth any changes, decreases or increases in the items specified in clause
(iii) of Annex I, it shall be a further condition to the obligations of the
Underwriters that (i) such letters shall be accompanied by a written
explanation by the Company as to the significance thereof, unless the
Underwriters deem such explanation unnecessary, and (ii) such changes,
decreases, or increases do not, in the reasonable judgment of the Underwriters,
make it impracticable or inadvisable to proceed with the purchase, sale and
delivery of the Shares being delivered at such Time of Delivery as contemplated
by the Registration Statement, as amended as of the date of such letter.
(f) Since the date of the latest audited financial
statements included in the Prospectus, the Company and its Subsidiaries shall
not have sustained (i) any loss or interference with their respective businesses
from fire, explosion, flood, hurricane or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as disclosed in or contemplated by the Prospectus, or
(ii) any change, or any development involving a prospective change (including
without limitation a change in management or control of the Company) in or
affecting the position (financial or otherwise), results of operations, net
worth or business prospects of the Company and its Subsidiaries, otherwise than
as disclosed in or contemplated by the Prospectus, the effect of which, in
either such case, is in the reasonable judgment of the
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<PAGE> 18
Underwriters so material and adverse as to make it impracticable or inadvisable
to proceed with the purchase, sale, and delivery of the Shares being delivered
at such Time of Delivery as contemplated by the Registration Statement, as
amended as of the date hereof.
(g) Subsequent to the date hereof there shall not have
occurred any of the following: (i) any suspension or limitation in trading in
securities generally on the New York Stock Exchange, or any setting of minimum
prices for trading on such exchange or in the Common Stock by the Commission or
The Nasdaq Stock Market; (ii) a moratorium on commercial banking activities in
New York or Florida declared by either federal or state authorities; or (iii)
any outbreak or escalation of hostilities involving the United States,
declaration by the United States of a national emergency or war or any other
national or international calamity or emergency if the effect of any such event
specified in this clause (iii) in the reasonable judgment of the Underwriters
makes it impractical or inadvisable to proceed with the purchase, sale and
delivery of the Shares being delivered at such Time of Delivery as contemplated
by the Registration Statement, as amended as of the date hereof.
(h) The Company shall have furnished to the Underwriters
at such Time of Delivery certificates of officers of the Company, reasonably
satisfactory to the Underwriters, as to the accuracy in all material respects
of the representations and warranties of the Company herein at and as of such
Time of Delivery, as to the performance by the Company of all of their
respective obligations hereunder to be performed at or prior to such Time of
Delivery, and as to such other matters as the Underwriters may reasonably
request, and the Company shall have furnished or caused to be furnished
certificates as to the matters set forth in subsections (a) and (f) of this
Section 7, and as to such other matters as the Underwriters may reasonably
request.
(i) The Shares shall have been approved for quotation on
the Nasdaq National Market.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless
each Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages, or liabilities (or actions
in respect thereof) arise out of or are based upon: (i) any untrue statement or
alleged untrue statement made by the Company in Section 1 of this Agreement;
(ii) any untrue statement or alleged untrue statement of any material fact
contained in (A) the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or (B) any application or other document, or any amendment or
supplement thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify the Shares under the securities or blue sky laws thereof or filed with
the Commission or any securities association or securities exchange (each an
"Application"); or (iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus,
the Prospectus or any amendment or supplement thereto, or any Application a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating, defending against or appearing as a third-party witness in
connection with any such loss, claim, damage, liability or action; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or action arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement or any Amendment thereto,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto or any Application in reliance upon and in conformity with written
information furnished to the Company by any Underwriter expressly for use
therein. The obligations of the Company to indemnify the Underwriters (or any
controlling person of such Underwriter) pursuant to this indemnity agreement
are subject to the condition that, insofar as such losses, claims, damages,
liabilities or expenses relate to any such untrue statement, alleged untrue
statement, omission or alleged omission made in a Preliminary Prospectus that
is corrected in the Prospectus, such indemnity agreement shall not inure to the
benefit of any Underwriter from whom the person asserting such losses,
liabilities, claims, damages or expenses purchased the Shares in the Offering,
if (i) such Underwriter failed to deliver a copy of the Prospectus to such
person at or prior to the time delivery of the
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<PAGE> 19
Prospectus as is required by the Act, unless such failure was due to the
failure by the Company to provide copies of the Prospectus to such Underwriter;
and (ii) the delivery of such Prospectus to such person would have constituted
a complete defense to the losses, claims, damages, liabilities or expenses
asserted by such person. The Company will not, without the prior written
consent of each Underwriter, settle or compromise or consent to the entry of
any judgment in any pending or threatened claim, action, suit or proceeding (or
related cause of action or portion thereof) in respect to which indemnification
may be sought hereunder (whether or not such Underwriter is a party to such
claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of such Underwriter from all
liability arising out of such claim, action, suit or proceeding (or related
cause of action or portion thereof).
(b) Each Underwriter, severally but not jointly, agrees
to indemnify and hold harmless the Company against any losses, claims, damages
or liabilities to which the Company may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus,
or any amendment or supplement thereto, or any Application or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter expressly for use therein; and will reimburse
the Company for any legal or other expenses reasonably incurred by the Company
in connection with investigating or defending any such loss, claim, damage,
liability or action.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; provided, however,
that if the defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnifying party shall not have the right to
assume the defense of such action on behalf of such indemnified party and such
indemnified party shall have the right to select separate counsel to defend such
action oh behalf of such indemnified party, provided, further, however, that the
Company shall be liable for the fees and expenses of only one separate firm of
attorneys (in addition to local counsel) for all indemnified parties at any time
in connection with any action, suit or proceeding, or in a series of separate
but substantially similar or related actions, suits or proceedings arising out
of the same general allegations and circumstances. After such notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and approval by such indemnified party of counsel appointed to
defend such action, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses, other
than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence or (ii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. Nothing in this Section 8(c) shall preclude an
indemnified party from participating at its own expense in the defense of any
such action so assumed by the indemnifying party.
(d) If the indemnification provided for in this Section 8
is unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the
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<PAGE> 20
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other from the offering of
the Shares. If, however, the allocation provided by the immediately preceding
sentence is not permitted by applicable law, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company on the one hand and the Underwriters on the
other in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company on the
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would not
be just and equitable if contributions pursuant to this subsection (d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), (i) no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission, and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 8
shall be in addition to any liability which the Company may otherwise have and
shall extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations of
the Underwriters under this Section 8 shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon the
same terms and conditions, to each officer and director of the Company and to
each person, if any, who controls the Company within the meaning of the Act.
9. DEFAULT OF UNDERWRITER.
(a) If any Underwriter defaults in its obligation to
purchase Shares at a Time of Delivery, the Underwriters in their discretion may
arrange for their or another party or other parties to purchase such Shares on
the terms contained herein. If within thirty-six hours after such default by
any Underwriter the Underwriters do not arrange for the purchase of such
Shares, the Company shall be entitled to a further period of thirty-six hours
within which to procure another party or other parties satisfactory to the
Underwriters to purchase such Shares on such terms. In the event that, within
the respective prescribed periods, the Underwriters notify the Company that
they have so arranged for the purchase of such Shares, or the Company notifies
the Underwriters that they have so arranged for the purchase of such Shares,
the Underwriters or the Company shall have the right to postpone a Time of
Delivery for a period of not more than seven days in order to effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees
to file promptly any amendments to the Registration Statement or the Prospectus
that in the opinion of the Underwriters may thereby be made necessary. The
cost of preparing, printing and filing any such amendments shall be paid for by
the Underwriters. The term "Underwriter" as used in this Agreement shall
include
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<PAGE> 21
any person substituted under this Section with like effect as if such person
had originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by the
Underwriters and the Company as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of Shares to be purchased at such Time of Delivery, then
the Company shall have the right to require each non-defaulting Underwriter to
purchase the number of Shares which such Underwriter agreed to purchase
hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the number
of Shares which such Underwriter agreed to purchase hereunder) of the Shares of
such defaulting Underwriter or Underwriters for which such arrangements have not
been made, but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
10. TERMINATION.
(a) This Agreement may be terminated with respect to (i)
the Firm Shares or (ii) any Optional Shares, in the sole discretion of the
Underwriters, by notice to the Company given prior to the First Time of
Delivery or any Subsequent Time of Delivery, respectively, in the event that
(a) any condition to the obligations of the Underwriters set forth in Section 7
hereof has not been satisfied, or (b) the Company shall have failed, refused or
been unable to deliver the Shares or to perform all obligations and satisfy all
conditions on its part to be performed or satisfied hereunder at or prior to
such Time of Delivery, in either case other than by reason of a default by any
of the Underwriters. If this Agreement is terminated pursuant to this Section
10(a), the Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including reasonable counsel fees and disbursements)
that shall have been reasonably incurred by them in connection with the proposed
purchase and sale of the Shares. The Company shall not in any event be liable
to any of the Underwriters for the loss of expected profits from the
transactions covered by this Agreement.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter by the Underwriters and the
Company as provided in Section 9(a), the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of Shares to
be purchased at such Time of Delivery, or if the Company shall not exercise the
right described in Section 9(b) to require non-defaulting Underwriter to
purchase Shares of a defaulting Underwriter or Underwriters, then this
Agreement (or, with respect to a Subsequent Time of Delivery, the obligations
of the Underwriters to purchase and of the Company to sell the Optional Shares)
shall thereupon terminate, without liability on the part of any non-defaulting
Underwriter to the Company, except for the expenses to be borne by the Company
and the Underwriters as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
11. SURVIVAL. The respective indemnities, agreements,
representations, warranties and other statements of the Company and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person referred to in
Section 8(e) or the Company or any officer or director or controlling person of
the Company referred to in Section 8(e), and shall survive delivery of and
payment for the Shares. The respective agreements, covenants, indemnities and
other statements set forth in Sections 6 and 8 hereof shall remain in full force
and effect, regardless of any termination or cancellation of this Agreement.
12. NOTICES. All communications hereunder shall be in writing
and, if sent to any of the Underwriters, shall be mailed, delivered or
telecopied and confirmed in writing to the Underwriters in care of Raymond
James & Associates, Inc., 880 Carillon Parkway, St. Petersburg, Florida 33716,
Attention: Fred E. Whaley, with a copy to Holland & Knight, 400 North Ashley
Drive, Tampa, Florida 33602, Attention: Michael L. Jamieson, Esq.; and
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<PAGE> 22
if sent to the Company, shall be mailed, delivered or telecopied and confirmed
in writing to the Company at 2310 A-Z Park Road, Lakeland, Florida 33601,
Attention: William B. Bull with a copy to Alston & Bird LLP, 1201 West
Peachtree Street, Atlanta, Georgia 30309- 3424, Attention: M. Hill Jeffries,
Esq.
13. ACTION BY THE UNDERWRITERS. Any action under this Agreement
taken by Raymond James & Associates, Inc. will be binding upon the
Underwriters.
14. BINDING EFFECT. This Agreement shall be binding upon, and
inure solely to the benefit of, the Underwriters, the Company and to the extent
provided in Sections 8 and 10 hereof, the officers and directors and controlling
persons referred to therein and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
15. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Florida without giving
effect to any provisions regarding conflicts of laws.
16. COUNTERPARTS. This Agreement may be executed by any one or
more of the parties hereto in any number of counterparts, each of which shall
be deemed to be an original, but all such counterparts shall together
constitute one and the same instrument.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one of the counterparts hereof, and
upon the acceptance hereof by Raymond James & Associates, Inc., on behalf of
each of the Underwriters, this letter will constitute a binding agreement among
the Underwriters and the Company. It is understood that your acceptance of
this letter on behalf of each of the Underwriters is pursuant to the authority
set forth in the Master Agreement among Underwriters, a copy of which shall be
submitted to the Company for examination, upon request, but without warranty on
the part of the Underwriters as to the authority of the signers thereof.
Very truly yours,
SUMMIT HOLDING SOUTHEAST, INC.
By:
-------------------------------
Title:
-----------------------------
The foregoing Agreement is hereby confirmed and
accepted as of the date first written above at
March ____, 1997.
RAYMOND JAMES & ASSOCIATES, INC.
By: Raymond James & Associates, Inc.
By:__________________________________________
On behalf of each of the Underwriters
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SCHEDULE I
<TABLE>
<CAPTION>
Maximum
Number of
Optional Shares
to be Purchased
Number of Upon Exercise
Firm Shares of
to be Over-Allotment
Underwriter Purchased Option
----------- --------- ------
<S> <C> <C>
Raymond James & Associates, Inc.
ABN AMRO Chicago Corporation
</TABLE>
23
<PAGE> 24
SCHEDULE II
PUBLIC HEARING NOTICE PUBLICATIONS
24
<PAGE> 25
ANNEX I
Pursuant to Section 7(e) of the Underwriting Agreement, Ernst & Young
LLP shall furnish a letter to the Underwriters to the effect that:
(i) they are independent public accountants with respect
to the Company within the meaning the Act and the applicable published
rules and regulations thereunder;
(ii) in their opinion, the financial statements and
schedules audited by them and included in the Prospectus and the
Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the Act and the related
published rules and regulations thereunder;
(iii) On the basis of limited procedures, not constituting
an audit in accordance with generally accepted auditing standards,
consisting of a reading of the latest available interim financial
statements of the Company, inspection of the minute books of the
Company since the date of the latest audited financial statements
included in the Prospectus, inquiries of officials of the Company
responsible for financial accounting matters and such other inquiries
and procedures as may be specified in such letter, nothing came to
their attention that caused them to believe that:
(A) the unaudited financial statements of the
Company included in the Registration Statement and the
Prospectus do not comply in form in all material respects with
the applicable accounting requirements of the Act and the
related published rules and regulations thereunder or are not
in conformity with generally accepted principles applied on
the basis substantially consistent with that of the audited
financial statements included in the Registration Statement
and the Prospectus;
(B) the unaudited amounts for sales, net revenues
and total and per share amounts of net income included in the
Registration Statement and the Prospectus do not agree with the
amounts set forth in the unaudited financial statements for
those same periods or are not in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the corresponding amounts in the
audited financial statements included in the Registration
Statement and the Prospectus;
(C) as of a specified date not more than five
days prior to the date of such letter, there were any changes
in the capital stock (other than the issuance of capital stock
upon exercise of options which were outstanding on the date of
the latest balance sheet included in the Prospectus) or any
increase in inventories or the long-term debt or short-term
debt of the Company, or any decreases in net current assets or
net assets or other items specified by the Underwriters, or
any increases in any items specified by the Underwriters, in
each case as compared with amounts shown in the latest balance
sheet included in the Prospectus, except in each case for
changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such
letter;
(D) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in Clause (A) there were any
decreases in net sales or operating income or the total or per
share amounts of net income or other items specified by the
Underwriters, or any increases in any items specified by the
Underwriters, in each case as compared with the comparable
period of the preceding year and with any other period of
corresponding length specified by the Underwriters, except in
each case for increases or decreases which the Prospectus
discloses have occurred or may occur which are described in
such letter; and
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<PAGE> 26
(iv) In addition to the audit referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraph (iii) above, they have carried out certain specified
procedures, not constituting an audit in accordance with generally
accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the Underwriters
which are derived from the general accounting records of the Company,
included in the Registration Statement and the Prospectus, or which
appear in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Underwriters, and have compared certain of
such amounts, percentages and financial information with the accounting
records of the Company and have found them to be in agreement.
References to the Registration Statement and the Prospectus in this
Annex I shall include any amendment or supplement thereto at the date of such
letter.
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<PAGE> 27
ANNEX II
Pursuant to Section 7(e) of the Underwriting Agreement, Brinton &
Mendez shall furnish a letter to the Underwriters to the effect that:
(i) they are independent public accountants with respect
to the Company within the meaning the Act and the applicable published
rules and regulations thereunder;
(ii) in their opinion, the financial statements and
schedules audited by them and included in the Prospectus and the
Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the Act and the related
published rules and regulations thereunder;
(iii) On the basis of limited procedures, not constituting
an audit in accordance with generally accepted auditing standards,
consisting of a reading of the latest available interim financial
statements of the Company, inspection of the minute books of the
Company since the date of the latest audited financial statements
included in the Prospectus, inquiries of officials of the Company
responsible for financial accounting matters and such other inquiries
and procedures as may be specified in such letter, nothing came to
their attention that caused them to believe that:
(A) the unaudited financial statements of the
Company included in the Registration Statement and the
Prospectus do not comply in form in all material respects with
the applicable accounting requirements of the Act and the
related published rules and regulations thereunder or are not
in conformity with generally accepted principles applied on
the basis substantially consistent with that of the audited
financial statements included in the Registration Statement
and the Prospectus;
(B) the unaudited amounts for sales, net revenues
and total and per share amounts of net income included in the
Registration Statement and the Prospectus do not agree with the
amounts set forth in the unaudited financial statements for
those same periods or are not in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the corresponding amounts in the
audited financial statements included in the Registration
Statement and the Prospectus;
(C) as of a specified date not more than five days
prior to the date of such letter, there were any changes in the
capital stock (other than the issuance of capital stock upon
exercise of options which were outstanding on the date of the
latest balance sheet included in the Prospectus) or any
increase in inventories or the long-term debt or short-term
debt of the Company, or any decreases in net current assets or
net assets or other items specified by the Underwriters, or any
increases in any items specified by the Underwriters, in each
case as compared with amounts shown in the latest balance sheet
included in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter;
(D) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in Clause (A) there were any
decreases in net sales or operating income or the total or per
share amounts of net income or other items specified by the
Underwriters, or any increases in any items specified by the
Underwriters, in each case as compared with the comparable
period of the preceding year and with any other period of
corresponding length specified by the Underwriters, except in
each case for increases or decreases which the Prospectus
discloses have occurred or may occur which are described in
such letter; and
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<PAGE> 28
(iv) In addition to the audit referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraph (iii) above, they have carried out certain specified
procedures, not constituting an audit in accordance with generally
accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the Underwriters
which are derived from the general accounting records of the Company,
included in the Registration Statement and the Prospectus, or which
appear in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Underwriters, and have compared certain of
such amounts, percentages and financial information with the accounting
records of the Company and have found them to be in agreement.
References to the Registration Statement and the Prospectus in this
Annex I shall include any amendment or supplement thereto at the date of such
letter.
28
<PAGE> 1
EXHIBIT 1.2
SUMMIT HOLDING SOUTHEAST, INC.
COMMON STOCK
SUBSCRIPTION ADVISORY AGREEMENT
February __, 1997
RAYMOND JAMES & ASSOCIATES, INC.
ABN AMRO CHICAGO CORPORATION
c/o Raymond James & Associates, Inc.
880 Carillon Parkway
St. Petersburg, FL 33716
Dear Sirs:
Subject to the terms and conditions stated herein, Summit Holding
Southeast, Inc., a Florida corporation (the "Company"), proposes to issue and
sell shares of its common stock, par value $.01 per share ("Common Stock"), in
connection with the Amended Plan of Conversion and Recapitalization (the
"Plan") of Employers Self Insurers Fund ("ESIF"), pursuant to which ESIF will
simultaneously convert from a Florida group self-insurance fund to a Florida
stock insurance company under the name Bridgefield Employers Insurance Company
("Bridgefield") and become a wholly owned subsidiary of the Company (the
"Conversion"). Pursuant to the Plan, the Company proposes: (1) to issue to
Eligible Policyholders (as defined in the Plan) of ESIF shares of Series A
Preferred Stock, par value $10 per share (the "Preferred Stock"), in partial
exchange for their membership interests in ESIF, and (2) to offer to issue and
sell up to 5,000,000 shares of Common Stock (the "Shares," the number of Shares
actually being subscribed for in the Subscription Offering (as defined below)
being referred to as the "Subscribed Shares") to Eligible Policyholders, as well
as to certain directors, officers and employees of the Company and its
subsidiaries (the "Management Group"), pursuant to nontransferable subscription
rights (the "Subscription Offering"). As used in this Agreement, unless the
context requires otherwise, the term "subsidiaries" refers to ESIF and its
subsidiaries, whether before or after the Company's acquisition of the Common
Stock of ESIF in connection with the Conversion.
It is currently the intention of the Company to offer all or a portion
of the Shares not subscribed for in the Subscription Offering to the
public in a public offering (the "Public Offering"). It is acknowledged that
the purchase of any of the Shares by each subscriber is subject to a maximum
purchase limitation of 4.99% of all Shares sold in the Subscription Offering
and the Public Offering, subject to certain permitted exceptions (249,999
shares if all shares offered in the Subscription Offering and the Public
Offering are sold) and a minimum purchase limitation of 100 shares.
The Company desires to retain Raymond James & Associates, Inc. and
ABN AMRO Chicago Corporation (the "Subscription Advisors") to act as the
Company's exclusive subscription advisors in connection with the Subscription
Offering. The Company hereby confirms its agreements contained herein with the
Subscription Advisors with respect to the appointment of the Subscription
Advisors as its advisors to assist in the sale of the Common Stock in the
Subscription Offering.
1. APPOINTMENT OF THE SUBSCRIPTION ADVISORS. Subject to the
terms and conditions of this Agreement, the Company hereby appoints the
Subscription Advisors, as its exclusive Subscription Advisors, to consult with
and advise the Company with regard to the pricing of the Common Stock and
otherwise in connection with the Subscription Offering, and to assist in the
solicitation of subscriptions for the Shares. On the basis of the
representations, warranties and agreements herein contained, the Subscription
Advisors accept such appointment and agree to assist the Company in the
Subscription Offering.
<PAGE> 2
2. SUBSCRIPTION PRICE. The Company, in consultation with the
Subscription Advisors has estimated a price range for the Common Stock of
$11.00 to $13.00 per share (the "Price Range"). This Price Range is not based
on an appraisal or any other objective factors. Using the lowest per share
price within the Price Range, the Company has set the subscription price at
$11.00 per share (the "Subscription Price"), which is the per share amount that
each Eligible Policyholder and members of the Management Group (as such terms
are defined in the Plan) must pay in order to subscribe for shares of Common
Stock in the Subscription Offering, subject to adjustment as described below.
Prior to the effective date of the Conversion (the "Effective Date"),
the Company will determine, after consultation with the Subscription Advisors,
the price per share at which the shares of Common Stock are to be sold to the
public (the "Public Offering Price"). If the Public Offering Price is within
the Price Range so that such price is not less than $11.00 nor more than
$13.00, then the effective price per share paid by subscribers in the
Subscription Offering shall be adjusted to the Public Offering Price. Such
adjustment will be effected by reducing the number of shares of Common Stock
that each subscriber will receive relative to the number of shares that such
subscriber would have received based on a Subscription Price of $11.00. No
subscriber will be required to pay any additional money for its subscription.
If the Subscription Offering is fully subscribed, the Subscription Price shall
remain $11.00 per share.
In the event that the Public Offering Price is not within the Price
Range (either less than $11.00 or more than $13.00), the Company will notify
in writing each subscribing Eligible Policyholder and member of the Management
Group, and each such person may then elect to either (i) rescind such person's
subscription and receive a full refund of the subscription amount paid by such
person with interest thereon as provided in the Company's proxy
statement/prospectus related to the Conversion and Subscription Offering (the
"Prospectus"), or (ii) continue to participate in the Subscription Offering,
receiving the number of shares that such person's subscription amount paid
will purchase at the applicable Public Offering Price or Revised Subscription
Price, provided that in no event will the Company issue to any purchaser in
the Subscription Offering more than 4.99% (subject to certain permitted
exceptions) of the shares of Common Stock to be outstanding immediately
following the Conversion, and the Company will refund in cash any portion of
the subscription amount paid necessary to effect this purchase limit.
3. FEES. In addition to the expenses specified in Section 7, as
compensation for the Subscription Advisors' services under this Agreement, the
Company will pay to the Subscription Advisors a fee of seven percent of the
total aggregate proceeds of the Subscription Offering.
4. CLOSING. In the event that the Subscription Offering is not
consummated for any reason, including but not limited to the inability to sell
the shares of Common Stock during the Subscription Offering and Public Offering
(including any permitted extension thereof), this Agreement shall terminate and
any persons who have subscribed for any of the shares of Common Stock shall
have refunded to them the full amount which has been received from such person,
together with interest, if any, as provided in the Prospectus. In the event of
an over-subscription of the Subscription Offering, the Company shall allocate
the shares to subscribers in accordance with the terms of the Subscription
Offering. The Company hereby agrees that the Subscription Advisors shall be
held harmless from any liability arising out of any allocation of shares of
Common Stock. The closing of the Subscription Offering (which may be
simultaneous with the closing of the Public Offering) shall be held at the
offices of Raymond James & Associates, Inc., 880 Carillon Parkway, St.
Petersburg, Florida 33716, except that physical delivery of certificates for the
shares of Common Stock shall be made at the office of ChaseMellon Shareholder
Services, L.L.C., 120 Broadway, 13th Floor, New York, New York 10271, or at such
other location designated by Raymond James & Associates, Inc. The Company will
instruct ChaseMellon Shareholder Services, L.L.C., its Subscription Agent, to
report to the Subscription Advisors daily the aggregate number of shares of
Common Stock subscribed for by Eligible Policyholders and the Management Group,
and to notify the
2
<PAGE> 3
Subscription Advisors by 10:00 a.m., Eastern Time, on the day after the
expiration of the Subscription Offering as to the aggregate number of shares
subscribed for during the Subscription Offering. At the closing, the Company
shall deliver to the Subscription Advisors, in same day available funds, the
fees and expenses due and owing to the Subscription Advisors as set forth in
Sections 3 and 7 hereof, and any certificates required hereby and other
documents deemed reasonably necessary by the Subscription Advisors shall be
executed and delivered to effect the sale of the Common Stock as contemplated
hereby and pursuant to the terms of the Prospectus. The hour and date upon
which the Company shall release the Subscribed Shares for delivery, in
accordance with the terms hereof, are referred to herein as the "Closing Date."
Such time and date for delivery of the shares of Common Stock is herein called
the "Time of Delivery." The Company will make certificates for the Subscribed
Shares of Common Stock available for checking and packaging at least 24 hours
prior to the Time of Delivery at the office of The Depository Trust Company,
55 Water Street, New York, New York 10041 or at such other location in New
York, New York specified by the Subscription Advisors in writing at least 48
hours prior to the Time of Delivery.
5. REPRESENTATIONS AND WARRANTIES.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to, and agrees with, each of the Subscription
Advisors that:
(i) A registration statement on Form S-1
(File No. 333-16499) with respect to the Preferred Stock and
Common Stock, including a prospectus subject to completion,
has been filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of
1933, as amended (the Act"), and one or more amendments,
including one or more post-effective amendments, to such
registration statement may have been so filed. After the
execution of this Agreement, the Company will file with the
Commission, if such registration statement, as it may have
been amended, has become effective under the Act and
information has been omitted therefrom (or from any
post-effective amendment thereto) in accordance with Rule 430A
under the Act, a prospectus in the form most recently included
in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration
statement) with such changes or insertions as are required by
Rule 430A or permitted by Rule 424(b) under the Act and as
have been provided to and approved by the Subscription
Advisors. As used in this Agreement, the term "Registration
Statement" means such registration statement, as amended at
the time when it (or the most recent post-effective amendment
thereto) was or is declared effective, including all financial
statement schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the
Act and included in the Prospectus (as hereinafter defined);
the term "Preliminary Prospectus" means each prospectus
subject to completion included in such Registration Statement
or any amendment or post-effective amendment thereto
(including the prospectus subject to completion, if any,
included in the Registration Statement (or the most recent
post-effective amendment thereto) at the time it was or is
declared effective); and the term "Prospectus" means the
prospectus first filed with the Commission pursuant to Rule
424(b) under the Act or, if no prospectus is required to be so
filed, such term means the prospectus included in the
Registration Statement. For purposes of the following
representations and warranties, to the extent reference is
made to the Prospectus and at the relevant time the Prospectus
is not yet in existence, such reference shall be deemed to be
to the most recent Preliminary Prospectus.
(ii) No order preventing or suspending the
use of any Preliminary Prospectus or the Prospectus has been
issued and no proceeding for that purpose has been instituted
or threatened by the Commission or the securities authority of
any state or other jurisdiction. No stop order suspending the
effectiveness of the Registration Statement or any part
thereof has been issued and no proceeding for that purpose has
been instituted or, to the knowledge of the Company,
threatened or contemplated by the Commission or the securities
authority of any state or other jurisdiction.
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<PAGE> 4
(iii) When any Preliminary Prospectus was
filed with the Commission it (A) contained all statements
required to be stated therein in accordance with, and complied
in all material respects with the requirements of, the Act and
the rules and regulations of the Commission thereunder, and
(B) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading. When the Registration
Statement or any amendment thereto was or is declared
effective, and at the Time of Delivery, it (A) contained or
will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material
respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder, and (B) did not or
will not include any untrue statement of a material fact or
omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any
amendment or supplement thereto is filed with the Commission
pursuant to Rule 424(b) (or, if the Prospectus or such
amendment or supplement is not required to be so filed, when
the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is
declared effective) and at the Time of Delivery, the
Prospectus, as amended or supplemented at any such time, (A)
contained or will contain all statements required to be stated
therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the
rules and regulations of the Commission thereunder, and (B)
did not or will not include any untrue statement of a material
fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances
under which they were made, not misleading. The foregoing
provisions of this paragraph (iii) do not apply to statements
or omissions made in any Preliminary Prospectus, the
Registration Statement or any amendment thereto or the
Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with written information furnished to
the Company by any of the Subscription Advisors specifically
for use therein.
(iv) The descriptions in the Registration
Statement and the Prospectus of statutes, legal and
governmental proceedings or contracts and other documents are
accurate and fairly present the information required to be
shown; and there are no statutes or legal or governmental
proceedings required to be described in the Registration
Statement or the Prospectus that are not described as required
and no contracts or documents of a character that are required
to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration
Statement that are not described and filed as required.
(v) The Company and its subsidiaries each
has been duly incorporated, is validly existing as a
corporation in good standing under the laws of its
jurisdiction of incorporation and has full power and authority
(corporate and other) to own or lease its properties and
conduct its business as described in the Prospectus. The
Company has full power and authority (corporate and other) to
enter into this Agreement and to perform its obligations
hereunder. The Company and each of its subsidiaries is duly
qualified to transact business as a foreign corporation and is
in good standing under the laws of each other jurisdiction in
which it owns or leases properties, or conducts any business,
so as to require such qualification, except where the failure
to so qualify would not have a material adverse effect on the
financial position, results of operations or business of the
Company (a "Material Adverse Effect").
(vi) The Company's authorized, issued and
outstanding capital stock is as set forth in the Prospectus
under the caption "Capitalization." All of the issued shares
of capital stock of the Company and each of its subsidiaries
have been duly authorized and validly issued, are fully paid
and nonassessable and the Common Stock conforms to the
description of the Common Stock contained in the Prospectus.
None of the issued shares of capital stock of the Company and
its subsidiaries each has been issued or is owned or held in
violation of any preemptive rights of
4
<PAGE> 5
shareholders, and no person or entity has any preemptive or
other rights to subscribe for any of the Shares.
(vii) The Plan has been duly adopted by the
required vote of ESIF's Board of Trustees and is in compliance
with the insurance laws of the State of Florida applicable to
the reorganization of group self-insurance funds into stock
property and casualty insurance companies. On August 20, 1996,
ESIF submitted an application, including an initial Plan of
Conversion and Recapitalization, to the Department of Insurance
of the State of Florida (the "Florida DOI") for permission to
convert from a group self-insurance fund to a stock insurance
company. On or before September 30, 1996, ESIF gave notice of
a public hearing regarding the Plan in the appropriate
publications. The Florida DOI held a public hearing on October
10, 1996, and issued a consent order dated November 15, 1996
(the "Order") approving the Conversion, subject to the
satisfaction of certain conditions. [UPDATE FOR AMENDMENT]
Other than the conditions to effectiveness set forth in the
Order or in the Plan, no other approvals are required to be
obtained under the Florida Insurance Code for the effectiveness
of the Plan. Prior to or contemporaneously with the Time of
Delivery, each of the actions required to occur prior to the
effectiveness of the Plan pursuant to the Order or the Plan
will have occurred.
(viii) The Company does not own, directly or
indirectly, any capital stock or other equity securities of
any other corporation or any ownership interest in any
partnership, joint venture or other entity or association
other than those listed on Exhibit 21.1 to the Registration
Statement.
(ix) Except as disclosed in the Prospectus,
there are no outstanding (A) securities or obligations of the
Company convertible into or exchangeable for any capital stock
of the Company, (B) warrants, rights or options to subscribe
for or purchase from the Company any such capital stock or any
such convertible or exchangeable securities or obligations, or
(C) obligations of the Company to issue any shares of capital
stock, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or options.
(x) Since the date of the most recent
audited financial statements included in the Prospectus,
neither the Company nor any of its subsidiaries has sustained
any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as disclosed in or
contemplated by the Prospectus.
(xi) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (A) the Company has not incurred any liabilities
or obligations, direct or contingent, or entered into any
transactions, not in the ordinary course of business, that are
material to the Company, (B) the Company has not purchased any
of its outstanding capital stock or declared, paid or
otherwise made any dividend or distribution of any kind on its
capital stock, (C) there has not been any change in the
capital stock, or any material increase or decrease in the
long-term debt or short-term debt of the Company, and (D)
there has not been any material adverse change, or any
development involving a prospective material adverse change,
in or affecting the financial position, results of operations
or business of the Company, in each case other than as
disclosed in or contemplated by the Prospectus.
(xii) The Subscribed Shares have been duly
authorized and, when issued and delivered against payment
therefor as provided herein, will be validly issued and fully
paid and nonassessable and will conform to the description of
the Common Stock contained in the Prospectus; and the
certificates evidencing the Shares will comply with all
applicable requirements of Florida law.
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<PAGE> 6
(xiii) Except as disclosed in the Prospectus,
there are no contracts, agreements or understandings between
the Company and any person granting such person the right to
require the Company to file a registration statement under the
Act with respect to any securities of the Company owned or to
be owned by such person or to require the Company to include
such securities in the securities registered pursuant to the
Registration Statement (unless an such right has been
exercised or effectively waived) or any securities being
registered pursuant to any other registration statement filed
by the Company under the Act.
(xiv) All offers and sales of the Company's
capital stock prior to the date hereof were at all relevant
times duly registered under the Act or exempt from the
registration requirements of the Act and were duly registered
or the subject of an available exemption from the registration
requirements of the applicable state securities or blue sky
laws.
(xv) The Company and its subsidiaries each
is not, nor with the giving of notice or passage of time or
both would be, in violation of its Certificate of
Incorporation or Bylaws or in default under any indenture,
mortgage, deed of trust, loan agreement, lease, or other
agreement or instrument to which the Company or any of its
subsidiaries is a party or to which any of their respective
properties or assets is subject, which default would have a
Material Adverse Effect.
(xvi) Subject to the satisfaction of the
conditions to the effectiveness of the Conversion set forth in
the Plan, the issue and sale of the Subscribed Shares and the
performance of this Agreement and the consummation of the
transactions herein contemplated will not conflict with, or
(with or without the giving of notice or the passage of time
or both) result in a breach or violation of any of the terms
or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which the Company or any of
its subsidiaries is a party or to which its properties or
assets is subject, nor will such action conflict with or
violate any provision of the Certificate of Incorporation or
Bylaws of the Company or any statute, rule or regulation
(assuming compliance with all applicable state securities or
blue sky laws) or any order, judgment or decree of any court
or governmental agency or body having jurisdiction over the
Company or any of its properties or assets.
(xvii) The Company and its subsidiaries each
has good title to all personal property owned by it free and
clear of all liens, security interests, pledges, charges,
encumbrances, mortgages, and defects, except such as are
disclosed in the Prospectus or such as do not materially and
adversely affect the value of such property and do not
interfere with the use made or proposed to be made of such
property by the Company; and any real property and buildings
held under lease by the Company are held under valid,
subsisting and enforceable leases, with such exceptions as are
disclosed in the Prospectus or are not material and do not
interfere with the use made or proposed to be made of such
property and buildings by the Company.
(xviii) No consent, approval, authorization,
order or declaration of or from, or registration,
qualification or filing with, any court or governmental agency
or body is required for the sale of the Subscribed Shares or
the consummation of the transactions contemplated by this
Agreement, except: (1) the approval by the Florida DOI of the
Plan, ESIF's Certificate of Incorporation and by-laws, and
ESIF's application to convert to a stock insurance company,
and (2) the registration of the Subscribed Shares under the
Act and as may be required by the National Association of
Securities Dealers, Inc. or under state securities or blue
sky laws in connection with the offer, sale and distribution
of the Subscribed Shares.
(xix) Other than as disclosed in the
Prospectus, there is no litigation, arbitration, claim,
proceeding (formal or informal) or investigation pending or,
to the knowledge of the Company, threatened (or any basis
therefor) in which the Company is a party or of which any of
its properties
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<PAGE> 7
or assets is the subject which, if determined adversely to the
Company, would individually or in the aggregate have a
Material Adverse Effect. The Company is not in violation of,
or in default with respect to, any statute, rule, regulation,
order, judgment or decree, except as described in the
Prospectus or such as do not and will not individually or in
the aggregate have a Material Adverse Effect.
(xx) Ernst & Young LLP and Brinton &
Mendez, who have certified certain financial statements of
ESIF and its subsidiaries for the fiscal years ended March 31,
1994, 1995 and 1996, and Ernst & Young LLP who has certified
certain financial statements of Summit Holding Corporation and
its subsidiaries (collectively, "SHC") for the fiscal years
ended December 31, 1993, 1994 and 1995 are, and were at all
times, during the periods covered by their reports included in
the Registration Statement and the Prospectus, independent
public accountants as required by the Act and the rules and
regulations of the Commission thereunder.
(xxi) The financial statements and schedules
(including the related notes) of ESIF and SHC and their
respective subsidiaries included in the Registration
Statement, the Prospectus or any Preliminary Prospectus were
prepared in accordance with generally accepted accounting
principles consistently applied (or, if not consistently
applied, as applied on the basis stated in such financial
statements and schedules or the related notes thereto)
throughout the periods involved and fairly present the
financial position and results of operations of ESIF and SHC
and their respective subsidiaries at the dates and for the
periods presented. The selected financial data set forth
under the caption "Selected Financial Data" in the Prospectus
fairly present, on the basis stated in the Prospectus, the
information included therein.
(xxii) This Agreement has been duly
authorized, executed and delivered by the Company.
(xxiii) None of the Company, any of its
subsidiaries, or, to the knowledge of the Company, their
respective officers, directors or affiliates, has (A) taken,
directly or indirectly, any action designed to cause or result
in, or that has constituted or might reasonably be expected to
constitute, the stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale
of the Common Stock or (B) since the filing of the
Registration Statement (1) sold, bid for, purchased or paid
anyone any compensation for soliciting purchases of the Common
Stock or (2) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other
securities of the Company.
(xxiv) Neither the Company nor any of its
subsidiaries, nor, to the knowledge of the Company or any of
its subsidiaries, any other director, officer, agent, employee
or other person associated with or acting on behalf of the
Company or any of its subsidiaries has, directly or
indirectly, used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses
relating to political activity; made any unlawful payment to
foreign or domestic government officials or employees or to
foreign or domestic political parties or campaigns from
corporate funds; violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or made any bribe, rebate,
payoff, influence payment kickback or other payment, unlawful
under the laws of the United States or any foreign
jurisdiction.
(xxv) The Company and its subsidiaries each
is in compliance in all material respects with all foreign,
federal, state, and local laws, ordinances, rules, and
regulations (collectively, "Laws"), and the Company and its
subsidiaries each has all licenses, permits, and
authorizations necessary to operate under all Laws, except
where the failure to have such license, permit, or
authorization would not (individually or in the aggregate with
respect to all such failures) have a Material Adverse Effect
and are in compliance in all material respects with all terms
and conditions
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<PAGE> 8
of such licenses, permits, and authorizations; neither the
Company nor any of its subsidiaries has authorized, conducted,
or has knowledge of the generation, transportation, storage,
use, treatment, disposal or release of any hazardous
substance, hazardous waste, hazardous material, hazardous
constituent, toxic substance, pollutant, contaminant,
petroleum product, natural gas, liquefied gas or synthetic gas
defined or regulated under any environmental law; and there is
no pending or, to the knowledge of the Company and each of its
subsidiaries, threatened claim, litigation or any
administrative agency proceeding, nor has the Company or any
of its subsidiaries received any written or oral notice from
any governmental entity or third party, that: (A) alleges a
violation of any Laws by the Company or any of its
subsidiaries; (B) alleges the Company or any of its
subsidiaries is a liable party under the Comprehensive
Environmental Response, Compensation, and Liability Act, 42
U.S.C. Section 9602 et seq. or any state superfund law; or
(C) alleges possible contamination of the environment by the
Company or any of its subsidiaries.
(xxvi) The Company owns or has the right to
use all patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights,
franchises, trade secrets, proprietary or other confidential
information and intangible properties and assets
(collectively, "Intellectual Property Rights") necessary to
conduct its business as presently conducted and as described
in the Prospectus, and as the Prospectus indicates the Company
proposes to conduct its business, except where the failure to
own or have such rights would not have a Material Adverse
Effect; and to the knowledge of the Company, the Company has
not infringed and is not infringing, and the Company has not
received notice of infringement with respect to, asserted
Intellectual Property Rights of others and there is no
infringement by others of Intellectual Property Rights of the
Company, in either case which might result in a Material
Adverse Effect.
(xxvii) The Company is insured by insurers of
recognized financial responsibility against such losses and
risks and in such amounts as management of the Company deems
prudent and in the best interests of the Company and its
shareholders; and the Company has no reason to believe that it
will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its
business at a comparable cost, except as disclosed in the
Prospectus.
(xxviii) The Company and its subsidiaries each
makes and keeps accurate books and records reflecting its
assets and maintains internal accounting controls which
provide reasonable assurance that (A) transactions are
executed in accordance with management's authorization, (B)
transactions are recorded as necessary to permit preparation
of the Company's financial statements in accordance with
generally accepted accounting principles and to maintain
accountability for the assets of the Company, (C) access to
the assets of the Company is permitted only in accordance with
management's authorization, and (D) the recorded
accountability for assets of the Company is compared with
existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(xxix) The Company and its subsidiaries each
has filed all foreign, federal, state and local tax returns
that are required to be filed by it and has paid all taxes
shown as due on such returns as well as all other taxes,
assessments and governmental charges that are due and payable;
and no deficiency with respect to any such return has been
assessed or, to the knowledge of the Company, proposed.
(xxx) The Company is not and will not become
as a result of the transactions contemplated hereby, and does
not intend to conduct its business in a manner that would
cause it to become, an "investment company" or a company
"controlled" by an "investment company" within the meaning of
the Investment Company Act of 1940.
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<PAGE> 9
(xxxi) The Company and its subsidiaries each
has complied with all provisions of Section 517.075, Florida
Statutes, relating to doing business with the Government of
Cuba and certain other persons and entities.
(xxxii) As of the date of this Agreement, the
Company is not required to be licensed as an insurance company
in any state. ESIF, U.S. Employers Insurance, Inc. and
Bridgefield Casualty Insurance Company (together, the
"Insurance Subsidiaries") are the only subsidiaries of the
Company that are insurance companies. Each of the Insurance
Subsidiaries holds all licenses, certificates and permits from
insurance departments and all other governmental authorities
(collectively, the "Insurance Licenses") necessary or
desirable to conduct its business as presently conducted or
the Company presently contemplates it will conduct its
business in the future. Each of the Insurance Subsidiaries
has fulfilled and performed all material obligations necessary
to maintain its Insurance Licenses, and no event or events
have occurred which would result in the impairment,
modification, termination, or revocation of such Insurance
Licenses. The Company and the Insurance Subsidiaries each
have filed all material reports, registrations and statements,
together with any amendments required to be made with respect
thereto, that they were required to file with any state
insurance commission, agency or authority. As of their
respective dates, such reports, registrations and statements
complied in all material respects with all the laws, statutes,
rules, and regulations of each such jurisdiction, including,
without limitation, those rules and regulations promulgated by
the applicable insurance commission, agency, or authority in
any such state.
(xxxiii) Except as set forth in the Prospectus,
no loss experience has occurred that would require or make it
necessary or appropriate for the Company to change, alter,
modify or amend the Company's methodology or assumptions
relating to losses.
(xxxiv) All reinsurance treaties, contracts,
agreements, and arrangements to which the Company or any of
its subsidiaries is a party and as to which any of them
reported recoverables, premiums due or other amounts in its
financial statements are in full force and effect and neither
the Company nor any of the Insurance Subsidiaries is in
violation of, or in default in the performance, observance or
fulfillment of, any material obligation, agreement, covenant
or condition contained therein, which violation or default
would, singularly or in the aggregate, have a Material Adverse
Effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company
and the Insurance Subsidiaries taken as a whole. Neither the
Company nor any of the Insurance Subsidiaries has any reason
to believe that any other party to such treaties, contracts,
agreements or arrangements will not or cannot perform in any
material respect its duties or obligations under such treaty,
contract, agreement, or arrangement, except where the failure
to perform would not have a Material Adverse Effect on the
condition (financial or other), business, properties, net
worth or results of operations of the Company and its
subsidiaries taken as a whole.
6. COVENANTS OF THE COMPANY.
The Company covenants and agrees with each of the Subscription
Advisors:
(a) If required by the rules and regulations of the
Commission, the Company will file the Prospectus with the Commission
pursuant to and in accordance with subparagraph (1) (or, if applicable
and if consented to by the Subscription Advisors, subparagraph (4)) of
Rule 424(b) not later than the earlier of (A) the second business day
following the execution and delivery of this Agreement or (B) the
fifth business
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<PAGE> 10
day after the date on which a post-effective amendment to the
Registration Statement is declared effective. The Company will advise
the Subscription Advisors promptly of any such filing.
(b) The Company will not file with the Commission the
Prospectus or the amendment referred to in the second sentence of
Section 5(i) hereof, any amendment or supplement to the Prospectus or
any amendment to the Registration Statement unless the Subscription
Advisors have received a reasonable period of time to review any such
proposed amendment or supplement and consented to the filing thereof,
such consent not to be unreasonably delayed or withheld. The Company
will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective as promptly as
possible. Upon the reasonable request of the Subscription Advisors or
counsel for the Subscription Advisors, the Company will promptly
prepare and file with the Commission, in accordance with the rules and
regulations of the Commission, any amendments to the Registration
Statement or amendments or supplements to the Prospectus that may be
necessary or advisable in connection with the distribution of the
Subscribed Shares and will use its best efforts to cause any such
amendment to the Registration Statement to be declared effective as
promptly as possible. If required, the Company will file any amendment
or supplement to the Prospectus with the Commission in the manner and
within the time period required by Rule 424(b) under the Act. The
Company will advise the Subscription Advisors, promptly after receiving
notice thereof, of the time when any amendment to the Registration
Statement has been filed or declared effective or the Prospectus or any
amendment or supplement thereto has been filed and will provide
evidence to the Subscription Advisors of each such filing or
effectiveness.
(c) The Company will advise the Subscription Advisors
promptly after receiving notice or obtaining knowledge of (A) the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any part thereof or
any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto
(B) the suspension of the qualification of the Shares for offer or
sale in any jurisdiction or of the initiation or threatening of any
proceeding for any such purpose, or (C) any request made by the
Commission or any securities authority of any other jurisdiction for
amending the Registration Statement, for amending or supplementing the
Prospectus or for additional information. The Company will use its
best efforts to prevent the issuance of any such stop order and, if
any such stop order is issued, to obtain the withdrawal thereof as
promptly as possible.
(d) If during the period when the delivery of a
prospectus relating to the Subscribed Shares is required under the Act,
any events have occurred as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading, or if for any reason it is necessary during such
same period to amend or supplement the Prospectus to comply with the
Act or the rules and regulations thereunder, the Company will promptly
notify the Subscription Advisors and upon their request (but at the
Company's expense) prepare and file with the Commission an amendment or
supplement to the Prospectus that corrects such statement or omission
or effects such compliance and will furnish without charge to each
Subscription Advisor as many copies of such amended or supplemented
Prospectus as the Subscription Advisors may from time to time
reasonably request. The Subscription Advisors' consent to any such
amendment or supplement shall not be deemed a waiver of any of the
conditions set forth in Section 8.
(e) The Company promptly from time to time will take such
action as may be necessary to qualify the Shares for offering and sale
under the securities or blue sky laws of such jurisdictions as the
Company shall determine after consultation with the Subscription
Advisors and will continue such qualification in
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<PAGE> 11
effect for as long as may be deemed appropriate by the Company after
consultation with the Subscription Advisors in connection with the
distribution of the Subscribed Shares, provided that in connection
therewith the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction.
(f) The Company will promptly provide the Subscription
Advisors, without charge, (A) two manually executed copies of the
Registration Statement as originally filed with the Commission and of
each amendment thereto, and (B) so long as a prospectus relating to
the Subscribed Shares is required to be delivered under the Act, as
many copies of each Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto as the Subscription Advisors may
reasonably request.
(g) As soon as practicable, but in any event not later
than the 45th day following the end of the fiscal quarter in which
occurs the first anniversary of the effective date of the Registration
Statement (except such date shall be the 90th day rather than the 45th
day if such quarter is then the fourth fiscal quarter of the Company's
fiscal year) after the effective date of the Registration Statement,
the Company will make generally available to its security holders an
earnings statement of the Company covering a period of at least 12
months beginning after the effective date of the Registration
Statement (which need not be audited) complying with Section 11(a) of
the Act and the rules and regulations thereunder.
(h) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Conversion, the Company will not, without the prior written consent of
Raymond James & Associates, Inc., offer, pledge, issue, sell, contract
to sell, grant any option for the sale of, or otherwise dispose of (or
announce any offer, pledge, sale, grant of an option to purchase or
other disposition), directly or indirectly, any shares of Common Stock
or securities convertible into, exercisable or exchangeable for,
shares of Common Stock, except (a) as provided in Sections 2 and 4 and
except for the issuance of Common Stock upon the exercise of stock
options or warrants outstanding on the date of this Agreement to the
extent that such stock options or warrants were issued pursuant to
plans or agreements which are disclosed in the Prospectus, (b) the
grant of options to employees or directors under existing stock option
plans and the issuance of Common Stock upon the exercise thereof, or
(c) as otherwise disclosed or contemplated by the Prospectus.
(i) During a period of five years from the effective date
of the Registration Statement, the Company will furnish to the
Subscription Advisors, without charge, (A) copies of all reports or
other communications (financial or other) furnished to shareholders
generally, (B) as soon as they are available, copies of any reports
and financial statements furnished to or filed with the Commission or
the National Association of Securities Dealers, Inc. or any national
securities exchange upon which trading in shares of the Common Stock
is listed or reported, and (C) such additional information concerning
the business and financial condition of the Company as the
Subscription Advisors may reasonably request subject to appropriate
confidentiality provisions with respect to material non-public
information.
(j) The Company will not (A) take, directly or
indirectly, prior to the termination of the underwriting syndicate
contemplated in connection with the Public Offering, any action
designed to cause or to result in, or that might reasonably be
expected to constitute, the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of any
of the Common Stock, (B) sell, bid for, purchase or pay anyone any
compensation for soliciting purchases of, the Common Stock, or (C) pay
or agree to pay to any person any compensation for soliciting another
to purchase any other securities of the Company.
(k) The Company will apply the net proceeds from the
Subscription Offering and the Public Offering in the manner set forth
under "Use of Proceeds" in the Prospectus.
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<PAGE> 12
(l) The Company will use its best efforts to cause the
Common Stock to be listed on the Nasdaq National Market at the Time of
Delivery and maintain such listing on a continuous basis for at least
one year from the date hereof.
(m) If at any time during the period beginning on the
date the Registration Statement becomes effective and ending on the
later of (A) the date 25 days after such effective date and (B) the
date that is the earlier of (1) the date on which the Company first
files with the Commission a Quarterly Report on Form 10-Q after such
effective date and (2) the date on which the Company first issues a
quarterly financial report to shareholders after such effective date,
any rumor, publication or event relating to or affecting the Company
shall occur as a result of which in the reasonable opinion of the
Subscription Advisors the market price of the Common Stock has been or
is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates an amendment of or supplement to the
Prospectus), the Company will, after written notice from the
Subscription Advisors advising the Company to the effect set forth
above, forthwith prepare, consult with the Subscription Advisors
concerning the substance of, and consult with Company counsel to
determine whether or not it is advisable, under the circumstances, to
disseminate a press release or other public statement, reasonably
satisfactory to the Subscription Advisors, responding to or commenting
on such rumor, publication or event.
7. EXPENSES. The Company will pay all costs and expenses
incident to the performance of its respective obligations under this Agreement,
whether or not the transactions contemplated hereby are consummated or this
Agreement is terminated pursuant to Section 10 hereof, including, without
limitation, all costs and expenses incident to (i) the fees, disbursements and
expenses of the Company's counsel and accountants in connection with the
registration of the Shares under the Act and all other expenses in connection
with the preparation, printing and, if applicable, filing of the Registration
Statement (including all amendments thereto), any Preliminary Prospectus, the
Prospectus and any amendments and supplements thereto, and any blue sky
memoranda; (ii) the delivery of copies of the foregoing documents and this
Agreement to the Subscription Advisors; (iii) the filing fees of the Commission
and the National Association of Securities Dealers, Inc. relating to the
Shares; (iv) the preparation, issuance and delivery to the Subscription
Advisors of any certificates evidencing the Subscribed Shares, including
transfer agent's and registrar's fees; (v) the qualification of the Subscribed
Shares for offering and sale under state securities and blue sky laws, including
filing fees and the reasonable fees and disbursements of counsel for the
Subscription Advisors relating thereto; (vi) any listing of the Subscribed
Shares on the Nasdaq National Market and (vii) any expenses for travel, lodging
and meals incurred by the Company and any of its officers, directors and
employees in connection with any meetings with prospective investors in the
Shares.
8. CONDITIONS OF THE SUBSCRIPTION ADVISORS' OBLIGATIONS. The
several obligations of the Subscription Advisors hereunder shall be subject, in
their discretion, to the accuracy of the representations and warranties of the
Company contained herein as of the date hereof and as of the Time of Delivery,
to the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company of their respective
covenants and agreements hereunder, and to the following additional conditions
precedent:
(a) If the registration statement as amended to date has
not become effective prior to the execution of this Agreement, such
registration statement shall have been declared effective not later than 5:30
p.m., St. Petersburg time, on the date of this Agreement or such later date
and/or time as shall have been consented to by the Subscription Advisors in
writing. If required, the Prospectus and any amendment or supplement thereto
shall have been filed with the Commission pursuant to Rule 424(b) within the
applicable time period prescribed for such filing and in accordance with
Section 6(a) of this Agreement; no stop order suspending the effectiveness of
the Registration Statement or any part thereof shall have been issued and no
proceedings for that purpose shall have been instituted, or to the knowledge of
the Company and the Subscription Advisors, threatened or contemplated by the
Commission; and all requests for additional information on the part of the
Commission shall have been complied with to the reasonable satisfaction of the
Subscription Advisors.
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(b) Holland & Knight, counsel for the Subscription
Advisors, shall have furnished to the Subscription Advisors such opinion or
opinions, dated the Time of Delivery, with respect to the incorporation of the
Company, the validity of the Subscribed Shares being delivered at the Time of
Delivery, the Registration Statement, the Prospectus, and other related matters
as the Subscription Advisors may reasonably request, and the Company shall have
furnished to such counsel such documents as such counsel or the Subscription
Advisors request prior to the Time of Delivery for the purpose of enabling them
to pass upon such matters.
(c) The Subscription Advisors shall have received an
opinion, dated at the Time of Delivery, of Alston & Bird LLP, to the effect
that:
(i) The Company and each of its
subsidiaries is duly qualified to transact business as a
foreign corporation and is in good standing under the laws of
each jurisdiction other than Florida in which it owns or
leases property, or conducts any business, so as to require
such qualification, except where the failure to so qualify
would not have a Material Adverse Effect.
(ii) The Company has no subsidiaries other
than those listed on Exhibit 21.1 to the Registration
Statement and, to the knowledge of such counsel, does not have
any ownership interest in any partnership, joint venture, or
other entity or association.
(iii) Except as disclosed in the Prospectus,
to the knowledge of such counsel there are no outstanding (A)
securities or obligations of the Company convertible into or
exchangeable for any capital stock of the Company, (B)
warrants, rights or options to subscribe for or purchase from
the Company any such capital stock or any such convertible or
exchangeable securities or obligations, or (C) obligations of
the Company to issue any shares of capital stock, any such
convertible or exchangeable securities or obligations, or any
such warrants, rights, or options.
(iv) Except as disclosed in the Prospectus,
to the knowledge of such counsel there are no contracts,
agreements, or understandings between the Company and any
person granting such person the right to require the Company
to file a registration statement under the Act with respect to
any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in
the securities registered pursuant to the Registration
Statement (or any such right has been effectively exercised or
waived) or in any securities being registered pursuant to any
other registration statement filed by the Company under the
Act.
(v) All offers and sales of the Company's
capital stock prior to the date hereof were at all relevant
times duly registered under the Act or exempt from the
registration requirements of the Act.
(vi) The Company is not, nor with the
giving of notice or passage of time or both, will it be, in
violation of its Articles of Incorporation or Bylaws or in
default under any indenture, mortgage, deed of trust, loan
agreement, lease, or other agreement or instrument to which
the Company is a party or to which any of its properties or
assets is subject and which in each instance is an exhibit to
the Registration Statement.
(vii) The issue and sale of the Subscribed
Shares and the performance of this Agreement and the
consummation of the transactions herein contemplated will not
conflict with, or (with or without the giving of notice or the
passage of time or both) result in a breach or violation of
any of the terms or provisions of, or constitute a default
under, any material indenture, mortgage, deed of trust, loan
agreement, lease, or other agreement or instrument known to
such counsel to which the Company is party or to which any of
its properties or assets is subject, nor will such action
conflict with or violate any provision of the Articles of
Incorporation or Bylaws of the Company or any federal statute,
rule or regulation normally applicable to transactions of the
type
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<PAGE> 14
herein contemplated, or to the knowledge of such counsel, any
other statute, rule or regulation (assuming compliance with
all applicable state securities or blue sky laws) or, to the
extent known to such counsel, any order, judgment, or decree
of any court or governmental agency or body having
jurisdiction over the Company or any of its properties or
assets (it being understood that such counsel need not express
any opinion with regard to insurance regulatory matters or,
under this paragraph, compliance with federal securities
laws).
(viii) No consent, approval, authorization,
order, or declaration of or from, or registration,
qualification or filing with, any federal court or
governmental agency or body, or to the knowledge of such
counsel, any other court or governmental agency or body, is
required for the issue and sale of the Subscribed Shares or
the consummation of the transactions contemplated by this
Agreement, except such as have been obtained under the Act and
the rules and regulations thereunder and such as may be
required by the National Association of Insurance Dealers,
Inc. or under state securities or blue sky laws in connection
with the offer, sale, and distribution of the Shares (it being
understood that such counsel need not express any opinion with
regard to insurance regulatory matters).
(ix) To such counsel's knowledge and other
than as disclosed in or contemplated by the Prospectus, (A)
there is no litigation, arbitration, claim, proceeding (formal
or informal) or investigation pending or threatened (or any
reasonable basis therefor) in which the Company or any of its
subsidiaries is a party or of which any of its properties or
assets is the subject which, if determined adversely to the
Company or any of its subsidiaries, would, individually or in
the aggregate, reasonably be expected to have a Material
Adverse Effect; and (B) neither the Company nor any of its
subsidiaries is in violation of, or in default with respect
to, any foreign or domestic statute, rule, regulation, order,
judgment or decree (excluding any insurance law, rule,
regulation, order, judgment or decree).
(x) This Agreement has been duly
authorized, executed and delivered by the Company.
(xi) The Registration Statement and the
Prospectus and each amendment or supplement thereto (other
than the financial statements and related schedules and other
financial and statistical data therein, as to which such
counsel need express no opinion), as of their respective
effective or issue dates, complied as to form in all material
respects with the requirements of the Act and the rules and
regulations thereunder. The descriptions in the Registration
Statement and the Prospectus of statutes, legal and
governmental proceedings (excluding insurance and Florida laws,
regulations, and governmental proceedings, as to which such
counsel need not express an opinion), or contracts and other
documents are accurate in all material respects and fairly
present the information required to be shown, and such counsel
does not know of any statutes or legal or governmental
proceedings required to be described in the Registration
Statement or Prospectus that are not described as required or
of any contracts or documents of a character required to be
described in the Registration Statement or Prospectus or to be
filed as exhibits to the Registration Statement which are not
described and filed as required.
(xii) The Registration Statement is
effective under the Act, any required filing of the Prospectus
pursuant to Rule 424(b) has been made in the manner and within
the time period required by Rule 424(b), and no stop order
suspending the effectiveness of the Registration Statement or
any part thereof has been issued and, to such counsel's
knowledge, no proceedings for that purpose have been
instituted or threatened or are contemplated by the
Commission.
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(xiii) The Company is not, and will not be as
a result of the consummation of the transactions contemplated
by this Agreement, an "investment company," or a company
"controlled" by an "investment company," within the meaning of
the Investment Company Act of 1940.
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deem proper, on warranties,
representations and certificates of responsible officers of the Company and
public officials and, as to matters involving the application of laws of any
jurisdiction other than Georgia or the United States, to the extent
satisfactory in form and scope to counsel for the Subscription Advisors, upon
the opinion of local counsel satisfactory to counsel for the Subscription
Advisors, provided that such counsel states such counsel believes that the
Subscription Advisors are justified in relying upon such opinion and copies of
such opinion are delivered to the Subscription Advisors and counsel for the
Subscription Advisors.
In addition, such counsel shall state that (i) based solely
upon a letter from The Nasdaq Stock Market to the Company attached to such
counsel's opinion, the Subscribed Shares have been approved for quotation on
The Nasdaq National Market upon issuance, (ii) based solely upon a certificate
of officers of the Company, no securities of the Company have previously been
offered or sold to any person who is not a Florida resident, except in
connection with the transactions contemplated by this Agreement, and (iii) such
counsel has participated in conferences with officers and other representatives
of the Company and the Subscription Advisors and their counsel during which the
contents of the Registration Statement and the Prospectus and related matters
were discussed and reviewed, and, although such counsel has not independently
verified and is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, on the basis of the information that
such counsel developed in the course of the performance of the services
referred to above, considered in the light of such counsel's understanding of
the applicable law, nothing came to their attention that caused them to believe
that the Registration Statement or the Prospectus (other than the financial
statements and schedules and the other financial and statistical data therein,
as to which such counsel need express no belief), on such effective date,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading.
(d) The Subscription Advisors shall have received an
opinion, dated at the Time of Delivery, of McConnaughhay, Roland, Maida &
Cherr, P.A., to the effect that:
(i) The Company and each of its
subsidiaries has been duly incorporated, is validly existing
as a corporation in good standing under the laws of Florida
and has the corporate power and authority to own or lease its
properties and conduct its business as described in the
Registration Statement and the Prospectus. The Company has
the corporate power and authority to enter into this Agreement
and perform its obligations hereunder.
(ii) The Company's authorized, issued and
outstanding capital stock is set forth in the Prospectus. All
of the issued shares of Common Stock of the Company have been
duly authorized and validly issued, are fully paid and
nonassessable and conform to the description of the Common
Stock contained in the Prospectus. None of the issued shares
of capital stock of the Company has been issued or is owned or
held in violation of any preemptive rights of shareholders,
and no person or entity (including any holder of outstanding
shares of capital stock of the Company) has any statutory
preemptive or, to the knowledge of such counsel, other rights
to subscribe for any of the Shares. All offers and sales of
the Company's capital stock outstanding prior to the date
hereof were the subject of an available exemption from the
registration or qualification requirements of the Florida
securities or blue sky laws (to the extent such offers and
sales were subject to such Florida laws).
(iii) The Subscribed Shares have been duly
authorized and, when issued and delivered against payment
therefor as provided herein, will be validly issued and fully
paid and nonassessable
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<PAGE> 16
and will conform to the description of the Common Stock
contained in the Prospectus, and the certificates evidencing
the Subscribed Shares comply with all requirements of
applicable law.
(iv) ESIF holds such insurance licenses,
certificates and permits from governmental authorities
(including, without limitation, Insurance Licenses) which are
necessary to the conduct of its business as described in the
Prospectus, and the Company and ESIF have fulfilled and
performed all obligations necessary to maintain the Insurance
Licenses. Neither the Company nor ESIF has received any
notice of, and such counsel has no knowledge of, any action,
suit, proceeding, or investigation, and to the best knowledge
of such counsel there has been no threatened action, suit,
proceeding or investigation, that could reasonably be expected
to result in the revocation, termination or suspension of any
Insurance Licenses.
(v) The issue and sale of the Subscribed
Shares and the performance of this Agreement and the
consummation of the transactions herein contemplated will not
violate any Florida statute, rule, or regulation, or to the
extent known to such counsel, any order, judgment, or decree
of any court or governmental agency or body having
jurisdiction over the Company or any of its properties or
assets related to insurance regulatory matters.
(vi) No consent, approval, authorization,
order, or declaration of or from, or registration,
qualification or filing with, any Florida court or Florida
governmental agency or body or to the knowledge of such
counsel from any other court, governmental agency or body
related to insurance regulatory matters is required for the
issue and sale of the Subscribed Shares or the consummation of
the transactions contemplated by this Agreement, except such
as have been obtained under the Florida Insurance Code and the
rules and regulations thereunder.
(vii) The Plan has been duly adopted by the
required vote of ESIF's Board of Trustees and members and is in
compliance with the insurance laws of the State of Florida
applicable to the reorganization of group self-insurance funds
into stock property and casualty insurance companies. Other
than the conditions to effectiveness set forth in the Order or
in the Plan, no other approvals are required to be obtained
under the Florida Insurance Code for the effectiveness of the
Plan. Prior to or contemporaneously with the Time of Delivery,
each of the actions required to occur prior to the
effectiveness of the Plan pursuant to the Order or the Plan
will have occurred.
(viii) To such counsel's knowledge and other
than as disclosed in or contemplated by the Prospectus,
neither the Company nor any of its subsidiaries is in
violation of, or in default with respect to, any Florida
statute, rule, regulation, order, judgment or decree, or as to
insurance regulatory matters, any other statute, rule,
regulation, order, judgment or decree.
(ix) The descriptions in the Registration
Statement and the Prospectus of insurance-related and Florida
laws and regulations and governmental proceedings are accurate
and fairly present the information required to be shown, and
such counsel does not know of any insurance related or Florida
laws or regulations or governmental proceedings required to be
described in the Registration Statement or Prospectus that are
not described as required.
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deem proper, on warranties,
representations and certificates of responsible officers of the Company and
public officials.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company and the Subscription Advisors and their counsel during which the
contents of the Registration Statement and the Prospectus and related matters
were discussed and reviewed, and, although such counsel has not independently
verified and is not passing upon and does not assume any responsibility for the
accuracy,
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<PAGE> 17
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus, on the basis of the information that such counsel
developed in the course of the performance of the services referred to above,
considered in the light of such counsel's understanding of the applicable law,
nothing came to their attention that caused them to believe that the
Registration Statement or the Prospectus, on such effective date, contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(e) The Subscription Advisors shall have received from
Ernst & Young LLP and Brinton & Mendez letters as of the date hereof and as of
the Effective Date and the Time of Delivery, in form and substance satisfactory
to the Subscription Advisors, to the effect set forth in Annex I and Annex II
hereto, respectively. In the event that the letters referred to in this
Section 8(e) set forth any changes, decreases or increases in the items
specified in clause (iii) of Annex I, it shall be a further condition to the
obligations of the Subscription Advisors that (i) such letters shall be
accompanied by a written explanation by the Company as to the significance
thereof, unless the Subscription Advisors deem such explanation unnecessary,
and (ii) such changes, decreases, or increases do not, in the reasonable
judgment of the Subscription Advisors, make it impracticable or inadvisable to
proceed with the purchase, sale and delivery of the Subscribed Shares being
delivered at the Time of Delivery as contemplated by the Registration
Statement, as amended as of the date of such letter.
(f) Since the date of the latest audited financial
statements included in the Prospectus, the Company and its subsidiaries shall
not have sustained (i) any loss or interference with their respective
businesses from fire, explosion, flood, hurricane or other calamity, whether or
not covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as disclosed in or contemplated by the
Prospectus, or (ii) any change, or any development involving a prospective
change (including without limitation a change in management or control of the
Company) in or affecting the position (financial or otherwise), results of
operations, net worth or business prospects of the Company and its
subsidiaries, otherwise than as disclosed in or contemplated by the Prospectus,
the effect of which, in either such case, is in the reasonable judgment of the
Subscription Advisors so material and adverse as to make it impracticable or
inadvisable to proceed with the purchase, sale, and delivery of the Subscribed
Shares being delivered at the Time of Delivery as contemplated by the
Registration Statement, as amended as of the date hereof.
(g) Subsequent to the date hereof there shall not have
occurred any of the following: (i) any suspension or limitation in trading in
securities generally on the New York Stock Exchange, or any setting of minimum
prices for trading on such exchange or in the Common Stock by the Commission or
The Nasdaq Stock Market; (ii) a moratorium on commercial banking activities in
New York or Florida declared by either federal or state authorities; or (iii)
any outbreak or escalation of hostilities involving the United States,
declaration by the United States of a national emergency or war or any other
national or international calamity or emergency if the effect of any such event
specified in this clause (iii) in the reasonable judgment of the Subscription
Advisors makes it impractical or inadvisable to proceed with the purchase, sale
and delivery of the Subscribed Shares being delivered at the Time of Delivery
as contemplated by the Registration Statement, as amended as of the date
hereof.
(h) The Company shall have furnished to the Subscription
Advisors at the Time of Delivery certificates of officers of the Company,
reasonably satisfactory to the Subscription Advisors, as to the accuracy in all
material respects of the representations and warranties of the Company herein
at and as of the Time of Delivery, as to the performance by the Company of all
of their respective obligations hereunder to be performed at or prior to the
Time of Delivery, and as to such other matters as the Subscription Advisors may
reasonably request, and the Company shall have furnished or caused to be
furnished certificates as to the matters set forth in subsections (a) and (f)
of this Section 8, and as to such other matters as the Subscription Advisors
may reasonably request.
(i) The Common Stock shall have been approved for
quotation on the Nasdaq National Market.
9. INDEMNIFICATION AND CONTRIBUTION.
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<PAGE> 18
(a) The Company agrees to indemnify and hold harmless
each Subscription Advisor against any losses, claims, damages or liabilities,
joint or several, to which such Subscription Advisor may become subject, under
the Act or otherwise, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon: (i) any untrue
statement or alleged untrue statement made by the Company in Section 5 of this
Agreement; (ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or (B) any application or other document, or any amendment
or supplement thereto, executed by the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to qualify the Subscribed Shares under the securities or blue sky laws
thereof or filed with the Commission or any securities association or securities
exchange (each an "Application"); or (iii) the omission or alleged omission to
state in the Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or any
Application a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Subscription
Advisor for any legal or other expenses reasonably incurred by such Subscription
Advisor in connection with investigating, defending against or appearing as a
third-party witness in connection with any such loss, claim, damage, liability
or action; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or action arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement or any amendment
thereto, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto or any Application in reliance upon and in conformity with
written information furnished to the Company by any Subscription Advisor
expressly for use therein. The obligations of the Company to indemnify the
Subscription Advisors (or any controlling person of such Subscription Advisor)
pursuant to this indemnity agreement are subject to the condition that, insofar
as such losses, claims, damages, liabilities or expenses relate to any such
untrue statement, alleged untrue statement, omission or alleged omission made in
a Preliminary Prospectus that is corrected in the Prospectus, such indemnity
agreement shall not inure to the benefit of any Subscription Advisor from whom
the person asserting such losses, liabilities, claims, damages or expenses
purchased the Shares in the Subscription Offering, if (i) such Subscription
Advisor failed to deliver a copy of the Prospectus to such person at or prior to
the time delivery of the Prospectus as is required by the Act, unless such
failure was due to the failure by the Company to provide copies of the
Prospectus to such Subscription Advisor; and (ii) the delivery of such
Prospectus to such person would have constituted a complete defense to the
losses, claims, damages, liabilities or expenses asserted by such person. The
Company will not, without the prior written consent of each Subscription
Advisor, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding (or related cause of
action or portion thereof) in respect to which indemnification may be sought
hereunder (whether or not such Subscription Advisor is a party to such claim,
action, suit or proceeding), unless such settlement, compromise or consent
includes an unconditional release of such Subscription Advisor from all
liability arising out of such claim, action, suit or proceeding (or related
cause of action or portion thereof).
(b) Each Subscription Advisor, severally but not jointly,
agrees to indemnify and hold harmless the Company against any losses, claims,
damages or liabilities to which the Company may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus,
or any amendment or supplement thereto, or any Application or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information furnished
to the Company by such Subscription Advisor expressly for use therein; and will
reimburse the Company for any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such loss, claim,
damage, liability or action.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
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<PAGE> 19
the indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; provided,
however, that if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that there may be one or more legal defenses available to
it or other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such action on behalf of such indemnified party
and such indemnified party shall have the right to select separate counsel to
defend such action oh behalf of such indemnified party, provided, further,
however, that the Company shall be liable for the fees and expenses of only one
separate firm of attorneys (in addition to local counsel) for all indemnified
parties at any time in connection with any action, suit or proceeding, or in a
series of separate but substantially similar or related actions, suits or
proceedings arising out of the same general allegations and circumstances.
After such notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof and approval by such indemnified
party of counsel appointed to defend such action, the indemnifying party will
not be liable to such indemnified party under this Section 9 for any legal or
other expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified party in connection with the defense thereof,
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence or (ii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. Nothing in this Section 9(c)
shall preclude an indemnified party from participating at its own expense in
the defense of any such action so assumed by the indemnifying party.
(d) If the indemnification provided for in this Section 9
is unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Subscription Advisors on the other from the offering of the Subscribed Shares.
If, however, the allocation provided by the immediately preceding sentence is
not permitted by applicable law, then each indemnifying party shall contribute
to such amount paid or payable by such indemnified party in such proportion as
is appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Subscription Advisors on the other
in connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Subscription Advisors on the other shall be
deemed to be in the same proportion as the total net proceeds from the
Subscription Offering (before deducting expenses) received by the Company bear
to the total fees received by the Subscription Advisors. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company on the
one hand or the Subscription Advisors on the other and the parties' relative
intent, knowledge, access to information, and opportunity to correct or prevent
such statement or omission. The Company and the Subscription Advisors agree
that it would not be just and equitable if contributions pursuant to this
subsection (d) were determined by pro rata allocation (even if the Subscription
Advisors were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this subsection (d). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Subscription Advisors' obligations in this
subsection (d) to contribute are several and not joint.
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(e) The obligations of the Company under this Section 9
shall be in addition to any liability which the Company may otherwise have and
shall extend, upon the same terms and conditions, to each person, if any, who
controls any Subscription Advisor within the meaning of the Act; and the
obligations of the Subscription Advisors under this Section 9 shall be in
addition to any liability which the respective Subscription Advisors may
otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company and to each person, if any, who controls
the Company within the meaning of the Act.
10. TERMINATION. This Agreement may be terminated in the sole
discretion of the Subscription Advisors, by notice to the Company given prior
to the Time of Delivery, in the event that (a) any condition to the obligations
of the Subscription Advisors set forth in Section 8 hereof has not been
satisfied, or (b) the Company shall have failed, refused or been unable to
deliver the Subscribed Shares or to perform all obligations and satisfy
all conditions on its part to be performed or satisfied hereunder at or prior
to the Time of Delivery. If this Agreement is terminated pursuant to this
Section 10, the Company will reimburse the Subscription Advisors severally upon
demand for all out-of-pocket expenses (including reasonable counsel fees and
disbursements) that shall have been reasonably incurred by them in connection
with the Subscription Offering. The Company shall not in any event be liable
to any of the Subscription Advisors for the loss of expected profits from the
transactions covered by this Agreement.
11. SURVIVAL. The respective indemnities, agreements,
representations, warranties and other statements of the Company and the several
Subscription Advisors, as set forth in this Agreement or made by or on behalf
of them, respectively, pursuant to this Agreement, shall remain in full force
and effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of any Subscription Advisor or any controlling
person referred to in Section 9(e) or the Company or any officer or director or
controlling person of the Company referred to in Section 9(e), and shall
survive delivery of and payment for the Shares. The respective agreements,
covenants, indemnities and other statements set forth in Sections 7 and 9
hereof shall remain in full force and effect, regardless of any termination or
cancellation of this Agreement.
12. EFFECTIVE DATE. This Agreement shall become effective
immediately upon execution.
13. NOTICES. All communications hereunder shall be in writing
and, if sent to any of the Subscription Advisors, shall be mailed, delivered or
telecopied and confirmed in writing to the Subscription Advisors in care of
Raymond James & Associates, Inc., 880 Carillon Parkway, St. Petersburg, Florida
33716, Attention: Fred E. Whaley, with a copy to Holland & Knight, 400 North
Ashley Drive, Tampa, Florida 33602, Attention: Michael L. Jamieson, Esq.; and
if sent to the Company, shall be mailed, delivered or telecopied and confirmed
in writing to the Company at 2310 A-Z Park Road, Lakeland, Florida 33601,
Attention: William B. Bull, with a copy to Alston & Bird LLP, 1201 West
Peachtree Street, Atlanta, Georgia 30309-3424, Attention: M. Hill Jeffries,
Esq.
14. ACTION BY THE SUBSCRIPTION AGENTS. Any action under this
Agreement taken by Raymond James & Associates, Inc. will be binding upon ABN
AMRO Chicago Corporation.
15. BINDING EFFECT. This Agreement shall be binding upon, and
inure solely to the benefit of, the Subscription Advisors, the Company and to
the extent provided in Section 9 hereof, the officers and directors and
controlling persons referred to therein and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement.
16. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Florida without giving
effect to any provisions regarding conflicts of laws.
17. COUNTERPARTS. This Agreement may be executed by any one or
more of the parties hereto in any number of counterparts, each of which shall
be deemed to be an original, but all such counterparts shall together
constitute one and the same instrument.
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18. CONSTRUCTION WITH UNDERWRITING AGREEMENT. In the event the
Public Offering occurs, the Company and the Subscription Advisors will enter
into an Underwriting Agreement. It is understood that any certificates or
opinions required to be rendered by both this Agreement and the Underwriting
Agreement may be rendered in a single certificate or opinion covering both the
Public Offering and the Subscription Offering.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one of the counterparts hereof, and
upon the acceptance hereof by Raymond James & Associates, Inc., on behalf of
each of the Subscription Advisors, this letter will constitute a binding
agreement among the Subscription Advisors and the Company.
Very truly yours,
SUMMIT HOLDING SOUTHEAST, INC.
By:
---------------------------------
Title:
------------------------------
The foregoing Agreement is hereby confirmed and
accepted as of the date first written above at
February ____, 1997.
RAYMOND JAMES & ASSOCIATES, INC.
By: Raymond James & Associates, Inc.
On behalf of each of the Subscription Advisors
By:
------------------------------------------
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ANNEX I
Pursuant to Section 8(e) of the Subscription Agency Agreement, Ernst &
Young LLP shall furnish a letter to the Subscription Advisors to the effect
that:
(i) they are independent public accountants with respect
to the Company within the meaning the Act and the applicable published
rules and regulations thereunder;
(ii) in their opinion, the financial statements and
schedules audited by them and included in the Prospectus and the
Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the Act and the related
published rules and regulations thereunder;
(iii) On the basis of limited procedures, not constituting
an audit in accordance with generally accepted auditing standards,
consisting of a reading of the latest available interim financial
statements of the Company, inspection of the minute books of the
Company since the date of the latest audited financial statements
included in the Prospectus, inquiries of officials of the Company
responsible for financial accounting matters and such other inquiries
and procedures as may be specified in such letter, nothing came to
their attention that caused them to believe that:
(A) the unaudited financial statements of the
Company included in the Registration Statement and the
Prospectus do not comply in form in all material respects with
the applicable accounting requirements of the Act and the
related published rules and regulations thereunder or are not
in conformity with generally accepted principles applied on
the basis substantially consistent with that of the audited
financial statements included in the Registration Statement
and the Prospectus;
(B) the unaudited amounts for sales, net revenues
and total and per share amounts of net income included in the
Registration Statement and the Prospectus do not agree with
the amounts set forth in the unaudited financial statements
for those same periods or are not in conformity with generally
accepted accounting principles applied on a basis
substantially consistent with that of the corresponding
amounts in the audited financial statements included in the
Registration Statement and the Prospectus;
(C) as of a specified date not more than five
days prior to the date of such letter, there were any changes
in the capital stock (other than the issuance of capital stock
upon exercise of options which were outstanding on the date of
the latest balance sheet included in the Prospectus) or any
increase in inventories or the long-term debt or short-term
debt of the Company, or any decreases in net current assets or
net assets or other items specified by the Subscription
Advisors, or any increases in any items specified by the
Subscription Advisors, in each case as compared with amounts
shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which
the Prospectus discloses have occurred or may occur or which
are described in such letter;
(D) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in Clause (A) there were any
decreases in net sales or operating income or the total or per
share amounts of net income or other items specified by the
Subscription Advisors, or any increases in any items specified
by the Subscription Advisors, in each case as compared with
the comparable period of the preceding year and with any other
period of corresponding length specified by the Subscription
Advisors, except in each case for increases or decreases which
the Prospectus discloses have occurred or may occur which are
described in such letter; and
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<PAGE> 23
(iv) In addition to the audit referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraph (iii) above, they have carried out certain specified
procedures, not constituting an audit in accordance with generally
accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the Subscription
Advisors which are derived from the general accounting records of the
Company, included in the Registration Statement and the Prospectus, or
which appear in Part II of, or in exhibits and schedules to, the
Registration Statement specified by the Subscription Advisors, and
have compared certain of such amounts, percentages and financial
information with the accounting records of the Company and have found
them to be in agreement.
References to the Registration Statement and the Prospectus in this
Annex I shall include any amendment or supplement thereto at the date of such
letter.
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ANNEX II
Pursuant to Section 8(e) of the Subscription Agency Agreement, Brinton
& Mendez shall furnish a letter to the Subscription Advisors to the effect
that:
(i) they are independent public accountants with respect
to the Company within the meaning the Act and the applicable published
rules and regulations thereunder;
(ii) in their opinion, the financial statements and
schedules audited by them and included in the Prospectus and the
Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the Act and the related
published rules and regulations thereunder;
(iii) On the basis of limited procedures, not constituting
an audit in accordance with generally accepted auditing standards,
consisting of a reading of the latest available interim financial
statements of the Company, inspection of the minute books of the
Company since the date of the latest audited financial statements
included in the Prospectus, inquiries of officials of the Company
responsible for financial accounting matters and such other inquiries
and procedures as may be specified in such letter, nothing came to
their attention that caused them to believe that:
(A) the unaudited financial statements of the
Company included in the Registration Statement and the
Prospectus do not comply in form in all material respects with
the applicable accounting requirements of the Act and the
related published rules and regulations thereunder or are not
in conformity with generally accepted principles applied on
the basis substantially consistent with that of the audited
financial statements included in the Registration Statement
and the Prospectus;
(B) the unaudited amounts for sales, net revenues
and total and per share amounts of net income included in the
Registration Statement and the Prospectus do not agree with
the amounts set forth in the unaudited financial statements
for those same periods or are not in conformity with generally
accepted accounting principles applied on a basis
substantially consistent with that of the corresponding
amounts in the audited financial statements included in the
Registration Statement and the Prospectus;
(C) as of a specified date not more than five
days prior to the date of such letter, there were any changes
in the capital stock (other than the issuance of capital stock
upon exercise of options which were outstanding on the date of
the latest balance sheet included in the Prospectus) or any
increase in inventories or the long-term debt or short-term
debt of the Company, or any decreases in net current assets or
net assets or other items specified by the Subscription
Advisors, or any increases in any items specified by the
Subscription Advisors, in each case as compared with amounts
shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which
the Prospectus discloses have occurred or may occur or which
are described in such letter;
(D) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in Clause (A) there were any
decreases in net sales or operating income or the total or per
share amounts of net income or other items specified by the
Subscription Advisors, or any increases in any items specified
by the Subscription Advisors, in each case as compared with
the comparable period of the preceding year and with any other
period of corresponding length specified by the Subscription
Advisors, except in each case for increases or decreases which
the Prospectus discloses have occurred or may occur which are
described in such letter; and
24
<PAGE> 25
(iv) In addition to the audit referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraph (iii) above, they have carried out certain specified
procedures, not constituting an audit in accordance with generally
accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the Subscription
Advisors which are derived from the general accounting records of the
Company, included in the Registration Statement and the Prospectus, or
which appear in Part II of, or in exhibits and schedules to, the
Registration Statement specified by the Subscription Advisors, and
have compared certain of such amounts, percentages and financial
information with the accounting records of the Company and have found
them to be in agreement.
References to the Registration Statement and the Prospectus in this
Annex I shall include any amendment or supplement thereto at the date of such
letter.
25
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------------------------- ----------------
1993 1993 1994 1995 1996 1995 1996
------ ------ ------- ------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL
Net income from continuing operations............ $6,844 $2,953 $ 8,885 $19,163 $ 382 $5,172 $ 5,233
Income tax (benefit)............................. 462 (208) 4,534 10,990 (505) 2,323 3,057
------ ------ ------- ------- --------- ------ -------
Income before income taxes....................... $7,306 $2,745 $13,419 $30,153 $ (123) $7,495 $ 8,290
====== ====== ======= ======= ========= ====== =======
Fixed charges
Interest expense............................... $ 847 $ -- $ 2,719
Estimated interest factor on operating
leases...................................... 88 -- 292
------ ------ ------- ------- --------- ------ -------
Total fixed charges......................... $ -- $ -- $ -- $ -- $ 935 $ -- $ 3,011
====== ====== ======= ======= ========= ====== =======
Earnings:
Income before income taxes..................... $7,306 $2,745 $13,419 $30,153 $ (123) $7,495 $ 8,290
Fixed charges.................................. -- -- -- -- 935 -- 3,011
------ ------ ------- ------- --------- ------ -------
Total earnings.............................. $7,306 $2,745 $13,419 $30,153 $ 812 $7,495 $11,301
====== ====== ======= ======= ========= ====== =======
Ratio of earnings to fixed charges(a)(b)......... -- -- -- -- .87 -- 3.75
PRO FORMA -- GIVING PRO FORMA EFFECT ONLY TO
PREFERRED STOCK DIVIDENDS(C)
Net income from continuing operations............ $ 382 $5,172 $ 5,233
Income tax (benefit)............................. (505) 2,323 3,057
--------- ------ -------
Income before income taxes....................... $ (123) $7,495 $ 8,290
========= ====== =======
Fixed charges
Interest expense............................... $ 847 $ -- $ 2,719
Estimated interest factor on operating
leases...................................... 88 -- 292
Dividends on preferred stock..................... 656 492 492
Income tax impact on nondeductibility of
preferred stock dividends................... 402 301 301
--------- ------ -------
Dividends on preferred stock, grossed up for
tax impact of nondeductibility.............. 1,058 793 793
--------- ------ -------
Total fixed charges and preferred stock
dividends................................. 1,993 793 1,085
========= ====== =======
Earnings:
Income before income taxes..................... $ (123) $7,495 $ 8,290
Fixed charges.................................. 935 -- 3,011
--------- ------ -------
Total earnings.............................. $ 812 $7,495 $11,301
========= ====== =======
Ratio of earnings to fixed charges(a)(e)......... .41 9.45 10.42
</TABLE>
<PAGE> 2
EXHIBIT 12.1
(CONTINUED)
COMPUTATION OF RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR
ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
--------- -----------------
1996 1995 1996
--------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA -- BASED ON PRO FORMA RESULTS OF
OPERATIONS(D)
Net income from continuing operations........... $ 1,696 $ 6,651 $ 5,620
Income tax...................................... 308 3,247 3,256
--------- ------- -------
Income before income taxes...................... $ 2,004 $ 9,898 $ 8,876
========= ======= =======
Fixed charges
Interest expense.............................. $ 3,978 $ 3,017 $ 2,719
Estimated interest factor on operating
leases..................................... 436 338 293
Dividends on preferred stock.................... 656 492 492
Income tax impact of nondeductibility of
preferred stock dividends.................. 402 301 301
--------- ------- -------
Dividends on preferred stock, grossed up for
tax impact of nondeductibility............. 1,058 793 793
--------- ------- -------
Total fixed charges and preferred
stock dividends..................... $ 5,472 $ 4,148 $ 3,805
========= ======= =======
Earnings:
Income before income taxes.................... $ 2,004 $ 9,898 $ 8,876
Fixed charges................................. 4,414 3,355 3,012
--------- ------- -------
Total earnings........................ $ 6,418 $13,253 $11,888
========= ======= =======
Ratio of earnings to fixed charges(a)........... 1.17 3.20 3.12
</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. Dividends
on preferred stock are 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 $123,000.
(c) Pro forma earnings to fixed charges and preferred stock dividends has been
calculated using historical amounts and giving pro forma effect only to
preferred stock dividends which relate to preferred stock to be issued in
the conversion.
(d) Pro forma earnings to fixed charges based on pro forma results of operations
have been calculated considering the pro forma effects of the Acquisition of
SHC and Recapitalization. The pro forma information for the year ended March
31, 1996 assumes the Acquisition and Conversion occurred on April 1, 1995.
The pro forma information for the nine months ended December 31, 1995
assumes the Acquisition and Conversion occurred on April 1, 1995. The pro
forma information for the nine months ended December 31, 1996 assumes the
Conversion occurred on April 1, 1995.
(e) For the year ended March 31, 1996, the Company's earnings were insufficient
to cover fixed charges and pro forma preferred stock dividends by
$1,181,000, after giving pro forma effect only to preferred stock dividends.
<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, our reports dated November 21,
1996 on the consolidated financial statements and financial statement schedules
of Employers Self Insurers Fund as of September 30, 1996 and for the six months
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 1,639,836 shares of Series A Preferred Stock.
ERNST & YOUNG LLP
Jacksonville, Florida
February 21, 1997
<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
February 20, 1997
