<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 8, 1997
REGISTRATION NO. 333-16499
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
SUMMIT HOLDING SOUTHEAST, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
FLORIDA 6411 59-3409855
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
Incorporation or Organization) Classification Code Number) Number)
</TABLE>
2310 A-Z PARK ROAD
LAKELAND, FLORIDA 33801
(941) 665-6060
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
WILLIAM B. BULL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SUMMIT HOLDING SOUTHEAST, INC.
2310 A-Z PARK ROAD
LAKELAND, FLORIDA 33801
(941) 665-6060
(941) 665-2926 (FAX)
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
SIDNEY J. NURKIN MICHAEL L. JAMIESON
M. HILL JEFFRIES ROBERT J. GRAMMIG
ALSTON & BIRD HOLLAND & KNIGHT
ONE ATLANTIC CENTER 400 NORTH ASHLEY
1201 WEST PEACHTREE STREET SUITE 2300
ATLANTA, GEORGIA 30309-3424 TAMPA, FLORIDA 33602
(404) 881-7000 (813) 227-8500
(404) 881-4777 (FAX) (813) 229-0134 (FAX)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains (i) a Proxy Statement/Prospectus
relating to (a) a special meeting of eligible members of Employers Self Insurers
Fund ("ESIF") to vote on the conversion of ESIF to a stock insurance company
(the "Conversion"); (b) an offering of 1,639,836 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
[EMPLOYERS SELF INSURERS FUND LETTERHEAD]
January , 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
10:00 a.m. Eastern Time on , February , 1997, at the offices of ESIF
in Lakeland, Florida. Holders of indemnity agreements issued by ESIF and in
effect on December 16, 1996 are entitled to vote at the Special Meeting and have
a proxy card enclosed with this mailing. THE BOARD OF TRUSTEES UNANIMOUSLY
RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE PLAN OF CONVERSION AND THE RELATED
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING ADOPTION AND APPROVAL OF THE
RESTATED ARTICLES OF INCORPORATION AND RESTATED BYLAWS OF BRIDGEFIELD. The
effectiveness of the Plan of Conversion and related transactions is conditioned
upon approval by both a majority of the members of ESIF that are entitled to
vote on this matter and two-thirds of the votes that are cast at the Special
Meeting, as well as the satisfaction of certain conditions described in the
attached Proxy Statement/Prospectus.
The Proxy Statement/Prospectus is designed to help you understand the Plan
of Conversion and related transactions and to provide certain information about
ESIF, Summit and the 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, 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.
We urge you to complete, date, sign and return your proxy promptly in the
accompanying postage-paid envelope.
Thank you for your continued support and confidence.
Sincerely,
GREG C. BRANCH
Chairman of the Board of Trustees
<PAGE> 4
EMPLOYERS SELF INSURERS FUND
2310 A-Z PARK ROAD
LAKELAND, FLORIDA 33801
(941) 665-6060
---------------------
NOTICE OF SPECIAL MEETING OF MEMBERS
TO VOTE ON A PROPOSAL TO APPROVE
AN AMENDED PLAN OF CONVERSION AND RECAPITALIZATION
---------------------
TO THE MEMBERS OF EMPLOYERS SELF INSURERS FUND:
Notice is hereby given that a special meeting of members (the "Special
Meeting") of Employers Self Insurers Fund ("ESIF") will be held at the offices
of ESIF, 2310 A-Z Park Road, Lakeland, Florida, on , February ,
1997, at 10:00 a.m. Eastern Time. The purpose of the Special Meeting is for the
members to consider and vote upon an Amended Plan of Conversion and
Recapitalization (the "Plan of Conversion") and the transactions contemplated
thereby, pursuant to which ESIF will convert from a group self-insurance fund to
a stock insurance company with the name Bridgefield Employers Insurance Company
("Bridgefield"). Also pursuant to the Plan of Conversion, Summit Holding
Southeast, Inc. ("Summit"), a Florida corporation formed at the direction of
ESIF, will acquire all of the common stock of the converted stock insurance
company in return for shares of Summit's Series A Preferred Stock, which will be
issued to eligible members of ESIF, and subscription rights to purchase shares
of Summit's Common Stock, which will be issued to eligible members of ESIF and
certain other persons. The approval of the Plan of Conversion by the members
will constitute approval and adoption of the Restated Articles of Incorporation
and Restated Bylaws of Bridgefield, which contain provisions appropriate for a
stock insurance company.
Information related to this proposal is set forth in the attached Proxy
Statement/Prospectus.
The members who shall be entitled to receive notice of and to vote at the
Special Meeting shall be all persons who, as reflected on the records of ESIF,
were owners of In-Force Policies (as defined below) of ESIF at the close of
business on December 16, 1996. "In-Force Policies" means the indemnity
agreements issued by ESIF (other than any agreement pursuant to which ESIF has
ceded or assumed reinsurance) pursuant to which a binder has been issued,
provided that the effective date noted in such binder has passed and such
indemnity agreement has not been surrendered or otherwise terminated and has not
expired by its terms. In general, the owner of an individual In-Force Policy is
the person specified on ESIF's records as the insured. The owner of a group
In-Force Policy is the person or persons specified on ESIF's records as the
owner or "policyholder."
THE BOARD OF TRUSTEES OF ESIF HAS DETERMINED THAT THE CONVERSION IS IN THE
BEST INTERESTS OF ESIF AND ITS MEMBERS AND UNANIMOUSLY RECOMMENDS THAT MEMBERS
VOTE "FOR" APPROVAL OF THE PLAN OF CONVERSION AND THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING ADOPTION AND APPROVAL OF THE RESTATED ARTICLES OF
INCORPORATION AND THE RESTATED BYLAWS OF BRIDGEFIELD.
By Order of the Board of Trustees,
GREG C. BRANCH
Chairman of the Board of Trustees
January , 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
JANUARY , 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 concurrently offering to sell all or a
portion of the shares of Common Stock not subscribed for in the Subscription
Offering to the public in an underwritten public offering (the "PUBLIC
OFFERING"). 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 of $11.00 per share.
"ELIGIBLE POLICYHOLDERS" include any person who owned an indemnity agreement
(hereinafter a "POLICY") issued by ESIF at any time during the period August 20,
1993 through and including August 20, 1996. See "THE
CONVERSION -- Consideration."
The Series A Preferred Stock and the subscription rights to purchase Common
Stock will be issued to Eligible Policyholders without consideration other than
the extinguishment of their Membership Interests. The Series A Preferred Stock
is redeemable at any time by the Company for cash at the option of the Company.
The price of the Common Stock in the Subscription Offering (the "SUBSCRIPTION
PRICE") will be $11.00 per share. The Subscription Price was set by Summit after
consultation with its financial advisors and was not based on an appraisal or
any other objective factors. The number of shares of Series A Preferred Stock
that will be issued to each Eligible Policyholder and the number of shares of
Common Stock that each Eligible Policyholder will be entitled to subscribe for
in the Subscription Offering were determined in accordance with formulas
established by the Plan of Conversion. In
<PAGE> 6
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 premiums earned 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." See "THE
OFFERINGS -- Subscription Offering." The number of shares of Common Stock to be
issued to purchasers in the Subscription Offering in exchange for full payment
at the Subscription Price will be (i) increased if the per share price to the
public in the Public Offering (the "PUBLIC OFFERING PRICE") or the Revised
Subscription Price (as defined in "THE OFFERINGS -- Subscription
Offering -- Subscription Price") is less than the Subscription Price, and (ii)
decreased if the Public Offering Price or the Revised Subscription Price is
greater than the Subscription Price. See "THE OFFERINGS -- Subscription
Offering -- Subscription Price" and "-- Payment for Shares."
The issuance of Common Stock in the Subscription Offering is not contingent
upon the receipt by Summit of subscriptions for a minimum number of shares of
Common Stock in the Subscription Offering or the consummation of the Public
Offering. HOWEVER, THE CONVERSION IS CONTINGENT UPON THE RECEIPT BY SUMMIT OF
NET PROCEEDS FROM THE OFFERINGS OF A MINIMUM OF $50,000,000, WHICH IS THE
CURRENT ESTIMATE OF THE AMOUNT NECESSARY TO CAPITALIZE BRIDGEFIELD. See "Use of
Proceeds." There can be no assurance that subscribers for Common Stock in the
Subscription Offering will in fact be able to purchase such shares because
Summit may be unable to raise such minimum net proceeds or because the Board of
Trustees of ESIF may determine to cancel the Conversion at any time prior to the
Effective Date.
In accordance with the terms of the Plan of Conversion, no person alone or
in conjunction with any affiliated person (as defined in "THE
OFFERINGS -- Subscription Offering -- Limitations on Common Stock Purchases")
may purchase in the Offerings more than 4.99% (the "PURCHASE LIMIT") of the
shares of Common Stock to be outstanding after the Conversion (the "POST
OFFERING OUTSTANDING SHARES"). The Purchase Limit will be 249,999 shares if all
shares of Common Stock offered in the Offerings are sold (assuming no exercise
of the over-allotment option to be granted by Summit to the underwriters of the
Public Offering). Notwithstanding the foregoing, Summit may, in its discretion,
permit any purchaser in the Offerings to purchase a number of shares of Common
Stock exceeding the Purchase Limit, subject to each such purchaser obtaining the
prior approval of the Florida 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.
Following the Effective Date, the insurance laws of Florida (together with
all applicable regulations, the "FLORIDA INSURANCE CODE"), as applicable to
Summit as the holding company of a wholly owned Florida insurance company, will
prohibit any person from acquiring 10% or more of the outstanding voting
securities of Summit without the prior approval of the Florida DOI, and any
person who acquires at least 5% but less than 10% of the outstanding voting
securities of Summit will be permitted to do so only by filing a disclaimer of
affiliation and control that is not disallowed by the Florida DOI.
THE TERM OF THE SUBSCRIPTION OFFERING WILL RUN FROM THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS THROUGH FEBRUARY , 1997 (THE "SUBSCRIPTION EXPIRATION
DATE"). ALL SUBSCRIPTION RIGHTS IN THE SUBSCRIPTION OFFERING ARE NONTRANSFERABLE
AND WILL EXPIRE UNLESS THE ACCOMPANYING STOCK ORDER FORM, TOGETHER WITH FULL
PAYMENT AT THE SUBSCRIPTION PRICE (IN CASH IF DELIVERED IN PERSON, OR OTHERWISE
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 4:00 P.M., EASTERN TIME,
ON THE SUBSCRIPTION EXPIRATION DATE. SUBSCRIPTION FUNDS WILL BE HELD IN AN
ESCROW ACCOUNT WITH THE ESCROW AGENT PENDING CONSUMMA-
(ii)
<PAGE> 7
TION OF THE SUBSCRIPTION OFFERING OR THE REFUND OF SUCH FUNDS TO SUBSCRIBERS.
PLEASE READ THIS PROXY STATEMENT/PROSPECTUS FOR ADDITIONAL INFORMATION ON
SUBSCRIPTION PROCEDURES AND ON OTHER ASPECTS OF THIS SUBSCRIPTION OFFERING.
Prior to the Effective Date, there will be no public market for the Common
Stock. Summit has applied to have the Common Stock quoted on the Nasdaq National
Market under the proposed symbol "SHSE." There can be no assurance that such
quotation will be obtained.
This Proxy Statement/Prospectus is being furnished to all Eligible
Policyholders and to all persons (the "VOTING POLICYHOLDERS") who were owners of
In-Force Policies of ESIF as of the close of business on December 16, 1996 (the
"RECORD DATE") in connection with the solicitation by and on behalf of the Board
of Trustees of ESIF of proxies for use at the Special Meeting of Members of ESIF
(the "SPECIAL MEETING") to be held at 10:00 a.m. Eastern Time on ,
February , 1997, at the offices of ESIF, 2310 A-Z Park Road, Lakeland, Florida
and at any adjournment or postponement thereof. The purpose of the Special
Meeting is for the Voting Policyholders to consider and vote upon the Plan of
Conversion and the transactions contemplated thereby, as described in greater
detail herein. The approval of the Plan of Conversion by the Voting
Policyholders will constitute approval and adoption of the Restated Articles of
Incorporation ("ARTICLES") of Bridgefield, which, among other things, will
change the name of ESIF to Bridgefield Employers Insurance Company and authorize
the issuance of common stock, and the Restated Bylaws ("BYLAWS") of Bridgefield,
which contain provisions appropriate for a stock insurance company. A copy of
the Articles is attached hereto as Exhibit B, and a copy of the Bylaws is
attached hereto as Exhibit C. THE CONVERSION IS CONTINGENT UPON APPROVAL OF THE
PLAN OF CONVERSION BY THE VOTING POLICYHOLDERS, INCLUDING APPROVAL BY BOTH A
MAJORITY OF THE VOTING POLICYHOLDERS ENTITLED TO VOTE THEREON AND TWO-THIRDS OF
THE VOTES CAST AT THE SPECIAL MEETING.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), ANY STATE SECURITIES
COMMISSION, OR THE FLORIDA DOI, NOR HAS THE COMMISSION, ANY STATE SECURITIES
COMMISSION OR THE FLORIDA DOI PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE FLORIDA DOI HAS APPROVED THE PLAN OF CONVERSION. HOWEVER, THE APPROVAL
OF THE PLAN OF CONVERSION BY THE FLORIDA DOI DOES NOT CONSTITUTE IN ANY WAY A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION BY THE FLORIDA DOI.
<TABLE>
<CAPTION>
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ESTIMATED NET
COMMON STOCK SUBSCRIPTION PRICE ESTIMATED EXPENSES(1) PROCEEDS(2)
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<S> <C> <C> <C>
Per Share(3)........................... $11.00 $1.00 $10.00
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Total(4)............................... $55,000,000 $5,000,000 $50,000,000
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</TABLE>
(1) Consists of estimated expenses of ESIF and Summit incurred in connection
with the Conversion, including the Offerings. See "USE OF PROCEEDS."
(2) The Conversion is contingent upon the receipt by Summit of net proceeds from
the Offerings of a minimum of approximately $50,000,000, which is the
current estimate of the amount necessary to capitalize Bridgefield. See
"USE OF PROCEEDS."
(3) If the Public Offering Price or the Revised Subscription Price is less than
the Subscription Price, the effective price per share to Eligible
Policyholders and the amount of proceeds per share to Summit will be
reduced because the number of shares of Common Stock issued to Eligible
Policyholders in exchange for full payment at the Subscription Price will
be increased. If the Public Offering Price or the Revised Subscription
Price is greater than the Subscription Price, the effective price per share
to Eligible Policyholders and the amount of proceeds per share to Summit
will be increased because the number of shares of Common Stock issued to
(iii)
<PAGE> 8
Eligible Policyholders in exchange for full payment at the Subscription
Price will be decreased. See "THE OFFERINGS -- Subscription
Offering -- Subscription Price" and "-- Payment for Shares."
(4) Assumes all shares of Common Stock are sold in the Subscription Offering.
THIS PROXY STATEMENT/PROSPECTUS RELATES SOLELY TO THE OFFERING OF SERIES A
PREFERRED STOCK TO ELIGIBLE POLICYHOLDERS AND TO THE SUBSCRIPTION OFFERING AND
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
COMMON STOCK IN THE PUBLIC OFFERING. COMMON STOCK, IF ANY, TO BE OFFERED IN THE
ANTICIPATED PUBLIC OFFERING 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.
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
(iv)
<PAGE> 9
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
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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......................................... 11
Summary Historical Financial and Other Data........................................ 12
RISK FACTORS
Highly Competitive Florida Workers' Compensation Market............................ 13
Government Regulation.............................................................. 13
Possible Underfunding of Florida Special Disability Trust Fund..................... 14
Competition........................................................................ 14
Concentration in a Single State.................................................... 15
Possible Inadequacy of Loss Reserves............................................... 15
Renewal Risks; Quarterly Fluctuations in Operating Results......................... 15
Potential Inability to Service Debt................................................ 16
Need for Capital................................................................... 16
Reliance on Independent Insurance Agencies......................................... 16
Reliance Upon Key Personnel........................................................ 17
Dependence Upon Reinsurance........................................................ 17
Absence of Prior Market............................................................ 17
Shares Eligible for Future Sale; Possible Volatility of Stock Price................ 18
Effect of Partial Subscription for Common Stock; Withdrawal........................ 19
Obstacles to Changes in Control; Certain Anti-Takeover Effects..................... 19
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............................... 20
Effect of Holding Company Structure; Dividends..................................... 20
THE COMPANY.......................................................................... 21
THE SPECIAL MEETING
General............................................................................ 22
Voting Rights and Vote Required for Approval....................................... 23
Proxies............................................................................ 23
THE CONVERSION
General............................................................................ 24
Reasons for the Conversion......................................................... 24
Determination of Conversion Terms.................................................. 25
Conditions to Effectiveness........................................................ 26
Identification of Eligible and Voting Policyholders................................ 26
Extinguishment of Membership Interests............................................. 27
Consideration...................................................................... 28
Amendments to or Withdrawal of the Plan of Conversion; Effects of Failure to
Consummate...................................................................... 31
Interpretation of the Plan of Conversion........................................... 31
Fairness Opinion................................................................... 31
THE OFFERINGS
Subscription Offering.............................................................. 32
Public Offering.................................................................... 36
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MARKET FOR STOCK
Series A Preferred Stock........................................................... 36
Common Stock....................................................................... 36
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.................................................... 55
Losses and Loss Adjustment Expense................................................. 57
BUSINESS
Overview........................................................................... 61
Industry........................................................................... 61
Strategy........................................................................... 62
Managed Care....................................................................... 62
Products and Services.............................................................. 63
Reinsurance........................................................................ 67
Investment Portfolio............................................................... 68
Competition........................................................................ 69
A.M. Best Rating................................................................... 69
Regulation......................................................................... 69
Disposal of Business............................................................... 72
Information Technology Systems..................................................... 73
Employees.......................................................................... 73
Properties......................................................................... 73
Legal Proceedings.................................................................. 73
MANAGEMENT OF THE COMPANY
General............................................................................ 74
Compensation Committee Interlocks and Insider Participation........................ 76
Executive Compensation............................................................. 77
Employment Agreements.............................................................. 77
401(k) Plan........................................................................ 78
Incentive Plan..................................................................... 78
CERTAIN TRANSACTIONS................................................................. 80
PRINCIPAL SHAREHOLDERS............................................................... 81
DESCRIPTION OF CAPITAL STOCK
Preferred Stock.................................................................... 82
Common Stock....................................................................... 83
Other Characteristics of Capital Stock............................................. 83
Anti-Takeover Provisions........................................................... 83
Transfer Agent..................................................................... 85
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General Discussion................................................................. 85
Taxpayer Identification Number..................................................... 86
Ordinary Income and Capital Gains Tax Rate Differential............................ 87
SHARES ELIGIBLE FOR FUTURE SALE...................................................... 87
LEGAL MATTERS........................................................................ 88
EXPERTS.............................................................................. 88
CHANGE IN ACCOUNTANTS................................................................ 88
ADDITIONAL INFORMATION............................................................... F-1
INDEX TO FINANCIAL STATEMENTS
EXHIBIT A -- AMENDED PLAN OF CONVERSION AND RECAPITALIZATION....................... A-1
EXHIBIT B -- RESTATED ARTICLES OF INCORPORATION OF BRIDGEFIELD EMPLOYERS INSURANCE
COMPANY......................................................................... B-1
EXHIBIT C -- RESTATED BYLAWS OF BRIDGEFIELD EMPLOYERS INSURANCE COMPANY............ C-1
EXHIBIT D -- CONSENT ORDER OF THE FLORIDA DEPARTMENT OF INSURANCE APPROVING THE
PLAN............................................................................ D-1
EXHIBIT E -- FAIRNESS OPINION OF THE CHICAGO CORPORATION........................... E-1
EXHIBIT F -- TAX OPINION OF ALSTON & BIRD.......................................... F-1
EXHIBIT G -- INSTRUCTIONS FOR COMPLETING THE TAXPAYER IDENTIFICATION CARD.......... G-1
</TABLE>
(viii)
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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 September 30, 1996, the
Company's insurance products and administrative services are provided to
approximately 15,500 employers representing approximately $219.0 million in
premiums, including approximately $102.0 million in premiums attributable to the
Funds and $117.0 million in premiums attributable to the Insurance Subsidiaries.
See "BUSINESS."
The Company's approach to managed care workers' compensation is to select
responsible employers for coverage, assist such employers in creating a safe
work place and proactively manage claims, thereby returning employees to work
promptly and minimizing losses. Employers' safety programs are monitored by the
Company's staff of approximately 25 loss control field representatives who visit
an employer's work place on at least an annual basis. Reported claims are
proactively managed by the Company so that employees receive prompt care by
healthcare professionals which are part of the Company's provider network. The
Company's claims management professionals direct care through the provider
network, monitor employee treatment and progress toward returning to work and
perform utilization and peer review to control costs. The Company's approach to
managed care workers' compensation has produced an average net ultimate loss
ratio for ESIF during the three fiscal years ended March 31, 1996 of 69.8%,
which is better than the national average of 75.0% during the period 1993
through 1995, based on information published by A.M. Best Company ("A.M. BEST").
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," "BUSINESS -- Strategy" and "-- Managed Care."
The Company believes that the Conversion provides new opportunities for
improving its return on invested capital through growth in its core workers'
compensation business. 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 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. The
Series A Preferred Stock is redeemable at any time by the Company for cash at
the option of the Company. 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 -- Considera-
2
<PAGE> 15
tion" and "-- Identification of Eligible Policyholders and Voting
Policyholders," and "THE OFFERINGS -- Subscription Offering." All or a portion
of any shares of Common Stock that are not subscribed for by Eligible
Policyholders in the Subscription Offering are simultaneously being offered for
sale to the public in the Public Offering. See "THE OFFERINGS -- Public
Offering."
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 Plan of Conversion and submitted other documents, and the Florida
DOI granted its final approval of the Conversion. In the Order, the Commissioner
of Insurance of the State of Florida found that the Plan of Conversion is in
compliance with the Florida Insurance Code and is equitable to the members of
ESIF. A copy of the Order is attached hereto as Exhibit D. THE ORDER ISSUED BY
THE FLORIDA DOI DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN
OF CONVERSION OR THE TRANSACTIONS CONTEMPLATED THEREBY.
Opinion of Financial Advisor. On July 31, 1996, the Board of Trustees of
ESIF received a written fairness opinion (which has been confirmed in a letter
dated as of the date of this Proxy Statement/Prospectus) from The Chicago
Corporation, 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., which sets forth certain of the
procedures followed, as well as the assumptions and qualifications made and the
matters considered by Chicago Corp. in formulating its opinion, is attached
hereto as Exhibit E and should be read in its entirety. See "THE
CONVERSION -- Fairness Opinion."
Special Meeting of Members. The Special Meeting will be held at the
offices of ESIF, 2310 A-Z Park Road, Lakeland, Florida, at 10:00 a.m. Eastern
Time on , February , 1997, for the purpose of considering and voting
upon a proposal to approve the Plan of Conversion and the transactions
contemplated
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<PAGE> 16
thereby, including the adoption and approval of the Articles and the Bylaws of
Bridgefield. The affirmative vote of at least two-thirds of all validly cast
votes, and the affirmative vote of a majority of all Voting Policyholders
entitled to vote thereon, will be required to approve the Plan of Conversion. As
further described herein, the term "VOTING POLICYHOLDER" generally means a
person whose name appears on ESIF's records as of December 16, 1996 as the owner
of an In-Force Policy. As further described herein, an "IN-FORCE POLICY" is a
policy that has been issued by ESIF (other than any agreement or policy pursuant
to which ESIF has ceded or assumed reinsurance) pursuant to which a binder has
been issued, provided that the effective date noted in such binder has passed
and such policy has not been surrendered or otherwise terminated and has not
expired by its terms. Abstentions will not be counted at the Special Meeting as
votes cast for or against the Plan of Conversion and, therefore, will have the
same effect as votes against the Plan of Conversion. The presence in person or
by proxy of any number of Voting Policyholders constitutes a quorum for the
transaction of business at the Special Meeting. THE BOARD OF TRUSTEES OF ESIF
RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE PLAN OF CONVERSION AND TRANSACTIONS
CONTEMPLATED THEREBY.
Conditions to Effectiveness. For the Conversion to become effective, all
of the conditions listed below must be satisfied:
(i) The Plan of Conversion must be approved by not less than
two-thirds of the votes cast in person or by proxy by the Voting
Policyholders at the Special Meeting and by a majority of all Voting
Policyholders entitled to vote thereon.
(ii) The Board of Trustees of ESIF must declare the Plan of Conversion
effective. Pursuant to the Plan of Conversion, the Effective Date must
occur on or before May 14, 1997, which is 180 days after the date of the
Order. However, the Board of Trustees may request a six-month extension of
the Effective Date from the Florida DOI.
(iii) The Articles and Bylaws of Bridgefield must have been approved
by the Florida DOI and the Articles must have been filed with the Florida
Secretary of State.
(iv) Bridgefield must have surplus as to policyholders and a ratio of
premiums to surplus sufficient to satisfy the requirements of the Florida
Insurance Code for a stock property and casualty insurance company.
(v) ESIF must not have imposed any assessments against its members.
(vi) The Company must have received an opinion of tax counsel to the
effect that the Conversion will be treated as a tax-free transaction under
Sections 368 and 351 of the Internal Revenue Code of 1986, as amended
(together with all regulations promulgated thereunder, the "TAX CODE").
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 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
4
<PAGE> 17
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, 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 lists the ESIF
policies for which such Eligible Policyholder has been identified as the owner
and shows the number of shares of Series A Preferred Stock that such Eligible
Policyholder will receive if the Plan of Conversion becomes effective, and (ii)
a 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 allows such Voting Policyholder to cast a vote 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, but no later than 4:00 p.m. Eastern Time on , 1997, to
ensure that its vote will be counted, even if such Voting Policyholder does not
plan to purchase Common Stock.
For more information about each card and form, see the instructions
indicated on each such card and form enclosed with this mailing or call ESIF's
Information Center at 1-800-331-7742.
INTERESTS OF CERTAIN PERSONS IN THE OFFERINGS
All directors and officers and certain other management employees of the
Company have been granted subscription rights to purchase in the Subscription
Offering an aggregate of up to 10% of the Common Stock being offered in the
Subscription Offering. 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 the Management
Group will be subject to the same terms and conditions of the Subscription
Offering as the Eligible Policyholders, including, without limitation, the
requirement to pay the Subscription Price of $11.00 per share. It is expected
that the Management Group will purchase approximately 238,000 shares
(approximately $2.6 million aggregate subscription amount). See "THE
OFFERINGS -- Subscription Offering" and "PRINCIPAL SHAREHOLDERS."
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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."
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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 Redeemable
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."
7
<PAGE> 20
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."
Subscription Price......... $11.00 per share of Common Stock. If the Public
Offering Price or the Revised Subscription Price
is lower than the Subscription Price, the
effective price per share of Common Stock in the
Subscription Offering will be less than the
Subscription Price because the number of shares
to be issued in exchange for full payment at the
Subscription Price will be increased. If the
Public Offering Price or the Revised Subscription
Price is higher than the Subscription Price, the
effective price per share of Common Stock in the
Subscription Offering will be greater than the
Subscription Price because the number of shares
to be issued in exchange for full payment at the
Subscription Price will be decreased.
The Revised Subscription Price is defined in "The
OFFERINGS -- Subscription
Offering -- Subscription Price," and it generally
means a per share price for the Common Stock
determined by Summit, subject to Florida DOI
approval, in the event that the Public Offering
does not occur before the Effective Date. See
"THE OFFERINGS -- Subscription
Offering -- Subscription Price."
Number of Shares of Series
A Preferred Stock Being
Offered to Each Eligible
Policyholder............. For each Eligible Policyholder, (a) 10 shares, plus
(b) a number of shares based on the Eligible
Policyholder's contribution to ESIF's premiums
earned during the Eligibility Period, plus (c) a
number of shares based on the Eligible
Policyholder's premium volume and loss experience
during the Eligibility Period. The formulae for
determining the numbers of shares described in
(b) and (c) are set forth in the Plan of
Conversion and are described more fully in "THE
CONVERSION -- Consideration."
Maximum Number of Shares of
Common Stock Offered to
Each Eligible
Policyholder Pursuant to
the Subscription
Offering................. 4.99% of the Post Offering Outstanding Shares,
which will be 249,999 shares if all shares
offered in the Offerings are sold.
8
<PAGE> 21
Stock Purchase
Limitations.............. No person, alone or in conjunction with any
affiliated person, may purchase, directly or
indirectly, in the Offerings, more than 4.99% of
the Post Offering Outstanding Shares, which is
249,999 shares if all shares offered in the
Offerings are sold. Summit may, in its
discretion, elect to permit any purchaser in the
Offerings to purchase a number of shares of
Common Stock exceeding the Purchase Limit,
subject to each such purchaser's obtaining the
prior approval of the Florida DOI. As a result, a
single shareholder or group of shareholders could
acquire a sufficient number of shares of Common
Stock to control election of Summit's Board of
Directors. To the extent that Common Stock is
available, each subscriber in the Subscription
Offering must subscribe for a minimum of 100
shares. See "RISK FACTORS -- Potential Control by
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. (the "Escrow Agent") c/o
ChaseMellon Shareholder Services, L.L.C. not
later than 4:00 p.m. Eastern Time on
, 1997 (the "SUBSCRIPTION EXPIRATION DATE").
Payment for the shares may be made by cash (if
delivered in person), check or money order in
United States dollars 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
(February , 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 an annual rate of
interest of 3.25% simple interest, calculated on
a 360-day annual basis (the "REFUND INTEREST
RATE"). See "THE OFFERINGS -- Subscription
Offering -- Subscription Price."
9
<PAGE> 22
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.
10
<PAGE> 23
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 six-month period ended September 30, 1995
reflect the Acquisition and the Conversion as if they had been completed as of
April 1, 1995. The pro forma Statement of Income data for the six-month period
ended September 30, 1996 reflect the Conversion as if it had occurred on April
1, 1996. The pro forma Balance Sheet data at September 30, 1996 reflect the
Conversion as if it had been completed as of September 30, 1996. This
information should be read in conjunction with the pro forma consolidated
financial statements and notes thereto appearing elsewhere in this Proxy
Statement/Prospectus. See "SELECTED FINANCIAL DATA."
<TABLE>
<CAPTION>
YEAR SIX MONTHS ENDED
ENDED SEPTEMBER 30,
MARCH 31, ---------------------
1996 1995 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Statement of Income Data:
Total revenue............................................... $ 172,299 $ 92,789 $ 74,531
Losses and loss adjustment expenses......................... 94,844 42,365 32,135
Other underwriting, general and administrative expenses..... 63,008 34,034 29,848
Total losses and operating expenses......................... 157,852 76,399 61,983
Interest expense............................................ 3,978 2,029 1,831
Amortization and depreciation............................... 5,340 2,698 2,479
Net income before taxes..................................... 5,129 11,663 8,238
Net income.................................................. 3,645 7,791 5,037
Preferred dividends......................................... 656 328 328
Net income available to common shareholders................. $ 2,989 $ 7,463 $ 4,709
========== ========== ==========
Net income per common share................................. $ 0.60 $ 1.49 $ 0.94
========== ========== ==========
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% 67.1% 65.5%
Expense ratio(3)......................................... 34.1% 34.2% 33.0%
Combined ratio(4)........................................ 116.6% 101.3% 98.5%
Administrative Subsidiaries:
EBITDA(5)................................................ $ 11,804 $ 7,377 $ 3,577
Coverage Ratio:
Ratio of earnings to fixed charges and preferred stock
dividends................................................ 1.74 5.00 4.02
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------
(IN THOUSANDS)
<S> <C>
Balance Sheet Data:
Cash and invested assets.............................................. $263,829
Total assets.......................................................... 552,310
Loss and loss adjustment expenses..................................... 378,196
Debt.................................................................. 36,500
Total shareholders' equity............................................ 74,993
</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.
11
<PAGE> 24
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 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. The summary financial data
provided as of and for the fiscal years ended March 31, 1992 and 1993 and the
six months ended September 30, 1995 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>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1995 1996
----------- ----------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Total revenue............. $ 143,750 $ 192,067 $158,951 $140,815 $140,328 $ 71,752 $ 73,048
Losses and loss adjustment
expenses................ 103,657 149,177 108,411 69,116 94,844 42,365 32,135
Other underwriting,
general and
administrative
expenses................ 32,787 40,145 37,121 41,546 43,657 21,623 30,532
Interest expense.......... -- -- -- -- 847 -- 1,831
Amortization and
depreciation............ -- -- -- -- 1,103 -- 2,499
Income (loss) from
continuing operations
before income taxes..... 7,306 2,745 13,419 30,153 (123) 7,764 6,051
Loss from discontinued
operations.............. -- -- -- -- (197) -- (890)
Net income................ $ 6,844 $ 2,953 $ 8,885 $ 19,163 $ 185 $ 5,374 $ 2,386
======== ======== ======== ======== ======== ======== ========
Other Data(1):
Net loss ratio(2)......... 78.5% 82.3% 73.0% 53.8% 82.5% 67.1% 65.5%
Expense ratio(3).......... 24.8% 22.1% 25.0% 32.3% 34.1% 34.2% 33.0%
Combined ratio(4)......... 103.3% 104.4% 98.0% 86.1% 116.6% 101.3% 98.5%
Coverage Ratio:
Ratio of earnings to fixed
charges and preferred
stock dividends
Historic(5)(6).......... 0.87 -- 3.99
Pro forma(7)(8)......... .41 14.68 3.16
</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
Total assets.............. 307,345 373,069 354,546 425,206 492,790 456,012 502,310
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
</TABLE>
- ---------------
(1) Ratio 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.
(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.
12
<PAGE> 25
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."
13
<PAGE> 26
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 September 30, 1996 included an asset
of approximately $21.1 million representing SDTF recoveries that the Company
estimated at that time it would be entitled to receive, based on claims
identified as subject to SDTF recovery and considering the Company's recovery
experience. The SDTF's assessment formula has historically yielded sufficient
revenues for annual reimbursement payments and for costs associated with
administering the SDTF; however, the SDTF has not actuarially funded its claims
liability and no reserves currently exist. A study commissioned by the State of
Florida estimated the total dollar liability of the SDTF for all future payments
required on accidents occurring on or before June 30, 1995 to be approximately
$4.7 billion on an undiscounted basis. There is no assurance that the SDTF will
have funds available in the future for the payment of claimed recoveries. Under
Florida sunset laws, the SDTF is currently scheduled for review by the Florida
legislature in the year 2000. The Florida legislature may, however, review the
SDTF earlier, and no assurance can be made with regard to the legislature's
possible actions. 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
14
<PAGE> 27
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.
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. During the fiscal years ended March 31, 1994,
1995 and 1996 and the six months ended September 30, 1996, the Company accrued
for retrospective refunds in the amount of $6.4 million, $9.2 million, $10.6
million and $9.9 million, respectively, and payments in excess of accruals were
$0.0, $0.0, $0.0 and $0.8 million, respectively. Retrospective rated policies
accounted for 33%, 32%, 30% and 32%, respectively, of total premiums during the
fiscal years ended March 31, 1994, 1995 and 1996 and the six months ended
September 30, 1996. To the extent that reserves prove to be inadequate in the
future, the Insurance Subsidiaries would have to increase such reserves and
incur a charge to earnings in the period such reserves are increased, which
could cause fluctuations in quarterly operating results and which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RENEWAL RISKS; QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The members of each of the Funds, and most of the policyholders of
Bridgefield, are eligible to renew their memberships or policies each year on a
common anniversary date. With respect to Bridgefield, this anniversary date each
year is April 1. If a large number of members of any Fund, or a large number of
Bridgefield's policyholders, were to decline renewal in any given year, the
Company's results of operations could be materially adversely affected in the
renewal quarter and subsequent quarters. Results of operations may also
fluctuate as a result of a variety of other factors, including, without
limitation, changes in pricing policies by the Company or its competitors, the
results of actuarial analysis of loss development, demand for the services of
the Administrative Subsidiaries, the introduction of new services and service
enhancements by the Company or its competitors, the market acceptance of new
services, competitive conditions in the
15
<PAGE> 28
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 September 30, 1996 was approximately $36.5 million. The
interest rate for such debt is prime plus 1% for "Base Rate" portions. Scheduled
quarterly payments of the term loan began on September 30, 1996 and extend
through June 30, 2002, with principal payments totaling approximately $1.6
million, $3.8 million, $4.6 million, $9.0 million, $10.0 million and $4.0
million due in calendar years 1997, 1998, 1999, 2000, 2001 and 2002,
respectively. Accrued interest is due with each principal payment. The
commitment under the revolving 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. 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. From time to time, the
Company may be required to increase the capital surplus of the Insurance
Subsidiaries to remain in compliance with state regulatory requirements. If the
Company is unable to generate sufficient capital, either internally or from
outside sources, it could be required to reduce its growth. There can be no
assurance that capital will continue to be available when needed or, if
available, will be on terms acceptable to the Company. See "USE OF PROCEEDS" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
RELIANCE ON INDEPENDENT INSURANCE AGENCIES
The Company markets its managed care workers' compensation insurance
products and services through independent insurance agencies. See
"BUSINESS -- Products and Services." As of September 30, 1996, ESIF's top ten
independent agencies accounted for approximately 20% of ESIF's direct in-force
premiums, with the top independent insurance agency accounting for approximately
4%. These agencies offer and sell competitors' products, as well as the
Company's products. As a result, the Company's business depends in part on the
marketing efforts of these agencies and on the Company's ability to offer
workers' compensation insurance products and services that meet the requirements
of these agencies and their customers. In addition,
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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
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."
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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 237,931 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
companies but which are unrelated to the operating performance of such
companies. See "-- Renewal Risks; Quarterly Fluctuations in Operating Results."
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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. The failure of the Company to raise significant proceeds
in the Offerings may adversely affect the business, financial condition and
results of operations of the Company. In addition, a partial subscription and
the failure to effect the Public Offering might have an adverse effect on the
market for the Common Stock and the ability of the Company to raise additional
capital in the equity markets in the future. In addition, the Company may
withdraw the Plan of Conversion at any time prior to the Effective Date.
Therefore, there can be no assurance that persons who wish to purchase shares of
Common Stock in the Offerings will be able to purchase such shares.
OBSTACLES TO CHANGES IN CONTROL; CERTAIN ANTI-TAKEOVER EFFECTS
After the consummation of the Conversion, Summit will be the holding
company of Bridgefield, a Florida stock insurance company. The Florida Insurance
Code will prohibit any person, individually or in conjunction with any
affiliated person, from acquiring, directly or indirectly, 5% or more of the
outstanding voting securities of Summit without prior approval of the Florida
DOI. However, a person who acquires at least 5% but less than 10% of such
outstanding voting securities may file with the Florida DOI a disclaimer of
affiliation and control and, unless such disclaimer is disallowed by the Florida
DOI, such person will not be required to seek prior approval of the Florida DOI
for the acquisition. In addition to such insurance regulation, the Florida
Business Corporation Act (the "FLORIDA ACT") contains provisions that may deter
or frustrate takeovers of 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, 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
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Shares, assuming the Eligible Policyholders and the Management Group do not
subscribe in the aggregate for a substantial number of the Post Offering
Outstanding Shares. In such event, such controlling shareholders collectively
would have the ability to elect all of the members of the Board of Directors,
the power to determine the management of the business and the power to determine
the outcome of corporate actions requiring shareholder approval. As a result,
potential acquirers may be discouraged from seeking to acquire control of the
Company through the purchase of Common Stock, which could have a depressive
effect on the price of Summit's securities.
DIRECTOR AND OFFICER INDEMNIFICATION AND EXCULPATION
The Florida Act authorizes a Florida corporation to indemnify such
company's directors, officers, employees and agents. Summit has adopted a Bylaw
provision mandating such indemnification for directors, and permitting the Board
of Directors to indemnify officers, employees and agents in certain
circumstances, to the fullest extent permitted by law. In addition, Summit has
entered into agreements with its directors and certain of its executive officers
that contractually obligate Summit to provide indemnification. Pursuant to
exculpation provisions in Summit's Articles of Incorporation, the personal
liability of a director shall be eliminated or limited to the fullest extent of
the Florida Act.
EFFECT OF HOLDING COMPANY STRUCTURE; DIVIDENDS
The Company does not anticipate paying dividends on the Common Stock in the
foreseeable future. In addition, the source of funds for payment of dividends by
the Company would be dividends paid to it by its subsidiaries. The Florida
Insurance Code limits the amount of dividends which the Insurance Subsidiaries
may pay to Summit and, in any event, for the foreseeable future Summit expects
to cause its subsidiaries to retain all earnings to provide capital for their
operations and business. In addition, if any shares of Series A Preferred Stock
are outstanding, no dividends may be paid to the holders of Common Stock so long
as there are 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
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direct wholly owned subsidiary of Summit. Also pursuant to the Conversion, the
Company's corporate 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 the main office of ESIF, 2310 A-Z
Park Road, Lakeland, Florida 33801, on , February , 1997 at 10:00
a.m. Eastern Time and at any adjournment or postponement thereof. At the Special
Meeting, the Voting Policyholders will consider and vote upon the Plan of
Conversion and the transactions contemplated thereby pursuant to which ESIF
will, pursuant to the laws of the State of Florida, convert from a group
self-insurance fund to a stock insurance company with the name Bridgefield
Employers Insurance Company, and Summit, a Florida corporation formed at the
direction of ESIF, will acquire all of the capital stock of the converted stock
insurance company in return for the issuance of shares of the Series A Preferred
Stock to Eligible Policyholders of ESIF and subscription rights to purchase the
Common Stock to Eligible Policyholders of ESIF and certain other persons. All
Membership Interests in ESIF will be extinguished pursuant to the Conversion.
The approval of the Plan of Conversion by the Voting Policyholders will
constitute approval and adoption of the Articles, which, among other things,
will change the name of ESIF to Bridgefield Employers Insurance Company and
authorize the issuance of Common Stock, and the Bylaws, which contain provisions
appropriate for a stock insurance company. Any shares of Common Stock not
purchased in the Subscription Offering may be offered for sale in the Public
Offering or Summit may determine not to offer all or a portion of any remaining
shares for sale. The Subscription Price of the Common Stock to be issued by
Summit under the Plan of Conversion will be $11.00 per share, subject to
adjustment if the Public Offering Price or Revised Subscription Price is
different. See "THE OFFERINGS -- Subscription Offering -- Subscription Price."
The Board of Trustees of ESIF, based in part upon the opinion and analysis
of its professional advisors, has concluded that the Plan of Conversion is in
the best interests of ESIF and its members and the Board has
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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 5,030 In-Force Policies and, therefore, 5,030 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 William B. Bull at the main office of ESIF, 2310 A-Z
Park Road, Lakeland, Florida 33801, either a written revocation of the proxy or
a duly executed proxy bearing a later date, or by voting in person at the
Special Meeting. Proxies are being solicited only for use at the Special Meeting
and any and all adjournments thereof and will not be used for any other meeting.
If the Plan of Conversion is approved, only holders of the Common Stock of
Summit will be entitled to vote at future meetings. Holders of Series A
Preferred Stock will not be entitled to vote (except as may be otherwise
specifically required by law).
The cost of preparing, printing and mailing this Proxy Statement/Prospectus
and proxies will be borne by the Company. In addition to the use of the mails,
proxies may be solicited by telephone, telecopy, telegraph or personal interview
by directors, officers and employees of the Company without additional
compensation.
The Board of Trustees of ESIF urges each Voting Policyholder to mark, sign,
date and return the enclosed proxy card in the enclosed postage-prepaid envelope
as soon as possible, even if such Voting Policyholder does not intend to
purchase Common Stock. This will ensure that its vote will be counted.
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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. 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 insurance entities; and (iii) loss portfolio transfers by
self-insured groups to insurance companies. See
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"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 provides
ESIF's members with an attractive workers' compensation solution in view of the
changing market conditions.
Central to the Board's analysis was its determination that Policyholders
must no longer bear ongoing potential liability for fund losses. Consequently,
the Board considered three available alternatives. First, ESIF could discontinue
operations and distribute net assets, if any, to the members. Second, ESIF could
transfer its business to a third party insurance company. Third, ESIF could
convert from a fund to a stock insurance company and raise capital through sales
of securities, thereby eliminating the potential need for Policyholder
assessability. 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 interest 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
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.
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<PAGE> 38
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 in
an amount approximately equal to ESIF's statutory surplus. 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 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 equitably allocate the
value of ESIF to Eligible Policyholders based on each Eligible Policyholder's
contribution to ESIF's premiums earned 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.
(iv) Bridgefield must have surplus as to policyholders and a ratio of
premiums to surplus sufficient to satisfy the requirements of the Florida
Insurance Code for a stock property and casualty insurance company.
(v) ESIF must not have imposed any assessments against its members.
(vi) The Company must have received an opinion of tax counsel to the
effect that the Conversion will be treated as a tax-free transaction under
Sections 368 and 351 of the Tax Code.
The Plan of Conversion may be amended, with the concurrence of the Florida
DOI, or withdrawn, at any time prior to the Effective Date by the Board of
Trustees of ESIF.
IDENTIFICATION OF ELIGIBLE AND VOTING POLICYHOLDERS
A person's eligibility to receive consideration under the Plan of
Conversion and a person's right to vote on the Plan of Conversion and related
transactions are based on such person's status as an Eligible Policyholder and a
Voting Policyholder, respectively.
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<PAGE> 39
A person is an Eligible Policyholder if it was the holder of an In-Force
Policy in effect at any time during the period from August 20, 1993 through and
including August 20, 1996 (the "ELIGIBILITY PERIOD"). The determination of which
members are Eligible Policyholders is dictated by the Florida Insurance Code,
relevant sections of which require that in the conversion of a self-insurance
fund to a stock insurance company, persons who had been members of the fund
within three years prior to the date of the Plan of Conversion shall participate
in the distribution of consideration to members. The initial Plan of Conversion
and Recapitalization was dated and filed with the Florida DOI as of August 20,
1996.
A person is a Voting Policyholder if it is the holder of an In-Force Policy
that was in effect on December 16, 1996. In general, subject to certain limited
exceptions set forth in the Plan of Conversion, a person is the Voting
Policyholder of an In-Force Policy as of such Record Date if such person is the
first listed individual named insured of such In-Force Policy or the first
listed business named insured of such In-Force Policy as specified in ESIF's
records with respect to such In-Force Policy on the Record Date. In general, if
more than one person is identified as a holder of an In-Force Policy, all of
such persons collectively are considered to be one Eligible Policyholder,
entitled to receive collectively any consideration to be paid in respect of the
In-Force Policy. If an In-Force Policy has been assigned and ESIF has not
received notification of such assignment or has not agreed to provide coverage
for the assignee as of the Record Date, then the owner of such In-Force Policy
prior to the assignment shall be deemed to be the owner. If an In-Force Policy
has been assigned, ESIF has received notification of the assignment and a new
In-Force Policy has been issued to the assignee, the assignee of the new
In-Force Policy shall be recognized as the owner.
In general, an "IN-FORCE POLICY" means a policy pursuant to which a binder
has been issued (other than any agreement or policy pursuant to which ESIF has
ceded or assumed reinsurance) provided that the effective date noted in such
binder has passed and such policy has not been surrendered or otherwise
terminated and has not expired by its terms. The identification of Eligible
Policyholders and Voting Policyholders, and the determination of whether a
policy is an In-Force Policy, will be made by ESIF in good faith on the basis of
its records and ESIF will not be obligated to examine or consider any other
facts or circumstances.
EXTINGUISHMENT OF MEMBERSHIP INTERESTS
Each person who holds an In-Force Policy on the Effective Date is a member
of ESIF and, regardless of whether such person is also an Eligible Policyholder
or a Voting Policyholder, such person has certain Membership Interests arising
under the organizational documents of ESIF, the Florida Insurance Code and
otherwise. Such Membership Interests provide, among other things, rights to vote
for the election of trustees and rights to participate in any distribution of
the surplus of ESIF in the event of its liquidation. Pursuant to the Conversion,
each member of ESIF will automatically relinquish such Membership Interests, but
will retain all ownership rights and coverage with respect to its In-Force
Policy.
Changes in Rights to Vote
Before the Conversion, policies issued by ESIF provide the right to vote on
matters submitted to a vote of members, including the election of trustees, and
each member has one vote for each policy owned regardless of the size of the
policy. Upon the Conversion, policies of Bridgefield will no longer have any
voting rights and, therefore, policyholders will not be able to vote in the
election of directors or on any other matters. Instead, all matters required to
be submitted to a vote of Bridgefield's shareholders (including the election of
directors) will be voted on by its sole shareholder, Summit. All matters
submitted to a vote of Summit's shareholders (including the election of
directors) will be voted on by the holders of Common Stock of Summit, who, upon
the Conversion, will initially consist of purchasers of Common Stock in the
Offerings. Each shareholder of Summit will be entitled to one vote for each
share of Common Stock held. Holders of Series A Preferred Stock of Summit will
have no voting rights, except as may otherwise be required by law. 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
27
<PAGE> 40
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, on the Effective Date, Eligible
Policyholders will receive shares of Series A Preferred Stock and the right to
subscribe for shares of Common Stock. ELIGIBLE POLICYHOLDERS WILL NOT BE
REQUIRED TO PAY CASH FOR SERIES A PREFERRED STOCK DISTRIBUTED TO THEM IN THE
CONVERSION, BUT ONLY FOR SHARES OF COMMON STOCK THAT THEY MAY PURCHASE IN THE
SUBSCRIPTION OFFERING. A person who is indicated as an Eligible Policyholder on
the enclosed policyholder record card is entitled to receive that number of
shares of Series A Preferred Stock shown on such policyholder record card, which
number of shares has been determined as described below. The Series A Preferred
Stock is redeemable at any time by the Company at its par value of $10.00 per
share, at the option of the Company. 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.
Series A Preferred Stock
Holders of Series A Preferred Stock 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 are entitled to one vote for each share held of
record at all shareholder meetings. 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 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."
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<PAGE> 41
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 earned 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 paid
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 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.
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<PAGE> 42
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 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.
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<PAGE> 43
AMENDMENTS TO OR WITHDRAWAL OF THE PLAN OF CONVERSION; EFFECTS OF FAILURE TO
CONSUMMATE
The Plan of Conversion may be amended at any time before or after the
Effective Date upon the affirmative vote of not less than a majority of the
entire Board of Trustees of ESIF and with the approval of the Florida DOI. The
Plan of Conversion provides that ESIF may withdraw the Plan of Conversion at any
time before the Effective Date upon the affirmative vote of not less than a
majority of the entire Board of Trustees.
In the event that the Conversion is not effective on or before May 14,
1996, or within 180 days thereafter if the Florida DOI were to grant such
180-day extension, ESIF will be required to increase immediately the amount of
its security and collateral deposit with the Florida DOI from $5 million to $25
million. In addition, under the terms of the amended credit agreement with the
Bank, if the failure to consummate the Conversion is due to any factor other
than the failure of ESIF to obtain the requisite approval of the Florida DOI or
the Voting Policyholders, the Company will be in default under such amended
credit agreement.
INTERPRETATION OF THE PLAN OF CONVERSION
The Plan of Conversion provides that, subject to the provisions of the
Florida Insurance Code, other laws of the State of Florida and orders of the
Florida DOI, ESIF will have the power to interpret and construe the Plan of
Conversion and to determine all questions of eligibility, status and rights of
members and others under the Plan of Conversion. The determination of ESIF in
all such matters will be binding and conclusive on all persons.
FAIRNESS OPINION
Chicago Corp. was retained by the Board of Trustees of ESIF to render an
opinion as to the fairness of the consideration to be received by the Eligible
Policyholders pursuant to the Plan of Conversion, from a financial point of
view. Such consideration, including the aggregate amount of Series A Preferred
Stock to be distributed, was determined by ESIF. On July 31, 1996, Chicago Corp.
delivered a written opinion (which has been confirmed in a letter dated as of
the date of this Proxy Statement/Prospectus) to the Board that, as of such date,
based upon a review of information then available to it, and further based upon
the assumptions and qualifications contained in such written opinion, such
consideration to be received by the Eligible Policyholders pursuant to the Plan
of Conversion is fair, from a financial point of view, to such Eligible
Policyholders. The full text of Chicago Corp.'s fairness opinion, which sets
forth the procedures followed, the assumptions and qualifications made and the
matters considered by Chicago Corp. in rendering its fairness opinion, is set
forth in Exhibit E to this Proxy Statement/Prospectus, and the Voting
Policyholders are advised to read carefully the contents of such opinion in its
entirety.
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) analyzed 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 to the foregoing, Chicago Corp. considered such other financial,
economic and market criteria as it deemed appropriate in arriving at its
fairness opinion.
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.
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<PAGE> 44
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.
As set forth in its opinion, Chicago Corp. has relied upon and assumed,
without independent verification, the accuracy and completeness of the financial
and other information provided to it by ESIF and its subsidiaries and their
representatives. Chicago Corp. has neither made nor obtained any independent
evaluation or appraisal of ESIF's assets or liabilities. Chicago Corp. has also
assumed for purposes of its fairness opinion (i) that there will have been no
assessments imposed upon the members of ESIF prior to the Effective Date, and
(ii) that there have been no material changes in ESIF's or its subsidiaries'
financial position, business or prospects since March 31, 1996.
Chicago Corp. has expressed no opinion as to the Public Offering Price or
the price at which Summit's Common Stock will trade. Chicago Corp. has also
expressed no opinion as to the fairness of the consideration to be paid pursuant
to the Plan of Conversion to any individual Eligible Policyholder or to any
class of Eligible Policyholder in connection with the Plan of Conversion. The
fairness opinion was completed for the benefit of the Board of Trustees and does
not represent a recommendation to any Individual Eligible Policyholder.
No limitations were imposed by the Board with respect to the scope of
Chicago Corp.'s investigation. ESIF paid Chicago Corp. a fee of $200,000 for its
services in rendering the opinion, and ESIF agreed to indemnify Chicago Corp.
for certain losses and expenses that may arise out of certain circumstances.
Chicago Corp. is a nationally recognized investment banking firm that
regularly engages in, among other things: (i) valuation of businesses and their
securities in connection with mergers and acquisitions, leveraged buyouts,
negotiated underwritings, secondary distributions of listed and unlisted
securities and private placements, and (ii) valuations for estate, corporate and
other purposes. Chicago Corp. was selected by the Board based primarily upon its
expertise and experience in rendering fairness opinions and its expertise in
trading and valuing securities. Chicago Corp. also was selected because of its
knowledge of the insurance industry. Furthermore, Chicago Corp. is familiar with
the operations of ESIF and SHC as a result of Chicago Corp.'s involvement in
ESIF's acquisition of SHC in January 1996. In connection with the Acquisition,
Chicago Corp. acted as advisor and placement agent to ESIF, for which it
received total fees of approximately $600,000.
THE OFFERINGS
SUBSCRIPTION OFFERING
In addition to shares of Series A Preferred Stock that will be issued to
Eligible Policyholders in the Conversion, up to 5,000,000 shares of Common Stock
are being offered pursuant to the Subscription Offering. Each Eligible
Policyholder has the right to subscribe for up to 4.99% of the Post Offering
Outstanding Shares, which is 249,999 shares, if all shares offered in the
Offering are sold. No fewer than 100 shares of Common Stock may be purchased by
any person in the Subscription Offering. Eligible Policyholders as a group may
purchase in the aggregate up to 90% of the Post Offering Outstanding Shares. In
the event the Eligible Policyholders collectively subscribe for more than 90% of
the Post Offering Outstanding Shares, each
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<PAGE> 45
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, no person,
either individually or in conjunction with any affiliated person and whether
purchasing shares in the Subscription Offering or the Public Offering, shall be
permitted to acquire directly or indirectly more 4.99% of the Post Offering
Outstanding Shares, which is 249,999 shares, if all shares offered in the
Offerings are sold. Notwithstanding the foregoing, Summit may, in its
discretion, permit any purchaser in the Offerings to purchase any number of
shares of Common Stock, even exceeding the Purchase Limit, subject to such
purchaser's obtaining the prior approval of the Florida DOI. In such event, a
single shareholder or a small group of shareholders could acquire a sufficient
number of shares of the Common Stock to control election of Summit's Board of
Directors. See "RISK FACTORS -- Potential Control by 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 4:00 p.m.
Eastern Time on February , 1997. Subscription rights not exercised prior to
the Subscription Expiration Date will be void. No Eligible Policyholder is
obligated in any manner to purchase Common Stock in the Subscription Offering.
Use of Order Forms. Subscription rights may only be exercised by
completion of Subscription Order Forms. Any Eligible Policyholder receiving an
order form who desires to subscribe for shares of Common Stock of Summit must do
so prior to the Subscription Expiration Date by delivering (by mail or in
person) to the Escrow Agent c/o ChaseMellon Shareholder Services, L.L.C., 120
Broadway, 13th Floor, New York, New York, 10271, Attention: Reorganization
Dept., 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.
Restrictions on Transfer of Subscription Rights. Each subscription right
may be exercised only by the Eligible Policyholder to whom it is issued and only
for its own account. The subscription rights granted under the Plan of
Conversion are not transferable or assignable. Eligible Policyholders
subscribing for shares are required to represent to Summit that they are
purchasing such shares for their account and that there is no agreement or
understanding with any other person for the sale or transfer of such shares.
Subscription Price. The Subscription Price is $11.00 per share, which was
set by Summit after consultation with its financial advisors, Raymond James &
Associates, Inc. ("RAYMOND JAMES") and Chicago Corp., and was not based on an
appraisal or any other objective factors. If the Public Offering closes on the
Effective Date, and the Public Offering Price is different from the Subscription
Price, then the effective price per share paid by subscribers shall be adjusted
to the Public Offering Price. In such event, the number of shares of Common
Stock issued to subscribers will be reduced if the Public Offering Price is
greater than the Subscription Price, or increased if the Public Offering Price
is less than the Subscription Price, to assure that the price per share paid by
Eligible Policyholders and the Management Group is the same as the Public
Offering Price. The Public Offering Price will be determined by negotiation
between Raymond James and Chicago Corp., as representatives of the underwriters
of the Public Offering (the "REPRESENTATIVES"), and Summit.
In the event that Summit determines that the Effective Date shall occur
prior to or without closing the Public Offering, then, subject to the approval
of the Florida DOI, a bona fide determination will be made by Summit, after
consultation with Raymond James and Chicago Corp., of the price per share at
which the
33
<PAGE> 46
Common Stock would trade in the public market on the Effective Date (the
"REVISED SUBSCRIPTION PRICE"). If the Revised Subscription Price is less than or
greater than the Subscription Price, then the effective price per share paid by
subscribers shall be the Revised Subscription Price, and the number of shares of
Common Stock that will be issued to subscribers will be adjusted to offset the
effect of such price difference.
No fractional shares of Common Stock will be issued, but in lieu thereof,
the value of such fractional shares will be refunded to subscribers in cash
within 60 days after the Effective Date. There has not been any public market
for the Common Stock. Some of the major factors that may influence the
determination of the Public Offering Price or the Revised Subscription Price
are, in addition to prevailing market conditions, the historical performance of
ESIF, estimates of the business potential and earning prospects of the Company,
an assessment of the Company's management and the consideration of such factors
in relation to market valuations of other insurance companies.
While it is currently the intention of Summit to offer all or a portion of
the shares of Common Stock not subscribed for in the Subscription Offering to
the public in the Public Offering, Summit may close the Subscription Offering
without commencing or closing the Public Offering.
Payment for Shares. Payment for all subscribed shares, computed on the
basis of the Subscription Price of $11.00, must accompany all completed order
forms for subscriptions to be valid. Payment for subscribed shares may be made:
(i) in cash, if delivered in person, or (ii) by check or money order. All
payments will be placed in a segregated escrow account established with the
Escrow Agent specifically for this purpose. If the period from the Subscription
Expiration Date to the Effective Date exceeds 60 days, interest will be paid to
each subscriber on all subscription amounts from such 60th day until the
Effective Date at the Refund Interest Rate.
ChaseMellon Shareholder Services, L.L.C. has been appointed as Transfer
Agent for the Common Stock and as Escrow Agent for the Subscription Offering.
The subscription order form and required payment for shares subscribed for
should be mailed or delivered to the Escrow Agent as follows:
<TABLE>
<S> <C>
By mail, in the pre-addressed,
postage-paid envelope: By hand:
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 817, Midtown Station 120 Broadway, 13th Floor
New York, New York 10018 New York, New York 10271
Attn: Reorganization Dept. Attn: Reorganization Dept.
</TABLE>
Delivery of Share Certificates. Subscribers will be notified by mail of
the number of shares of Common Stock for which their subscriptions have been
accepted promptly upon completion of the Offerings. Certificates representing
shares of Common Stock will be delivered to subscribers by the Transfer Agent as
soon as reasonably practicable thereafter. Any certificates returned as
undeliverable will be held by Summit until claimed by persons legally entitled
thereto or otherwise disposed of in accordance with applicable law. Until
certificates for the Common Stock are available and delivered to subscribers,
subscribers may not be able to sell the shares of stock for which they
subscribed.
Cancellation of the Subscription Offering. Summit shall cancel the
Subscription Offering in the event that the Board of Trustees of ESIF withdraws
the Plan of Conversion. In the event that the Subscription Offering is canceled,
subscriptions for Common Stock will not be executed by Summit and payments will
be promptly refunded with interest at the Refund Interest Rate from the
Subscription Expiration Date to the date of the refund.
34
<PAGE> 47
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 may, in its discretion, permit any
purchaser in the Offerings to purchase any number of shares of Common Stock,
even exceeding the Purchase Limit, subject to such purchaser's obtaining the
prior approval of the Florida DOI. 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.
It is expected that the Management Group will collectively purchase in the
Subscription Offering approximately 238,000 shares (approximately $2.6 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."
35
<PAGE> 48
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. PLEASE CALL RAYMOND JAMES &
ASSOCIATES, INC. AT 1-800-248-8863 WITH ANY QUESTIONS REGARDING THE SERIES A
PREFERRED STOCK AND THE COMMON STOCK OFFERED IN, AND OTHER TERMS OF, THE
SUBSCRIPTION OFFERING.
PUBLIC OFFERING
If all of the shares of Common Stock offered are sold in the Subscription
Offering, there will be no Public Offering. If less than all of the shares of
Common Stock offered are sold in Subscription Offering, the Company may, in its
sole discretion, offer all or a portion of such remaining shares in the Public
Offering. The Public Offering may, at the discretion of Summit, close on or at
any time after the Effective Date. It is anticipated that the Representatives
will act as representatives of the underwriters of the Public Offering.
Purchasers in the Public Offering are subject to the Purchase Limit, but
purchasers in the Public Offering will not be required to purchase any minimum
number of shares. Summit may, in its discretion, permit a 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."
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
36
<PAGE> 49
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."
37
<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. The Conversion is contingent upon the receipt by Summit of net
proceeds of approximately $50.0 million which is required to satisfy applicable
provisions of the Florida Insurance Code.
CAPITALIZATION
The following table presents the consolidated capitalization at September
30, 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>
SEPTEMBER 30, 1996
------------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------
ESIF CONVERSION OFFERINGS
HISTORICAL (A) (B) AS ADJUSTED
---------- ---------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Long term debt.................................... $ 36,500 $ 36,500
Equity:
Preferred stock, $10.00 par value, 5,000,000
shares authorized; no shares issued and
outstanding, 1,639,836 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............................... 24,045 (16,398) 7,647
Unrealized appreciation on available for sale
securities................................... 948 948
------- ------- ------ --------
Total equity................................. 24,993 -- 50,000 74,993
------- ------- ------ --------
Total capitalization......................... $ 61,493 -- 50,000 $ 111,493
======= ======= ====== ========
</TABLE>
- ---------------
(A) Adjustment relates to 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.
(B) Adjustment relates to the assumed 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).
(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. The selected financial data
provided as of and for the fiscal years ended March 31, 1992 and 1993 and the
six months ended September 30, 1995 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.............. 121 205 90 216
-------- -------- -------- -------- -------- -------- --------
Total revenue............. 143,750 192,067 158,951 140,815 140,328 71,752 73,048
Losses and loss adjustment
expenses................ 103,657 149,177 108,411 69,116 94,844 42,365 32,135
Other underwriting,
general and
administrative
expenses................ 32,787 40,145 37,121 41,546 43,657 21,623 30,532
Interest expense.......... -- -- -- -- 847 -- 1,831
Amortization and
depreciation............ 1,103 2,499
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes..... 7,306 2,745 13,419 30,153 (123) 7,764 6,051
Loss from discontinued
operations.............. -- -- -- -- (197) -- (890)
Net income................ $ 6,844 $ 2,953 $ 8,885 $ 19,163 $ 185 $ 5,374 $ 2,386
======== ======== ======== ======== ======== ======== ========
Other Data:(2)
Net loss ratio(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%
</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
Total assets.............. 307,345 373,069 354,546 425,206 492,790 456,012 502,310
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
</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 (967) (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 September 30, 1996
The unaudited pro forma consolidated balance sheet as of September 30, 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 September 30, 1996.
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 Six Months Ended September 30, 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 Six Months Ended September 30, 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.
41
<PAGE> 54
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
EMPLOYERS --------------------------
SELF INSURERS CONVERSION OFFERINGS
FUND (A) (B) PRO FORMA
------------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Investments................................... $ 206,218 $ -- $ 50,000(D) $ 256,218
Cash and cash equivalents..................... 7,611 -- -- 7,611
Premiums receivable........................... 67,179 -- -- 67,179
Accounts receivable........................... 3,102 -- -- 3,102
Reinsurance recoverable....................... 103,861 -- -- 103,861
Recoverable from Florida Special Disability
Trust Fund.................................. 21,138 -- -- 21,138
Excess of cost over net assets of business
acquired.................................... 47,925 -- -- 47,925
Deferred income taxes......................... 17,446 -- -- 17,446
Other assets.................................. 27,830 -- -- 27,830
-------- -------- ------- --------
Total assets........................ $ 502,310 $ -- $ 50,000 $ 552,310
======== ======== ======= ========
LIABILITIES AND SHAREHOLDERS EQUITY
Liabilities:
Loss and loss adjustment expenses........... $ 378,196 -- -- $ 378,196
Debt........................................ 36,500 -- -- 36,500
Unallocated policyholder remittances........ 46,000 -- -- 46,000
Accounts payable............................ 10,532 -- -- 10,532
Other liabilities........................... 6,089 -- -- 6,089
-------- -------- ------- --------
Total liabilities................... 477,317 -- -- 477,317
Equity:
Preferred stock............................. -- 16,399(C) -- 16,399
Common stock................................ -- -- 50(D) 50
Additional paid-in capital.................. -- -- 49,950(D) 49,950
Retained earnings........................... 24,045 (16,399)(C) -- 7,646
Unrealized appreciation on available for
sale securities.......................... 948 -- -- 948
-------- -------- ------- --------
Total equity........................ 24,993 -- 50,000 --
-------- -------- ------- --------
Total liabilities and shareholders
equity............................ $ 502,310 $ -- $ 50,000 $ 552,310
======== ======== ======= ========
</TABLE>
See notes to pro forma condensed consolidated balance sheet.
42
<PAGE> 55
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(A) Assumes that the Conversion of ESIF from a group self-insurance fund to a
stock insurance company occurred as of September 30, 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 is received
as of September 30, 1996.
(C) Adjustment relates to 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.
(D) Adjustment relates to the assumed 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).
43
<PAGE> 56
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1996(A)
<TABLE>
<CAPTION>
(B) (C)
EMPLOYERS SUMMIT
SELF INSURERS HOLDING PRO FORMA
FUND CORPORATION ADJUSTMENTS PRO FORMA
------------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned........................... $ 114,893 $ -- $ -- $ 114,893
Net investment income..................... 13,210 1,026 3,125(D) 15,499
(1,855)(E)
(7)(F)
Realized investment gains................. 4,354 -- -- 4,354
Administrative fees....................... 7,665 49,040 (19,358)(G) 37,347
Other income.............................. 206 921 (921)(F) 206
-------- -------- -------- ---------
Total revenue..................... 140,328 50,987 (19,016) 172,299
-------- -------- -------- ---------
Expenses:
Losses and loss adjustment expenses....... 94,844 -- -- 94,844
Other underwriting, general, and
administrative expenses................ 43,657 40,489 (19,358)(G) 63,008
(1,780)(F)
Interest expense.......................... 847 30 3,101(H) 3,978
Amortization and depreciation............. 1,103 4,033 341(I) 5,340
(137)(F)
-------- -------- -------- ---------
Total expenses.................... 140,451 44,552 (17,833) 167,170
-------- -------- -------- ---------
Income from continuing operations before
income taxes........................... (123) 6,435 (1,183) 5,129
Income taxes (benefit).................... (505) 2,356 (367)(J) 1,484
-------- -------- -------- ---------
Income from continuing operations........... $ 382 $ 4,079 $ (816) $ 3,645
======== ======== ======== =========
Income from continuing operations per common
share..................................... $ 0.60
=========
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) Adjustment relates to investment earnings (at an assumed rate of 6.25%) on
$50.0 million in net proceeds (minimum amount expected to be received,
assuming the issuance of 5,000,000 common shares).
(E) 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%.
(F) 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.
(G) Adjustment relates to elimination of administrative fees paid by ESIF to
SHC.
(H) Adjustment relates to interest expense from the financed portion of the
Acquisition assuming scheduled interest rates ranging from 7% to 9.5%.
(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
---------------------------------
HISTORIC 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>
(J) Adjustment relates to the total income tax effect of adjustments (D)
through (I).
45
<PAGE> 58
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995(A)
<TABLE>
<CAPTION>
(D)
(C) SUMMIT
EMPLOYERS SELF HOLDING PRO FORMA
INSURERS FUND CORPORATION ADJUSTMENTS PRO FORMA
-------------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned........................... $ 63,145 $ -- $ -- $ 63,145
Net investment income..................... 7,598 494 1,563(E) 8,482
(1,173)(G)
Realized investment gains................. 919 -- -- 919
Administrative fees....................... -- 32,558 (12,573)(F) 19,985
Other income.............................. 90 529 (361)(J) 258
------- ------- -------- ---------
Total revenue..................... 71,752 33,581 (12,544) 92,789
Expenses:
Losses and loss adjustment expenses....... 42,365 -- -- 42,365
Other underwriting, general and
administrative expenses................ 21,623 25,707 (12,573)(F) 34,034
(723)(J)
Interest expense.......................... -- 16 2,013(I) 2,029
Amortization and depreciation............. -- 2,529 216(H) 2,698
(47)(J)
------- ------- -------- ---------
Total expenses.................... 63,988 28,252 (11,114) 81,126
------- ------- -------- ---------
Income from continuing operations before
income taxes........................... 7,764 5,329 (1,430) 11,663
Income taxes.............................. 2,390 1,962 (480)(K) 3,872
------- ------- -------- ---------
Income from continuing operations........... $ 5,374 $ 3,367 $ (950) $ 7,791
======= ======= ======== =========
Income from continuing operations per common
share..................................... $ 1.49
=========
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 SIX MONTHS ENDED SEPTEMBER 30, 1996(B)
<TABLE>
<CAPTION>
(C)
EMPLOYERS SELF PRO FORMA
INSURERS FUND ADJUSTMENTS PRO FORMA
-------------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenues:
Premiums earned...................................... $ 49,029 $ -- $ 49,029
Net investment income................................ 6,363 1,563(E) 7,846
(80)(J)
Realized investment gains............................ 8 -- 8
Administrative fees.................................. 17,432 -- 17,432
Other income......................................... 216 -- 216
------- ------ -------
Total revenue................................ 73,048 1,483 74,531
------- ------ -------
Expenses:
Losses and loss adjustment expenses.................. 32,135 -- 32,135
Other underwriting, general, and administrative
expenses.......................................... 30,532 (684)(J) 29,848
Interest expense..................................... 1,831 1,831
Amortization and depreciation........................ 2,499 (20)(J) 2,479
------- ------ -------
Total expenses............................... 66,997 (704) 66,293
------- ------ -------
Income from continuing operations before income
taxes............................................. 6,051 2,187 8,238
Income taxes......................................... 2,400 801(K) 3,201
------- ------ -------
Income from continuing operations...................... $ 3,651 $ 1,386 $ 5,037
======= ====== =======
Income from continuing operations per common share..... $ 0.94
=======
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 SIX MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996
(A) Assumes the Acquisition and the Conversion occurred on April 1, 1995.
(B) Assumes the Conversion occurred on April 1, 1995.
(C) Includes historical information for ESIF and subsidiaries for the six
months ended September 30, 1995 and 1996, respectively, on a consolidated
basis.
(D) Includes SHC for the period April 1, 1995 through September 30, 1995.
(E) Adjustments relate to investment earnings (at an assumed of 6.25%) on $50.0
million in net proceeds (minimum amount expected to be received, assuming
the issuance of 5,000,000 common shares).
(F) Adjustment relates to elimination of fees paid by ESIF to SHC.
(G) Adjustment relates to the effect on investment income of foregone
investment earnings on $26.0 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%.
(H) Adjustment represents the net of the reversal of the amortization of SHC's
historical intangible assets and the amortization of the goodwill, customer
contracts, and developed software capitalized in the Acquisition.
Amortization periods assumed are as follows: goodwill -- 25 years; customer
contracts -- 10 years; and developed software -- 5 years. Such intangible
asset amortization is not tax deductible. The components of the
amortization adjustment are as follows:
<TABLE>
<CAPTION>
AMORTIZATION EXPENSE
---------------------------------
HISTORIC 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>
(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 relates to decrease in revenue and operating expenses
attributable to the disposition of Carolina Summit.
(K) Adjustment relates to the total income tax effect of adjustments (E)
through (J).
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; and (iv) leveraging of administrative services
capabilities; (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 18 and 19 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.
The discussion below in "Results of Operations" is divided into three
segments: (i) a comparison of fiscal years ended March 31, 1994, 1995 and 1996
for ESIF, including SHC after the date of the Acquisition; (ii) a comparison of
the six-month periods ended September 30, 1995 and 1996 for ESIF on a
consolidated basis; and (iii) a comparison of fiscal years ended December 31,
1993, 1994 and 1995 for SHC.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 1994, 1995 AND 1996 FOR ESIF
REVENUE. Revenue was $159.0 million, $140.8 million and $140.3 million for
the fiscal years ended March 31, 1994, 1995 and 1996, respectively. Revenue
declined for the fiscal year ended March 31, 1995, primarily due to a $20.0
million decrease in premiums earned. Revenue declined by $0.5 million for the
fiscal year ended March 31, 1996, primarily due to a decrease in premiums earned
of $13.6 million, which was offset by the addition of $7.6 million in
administrative fees as a result of the Acquisition and an increase in realized
investment gains of $4.4 million. Set forth below is a discussion of the
composition of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Premiums earned................................................ $148,441 $128,489 $114,893
Net investment income.......................................... 10,510 12,205 13,210
Realized investment gains...................................... -- -- 4,354
Administrative fees............................................ -- -- 7,665
Other income................................................... -- 121 206
-------- -------- --------
Total revenue........................................ $158,951 $140,815 $140,328
======== ======== ========
</TABLE>
Premiums Earned. Premiums earned decreased by $20.0 million, or 13.4%, for
the year ended March 31, 1995, and decreased by $13.6 million, or 10.6%, for the
year ended March 31, 1996. These declines in premiums resulted in large part
from: (i) lost accounts due to the market's increasing preference for non-
assessable products; (ii) increased competition; (iii) the effects of increasing
participation in the premium credit programs; and (iv) a refinement in
estimation of accrued retrospective premiums which reduced reported premiums for
the fiscal year ended March 31, 1996 by approximately $9.3 million. In order to
more accurately estimate the accrued retrospective premium amounts, the
Company's estimation methodology was revised in 1996 such that individual member
premium and loss data was utilized in its calculation. Prior thereto, ESIF
estimated its accrued retrospective premiums using aggregate premium and loss
data.
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 $108.4 million compared to $69.1 million for the fiscal year ended
March 31, 1995 and $94.8 million for the
51
<PAGE> 64
fiscal year ended March 31, 1996. Prior to the fiscal year ended March 31, 1995,
management had recorded certain reserves in excess of reserve levels required by
actuarial reports because the actuarial estimates for fund years 1991 and
earlier had a history of increasing (or "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
increase (or "development") with the maturity of the fund years. These
development trends are reflected in the table below captioned "Development of
Actuarial Net Loss Ratios," which shows that the loss ratios for 1991 increased
with the passage of time, but the loss ratios for later years have increased
only slightly and, in some cases, decreased. This change based on development
trends, together with a reduction in premiums earned and a lower actuarial loss
ratio, resulted in a $39.3 million decrease in incurred losses for the fiscal
year ended March 31, 1995 as compared to fiscal year ended March 31, 1994. The
subsequent increase of $25.7 million in losses and LAE for the fiscal year ended
March 31, 1996 was primarily the result of revised actuarial estimates for prior
years. The loss ratio for the fiscal years ended March 31, 1994, 1995 and 1996
was 73.0%, 53.8% and 82.5%, respectively, or an average of 69.8%.
The following table shows loss and LAE ratios computed on an actuarial
basis which excludes the effects of adjustments for prior years. As a result,
these loss ratios may be more indicative of current underwriting results. The
actuarial loss and LAE ratios in the following table indicate a downward trend
for the fiscal years ended March 31, 1992 to 1996, which ESIF believes reflects
the impact of managed care and other cost containment programs.
DEVELOPMENT OF ACTUARIAL NET LOSS RATIOS(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Actuarial loss & loss adjustment expense
ratios......................................... 66.8% 67.0% 59.8% 55.8% 59.8% 60.4%
One year later................................... 67.1 64.8 56.2 53.8 58.7
Two years later.................................. 66.9 61.6 61.0 54.3
Three years later................................ 70.3 64.2 60.7
Four years later................................. 75.3 64.7
Five years later................................. 76.8
</TABLE>
- ---------------
(1) Actuarial net loss ratios are from actuarial reports filed with the Florida
Department of Labor and Employment Security and the Florida DOI. Actuarial
net loss ratios are based on modified and discount manual premium.
Underwriting, General and Administrative Expenses. The increase in ESIF's
expenses from $37.1 million to $41.5 million in the fiscal year ended March 31,
1995 was primarily due to four factors: (i) higher administrative taxes; (ii)
higher SDTF assessments; (iii) the introduction and operation of state-wide
managed care programs; and (iv) the increase in commission expenses.
Underwriting, general and administrative expenses increased to $43.7 million
during the fiscal year ended March 31, 1996 primarily due to the Acquisition.
Interest Expense. For the fiscal years ended March 31, 1994 and 1995, ESIF
had no interest expense. In connection with the Acquisition, SHC borrowed $44.0
million from the Bank, and, as a result, interest expense on a consolidated
basis for the fiscal year ended March 31, 1996 was $0.8 million.
Amortization and Depreciation. For the fiscal years ended March 31, 1994
and 1995, ESIF had no amortization or depreciation expense. In connection with
the Acquisition, SHC recorded certain intangibles including software, noncompete
agreements, customer contracts and goodwill. For the fiscal year ended March 31,
1996, amortization of these intangible assets was $1.1 million. The expense
associated with amortization of these intangible assets is not deductible for
federal income tax purposes.
NET INCOME. Net income was $8.9 million, $19.2 million and $0.2 million
for the fiscal years ended March 31, 1994, 1995 and 1996, respectively. The
increase in net income of $10.3 million for the fiscal year ended March 31, 1995
resulted primarily from a reduction in ESIF's reserves partially offset by a
decrease in
52
<PAGE> 65
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.
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 $9.6 million for the six months ended September 30, 1996 as
compared to $6.1 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. SCI generated $17.4 million in administrative fees
through its contracts with administrative clients for the six months ended
September 30, 1996. Administrative fees represent 23.9% of total revenue for the
six-month period and are expected to provide additional future revenues through
SCI's contracts with clients in Florida, Louisiana and Kentucky.
LOSSES AND EXPENSES. ESIF's losses and expenses increased from $64.0
million for the six months ended September 30, 1995 to $67.0 million for the six
months ended September 30, 1996. Set forth below is a discussion of the expenses
for the period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
---------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Losses and loss adjustment expenses.................................... $42,365 $32,135
Underwriting, general and administrative expenses...................... 21,623 30,532
Interest expense....................................................... -- 1,831
Amortization and depreciation.......................................... -- 2,499
------- -------
Total losses and expenses.................................... $63,988 $66,997
======= =======
</TABLE>
Losses and Loss Adjustment Expenses. Losses and LAE incurred for the six
months ended September 30, 1995 were $42.4 million compared to $32.1 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.
53
<PAGE> 66
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.
The adjusted expense ratio decreased slightly from 34.2% on September 30,
1995 to 32.6% on September 30, 1996. It should be noted that the Florida
Department of Labor administrative tax has decreased retrospectively from 3.15%
to 2.50%, effective July 1996. Furthermore, the ongoing expenses related to
managed care approvals should decrease as ESIF's managed care network continues
to service more of the existing policyholder base, thereby reducing delivery
costs.
Interest Expense. Interest expense increased $1.8 million for the six
months ended September 30, 1996 from zero for the six months ended September 30,
1995. Interest expense resulted from the $44.0 million of debt incurred by SHC
to fund the Acquisition.
Amortization and Depreciation. For the six months ended September 30,
1996, amortization and depreciation expense was recorded of $2.5 million
primarily in connection with intangible assets acquired in the Acquisition. The
expense associated with amortization of the intangible assets, which is expected
to be approximately $3.9 million per year, is not deductible for federal income
tax purposes.
NET INCOME. Income from continuing operations for the six months ended
September 30, 1996 was $3.7 million compared to $5.4 million for the six months
ended September 30, 1995. ESIF had $1.3 million of non-recurring charges in
September 1996 which included the disposition of discontinued operations and
conversion costs.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 FOR SHC
REVENUE. Revenue for the fiscal years ended December 31, 1993, 1994 and
1995 was $70.8 million, $73.8 million and $64.1 million, respectively. Gross
service fee (administrative fee) revenue received from ESIF and the Funds is
computed as a percentage of ESIF's and the Funds' premiums. Such revenue is
recognized by SHC in proportion to ESIF's and the Funds' recognition of premiums
earned. SHC is required to pay certain direct expenses that are a percentage of
the premiums earned by ESIF and the Funds. Such direct expenses principally
include agents' commissions, reinsurance premium costs, association fees and
administrative taxes. Subsequent to the Acquisition, direct expenses are
included in underwriting, general and administrative expenses in ESIF's
consolidated financial statements. The changes in revenue for each of the three
years are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross service fees................................. $ 70,814 $ 73,833 $ 64,090
Direct expenses.................................... (32,972) (31,639) (27,470)
Net service fees................................... 37,842 42,194 36,620
Investment and other income........................ 632 934 2,175
------- ------- -------
Total revenue............................ $ 38,474 $ 43,128 $ 38,795
======= ======= =======
</TABLE>
Net Service Fees. Net service fees increased from $37.8 million in 1993 to
$42.2 million in 1994 and decreased by $5.6 million to $36.6 million for the
fiscal year ended December 31, 1995. The decline in net service fees for this
period is due to a proportional decrease in gross service fees and direct
expenses during 1995, principally attributable to a decrease in premiums earned
by ESIF and the Funds. In 1994, SHC's net service fee revenue included a $3.3
million one-time reimbursement.
Investment and Other Income. Investment income for the fiscal 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 is expected to be
completed by December 31, 1996.
54
<PAGE> 67
EXPENSES. Expenses for the fiscal years ended December 31, 1993, 1994 and
1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Compensation and employee benefits.................... $14,503 $15,425 $16,616
Other operating expenses.............................. 7,707 8,218 8,204
Interest expense...................................... 1,610 58 42
Depreciation and amortization......................... 4,891 4,872 5,112
------ ------ ------
Total expenses.............................. $28,711 $28,573 $29,974
====== ====== ======
</TABLE>
Compensation and Employee Benefits. Compensation and employee benefits
increased by $0.9 million to $15.4 million for the fiscal year ended December
31, 1994 compared to $14.5 million for 1993. The increase was principally
attributable to increased payroll costs, combined with increased group life and
health insurance costs. Compensation and employee benefits increased by $1.2
million to $16.6 million for the fiscal year ended December 31, 1995 compared to
$15.4 million for 1994, primarily as a result of increased payroll costs coupled
with the addition of employees resulting from the purchase of Meritec, effective
July 1995.
Interest Expense. Interest expense decreased by $1.6 million or 96.4% to
approximately $58,000 for the fiscal year ended December 31, 1994 compared to
$1.6 million for 1993. In 1993, interest expense included $1.5 million for the
buyout of the Capital Appreciation Rights agreement related to a revolving loan
agreement.
Amortization and Depreciation. Amortization of intangibles for the fiscal
years ended 1993, 1994 and 1995 was $4.1 million, $4.1 million and $4.3 million,
respectively. Intangible assets were originally established in connection with
the acquisition of Summit Consulting, Inc. from Alexander and Alexander
Services, Inc. ("A&A") on January 1, 1992.
NET INCOME. Net income for the fiscal years ended 1993, 1994 and 1995 was
$5.9 million, $9.0 million and $5.6 million, respectively. The increase in net
income for 1994 as compared to 1993 of $3.1 million or 52.5% is due primarily to
a one-time reimbursement from one of the Funds, Louisiana Employers Safety
Association Self Insurers Fund, for $3.3 million. The decrease in net income for
1995 of $3.4 million, or 37.8%, is due primarily to lower administrative fee
income which is attributable to a decrease in Fund premiums.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its cash requirements and financed its
growth principally through cash flows generated from operations. The Insurance
Subsidiaries' primary sources of cash flows are premiums earned, investment
income and the proceeds from the sale or maturity of invested assets. The
Administrative Subsidiaries' primary source of cash flow is service fees
generated from ESIF and the Funds. The cash requirements of the Insurance
Subsidiaries are primarily for the payment of claims, commissions, and
reinsurance premiums and management fees to SCI and the purchase of investment
securities. The cash requirements of the Administrative Subsidiaries are
primarily for the payment of salaries, employees benefits, debt obligations and
other operating expenses. 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 September 30, 1996,
consisted of a term loan in the amount of $34.5 million and $2.0 million which
was outstanding under the revolving line of credit. Scheduled quarterly payments
for the term loan began on September 30, 1996 and extend through June 30, 2002,
with principal payments totaling approximately $1.6 million, $3.8 million, $4.6
million, $9.0 million, $10.0 million and $4.0 million due in calendar years
1997, 1998, 1999, 2000, 2001 and 2002, respectively.
55
<PAGE> 68
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. 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 September 30, 1996
reflect $20.1 million and $21.1 million, respectively, of recoverables from the
SDTF. The Company received $5.6 million and $4.3 million in actual recoveries
from the SDTF for the fiscal year ended March 31, 1996 and the six months ended
September 30, 1996, respectively. The SDTF has not failed to make payments on
accepted claims and the Company has no reason to believe that the SDTF will fail
to meet its obligations to pay accepted claims in the future, although there can
be no assurance. 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 $46.9 million at March 31, 1995, March 31, 1996
and September 30, 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 September 30, 1996, respectively.
ESIF's statutory basis surplus as a self-insurance fund was approximately $20.5
million at September 30, 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 $33.3 million at September 30, 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
56
<PAGE> 69
distributions by the Insurance Subsidiaries be approved by the Florida DOI in
advance, but the Order states that approval will be given for any dividend or
distribution otherwise complying with the Florida Insurance Code. As a
consequence of these legal restrictions and other business considerations, the
amount of dividends that may be paid by the Insurance Subsidiaries to Summit may
be limited, which may in turn limit the amount of cash available to Summit for
servicing its debt and other purposes.
LOSSES AND LOSS ADJUSTMENT EXPENSE
Beginning in 1994, workers' compensation insurers in Florida were permitted
to settle both the medical and indemnity portions of a claim; previously, an
insurer was not permitted to limit its exposure for lost wage expenses by
settling with the injured employee for a lump sum. ESIF undertook a claims
settlement initiative in 1994, which reduced outstanding claims amounts and
favorably impacted ESIF's losses and LAE for the fiscal year ended March 31,
1994 and subsequent periods. ESIF actively continues to try to settle all
aspects of each claim.
The Company's consolidated financial statements include estimated reserves
for unpaid losses and LAE. The reserves for these expenses are estimated using
individual case-basis valuations and statistical analyses and represent
estimates of the ultimate gross and net costs of all unpaid losses and LAE
incurred through the Balance Sheet date of each period presented. Those
estimates are subject to the effects of trends in claim severity and frequency.
The Company's estimates are continually reviewed and, as experience develops and
new information becomes known, the reserves are adjusted as necessary.
Adjustments, including increases and decreases, are included in current
operations net of reinsurance.
Since its inception and continuing through January 1989, ESIF claims were
adjusted and managed by Adjustco, Inc. ("ADJUSTCO"), an independent claims
adjusting company, under the supervision of SCI. Adjustco was responsible for
establishing, monitoring and updating case-based loss reserves used to set loss
reserves for ESIF's financial statements. In January 1989, SCI discontinued the
contract with Adjustco and performed such claims adjustment functions through
its wholly owned subsidiary, Summit Claims Management, Inc. ("SCM"). In
subsequent periods, such Adjustco loss reserves have proved deficient resulting
in significant reserve increases for losses incurred prior to 1989. Adverse loss
reserve development has significantly decreased for the years since SCM
performed the claims management functions.
The following table shows changes in historical loss reserves for ESIF for
the fiscal year ended March 31, 1987 and subsequent years. The top line of the
table shows the reserves for estimated unpaid losses and LAE recorded at each
fiscal year end. Each amount in the top line represents the estimated amount of
losses and LAE for the losses occurring in that year as well as future payments
on claims occurring in prior years. The upper (cumulative amount paid) portion
of the table presents the amounts paid as of subsequent years on those losses
for which reserves were carried as of each specific year. The lower (reserves
re-estimated) portion shows the reestimated amounts of the previously recorded
reserves based on experience as of the end of each succeeding year. The estimate
changes as more information becomes known about the actual losses for which the
initial reserves were carried. An adjustment to the carrying value of unpaid
losses for a prior year will also be reflected in the adjustments for each
subsequent year. For example, an adjustment made in the fiscal year ended March
31, 1995 for loss reserves in the fiscal year ended March 31, 1992 will be
reflected in the re-estimated ultimate net loss for each of the fiscal years
ended March 31, 1992 through March 31, 1995. The cumulative redundancy
(deficiency) line represents the cumulative change in estimates since the
initial
57
<PAGE> 70
reserve was established. It is equal to the difference between the initial
reserve and the latest reserves re-estimated amount.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for losses
and LAE at end of
period........... $ 37,297 $ 57,300 $124,425 $168,608 $207,353 $164,399 $251,748 $260,531 $238,985 $250,363
Cumulative paid as
of One year
later............ $ 23,190 $ 40,028 $ 57,482 $ 74,481 $ 88,815 $ 71,364 $ 73,839 $ 71,915 $ 64,882
Two years
later.......... 42,031 70,077 100,883 133,064 138,546 118,326 122,411 114,097
Three years
later.......... 54,469 92,466 135,490 160,896 170,259 149,424 149,175
Four years
later.......... 63,986 110,856 146,825 176,483 190,179 165,628
Five years
later.......... 70,433 119,024 151,683 185,759 199,556
Six years
later.......... 72,985 123,810 154,668 189,948
Seven years
later.......... 75,390 126,776 158,802
Eight years
later.......... 76,457 130,904
Nine years
later.......... 78,730
Reserves re-estimated as of end of year
One year later... $ 47,627 $101,405 $140,492 $183,938 $200,237 $228,556 $231,759 $234,166 $247,785
Two years
later.......... 68,549 112,475 155,440 178,390 235,515 209,306 232,455 243,431
Three years
later.......... 70,736 126,109 161,012 214,234 229,571 220,163 241,769
Four years
later.......... 76,275 131,975 181,370 209,498 236,861 230,088
Five years
later.......... 78,412 148,033 178,170 208,800 246,100
Six years
later.......... 86,978 145,749 177,402 215,588
Seven years
later.......... 85,771 143,717 184,346
Eight years
later.......... 83,725 148,595
Nine years
later.......... 87,695
Cumulative redundancy (deficiency)
Dollars.......... $(50,398) $(91,295) $(59,921) $(46,980) $(38,747) $(65,689) $ 9,979 $ 17,100 $ (8,800)
Percentage....... -135.13% -159.33% -48.16% -27.86% -18.69% -39.96% 3.96% 6.56% -3.68%
Net reserves for losses and LAE at end of year................................................. 260,531 238,985 250,363
Add: Impact of reinsurance for FASB 113........................................................ 121,463 108,440 107,092
Impact of implied Special Disability Trust Fund recoverables............................... 15,531 24,836 31,376
Unallocated LAE assumed through the Acquisition............................................ -- -- 3,398
Less: Discount on reserves..................................................................... (4,730) (4,875) (4,668)
Other.......................................................................................... (11) 5 71
-------- -------- --------
Gross reserves for losses and LAE at end of year (GAAP basis).................................. $392,784 $367,391 $387,632
======== ======== ========
</TABLE>
The table above evidences a generally favorable trend in the cumulative
redundancy (deficiency) from the year ended March 31, 1988 through the year
ended March 31, 1995, with a significant exception to this generally favorable
trend occurring only in the year ended March 31, 1992. The Company attributes
these generally favorable results primarily to changes in regulations over the
years that have curbed benefit costs and facilitated earlier closing of cases in
some circumstances. The improved results also are due in part to improved
information on which to base estimates of reserves for losses and LAE and
subsequent re-estimates of reserves in the years since 1992. These factors
contributed to redundancies in 1993 and 1994 and a small deficiency in 1995.
58
<PAGE> 71
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 ended September 30, 1996:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, FOR THE SIX MONTHS
------------------------------ ENDED
1994 1995 1996 SEPTEMBER 30, 1996
-------- -------- -------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net reserves for losses and LAE at
beginning of year.................... $251,751 $260,520 $238,990 $250,434
Add provision for claims occurring in:
The current year..................... 118,889 94,520 84,058 35,663
Prior years.......................... (10,478) (25,404) 10,786 (3,528)
-------- -------- -------- --------
Incurred losses during the current
year................................. 108,411 69,116 94,844 32,135
Deduct payments for claims occurring
in:
The current year..................... 17,704 16,857 15,432 3,565
Prior years.......................... 81,938 73,789 67,968 30,665
-------- -------- -------- --------
Claim payments during the current
year................................. 99,642 90,646 83,400 34,230
Net reserves for losses and LAE at end
of year.............................. 260,520 238,990 250,434 248,339
Add: Impact of reinsurance for FASB
113............................... 121,463 108,440 107,092 102,396
Impact of implied Special
Disability Trust Fund
recoverables...................... 15,531 24,836 31,376 28,832
Unallocated LAE assumed through
the Acquisition.................. -- -- 3,398 2,864
Less: Discount on reserves............. (4,730) (4,875) (4,668) (4,235)
-------- -------- -------- --------
Gross reserves for losses and LAE at
end of year (GAAP basis)............. $392,784 $367,391 $387,632 $378,196
======== ======== ======== ========
</TABLE>
The September 30, 1996 reserves of $378.2 million for losses and LAE as
determined under GAAP were $127.5 million more than the reserves of $250.7
million as recorded on the statutory financial statements provided to state
regulatory authorities. The difference is an increase of $102.4 million for
reserves recoverable from third-party reinsurance carriers, a decrease for
discounting of the indemnity portion of permanent disability claims of $4.2
million, and an increase of $28.8 million for the impact of implied disability
trust fund recoverables that reduce reserves for statutory reporting. An asset
of $21.1 million has been recorded as of September 30, 1996 based on ESIF's
historical collection experience and the amount of claims identified as subject
to SDTF recovery. Furthermore, reinsurance recoverables included in the Balance
Sheet are increased by $8.4 million as a result of calculating such recoverables
using loss and LAE reserves gross of SDTF.
The Company has recorded $17.8 million in accrued recoverables from SDTF as
of September 30, 1995 and $21.1 million for the six months ended September 30,
1996. The Company received $2.2 million for the six months ended September 30,
1995 and $4.3 million for the six months ended September 30, 1996. 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 three 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
59
<PAGE> 72
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.
60
<PAGE> 73
BUSINESS
OVERVIEW
The Company provides a variety of managed care workers' compensation
products and services to employers and self-insured employer groups primarily in
Florida, as well as in Louisiana and Kentucky. Through the Company's
Administrative Subsidiaries, the Company provides administrative services for
the Funds for the Insurance Subsidiaries and for certain municipalities. These
administrative services include most aspects of daily operations of the Funds
and the Insurance Subsidiaries, including sales and marketing, underwriting,
claims administration, loss control and policy administration. These services
are provided for a fee, with the Company generally receiving a percentage of
premiums. The Administrative Subsidiaries do not assume any underwriting risk of
the Funds, entities formed to provide workers' compensation coverage for self-
insured employer groups on a pooled basis.
The Insurance Subsidiaries, which include Bridgefield and Bridgefield
Casualty, underwrite and assume the underwriting risk with respect to workers'
compensation insurance policies for Florida employers of all sizes, primarily in
the construction, manufacturing, wholesale and retail, and service industries.
As of September 30, 1996, the Company's insurance products and administrative
services are provided to approximately 15,500 employers representing
approximately $219.0 million in premiums, including approximately $102.0 million
in premiums attributable to the Funds and $117.0 million in premiums
attributable to the Insurance Subsidiaries ($110.0 million in the case of
Bridgefield and $7.0 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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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> 75
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> 76
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 September 30, 1996, FRF had approximately 7,300 member
employers and annual premiums in excess of $80.0 million. FRF memberships
renew each year on January 1.
Louisiana Employers Safety Association Self Insurers Fund. LESA was
established in 1982 and currently provides coverage to over 800 member
employers in Louisiana. As of September 30, 1996, LESA had annual premiums
of approximately $12.0 million. LESA memberships renew each year on April
1.
Louisiana Retailers Association Self Insurers Fund. LRA was
established in 1980 as a workers' compensation self-insurance fund
specifically targeting wholesalers and retail-related businesses in
Louisiana. As of September 30, 1996, LRA had over 1,250 retail member
employers and annual premiums of approximately $9.0 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
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September 30, 1996, KRF had over 1,100 members and annual premiums of
approximately $3.0 million. KRF memberships renew each year on January 1.
Insurance Operations. Prior to the Conversion, ESIF was one of the largest
workers' compensation self-insurance funds in Florida, with approximately 5,000
member employers and approximately $110.0 million in annual premiums as of
September 30, 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 September 30, 1996 had written
approximately 400 such policies representing approximately $6.7 million of
annual premiums. Subject to receipt of licensing approvals, Bridgefield Casualty
intends to begin selling non-assessable workers' compensation policies in
Louisiana. Future plans also include possible workers' compensation offerings in
other states as well as other property/casualty products offered to members of
the Funds.
The Company's products and rating plans encompass a continuum of options
designed to fit the needs of its insured employers and employer groups. The
basic product, accounting for approximately 70% of the Insurance Subsidiaries'
premiums in force at March 31, 1996, is a guaranteed cost contract, in which the
premium for each employer is set in advance and varies only based upon changes
in the client's operations or payroll. In return, the Company agrees to assume
statutorily imposed obligations of the employer to provide workers' compensation
benefits to its employees. The premium for such a policy depends upon the type
of work performed by the employees and the general business of the insured. An
employer large enough to qualify, typically those paying more than $25,000 in
annual premiums, may choose a different product, having its premium based on its
loss experience relative to its peers as determined over a one-year period. A
client who desires to assume a certain amount of financial risk may elect a
deductible which makes the client responsible for the first portion of any
claim. In exchange for the deductible election, the employer receives a premium
reduction. The Company also offers a loss sensitive plan (retrospective 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. During the fiscal years ended March 31, 1994, 1995 and
1996 and the six months ended September 30, 1996, the Company accrued for
retrospective refunds in the amount of $6.4 million, $9.2 million, $10.6 million
and $9.9 million, respectively, and payments in excess of accruals were $0.0,
$0.0, $0.0 and $0.8 million, respectively. Retrospective rated policies
accounted for 33%, 32%, 30% and 32%, respectively, of total premiums during the
fiscal years ended March 31, 1994, 1995 and 1996 and the six months ended
September 30, 1996. The Company secures substantially all of its retrospective
liability through a combination of letters of credit, cash deposits and other
instruments.
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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 SEPTEMBER 30, 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 $ -- $ 380 $ 380
Cayzer
Steel....... N/R -- -- -- 2 -- 2
Cigna......... A-/XIII 297 -- 297 189 -- 189
Continental
Casualty.... A/XV -- 10,531 10,531 -- 9,245 9,245
Crossroads(2).. N/R 917 9,375 10,292 653 10,305 10,958
Employers Re.. A++/XV 595 6,805 7,400 505 6,406 6,911
Federal Ins.
Co.......... A++/XV -- 9,626 9,626 -- 8,417 8,417
INA........... A-/XIII -- 5,678 5,678 -- 5,156 5,156
Lloyds of
London...... N/R -- 12,274 12,274 -- 14,595 14,595
National
Union....... A++/XV -- -- -- -- 1,590 1,590
Old Republic.. A+/IX 53 17,242 17,295 37 15,172 15,209
Transamerica.. A/XI 20 37,820 37,840 25 31,185 31,210
------ -------- -------- ------ -------- --------
Total.. $1,882(3) $109,637 $111,519 $1,411(4) $102,451 $103,862
====== ======== ======== ====== ======== ========
</TABLE>
- ---------------
(1) 1996 Best's Key Rating Guide -- Property-Casualty Edition.
(2) The Company believes that Crossroads maintains trust fund assets sufficient
to secure its obligations.
(3) All recoverables less than 90 days old, except $3,000 owed by Employers Re
which is more than 120 days old.
(4) All recoverables 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.
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 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.
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As of September 30, 1996, approximately 72% of the bonds in the Company's
investment portfolio were rated AA or above by Standard & Poor's ("S&P") and
approximately 98% were either rated AA- or better by S&P or are considered Class
I under the NAIC's classification system. The composition of the investment
portfolio as of September 30, 1995 and 1996 is depicted in the following table.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
------------------------------------
1995 1996
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Government bonds........................................... $ 94,884 41.0% $ 62,165 29.1%
Municipal bonds............................................ 67,218 29.1% 68,349 32.0%
Corporate bonds............................................ 29,162 12.6% 42,906 20.1%
Preferred stock............................................ 2,956 1.3% 3,787 1.8%
Common stock............................................... 15,228 6.6% 12,298 5.7%
Short-term investments..................................... 17,176 7.4% 16,713 7.8%
Cash and cash equivalents.................................. 4,664 2.0% 7,611 3.5%
-------- ----- -------- -----
Total cash and invested assets................... $231,288 100.0% $213,829 100.0%
======== ===== ======== =====
</TABLE>
COMPETITION
The markets for workers' compensation insurance products and services are
highly competitive. The Company's competitors include, among others, insurance
companies, specialized provider groups, in-house benefits administrators, state
insurance pools and other significant providers of workers' compensation,
administration and insurance services. A number of the Company's current and
potential competitors are significantly larger, with greater financial and
operating resources than those of the Company, and can offer their services
nationwide. After a period of absence from the market in Florida, traditional
national insurance companies have re-entered that market, thereby increasing
competition. Their presence in the Company's current market, and in markets into
which the Company might consider for expansion, will likely create greater
competition for acquisitions of workers' compensation businesses, making it more
difficult for the Company to grow by acquisition.
Competitive factors in the workers' compensation insurance field include
premium rates (in some states), levels of service, A.M. Best ratings, levels of
capitalization, quality of managed care services, the ability to reduce loss
ratios and the ability to reduce claims expenses. The Company believes that its
products and services are competitively priced. In addition, the Company
believes its premium rates are typically lower than those for clients assigned
to the state-sponsored risk pools, allowing the Company to provide a viable
alternative for employers in such pools. The Company also believes that its
level of service and its ability to reduce claims are strong competitive factors
that have enabled it to retain existing clients and attract new clients.
Competitive factors relating to the Company's administrative service products
are primarily based upon pricing, service and reputation. See "RISK
FACTORS -- Competition."
A.M. BEST RATING
A.M. Best is a rating agency that reports on the financial condition of
insurance companies. Neither of the Insurance Subsidiaries has been assigned a
rating by A.M. Best because neither company has accumulated the required five
consecutive years of operating experience. Management has met with
representatives of A.M. Best to discuss whether ESIF's prior operations might be
considered in assigning a rating to Bridgefield, but there can be no assurance
that any rating will be assigned to either Insurance Subsidiary in the near
future. See "RISK FACTORS -- Competition."
REGULATION
General. Workers' compensation and managed healthcare programs are subject
to various laws and regulations. Both the nature and degree of applicable
government regulation vary greatly depending upon the specific activities
involved. Generally, parties that actually provide or arrange for the provision
of managed care workers' compensation programs, assume financial risk related to
the provision of those programs, or
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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.
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.
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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 1996, respectively. In addition,
the Company's consolidated balance sheet as of September 30, 1996 included an
asset of approximately $21.1 million, representing SDTF recoveries that the
Company estimated at that time it would be entitled to receive, based on claims
identified as subject to SDTF recovery and considering the Company's recovery
experience. The SDTF's assessment formula has historically yielded sufficient
revenues for annual reimbursement payments and for costs associated with
administering the SDTF, however, the SDTF has not actuarially funded its claims
liability and no reserves currently exist. A study commissioned by the State of
Florida estimated the total dollar liability of the SDTF for all future payments
required on accidents occurring on or before June 30, 1995 to be approximately
$4.7 billion on an undiscounted basis. There is no assurance that the SDTF will
have funds available in the future for the payment of claimed recoveries.
The SDTF is scheduled for further review under Florida sunset laws in the
year 2000. The Florida legislature may, however, review the SDTF earlier and no
assurance can be made with regard to the
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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, 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
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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 18 and 19 of the notes to ESIF's consolidated financial
statements contained elsewhere in this Proxy Statement/Prospectus.
INFORMATION TECHNOLOGY SYSTEMS
The Company's centralized information technology systems department
provides, maintains and manages the information resources for all of the
Company. The department currently has four IBM AS/400 mainframe computers
supporting approximately 430 terminals in the Company's Lakeland, Florida
headquarters and remote locations. Some 100 personal computers are used in
networks, as stand-alone units or as host-connected PCs. The Company also
maintains a number of laptop computers for field personnel. More than 80% of the
department's approximately 26 employees have been with the Company five or more
years. The department's programming staff averages 10 years of experience. The
department's personnel include full-time programmers, quality-control engineers
and operational support specialists.
EMPLOYEES
The Company employs approximately 430 full-time employees. Approximately
395 employees are based in Florida, while 35 are based in Louisiana and
Kentucky.
PROPERTIES
The Company is headquartered in Lakeland, Florida, where it leases
approximately 80,000 square feet of space in a campus of nine buildings. The
Company also leases office space including approximately 7,000 square feet in
Atlanta, Georgia (Meritec); approximately 6,000 square feet in Raleigh, North
Carolina (Carolina Summit); approximately 5,000 square feet in Baton Rouge,
Louisiana; approximately 2,000 square feet in Lexington, Kentucky; and
approximately 1,000 square feet in Ft. Lauderdale, Florida.
LEGAL PROCEEDINGS
The Company is periodically involved as plaintiff or defendant in various
legal actions incident to its business. Based upon information presently
available to it, management is not aware of any threatened or pending litigation
that is expected to have a material adverse effect on the Company or its
business.
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MANAGEMENT OF THE COMPANY
GENERAL
The Board of Directors of Summit and the Board of Trustees of ESIF are
composed of seven and six members, respectively. Listed below is certain
information about the directors, executive officers and certain key managers of
Summit and the Trustees of ESIF.
<TABLE>
<CAPTION>
YEAR OF
YEAR FIRST EXPIRATION OF
ELECTED AS TERM AS
TRUSTEE OF DIRECTOR
NAME AGE POSITION WITH SUMMIT AND ESIF ESIF OF SUMMIT
- ----------------------------------- --- ------------------------------- ---------- -------------
<S> <C> <C> <C> <C>
Directors and Executive Officers:
William B. Bull.................... 48 President, Chief Executive -- 1997
Officer and Director of Summit
Russell L. Wall.................... 53 Vice President of Finance of -- --
Summit
Greg C. Branch..................... 49 Chairman of the Board of 1980 1998
Directors of Summit and of the
Board of Trustees of ESIF
C. C. Dockery...................... 63 Director of Summit and Trustee 1987 1999
of ESIF
John A. Gray....................... 51 Director of Summit and Trustee 1979 1997
of ESIF
Robert L. Noojin, Sr............... 62 Director of Summit and Trustee 1979 1998
of ESIF
Thomas S. Petcoff.................. 48 Director of Summit and Trustee 1987 1997
of ESIF
Robert Siegel...................... 65 Director of Summit and Trustee 1978 1999
of ESIF
Other Key Managers:
Allen C. Bennett................... 47 Vice President of Summit Loss -- --
Control Services, Inc.
David T. Cederholm................. 51 Vice President, Operations of -- --
Bridgefield Casualty
Timothy J. Ermatinger.............. 47 Vice President of Operations of -- --
SCI
Ricky T. Hodges.................... 42 Vice President of Claims of -- --
Summit Claims Management, Inc.
</TABLE>
William B. Bull has served as President and Chief Executive Officer of SHC
and its predecessors since 1987, and as President, Chief Executive Officer and a
director of Summit since November 1996. Mr. Bull joined SCI in 1984 as special
assistant to the President and subsequently became Executive Vice President in
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.
Any future transactions between the Company and any director, officer or
principal shareholder of the Company, or any affiliate of such a person, will be
on terms no less favorable to the Company than can be obtained from unaffiliated
third parties.
William B. Bull, President, Chief Executive Officer and a director of the
Company, may be relieved of certain personal indemnification obligations if the
Conversion becomes effective. In connection with the Acquisition, the Florida
DOI issued the January Consent Order requiring that Mr. Bull, who was at that
time President and Chief Executive Officer and a shareholder of SHC, personally
indemnify ESIF up to a maximum of $5.0 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 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
Con-
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sent 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 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........................................ 47,023(1) * 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)............................................ 237,931(1) 4.8% 500 *
</TABLE>
- ---------------
* Less than one percent.
(1) Includes 1,568 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.
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(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.
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
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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 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
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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 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, 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
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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 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 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 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 4:00 p.m. Eastern Time
on February , 1997.
86
<PAGE> 99
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.
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 238,000 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 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.
87
<PAGE> 100
Prior to the Conversion, there has been no public trading market for
Summit's securities. Summit cannot predict the effect, if any, that sales of
Common Stock or Series A Preferred Stock following the Conversion, pursuant to a
registration statement, Rule 144, or otherwise, or the availability of such
shares for sale, will have on the market price prevailing from time to time.
Sales, or the availability for sale, of a substantial amount of Common Stock or
Series A Preferred Stock could adversely affect prevailing market prices for
such stock.
LEGAL MATTERS
Certain legal matters with respect to the shares of the Common Stock
offered hereby will be passed upon for the Company by Alston & Bird, Atlanta,
Georgia, and McConnaughhay, Roland, Maida & Cherr, P.A., Tallahassee, Florida,
and for the Underwriters by Holland & Knight, Tampa, Florida.
EXPERTS
The consolidated financial statements of ESIF and subsidiaries as of March
31, 1996 and for the year then ended and 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
88
<PAGE> 101
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 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.
89
<PAGE> 102
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
Note to Consolidated Financial Statements........................................... F-33
SUMMIT HOLDING CORPORATION AND SUBSIDIARIES
Report of Independent Auditors...................................................... F-53
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and
1995............................................................................. F-54
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995.............................................................. F-55
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995......................................................................... F-56
Notes to Consolidated Financial Statements.......................................... F-57
FINANCIAL STATEMENT SCHEDULES
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
Reports of Independent Auditors on Financial Statement Schedules.................... F-62
Schedule I -- Summary of Investments as of March 31, 1996 and September 30, 1996.... F-64
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-65
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-66
</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> 103
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> 104
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> 105
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 10,678
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............................................... -- 2,529
Capitalized computer software costs.................................. -- 6,038
Value assigned to future administration of insurance contracts....... -- 6,470
Unamortized debt acquisition cost.................................... -- 709
Excess of cost over net assets of business acquired.................. -- 49,198
Deferred income taxes................................................ 19,100 16,355
Other assets......................................................... 1,330 1,907
Net assets of discontinued operations................................ -- 612
-------- --------
Total assets............................................... $425,206 $492,790
======== ========
LIABILITIES AND EQUITY
Liabilities:
Loss and loss adjustment expenses.................................. $367,391 $387,632
Debt............................................................... -- 44,000
Unallocated policyholder remittances............................... 18,234 14,635
Accounts payable and accrued expenses.............................. 12,690 14,492
Taxes, licenses and fees........................................... 1,861 1,493
Deferred revenue................................................... 87 7,384
Federal income taxes payable....................................... 4,878 --
-------- --------
Total liabilities.......................................... 405,141 469,636
Equity:
Retained earnings.................................................. 21,474 21,659
Unrealized appreciation (depreciation) on available-for-sale
securities...................................................... (1,409) 1,495
-------- --------
Total equity............................................... 20,065 23,154
-------- --------
Total liabilities and equity............................... $425,206 $492,790
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 106
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Premiums earned.............................................. $148,441 $128,489 $114,893
Net investment income........................................ 10,510 12,205 13,210
Net realized investment gains................................ -- -- 4,354
Administrative fees.......................................... -- -- 7,665
Other income................................................. -- 121 206
-------- -------- --------
Total revenue........................................ 158,951 140,815 140,328
Losses and expenses:
Losses and loss adjustment expenses.......................... 108,411 69,116 94,844
Other underwriting, general and administrative expenses...... 37,121 41,546 43,657
Amortization and depreciation................................ -- -- 1,103
Interest expense............................................. -- -- 847
-------- -------- --------
Total losses and expenses............................ 145,532 110,662 140,451
-------- -------- --------
Income (loss) from continuing operations before income taxes... 13,419 30,153 (123)
Income tax expense (benefit)................................... 4,534 10,990 (505)
-------- -------- --------
Income from continuing operations.............................. 8,885 19,163 382
-------- -------- --------
Discontinued operations:
Loss from discontinued operations (net of income tax benefit
of $121).................................................. -- -- (197)
-------- -------- --------
Loss from discontinued operations.............................. -- -- (197)
-------- -------- --------
Net income........................................... $ 8,885 $ 19,163 $ 185
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 107
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> 108
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................... $ 8,885 $ 19,163 185
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and depreciation................................ 485 372 1,103
Net realized gains........................................... (14) -- (4,354)
Bad debt allowance........................................... (146) (216) (600)
(Increase) decrease in premiums receivable................... (6,964) 8,880 12,898
(Increase) decrease in accounts receivable................... (4) 14 (3,157)
Increase in reinsurance recoverable.......................... (26,563) (20,424) (1,377)
Increase in Special Disability Trust Fund recoverable........ (3,184) (5,950) (4,181)
(Increase) decrease in accrued investment income............. (398) (1,184) 473
Increase in federal income tax recoverable................... -- -- (9,690)
(Increase) decrease in deferred income taxes................. (7,535) 513 2,745
Increase in other assets..................................... -- -- (665)
Discontinued operations...................................... -- -- (612)
Increase in loss and loss adjustment expense................. 39,754 9,677 20,240
Increase (decrease) in unallocated policyholder
remittances............................................... 16,115 (2,155) (3,600)
Increase in accounts payable and accrued expenses............ 39 2,291 1,802
Increase (decrease) in taxes, licenses and fees.............. -- 1,201 (368)
Increase in deferred revenue................................. -- 86 7,298
Increase (decrease) in federal income tax payable............ -- 1,043 (4,878)
-------- -------- --------
Net cash provided (used) in operating activities............... 20,470 13,311 13,262
INVESTING ACTIVITIES:
Purchase of investment securities.............................. (760,811) (859,038) (982,289)
Disposal and maturity of investment securities................. 685,168 846,575 972,918
Purchase of equipment and software............................. -- -- (2,697)
Purchase of Summit Holding Corporation......................... -- -- (37,500)
Other investing activities..................................... 68 152 --
-------- -------- --------
Net cash provided by investing activities...................... (75,575) (12,311) (49,568)
FINANCING ACTIVITIES:
Increase in notes payable...................................... -- -- 44,000
-------- -------- --------
Net cash provided by financing activities...................... -- -- 44,000
-------- -------- --------
Net increase in cash and cash equivalents...................... (55,105) 1,000 7,694
Beginning cash and cash equivalents............................ 57,089 1,984 2,984
-------- -------- --------
Ending cash and cash equivalents............................... $ 1,984 $ 2,984 $ 10,678
======== ======== ========
</TABLE>
F-7
<PAGE> 109
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. 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
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 retained
its earnings and profits to pay its obligations and avoid making assessments
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. Such estimates and assumptions
could change in the future as more information becomes known which could impact
the amounts reported and disclosed herein.
F-8
<PAGE> 110
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Recognition of Revenues
Workers' compensation insurance premiums are based on rates established by
the National Council on Compensation Insurance ("NCCI"). Premium revenues
generally are recognized over the life of the related policies on the daily pro
rata method with a reserve for premiums earned established for the unexpired
portion of the premiums applicable to those policies. 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.
- 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.
F-9
<PAGE> 111
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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.
F-10
<PAGE> 112
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $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.
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.
F-11
<PAGE> 113
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 114
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> 115
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> 116
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> 117
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> 118
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> 119
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 (dollars
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> 120
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> 121
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> 122
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>
Gross reserves for losses and LAE, at beginning of
year.............................................. $ 361,095 $ 392,784 $ 367,391
Add: Discount on reserves........................... 4,324 4,730 4,875
Less: Impact of reinsurance for FASB 113............ (103,118) (121,463) (108,440)
Impact of implied Special Disability Trust
Fund recoverables............................. (10,550) (15,531) (24,836)
--------- --------- ---------
Net reserves for losses and LAE, at beginning of
year.............................................. 251,751 260,520 238,990
Add provision for claims occurring in:
The current year.................................. 118,889 94,520 84,058
Prior years....................................... (10,478) (25,404) 10,786
--------- --------- ---------
Incurred losses during the current year............. 108,411 69,116 94,844
Deduct payments for claims occurring in:
The current year.................................. 17,704 16,857 15,432
Prior years....................................... 81,938 73,789 67,968
--------- --------- ---------
Claim payments during the current year.............. 99,642 90,646 83,400
Net reserves for losses and LAE, at end of year..... 260,520 238,990 250,434
Add: Impact of implied Special Disability Trust Fund
recoverables................................... 15,531 24,836 31,376
Impact of reinsurance for FASB 113............ 121,463 108,440 107,092
LAE assumed through acquisition of Summit..... -- -- 3,398
Less: Discount on reserves.......................... (4,730) (4,875) (4,668)
--------- --------- ---------
Gross reserves for losses and LAE, at end of year... $ 392,784 $ 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.
Estimated future SDTF recoveries implicitly netted from loss reserves on a
statutory basis were grossed up for GAAP purposes. This 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 three 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> 123
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> 124
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> 125
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................................................ 6,000 1,480
Thereafter.......................................... 4,950 1,110
------- ------
$36,000 8,000
======= ======
</TABLE>
F-24
<PAGE> 126
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> 127
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..................... 789
------
Net assets....................................................... $ 611
======
</TABLE>
The operating results of the computer software development subsidiary for
the period January 16, 1996 to March 31, 1996 were as follows (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> 128
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 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> 129
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> 130
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 7,611
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............................................... -- 2,358
Non-compete agreement................................................ -- 100
Capitalized computer software costs.................................. -- 5,408
Value assigned to future administration of insurance contracts....... -- 6,140
Unamortized debt acquisition cost.................................... -- 596
Excess of cost over net assets of business acquired.................. -- 47,925
Deferred income taxes................................................ 17,514 17,446
Other assets......................................................... 109 3,506
Net assets of discontinued operations................................ -- 678
-------- --------
Total assets............................................... $456,012 $502,310
======== ========
LIABILITIES AND EQUITY
Liabilities:
Loss and loss adjustment expenses.................................. $364,210 $378,196
Debt............................................................... -- 36,500
Unallocated policyholder remittances............................... 51,208 46,000
Accounts payable and accrued expenses.............................. 7,100 10,532
Taxes, licenses and fees........................................... 2,076 1,471
Deferred revenue................................................... 34 4,618
Federal income taxes payable....................................... 297 --
-------- --------
Total liabilities.......................................... 424,925 477,317
Equity:
Retained earnings.................................................. 26,848 24,045
Unrealized appreciation (depreciation) on available-for-sale
securities...................................................... 4,239 948
-------- --------
Total equity............................................... 31,087 24,993
-------- --------
Total liabilities and equity............................... $456,012 $502,310
======== ========
</TABLE>
See accompanying notes.
F-29
<PAGE> 131
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------
1995 1996
----------- -------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Revenue:
Premiums earned...................................................... $63,145 $49,029
Net investment income................................................ 7,598 6,363
Realized investment gains............................................ 919 8
Administrative fees.................................................. -- 17,432
Other income......................................................... 90 216
----------- -------
Total revenue................................................ 71,752 73,048
Losses and expenses:
Losses and loss adjustment expenses.................................. 42,365 32,135
Other underwriting, general and administrative expenses.............. 21,623 30,532
Amortization and depreciation........................................ -- 2,499
Interest expense..................................................... -- 1,831
----------- -------
Total losses and expenses.................................... 63,988 66,997
----------- -------
Income from continuing operations before income taxes.................. 7,764 6,051
Income tax expense..................................................... 2,390 2,400
----------- -------
Income from continuing operations...................................... 5,374 3,651
----------- -------
Discontinued operations:
Loss from operation (net of income tax benefit of $212 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> 132
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
-------- ------------------ -------
<S> <C> <C> <C>
(IN THOUSANDS)
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> 133
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------
1995 1996
--------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................... $ 5,374 $ 2,386
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization and depreciation...................................... -- 2,499
Net realized gains................................................. (429) (8)
Bad debt allowance................................................. -- 500
Increase in premiums receivable.................................... (27,838) (29,586)
Decrease in accounts receivable.................................... -- 56
Decrease in reinsurance recoverable................................ 2,690 11,883
Increase in special disability trust fund recoverable.............. (1,896) (1,078)
(Increase) decrease in accrued investment income................... (236) 127
Decrease in federal income tax recoverable......................... -- 3,456
(Increase) decrease in deferred income taxes....................... 1,586 (1,090)
(Increase) decrease in other assets................................ 1,220 (1,905)
Discontinued operations............................................ -- (67)
Decrease in loss and loss adjustment expense....................... (3,182) (13,661)
Increase in unallocated policyholder remittances................... 32,973 31,365
Decrease in accounts payable and accrued expenses.................. (5,589) (3,960)
(Increase) decrease in taxes, license, and fees.................... 214 (22)
Decrease in deferred revenue....................................... -- (2,767)
Decrease in federal income tax payable............................. (4,580) --
--------- ---------
Net cash provided (used) in operating activities..................... 307 (1,872)
INVESTING ACTIVITIES:
Purchase of investments securities................................... (410,101) (816,626)
Disposal and maturity of investment securities....................... 411,475 823,189
Purchase of equipment and software................................... -- (258)
--------- ---------
Net cash provided by investing activities............................ 1,374 6,305
FINANCING ACTIVITIES:
Decrease in notes payable............................................ -- (7,500)
--------- ---------
Net cash provided by financing activities............................ -- (7,500)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 1,681 (3,067)
Beginning cash and cash equivalents.................................. 2,984 10,678
--------- ---------
Ending cash and cash equivalents..................................... $ 4,665 $ 7,611
========= =========
</TABLE>
See accompanying notes.
F-32
<PAGE> 134
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. 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
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 retained
its earnings and profits to pay its obligations and avoid making assessments
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 bee 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.
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-33
<PAGE> 135
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 earned 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.
- 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.
F-34
<PAGE> 136
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- 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.
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.
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
F-35
<PAGE> 137
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $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.
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.
F-36
<PAGE> 138
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 139
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> 140
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> 141
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> 142
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>
F-41
<PAGE> 143
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> 144
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 (dollars
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> 145
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........................................ 18,930 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> 146
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> 147
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 ENDED
SEPTEMBER 30,
-------------------------
1995 1996
----------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Gross reserves for losses and LAE, at beginning of year...... $ 367,391 $ 387,632
Add: Discount on reserves.................................... 4,875 4,668
Less: Reinsurance recoverables............................... (108,440) (107,092)
Special Disability Trust Fund recoverables............. (24,836) (31,376)
LAE assumed through acquisition of SHC....................... -- (3,398)
--------- ---------
Net reserves for losses and LAE, at beginning of year........ 238,990 250,434
Add provision for claims occurring in:
The current year........................................... 42,198 35,663
Prior years................................................ 167 (3,528)
--------- ---------
Incurred losses during the current year...................... 42,365 32,135
Deduct payments for claims occurring in:
The current year........................................... 3,753 3,565
Prior years................................................ 38,251 30,665
--------- ---------
Claim payments during the current year....................... 42,004 34,230
Net reserves for losses and LAE at end of year............... 239,351 248,339
Add: Impact of Special Disability Trust Fund recoverables.... 27,932 28,832
Impact of Reinsurance recoverables..................... 101,702 102,396
LAE assumed through acquisition of SHC................. -- 2,864
Less: Discount on reserves................................... (4,775) (4,235)
--------- ---------
Gross reserves for losses and LAE, at end of year............ $ 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.
Estimated future Special Disability Trust Fund ("SDTF") recoveries
implicitly netted from loss reserves on a statutory basis were grossed up for
GAAP purposes. This increased loss reserves by $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 three
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> 148
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>
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.
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.
F-47
<PAGE> 149
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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,
F-48
<PAGE> 150
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-49
<PAGE> 151
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and healthcare 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 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>
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>
F-50
<PAGE> 152
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $ (1,476) --
Identifiable assets.................. $498,085 $498,085 -- --
</TABLE>
Depreciation expense and capital expenditures are not considered material.
The preceding financial information does not include the computer software
operations which are presented as discontinued operations in the accompanying
financial statements.
F-51
<PAGE> 153
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $.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 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> 154
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-53
<PAGE> 155
SUMMIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gross service fees................................ $70,813,669 $73,832,809 $64,089,709
Direct expenses................................... 32,971,912 31,638,931 27,469,989
----------- ----------- -----------
Net service fees............................... 37,841,757 42,193,878 36,619,720
Software consulting and maintenance fees.......... -- -- 899,629
Investment and other income....................... 631,924 934,178 1,275,712
----------- ----------- -----------
38,473,681 43,128,056 38,795,061
Expenses:
Compensation and other employee benefits.......... 14,503,311 15,425,560 16,616,339
Other operating expenses.......................... 7,707,071 8,217,870 8,203,572
Depreciation and amortization..................... 4,890,675 4,872,134 5,112,228
Interest expense.................................. 1,609,720 57,563 41,943
----------- ----------- -----------
28,710,777 28,573,127 29,974,082
----------- ----------- -----------
Income before income taxes.......................... 9,762,904 14,554,929 8,820,979
Income taxes........................................ 3,833,288 5,553,646 3,245,848
----------- ----------- -----------
Net income................................ $ 5,929,616 $ 9,001,283 $ 5,575,131
=========== =========== ===========
</TABLE>
See accompanying notes.
F-54
<PAGE> 156
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-55
<PAGE> 157
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-56
<PAGE> 158
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-57
<PAGE> 159
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangibles
Intangible assets are stated at cost less accumulated amortization and
include purchased software, customer accounts and contracts, noncompete
agreements, deferred financing costs, and the excess of the purchase price over
the fair value of identifiable net assets acquired (goodwill). Purchased
software, customer accounts and contracts, and noncompete agreements are being
amortized on a straight-line basis over the estimated useful lives and contract
period which range from three to five years. Deferred financing costs relate to
the incurrence of debt acquisition costs, and were completely amortized in 1995.
The excess of cost over the fair value of identifiable net assets acquired is
being amortized on a straight-line basis over 20 years. SHC evaluates the
recoverability of intangible assets through a comparison of forecasted operating
income to the remaining asset balances.
Amortization expense in 1993, 1994 and 1995 was $4,166,681, $4,141,680 and
$4,281,820, respectively.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Adoption for
Statement No. 121 is required for all fiscal years beginning after December 15,
1995. SHC does not anticipate that the adoption of Statement No. 121 will have a
material impact on its financial results.
Aggregate Reserve
Under the terms of SHC's service agreement with the self-insurance funds,
SHC is responsible for providing certain reinsurance coverage through
independent reinsurers. Premiums are calculated and paid to the reinsurers on
the basis of the self-insurance funds' earned premiums and the cost of the
reinsurance is recognized as a direct expense by SHC on the same basis as
service fee revenue. Under the terms of SHC's agreement with one reinsurer, on
behalf of one of the self-insurance funds, an aggregate reserve has been
established by SHC to record a liability for additional reinsurance payments for
fund years where aggregate losses exceed a specified loss ratio. SHC accounts
for the aggregate reserve annually utilizing the latest actuarial loss ratios.
As of December 31, 1993, 1994 and 1995, SHC has recorded a liability for future
premium obligations on these policies of $4,063,719, $2,277,410, and $1,407,842,
respectively, which is the present value, at 2.5%, 7.0% and 7.0%, respectively,
of its estimated total liability of approximately $5.1 million, $2.5 million,
and $1.6 million, respectively. As a result of the change in the discount rate
in 1994, the aggregate reserve liability as of December 31, 1994 was reduced by
approximately $120,000.
Deferred Income
SHC defers a portion of its fees to cover future claims servicing costs
pertaining to claims incurred in the year for which SHC received its fee, and
for certain other services which SHC is contractually required to provide
subsequent to the funds' year end.
Major Customers
Significant portions of SHC's gross service fees are derived from three
major customers, Employers Self Insurers Fund ("ESIF"), Florida Retail
Federation Self Insurers Fund ("FRFSIF") and Louisiana Employers Safety
Association Self Insurers Fund ("LESASIF"). Gross service fees for the years
ended December 31, 1993, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
ESIF............................................ $25,336,689 $26,829,023 $24,867,269
FRFSIF.......................................... 32,195,587 31,103,771 28,990,003
LESASIF......................................... 8,708,425 11,305,177 6,034,794
</TABLE>
F-58
<PAGE> 160
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-59
<PAGE> 161
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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,
F-60
<PAGE> 162
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-61
<PAGE> 163
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-62
<PAGE> 164
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-63
<PAGE> 165
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-64
<PAGE> 166
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%
</TABLE>
F-65
<PAGE> 167
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
SCHEDULE VI -- SUPPLEMENTAL INFORMATION CONCERNING INSURANCE OPERATIONS
<TABLE>
<CAPTION>
CLAIMS & CLAIMS
SETTLEMENT
RESERVES EXPENSES INCURRED
FOR UNPAID RELATED TO
DEFERRED CLAIMS AND -----------------
POLICY CLAIM DISCOUNT NET NET PRIOR
ACQUISITION SETTLEMENT DEDUCTED UNEARNED EARNED INVESTMENT YEARS
SEGMENT COSTS EXPENSES IN COL C PREMIUMS PREMIUMS INCOME CURRENT COLUMN
YEAR ENDED COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G YEAR H
- ------------------------ -------------- ----------- ---------- -------- -------- -------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1994.......... Workers' $ 0 $ 392,784 $4,730 $ 0 $148,441 $ 10,510 $118,889 $10,478
Compensation
Insurance
March 31, 1995.......... Workers' 0 367,391 4,875 0 128,489 12,205 94,520 25,404
Compensation
Insurance
March 31, 1996.......... Workers' 0 387,632 4,668 0 114,893 13,209 84,058 10,786
Compensation
Insurance
SIX MONTHS ENDED
- ------------------------
September 30, 1995...... Workers' $ 0 $ 364,210 $4,775 $ 51,208 $ 63,145 $ 7,598 $ 42,198 $ 167
Compensation
Insurance
September 30, 1996...... Workers' 0 367,971 4,235 46,000 49,029 6,363 35,663 (3,528)
Compensation
Insurance
<CAPTION>
AMORTIZATION NET PAID
OF DEFERRED CLAIMS &
POLICY CLAIMS NET
ACQUISITION SETTLEMENT PREMIUMS
COSTS EXPENSES WRITTEN
YEAR ENDED COLUMN I COLUMN J COLUMN K
- ------------------------ ------------ ---------- --------
<S> <C> <C> <C>
March 31, 1994.......... $ 10,664 $ 99,642 $156,086
March 31, 1995.......... 10,078 90,646 144,427
March 31, 1996.......... 9,707 63,400 121,296
SIX MONTHS ENDED
- ------------------------
September 30, 1995...... $ 4,236 $ 42,009 $117,823
September 30, 1996...... 4,839 34,230 103,178
</TABLE>
F-66
<PAGE> 168
EXHIBIT A
AMENDED
PLAN OF CONVERSION
AND RECAPITALIZATION
OF
EMPLOYERS SELF INSURERS FUND
<PAGE> 169
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......................................... 7
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> 170
AMENDED
PLAN OF CONVERSION
AND RECAPITALIZATION
OF
EMPLOYERS SELF INSURERS FUND
This Amended Plan of Conversion and Recapitalization (the "Plan"), which
has been adopted by the Board of Trustees of Employers Self Insurers Fund at a
meeting duly called and held on , 1996, provides for the ultimate
conversion of Employers Self Insurers Fund to a domestic stock insurance company
in accordance with the requirements of the Florida Insurance Code.
BACKGROUND
Employers Self Insurers Fund ("ESIF") currently exists as a group
self-insurance fund ("GSIF") authorized pursuant to Section 624.4621, Florida
Statutes. In 1995, ESIF's Board of Trustees resolved to effect the conversion of
ESIF from a GSIF to an assessable mutual insurer authorized pursuant to part II
of Chapter 628, Florida Statutes. In January 1996, ESIF purchased Summit
Consulting, Inc., ESIF's management and service company. Due in part to the need
to focus upon that acquisition, the conversion to an assessable mutual was
delayed and has yet to be completed.
Earlier this year, the Board of Trustees reiterated its desire to effect a
conversion of ESIF. The Board determined, however, that conversion to an
assessable mutual would not fully achieve its objectives, and resolved to take
the next step and propose a conversion of ESIF to a domestic stock insurance
company. The stock insurer will be recapitalized and will become a wholly-owned
subsidiary of a holding company whose outstanding shares of common stock are
traded in a public securities market. The reasons and rationale behind the
Board's decisions are set out below under "Purposes of Conversion."
The Board has submitted to the Florida Department of Insurance (the
"Department"), in conjunction with the submission of this Plan, an application
for authorization to become an assessable mutual insurer. The application, if
approved, will convert ESIF to an assessable mutual insurer (the "Mutual
Company"). This Plan, which contemplates the conversion from an assessable
mutual to a stock insurer and recapitalization by the Holding Company, is
predicated upon the approval of the aforementioned application. It is
contemplated that the Department will issue one consent order approving both the
conversion of ESIf from a group self-insurance fund to an assessable mutual and
from an assessable mutual to a stock insurer, and that both conversions will
occur in a single day.
PURPOSE OF CONVERSION
GSIFs such as ESIF have played a significant role in Florida's workers'
compensation insurance marketplace for two decades. During that time, the GSIFs
provided coverage to employers as an alternative to the limited number of
commercial carriers. As a result of the 1993 workers' compensation reforms, the
marketplace has undergone significant change, attracting significant competition
from commercial carriers. Consequently, GSIFs such as ESIF find it increasingly
difficult to maintain their market share and sustain healthy growth as
policyholders move toward more traditional products and non-assessability. In
fact, many of Florida's GSIFs have left the marketplace, either by transferring
their business to commercial carriers or by converting to stock or
non-assessable mutual companies. The Board has concluded that ESIF should join
those GSIFs which have converted to stock insurers.
ESIF's ultimate conversion to a stock company that is wholly owned by a
publicly traded holding company (the "Conversion") is expected to strengthen
ESIF's financial condition by enabling it to obtain capital from sources that
are generally available to a stock company, but not to a policyholder-owned
self-insurance fund or mutual insurer. Formation of the holding company will
provide greater flexibility than ESIF would otherwise have to diversify its
business activities through existing or newly-formed subsidiaries or through
strategic partnerships which could enhance its financial security and diversity
and permit it to grow and eventually expand into other markets. Finally,
Policyholders will be able to realize an economic benefit for
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their membership interest which is not currently available to them, in addition
to being relieved of contingent liability for assessment which currently exists
under their insurance contracts, and the Florida Insurance Code.
ARTICLE I
DEFINITIONS
As used in this Plan, the following capitalized terms shall have the
following meanings:
1.1 Special Meeting. "Special Meeting" shall mean the meeting of ESIF,
including adjournments or postponements thereof, at which this Plan is to be
submitted to the Voting Policyholders for approval as provided in Section 3.1 of
this Plan.
1.2 Board of Trustees. "Board of Trustees" shall mean the Board of
Trustees of ESIF.
1.3 Common Stock. "Common Stock" shall mean the shares of the common
stock, no par value, of the Holding Company.
1.4 Department. "Department" shall mean the Department of Insurance of the
State of Florida.
1.5 Effective Date. "Effective Date" shall mean the date on which all the
conditions to the effectiveness as provided in Article XIII of this Plan have
been satisfied. The Effective Date shall not be more than six (6) months from
the date the order of the Department approving the Plan becomes effective;
provided that such period may be extended for such an additional period as may
be requested by the Board of Trustees and approved by the Department.
1.6 Eligible Policyholders. "Eligible Policyholders" shall mean owners of
Policies issued by ESIF, who owned such Policies during the period beginning
August 20, 1993, and ending August 20, 1996, as required by Section
628.6017(1)(f), Florida Statutes.
1.7 ESOP. "ESOP" shall mean the Employee Stock Ownership Plan formed at
the direction of the Board of Trustees of the Holding Company for the benefit of
the employees of the Holding Company and its subsidiaries, including the Stock
Company.
1.8 Financing. "Financing" shall mean a transaction or transactions
resulting in the infusion into the Stock Company of Policyholders' surplus in an
amount: (i) not less than that required of a newly-licensed Florida stock
insurer pursuant to Section 624.407, Florida Statutes; (ii) not less than an
amount sufficient to satisfy the premium-to-surplus requirements of Section
624.4095, Florida Statutes; and (iii) acceptable to the Department. Section
624.4095 provides that an insurer's ratio of actual annual written premiums to
current surplus as to Policyholders must not exceed 10 to 1 for gross written
premiums and must not exceed 4 to 1 for net written premiums. For the purposes
of the foregoing, Section 624.4095 provides that premiums shall be calculated as
the product of the actual or projected premiums and the following: (i) for
property insurance, 0.90; (ii) for casualty insurance, 1.25; (iii) for health
insurance, 0.80; and (iv) for all other kinds of insurance, 1.00.
Notwithstanding the foregoing, the Department may, in practice, require a higher
level of Policyholders' surplus for a domestic insurer after taking into
consideration factors including, but not limited to: (i) the lines of business
underwritten; (ii) the maturity of the insurer and its business; (iii) the
quality of the asset portfolio of the insurer; (iv) the experience and
competence of the management of the insurer; and (v) applicable risk-based
capital requirements.
1.9 Florida Insurance Code. "Florida Insurance Code" shall mean Chapters
624 through 632, 634, 635, 637, 638, 641, 642, 648, and 651 of the Florida
Statutes, and any amendments thereto effective on the Effective Date.
1.10 Holding Company. "Holding Company" shall mean Summit Holding
Southeast, Inc., a Delaware corporation, formed for the purpose of acquiring
100% of the capital stock of the Stock Company and to facilitate the Financing.
The proposed Articles of Incorporation and Bylaws of the Holding Company are
attached as Exhibits A and B, respectively.
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1.11 In-Force Policy. "In-Force Policy" shall mean a Policy for which a
binder letter has been issued and the effective date noted in such letter has
passed, and such Policy has not been surrendered or otherwise terminated, or
expired by its terms.
1.12 Meeting Record Date. "Meeting Record Date" shall mean a date set by
ESIF, which date shall be no more than seventy days and no less than thirty days
prior to the date on which the Special Meeting is to be convened.
1.13 Member. "Member" shall mean a member of ESIF (as such term is used in
the Florida Insurance Code in reference to members of group self-insurance
funds).
1.14 Membership Interests. "Membership Interests" shall mean the rights of
Members of ESIF arising under the organizational documents thereof, the Florida
Insurance Code and otherwise, including, without limitation, the right to vote
for trustees and on other matters and to participate in any distribution of
surplus on liquidation, but not including contractual rights arising under
Policies, including, without limitation, the right to be paid insurance
benefits. "Membership Interests" shall include all rights of Policyholders of
whatever type in the surplus of ESIF or the Mutual Company.
1.15 Mutual Company. "Mutual Company" shall mean the interim assessable
mutual company resulting from the conversion of ESIF.
1.16 Person. "Person" shall mean an individual, corporation, partnership,
association, joint stock company, trust, unincorporated organization, government
or political subdivision thereof or any other entity not specifically listed in
this definition.
1.17 Plan. "Plan" shall mean this Amended Plan of Conversion and
Recapitalization, as it may be amended from time to time.
1.18 Policies. "Policies" shall mean the indemnity agreements issued by
ESIF.
1.19 Policyholders. "Policyholders" shall mean the owners of Policies.
1.20 Preferred Stock. "Preferred Stock" shall mean the Series A Preferred
Stock of the Holding Company, having the designation, preferences and rights,
and subject to the qualifications, limitations and restrictions as are set forth
in the "Certificate of Designation, Preferences and Rights of Series A Preferred
Stock" attached hereto as Exhibit C.
1.21 Stock Company. "Stock Company" shall mean the stock company resulting
from the conversion of Mutual Company pursuant to the Plan.
1.22 Subscription Rights. "Subscription Rights" shall mean nontransferable
rights to purchase shares of the Common Stock. All such Subscription Rights
granted as described in the Plan shall be exercisable at the same per share
price, and such price shall be determined in accordance with Section 7.2(a)
below.
1.23 Voting Policyholders. "Voting Policyholders" shall mean all Persons
who, as reflected on the records of ESIF, were owners of In-Force Policies of
ESIF at the close of business on the Meeting Record Date.
ARTICLE II
REGULATORY APPROVAL
This Plan is subject to the approval by the Department pursuant to Sections
628.461, 628.6013, and 628.6017, Florida Statutes. The approval of the
Department will constitute approval of all aspects of this Plan under the
Florida Insurance Code.
2.1 Approval of the Plan shall constitute a determination by the Department
that the terms of the Plan are fair and equitable to the Members. However, the
Department's approval of the Plan does not constitute an endorsement or
recommendation thereof.
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2.2 The Plan contemplates the reorganization of ESIF and its subsidiaries.
Pursuant to that reorganization, the Holding Company will become the parent of
Stock Company and its subsidiaries, either directly or indirectly. Additionally,
the companies within the holding company system shall be reorganized in
accordance with the Organizational Chart attached hereto as Exhibit H.
Accordingly, approval of the Plan will constitute approval of the reorganization
of the holding company system as required under Section 628.461, Florida
Statutes. No separate approval by the Department will therefore be required in
connection with the acquisition of one hundred percent (100%) of the voting
securities of Stock Company or its stock insurer subsidiary by the Holding
Company or the reorganization of the holding company system. The Plan also
contemplates the ESOP purchasing up to ten percent (10%) of the Common Stock.
Approval of this Plan shall constitute approval of said acquisition, or,
alternatively, a determination that no such approval is required.
2.3 The Department may deem it appropriate to conduct a public or
evidentiary hearing in connection with its review of this Plan.
ARTICLE III
POLICYHOLDER VOTING
3.1 Special Meeting. After approval of the Plan by the Department, ESIF
shall provide notice of the 1996 Special Meeting (the "Special Meeting") of its
Members at which the Plan and the Amended and Restated Articles of Incorporation
of the Stock Company (in the form attached hereto as Exhibit D) and the amended
and restated bylaws of the Stock Company (in the form attached hereto as Exhibit
E) reflecting the conversion to the Stock Company (the "Restated Articles of
Incorporation" and "Restated Bylaws," respectively) shall be submitted for the
approval of the Voting Policyholders. Such Special Meeting shall be held at the
home office of the Mutual Company or at such other reasonable location as may be
determined by the Mutual Company. Prior to such Special Meeting, ESIF shall send
to its Voting Policyholders, at their addresses as most recently reflected in
the records of ESIF, such notices, disclosure documents, proxy or ballot forms
and information or explanatory statements as shall be necessary and appropriate.
3.2 Approval. This Plan, the Articles of Incorporation of the Mutual
Company, and the Restated Articles of Incorporation and Bylaws of the Stock
Company shall be approved by the Voting Policyholders if (i) not less than
two-thirds of the votes cast by the Voting Policyholders voting thereon in
person, by proxy, or by mail and (2) not less than a majority of the votes of
Voting Policyholders, are cast in favor of the Plan.
3.3 Supervision by Department. The Department may supervise the tabulation
of votes and may appoint such voting inspectors as it deems necessary or
advisable.
3.4 Certifying and Filing the Approved Plan. If this Plan and the Articles
of Incorporation of the Mutual Company and the Restated Articles of
Incorporation and Bylaws of the Stock Company are approved at the Special
Meeting, then within five days after the Special Meeting, the Mutual Company
shall prepare under its corporate seal a certificate setting forth the date and
results of the vote cast at the Special Meeting and a copy of the Plan as
approved. Such certificate shall be executed by both ESIF's chairman and Mutual
Company's chairman and secretary (or assistant secretary) and duly sworn to by
one of them. The certificate shall be delivered to the Department.
ARTICLE IV
PROCESS OF CONVERSION
The Florida Insurance Code does not currently provide for conversion
directly from a GSIF to a stock insurer. In order to effect such a conversion, a
GSIF must convert first to an assessable mutual. The application process for
conversion to an assessable mutual is separate and distinct from this Plan.
Nevertheless, in the interest of expediting ESIF's transformation to a stock
company, this Plan shall be filed for approval by the Department concurrently
with ESIF's application to convert to an assessable mutual. It is anticipated
that both review and approval processes will run concurrently. It is further
anticipated that ESIF's application to become an assessable mutual and approval
of this Plan will occur simultaneously.
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ARTICLE V
REORGANIZATION
5.1 Restatement of Articles of Incorporation and Bylaws. On the Effective
Date, the Restated Articles of Incorporation and Bylaws of the Stock Company
shall be filed with the Department and the Florida Secretary of State as
required by applicable law. Such Restated Articles of Incorporation and Bylaws
may be further amended after the Effective Date in accordance with their
provisions and the laws of the State of Florida.
5.2 Recapitalization of Stock Company. On the Effective Date, the Restated
Articles of Incorporation of the Stock Company shall authorize it to issue
fifteen thousand (15,000) shares of Common Stock with a par value of one hundred
dollars ($100) per share. On the Effective Date, the Eligible Policyholders will
exchange their Membership Interest for Preferred Stock in the Holding Company,
pursuant to the Recapitalization Agreement attached hereto as Exhibit F, all of
such authorized shares of Common Stock, and in exchange therefor the Holding
Company shall issue and deliver to the Stock Company the Preferred Stock and the
Subscription Rights as described in Sections 6.1 and 6.2 below, and the Holding
Company shall contribute in cash an amount adequate to capitalize Stock Company
in the manner described in Section 13.4 of this Plan.
ARTICLE VI
CONSIDERATION FOR MEMBERSHIP INTERESTS
Upon the Effective Date, Policyholders will cease to have any rights as
Members of ESIF or the Mutual Company, including, without limitation, the right
to elect trustees or directors and vote as to other matters, and any rights to
the distribution of surplus in liquidation, subject to the provisions of
Articles VII and VIII of this Plan. In exchange for their Membership Interests,
Policyholders will (i) no longer be subject to assessment by ESIF or the Mutual
Company during their current Policy year (in the case of those Policyholders who
have In-Force Policies) or for any prior year in which they held a Policy,
unless such assessment was imposed prior to the Effective Date; (ii) be relieved
of all future contingent liabilities of ESIF and the Mutual Company arising
after the Effective Date; (iii) receive that number of shares of Preferred Stock
determined in accordance with Section 7.1 below; and (iv) receive subscription
rights to purchase that number of shares of Common Stock determined in
accordance with Section 7.2.
6.1 Preferred Stock. As consideration for their Membership Interests,
Eligible Policyholders shall receive consideration, the principal component of
which will be shares of Preferred Stock in the Holding Company. Such Preferred
Stock shall be issued to Eligible Policyholders based upon the Allocation of
Policyholder Consideration described in Section 7.1 below and shall be issued as
soon as practicable after the Effective Date. The aggregate number of shares of
Preferred Stock to be given to Eligible Policyholders pursuant to this Plan
shall be 1,640,000 shares with a par value of Ten Dollars ($10.00) per share.
The Preferred Stock is described in detail in the Certificate of Designation,
Preferences and Rights of Service A Preferred Stock, a copy of which is attached
hereto as Exhibit C.
6.2 Subscription Rights. In addition to the Preferred Stock described
above, Eligible Policyholders shall receive Subscription Rights in the Common
Stock to be issued by the Holding Company. The Subscription Rights shall, in the
aggregate, entitle the Eligible Policyholders to purchase eighty percent (80%)
of the Aggregate Common Shares (as defined in Section 7.2(a) below). Thus,
should the Eligible Policyholders determine that it is in their best interests
to capitalize the Stock Company through the purchase of Holding Company Common
Stock, the Eligible Policyholders shall be entitled to retain ownership and
control of the Stock Company and its subsidiaries through their ownership of the
Common Stock. The remaining twenty percent (20%) of the Aggregate Common Shares
shall be reserved for subscription by the ESOP and the officers, directors and
executive employees of the Holding Company and its subsidiaries, including the
Stock Company, pursuant to Article VIII below. It is contemplated that any
portion of the Aggregate Common Shares allocated to, but not issued to, Eligible
Policyholders, the ESOP or the
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Management Group (as defined in Section 8.1(b)) shall be offered for sale to the
public. The procedures for offering the shares of Common Stock pursuant to the
Subscription Rights are set forth in Article IX below.
ARTICLE VII
ALLOCATION OF POLICYHOLDER CONSIDERATION
The allocation of the Preferred Stock and the Subscription Rights,
described in Sections 6.1 and 6.2 above, shall be determined as follows:
7.1 Preferred Stock. Each Eligible Policyholder shall be paid
consideration based upon the allocation to such Policyholder of a number of
shares of Preferred Stock as follows:
(a) Each Eligible Policyholder shall receive a total number of shares
of Preferred Stock equal to the sum of (i) and (ii) below.
(i) A fixed number of shares of Preferred Stock based upon the
number of Policies, and earned premium attributable to each Policy, of
which such Policyholder was the owner of record during the period from
August 20, 1993, through August 20, 1996 (the "Eligibility Period").
Specifically, each Eligible Policyholder shall be entitled to Ten (10)
shares of Preferred Stock for each Policy of which such Policyholder was
the owner of record during the Eligibility Period. Additionally, each
such Policyholder shall be entitled to ( ) share of Preferred
Stock for each Dollars ($ ) of earned premium attributable
to Policies of which such Policyholder was the owner of record during
the Eligibility Period. A Policyholder shall not be entitled to a share
of Preferred Stock for any fraction of earned premium less than
Dollars ($ ).
(ii) A variable number of shares of Preferred Stock based upon an
actuarial formula determining the contribution to surplus attributable
to each Eligible Policyholder during the Eligibility Period. Only
Eligible Policyholders whose policies were "guaranteed cost" shall
receive any shares pursuant to this section 7.1(a)(ii). Subject thereto,
the number of shares of Preferred Stock comprising the variable
component for each Eligible Policyholder shall be determined according
to the Actuarial Contribution Memorandum, attached hereto as Exhibit G.
The actuarial formula explained therein is substantially similar to the
methodology utilized in determining the dividends payable to ESIF
Members during ESIF's existence as a self-insurance fund.
(b) Thirty percent (30%) of the total number of shares of Preferred
Stock that will be issued by the Holding Company pursuant to this Plan
shall be allocated as the aggregate fixed component and the remaining
seventy percent (70%) shall be allocated as the aggregate variable
component.
7.2 Subscription Rights. Each Eligible Policyholder shall receive
Subscriptions Rights based upon the allocation to such Policyholder of
Subscription Rights to purchase Common Stock as follows:
(a) The total number of shares of Common Stock that will be issued by
the Holding Company (the "Aggregate Common Shares") shall be determined by
the Board of Trustees or a committee of the Board of Trustees of the Stock
Company based upon (i) the amount of cash that the Holding Company needs to
fund the Financing, plus any other working capital needs of the Holding
Company, and its subsidiaries, including the Stock Company, and (ii) the
price per share at which the Holding Company actually offers its Common
Stock pursuant to the Subscription Rights and any subsequent sale of Common
Stock to the public (the "Per Share Offering Price"). The amounts described
in items (i) and (ii) shall be determined with the help of professional
advisors and will be agreed upon by the Board of Trustees of the Stock
Company and the Holding Company. A further description of the determination
of the Per Share Offering Price is set forth in Section 9.5.
(b) Each Eligible Policyholder shall receive Subscription Rights to
purchase up to 4.99 percent of Aggregate Common Shares at a price per share
equal to the Per Share Offering Price, with a minimum required purchase of
one hundred (100) shares of Common Stock for each Eligible Policyholder who
chooses to subscribe. In the aggregate, Eligible Policyholders shall be
allocated Subscription Rights to
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one hundred percent (100%) of the Aggregate Common Shares, less the shares
subscribed for by the ESOP and the Management Group, which together shall
not exceed twenty percent (20%) of the Aggregate Common Shares. In the
event that the Eligible Policyholders collectively subscribe to more than
the eighty percent (80%) of the Aggregate Common Shares that has been
initially allocated to them, such eighty percent (80%) of the Aggregate
Common Shares, plus any additional shares that are not subscribed for by
the ESOP and the Management Group (as defined in Section 8.1(b)), shall be
allocated among individual Eligible Policyholders by multiplying the ratio
of the earned premium attributable to Policies of which each Policyholder
was the owner of record during the Eligibility Period to the total premium
earned during the Eligibility Period by the total number of shares
representing the allocation to Eligible Policyholders.
(c) No Person other than the ESOP shall be permitted, individually or
in conjunction with any affiliated Person, to acquire directly or
indirectly more than 4.99 percent of the Common Stock, without Department
approval as required by section 628.461, Florida Statutes.
ARTICLE VIII
ALLOCATION OF ADDITIONAL SUBSCRIPTION RIGHTS
8.1 In order to provide incentives to the directors, officers and executive
employees of the Holding Company and its subsidiaries, including the Stock
Company, in a manner comparable to other publicly-owned companies, and to
encourage these individuals future to become partners in its development, twenty
percent (20%) of the Aggregate Common Shares shall be set aside for subscription
by or on behalf of those individuals, as follows:
(a) The Holding Company shall grant Subscription Rights to the ESOP to
purchase up to ten percent (10%) of the Aggregate Common Shares. The price
to be paid by the ESOP for the purchase of each share of Common Stock
pursuant to such Subscription Rights shall be the Per Share Offering Price.
(b) The Holding Company shall also grant Subscription Rights to
certain officers, directors and executive employees of the Holding Company
and its subsidiaries, including the Stock Company (the "Management Group")
to purchase up to an aggregate of ten percent (10%) of the Aggregate Common
Shares. The price to be paid by each member of the Management Group for the
purchase of each share of Common Stock pursuant to such Subscription Rights
shall be the Per Share Offering Price. Certain members of the Management
Group may also be granted Subscription Rights in accordance with Section
7.2 because they are Eligible Policyholders. However, no member of the
Management Group shall be permitted, individually or in conjunction with
any affiliated Person, to acquire directly or indirectly more than 4.99
percent of the Common Stock, pursuant to all Subscription Rights granted to
such member.
(c) Any shares of the Aggregate Common Shares that are not subscribed
to by the ESOP or the Management Group, as the case may be, shall be
available for purchase by Eligible Policyholders, in the event that the
Eligible Policyholders subscribe for more than the 80% of the Aggregate
Common shares initially allocated for subscription by the Eligible
Policyholders.
ARTICLE IX
SUBSCRIPTION AND PUBLIC OFFERINGS
9.1 Subscription Offering Procedures. The Stock Company and the Holding
Company will prepare a joint proxy statement/prospectus (the "Prospectus"),
pursuant to which each Voting Policyholder will be asked to vote on the
Conversion and other matters set forth in this Plan. In addition, pursuant to
the Prospectus, the Holding Company will offer for sale shares of its Common
Stock pursuant to exercise of the Subscription Rights (the "Subscription
Offering"). Also pursuant to the Prospectus and simultaneously with the
Subscription Offering, the Holding Company will offer its Preferred Stock to
Eligible Policyholders. If the
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requisite number of the Voting Policyholders approve the Conversion, the
Preferred Stock will be distributed to each Eligible Policyholder in
consideration of such Eligible Policyholder's Membership Interest, without any
exercise of Subscription Rights by Eligible Policyholders. As soon as
practicable after the Department has approved this Plan and the Prospectus has
been declared effective by the Securities and Exchange Commission, the
Prospectus will be delivered to each Eligible Policyholder, the ESOP and the
Management Group, along with an order form (the "Order Form") for use by such
Persons in exercising his or its Subscription Rights for Common Stock. Each
Order Form will contain, among other things, the following:
(a) A specified date by which all Order Forms must be received by the
Holding Company, which date shall be not less than twenty (20) nor more
than forty-five (45) days following the date on which the Order Forms are
mailed by the Holding Company, and which date shall constitute the
termination of the Subscription Offering;
(b) The Per Share Offering Price;
(c) A description of the minimum and maximum number of shares of
Common Stock which may be subscribed for pursuant to the exercise of
Subscription Rights;
(d) Instructions as to how the recipient of the Order Form is to
indicate thereon the number of shares of Common Stock for which such Person
elects to subscribe and the available alternative methods of payment;
(e) An acknowledgment that the recipient of the Order Form has
received a copy of the Prospectus prior to the execution of the Order Form;
(f) A statement to the effect that the Subscription Rights are
nontransferable, will be void at the end of the Subscription Offering, and
can only be exercised by the Persons to whom they are granted at least 48
hours prior to timely delivery to the Holding Company of a properly
completed and executed Order Form, together with cash (if delivered in
person) or check or money order in the full amount of the purchase price as
specified in the Order Form for the shares of Common Stock for which the
recipient elects to subscribe in the Subscription Offering; and
(g) A statement that the executed Order Form, once received by the
Holding Company, may not be modified or amended by the subscriber without
the consent of the Holding Company.
9.2 Payments for Subscriptions. (a) All payments for Common Stock
purchased pursuant to the Subscription Rights must be delivered in full to the
Holding Company, together with a properly completed and executed Order Form on
or prior to the expiration date specified on the Order Form, unless such date is
extended by the Holding Company. Notwithstanding the foregoing, if the ESOP
subscribes for shares during the Subscription Offering, the ESOP will not be
required to pay for such shares at the time it subscribes, but rather may pay
for such shares of Common Stock on the Effective Date, provided that there is in
force from the time of its subscription until the Effective Date a loan
commitment from a financial institution reasonably acceptable to the Holding
Company to lend to the ESOP, on the Effective Date, the aggregate Per Share
Offering Price owed by the ESOP pursuant to its subscription.
(b) Payment for Common Stock subscribed for in the Subscription Offering
shall be held by the Holding Company in a segregated, interest-bearing escrow
account (the "Escrow Account"). On the Effective Date, the Holding Company shall
apply each subscriber's proceeds in the Escrow Account to satisfy the applicable
subscription price owed by such subscriber. The Holding Company shall as soon as
practicable thereafter distribute to each subscriber the amount of interest
earned in the Escrow Account on such subscriber's payment, net of any costs to
the Holding Company of maintaining the Escrow Account. If for any reason the
Conversion is not consummated, all payments made by subscribers shall be
refunded to them (with interest net of any costs to the Holding Company of
maintaining the Escrow Account) as soon as practicable after the determination
that no such consummation shall occur.
9.3 Undelivered, Defective or Late Order Forms. In the event that Order
Forms (i) are not delivered and are returned to the Holding Company by the
United States Postal Service, or the Holding Company is unable to locate the
addressee, (ii) are not received back by the Holding Company or are received by
the
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Holding Company after the expiration date specified thereon, (iii) are
defectively filled out or executed, or (iv) are not accompanied by the full
required payment for the shares of Common Stock subscribed for, the Subscription
Rights of the Person to whom such rights have been granted will lapse as
specified thereon; provided, however, that the Holding Company may, but will not
be required to, waive any immaterial irregularity on any Order Form or require
the submission of corrected Order Forms or the remittance of full payment for
subscription shares by such date as the Holding Company may specify. The
interpretation of the Stock Company of terms and conditions of the Plan, and of
the Holding Company of terms and conditions of the Order Forms, will be final,
subject to the authority of the Department.
9.4 Public Offering. The Subscription Offering will include simultaneous
offerings to the Eligible Policyholders, the ESOP and the Management Group. If
feasible, all shares of the Aggregate Common Shares not subscribed for in the
Subscription Offering may be sold in a public or private offering, subject to
such terms, conditions and procedures as may be determined by the Holding
Company. In such offering, no Person, individually or in conjunction with any
affiliated Person, shall be permitted to acquire directly or indirectly more
than 4.99 percent of the Aggregate Common Stock, without approval of the
Department pursuant to section 628.461, Florida Statutes, provided that such
limitation shall not be applicable to underwriters for purposes of such an
offering but shall be applicable to the sales by the underwriters to the public.
The amount to be paid by the underwriters in such a public offering shall be
equal to the Per Share Offering Price less an underwriting discount to be
negotiated among such underwriters and the Holding Company. Such public offering
will be commenced as soon as practicable following the date upon which the
Subscription Offering terminates. If for any reason a public offering of any of
the Aggregate Common Shares not sold in the Subscription Offering cannot be
effected, or in the event that any insignificant number of remaining shares is
not sold in the Subscription Offering or the subsequent public offering, other
purchase arrangements may be made by the Holding Company.
9.5 Per Share Offering Price. All shares of Common Stock sold pursuant to
the Subscription Offering and the subsequent public or private offering shall be
sold for a uniform price. The Per Share Offering Price shall be agreed upon by
the Boards of Directors or a committee of the Board of the Stock Company and the
Holding Company prior to commencement of the Subscription Offering.
ARTICLE X
STOCK INCENTIVE PLAN FOR EMPLOYEES AND DIRECTORS
10.1 Employee Plan. It is anticipated that the Holding Company will
implement the 1996 Employee Incentive Plan (the "Employee Plan"), providing for
stock and stock-based incentive awards to be granted to certain key employees of
the Holding Company and its subsidiaries, including the Stock Company. The
purpose of the Employee Plan is to promote the success, and enhance the value,
of the Holding Company, by linking the personal interests of the Holding
Company's key employees to those of Holding Company shareholders and by
providing the Holding Company's key employees with an incentive for outstanding
performance. Subject to the terms and conditions set forth in the Employee Plan,
a committee of the Holding Company's Board of Trustees, comprised of at least
two directors who are not also employees of the Holding Company, will have
discretion to select the key employees who are eligible to participate and to
determine their awards.
10.2 Director Plan. It is also anticipated that the Holding Company will
implement the 1996 Stock Option Plan for Outside Directors (the "Director
Plan"), providing for the Holding Company to grant to non-employee directors
options to purchase shares of the Holding Company's Common Stock. The purpose of
the Director Plan is to advance the interests of the Holding Company by
encouraging the non-employee directors to own Common Stock of the Holding
Company, thereby giving them an increased incentive to devote their efforts to
the success of the Holding Company. Each non-employee director will be entitled
to receive a number of options determined by a predetermined formula that is set
forth in the Director Plan.
9
<PAGE> 179
ARTICLE XI
POLICYHOLDER INTERESTS
Upon Conversion, the Policies held by Policyholders will be converted from
assessable Policies to non-assessable Policies, without any endorsement or
modification thereto. Policyholders will remain liable for all assessments
imposed prior to the Effective Date. Policyholders will be relieved of all
future contingent liabilities arising after the Effective Date from such
Policies held. Insurance coverage under insurance policies issued by ESIF,
including, without limitation, Policy coverages and benefits, will continue
unaffected.
ARTICLE XII
FEDERAL TAX CONSEQUENCES
It is intended that the Conversion, the Subscription Offering and the
public or private offering will be regarded for federal income tax purposes as
one transaction with several discrete steps having the tax consequences outlined
herein. The conversion of ESIF into Mutual Company is intended to be treated for
federal income tax purposes as a tax-free reorganization under section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the "Code"). The
conversion of Mutual Company into Stock Company is intended to be treated as a
tax-free Code section 368(a)(1)(E) recapitalization. Finally, the exchange by
Eligible Policyholders of their Membership Interests in Mutual Company in return
for the Preferred Stock and the exchange by Eligible Policyholders, the ESOP,
the Management Group and the underwriters of cash for Common Stock is intended
to be treated as a tax-free exchange under Code section 351. This Plan of
Conversion shall constitute a plan to effect a change in the identity of ESIF, a
plan of recapitalization and a plan of exchange under Section 351. Eligible
Policyholders and ESIF, Mutual Company, Stock Company and Holding Company shall
recognize no income, gain or loss as a result of the transaction contemplated by
this Plan. ESIF may seek a ruling from the Internal Revenue Service to confirm
the above described federal income tax consequences. As a condition to closing
the transactions contemplated by this Plan, ESIF shall have received such ruling
or have received an opinion of its counsel substantially to the same effect (in
which event it may withdraw the ruling request to the Internal Revenue Service).
ARTICLE XIII
CONDITIONS TO EFFECTIVENESS
In order for the Plan to become effective, all of the conditions listed
below must be satisfied. No Person shall have any rights or claims against ESIF,
the Mutual Company, the Stock Company, the Holding Company, or any of their
directors, officers, employees or agents, based upon the Plan not becoming
effective due to the failure of one or more of the conditions set forth below to
be satisfied.
13.1 Approval of the Plan by the Department and Policyholders. The Plan
and the Restated Articles of Incorporation and Bylaws of Stock Company shall
have been approved by the Department and by the necessary vote of the Voting
Policyholders.
13.2 Approval of the Application by the Department. ESIF's application for
approval to convert to an assessable mutual insurer shall have been approved by
the Department.
13.3 Financing. The Holding Company must have completed such equity or
debt financing transaction or transactions which is or are adequate to
capitalize Stock Company in the manner described below.
13.4 Capitalization of Stock Company. On the Effective Date, Stock Company
must have surplus as to Policyholders in an amount: (i) not less than that
required pursuant to Section 624.407, Florida Statutes, of a 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
10
<PAGE> 180
actual or projected premiums and the following: (i) for property insurance,
0.90; (ii) for casualty insurance, 1.25; (iii) for health insurance, 0.80; and
(iv) for all other kinds of insurance, 1.00. Notwithstanding the foregoing, the
Department may, in practice, require a higher level of Policyholders' surplus
for a domestic insurer after taking into consideration factors including, but
not limited to: (i) the lines of business underwritten; (ii) the maturity of the
insurer and its business; (iii) the quality of the asset portfolio of the
insurer, (iv) the experience and competence of the management of the insurer;
and (v) applicable risk-based capital requirements.
13.5 Filing of Articles of Incorporation and Bylaws. The Restated Articles
of Incorporation and Bylaws of Stock Company shall be filed in the manner
provided by applicable statute or regulation.
13.6 Policyholder Assessment. No assessments shall have been imposed
against Policyholders.
13.7 Tax Ruling or Opinion. ESIF shall have received the tax ruling or
opinion described in the last sentence of Article XII.
ARTICLE XIV
FAILURE OF PLAN TO BECOME EFFECTIVE
If the Plan does not become effective, the Mutual Company will remain a
group self-insurance fund. ESIF's articles of incorporation and bylaws will not
be restated pursuant to the Plan, the Membership Interests will remain
unchanged, and Policyholders will continue to be liable for assessments for each
year that funds of ESIF are insufficient to satisfy its liabilities as if this
Plan had not been proposed. The expenses incurred in the process of proposing
the Conversion and recapitalization contemplated by the Plan shall be borne
exclusively by ESIF.
ARTICLE XV
MISCELLANEOUS PROVISIONS
15.1 Amendment of Plan. At any time prior to the Effective Date, the Board
of Trustees of ESIF may amend this Plan and any filing made pursuant to this
Plan so long as such amendment is consistent with the intent and purposes of the
Plan as originally filed. If an amendment is adopted after the Plan has been
approved by Voting Policyholders at the Special Meeting, and such amendment is
not, in the judgment of the Board of Trustees of ESIF, materially
disadvantageous to Policyholders, and in conformity with such intent and
purposes, the Plan, as amended, need not be submitted for reconsideration by
Voting Policyholders.
15.2 Continuity of Corporate Existence. Upon the Conversion and
recapitalization of ESIF, as provided for in this Plan, the corporate existence
of ESIF shall continue uninterrupted in the form of Stock Company. All rights,
franchises, licenses and interests of ESIF in and to every type of property,
real, personal and mixed, and all choses in action shall continue unaffected and
uninterrupted by the Conversion and recapitalization and shall accrue to the
Stock Company. This Plan shall not be construed to result in any real or
constructive issuance or exchange of any insurance Policy or any other transfer
of any assets, rights or obligations by ESIF. All obligations and liabilities of
ESIF shall continue unaffected and uninterrupted by the Conversion and
recapitalization in the Stock Company. No action or proceeding pending at the
Effective Date to which ESIF is a party shall be abated or discontinued by
reason of this transaction but may be prosecuted to final judgment by the Stock
Company in the same manner as if the recapitalization and conversion had not
taken place. For all purposes, Stock Company shall be deemed to have been
organized on April 1, 1978, the initial date of organization of ESIF.
15.3 Extensions of Time Periods. In the event that subsequent to the
approval of this Plan by the Department, this Plan or any action contemplated by
this Plan becomes the subject of one or more legal or equitable proceedings in
any state, federal court or administrative agency in the United States, then the
periods referred to in the definition of the "Effective Date" and Article III of
this Plan, respectively, may be
11
<PAGE> 181
lengthened by a period of time equal to the pendency of such proceeding or
proceedings plus such previously determined periods.
15.4 Governing Law. This Plan, and the rights and obligations of all
parties under this Plan, will be governed and construed in accordance with the
Florida Insurance Code and other applicable laws of the State of Florida without
regard to principles of conflicts of laws.
15.5 Interpretation of Plan. This Plan and any filing made pursuant to
this Plan shall be interpreted in good faith by ESIF, and, unless objected to by
the Department, such interpretation shall be binding upon all Policyholders and
other Persons.
15.6 Name Change. Immediately upon the Effective Date, the name of Stock
Company will be changed from Employers Self Insurers Fund to a name to be chosen
by the Board of Trustees.
15.7 Oversights. If ESIF complies substantially and in good faith with the
requirements of this Plan, the Department, the Florida Insurance Code and other
applicable laws and regulations with respect to the giving of any notice, proxy,
proxy statement or other materials to the Voting Policyholders or other Persons,
or any other determination or action required by the Plan, then the failure or
inability to comply in every respect with such requirements in any particular
case shall not impair the validity of the actions or proceedings taken under
this Plan or entitle any Person to any injunctive or other equitable relief with
respect thereto.
15.8 Right to Rely upon Documents Deemed Genuine. ESIF, its Board of
Trustees, and its agents, officers and employees shall have the right to rely
upon documents and records deemed in good faith to be genuine, authorized or
properly executed and shall incur no liability or obligation for acting in
reliance thereon.
15.9 Authority to Remedy Errors. Subject to the terms of this Plan and
with the approval of the Department, the Holding Company may issue additional
shares of Preferred or Common Stock and take any other action it deems
appropriate to remedy errors or miscalculations made in connection with this
Plan.
15.10 Corrections. ESIF may make such modifications to the Plan as are
appropriate to correct errors, clarify existing items or make additions to
correct manifest omissions in the Plan; provided, however, that material
modifications must be approved by the Department.
15.11 Costs and Expenses. All reasonable costs, including those costs
attributable to the use of the staff personnel and outside advisors, consultants
and attorneys, relating to the Plan, shall be borne by the Stock Company or the
Holding Company.
15.12 No Preemptive Rights. Other than the Subscription Rights referred to
in the Plan, no Policyholder of ESIF, Mutual Company or Stock Company shall have
any preemptive right to acquire shares of Common or Preferred Stock in the
Holding Company or Common Stock in the Stock Company in connection with or as a
result of this Plan.
IN WITNESS WHEREOF, this Amended Plan of Conversion and Recapitalization
has been executed as of the date first above written.
EMPLOYERS SELF INSURERS FUND
By:
------------------------------------
Name:
----------------------------------
Chairman of the Board of Trustees
ATTEST:
- --------------------------------------
Secretary
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<PAGE> 182
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> 183
time, with respect to keeping an office to receive service of process from the
Treasurer and Insurance Commissioner of the State of Florida.
ARTICLE VI
DIRECTORS
Section 1. The Corporation shall have at least five (5) directors, all of
whom are United States citizens and all of whom are over the age of eighteen
(18). The names and residence street addresses of the initial directors, whose
initial terms of office shall be for one (1) year, are:
<TABLE>
<CAPTION>
NAME ADDRESS
-------------------------------------------------------------------------- ----------
<S> <C>
Robert L. Noojin, Sr...................................................... [address]
Thomas S. Petcoff......................................................... [address]
Robert Siegel............................................................. [address]
John Gray................................................................. [address]
Greg C. Branch............................................................ [address]
C.C. Dockery.............................................................. [address]
William B. Bull........................................................... [address]
</TABLE>
Section 2. The election of directors by the shareholders is approved if a
quorum exists, as provided in the Bylaws of the Corporation, and the votes cast
favoring the election of a director exceeds the votes cast opposing the election
of a director.
Section 3. The initial term of office of all of the initial directors
shall expire at the first annual meeting of the shareholders in 1997. At that
meeting, the directors elected shall be divided into three classes, Class I,
Class II and Class III, as nearly equal in number as possible. The term of
office for each of the Class I directors shall expire at the first annual
meeting of the shareholders in 1998; the term of office for each of the Class II
directors shall expire at the annual meeting of the shareholders in 1999; and
the term of office for each of the Class III directors shall expire at the
annual meeting of the shareholders in 2000. At each annual meeting of the
shareholders commencing with the meeting held in 1997, the successors to the
directors whose terms are expiring shall be elected to terms expiring at the
third succeeding annual meeting of shareholders. If the number of directors is
changed, any increase or decrease shall be apportioned among the classes so as
to maintain the number of directors in each class as nearly equal as possible,
and any additional directors of any class elected to fill a vacancy resulting
from an increase in such class shall hold office for a term that shall coincide
with the remaining term of that class, but in no case will a decrease in the
number of directors shorten the term of any incumbent director. A director shall
hold office until the annual meeting of the shareholders for the year in which
his term expires and until his successor shall be elected and shall qualify,
subject, however, to prior death, resignation, retirement, disqualification or
removal from office.
Section 4. All corporate powers shall be exercised by or under the
authority of the directors and the business and affairs of the Corporation shall
be managed and administered pursuant to the policies adopted by the directors.
Section 5. The qualification, election and tenure of the directors shall
be further provided for in the Bylaws.
Section 6. A member of the Board of Directors is not personally liable for
monetary damages to any person, including, but not limited to the Corporation,
for any statement, vote, decision, or failure to act, regarding the management
or policies of the Corporation, by such director, unless:
(a) The director breached or failed to perform his duties as a
director; and
(b) The director's breach of or failure to perform his duties
constitutes:
(1) A violation of the criminal law, unless the director had
reasonable cause to believe his conduct was lawful or had no reasonable
cause to believe his conduct was unlawful. A final judgment
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<PAGE> 184
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.
3
<PAGE> 185
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)
4
<PAGE> 186
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> 187
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.
2
<PAGE> 188
Section 6. Additional Meetings. Additional meetings of the Board of
Directors may be called by the Chairman of the Board or by a majority of the
directors. The person or persons authorized to call additional meetings of the
Board of Directors may fix a reasonable time and place for holding them.
Section 7. Telephone Meetings. Directors may participate in meetings of
the Board of Directors by means of a conference telephone or similar
communications equipment by which all persons participating can hear each other
at the same time, and participation by such means shall constitute presence in
person at such meeting.
Section 8. Action Without Meeting. Any action of the Board of Directors
may be taken without a meeting if a consent in writing setting forth the action
so taken is signed by all of the directors and is filed in the minutes of the
Board of Directors. Such consent shall have the same effect as an unanimous
vote.
Section 9. Notice and Waiver. Notice of any additional meeting shall be
given at least three (3) days prior thereto by written notice delivered
personally or by United States mail or facsimile to each director at his
residence or business address. If mailed, such notice must be mailed at least
seven (7) days prior thereto, and shall be deemed to be mailed when deposited in
the United States mail with postage prepaid. Any director may waive notice of
any meeting, either before, at, or after such meeting by signing a waiver of
notice. The attendance of a director at a meeting shall constitute a waiver of
notice of such meeting and waiver of any and all objections of the place of such
meeting or the manner in which it has been called or convened, except when a
director states at the beginning of the meeting any objection to the transaction
of business because the meeting is not lawfully called or convened.
Section 10. Quorum and Voting. A majority of directors in office shall
constitute a quorum for the transaction of business. The vote of a majority of
directors present at a meeting at which a quorum is present shall constitute the
action of the Board of Directors. If less than a quorum is present, then a
majority of those directors present may adjourn the meeting from time to time
until a quorum is present. Any meeting of the Board of Directors at which a
quorum is present may be adjourned from day to day or from time to time by a
vote of a majority of the directors present and voting at such meeting; the same
may be adjourned from time to time until a quorum is obtained, or may be
adjourned without assigning a day for further meeting. At any adjourned meeting
at which a quorum is present, any business may be transacted which might have
been transacted at the original meeting.
Section 11. Vacancies. Any vacancy occurring in the Board of Directors may
be filled by the affirmative vote of a majority of the remaining directors even
though it is less than a quorum of the Board of Directors, unless otherwise
provided by law or the Articles of Incorporation. A director elected or
appointed, as the case may be, to fill a vacancy shall hold office for the
unexpired term of the vacancy filled by such director. Any directorship to be
filled by reason of an increase in the number of directors shall be filled by
election at a meeting of the Board of Directors called for that purpose.
Section 12. Removal. At any meeting of shareholders called expressly for
that purpose, any director or directors may be removed from office, with or
without cause, by vote of a majority of the shareholders then entitled to vote
at an election of directors. New directors may be elected by the shareholders
for the unexpired terms of directors removed from office at the same meeting at
which such removals are voted. If the shareholders fail to elect persons to fill
the unexpired terms of removed directors, then the vacancies unfilled shall be
filled in accordance with provisions in these Bylaws for vacancies.
Section 13. Compensation. The Board of Directors may set the compensation
of directors and provide for the reimbursement of expenses of directors.
Section 14. Presumption of Assent. A director of the Corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless he
votes against such action or abstains from voting because of an asserted
conflict of interest.
Section 15. Indemnification. The Corporation shall indemnify the directors
of the Corporation in accordance with the policy of indemnification set forth in
Article XII and Exhibit A to these Bylaws.
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Section 16. Limitation of Directors' Liability. A member of the Board of
Directors shall not be personally liable for monetary damages to any person,
including but not limited to the Corporation, for any statement, vote, decision,
or failure to act, regarding the management or policy of the Corporation, by
such director, unless:
a. The director breached or failed to perform his duties as a
director; and
b. The director's breach of, or failure to perform, his duties
constitutes:
1. A violation of the criminal law, unless the director had
reasonable cause to believe his conduct was lawful or had no reasonable
cause to believe his conduct was unlawful. A final judgment or other
final adjudication against a director in any criminal proceeding for
violation of the criminal law estops that director from contesting the
fact that his breach, or failure to perform, constitutes a violation of
the criminal law; but does not estop the director from establishing that
he had reasonable cause to believe that his conduct was lawful or had no
reasonable cause to believe that his conduct was unlawful.
2. A transaction from which the director derived an improper
personal benefit, either directly or indirectly; or
3. Recklessness or an act or omission which was committed in bad
faith or with malicious purpose or in a manner exhibiting wanton and
willful disregard of human rights, safety, or property. For purposes of
this subdivision, the term "recklessness" means the acting, or omission
to act, in conscious disregard of a risk:
a. Known, or so obvious that it should have been known, to the
director; and
b. Known to the director, or so obvious that it should have been
known, to be so great as to make it highly probable that harm would
follow from such action or omission.
ARTICLE IV
OFFICERS
Section 1. Officers. The corporate officers of this Corporation shall be a
president, one or more vice-president(s), a secretary, and a treasurer, each of
whom shall be appointed by the Board of Directors. The Board officers of this
Corporation shall be a Chairman of the Board and a Vice-Chairman of the Board.
Any two or more offices may be held by the same person. A failure to appoint a
president, vice president(s), secretary, or treasurer shall not affect the
existence of the Corporation, and the president, vice president(s), secretary,
or treasurer shall continue to serve in office until new officers are appointed
by the Board of Directors.
Section 2. Appointment and Term of Office. The corporate officers and
board officers of the Corporation shall be appointed by the Board of Directors
and shall serve at the pleasure of the Board of Directors. Each officer shall
hold office until his successor shall have been duly appointed and shall have
qualified, or until his death, or until he shall resign or have been removed in
the manner hereafter provided.
Section 3. Removal. Any officer may be removed from office on the
affirmative vote of a majority of the entire Board of Directors whenever, in its
judgment, the best interests of the Corporation shall be served thereby. Removal
shall be without prejudice to any contract rights of the person so removed, but
the election of an officer shall not of itself create contract rights.
Section 4. Vacancies. Vacancies in offices, however occasioned, may be
filled at any time by appointment by the Board of Directors of officers to serve
the unexpired terms of such offices.
Section 5. Duties. The corporate officers and board officers shall have
the following duties:
a. Chairman of the Board. The Chairman of the Board shall preside at
all meetings of the Board of Directors and of the shareholders.
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b. Vice-Chairman of the Board. In the case of the death, absence of,
inability of the Chairman of the Board to act, the Vice-Chairman of the
Board shall preside at meetings of the Board of Directors and of the
shareholders.
c. President. The president shall perform all the usual and customary
duties of that office, including, without limitation, the general
supervision of the business of the Corporation.
d. Vice Presidents. The vice presidents shall have such power and
perform such duties as may be delegated to them by the President. In the
case of the death, absence, or inability of the president to act, except as
may be expressly limited by action of the Board of Directors, a vice
president expressly designated by the Board of Directors shall perform the
duties and exercise the power of the president following such death of the
president or during the absence or inability of the president to act.
e. Secretary. The secretary shall keep the minutes of all meetings of
the shareholders and of the Board of Directors in a book or books to be
kept for such purposes, and also, when so requested, the minutes of all
meetings of committees in a book or books to be kept for such purposes. He
shall attend to giving and serving of all notices, and he shall have charge
of all books and papers of the Corporation, except those hereinafter
described to be in the charge of the treasurer or except as otherwise
expressly directed by the Board of Directors. The secretary shall be the
custodian of the seal of the Corporation. The secretary shall have and
perform such other duties as may be delegated to him by the president.
f. Treasurer. The treasurer shall perform all the usual and customary
duties of that office. The treasurer shall also have the power and perform
such duties as may be delegated to him by the president.
Section 6. Compensation. The compensation of all officers of the
Corporation shall be fixed by the Board of Directors.
Section 7. Indemnification. The Corporation shall indemnify the officers
of the Corporation in accordance with the policy of indemnification set forth in
Article XII and Exhibit A to these Bylaws.
ARTICLE V
COMMITTEES
Section 1. Creation of Committees. The Board of Directors shall, by
resolution passed by a majority of the whole Board, designate an Audit Committee
and may, by resolution passed by a majority of the whole Board, designate a
Finance and Investment Committee, and such other committees as the Board shall
deem appropriate.
Section 2. Committee Functions. Such committees shall have such functions
and may exercise such power as can be lawfully delegated by the Board of
Directors and to the extent provided in the resolution creating such committee
or committees.
Section 3. Meetings. Regular committee meetings may be held without notice
at such time and at such place as shall from time to time be determined by the
committees, and additional meetings of the committees may be called by any
member thereof upon two (2) days' notice to the other members of such committee,
or on such shorter notice as may be agreed to in writing by each of the other
members of such committee, given either personally or in the manner provided in
these Bylaws pertaining to notice for directors' meetings.
Section 4. Members. Members of the committees shall be directors and shall
be appointed by a majority of the Board.
Section 5. Quorum. At all meetings of the committees, a majority of the
committee's members then in office shall constitute a quorum for the transaction
of business.
Section 6. Manner of Acting. The vote of a majority of the members of any
committee present at any meeting at which there is a quorum shall constitute the
action of such committee.
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Section 7. Minutes. The committee shall keep regular minutes of their
proceedings and report the same to the Board of Directors when required.
Section 8. Compensation. Members of the committees may be paid
compensation in accordance with the provisions of these Bylaws pertaining to
compensation of directors.
ARTICLE VI
MANAGEMENT COMPANY
The Board of Directors of the Corporation may contract with an authorized
management company to manage and administer the affairs of the Corporation
including, but not limited, to marketing, underwriting, billing, collection,
claims administration, terminations, reinstatement, safety and loss prevention,
reinsurance, policy issuance, accounting, custody of funds for day-to-day
operations, regulatory reporting, investments, and general administration.
ARTICLE VII
BOOKS, RECORDS AND REPORTS
The Corporation shall send a report to the shareholders of the Corporation
at least annually. Such report shall include a balance sheet as of the close of
the fiscal year of the Corporation and a profit and loss statement for the year
ending on such closing date. Such financial statements shall be prepared from
and in accordance with the books of the Corporation, in conformity with
generally accepted accounting principles applied on a consistent basis.
ARTICLE VIII
DIVIDENDS
The Board of Directors of the Corporation may from time to time apportion
and pay to the shareholders dividends only out of that part of its available and
accumulated surplus funds which is derived from realized net operating profits
on its business and net realized capital gains. Any such dividend payment shall
be made in accordance with section 628.371, Florida Statutes (1995), as amended
from time to time. This article shall not be interpreted to require any payment
of dividends.
ARTICLE IX
SEAL
The corporate seal shall bear the name of the Corporation between two
concentric circles and in the inside of the inner circle shall be the year of
incorporation.
ARTICLE X
FUNDS OF THE CORPORATION
All monies of the Corporation or under its charge deposited in any bank or
other place of deposit shall be deposited to the credit of the Corporation by
its corporate name.
ARTICLE XI
AMENDMENTS
These Bylaws may be altered, amended or replaced and new Bylaws may be
adopted by a two-thirds ( 2/3) vote of the Board of Directors or by a majority
of the shareholders.
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ARTICLE XII
INDEMNIFICATION
The Corporation shall indemnify any person who was or is threatened with or
made a party to any suit or other legal or administrative proceedings brought to
impose upon him a liability or penalty for an act alleged to have been committed
by him in his capacity as a director, officer, employee or agent of the
Corporation in accordance with the policy of indemnification set forth in
Exhibit A to these Bylaws.
IN WITNESS WHEREOF, I, the Secretary of said Corporation, have hereunto set
my hand and affixed the seal of said Corporation on this the day of
, 1996.
By:
--------------------------------------
Secretary
(SEAL)
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EXHIBIT A
POLICY OF INDEMNIFICATION
(1) Corporate Power to Indemnify. Upon the following terms and subject to
the following conditions, this Corporation shall indemnify any person who is
threatened with or made a party to any proceeding brought to impose upon him a
liability or penalty for an act alleged to have been committed by him in his
capacity as a director, officer, employee, or agent of the Corporation or by
reason of the fact that he is or was serving at the request of the Corporation
as a director, officer, or agent of another corporation, partnership, joint
venture, trust, or other enterprise (including any employee benefit plan). A
proceeding includes any threatened, pending or completed action, suit or other
type of proceeding, whether civil, criminal, administrative, or investigative
and whether formal or informal.
(2) Third Party Actions. If the proceeding is not one brought by or in the
right of the Corporation for the purpose of obtaining a judgment in its favor
and if the person acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation (or, in a
criminal action, if he was without reasonable cause for believing that his
conduct was unlawful), the Corporation shall indemnify him against judgments,
penalties, fines (including any excise taxes with respect to any employee
benefit plan), amounts paid in settlement, and all reasonable expenses,
including attorneys' fees, which he has actually and necessarily incurred as a
result of the proceeding, including any appeal. The termination of any
proceeding by judgment, order, settlement, or conviction or upon a plea of nolo
contendere or its equivalent shall not, or itself, create a presumption that the
person did not act in good faith and in a manner which he reasonably believed to
be in, or not opposed to, the best interests of the Corporation or, with respect
to any criminal action or proceeding, that the person had reasonable cause to
believe that his conduct was unlawful.
(3) Derivative Suits. If the proceeding is brought by or in the right of
the corporation to obtain a judgment in its favor and if the person acted in
good faith in the reasonable belief that his action was in, or not opposed to,
the best interests of the Corporation, the Corporation shall indemnify him
against amounts paid in settlement, or if there is no settlement or if, in the
judgment of the Board of Directors, the costs of settlement exceed the estimated
expense of litigating the proceeding to conclusion, against any loss, liability
or damages arising out of such proceeding, as well as all reasonable expenses,
including attorneys' fees, which he has actually and necessarily incurred in
connection with the defense or settlement of the proceedings, including any
appeal, except that, if the person is adjudged to have been guilty of negligence
or misconduct in the performance of his duty to the Corporation, he shall be
entitled to indemnification only to the extent that the court, administrative
agency, or investigative body before which the proceeding is heard, shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, the person is fairly and reasonably
entitled to indemnity.
(4) Right to Indemnification. To the extent a director, officer, employee
or agent of the Corporation is successful in defending any proceeding, whether
or not brought by or in the right of the Corporation, or in defending any claim,
issue, or matter therein, this Corporation shall indemnify him against all
reasonable expenses, including attorneys' fees, which he has actually and
necessarily incurred in connection therewith.
(5) Action Required by Directors. Unless indemnification is ordered by the
tribunal before which the proceeding is held, the determination of whether the
standards of conduct giving rise to indemnity under Sections (2) and (3) of this
policy have been met shall be made by a majority vote of the Board of Directors
of a quorum consisting of directors who were not parties to the proceeding.
(6) Advance Payments. The Corporation may authorize payment of the
expenses incurred by a director, officer, employee, or agent of the Corporation
in defending any proceeding in advance of the final disposition of such
proceeding, upon receipt of an undertaking by or on behalf of the director,
officer, employee, or agent to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Corporation.
(7) Additional Indemnification. The Corporation shall have the right and
power to make any other or further indemnification, except indemnification
against gross negligence or willful misconduct and except indemnification
contrary to law, under any bylaw, agreement, vote of shareholders or
disinterested directors, or
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otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
(8) Power to Purchase and Maintain Insurance. The Board of Directors shall
have the power to purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee, or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust, or other
enterprise against liability asserted against him and incurred by him in any
such capacity or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of this policy. This Section (8) shall not limit the power of the
Corporation to purchase and maintain insurance on behalf of any person who is or
was a director, officer, or employee of the Corporation.
(9) Continuing Coverage. Indemnification as provided for in this policy
shall continue as to a person who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the heirs, executors, and
administrators of such a person. This policy of indemnification shall be deemed
to constitute a contract between the Corporation and each officer, director,
employee, and agent of the Corporation. This policy may be amended or terminated
by the Board of Directors of the Corporation provided that such amendment or
termination shall not diminish any rights of an officer, director, employee, or
agent with respect to matters arising or causes of action accruing prior to such
action by the Board.
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EXHIBIT D
[SEAL]
THE TREASURER OF THE STATE OF FLORIDA
DEPARTMENT OF INSURANCE
BILL NELSON
IN THE MATTER OF:
CASE NO. 17191-96-C
EMPLOYERS SELF INSURERS FUND;
BRIDGEFIELD EMPLOYERS INSURANCE
COMPANY, AN ASSESSABLE MUTUAL;
BRIDGEFIELD EMPLOYERS INSURANCE
COMPANY; AND SUMMIT HOLDING
SOUTHEAST, INC.
- ---------------------------------------------------/
CONSENT ORDER
THIS CAUSE came on to be considered upon an application with attachments
(Collectively referred to herein as the "APPLICATION") filed on behalf of
APPLICANTS, Employers Self Insurers Fund ("ESIF"), Bridgefield Employers
Insurance Company, an Assessable Mutual ("BEIC MUTUAL"), Bridgefield Employers
Insurance Company ("BEIC STOCK"), and Summit Holding Southeast, Inc. ("SUMMIT
SOUTHEAST") with the Florida Department of Insurance (the "DEPARTMENT") on or
about August 20, 1996, pursuant to Sections 624.463, 628.461, 628.6013, and
628.6017, Florida Statutes. After a complete review of the entire record, and
upon consideration thereof and being otherwise fully advised in the premises,
the Treasurer and Insurance Commissioner, as head of the DEPARTMENT, finds as
follows:
1. The Treasurer and Insurance Commissioner, as head of the DEPARTMENT, has
jurisdiction over the subject matter and of the parties herein.
2. The proposed conversion of ESIF from a group self-insurance fund to an
interim domestic assessable mutual insurer, BEIC MUTUAL, is in compliance with
and approved pursuant to Section 624.463 and 628.6013, Florida Statutes, subject
to and contingent upon compliance with the terms of this Consent Order.
3. The proposed formation of BEIC MUTUAL is in compliance with and approved
pursuant to applicable provisions of Chapter 628, Part II, Florida Statutes
including Section 628.6013, Florida Statutes, subject to and contingent upon
compliance with the terms of this Consent Order.
4. The proposed conversion of BEIC MUTUAL from an interim domestic
assessable mutual insurer to a domestic stock insurer, BEIC STOCK, is in
compliance with and approved pursuant to Section 628.6017, Florida Statutes,
subject to and contingent upon compliance with the terms of this Consent Order.
5. The proposed acquisition of all outstanding shares of BEIC STOCK by
SUMMIT SOUTHEAST as outlined in the Amended Plan of Conversion and
Recapitalization of Employers Self Insurers Fund (hereinafter referred to as the
"Amended Plan of Conversion and Recapitalization") submitted to the DEPARTMENT
on November 5, 1996 is in compliance with and approved pursuant to Section
628.461, Florida Statutes, subject to and contingent upon compliance with the
terms of this Consent Order.
6. Pursuant to APPLICANTS' APPLICATION, including the Amended Plan of
Conversion and Recapitalization and the Plan of Operation, APPLICANTS will take
a number of intermediate steps in order to convert from a group self insurance
fund to an assessable mutual insurer and ultimately to a domestic stock insurer
which shall then be acquired by a newly formed holding company. As consideration
for the exchange of membership interests in BEIC MUTUAL, the APPLICATION
provides for the elimination of any liability the members may have for future
assessments, issuance of Preferred Stock of SUMMIT SOUTHEAST, and Subscription
Rights to purchase Common Stock of SUMMIT SOUTHEAST. Further, in
<PAGE> 196
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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<PAGE> 200
time as a valuation of such affiliates is rendered by the Securities Valuation
Office of the National Association of Insurance Commissioners, but in no event
in excess of the amounts allowed pursuant to section 625.151(3), Florida
Statutes. If the Bank imposes any material additional requirements on any member
of the SUMMIT SOUTHEAST holding company system which could reasonably be
expected to have a material adverse effect on the financial condition of
BRIDGEFIELD CASUALTY or BEIC STOCK, SUMMIT SOUTHEAST shall obtain the prior
written approval of the DEPARTMENT prior to the additional requirement's taking
effect. In the event that the transactions contemplated by the APPLICATION are
not consummated or for any reason those transactions are reversed or otherwise
voided, all provisions of the January 11, 1996 Consent Order in DEPARTMENT case
number 13402-95-C-AJL shall be enforceable by the parties thereto.
32. In an attempt to avoid potential policyholder confusion as a result of
the transactions contemplated by the APPLICATION, and to avoid unnecessary
impediments to those transactions, BEIC STOCK may utilize the current rates and
rating plans of ESIF through December 31, 1997. After such time, BEIC STOCK
shall file rates with the DEPARTMENT for its written approval unless using rates
not requiring such approval under the Florida Insurance Code or applicable rules
of the DEPARTMENT. BEIC STOCK shall obtain the prior written approval of the
DEPARTMENT for the use of all forms or endorsements to existing forms. Policies
issued with effective dates on or after January 1, 1998 shall be written only on
forms and with rates approved for use by the DEPARTMENT by written approval
obtained after the filing of this Consent Order.
33. The Effective Date of the APPLICATION and the transactions contemplated
by the APPLICATION shall be the date on which the conversions, acquisition and
recapitalization contemplated by the APPLICATION are effectuated. The Effective
Date shall be within six (6) months of the entry of this Consent Order.
APPLICANTS may apply to the DEPARTMENT for up to a six (6) month extension to
this deadline. The granting or denial of such request is in the sole discretion
of the DEPARTMENT. Each conversion, acquisition and recapitalization
contemplated by the APPLICATION shall follow immediately the prior transaction
without delay and all such conversions, acquisition and recapitalization, shall
be effectuated in a single day. The taking of the vote of members of ESIF and
BEIC MUTUAL and, if authorized by the vote of the members, the conversion of
ESIF to BEIC MUTUAL and of BEIC MUTUAL to BEIC STOCK shall occur in immediate
succession and in a single day. The acquisition of the stock of BEIC STOCK by
SUMMIT SOUTHEAST shall be consummated immediately upon the completion of the
conversion of BEIC MUTUAL to BEIC STOCK. Due to the rapid conversion, no
certificates of authority or permits will be physically issued to BEIC MUTUAL as
it shall not transact insurance or engage in any business activity except that
which is required to implement the transactions contemplated by the APPLICATION.
All authority granted to ESIF and BEIC MUTUAL shall terminate immediately upon
their respective conversions. ESIF shall physically surrender its certificate of
authority immediately upon completion of all transactions contemplated by the
APPLICATION.
34. In accordance with the Amended Plan of Conversion and Recapitalization,
and all attachments thereto, ESIF shall submit the Amended Plan of Conversion
and Recapitalization to its members for a vote. The Amended Plan of Conversion
and Recapitalization must be approved by:
A. an affirmative vote of a majority of the members of ESIF, and
B. an affirmative vote of not less than two-thirds (2/3rds) of BEIC
MUTUAL "voting policyholders" as defined in the Proxy Statement.
The Secretary of BEIC MUTUAL shall immediately certify the results of the
vote to the DEPARTMENT. A single vote of the members of ESIF and BEIC MUTUAL
approving both conversions shall satisfy the voting requirements of Sections
628.6013(1) and 628.6017(1)(b), Florida Statutes if the votes obtained are
sufficient to satisfy both the 1/2 of all members and 2/3 of all votes cast
requirements set forth therein. On the Effective Date, the Directors of BEIC
MUTUAL shall promptly ratify the execution of this Consent Order on their behalf
by Mr. William B. Bull, a member of the Board of Organizers of BEIC MUTUAL and
who is anticipated to be a Director and President of BEIC MUTUAL. The Secretary
of BEIC MUTUAL shall immediately certify the ratification to the DEPARTMENT.
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35. If the Amended Plan of Conversion and Recapitalization is not approved
by vote of not less than two-thirds ( 2/3rds) of BEIC MUTUAL's "voting
policyholders" and the approval of at least a majority of all members of ESIF,
the conversion to BEIC MUTUAL and subsequent conversion to BEIC STOCK shall not
be effectuated and ESIF shall remain a group self-insurance fund pursuant to
Section 624.4621, Florida Statutes.
36. If the Amended Plan of Conversion of BEIC MUTUAL is approved by vote of
not less than two-thirds ( 2/3rds) of BEIC MUTUAL's "voting policyholders" and
at least a majority of all members of ESIF, APPLICANTS shall then, on the
Effective Date, effectuate the acquisition of BEIC STOCK by SUMMIT SOUTHEAST.
Additionally, on the Effective Date, the Directors of BEIC STOCK shall promptly
ratify the execution of this Consent Order on their behalf by Mr. William B.
Bull, who is anticipated to be a Director and President of BEIC STOCK. The
Secretary of BEIC STOCK shall immediately certify the ratification to the
DEPARTMENT. Failure to promptly effectuate the acquisition in accordance with
the Amended Plan of Conversion and Recapitalization of BEIC MUTUAL as disclosed
in the Proxy Statement shall result in the recision of the conversions of BEIC
MUTUAL and ESIF and BEIC STOCK shall revert back to ESIF, a group self-insurance
fund pursuant to Section 624.4621, Florida Statutes.
37. The DEPARTMENT has relied upon various unexecuted and draft documents
submitted as part of the APPLICATION pursuant to the proposed conversions and
acquisition transactions. No later than the close of business on the next
business day following the Effective Date, except as otherwise provided below,
APPLICANTS shall submit and verify to the DEPARTMENT true, correct, and complete
copies of the executed documents supporting the conversions and acquisition
transactions. APPLICANTS shall notify the DEPARTMENT in writing of any revisions
to the documents at the time the revisions are made. If, within 30 days of
submission of the executed documents, the DEPARTMENT determines that the
executed documents vary in any material respect from those submitted to and
reviewed by the DEPARTMENT prior to the entry of this Consent Order, the
DEPARTMENT shall notify APPLICANTS in writing of the material deviation and if
the material deviation is not corrected to the DEPARTMENT's satisfaction within
ten days of the notice, the DEPARTMENT may enter a subsequent Order vacating
this Consent Order. Such Order may disapprove the conversions and acquisition
transactions. In addition, if necessary to protect policyholders or the public,
the DEPARTMENT may enter an Immediate Final Order suspending the license of BEIC
STOCK. The DEPARTMENT's determination as to the existence of a material
variation shall be in the DEPARTMENT's sole discretion and shall not be subject
to Section 120.57, Florida Statutes. APPLICANTS shall continue to promptly
report and provide documentation to the DEPARTMENT with respect to any
transactions or arrangements made or entered into for the purposes of these
conversions and acquisition agreements including, but not limited to, the
following documents to be supplied to the DEPARTMENT, except as otherwise
indicated, by close of business on the Effective Date:
(a) A certified copy of the executed Articles of Incorporation of BEIC
MUTUAL as filed with the Secretary of State as well as the executed By-Laws
of BEIC MUTUAL.
(b) A certified copy of the executed Articles of Restatement and
Certificate of Restatement for BEIC MUTUAL as filed with the Secretary of
State.
(c) A certified copy of the executed Restated Articles of
Incorporation of BEIC STOCK as filed with the Secretary of State as well as
the executed Restated By-Laws of BEIC STOCK.
(d) An original certificate of status from the Secretary of State for
BEIC STOCK.
(e) A certified copy of the executed Amended Plan of Conversion and
Recapitalization of ESIF and BEIC STOCK.
(f) The original Waiver of Hearing From Seller executed by BEIC STOCK.
(g) The original Waiver of Hearing From Buyer executed by SUMMIT
SOUTHEAST.
(h) A certified copy of the executed Certificate of Designation,
Preferences and Rights of Series A Preferred Stock.
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(i) Certified executed copies of the "Recapitalization Agreement"
between ESIF and SUMMIT SOUTHEAST.
(j) Upon mailing to members, a certified copy of the Dear Member
Letter, Notice of Meeting, and Proxy Statement together with attachments,
that were sent to the policyholders of ESIF and BEIC MUTUAL for their
conversion to BEIC STOCK.
(k) Within twenty (20) days of the special meeting of policyholders of
ESIF, certified copies of minutes of the meeting.
(l) When available, and in any event, within 30 days of the Effective
Date, certified copies of the minutes of all meetings of APPLICANTS held on
the Effective Date.
(m) A certified copy of the fidelity bond in the name of BEIC STOCK.
(n) Prior to release to any prospective subscribers, a true and
correct copy of the Prospectus of SUMMIT SOUTHEAST.
38. Except as otherwise provided in this Consent Order, upon conversion of
ESIF and BEIC MUTUAL to BEIC STOCK, APPLICANTS shall comply with all
requirements of the Florida Insurance Code relating to the reporting
requirements applicable to domestic stock insurers.
39. APPLICANTS shall, pursuant to section 624.408, Florida Statutes, at and
after the Effective Date, have and maintain policyholder surplus in an amount
not less than that required of a domestic stock insurer and shall be in and
maintain compliance with the requirements of section 624.4095, Florida Statutes,
regarding the ratio of premium to surplus. If implementation of the Amended Plan
of Conversion and Recapitalization results in, BEIC STOCK having policyholder
surplus in an amount that differs in a material amount from the amount shown on
the pro formas submitted to the DEPARTMENT with the APPLICANTS' APPLICATION,
BEIC STOCK shall submit updated pro formas to the DEPARTMENT reflecting the
correct amount of policyholder surplus.
40. Neither ESIF, BEIC MUTUAL, nor BEIC STOCK shall declare, set aside or
pay any dividends or make or agree to make any other distributions or payment or
enter into any transaction, other than in the ordinary course of business and
consistent with past practices, prior to the Effective Date. After the Effective
Date and prior to the Loan Termination Date, neither BEIC STOCK nor BRIDGEFIELD
CASUALTY shall declare, set aside or pay any dividends or premium refunds, or
make any other distributions of the surplus of BEIC STOCK or BRIDGEFIELD
CASUALTY without the prior written approval of the DEPARTMENT. The DEPARTMENT
shall grant such approval if the proposed dividend or premium refund complies
with applicable provisions of the Florida Insurance Code. The term "premium
refunds" as used in this paragraph does not refer to the return of premiums due
under the retrospectively rated plans offered by ESIF, BEIC MUTUAL, and BEIC
STOCK.
41. For the three year period immediately following the Effective Date,
BEIC STOCK shall not assume reinsurance without the prior written approval of
the DEPARTMENT. In addition, BEIC STOCK shall cede reinsurance only to
authorized reinsurers unless prior written approval has been given by the
DEPARTMENT. Furthermore, BEIC STOCK shall within twenty (20) days from the
effective date of any reinsurance treaty for reinsurance ceded or assumed by
BEIC STOCK, submit to the DEPARTMENT a true and correct copy of the cover notes
of such treaty and shall provide a true and correct copy of the entire treaty to
the DEPARTMENT, if so requested. Further, BEIC STOCK shall notify the DEPARTMENT
of any proposed or prospective changes in its reinsurance prior to implementing
such changes.
42. APPLICANTS hereby represent that they have, in the APPLICATION,
described all material terms and conditions that will constitute the conversions
and acquisition and have disclosed and described all transactions and agreements
related thereto. The representations made in the documents, and herein, are
material to the entry of this Consent Order and the APPLICANTS shall conduct
themselves in accordance with the representations and requirements of such
documents.
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43. That APPLICANTS have made material representations that none of its
officers and/or directors have been charged with or convicted of a felony or
misdemeanor other than minor traffic violations. If the completed fingerprint
cards of said officers and directors furnished to the DEPARTMENT or other
sources utilized by the DEPARTMENT in its investigation process reveal
otherwise, those individuals involved shall be removed as an officer and/or
director of said APPLICANTS, within thirty (30) days after notification by the
DEPARTMENT and replaced with an officer or a director acceptable to the
DEPARTMENT.
44. APPLICANTS have further represented that they have submitted complete
information on each of the principals. If material information on one or more
principal(s) has not been provided, and the DEPARTMENT would not have approved
this APPLICATION if such information had been provided, those individuals
involved shall be removed within thirty (30) days of receipt of notification
from the DEPARTMENT.
45. With respect to the officers and directors identified in the
APPLICATION, upon receipt of such notification from the DEPARTMENT, as described
under paragraphs 44 and 45 above, if the required corrective action is not
timely taken by APPLICANTS, APPLICANTS agree that such failure to act would
constitute an immediate danger to the public and the DEPARTMENT immediately may
suspend or revoke the license of BEIC STOCK without further proceedings.
APPLICANTS further affirm that the above representations are material to the
issuance of this Consent Order.
46. Within 45 days after the Effective Date, BEIC STOCK shall file an
amended Holding Company Registration Statement with the DEPARTMENT. Thereafter,
BEIC STOCK shall file updates to its Holding Company Registration Statement with
the DEPARTMENT as required by Section 628.801, Florida Statutes, and Rule
4-143.046, Florida Administrative Code.
47. For the three year period following the Effective Date, prior to
conducting business in another state, BEIC STOCK shall notify the DEPARTMENT in
writing and submit a copy of the business plan submitted to that state, the
earlier of 60 days prior to writing business or at the time of filing the
business plan with that state.
48. Any administrative contracts entered into by BEIC STOCK must meet the
requirements of Sections 626.091, 626.7451 and 626.7491, Florida Statutes. Any
contract in which BEIC STOCK contracts, with a managing general agent or
administrator, for services must be subject to writing limitations which may be
exercised at the option of the BEIC STOCK.
49. Upon issuance of this Consent Order, APPLICANTS' failure to adhere to
one or more of the terms and conditions contained herein after having been
provided written notice of the failure by the DEPARTMENT and thirty business
days to cure the deviation (Notice and Opportunity to Cure), except as provided
in paragraph 46 herein, may result, without further proceedings, in the
Treasurer and Insurance Commissioner withdrawing approval of the APPLICATION and
the transactions contemplated by the APPLICATION or in the revocation of BEIC
STOCK's certificate of authority. Compliance by APPLICANTS after being provided
a Notice and Opportunity to Cure shall not foreclose the DEPARTMENT from
pursuing disciplinary proceedings as appropriate. The remedy provided herein for
APPLICANTS' failure to adhere to one or more of the terms and conditions
contained herein is not exclusive and shall not foreclose the DEPARTMENT from
pursuing other enforcement or disciplinary actions as provided for by law or
other provisions of this order and including emergency actions with immediate
effect.
50. The parties agree that this Consent Order will be deemed to be executed
when the Treasurer and Insurance Commissioner or his designee has signed a copy
of this Consent Order which bears the signatures of APPLICANTS or their
authorized representatives, notwithstanding the fact that the copy was
transmitted to the agency by facsimile machine. APPLICANTS further agree that
the original of this Consent Order with original signatures will be forwarded to
the DEPARTMENT within three (3) days of its receipt from the DEPARTMENT. Failure
to forward a signed original within the specified time period shall render this
agreement voidable.
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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
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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
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EXHIBIT E
THE CHICAGO CORPORATION
July 31, 1996
The Board of Trustees
Employers Self Insurers Fund
2310 A-Z Park Road
Lakeland, Florida 33801
Trustees:
We understand that, pursuant to the Plan of Conversion and Recapitalization
(Draft dated July 26, 1996) (the "Plan") of Employers Self Insurers Fund ("ESIF"
or the "Fund"), a group self insurance fund authorized pursuant to Section
624.4621 of the Florida Statutes, (i) ESIF will convert from a group self
insurance fund to an assessable mutual insurance company and subsequently to a
non-assessable stock insurance company; (ii) ESIF will become a wholly-owned
subsidiary of a newly formed holding company ("NEWCO"); (iii) the articles of
incorporation and by-laws of ESIF will be restated; (iv) newly issued common
stock of NEWCO will be sold in an initial public offering ("IPO") in an amount
necessary to capitalize ESIF in accordance with the Plan; and (v) in exchange
for their Membership Interests, policyholders of ESIF (the "Eligible
Policyholders") (a) will no longer be subject to assessments during their
current policy year (in the case of those Policyholders who have In-Force
Policies) or for any prior year in which they held a Policy with ESIF or any
predecessor thereto unless such assessment was imposed prior to the effective
date of the Plan (the "Effective Date"), and will also be relieved of all future
contingent liabilities arising after the Effective Date; (b) will cease to have
any rights as members of ESIF, including, without limitation, the right to vote
for trustees and rights in liquidation; (c) will retain all policy coverages and
benefits as unchanged and the Plan will not result in any real or constructive
issuance or exchange of any Policy; (d) will receive cumulative, redeemable
preferred stock of NEWCO (the "Preferred Stock") with total par value of $16.4
million; and (e) will receive non-transferable subscription rights (the
"Subscription Rights") to acquire, at the IPO price, all of NEWCO's common stock
except for those shares (not to exceed 20% of all NEWCO shares) sold to NEWCO's
officers, directors and employees; collectively (a) through (e) are hereinafter
referred to as the "Consideration". The effectiveness of the Plan is
conditional, among other things, upon approval by the requisite vote of Eligible
Policyholders, approval by the Department of Insurance of the State of Florida,
and the raising of sufficient equity to adequately capitalize NEWCO, all of
which are more fully described in the Plan.
You have asked us to render our opinion (the "Opinion") as to the fairness,
from a financial point of view, of the Consideration to be received by the
Eligible Policyholders pursuant to the Plan. In rendering our Opinion, among
other things, we have:
(i) reviewed the Plan;
(ii) reviewed the audited statutory financial statements of ESIF for
the years of March 31, 1994 and 1995, as well as an audited GAAP balance
sheet (draft dated) as of March 31, 1996.
(iii) reviewed certain financial forecasts of ESIF and Summit Holding
Corporation (together with its wholly-owned subsidiary and the Fund's
administrator. Summit Consulting, Inc., hereinafter collectively referred
to as "Summit"), including those given pro forma effect to the Plan;
(iv) reviewed the report of the Fund's independent actuarial firm,
dated March 31, 1996, analyzing ESIF's liability for unpaid losses and
allocated and unallocated loss adjustment expenses as of March 31, 1996
(the "Actuarial Report");
(v) discussed with certain officers of Summit the business and
operations of Summit and the terms of the Management Agreement, and toured
the facilities of Summit at 2310 A-Z Park Road;
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(vi) discussed with certain trustees of ESIF and its outside corporate
and Florida regulatory counsel, independent actuaries and independent
auditors, as well as certain officers of Summit, the Plan, the business,
financial condition and prospects of ESIF and Summit, and other matters we
believe relevant to our inquiry;
(vii) reviewed financial and market data for selected publicly-traded
workers' compensation insurance companies and compared NEWCO's pro forma
financial data to such companies as if the Fund had been properly
capitalized and operated on a stand-alone basis;
(viii) reviewed the financial terms of recent sales of selected
workers' compensation insurance companies; and
(ix) performed such other studies, analyses, inquiries and
investigations as we deemed appropriate.
In arriving at our Opinion, we have relied upon, without independent
verification, the accuracy and completeness of the financial and other
information provided to us by ESIF and Summit and their representatives. We have
neither made nor obtained any independent evaluation or appraisal of the Fund's
properties and facilities or any of the Fund's assets or liabilities, and we
have not had an additional independent actuarial firm examine or review the
Actuarial Report. We have assumed that the financial forecasts for ESIF and
Summit prepared by management have been reasonably prepared and are based on the
best currently available estimates and business judgements of management at the
time of preparation. We have also assumed that there have been no material
changes in the Fund's or Summit's financial position, business or prospects
since March 31, 1996. We have also assumed for purposes of our opinion that
there will have been no assessment imposed upon the Eligible Policyholders prior
to the Effective Date. In addition, we have assumed that the final forms of all
materials will not differ in any material respect from the drafts of such
materials reviewed by us as of the date of this letter. Our Opinion is further
based upon our analyses of the foregoing and upon our assessment as of the date
of this letter of general economic, financial and market conditions.
We express no opinion as to the IPO price, or the price at which the NEWCO
Common Stock will trade. The IPO price and the subsequent market prices of the
NEWCO Common Stock will be a function of, among other things, the market
conditions and outlook for the Fund. In delivering the Opinion, we have made the
assumption, which we believe to be reasonable, that (i) the members of NEWCO's
pricing committee will act in compliance with their fiduciary duties, and (ii)
the underwriters of the IPO will follow pricing practices which are consistent
with customary practices for comparable initial public offerings. You have not
asked for our opinion and we have not expressed any opinion as to (i) which of
the Fund's policyholders are to be included among the Eligible Policyholders,
and (ii) the fairness of the consideration to be paid to any individual Eligible
Policyholder or to any class of Eligible Policyholders in connection with the
Plan.
Based upon the foregoing and in reliance thereon, it is our Opinion as of
the date hereof that the Consideration to be received by the Eligible
Policyholders pursuant to the Plan is fair, from a financial point of view, to
the Eligible Policyholders.
Very truly yours,
THE CHICAGO CORPORATION
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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> 209
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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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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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.
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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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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).
10
<PAGE> 218
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.
11
<PAGE> 219
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
12
<PAGE> 220
EXHIBIT G
INSTRUCTIONS FOR COMPLETING THE
TAXPAYER IDENTIFICATION CARD
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
SUBSTITUTE FORM W-9
PAYER'S NAME: SUMMIT HOLDING SOUTHEAST, INC. ("SUMMIT")
- --------------------------------------------------------------------------------------------------------
SUBSTITUTE PART I -- PLEASE PROVIDE YOUR TIN PART III -- Social Security Number
FORM W-9 IN THE BOX AT RIGHT AND CERTIFY BY or
DEPARTMENT OF THE TREASURY SIGNING AND DATING BELOW. Employer Identification Number
INTERNAL REVENUE SERVICE
---------------------------------
(If awaiting TIN write "Applied
For")
- --------------------------------------------------------------------------------------------------------
PAYER'S REQUEST FOR TAXPAYER PART II -- For Payees exempt from backup withholding, see the
IDENTIFICATION NUMBER (TIN) Certification Instructions below.
- --------------------------------------------------------------------------------------------------------
CERTIFICATION. Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a
number to be issued to me);
(2) I am not subject to backup withholding either because I have not been notified by the Internal
Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report
all interest or dividends, or the IRS has notified me that I am no longer subject to backup
withholding; and
(3) The information provided on this form is true, correct and complete.
CERTIFICATION INSTRUCTIONS. You must cross out item (2) above if you have been notified by the IRS
that you are subject to backup withholding because of under reporting interest or dividends on your tax
return. However, if after being notified by the IRS that you are subject to backup withholding, you
received another notification from the IRS that you are no longer subject to backup withholding, do not
cross out item (2).
Signature ________________________________________________ Date __________________________ ,
1997
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN BACKUP WITHHOLDING OF 31%
OF ANY CASH PAYMENT MADE TO YOU.
- --------------------------------------------------------------------------------------------------------
</TABLE>
SUBSTITUTE FORM W-9; BACK-UP WITHHOLDING TAX. 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> 221
REVOCABLE PROXY APPENDIX
EMPLOYERS SELF INSURERS FUND
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES FOR
A SPECIAL MEETING OF POLICYHOLDERS.
The undersigned hereby appoints Greg C. Branch and Russell L. Wall, and each
of them, proxies, with full power of substitution, to vote for and in the name
of the undersigned at a Special Meeting of Policyholders of Employers Self
Insurers Fund ("ESIF"), to be held at ESIF's headquarters, 2310 A-Z Park Road,
Lakeland, Florida on , February , 1997 at 10:00 a.m., local time, and
at any and all adjournments thereof, as indicated below.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL.
Approval and adoption of the Amended Plan of Conversion and Recapitalization
(the "Plan") and the transactions contemplated thereby pursuant to which ESIF
will, pursuant to the laws of the State of Florida, convert contemporaneously
from a group self-insurance fund to an assessable mutual insurance company to a
stock insurance corporation with the name Bridgefield Employers Insurance
Company ("Bridgefield"), and Summit Holding Southeast, Inc. (the "Holding
Company"), a Florida corporation formed by ESIF, will acquire all of the capital
stock of the converted stock insurance company in return for the issuance of
shares of the Holding Company's Series A Preferred Stock to eligible members of
ESIF and subscription rights to purchase shares of the Holding Company's Common
Stock to eligible policyholders of ESIF and certain other persons. The approval
of the Plan by the policyholders will constitute approval and adoption of the
Amended and Restated Articles of Incorporation of Bridgefield, which, among
other things, change the name of ESIF to Bridgefield Employers Insurance Company
and authorize the issuance of Common Stock, and the Bylaws of Bridgefield, which
contain provisions appropriate for a stock insurance company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY CARD IN THE ENCLOSED PREPAID
ENVELOPE.
(Continued, and to be signed and dated, on the reverse side)
<PAGE> 222
(Continued from other side)
PROXY-SOLICITED BY THE BOARD OF TRUSTEES
THIS PROXY CARD WILL BE VOTED AS DIRECTED. IF NO INSTRUCTIONS ARE SPECIFIED,
THIS PROXY CARD WILL BE VOTED IN THE DISCRETION OF THE PROXIES 'FOR' THE
PROPOSAL.
If the undersigned elects to withdraw this proxy card on or before the time
of the Special Meeting or any adjournments thereof and notifies the Secretary of
ESIF at or prior to the Special Meeting of the decision of the undersigned to
withdraw this proxy card, then the power of said proxies shall be deemed
terminated and of no further force and effect. If the undersigned withdraws this
proxy card in the manner described above and prior to the Special Meeting does
not submit a duly executed and subsequently dated proxy card to ESIF, the
undersigned may vote in person at the Special Meeting.
<PAGE> 223
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 February , 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 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> 224
[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> 225
PROSPECTUS SUMMARY
Pursuant to the Plan of Conversion, and upon the approval of the Conversion
by the members of ESIF at a Special Meeting of Policyholders to be held on
February , 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 September 30, 1996, in the
aggregate, the Company's insurance products and administrative services are
provided to approximately 15,500 employers representing approximately $219.0
million in premiums, including approximately $102.0 million in premiums
attributable to the Funds and $117.0 million in premiums attributable to the
Insurance Subsidiaries. See "BUSINESS."
The Company's approach to managed care workers' compensation is to select
responsible employers for coverage, assist such employers in creating a safe
work place and proactively manage claims, thereby returning employees to work
promptly and minimizing losses. Employers' safety programs are monitored by the
Company's staff of approximately 25 loss control field representatives who visit
an employer's work place on at least an annual basis. Reported claims are
proactively managed by the Company so that employees receive prompt care by
healthcare professionals which are part of the Company's provider network. The
Company's claims management professionals direct care through the provider
network, monitor employee treatment and progress toward returning to work and
perform utilization and peer review to control costs. The Company's approach to
managed care workers' compensation has produced an average net ultimate loss
ratio for ESIF during the three fiscal years ended March 31, 1996 of 69.8%,
which is better than the national average of 75.0% during the period 1993
through 1995, based on information published by A.M. Best Company ("A.M. BEST").
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 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> 226
(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 of $11.00 per share (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> 227
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"), except that Summit may, in its discretion, permit any purchaser in the
Offerings to purchase a number of shares in the Offerings that exceeds such
limit, subject to each such purchaser obtaining the prior 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> 228
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 six-month period ended September 30, 1995
reflect the Acquisition and the Conversion as if they had been completed as of
April 1, 1995. The pro forma Statement of Income data for the six-month period
ended September 30, 1996 reflect the Conversion as if it had occurred on April
1, 1996. The pro forma Balance Sheet data at September 30, 1996 reflect the
Conversion as if it had been completed as of September 30, 1996. This
information should be read in conjunction with the pro forma consolidated
financial statements and notes thereto appearing elsewhere in this Prospectus.
See "SELECTED FINANCIAL DATA."
<TABLE>
<CAPTION>
YEAR SIX MONTHS ENDED
ENDED SEPTEMBER 30,
MARCH 31, ---------------------
1996 1995 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Statement of Income Data:
Total revenue............................................... $ 172,299 $ 92,789 $ 74,531
Losses and loss adjustment expenses......................... 94,844 42,365 32,135
Other underwriting, general and administrative expenses..... 63,008 34,034 29,848
Total losses and operating expenses......................... 157,852 76,399 61,983
Interest expense............................................ 3,978 2,029 1,831
Amortization and depreciation............................... 5,340 2,698 2,479
Net income before taxes..................................... 5,129 11,663 8,238
Net income.................................................. 3,645 7,791 5,037
Preferred dividends......................................... 656 328 328
Net income available to common shareholders................. $ 2,989 $ 7,463 $ 4,709
========= ========= =========
Net income per common share................................. $ 0.60 $ 1.49 $ 0.94
========= ========= =========
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% 67.1% 65.5%
Expense ratio(3)......................................... 34.1% 34.2% 33.0%
Combined ratio(4)........................................ 116.6% 101.3% 98.5%
Administrative Subsidiaries:
EBITDA(5)................................................ $ 11,804 $ 7,377 $ 3,577
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------
(IN THOUSANDS)
<S> <C>
Balance Sheet Data:
Cash and invested assets.............................................. $263,829
Total assets.......................................................... 552,310
Loss and loss adjustment expenses..................................... 378,196
Debt.................................................................. 36,500
Total shareholders' equity............................................ 74,993
</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.
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<PAGE> 229
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 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.
The summary financial data provided as of and for the fiscal years ended March
31, 1992 and 1993 and the six months ended September 30, 1995 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>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1995 1996
----------- ----------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Total revenue............. $ 143,750 $ 192,067 $158,951 $140,815 $140,328 $ 71,752 $ 73,048
Losses and loss adjustment
expenses................ 103,657 149,177 108,411 69,116 94,844 42,365 32,135
Other underwriting,
general and
administrative
expenses................ 32,787 40,145 37,121 41,546 43,657 21,623 30,532
Interest expense.......... -- -- -- -- 847 -- 1,831
Amortization and
depreciation............ -- -- -- -- 1,103 -- 2,499
Income (loss) from
continuing operations
before income taxes..... 7,306 2,745 13,419 30,153 (123) 7,764 6,051
Loss from discontinued
operations.............. -- -- -- -- (197) -- (890)
Net income................ $ 6,844 $ 2,953 $ 8,885 $ 19,163 $ 185 $ 5,374 $ 2,386
======== ======== ======== ======== ======== ======== ========
Other Data(1):
Net loss ratio(2)......... 78.5% 82.3% 73.0% 53.8% 82.5% 67.1% 65.5%
Expense ratio(3).......... 24.8% 22.1% 25.0% 32.3% 34.1% 34.2% 33.0%
Combined ratio(4)......... 103.3% 104.4% 98.0% 86.1% 116.6% 101.3% 98.5%
</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
Total assets.............. 307,345 373,069 354,546 425,206 492,790 456,012 502,310
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
</TABLE>
- ---------------
(1) Ratio 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.
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<PAGE> 230
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> 231
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 September 30, 1996 included an asset
of approximately $21.1 million representing SDTF recoveries that the Company
estimated at that time it would be entitled to receive, based on claims
identified as subject to SDTF recovery and considering the Company's recovery
experience. The SDTF's assessment formula has historically yielded sufficient
revenues for annual reimbursement payments and for costs associated with
administering the SDTF; however, the SDTF has not actuarially funded its claims
liability and no reserves currently exist. A study commissioned by the State of
Florida estimated the total dollar liability of the SDTF for all future payments
required on accidents occurring on or before June 30, 1995 to be approximately
$4.7 billion on an undiscounted basis. There is no assurance that the SDTF will
have funds available in the future for the payment of claimed recoveries. Under
Florida sunset laws, the SDTF is currently scheduled for review by the Florida
legislature in the year 2000. The Florida legislature may, however, review the
SDTF earlier, and no assurance can be made with regard to the legislature's
possible actions. 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
9
<PAGE> 232
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.
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. During the fiscal years ended March 31, 1994,
1995 and 1996 and the six months ended September 30, 1996, the Company accrued
for retrospective refunds in the amount of $6.4 million, $9.2 million, $10.6
million and $9.9 million, respectively, and payments in excess of accruals were
$0.0, $0.0, $0.0 and $0.8 million, respectively. Retrospective rated policies
accounted for 33%, 32%, 30% and 32%, respectively, of total premiums during the
fiscal years ended March 31, 1994, 1995 and 1996 and the six months ended
September 30, 1996. To the extent that reserves prove to be inadequate in the
future, the Insurance Subsidiaries would have to increase such reserves and
incur a charge to earnings in the period such reserves are increased, which
could cause fluctuations in quarterly operating results and which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RENEWAL RISKS; QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The members of each of the Funds, and most of the policyholders of
Bridgefield, are eligible to renew their memberships or policies each year on a
common anniversary date. With respect to Bridgefield, this anniversary date each
year is April 1. If a large number of members of any Fund, or a large number of
Bridgefield's policyholders, were to decline renewal in any given year, the
Company's results of operations could be materially adversely affected in the
renewal quarter and subsequent quarters. Results of operations may also
fluctuate as a result of a variety of other factors, including, without
limitation, changes in pricing policies by the Company or its competitors, the
results of actuarial analysis of loss development, demand for the services of
the Administrative Subsidiaries, the introduction of new services and service
enhancements by
10
<PAGE> 233
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 September 30, 1996 was approximately $36.5 million. The
interest rate for such debt is prime plus 1% for "Base Rate" portions. Scheduled
quarterly payments of the term loan began on September 30, 1996 and extend
through June 30, 2002, with principal payments totaling approximately $1.6
million, $3.8 million, $4.6 million, $9.0 million, $10.0 million and $4.0
million due in calendar years 1997, 1998, 1999, 2000, 2001 and 2002,
respectively. Accrued interest is due with each principal payment. The
commitment under the revolving 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. 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. From time to time, the
Company may be required to increase the capital surplus of the Insurance
Subsidiaries to remain in compliance with state regulatory requirements. If the
Company is unable to generate sufficient capital, either internally or from
outside sources, it could be required to reduce its growth. There can be no
assurance that capital will continue to be available when needed or, if
available, will be on terms acceptable to the Company. See "USE OF PROCEEDS" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
RELIANCE ON INDEPENDENT INSURANCE AGENCIES
The Company markets its managed care workers' compensation insurance
products and services through independent insurance agencies. See
"BUSINESS -- Products and Services." As of September 30, 1996, ESIF's top ten
independent agencies accounted for approximately 20% of ESIF's direct in-force
premiums, with the top independent insurance agency accounting for approximately
4%. These agencies offer and sell competitors' products, as well as the
Company's products. As a result, the Company's business depends in part
11
<PAGE> 234
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
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
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<PAGE> 235
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 238,000 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
companies but which are unrelated to the operating performance of such
companies. See "-- Renewal Risks; Quarterly Fluctuations in Operating Results."
OBSTACLES TO CHANGES IN CONTROL; CERTAIN ANTI-TAKEOVER EFFECTS
After the consummation of the Conversion, Summit will be the holding
company of Bridgefield, a Florida stock insurance company. The Florida Insurance
Code will prohibit any person, individually or in conjunction
13
<PAGE> 236
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 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.
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
14
<PAGE> 237
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."
15
<PAGE> 238
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
16
<PAGE> 239
direct wholly owned subsidiary of Summit. Also pursuant to the Conversion, the
Company's corporate 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.
17
<PAGE> 240
Should Summit consider paying dividends on the Common Stock in the future,
the source of funds for payment of such dividends would be dividends from the
Insurance Subsidiaries and the Administrative Subsidiaries to Summit, dependent
on such subsidiaries' earnings. Summit currently expects to cause the Insurance
Subsidiaries to retain all of their earnings to provide capital for their
operations and business. In addition, under the Florida Insurance Code and the
Order, the Insurance Subsidiaries may not be permitted to pay cash dividends to
Summit generally in excess of 10% of the greater of surplus or net income,
without prior approval 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."
18
<PAGE> 241
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. The Conversion is contingent upon the receipt by Summit of net
proceeds of approximately $50.0 million which is required to satisfy applicable
provisions of the Florida Insurance Code.
CAPITALIZATION
The following table presents the consolidated capitalization at September
30, 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>
SEPTEMBER 30, 1996
-------------------------------------------------------
PRO FORMA ADJUSTMENTS
------------------------
ESIF CONVERSION OFFERINGS
HISTORICAL (A) (B) AS ADJUSTED
---------- ---------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Long term debt................................... $ 36,500 $ 36,500
Equity:
Preferred stock, $10.00 par value, 5,000,000
shares authorized; no shares issued and
outstanding, 1,639,836 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.............................. 24,045 (16,398) 7,647
Unrealized appreciation on available for sale
securities.................................. 948 948
------- ------- ------ --------
Total equity................................ 24,993 -- 50,000 74,993
------- ------- ------ --------
Total capitalization........................ $ 61,493 -- 50,000 $ 111,493
======= ======= ====== ========
</TABLE>
- ---------------
(A) Adjustment relates to 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.
(B) Adjustment relates to the assumed 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).
(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> 242
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.
The selected financial data provided as of and for the fiscal years ended March
31, 1992 and 1993 and the six months ended September 30, 1995 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.............. 121 205 90 216
-------- -------- -------- -------- -------- -------- --------
Total revenue............. 143,750 192,067 158,951 140,815 140,328 71,752 73,048
Losses and loss adjustment
expenses................ 103,657 149,177 108,411 69,116 94,844 42,365 32,135
Other underwriting,
general and
administrative
expenses................ 32,787 40,145 37,121 41,546 43,657 21,623 30,532
Interest expense.......... -- -- -- -- 847 -- 1,831
Amortization and
depreciation............ 1,103 2,499
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes..... 7,306 2,745 13,419 30,153 (123) 7,764 6,051
Loss from discontinued
operations.............. -- -- -- -- (197) -- (890)
Net income................ $ 6,844 $ 2,953 $ 8,885 $ 19,163 $ 185 $ 5,374 $ 2,386
======== ======== ======== ======== ======== ======== ========
Other Data:(2)
Net loss ratio(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%
</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
Total assets.............. 307,345 373,069 354,546 425,206 492,790 456,012 502,310
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
</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> 243
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 (967) (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 0 0 0
Shareholders' equity................................. 7,439 12,168 20,570 25,645
</TABLE>
- ---------------
(1) SHC commenced operations on January 1, 1992; therefore, historical data for
1991 is not applicable.
(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization.
21
<PAGE> 244
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 September 30, 1996
The unaudited pro forma consolidated balance sheet as of September 30, 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 September 30, 1996.
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 Six Months Ended September 30, 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 Six Months Ended September 30, 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> 245
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 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..................................... $ 206,218 $ -- $ 50,000(D) $ 256,218
Cash and cash equivalents....................... 7,611 -- -- 7,611
Premiums receivable............................. 67,179 -- -- 67,179
Accounts receivable............................. 3,102 -- -- 3,102
Reinsurance recoverable......................... 103,861 -- -- 103,861
Recoverable from Florida Special Disability
Trust Fund.................................... 21,138 -- -- 21,138
Excess of cost over net assets of business
acquired...................................... 47,925 -- -- 47,925
Deferred income taxes........................... 17,446 -- -- 17,446
Other assets.................................... 27,830 -- -- 27,830
-------- -------- ------- --------
Total assets.......................... $ 502,310 $ -- $ 50,000 $ 552,310
======== ======== ======= ========
LIABILITIES AND SHAREHOLDERS EQUITY
Liabilities:
Loss and loss adjustment expenses............. $ 378,196 -- -- $ 378,196
Debt.......................................... 36,500 -- -- 36,500
Unallocated policyholder remittances.......... 46,000 -- -- 46,000
Accounts payable.............................. 10,532 -- -- 10,532
Other liabilities............................. 6,089 -- -- 6,089
-------- -------- ------- --------
Total liabilities..................... 477,317 -- -- 477,317
Equity:
Preferred stock............................... -- 16,399(C) -- 16,399
Common stock.................................. -- -- 50(D) 50
Additional paid-in capital.................... -- -- 49,950(D) 49,950
Retained earnings............................. 24,045 (16,399)(C) -- 7,646
Unrealized appreciation on available for sale
securities................................. 948 -- -- 948
-------- -------- ------- --------
Total equity.......................... 24,993 -- 50,000 --
-------- -------- ------- --------
Total liabilities and shareholders
equity.............................. $ 502,310 $ -- $ 50,000 $ 552,310
======== ======== ======= ========
</TABLE>
See notes to pro forma condensed consolidated balance sheet.
23
<PAGE> 246
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(A) Assumes that the Conversion of ESIF from a group self-insurance fund to a
stock insurance company occurred as of September 30, 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 is received
as of September 30, 1996.
(C) Adjustment relates to 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.
(D) Adjustment relates to the assumed 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).
24
<PAGE> 247
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1996(A)
<TABLE>
<CAPTION>
(B) (C)
EMPLOYERS SELF SUMMIT HOLDING PRO FORMA
INSURERS FUND CORPORATION ADJUSTMENTS PRO FORMA
-------------- -------------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned............................. $114,893 $ -- $ -- $ 114,893
Net investment income....................... 13,210 1,026 3,125(D) 15,499
(1,855)(E)
(7)(F)
Realized investment gains................... 4,354 -- -- 4,354
Administrative fees......................... 7,665 49,040 (19,358)(G) 37,347
Other income................................ 206 921 (921)(F) 206
-------- ------- -------- --------
Total revenue....................... 140,328 50,987 (19,016) 172,299
-------- ------- -------- --------
Expenses:
Losses and loss adjustment expenses......... 94,844 -- -- 94,844
Other underwriting, general, and
administrative expenses.................. 43,657 40,489 (19,358)(G) 63,008
(1,780)(F)
Interest expense............................ 847 30 3,101(H) 3,978
Amortization and depreciation............... 1,103 4,033 341(I) 5,340
(137)(F)
-------- ------- -------- --------
Total expenses...................... 140,451 44,552 (17,833) 167,170
-------- ------- -------- --------
Income from continuing operations before
income taxes................................ (123) 6,435 (1,183) 5,129
Income taxes (benefit)........................ (505) 2,356 (367)(J) 1,484
-------- ------- -------- --------
Income from continuing operations............. $ 382 $ 4,079 $ (816) $ 3,645
======== ======= ======== ========
Income from continuing operations per common
share....................................... $ 0.60
========
Weighted average common shares outstanding.... 5,000,000
</TABLE>
See notes to pro forma condensed consolidated statement of income.
25
<PAGE> 248
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) Adjustment relates to investment earnings (at an assumed rate of 6.25%) on
$50.0 million in net proceeds (minimum amount expected to be received,
assuming the issuance of 5,000,000 common shares).
(E) 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%.
(F) 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.
(G) Adjustment relates to elimination of administrative fees paid by ESIF to
SHC.
(H) Adjustment relates to interest expense from the financed portion of the
Acquisition assuming scheduled interest rates ranging from 7% to 9.5%.
(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
---------------------------------
HISTORIC 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>
(J) Adjustment relates to the total income tax effect of adjustments (D)
through (I).
26
<PAGE> 249
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995(A)
<TABLE>
<CAPTION>
(D)
(C) SUMMIT
EMPLOYERS SELF HOLDING PRO FORMA
INSURERS FUND CORPORATION ADJUSTMENTS PRO FORMA
-------------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned............................ $ 63,145 $ -- $ -- $ 63,145
Net investment income...................... 7,598 494 1,563(E) 8,482
(1,173)(G)
Realized investment gains.................. 919 -- -- 919
Administrative fees........................ 32,558 (12,573)(F) 19,985
Other income............................... 90 529 (361)(J) 258
------- ------- -------- -------
Total revenue...................... 71,752 33,581 (12,544) 92,789
Expenses:
Losses and loss adjustment expenses........ 42,365 -- -- 42,365
Other underwriting, general and
administrative expenses................. 21,623 25,707 (12,573)(F) 34,034
(723)(J)
Interest expense........................... -- 16 2,013(I) 2,029
Amortization and depreciation.............. -- 2,529 216(H) 2,698
(47)(J)
------- ------- -------- -------
Total expenses..................... 63,988 28,252 (11,114) 81,126
------- ------- -------- -------
Income from continuing operations before
income taxes............................ 7,764 5,329 (1,430) 11,663
Income taxes............................... 2,390 1,962 (480)(K) 3,872
------- ------- -------- -------
Income from continuing operations............ $ 5,374 $ 3,367 $ (950) $ 7,791
======= ======= ======== =======
Income from continuing operations per common
share...................................... $ 1.49
=======
Weighted average common shares outstanding... 5,000,000
</TABLE>
See notes to pro forma condensed consolidated statement of income.
27
<PAGE> 250
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996(B)
<TABLE>
<CAPTION>
(C)
EMPLOYERS SELF PRO FORMA
INSURERS FUND ADJUSTMENTS PRO FORMA
-------------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenues:
Premiums earned....................................... $ 49,029 $ -- $ 49,029
Net investment income................................. 6,363 1,563(E) 7,846
(80)(J)
Realized investment gains............................. 8 -- 8
Administrative fees................................... 17,432 -- 17,432
Other income.......................................... 216 -- 216
------- ------ -------
Total revenue................................. 73,048 1,483 74,531
------- ------ -------
Expenses:
Losses and loss adjustment expenses................... 32,135 -- 32,135
Other underwriting, general, and administrative
expenses........................................... 30,532 (684)(J) 29,848
Interest expense...................................... 1,831 1,831
Amortization and depreciation......................... 2,499 (20)(J) 2,479
------- ------ -------
Total expenses................................ 66,997 (704) 66,293
------- ------ -------
Income from continuing operations before income
taxes.............................................. 6,051 2,187 8,238
Income taxes.......................................... 2,400 801(K) 3,201
------- ------ -------
Income from continuing operations....................... $ 3,651 $ 1,386 $ 5,037
======= ====== =======
Income from continuing operations per common share...... $ 0.94
=======
Weighted average common shares outstanding.............. 5,000,000
</TABLE>
See notes to pro forma condensed consolidated statement of income.
28
<PAGE> 251
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996
(A) Assumes the Acquisition and the Conversion occurred on April 1, 1995.
(B) Assumes the Conversion occurred on April 1, 1995.
(C) Includes historical information for ESIF and subsidiaries for the six
months ended September 30, 1995 and 1996, respectively, on a consolidated
basis.
(D) Includes SHC for the period April 1, 1995 through September 30, 1995.
(E) Adjustments relate to investment earnings (at an assumed of 6.25%) on $50.0
million in net proceeds (minimum amount expected to be received, assuming
the issuance of 5,000,000 common shares).
(F) Adjustment relates to elimination of fees paid by ESIF to SHC.
(G) Adjustment relates to the effect on investment income of foregone
investment earnings on $26.0 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%.
(H) Adjustment represents the net of the reversal of the amortization of SHC's
historical intangible assets and the amortization of the goodwill, customer
contracts, and developed software capitalized in the Acquisition.
Amortization periods assumed are as follows: goodwill -- 25 years; customer
contracts -- 10 years; and developed software -- 5 years. Such intangible
asset amortization is not tax deductible. The components of the
amortization adjustment are as follows:
<TABLE>
<CAPTION>
AMORTIZATION EXPENSE
---------------------------------
HISTORIC 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>
(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 relates to decrease in revenue and operating expenses
attributable to the disposition of Carolina Summit.
(K) Adjustment relates to the total income tax effect of adjustments (E)
through (J).
29
<PAGE> 252
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> 253
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 18
and 19 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.
The discussion below in "Results of Operations" is divided into three
segments: (i) a comparison of fiscal years ended March 31, 1994, 1995 and 1996
for ESIF, including SHC after the date of the Acquisition; (ii) a comparison of
the six-month periods ended September 30, 1995 and 1996 for ESIF on a
consolidated basis; and (iii) a comparison of fiscal years ended December 31,
1993, 1994 and 1995 for SHC.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 1994, 1995 AND 1996 FOR ESIF
REVENUE. Revenue was $159.0 million, $140.8 million and $140.3 million for
the fiscal years ended March 31, 1994, 1995 and 1996, respectively. Revenue
declined for the fiscal year ended March 31, 1995, primarily due to a $20.0
million decrease in premiums earned. Revenue declined by $0.5 million for the
fiscal year ended March 31, 1996, primarily due to a decrease in premiums earned
of $13.6 million, which was offset by the addition of $7.6 million in
administrative fees as a result of the Acquisition and an increase in realized
investment gains of $4.4 million. Set forth below is a discussion of the
composition of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Premiums earned................................................ $148,441 $128,489 $114,893
Net investment income.......................................... 10,510 12,205 13,210
Realized investment gains...................................... -- -- 4,354
Administrative fees............................................ -- -- 7,665
Other income................................................... -- 121 206
-------- -------- --------
Total revenue........................................ $158,951 $140,815 $140,328
======== ======== ========
</TABLE>
Premiums Earned. Premiums earned decreased by $20.0 million, or 13.4%, for
the year ended March 31, 1995, and decreased by $13.6 million, or 10.6%, for the
year ended March 31, 1996. These declines in premiums resulted in large part
from: (i) lost accounts due to the market's increasing preference for non-
assessable products; (ii) increased competition; (iii) the effects of increasing
participation in the premium credit programs; and (iv) a refinement in
estimation of accrued retrospective premiums which reduced reported premiums for
the fiscal year ended March 31, 1996 by approximately $9.3 million. In order to
more accurately estimate the accrued retrospective premium amounts, the
Company's estimation methodology was revised in 1996 such that individual member
premium and loss data was utilized in its calculation. Prior thereto, ESIF
estimated its accrued retrospective premiums using aggregate premium loss data.
31
<PAGE> 254
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 $108.4 million compared to $69.1 million for the fiscal year ended
March 31, 1995 and $94.8 million for the
32
<PAGE> 255
fiscal year ended March 31, 1996. Prior to the fiscal year ended March 31, 1995,
management had recorded certain reserves in excess of reserve levels required by
actuarial reports because the actuarial estimates fund years 1991 and earlier
had a history of increasing (or "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
increase (or "development") with the maturity of the fund years. These
development trends are reflected in the table below captioned "Development of
Actuarial Net Loss Ratios," which shows that the loss ratios for 1991 increased
with the passage of time, but the loss ratios for later years have increased
only slightly and, in some cases, decreased. This change based on development
trends, together with a reduction in premiums earned and a lower actuarial loss
ratio, resulted in a $39.3 million decrease in incurred losses for the fiscal
year ended March 31, 1995 as compared to fiscal year ended March 31, 1994. The
subsequent increase of $25.7 million in losses and LAE for the fiscal year ended
March 31, 1996 was primarily the result of revised actuarial estimates for prior
years. The loss ratio for the fiscal years ended March 31, 1994, 1995 and 1996
was 73.0%, 53.8% and 82.5%, respectively, or an average of 69.8%.
The following table shows loss and LAE ratios computed on an actuarial
basis which excludes the effects of adjustments for prior years. As a result,
these loss ratios may be more indicative of current underwriting results. The
actuarial loss and LAE ratios in the following table indicate a downward trend
for the fiscal years ended March 31, 1992 to 1996, which ESIF believes reflects
the impact of managed care and other cost containment programs.
DEVELOPMENT OF ACTUARIAL NET LOSS RATIOS(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------
1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Actuarial loss & loss adjustment expense ratios...... 66.8% 67.0% 59.8% 55.8% 59.8% 60.4%
One year later....................................... 67.1 64.8 56.2 53.8 58.7
Two years later...................................... 66.9 61.6 61.0 54.3
Three years later.................................... 70.3 64.2 60.7
Four years later..................................... 75.3 64.7
Five years later..................................... 76.8
</TABLE>
- ---------------
(1) Actuarial net loss ratios are from actuarial reports filed with the Florida
Department of Labor and Employment Security and the Florida DOI. Actuarial
net loss ratios are based on modified and discount manual premium.
Underwriting, General and Administrative Expenses. The increase in ESIF's
expenses from $37.1 million to $41.5 million in the fiscal year ended March 31,
1995 was primarily due to four factors: (i) higher administrative taxes; (ii)
higher SDTF assessments; (iii) the introduction and operation of state-wide
managed care programs; and (iv) the increase in commission expenses.
Underwriting, general and administrative expenses increased to $43.7 million
during the fiscal year ended March 31, 1996 primarily due to the Acquisition.
Interest Expense. For the fiscal years ended March 31, 1994 and 1995, ESIF
had no interest expense. In connection with the Acquisition, SHC borrowed $44.0
million from the Bank, and, as a result, interest expense on a consolidated
basis for the fiscal year ended March 31, 1996 was $0.8 million.
Amortization and Depreciation. For the fiscal years ended March 31, 1994
and 1995, ESIF had no amortization or depreciation expense. In connection with
the Acquisition, SHC recorded certain intangibles including software, noncompete
agreements, customer contracts and goodwill. For the fiscal year ended March 31,
1996, amortization of these intangible assets was $1.1 million. The expense
associated with amortization of these intangible assets is not deductible for
federal income tax purposes.
NET INCOME. Net income was $8.9 million, $19.2 million and $0.2 million
for the fiscal years ended March 31, 1994, 1995 and 1996, respectively. The
increase in net income of $10.3 million for the fiscal year ended March 31, 1995
resulted primarily from a reduction in ESIF's reserves partially offset by a
decrease in
33
<PAGE> 256
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.
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 $9.6 million for the six months ended September 30, 1996 as
compared to $6.1 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. SCI generated $17.4 million in administrative fees
through its contracts with administrative clients for the six months ended
September 30, 1996. Administrative fees represent 23.9% of total revenue for the
six-month period and are expected to provide additional future revenues through
SCI's contracts with clients in Florida, Louisiana and Kentucky.
LOSSES AND EXPENSES. ESIF's losses and expenses increased from $64.0
million for the six months ended September 30, 1995 to $67.0 million for the six
months ended September 30, 1996. Set forth below is a discussion of the expenses
for the period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Losses and loss adjustment expenses...................................... $42,365 $32,135
Underwriting, general and administrative expenses........................ 21,623 30,532
Interest expense......................................................... -- 1,831
Amortization and depreciation............................................ -- 2,499
------- -------
Total losses and expenses...................................... $63,988 $66,997
======= =======
</TABLE>
Losses and Loss Adjustment Expenses. Losses and LAE incurred for the six
months ended September 30, 1995 were $42.4 million compared to $32.1 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.
34
<PAGE> 257
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.
The adjusted expense ratio decreased slightly from 34.2% on September 30,
1995 to 32.6% on September 30, 1996. It should be noted that the Florida
Department of Labor administrative tax has decreased retrospectively from 3.15%
to 2.50%, effective July 1996. Furthermore, the ongoing expenses related to
managed care approvals should decrease as ESIF's managed care network continues
to service more of the existing policyholder base, thereby reducing delivery
costs.
Interest Expense. Interest expense increased $1.8 million for the six
months ended September 30, 1996 from zero for the six months ended September 30,
1995. Interest expense resulted from the $44.0 million of debt incurred by SHC
to fund the Acquisition.
Amortization and Depreciation. For the six months ended September 30,
1996, amortization and depreciation expense of $2.5 million was recorded
primarily in connection with intangible assets acquired in the Acquisition. The
expense associated with amortization of the intangible assets, which is expected
to be approximately $3.9 million per year, is not deductible for federal income
tax purposes.
NET INCOME. Income from continuing operations for the six months ended
September 30, 1996 was $3.7 million compared to $5.4 million for the six months
ended September 30, 1995. ESIF had $1.3 million of non-recurring charges in
September 1996 which included the disposition of discontinued operations and
conversion costs.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 FOR SHC
REVENUE. Revenue for the fiscal years ended December 31, 1993, 1994 and
1995 was $70.8 million, $73.8 million and $64.1 million, respectively. Gross
service fee (administrative fee) revenue received from ESIF and the Funds is
computed as a percentage of ESIF's and the Funds' premiums. Such revenue is
recognized by SHC in proportion to ESIF's and the Funds' recognition of premiums
earned. SHC is required to pay certain direct expenses that are a percentage of
the premiums earned by ESIF and the Funds. Such direct expenses principally
include agents' commissions, reinsurance premium costs, association fees and
administrative taxes. Subsequent to the Acquisition, direct expenses are
included in underwriting, general and administrative expenses in ESIF's
consolidated financial statements. The changes in revenue for each of the three
years are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross service fees................................. $ 70,814 $ 73,833 $ 64,090
Direct expenses.................................... (32,972) (31,639) (27,470)
Net service fees................................... 37,842 42,194 36,620
Investment and other income........................ 632 934 2,175
------- ------- -------
Total revenue............................ $ 38,474 $ 43,128 $ 38,795
======= ======= =======
</TABLE>
Net Service Fees. Net service fees increased from $37.8 million in 1993 to
$42.2 million in 1994 and decreased by $5.6 million to $36.6 million for the
fiscal year ended December 31, 1995. The decline in net service fees for this
period is due to a proportional decrease in gross service fees and direct
expenses during 1995, principally attributable to a decrease in premiums earned
by ESIF and the Funds. In 1994, SHC's net service fee revenue included a $3.3
million one-time reimbursement.
Investment and Other Income. Investment income for the fiscal 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 is expected to be
completed by December 31, 1996.
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<PAGE> 258
EXPENSES. Expenses for the fiscal years ended December 31, 1993, 1994 and
1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Compensation and employee benefits.................... $14,503 $15,425 $16,616
Other operating expenses.............................. 7,707 8,218 8,204
Interest expense...................................... 1,610 58 42
Depreciation and amortization......................... 4,891 4,872 5,112
------ ------ ------
Total expenses.............................. $28,711 $28,573 $29,974
====== ====== ======
</TABLE>
Compensation and Employee Benefits. Compensation and employee benefits
increased by $0.9 million to $15.4 million for the fiscal year ended December
31, 1994 compared to $14.5 million for 1993. The increase was principally
attributable to increased payroll costs, combined with increased group life and
health insurance costs. Compensation and employee benefits increased by $1.2
million to $16.6 million for the fiscal year ended December 31, 1995 compared to
$15.4 million for 1994, primarily as a result of increased payroll costs coupled
with the addition of employees resulting from the purchase of Meritec, effective
July 1995.
Interest Expense. Interest expense decreased by $1.6 million or 96.4% to
approximately $58,000 for the fiscal year ended December 31, 1994 compared to
$1.6 million for 1993. In 1993, interest expense included $1.5 million for the
buyout of the Capital Appreciation Rights agreement related to a revolving loan
agreement.
Amortization and Depreciation. Amortization of intangibles for the fiscal
years ended 1993, 1994 and 1995 was $4.1 million, $4.1 million and $4.3 million,
respectively. Intangible assets were originally established in connection with
the acquisition of SCI from Alexander and Alexander Services, Inc. ("A&A") on
January 1, 1992.
NET INCOME. Net income for the fiscal years ended 1993, 1994 and 1995 was
$5.9 million, $9.0 million and $5.6 million, respectively. The increase in net
income for 1994 as compared to 1993 of $3.1 million or 52.5% is due primarily to
a one-time reimbursement from one of the Funds, Louisiana Employers Safety
Association Self Insurers Fund, for $3.3 million. The decrease in net income for
1995 of $3.4 million, or 37.8%, is due primarily to lower administrative fee
income which is attributable to a decrease in Fund premiums.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its cash requirements and financed its
growth principally through cash flows generated from operations. The Insurance
Subsidiaries' primary sources of cash flows are premiums earned, investment
income and the proceeds from the sale or maturity of invested assets. The
Administrative Subsidiaries' primary source of cash flow is service fees
generated from ESIF and the Funds. The cash requirements of the Insurance
Subsidiaries are primarily for the payment of claims, commissions, and
reinsurance premiums and management fees to SCI and the purchase of investment
securities. The cash requirements of the Administrative Subsidiaries are
primarily for the payment of salaries, employees benefits, debt obligations and
other operating expenses. 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 September 30,
1996, consisted of a term loan in the amount of $34.5 million and $2.0 million
which was outstanding under the revolving line of credit. Scheduled quarterly
payments for the term loan began on September 30, 1996 and extend through June
30, 2002, with principal payments totaling approximately $1.6 million, $3.8
million, $4.6 million, $9.0 million, $10.0 million and $4.0 million due in
calendar years 1997, 1998, 1999, 2000, 2001 and 2002, respectively.
The Company 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. The annual principal
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<PAGE> 259
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 September 30, 1996
reflect $20.1 million and $21.1 million, respectively, of recoverables from the
SDTF. The Company received $5.6 million and $4.3 million in actual recoveries
from the SDTF for the fiscal year ended March 31, 1996 and the six months ended
September 30, 1996, respectively. The SDTF has not failed to make payments on
accepted claims and the Company has no reason to believe that the SDTF will fail
to meet its obligations to pay accepted claims in the future, although there can
be no assurance. 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 $46.9 million at March 31, 1995, March 31, 1996
and September 30, 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 September 30, 1996, respectively.
ESIF's statutory basis surplus as a self-insurance fund was approximately $20.5
million at September 30, 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 $33.3 million at September 30, 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
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<PAGE> 260
that may be paid by the Insurance Subsidiaries to Summit may be limited, which
may in turn limit the amount of cash available to Summit for servicing its debt
and other purposes.
LOSSES AND LOSS ADJUSTMENT EXPENSE
Beginning in 1994, workers' compensation insurers in Florida were permitted
to settle both the medical and indemnity portions of a claim; previously, an
insurer was not permitted to limit its exposure for lost wage expenses by
settling with the injured employee for a lump sum. ESIF undertook a claims
settlement initiative in 1994, which reduced outstanding claims amounts and
favorably impacted ESIF's losses and LAE for the fiscal year ended March 31,
1994 and subsequent periods. ESIF actively continues to try to settle all
aspects of each claim.
The Company's consolidated financial statements include estimated reserves
for unpaid losses and LAE. The reserves for these expenses are estimated using
individual case-basis valuations and statistical analyses and represent
estimates of the ultimate gross and net costs of all unpaid losses and LAE
incurred through the Balance Sheet date of each period presented. Those
estimates are subject to the effects of trends in claim severity and frequency.
The Company's estimates are continually reviewed and, as experience develops and
new information becomes known, the reserves are adjusted as necessary.
Adjustments, including increases and decreases, are included in current
operations net of reinsurance, and in the estimate of reserves for insured
events of prior periods.
Since its inception and continuing through January 1989, ESIF claims were
adjusted and managed by Adjustco, Inc. ("ADJUSTCO"), an independent claims
adjusting company, under the supervision of SCI. Adjustco was responsible for
establishing, monitoring and updating case-based loss reserves used to set loss
reserves for ESIF's financial statements. In January 1989, SCI discontinued the
contract with Adjustco and performed such claims adjustment functions through
its wholly owned subsidiary, Summit Claims Management, Inc. ("SCM"). In
subsequent periods, such Adjustco loss reserves have proved deficient resulting
in significant reserve increases for losses incurred prior to 1989. Adverse loss
reserve development has significantly decreased for the years since SCM
performed the claims management functions.
The following table shows changes in historical loss reserves for ESIF for
the fiscal year ended March 31, 1987 and subsequent years. The top line of the
table shows the reserves for estimated unpaid losses and LAE recorded at each
fiscal year end. Each amount in the top line represents the estimated amount of
losses and LAE for the losses occurring in that year as well as future payments
on claims occurring in prior years. The upper (cumulative amount paid) portion
of the table presents the amounts paid as of subsequent years on those losses
for which reserves were carried as of each specific year. The lower (reserves
re-estimated) portion shows the reestimated amounts of the previously recorded
reserves based on experience as of the end of each succeeding year. The estimate
changes as more information becomes known about the actual losses for which the
initial reserves were carried. An adjustment to the carrying value of unpaid
losses for a prior year will also be reflected in the adjustments for each
subsequent year. For example, an adjustment made in the fiscal year ended March
31, 1995 for loss reserves in the fiscal year ended March 31, 1992 will be
reflected in the re-estimated ultimate net loss for each of the fiscal years
ended March 31, 1992 through March 31, 1995. The cumulative redundancy
(deficiency) line represents the cumulative change in estimates since the
initial reserve was established. It is equal to the difference between the
initial reserve and the latest reserves re-estimated amount.
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<PAGE> 261
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
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Reserves for losses
and LAE at end of
period........... $ 37,297 $ 57,300 $124,425 $168,608 $207,353 $164,399 $251,748 $260,531 $238,985 $250,363
Cumulative paid as
of
One year later... $ 23,190 $ 40,028 $ 57,482 $ 74,481 $ 88,815 $ 71,364 $ 73,839 $ 71,915 $ 64,882
Two years
later.......... 42,031 70,077 100,883 133,064 138,546 118,326 122,411 114,097
Three years
later.......... 54,469 92,466 135,490 160,896 170,259 149,424 149,175
Four years
later.......... 63,986 110,856 146,825 176,483 190,179 165,628
Five years
later.......... 70,433 119,024 151,683 185,759 199,556
Six years
later.......... 72,985 123,810 154,668 189,948
Seven years
later.......... 75,390 126,776 158,802
Eight years
later.......... 76,457 130,904
Nine years
later.......... 78,730
Reserves re-estimated as of end of year
One year later... $ 47,627 $101,405 $140,492 $183,938 $200,237 $228,556 $231,759 $234,166 $247,785
Two years
later.......... 68,549 112,475 155,440 178,390 235,515 209,306 232,455 243,431
Three years
later.......... 70,736 126,109 161,012 214,234 229,571 220,163 241,769
Four years
later.......... 76,275 131,975 181,370 209,498 236,861 230,088
Five years
later.......... 78,412 148,033 178,170 208,800 246,100
Six years
later.......... 86,978 145,749 177,402 215,588
Seven years
later.......... 85,771 143,717 184,346
Eight years
later.......... 83,725 148,595
Nine years
later.......... 87,695
Cumulative redundancy (deficiency)
Dollars.......... $(50,398) $(91,295) $(59,921) $(46,980) $(38,747) $(65,689) $ 9,979 $ 17,100 $ (8,800)
Percentage....... -135.13% -159.33% -48.16% -27.86% -18.69% -39.96% 3.96% 6.56% -3.68%
Net reserves for losses and LAE at end of year................................................. 260,531 238,985 250,363
Add: Impact of reinsurance for FASB 113........................................................ 121,463 108,440 107,092
Impact of implied Special Disability Trust Fund recoverables.............................. 15,531 24,836 31,376
Unallocated LAE assumed through the Acquisition........................................... -- -- 3,398
Less: Discount on reserves..................................................................... (4,730) (4,875) (4,668)
Other.......................................................................................... (11) 5 71
-------- -------- --------
Gross reserves for losses and LAE at end of year (GAAP basis).................................. $392,784 $367,391 $387,632
======== ======== ========
</TABLE>
The table above evidences a generally favorable trend in the cumulative
redundancy (deficiency) from the year ended March 31, 1988 through the year
ended March 31, 1995, with a significant exception to this generally favorable
trend occurring only in the year ended March 31, 1992. The Company attributes
these generally favorable results primarily to changes in regulations over the
years that have curbed benefit costs and facilitated earlier closing of cases in
some circumstances. The improved results also are due in part to improved
information on which to base estimates of reserves for losses and LAE and
subsequent re-estimates of reserves in the years since 1992. These factors
contributed to redundancies in 1993 and 1994 and a small deficiency in 1995.
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<PAGE> 262
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 ended September 30, 1996:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, SIX MONTHS ENDED
------------------------------ SEPTEMBER 30,
1994 1995 1996 1996
-------- -------- -------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net reserves for losses and LAE at
beginning of year..................... $251,751 $260,520 $238,990 $250,434
Add provision for claims occurring in:
The current year...................... 118,889 94,520 84,058 35,663
Prior years........................... (10,478) (25,404) 10,786 (3,528)
-------- -------- -------- --------
Incurred losses during the current
year.................................. 108,411 69,116 94,844 32,135
Deduct payments for claims occurring in:
The current year...................... 17,704 16,857 15,432 3,565
Prior years........................... 81,938 73,789 67,968 30,665
-------- -------- -------- --------
Claim payments during the current
year.................................. 99,642 90,646 83,400 34,230
Net reserves for losses and LAE at end
of year............................... 260,520 238,990 250,434 248,339
Add: Impact of reinsurance for FASB
113................................... 121,463 108,440 107,092 102,966
Impact of implied Special
Disability Trust Fund
recoverables...................... 15,531 24,836 31,376 28,832
Unallocated LAE assumed through
the Acquisition of Summit......... -- -- 3,398 2,864
Less: Discount on reserves.............. (4,730) (4,875) (4,668) (4,235)
-------- -------- -------- --------
Gross reserves for losses and LAE at end
of year (GAAP basis).................. $392,784 $367,391 $387,632 $378,196
======== ======== ======== ========
</TABLE>
The September 30, 1996 reserves of $378.2 million for losses and LAE as
determined under GAAP were $127.5 million more than the reserves of $250.7
million as recorded on the statutory financial statements provided to state
regulatory authorities. The difference is an increase of $102.4 million for
reserves recoverable from third-party reinsurance carriers, a decrease for
discounting of the indemnity portion of permanent disability claims of $4.2
million, and an increase of $28.8 million for the impact of implied disability
trust fund recoverables that reduce reserves for statutory reporting. An asset
of $21.1 million has been recorded as of September 30, 1996 based on ESIF's
historical collection experience and the amount of claims identified as subject
to SDTF recovery. Furthermore, reinsurance recoverables included in the Balance
Sheet are increased by $8.4 million as a result of calculating such recoverables
using loss and LAE reserves gross of SDTF.
The Company has recorded $17.8 million in accrued recoverables from SDTF as
of September 30, 1995 and $21.1 million for the six months ended September 30,
1996. The Company received $2.2 million for the six months ended September 30,
1995 and $4.3 million for the six months ended September 30, 1996. 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 three 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 repaid. 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
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<PAGE> 263
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.
41
<PAGE> 264
BUSINESS
OVERVIEW
The Company provides a variety of managed care workers' compensation
products and services to employers and self-insured employer groups primarily in
Florida, as well as in Louisiana and Kentucky. Through the Company's
Administrative Subsidiaries, the Company provides administrative services for
the Funds, for the Insurance Subsidiaries and for certain municipalities. These
administrative services include most aspects of daily operations of the Funds
and the Insurance Subsidiaries, including sales and marketing, underwriting,
claims administration, loss control and policy administration. These services
are provided for a fee, with the Company generally receiving a percentage of
premiums. The Administrative Subsidiaries do not assume any underwriting risk of
the Funds, entities formed to provide workers' compensation coverage for self-
insured employer groups on a pooled basis.
The Insurance Subsidiaries, which include Bridgefield and Bridgefield
Casualty, underwrite and assume the underwriting risk with respect to workers'
compensation insurance policies for Florida employers of all sizes, primarily in
the construction, manufacturing, wholesale and retail, and service industries.
As of September 30, 1996, the Company's insurance products and administrative
services are provided to approximately 15,500 employers representing
approximately $219.0 million in premiums, including approximately $102.0 million
in premiums attributable to the Funds and $117.0 million in premiums
attributable to the Insurance Subsidiaries ($110.0 million in the case of
Bridgefield and $7.0 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> 265
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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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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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 September 30, 1996, FRF had approximately 7,300 member
employers and annual premiums in excess of $80.0 million. FRF memberships
renew each year on January 1.
Louisiana Employers Safety Association Self Insurers Fund. LESA was
established in 1982 and currently provides coverage to over 800 member
employers in Louisiana. As of September 30, 1996, LESA had annual premiums
of approximately $12.0 million. LESA memberships renew each year on April
1.
Louisiana Retailers Association Self Insurers Fund. LRA was
established in 1980 as a workers' compensation self-insurance fund
targeting specifically wholesalers and retail-related businesses in
Louisiana. As of September 30, 1996, LRA had over 1,250 retail member
employers and annual premiums of approximately $9.0 million. LRA
memberships renew each year on July 1.
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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 September 30,
1996, KRF had over 1,100 members and annual premiums of approximately $3.0
million. KRF memberships renew each year on January 1.
Insurance Operations. Prior to the Conversion, ESIF was one of the largest
workers' compensation self-insurance funds in Florida, with approximately 5,000
member employers and approximately $110.0 million in annual premiums as of
September 30, 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 September 30, 1996 had written
approximately 400 such policies representing approximately $6.7 million of
annual premiums. Subject to receipt of licensing approvals, Bridgefield Casualty
intends to begin selling non-assessable workers' compensation policies in
Louisiana. Future plans also include possible workers' compensation offerings in
other states as well as other property/casualty products offered to members of
the Funds.
The Company's products and rating plans encompass a continuum of options
designed to fit the needs of its insured employers and employer groups. The
basic product, accounting for approximately 70% of the Insurance Subsidiaries'
premiums in force at March 31, 1996, is a guaranteed cost contract, in which the
premium for each employer is set in advance and varies only based upon changes
in the client's operations or payroll. In return, the Company agrees to assume
statutorily imposed obligations of the employer to provide workers' compensation
benefits to its employees. The premium for such a policy depends upon the type
of work performed by the employees and the general business of the insured. An
employer large enough to qualify, typically those paying more than $25,000 in
annual premiums, may choose a different product, having its premium based on its
loss experience relative to its peers as determined over a one-year period. A
client who desires to assume a certain amount of financial risk may elect a
deductible which makes the client responsible for the first portion of any
claim. In exchange for the deductible election, the employer receives a premium
reduction. The Company also offers a loss sensitive plan (retrospective 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. During the fiscal years ended March 31, 1994, 1995 and
1996 and the six months ended September 30, 1996, the Company accrued for
retrospective refunds in the amount of $6.4 million, $9.2 million, $10.6 million
and $9.9 million, respectively, and payments in excess of accruals were $0.0,
$0.0, $0.0 and $0.8 million, respectively. Retrospective rated policies
accounted for 33%, 32%, 30% and 32%, respectively of total premiums during the
fiscal years ended March 31, 1994, 1995 and 1996 and the six months ended
September 30, 1996. The
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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 SEPTEMBER 30, 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 $ -- $ 380 $ 380
Cayzer
Steel....... N/R -- -- -- 2 -- 2
Cigna......... A-/XIII 297 -- 297 189 -- 189
Continental
Casualty.... A/XV -- 10,531 10,531 -- 9,245 9,245
Crossroads(2).. N/R 917 9,375 10,292 653 10,305 10,958
Employers Re.. A++/XV 595 6,805 7,400 505 6,406 6,911
Federal Ins.
Co.......... A++/XV -- 9,626 9,626 -- 8,417 8,417
INA........... A-/XIII -- 5,678 5,678 -- 5,156 5,156
Lloyds of
London...... N/R -- 12,274 12,274 -- 14,595 14,595
National
Union....... A++/XV -- -- -- -- 1,590 1,590
Old Republic.. A+/IX 53 17,242 17,295 37 15,172 15,209
Transamerica.. A/XI 20 37,820 37,840 25 31,185 31,210
------ -------- -------- ------ -------- --------
Total.. $1,882(3) $109,637 $111,519 $1,411(4) $102,451 $103,862
====== ======== ======== ====== ======== ========
</TABLE>
- ---------------
(1) 1996 Best's Key Rating Guide -- Property-Casualty Edition.
(2) Crossroads maintains trust fund assets sufficient to secure its obligations.
(3) All recoverables less than 90 days old, except $3,000 owed by Employers Re
which is more than 120 days old.
(4) All recoverables 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.
INVESTMENT PORTFOLIO
In general, the Company's investment policy focuses on: (i) safety of
principal; (2) 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 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.
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<PAGE> 272
As of September 30, 1996, approximately 72% of the bonds in the Company's
investment portfolio were rated AA or above by Standard & Poor's ("S&P") and
approximately 98% were either rated AA- or better by S&P or are considered Class
I under the NAIC's classification system. The composition of the portfolio as of
September 30, 1995 and 1996 is depicted in the following table.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
------------------------------------
1995 1996
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Government bonds................................... $ 94,884 41.0% $ 62,165 29.1%
Municipal bonds.................................... 67,218 29.1% 68,349 32.0%
Corporate bonds.................................... 29,162 12.6% 42,906 20.1%
Preferred stock.................................... 2,956 1.3% 3,787 1.8%
Common stock....................................... 15,228 6.6% 12,298 5.7%
Short-term investments............................. 17,176 7.4% 16,713 7.8%
Cash and cash equivalents.......................... 4,664 2.0% 7,611 3.5%
-------- ----- -------- -----
Total cash and invested assets........... $231,288 100.0% $213,829 100.0%
======== ===== ======== =====
</TABLE>
COMPETITION
The markets for workers' compensation insurance products and services are
highly competitive. The Company's competitors include, among others, insurance
companies, specialized provider groups, in-house benefits administrators, state
insurance pools and other significant providers of workers' compensation,
administration and insurance services. A number of the Company's current and
potential competitors are significantly larger, with greater financial and
operating resources than those of the Company, and can offer their services
nationwide. After a period of absence from the market in Florida, traditional
national insurance companies have re-entered that market, thereby increasing
competition. Their presence in the Company's current market, and in markets into
which the Company might consider for expansion, will likely create greater
competition for acquisitions of workers' compensation businesses, making it more
difficult for the Company to grow by acquisition.
Competitive factors in the workers' compensation insurance field include
premium rates (in some states), levels of service, A.M. Best ratings, levels of
capitalization, quality of managed care services, the ability to reduce loss
ratios and the ability to reduce claims expenses. The Company believes that its
products and services are competitively priced. In addition, the Company
believes its premium rates are typically lower than those for clients assigned
to the state-sponsored risk pools, allowing the Company to provide a viable
alternative for employers in such pools. The Company also believes that its
level of service and its ability to reduce claims are strong competitive factors
that have enabled it to retain existing clients and attract new clients.
Competitive factors relating to the Company's administrative service products
are primarily based upon pricing, service and reputation. See "RISK
FACTORS -- Competition."
A.M. BEST RATING
A.M. Best is a rating agency that reports on the financial condition of
insurance companies. Neither of the Insurance Subsidiaries has been assigned a
rating by A.M. Best because neither company has accumulated the required five
consecutive years of operating experience. Management has met with
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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
September 30, 1996 included an asset of approximately $21.1 million,
representing SDTF recoveries that the Company estimated at that time it would be
entitled to receive, based on claims identified as subject to SDTF recovery and
considering the Company's recovery experience. The SDTF's assessment formula has
historically yielded sufficient revenues for annual reimbursement payments and
for costs associated with administering the SDTF, however, the SDTF has not
actuarially funded its claims liability and no reserves currently exist. A study
commissioned by the State of Florida estimated the total dollar liability of the
SDTF for all future payments required on accidents occurring on or before June
30, 1995 to be approximately $4.7 billion on an undiscounted basis. There is no
assurance that the SDTF will have funds available in the future for the payment
of claimed recoveries.
The SDTF is scheduled for further review under Florida sunset laws in the
year 2000. The Florida legislature may, however, review the SDTF earlier and no
assurance can be made with regard to the legislature's possible actions or with
regard to operations of the SDTF if any legislative changes are made. 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 18 and 19 of the notes to ESIF's consolidated financial
statements contained elsewhere in this Prospectus.
INFORMATION TECHNOLOGY SYSTEMS
The Company's centralized information technology systems department
provides, maintains and manages the information resources for all of the
Company. The department currently has four IBM AS/400 mainframe computers
supporting approximately 430 terminals in the Company's Lakeland, Florida
headquarters and remote locations. Some 100 personal computers are used in
networks, as stand-alone units or as host-connected PCs. The Company also
maintains a number of laptop computers for field personnel. More than 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
Greg C. Branch..................... 49 Chairman of the Board of 1980 1998
Directors of Summit and of the
Board of Trustees of ESIF
C. C. Dockery...................... 63 Director of Summit and Trustee 1987 1999
of ESIF
John A. Gray....................... 51 Director of Summit and Trustee 1979 1997
of ESIF
Robert L. Noojin, Sr............... 62 Director of Summit and Trustee 1979 1998
of ESIF
Thomas S. Petcoff.................. 48 Director of Summit and Trustee 1987 1997
of ESIF
Robert Siegel...................... 65 Director of Summit and Trustee 1978 1999
of ESIF
Other Key Managers:
Allen C. Bennett................... 47 Vice President of Summit Loss -- --
Control Services, Inc.
David T. Cederholm................. 51 Vice President, Operations of -- --
Bridgefield Casualty
Timothy J. Ermatinger.............. 47 Vice President of Operations of -- --
SCI
Ricky T. Hodges.................... 42 Vice President of Claims of -- --
Summit Claims Management, Inc.
</TABLE>
William B. Bull has served as President and Chief Executive Officer of SHC
and its predecessors since 1987 and as President, Chief Executive Officer and a
director of Summit since November 1996. Mr. Bull joined SCI in 1984 as special
assistant to the President and subsequently became Executive Vice President in
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.
Any future transactions between the Company and any director, officer or
principal shareholder of the Company, or any affiliate of such a person, will be
on terms no less favorable to the Company than can be obtained from unaffiliated
third parties.
William B. Bull, President, Chief Executive Officer and a director of the
Company, may be relieved of certain personal indemnification obligations if the
Conversion becomes effective. In connection with the Acquisition, the Florida
DOI issued the January Consent Order requiring that Mr. Bull, who was at that
time President and Chief Executive Officer and a shareholder of SHC, personally
indemnify ESIF up to a maximum of $5 million for loss, injury or damage to ESIF
that may result from the parties' execution of the merger agreement pursuant to
which ESIF acquired SHC, or that may result from SHC's execution of a certain
credit agreement with the Bank. According to the January Consent Order, Mr.
Bull's indemnification obligations will decrease by $1.0 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 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.................................... 47,023(1) * 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)........................................ 237,931(1) 4.8% 500 *
</TABLE>
- ---------------
* Less than one percent.
(1) Includes 1,568 shares to be held by trust 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
The Conversion offers a number of advantages that could be important to the
future growth and performance of the Company and, therefore, beneficial to the
members of ESIF. The conversion of ESIF to a stock insurance company that is
wholly owned by a publicly traded holding company is expected to provide
improved access to the capital markets and increased flexibility for raising
additional capital and expanding through acquisitions. After completion of the
Conversion, Summit will have authority to issue capital stock that may permit
it, subject to market conditions and Florida DOI approval, to raise additional
equity capital through future sales of equity securities. Summit may also be
able to issue capital stock as payment in connection with acquisitions, subject
to Florida DOI approval. In addition, the holding company structure is expected
to provide greater flexibility for the diversification of business activities
through existing or newly formed subsidiaries of Summit or through strategic
partnerships, subject to Florida DOI approval. At the present time, the Company
has no plans with respect to additional offerings of securities or specific
acquisitions and has no specific plans for diversification. Following the
Conversion, Summit also will be able to use stock-related incentive programs to
reward and attempt to attract executives and other personnel for itself and its
subsidiaries.
Additionally, pursuant to the Conversion, the policies held by members of
ESIF will be converted from assessable policies to non-assessable policies. As a
consequence, members will no longer be subject to any assessment for the
liabilities of ESIF arising either before or after the Effective Date.
CONSIDERATION TO BE PAID TO POLICYHOLDERS
Each person who held an In-Force Policy prior to the Conversion is also a
member of ESIF and has certain Membership Interests that provide, among other
things, rights to vote for the election of trustees and rights to participate in
any distribution of the surplus of ESIF in the event of its liquidation.
Pursuant to the Conversion, each member of ESIF will automatically relinquish
such Membership Interests but will retain all ownership rights and coverage with
respect to its In-Force Policy.
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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), except Summit may, in its discretion, permit any
purchaser in the Offerings to purchase a number of shares of Common Stock in
excess of such amount, subject to each such purchaser obtaining the prior
approval of the Florida DOI.
The Subscription Offering will expire at 4:00 p.m. Eastern Time on February
, 1997. The Board of Directors of Summit may, at any time prior thereto, elect
to cancel or rescind the Subscription Offering and consequently, not consummate
the Public Offering. The Subscription Offering will not be consummated in the
event that: (i) the Plan of Conversion is not approved at the Special Meeting or
(ii) the Plan of Conversion is withdrawn by the Board of Trustees of ESIF.
The Subscription Price is $11.00 per share, which was set by Summit after
consultation with Raymond James & Associates, Inc. and ABN AMRO Chicago
Corporation, and was not based on an appraisal or any other objective factors.
If the Public Offering closes on the Effective Date, and the Public Offering
Price is different from the Subscription Price, then the effective price per
share paid by subscribers shall be adjusted to the Public Offering Price and
additional whole shares of Common Stock will be issued to subscribers or the
number of Shares of Common Stock issued to subscribers will be reduced to offset
the effect of such price difference and to assure that the price per share paid
by Eligible Policyholders and the Management Group is the Public Offering Price.
No fractional shares will be issued, but in lieu thereof, the value of such
fractional shares will be refunded to subscribers in cash within 60 days after
the Effective Date. The Public Offering Price will be determined by negotiation
between the Representatives and Summit.
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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. The Public Offering may, at the discretion of Summit, close on
or at any time after the Effective Date. It is anticipated that the
Representatives will act as representatives of the underwriters of the Public
Offering. Purchasers in the Public Offering are subject to the Purchase Limit,
but purchasers in the Public Offering will not be required to purchase any
minimum number of shares.
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DESCRIPTION OF CAPITAL STOCK
The following is a summary description of Summit's capital stock. This
summary does not purport to be complete and is subject to and qualified in its
entirety by the provisions of Summit's Articles of Incorporation (the "SUMMIT
ARTICLES") and Bylaws (the "SUMMIT BYLAWS"), copies of which are included as
exhibits to the Registration Statement of which this Prospectus is a part, and
by the provisions of applicable law.
PREFERRED STOCK
Summit is authorized to issue an aggregate of 5,000,000 shares of preferred
stock, par value $10 per share. The preferred stock may be issued in one or more
series, from time to time, with such designations, rights, preferences and
limitations, including but not limited to dividend rates and conversion
features, as the Board of Directors may determine. Accordingly, preferred stock
may be issued having dividend and liquidation preferences over the Common Stock
without the consent of the holders of Common Stock. In addition, the ability of
the Board to issue preferred stock could also be used by Summit as a means of
resisting a change of control of Summit and, therefore, could be considered an
"anti-takeover" device.
Series A Preferred Stock. In connection with the Conversion, Summit will
issue 1,639,836 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
70
<PAGE> 293
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 238,000 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.
71
<PAGE> 294
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 an additional
750,000 shares of Common Stock to cover over-allotments at the same price per
share to be paid by the Underwriters for the other shares offered hereby. If the
Underwriters purchase any additional shares pursuant to this option, each of the
Underwriters will be committed to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such option only to cover over-allotments ,if any, in
connection with the 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.
72
<PAGE> 295
LEGAL MATTERS
Certain legal matters with respect to the shares of the Common Stock
offered hereby will be passed upon for the Company by Alston & Bird, Atlanta,
Georgia, and McConnaughhay, Roland, Maida & Cherr, P.A., Tallahassee, Florida,
and for the Underwriters by Holland & Knight, Tampa, Florida.
EXPERTS
The consolidated financial statements of ESIF and subsidiaries as of March
31, 1996 and for the year then ended and the consolidated financial statements
of SHC and subsidiaries for the year ended December 31, 1993, 1994, and 1995
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young, LLP, independent auditors, as set forth in their reports therein
appearing elsewhere herein and in the Registration Statement and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of ESIF and subsidiaries as of March
31, 1994 and 1995 and for the years then ended 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
73
<PAGE> 296
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.
74
<PAGE> 297
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
Note to Consolidated Financial Statements........................................... F-33
SUMMIT HOLDING CORPORATION AND SUBSIDIARIES
Report of Independent Auditors...................................................... F-53
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and
1995............................................................................. F-54
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995.............................................................. F-55
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995......................................................................... F-56
Notes to Consolidated Financial Statements.......................................... F-57
FINANCIAL STATEMENT SCHEDULES
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
Reports of Independent Auditors on Financial Statement Schedules.................... F-62
Schedule I -- Summary of Investments as of March 31, 1996 and September 30, 1996.... F-64
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-65
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-66
</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> 298
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> 299
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> 300
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 10,678
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............................................... -- 2,529
Capitalized computer software costs.................................. -- 6,038
Value assigned to future administration of insurance contracts....... -- 6,470
Unamortized debt acquisition cost.................................... -- 709
Excess of cost over net assets of business acquired.................. -- 49,198
Deferred income taxes................................................ 19,100 16,355
Other assets......................................................... 1,330 1,907
Net assets of discontinued operations................................ -- 612
-------- --------
Total assets............................................... $425,206 $492,790
======== ========
LIABILITIES AND EQUITY
Liabilities:
Loss and loss adjustment expenses.................................. $367,391 $387,632
Debt............................................................... -- 44,000
Unallocated policyholder remittances............................... 18,234 14,635
Accounts payable and accrued expenses.............................. 12,690 14,492
Taxes, licenses and fees........................................... 1,861 1,493
Deferred revenue................................................... 87 7,384
Federal income taxes payable....................................... 4,878 --
-------- --------
Total liabilities.......................................... 405,141 469,636
Equity:
Retained earnings.................................................. 21,474 21,659
Unrealized appreciation (depreciation) on available-for-sale
securities...................................................... (1,409) 1,495
-------- --------
Total equity............................................... 20,065 23,154
-------- --------
Total liabilities and equity............................... $425,206 $492,790
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 301
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Premiums earned.............................................. $148,441 $128,489 $114,893
Net investment income........................................ 10,510 12,205 13,210
Net realized investment gains................................ -- -- 4,354
Administrative fees.......................................... -- -- 7,665
Other income................................................. -- 121 206
-------- -------- --------
Total revenue........................................ 158,951 140,815 140,328
Losses and expenses:
Losses and loss adjustment expenses.......................... 108,411 69,116 94,844
Other underwriting, general and administrative expenses...... 37,121 41,546 43,657
Amortization and depreciation................................ -- -- 1,103
Interest expense............................................. -- -- 847
-------- -------- --------
Total losses and expenses............................ 145,532 110,662 140,451
-------- -------- --------
Income (loss) from continuing operations before income taxes... 13,419 30,153 (123)
Income tax expense (benefit)................................... 4,534 10,990 (505)
-------- -------- --------
Income from continuing operations.............................. 8,885 19,163 382
-------- -------- --------
Discontinued operations:
Loss from discontinued operations (net of income tax benefit
of $121).................................................. -- -- (197)
-------- -------- --------
Loss from discontinued operations.............................. -- -- (197)
-------- -------- --------
Net income........................................... $ 8,885 $ 19,163 $ 185
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 302
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> 303
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................... $ 8,885 $ 19,163 185
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and depreciation................................ 485 372 1,103
Net realized gains........................................... (14) -- (4,354)
Bad debt allowance........................................... (146) (216) (600)
(Increase) decrease in premiums receivable................... (6,964) 8,880 12,898
(Increase) decrease in accounts receivable................... (4) 14 (3,157)
Increase in reinsurance recoverable.......................... (26,563) (20,424) (1,377)
Increase in Special Disability Trust Fund recoverable........ (3,184) (5,950) (4,181)
(Increase) decrease in accrued investment income............. (398) (1,184) 473
Increase in federal income tax recoverable................... -- -- (9,690)
(Increase) decrease in deferred income taxes................. (7,535) 513 2,745
Increase in other assets..................................... -- -- (665)
Discontinued operations...................................... -- -- (612)
Increase in loss and loss adjustment expense................. 39,754 9,677 20,240
Increase (decrease) in unallocated policyholder
remittances............................................... 16,115 (2,155) (3,600)
Increase in accounts payable and accrued expenses............ 39 2,291 1,802
Increase (decrease) in taxes, licenses and fees.............. -- 1,201 (368)
Increase in deferred revenue................................. -- 86 7,298
Increase (decrease) in federal income tax payable............ -- 1,043 (4,878)
-------- -------- --------
Net cash provided (used) in operating activities............... 20,470 13,311 13,262
INVESTING ACTIVITIES:
Purchase of investment securities.............................. (760,811) (859,038) (982,289)
Disposal and maturity of investment securities................. 685,168 846,575 972,918
Purchase of equipment and software............................. -- -- (2,697)
Purchase of Summit Holding Corporation......................... -- -- (37,500)
Other investing activities..................................... 68 152 --
-------- -------- --------
Net cash provided by investing activities...................... (75,575) (12,311) (49,568)
FINANCING ACTIVITIES:
Increase in notes payable...................................... -- -- 44,000
-------- -------- --------
Net cash provided by financing activities...................... -- -- 44,000
-------- -------- --------
Net increase in cash and cash equivalents...................... (55,105) 1,000 7,694
Beginning cash and cash equivalents............................ 57,089 1,984 2,984
-------- -------- --------
Ending cash and cash equivalents............................... $ 1,984 $ 2,984 $ 10,678
======== ======== ========
</TABLE>
F-7
<PAGE> 304
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. 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
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 retained
its earnings and profits to pay its obligations and avoid making assessments
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. Such estimates and assumptions
could change in the future as more information becomes known which could impact
the amounts reported and disclosed herein.
F-8
<PAGE> 305
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Recognition of Revenues
Workers' compensation insurance premiums are based on rates established by
the National Council on Compensation Insurance ("NCCI"). Premium revenues
generally are recognized over the life of the related policies on the daily pro
rata method with a reserve for premiums earned established for the unexpired
portion of the premiums applicable to those policies. 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.
- 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.
F-9
<PAGE> 306
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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.
F-10
<PAGE> 307
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $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.
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.
F-11
<PAGE> 308
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 309
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> 310
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> 311
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> 312
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> 313
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> 314
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 (dollars
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> 315
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> 316
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> 317
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>
Gross reserves for losses and LAE, at beginning of
year.............................................. $ 361,095 $ 392,784 $ 367,391
Add: Discount on reserves........................... 4,324 4,730 4,875
Less: Impact of reinsurance for FASB 113............ (103,118) (121,463) (108,440)
Impact of implied Special Disability Trust
Fund recoverables............................. (10,550) (15,531) (24,836)
--------- --------- ---------
Net reserves for losses and LAE, at beginning of
year.............................................. 251,751 260,520 238,990
Add provision for claims occurring in:
The current year.................................. 118,889 94,520 84,058
Prior years....................................... (10,478) (25,404) 10,786
--------- --------- ---------
Incurred losses during the current year............. 108,411 69,116 94,844
Deduct payments for claims occurring in:
The current year.................................. 17,704 16,857 15,432
Prior years....................................... 81,938 73,789 67,968
--------- --------- ---------
Claim payments during the current year.............. 99,642 90,646 83,400
Net reserves for losses and LAE, at end of year..... 260,520 238,990 250,434
Add: Impact of implied Special Disability Trust Fund
recoverables................................... 15,531 24,836 31,376
Impact of reinsurance for FASB 113............ 121,463 108,440 107,092
LAE assumed through acquisition of Summit..... -- -- 3,398
Less: Discount on reserves.......................... (4,730) (4,875) (4,668)
--------- --------- ---------
Gross reserves for losses and LAE, at end of year... $ 392,784 $ 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.
Estimated future SDTF recoveries implicitly netted from loss reserves on a
statutory basis were grossed up for GAAP purposes. This 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 three 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> 318
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> 319
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> 320
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................................................ 6,000 1,480
Thereafter.......................................... 4,950 1,110
------- ------
$36,000 8,000
======= ======
</TABLE>
F-24
<PAGE> 321
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> 322
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..................... 789
------
Net assets....................................................... $ 611
======
</TABLE>
The operating results of the computer software development subsidiary for
the period January 16, 1996 to March 31, 1996 were as follows (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> 323
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 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> 324
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> 325
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 7,611
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............................................... -- 2,358
Non-compete agreement................................................ -- 100
Capitalized computer software costs.................................. -- 5,408
Value assigned to future administration of insurance contracts....... -- 6,140
Unamortized debt acquisition cost.................................... -- 596
Excess of cost over net assets of business acquired.................. -- 47,925
Deferred income taxes................................................ 17,514 17,446
Other assets......................................................... 109 3,506
Net assets of discontinued operations................................ -- 678
-------- --------
Total assets............................................... $456,012 $502,310
======== ========
LIABILITIES AND EQUITY
Liabilities:
Loss and loss adjustment expenses.................................. $364,210 $378,196
Debt............................................................... -- 36,500
Unallocated policyholder remittances............................... 51,208 46,000
Accounts payable and accrued expenses.............................. 7,100 10,532
Taxes, licenses and fees........................................... 2,076 1,471
Deferred revenue................................................... 34 4,618
Federal income taxes payable....................................... 297 --
-------- --------
Total liabilities.......................................... 424,925 477,317
Equity:
Retained earnings.................................................. 26,848 24,045
Unrealized appreciation (depreciation) on available-for-sale
securities...................................................... 4,239 948
-------- --------
Total equity............................................... 31,087 24,993
-------- --------
Total liabilities and equity............................... $456,012 $502,310
======== ========
</TABLE>
See accompanying notes.
F-29
<PAGE> 326
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------
1995 1996
----------- -------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Revenue:
Premiums earned...................................................... $63,145 $49,029
Net investment income................................................ 7,598 6,363
Realized investment gains............................................ 919 8
Administrative fees.................................................. -- 17,432
Other income......................................................... 90 216
----------- -------
Total revenue................................................ 71,752 73,048
Losses and expenses:
Losses and loss adjustment expenses.................................. 42,365 32,135
Other underwriting, general and administrative expenses.............. 21,623 30,532
Amortization and depreciation........................................ -- 2,499
Interest expense..................................................... -- 1,831
----------- -------
Total losses and expenses.................................... 63,988 66,997
----------- -------
Income from continuing operations before income taxes.................. 7,764 6,051
Income tax expense..................................................... 2,390 2,400
----------- -------
Income from continuing operations...................................... 5,374 3,651
----------- -------
Discontinued operations:
Loss from operation (net of income tax benefit of $212 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> 327
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
-------- ------------------ -------
<S> <C> <C> <C>
(IN THOUSANDS)
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> 328
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------
1995 1996
--------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................... $ 5,374 $ 2,386
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization and depreciation...................................... -- 2,499
Net realized gains................................................. (429) (8)
Bad debt allowance................................................. -- 500
Increase in premiums receivable.................................... (27,838) (29,586)
Decrease in accounts receivable.................................... -- 56
Decrease in reinsurance recoverable................................ 2,690 11,883
Increase in special disability trust fund recoverable.............. (1,896) (1,078)
(Increase) decrease in accrued investment income................... (236) 127
Decrease in federal income tax recoverable......................... -- 3,456
(Increase) decrease in deferred income taxes....................... 1,586 (1,090)
(Increase) decrease in other assets................................ 1,220 (1,905)
Discontinued operations............................................ -- (67)
Decrease in loss and loss adjustment expense....................... (3,182) (13,661)
Increase in unallocated policyholder remittances................... 32,973 31,365
Decrease in accounts payable and accrued expenses.................. (5,589) (3,960)
(Increase) decrease in taxes, license, and fees.................... 214 (22)
Decrease in deferred revenue....................................... -- (2,767)
Decrease in federal income tax payable............................. (4,580) --
--------- ---------
Net cash provided (used) in operating activities..................... 307 (1,872)
INVESTING ACTIVITIES:
Purchase of investments securities................................... (410,101) (816,626)
Disposal and maturity of investment securities....................... 411,475 823,189
Purchase of equipment and software................................... -- (258)
--------- ---------
Net cash provided by investing activities............................ 1,374 6,305
FINANCING ACTIVITIES:
Decrease in notes payable............................................ -- (7,500)
--------- ---------
Net cash provided by financing activities............................ -- (7,500)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 1,681 (3,067)
Beginning cash and cash equivalents.................................. 2,984 10,678
--------- ---------
Ending cash and cash equivalents..................................... $ 4,665 $ 7,611
========= =========
</TABLE>
See accompanying notes.
F-32
<PAGE> 329
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. 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
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 retained
its earnings and profits to pay its obligations and avoid making assessments
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 bee 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.
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-33
<PAGE> 330
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 earned 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.
- 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.
F-34
<PAGE> 331
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- 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.
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.
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
F-35
<PAGE> 332
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $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.
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.
F-36
<PAGE> 333
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 334
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> 335
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> 336
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> 337
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>
F-41
<PAGE> 338
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> 339
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 (dollars
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> 340
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........................................ 18,930 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> 341
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> 342
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 ENDED
SEPTEMBER 30,
-------------------------
1995 1996
----------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Gross reserves for losses and LAE, at beginning of year...... $ 367,391 $ 387,632
Add: Discount on reserves.................................... 4,875 4,668
Less: Reinsurance recoverables............................... (108,440) (107,092)
Special Disability Trust Fund recoverables............. (24,836) (31,376)
LAE assumed through acquisition of SHC....................... -- (3,398)
--------- ---------
Net reserves for losses and LAE, at beginning of year........ 238,990 250,434
Add provision for claims occurring in:
The current year........................................... 42,198 35,663
Prior years................................................ 167 (3,528)
--------- ---------
Incurred losses during the current year...................... 42,365 32,135
Deduct payments for claims occurring in:
The current year........................................... 3,753 3,565
Prior years................................................ 38,251 30,665
--------- ---------
Claim payments during the current year....................... 42,004 34,230
Net reserves for losses and LAE at end of year............... 239,351 248,339
Add: Impact of Special Disability Trust Fund recoverables.... 27,932 28,832
Impact of Reinsurance recoverables..................... 101,702 102,396
LAE assumed through acquisition of SHC................. -- 2,864
Less: Discount on reserves................................... (4,775) (4,235)
--------- ---------
Gross reserves for losses and LAE, at end of year............ $ 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.
Estimated future Special Disability Trust Fund ("SDTF") recoveries
implicitly netted from loss reserves on a statutory basis were grossed up for
GAAP purposes. This increased loss reserves by $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 three
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> 343
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>
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.
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.
F-47
<PAGE> 344
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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,
F-48
<PAGE> 345
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-49
<PAGE> 346
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and healthcare 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 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>
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>
F-50
<PAGE> 347
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $ (1,476) --
Identifiable assets.................. $498,085 $498,085 -- --
</TABLE>
Depreciation expense and capital expenditures are not considered material.
The preceding financial information does not include the computer software
operations which are presented as discontinued operations in the accompanying
financial statements.
F-51
<PAGE> 348
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $.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 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> 349
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-53
<PAGE> 350
SUMMIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gross service fees................................ $70,813,669 $73,832,809 $64,089,709
Direct expenses................................... 32,971,912 31,638,931 27,469,989
----------- ----------- -----------
Net service fees............................... 37,841,757 42,193,878 36,619,720
Software consulting and maintenance fees.......... -- -- 899,629
Investment and other income....................... 631,924 934,178 1,275,712
----------- ----------- -----------
38,473,681 43,128,056 38,795,061
Expenses:
Compensation and other employee benefits.......... 14,503,311 15,425,560 16,616,339
Other operating expenses.......................... 7,707,071 8,217,870 8,203,572
Depreciation and amortization..................... 4,890,675 4,872,134 5,112,228
Interest expense.................................. 1,609,720 57,563 41,943
----------- ----------- -----------
28,710,777 28,573,127 29,974,082
----------- ----------- -----------
Income before income taxes.......................... 9,762,904 14,554,929 8,820,979
Income taxes........................................ 3,833,288 5,553,646 3,245,848
----------- ----------- -----------
Net income................................ $ 5,929,616 $ 9,001,283 $ 5,575,131
=========== =========== ===========
</TABLE>
See accompanying notes.
F-54
<PAGE> 351
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-55
<PAGE> 352
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-56
<PAGE> 353
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-57
<PAGE> 354
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangibles
Intangible assets are stated at cost less accumulated amortization and
include purchased software, customer accounts and contracts, noncompete
agreements, deferred financing costs, and the excess of the purchase price over
the fair value of identifiable net assets acquired (goodwill). Purchased
software, customer accounts and contracts, and noncompete agreements are being
amortized on a straight-line basis over the estimated useful lives and contract
period which range from three to five years. Deferred financing costs relate to
the incurrence of debt acquisition costs, and were completely amortized in 1995.
The excess of cost over the fair value of identifiable net assets acquired is
being amortized on a straight-line basis over 20 years. SHC evaluates the
recoverability of intangible assets through a comparison of forecasted operating
income to the remaining asset balances.
Amortization expense in 1993, 1994 and 1995 was $4,166,681, $4,141,680 and
$4,281,820, respectively.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Adoption for
Statement No. 121 is required for all fiscal years beginning after December 15,
1995. SHC does not anticipate that the adoption of Statement No. 121 will have a
material impact on its financial results.
Aggregate Reserve
Under the terms of SHC's service agreement with the self-insurance funds,
SHC is responsible for providing certain reinsurance coverage through
independent reinsurers. Premiums are calculated and paid to the reinsurers on
the basis of the self-insurance funds' earned premiums and the cost of the
reinsurance is recognized as a direct expense by SHC on the same basis as
service fee revenue. Under the terms of SHC's agreement with one reinsurer, on
behalf of one of the self-insurance funds, an aggregate reserve has been
established by SHC to record a liability for additional reinsurance payments for
fund years where aggregate losses exceed a specified loss ratio. SHC accounts
for the aggregate reserve annually utilizing the latest actuarial loss ratios.
As of December 31, 1993, 1994 and 1995, SHC has recorded a liability for future
premium obligations on these policies of $4,063,719, $2,277,410, and $1,407,842,
respectively, which is the present value, at 2.5%, 7.0% and 7.0%, respectively,
of its estimated total liability of approximately $5.1 million, $2.5 million,
and $1.6 million, respectively. As a result of the change in the discount rate
in 1994, the aggregate reserve liability as of December 31, 1994 was reduced by
approximately $120,000.
Deferred Income
SHC defers a portion of its fees to cover future claims servicing costs
pertaining to claims incurred in the year for which SHC received its fee, and
for certain other services which SHC is contractually required to provide
subsequent to the funds' year end.
Major Customers
Significant portions of SHC's gross service fees are derived from three
major customers, Employers Self Insurers Fund ("ESIF"), Florida Retail
Federation Self Insurers Fund ("FRFSIF") and Louisiana Employers Safety
Association Self Insurers Fund ("LESASIF"). Gross service fees for the years
ended December 31, 1993, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
ESIF............................................ $25,336,689 $26,829,023 $24,867,269
FRFSIF.......................................... 32,195,587 31,103,771 28,990,003
LESASIF......................................... 8,708,425 11,305,177 6,034,794
</TABLE>
F-58
<PAGE> 355
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-59
<PAGE> 356
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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,
F-60
<PAGE> 357
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-61
<PAGE> 358
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-62
<PAGE> 359
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-63
<PAGE> 360
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-64
<PAGE> 361
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%
</TABLE>
F-65
<PAGE> 362
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
SCHEDULE VI -- SUPPLEMENTAL INFORMATION CONCERNING INSURANCE OPERATIONS
<TABLE>
<CAPTION>
CLAIMS & CLAIMS
SETTLEMENT
EXPENSES
RESERVES INCURRED RELATED
FOR UNPAID TO
DEFERRED CLAIMS AND -----------------
POLICY CLAIM DISCOUNT NET NET PRIOR
ACQUISITION SETTLEMENT DEDUCTED UNEARNED EARNED INVESTMENT YEARS
SEGMENT COSTS EXPENSES IN COL C PREMIUMS PREMIUMS INCOME CURRENT COLUMN
YEAR ENDED COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G YEAR H
- ------------------------ -------------- ----------- ---------- -------- -------- -------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1994.......... Workers' $ 0 $ 392,784 $4,730 $ 0 $148,441 $ 10,510 $118,889 $10,478
Compensation
Insurance
March 31, 1995.......... Workers' 0 367,391 4,875 0 128,489 12,205 94,520 25,404
Compensation
Insurance
March 31, 1996.......... Workers' 0 387,632 4,668 0 114,893 13,209 84,058 10,786
Compensation
Insurance
SIX MONTHS ENDED
- ------------------------
September 30, 1995...... Workers' $ 0 $ 364,210 $4,775 $ 51,208 $ 63,145 $ 7,598 $ 42,198 $ 167
Compensation
Insurance
September 30, 1996...... Workers' 0 367,971 4,235 46,000 49,029 6,363 35,663 (3,528)
Compensation
Insurance
<CAPTION>
AMORTIZATION NET PAID
OF DEFERRED CLAIMS &
POLICY CLAIMS NET
ACQUISITION SETTLEMENT PREMIUMS
COSTS EXPENSES WRITTEN
YEAR ENDED COLUMN I COLUMN J COLUMN K
- ------------------------ ------------ ---------- --------
<S> <C> <C> <C>
March 31, 1994.......... $ 10,664 $ 99,642 $156,086
March 31, 1995.......... 10,078 90,646 144,427
March 31, 1996.......... 9,707 63,400 121,296
SIX MONTHS ENDED
- ------------------------
September 30, 1995...... $ 4,236 $ 42,009 $117,823
September 30, 1996...... 4,839 34,230 103,178
</TABLE>
F-66
<PAGE> 363
------------------------------------------------------
------------------------------------------------------
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.............................. 42
Management of the Company............. 56
Certain Transactions.................. 63
Principal Shareholders................ 64
The Conversion........................ 65
Description of Capital Stock.......... 68
Shares Eligible for Future Sale....... 71
Underwriting.......................... 72
Legal Matters......................... 73
Experts............................... 73
Change in Accountants................. 73
Additional Information................ 73
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> 364
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>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Corporation Act, as amended (the "Florida Act"),
provides that, in general, a business corporation may indemnify any person who
is or was a party to any proceeding (other than an action by, or in the right
of, the corporation) by reason of the fact that he is or was a director or
officer of the corporation, against liability incurred in connection with such
proceeding, including any appeal thereof, provided certain standards are met,
including that such officer or director acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and provided further that, with respect to any criminal action or
proceeding, the officer or director had no reasonable cause to believe his
conduct was unlawful. In the case of proceedings by or in the right of the
corporation, the Florida Act provides that, in general, a corporation may
indemnify any person who was or is a party to any such proceeding by reason of
the fact that he is or was a director or officer of the corporation against
expenses and amounts paid in settlement actually and reasonably incurred in
connection with the defense or settlement of such proceeding, including any
appeal thereof, provided that such person acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, except that no indemnification shall be made in respect of any
claim as to which such person is adjudged liable unless a court of competent
jurisdiction determines upon application that such person is fairly and
reasonably entitled to indemnity. To the extent that any officers or directors
are successful on the merits or otherwise in the defense of any of the
proceedings described above, the Florida Act provides that the corporation is
required to indemnify such officers or directors against expenses actually and
reasonably incurred in connection therewith. However, the Florida Act further
provides that, in general, indemnification or advancement of expenses shall not
be made to or on behalf of any officer or director if a judgment or other final
adjudication establishes that his actions, or omissions to act, were material to
the cause of action so adjudicated and constitute: (i) a violation of criminal
law, unless the director or officer had reasonable cause to believe his conduct
was lawful or had no reasonable cause to believe it was unlawful; (ii) a
transaction from which the director or officer derived an improper personal
benefit; (iii) in the case of a director, a circumstance under which the
director has voted for or assented to a distribution made in violation of the
Florida Act or the corporation's articles of incorporation; or (iv) willful
misconduct or a conscious disregard for the best interests of the corporation in
a proceeding by or in the right of the corporation to procure a judgment in its
favor or in a proceeding by or in the right of a shareholder. Article Eight of
Summit's Bylaws provides that Summit shall indemnify any
II-1
<PAGE> 365
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.
2.1 -- Amended Plan of Conversion and Recapitalization of Employers Self Insurers Fund.+
2.2 -- Recapitalization Agreement between Summit and Employers Self Insured Fund.
2.3 -- Order of the Florida DOI approving the Plan of Conversion.+
3.1 -- Articles of Incorporation of Summit.+
3.2 -- Bylaws of Summit.+
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 -- Form of 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).
</TABLE>
II-2
<PAGE> 366
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------------------------------------------------------------------
<C> <S> <C>
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>
- ---------------
* To be filed by amendment.
+ 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 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
II-3
<PAGE> 367
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> 368
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 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 January 7, 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. 2 to the Registration Statement has been signed by the following persons in
the capacities indicated on January 7, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- ------------------
<C> <S> <C>
/s/ WILLIAM B. BULL President, Chief Executive January 7, 1997
- --------------------------------------------- Officer, and Director
William B. Bull (principal executive
officer)
/s/ GREG C. BRANCH* Chairman of the Board of January 7, 1997
- --------------------------------------------- Directors
Greg C. Branch
/s/ C. C. DOCKERY* Director January 7, 1997
- ---------------------------------------------
C. C. Dockery
/s/ JOHN A. GRAY* Director January 7, 1997
- ---------------------------------------------
John A. Gray
/s/ ROBERT L. NOOJIN, SR.* Director January 7, 1997
- ---------------------------------------------
Robert L. Noojin, Sr.
/s/ THOMAS S. PETCOFF* Director January 7, 1997
- ---------------------------------------------
Thomas S. Petcoff
/s/ ROBERT SIEGEL* Director January 7, 1997
- ---------------------------------------------
Robert Siegel
/s/ RUSSELL L. WALL* Vice President of Finance January 7, 1997
- --------------------------------------------- (principal financial and
Russell L. Wall accounting officer)
*By: WILLIAM B. BULL
- ---------------------------------------------
As attorney-in-fact
</TABLE>
II-5
<PAGE> 369
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.
2.1 -- Amended Plan of Conversion and Recapitalization of Employers Self
Insurers Fund.+
2.2 -- Recapitalization Agreement between Summit and Employers Self Insured
Fund.
2.3 -- Order of the Florida DOI approving the Plan of Conversion.+
3.1 -- Articles of Incorporation of Summit.+
3.2 -- Bylaws of Summit.+
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 -- Form of 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>
- ---------------
* To be filed by amendment.
+ Previously filed.
<PAGE> 370
PROXY CARD
- --------------------------------------------------------------------------------
CONTROL NUMBER
FOR AGAINST ABSTAIN THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" THE
FOLLOWING PROPOSAL.
[ ] [ ] [ ]
Approval and adoption of the Amended Plan of
Conversion and Recapitalization (the "Plan") and the
transactions contemplated thereby pursuant to which
ESIF will, pursuant to the laws of the State of
Florida, convert contemporaneously from a group self-
insurance fund to an assessable mutual insurance
company to a stock insurance corporation with the
name Bridgefield Employers Insurance Company
("Bridgefield"), and Summit Holding Southeast, Inc.
(the "Holding Company"), a Florida corporation
formed by ESIF, will acquire all of the capital
stock of the converted stock insurance company in
return for the issuance of shares of the Holding
Company's Series A Preferred Stock to eligible
policyholders of ESIF and subscription rights to
purchase shares of the Holding Company's Common
Stock to eligible policyholders of ESIF and
certain other persons. The approval of the Plan by
the policyholders will constitute approval and
adoption of the Amended and Restated Articles of
Incorporation of Bridgefield, which, among other
things, change the name of ESIF to Bridgefield
Employers Insurance Company and authorize the
issuance of Common Stock, and the Bylaws of
Bridgefield, which contain provisions appropriate
for a stock insurance company.
SIGNATURE ______________________ SIGNATURE ________________________ DATE________
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS ABOVE. IF A CORPORATION, PLEASE SIGN IN
FULL CORPORATE NAME BY THE PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME, BY AN AUTHORIZED PERSON.
Please mark, sign, date and mail this proxy card promptly, using the enclosed
envelope.
- --------------------------------------------------------------------------------
TAXPAYER IDENTIFICATION CARD
CONTROL NUMBER
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 | | IF NOT PLEASE CORRECT IN THE
IDENTIFICATION NUMBER | | 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
PLEASE FOLLOW DIRECTIONS CAREFULLY: FAILURE TO COMPLETE THIS FORM CORRECTLY MAY
RESULT IN A BACKUP WITHHOLDING TAX OF 31%. PLEASE SIGN AND DATE TO INSURE
IMMEDIATE PROCESSING. PRINT CLEARLY THE NUMERALS OF YOUR TAXPAYER I.D. NUMBER
IN THE EMPTY BOXES PROVIDED IN THE RED AREA BELOW. THEN FILL IN COMPLETELY THE
CORRESPONDING BOXES IN INK AS SHOWN (n).
===========================================
[0] [0] [0] [0] [0] [0] [0] [0] [0]
[1] [1] [1] [1] [1] [1] [1] [1] [1]
[2] [2] [2] [2] [2] [2] [2] [2] [2]
[3] [3] [3] [3] [3] [3] [3] [3] [3]
[4] [4] [4] [4] [4] [4] [4] [4] [4]
[5] [5] [5] [5] [5] [5] [5] [5] [5]
[6] [6] [6] [6] [6] [6] [6] [6] [6]
[7] [7] [7] [7] [7] [7] [7] [7] [7]
[8] [8] [8] [8] [8] [8] [8] [8] [8]
[9] [9] [9] [9] [9] [9] [9] [9] [9]
===========================================
Please mark, sign, date and mail this Taxpayer Identification Card promptly,
using the enclosed envelope.
<PAGE> 371
REVOCABLE PROXY APPENDIX
EMPLOYERS SELF INSURERS FUND
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES FOR
A SPECIAL MEETING OF POLICYHOLDERS.
The undersigned hereby appoints Greg C. Branch and Russell L. Wall, and
each of them, proxies, with full power of substitution, to vote for and in the
name of the undersigned at a Special Meeting of Policyholders of Employers Self
Insurers Fund ("ESIF"), to be held at ESIF's headquarters, 2310 A-Z Park Road,
Lakeland, Florida on_________, February __, 1997 at 10:00 a.m, local time, and
at any and all adjournments thereof, as indicated on the reverse.
PROXY-SOLICITED BY THE BOARD OF TRUSTEES
THIS PROXY CARD WILL BE VOTED AS DIRECTED. IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY CARD WILL BE VOTED IN THE DISCRETION OF THE PROXIES "FOR"
THE PROPOSAL.
If the undersigned elects to withdraw this proxy card on or before the
time of the Special Meeting or any adjournments thereof and notifies the
Secretary of ESIF at or prior to the Special Meeting of the decision of the
undersigned to withdraw this proxy card, then the power of said proxies shall be
deemed terminated and of no further force and effect. If the undersigned
withdraws this proxy card in the manner described above and prior to the Special
Meeting does not submit a duly executed and subsequently dated proxy card to
ESIF, the undersigned may vote in person at the Special Meeting.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY CARD IN THE ENCLOSED
PRE-PAID ENVELOPE.
(CONTINUED, AND TO BE SIGNED AND DATED, ON THE REVERSE SIDE)
- --------------------------------------------------------------------------------
<PAGE> 372
SUMMIT HOLDING SOUTHEAST, INC.
SUBSCRIPTION ORDER FORM
Summit Holding Southeast, Inc. (the "Company") is conducting a subscription
offering (the "Subscription Offering") which entitles each Eligible
Policyholder, as described below, to purchase up to 249,999 shares of the
Company's Common Stock, par value $0.01 per share (the "Common Stock"). Each
share of Common Stock is purchasable by an Eligible Policyholder upon payment of
$11.00 in cash (the "Subscription Price"), subject to adjustment as described in
the Prospectus, defined below. The Subscription Offering is in connection with
the Plan of Conversion and Recapitalization (the "Conversion") of Employers Self
Insurers Fund ("ESIF"), whereby, in addition to certain other events, (i)
Eligible Policyholders will also receive shares of the Company's Series A
Preferred Stock, par value $10.00 per share, in exchange for certain membership
interests in ESIF and (ii) the Company will 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 term "Eligible
Policyholders" includes any person who owned an indemnity agreement issued by
ESIF at any time during the period August 20, 1993 through and including August
20, 1996.
FOR A MORE COMPLETE DESCRIPTION OF THE TERMS AND CONDITIONS OF THE
SUBSCRIPTION OFFERING AND THE CONVERSION, INCLUDING, WITHOUT LIMITATION, THE
CONDITIONS UNDER WHICH THE SUBSCRIPTION PRICE MAY BE ADJUSTED, PLEASE REFER TO
THE PROXY STATEMENT/PROSPECTUS DATED JANUARY___, 1997 (THE "PROXY
STATEMENT/PROSPECTUS"), WHICH IS INCORPORATED HEREIN BY REFERENCE. COPIES OF THE
PROXY STATEMENT/PROSPECTUS ARE AVAILABLE UPON REQUEST FROM THE COMPANY BY
CALLING THE COMPANY'S INFORMATION CENTER AT 1-800-331-7742. CAPITALIZED TERMS
USED BUT NOT DEFINED HEREIN SHALL HAVE THE MEANINGS ASCRIBED TO SUCH TERMS IN
THE PROXY STATEMENT/PROSPECTUS.
THIS SUBSCRIPTION ORDER FORM MUST BE RECEIVED BY MELLON BANK, N.A.,
THE ESCROW AGENT, C/O CHASEMELLON SHAREHOLDER SERVICES, L.L.C., THE SUBSCRIPTION
AGENT, WITH PAYMENT IN FULL BY 4:00 P.M., EASTERN TIME, ON FEBRUARY __, 1997
(THE "SUBSCRIPTION EXPIRATION DATE"). ANY SUBSCRIPTION FOR SHARES OF COMMON
STOCK IN THE SUBSCRIPTION OFFERING MADE HEREBY IS IRREVOCABLE UNLESS THE TERMS
OF THE SUBSCRIPTION OFFERING ARE SUBSEQUENTLY MATERIALLY AMENDED AS PROVIDED IN
THE PROXY STATEMENT/PROSPECTUS.
INFORMATION: Complete Part I of the reverse of the Subscription Order
Form, and, if applicable, the Part II special issuance and delivery
instructions, SIGN THIS SUBSCRIPTION ORDER FORM, and complete the enclosed
Form W-9. All questions concerning the timeliness, validity, form and
eligibility of Subscription Order Forms received will be determined by the
Company, whose determination will be final and binding.
SUBSCRIPTION PRICE: $11.00 PER SHARE
By ChaseMellon Shareholder Services, L.L.C. as
Subscription Agent
THE SUBSCRIPTION OFFERING EXPIRES AT 4:00 P.M.,
EASTERN TIME, ON FEBRUARY __, 1997 UNLESS EXTENDED BY
THE COMPANY.
SUBSCRIPTION TO PURCHASE SHARES OF COMMON STOCK
OFFERED BY SUMMIT HOLDING SOUTHEAST, INC.
RETURN TO: MELLON BANK, N.A. C/O CHASEMELLON
SHAREHOLDER SERVICES, L.L.C.
By Mail: By Hand/Overnight Delivery
- -------- --------------------------
Mellon Bank, N.A. Mellon Bank, N.A.
c/o ChaseMellon Shareholder c/o ChaseMellon Shareholder
Services, L.L.C. Services, L.L.C.
Post Office Box 817, Midtown Station 120 Broadway, 13th Floor
New York, New York 10018 New York, New York 10271
Attn: Reorganization Dept. Attn: Reorganization Dept.
- --------------------------------------------------------------------------------
POLICYHOLDER RECORD CARD
CONTROL NUMBER
If the Amended and Restated Plan and Agreement of Merger goes into
effect, it is estimated that you will receive the number of shares of
SUMMIT HOLDING SOUTHEAST, INC. as indicated above.
For more information please refer to the Proxy Statement/Prospectus or call the
Company's Information Center at 1-800-331-7742
<PAGE> 373
PART I - SUBSCRIPTION FOR SHARES OF COMMON STOCK IN THE OFFERING: The
undersigned hereby irrevocably subscribes for the number of shares of Common
Stock in the Subscription Offering as indicated below, on the terms and subject
to the conditions specified herein and in the Prospectus, receipt of which is
hereby acknowledged.
<TABLE>
<S> <C> <C> <C>
SUBSCRIPTION: Number of Shares (1) Subscription Price Total Payment (2)
---------------- ------------------ -----------------
X $11.00 =
---------------- ------------------ -----------------
</TABLE>
- ----------
(1) The undersigned acknowledges and understands that the number of shares of
Common Stock to be issued to such Eligible Policyholder will be (i) increased if
the per share price to the public in the Public Offering (the "Public Offering
Price") is less than the Subscription Price and (ii) decreased if the Public
Offering Price is greater than the Subscription Price.
(2) If the aggregate Subscription Price paid by an exercising Eligible
Policyholder is insufficient or exceeds the amount necessary to purchase the
number of shares of Common Stock that such Eligible Policyholder indicates are
being subscribed for, or if an exercising Eligible Policyholder does not specify
the number of shares of Common Stock to be purchased, then such Eligible
Policyholder will be deemed to have subscribed to the full extent of the payment
tendered, subject to the limits set forth in the Prospectus. If the aggregate
Subscription Price paid by an Eligible Policyholder exceeds the amount necessary
to purchase the number of shares of Common Stock for which the Eligible
Policyholder has indicated an intention to subscribe, the Eligible Policyholder
will receive promptly by mail a refund equal to the excess payment without
interest or deduction.
METHOD OF PAYMENT
[ ] Enclosed is a check or money order payable to
"Mellon Bank, N.A." $
-------------
PART II- SPECIAL ISSUANCE INSTRUCTIONS
Complete ONLY if new certificate is to be issued in a name which differs from
the name showing on the reverse.
(COMPLETE GUARANTEE OF SIGNATURE(S) SECTION BELOW)
Name:
--------------------------------
Address:
-----------------------------
Social Security or Tax ID
------------
Complete ONLY if new certificate is to be mailed to an address other than the
address shown on the reverse.
(COMPLETE GUARANTEE OF SIGNATURE(S) SECTION BELOW)
Name:
--------------------------------
Address:
-----------------------------
Social Security or Tax ID
------------
ACKNOWLEDGMENT
THE SUBSCRIPTION ORDER FORM IS NOT VALID UNLESS SIGNED BELOW
The undersigned acknowledges receipt of the Proxy Statement/Prospectus
and understands that after delivery to the Company, the undersigned may not
modify or revoke this Subscription Order Form unless the terms of the
Subscription Offering are subsequently materially amended. Under penalties of
perjury, the undersigned certifies that the information contained herein,
including the social security number or taxpayer identification number is
correct. If Part II Special Issuance Instructions are completed, the undersigned
certifies that although the certificate representing the Common Stock is to be
issued in a name other than the registered holder, beneficial ownership of the
Common Stock will not change.
The signature(s) below must correspond with the name of the registered
holder(s) exactly as it appears on the books of the Company's transfer agent
without any alteration or change whatsoever.
SIGN HERE Dated: , 1997
----------------------------- -----------------------
Dated: , 1997
----------------------------- -----------------------
Signature(s) of Eligible
Holder
Name: Date:
---------------------------------- ------------------------------
Title(if any): Social Security #
------------------------- or Taxpayer ID #:
------------------
Day Phone: Evening Phone:
----------------------------- ---------------------
GUARANTEE OF SIGNATURE
Signature(s) Guaranteed: Authorized Signature:
------------------ ----------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED MEDALLION SIGNATURE PROGRAM), PURSUANT TO S.E.C. RULE
17 AD-15.
NOTE: THE SIGNATURE MUST CORRESPOND WITH THE NAME AS WRITTEN AND THE NAME MUST
BE THAT OF THE ELIGIBLE POLICYHOLDER.
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 1.1
SUMMIT HOLDING SOUTHEAST, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
January __, 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 exchange
for their membership interests in ESIF; (2) to concurrently 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) concurrently 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
3 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 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. 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 is 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;
6
<PAGE> 7
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
7
<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. SUBSCRIPTION OFFERING. The Company shall, not later than the
close of business on the business day immediately following the date on which
the Registration Statement becomes effective (unless a later date shall be
consented to in writing by the Representatives), commence the Subscription
Offering upon the terms and conditions set forth in the Proxy
Statement/Prospectus included in the Registration Statement, by commencing to
mail to all Eligible Policyholders and the Management Group copies of the Proxy
Statement/Prospectus, any accompanying letter of the Company, and stock order
forms evidencing the subscription rights to purchase the Common Stock (the
"Rights"). The Representatives will assist the Company and will be entitled to
receive a 7% commission on all shares of Common Stock sold in the Subscription
Offering, excluding shares of Common Stock sold to the Management Group.
The Company will instruct Chase Mellon Shareholder Services, L.L.C.,
its Subscription Agent, to report to the Representatives daily the aggregate
number of shares of Common Stock subscribed for upon the exercise by Eligible
Policyholders and the Management Group of the Rights, and will notify the
Representatives by 8:00 a.m., Eastern Standard Time, on the day after the date
of expiration of the Subscription Offering as to the aggregate number of shares
issued and sold during the Subscription Offering.
3. 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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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 8 hereof at the Subsequent Time of Delivery (as such term is defined
in Section 5, below).
4. 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.
5. 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
6. COVENANTS.
(a) COVENANTS OF THE COMPANY. The Company covenants and
agrees with each of the Underwriters:
(i) 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(a)(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 3 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 3 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.
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 11 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.
8. 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, 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, be reasonably 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 on
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 for transfers 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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(d) The Underwriters shall have received an opinion,
dated at each Time of Delivery, of McConnaughhay, Roland, Maida, Cherr &
McCranie, 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 is in compliance
with the insurance laws of the State of Florida applicable to
the
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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 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
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 8, 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.
9. 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 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
19
<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 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 Underwriter within the meaning of the Act; and the obligations of
the Underwriters under this Section 9 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.
10. 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.
11. 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 8
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
11(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 10(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 10(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 7 hereof and the indemnity and
contribution agreements in Section 9 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
12. 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 9(f) or the Company or any officer or director or controlling person of
the Company referred to in Section 9(f), 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.
13. 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, with
a copy to Alston & Bird, 1201 West Peachtree Street, Atlanta, Georgia 30309-
3424, Attention M. Hill Jeffries, Esq.
14. ACTION BY THE UNDERWRITERS. Any action under this Agreement
taken by Raymond James & Associates, Inc. will be binding upon the
Underwriters.
15. 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 9 and 11 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.
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.
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
January ____, 1997.
RAYMOND JAMES & ASSOCIATES, INC.
By: Raymond James & Associates, Inc.
By:__________________________________________
On behalf of each of the Underwriters
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<PAGE> 23
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 8(d) 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 8(d) 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
27
<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 2.2
FORM OF
RECAPITALIZATION AGREEMENT
THIS RECAPITALIZATION AGREEMENT (this "Agreement") is made as of the
_______ day of _______________, 1996, by and between EMPLOYERS SELF INSURERS
TRUST, a self-insurance trust existing pursuant to Section 624.4621 of the
Florida Statutes ("ESIF"), and SUMMIT HOLDING SOUTHEAST, INC., a Florida
corporation (the "Holding Company").
WHEREAS, the Board of Trustees of ESIF (the "Trustees") has determined
that it is in the best interests of ESIF and its member policyholders (the
"Members") for ESIF to convert to an assessable mutual insurance company (the
"Mutual Company") and then to a stock insurance company (the "Stock Company");
and
WHEREAS, the Trustees have also determined that it is in the best
interests of ESIF and the Members for the Stock Company to be wholly owned by
the Holding Company, and for the Members to receive in return for their
membership interests in the Mutual Company consideration in the form of
preferred stock and subscription rights to purchase common stock of the Holding
Company; and
WHEREAS, the Trustees have adopted an Amended Plan of Conversion and
Recapitalization dated _____________, 1996 (the "Plan"), setting forth the
terms and conditions of the above-described transactions (the "Conversion");
and
WHEREAS, the parties contemplate that this Agreement will be filed
with the Florida Department of Insurance (the "Department") as an exhibit to
the Plan, but that this Agreement will not be effective unless and until the
Plan is approved by the Department and other conditions are satisfied, as
further described below; and
WHEREAS, any capitalized term used but not defined herein shall have
the meaning set forth in the Plan;
NOW, THEREFORE, in consideration of the mutual promises contained
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
<PAGE> 2
ARTICLE 1
THE RECAPITALIZATION
1.1 Issuance of Stock Company Shares. On the Effective Date, the
Stock Company shall issue to the Holding Company 15,000 shares of the common
stock, $100 par value per share, of the Stock Company, which will constitute
all of the authorized shares of common stock of the Stock Company on the
Effective Date (the "Shares").
1.2 Consideration. As consideration for the Shares, the Holding
Company shall, upon the Effective Date:
(a) issue and deliver to certain of the Members the number of
shares of Preferred Stock that is to be allocated to "Eligible Policyholders"
pursuant to the allocation of policyholder consideration set forth in Section
7.1 of the Plan; and
(b) issue and deliver to certain of the Members the Subscription
Rights that are to be allocated to Eligible Policyholders pursuant to Section
7.2 of the Plan;
(c) contribute to the capital of ESIF cash in an amount at least
equal to the funds required for the Financing, as defined in Section 1.8 of the
Plan.
1.3 Closing. The closing of the transactions contemplated hereby
(the "Closing") shall occur on the Effective Date, simultaneously with the
closing of the transactions contemplated by the Plan. The Closing shall take
place at such place and at such time as the parties shall mutually agree.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF ESIF
ESIF hereby represents and warrants to the Holding Company, as of the
date hereof and as of the Effective Date, as follows:
2.1 Organization and Authority. ESIF is a Group Self-Insurance
Fund organized under Florida Statutes Section 624.4621 (formerly Florida
Statutes Section 440.57), and is authorized pursuant to Florida Statutes
Section 624.4621 to operate as a Group Self-Insurance Fund. ESIF has the
requisite power and authority to own or lease its assets as now owned or
leased, and to execute and deliver this Agreement and, subject to the required
approvals of the Voting Policyholders and the Department and the other consents
expressly contemplated hereby, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution, delivery and
performance by ESIF of its obligations under this Agreement, and the
consummation of the transactions contemplated hereby, have been duly and
validly authorized by all necessary action on the part of ESIF. This Agreement
has been duly and validly executed and delivered by ESIF and constitutes ESIF's
valid and binding obligation, enforceable against ESIF in accordance with its
terms.
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<PAGE> 3
2.2 No Violation of Applicable Laws or Agreements. The execution
and delivery of this Agreement do not, and the consummation of the transactions
contemplated by this Agreement and the compliance with the terms, conditions
and provisions of this Agreement by ESIF will not, (a) violate or conflict with
any provision of ESIF's Constitution; (b) violate, conflict with or result in
the breach or termination of, or otherwise give any contracting party (which
has not consented to such execution, delivery and consummation) the right to
change the terms of, or to terminate or accelerate the maturity of, or
constitute a default under the terms of, any indenture, mortgage, loan or
credit agreement or any other material agreement or instrument to which ESIF is
a party or by which any of its assets may be bound or affected; (c) violate any
Applicable Law, other than any such conflicts, breaches, terminations,
accelerations, defaults or violations that would not, individually or in the
aggregate, have a material adverse effect on ESIF.
2.3 Capitalization and Ownership. On the Effective Date, the
authorized capital stock of the Stock Company will consist of 15,000 shares of
common stock, $100 par value per share, of which all 15,000 shares will be
issued and outstanding and will comprise the Shares. Upon issuance of the
Shares against delivery by Holding Company of the consideration described in
Section 1.2 above, all of such Shares shall be duly authorized, validly issued,
fully paid and nonassessable. Upon the Effective Date, there will not exist
any outstanding options, warrants, rights, agreements, calls, commitments or
demands of any character relating to the capital stock of the Stock Company or
any securities convertible into or exchangeable for any of such capital stock.
2.4 No Litigation. Except as described in writing to the Holding
Company, there are no suits, actions or legal or administrative proceedings
pending, or to the knowledge of ESIF, threatened, which individually or in the
aggregate, if adversely determined, might materially and adversely affect the
financial condition or properties of ESIF or the conduct of its business or
which challenge any of the transactions contemplated hereby.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE HOLDING COMPANY
The Holding Company hereby represents and warrants to ESIF, as of the
date hereof and as of the Effective Date, as follows:
3.1 Organization. The Holding Company is a corporation, duly
organized and validly existing under the laws of the State of Florida. The
Holding Company has the requisite power and authority to own or lease its
assets and to transact its business as the same are now owned or leased and as
such business is transacted, and to execute and deliver this Agreement and,
subject to the required approvals of the Voting Policyholders and the
Department, and the other consents expressly contemplated hereby, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby. The execution, delivery and performance by the Holding Company of its
obligations under this
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<PAGE> 4
Agreement, and the consummation of the transactions contemplated hereby, have
been duly and validly authorized by all necessary action on the part of the
Holding Company. This Agreement has been duly and validly executed and
delivered by the Holding Company and constitutes the valid and binding
obligation of the Holding Company, enforceable against the Holding Company in
accordance with its terms.
3.2 No Violation of Applicable Laws or Agreements. The execution
and delivery of this Agreement do not, and the consummation of the transactions
contemplated by this Agreement and the compliance with the terms, conditions
and provisions of this Agreement by the Holding Company will not, (a) violate
or conflict with any provision of the certificate of incorporation or bylaws of
the Holding Company; (b) violate, conflict with or result in the breach or
termination of, or otherwise give any contracting party (which has not
consented to such execution, delivery and consummation) the right to change the
terms of, or to terminate or accelerate the maturity of, or constitute a
default under the terms of, any indenture, mortgage, loan or credit agreement
or any other material agreement or instrument to which the Holding Company is a
party or by which any of its assets may be bound or affected; (c) violate any
Applicable Law, other than any such conflicts, breaches, terminations,
accelerations, defaults or violations that would not, individually or in the
aggregate, have a material adverse effect on the Holding Company.
3.3 Capitalization and Ownership. The Holding Company's
authorized capital stock consists of (a) 20,000,000 shares of Common Stock, of
which 7 shares are currently issued and outstanding, and (b) 5,000,000 shares
of preferred stock, of which 1,646,000 shares have been designated as Series A
Preferred Stock, none of which are issued and outstanding prior to the issuance
of the Preferred Stock pursuant to this Agreement. The currently issued and
outstanding Common Stock is, and the Common Stock and Preferred Stock upon its
issuance pursuant to the Plan will be, duly authorized, validly issued, fully
paid and nonassessable. Except for the Subscription Rights that the Holding
Company will issue as described in Section 1.2(b) above, and except for 500,000
shares of Common Stock reserved in the aggregate for issuance upon exercise of
options granted under the Holding Company's 1996 Long-Term Incentive Plan and
45,000 shares of Common Stock reserved in the aggregate for issuance in
connection with the Summit Consulting, Inc. Retirement (401(k)) Plan, there do
not exist any outstanding options, warrants, rights, agreements, calls,
commitments or demands of any character relating to the capital stock of the
Holding Company or any securities convertible into or exchangeable for any of
such capital stock.
3.4 No Litigation. Except as described in writing to ESIF, there
are no suits, actions or legal or administrative proceedings pending, or to the
knowledge of the Holding Company, threatened, which challenge any of the
transactions contemplated hereby.
3.5 Investment Intent. The Holding Company is acquiring the
Shares for investment for its own account and not with a view to, or for offer
or sale in connection with, any public distribution thereof.
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<PAGE> 5
ARTICLE 4
TRANSACTIONS PRIOR TO CLOSING
4.1 Operations in the Usual Manner. From and after the date
hereof and until the earlier of Closing or this Agreement is terminated in
accordance with its terms, except as otherwise provided herein, ESIF will:
(a) continue to conduct its business in the ordinary
course; and
(b) use all reasonable efforts to preserve its assets and
properties, to preserve good relations with its policyholders, and to
retain the services of its key employees, agents, consultants and
suppliers.
4.2 Antitrust Notification. The Holding Company and ESIF shall
each promptly file all notices and other documentation that may be required by
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations promulgated thereunder (the "HSR Act"), and each party
shall use all commercially reasonable efforts to obtain any approvals and
consents that may be required under the HSR Act.
4.3 Plan of Conversion and Recapitalization. The Trustees shall
take all actions required by the Department and otherwise use all commercially
reasonable efforts to cause the Department to approve the Plan. ESIF and the
Holding Company will deliver to the Eligible Policyholders a joint proxy
statement and prospectus (the "Prospectus"), pursuant to which the Eligible
Policyholders will be asked to vote on the Conversion and other matters set
forth in the Plan, as soon as practicable after the Plan is approved by the
Department and the Prospectus is approved by the Department and by the
Securities and Exchange Commission. In addition, pursuant to the Prospectus,
the Holding Company will issue and sell the Preferred Stock as described in the
Plan, and it will offer for sale its Common Stock pursuant to the Subscription
Offering and the Public Offering as described in the Plan.
4.4 Other Efforts to Close. In addition to other actions required
by the other covenants contained herein, each of the parties hereto agrees to
use all commercially reasonable efforts to take, or to cause to be taken, all
reasonable actions and to do, or to cause to be done, all reasonable things
necessary, proper or advisable under applicable laws to consummate the
transactions contemplated by this Agreement. None of the parties hereto will
take or permit to be taken any action that would be in breach of the terms or
provisions of this Agreement or that would cause any of the representations
contained herein to be or become untrue.
4.5 Expenses. If Closing occurs, each party shall bear its own
expenses, including, without limitation, the fees and expenses of its own
counsel, accountants, financial consultants and other advisers. If Closing
does not occur for any reason other than a breach hereof by the Holding
Company, all costs and expenses incurred by the
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<PAGE> 6
Holding Company and ESIF in connection with this Agreement and the transactions
contemplated hereby, including, without limitation, the incorporation
activities of the Holding Company and the filings under the HSR Act, shall be
paid by ESIF.
4.6 Notification of Changes Affecting Representations or of
Failure to Observe Covenants. Each of the parties covenants and agrees to
advise the other promptly in writing prior to the Effective Date as to the
existence of any fact or condition known to it which would make its
representations and warranties incorrect or as to its failure to observe,
perform or comply with, in any material fashion, any covenant on its part
contained in this Agreement.
ARTICLE 5
CONDITIONS PRECEDENT
5.1 Conditions to the Obligations of ESIF. The obligations of
ESIF to proceed with the Closing under this Agreement are subject to the
fulfillment prior to or upon the Effective Date of the following conditions
(any one or more of which may be waived in whole or in part by ESIF at ESIF's
option):
(a) Bringdown of Representations and Warranties. The
representations and warranties of the Holding Company contained in
this Agreement shall be true and correct in all material respects on
and as of the Effective Date, with the same force and effect as though
such representations and warranties had been made on, as of and with
reference to such time, and ESIF shall have received a certificate to
such effect signed by an authorized officer of the Holding Company.
(b) Performance and Compliance. The Holding Company
shall have performed in all material respects all of the covenants and
complied with all of the provisions required by this Agreement to be
performed or complied with by it prior to or upon the Effective Date,
and ESIF shall have received a certificate to such effect signed by an
authorized officer of the Holding Company.
(c) HSR Act. The applicable waiting period under the HSR
Act (and any extension thereof) shall have expired or been terminated,
if a filing under the HSR Act is required by applicable law.
(d) Regulatory and Member Approval. The Florida
Department and the Voting Policyholders shall have approved the Plan
and all transactions contemplated thereby or in connection therewith,
and the Plan shall have become effective.
(e) No Litigation. No order of any court or
administrative agency shall be in effect which enjoins or prohibits
the transactions contemplated hereby, and there shall not have been
threatened, nor shall there be pending, any action or proceeding by or
before any governmental authority reasonably likely to enjoin or
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<PAGE> 7
prohibit any of the transactions contemplated by this Agreement or
seeking significant monetary relief by reason of the consummation of
such transactions.
(f) Certified Copies of Resolutions. The Holding Company
shall have delivered to ESIF copies, certified by the duly qualified
and acting Secretary or Assistant Secretary of the Holding Company, of
resolutions adopted by the Board of Directors of the Holding Company
approving this Agreement and the consummation of the transactions
contemplated hereby.
(g) Catastrophic Events. There shall not have occurred
and be continuing: (i) any outbreak of war directly or indirectly
involving the United States, (ii) any banking moratorium or suspension
of payments in respect of banking in the United States, or (iii) any
general suspension of, or limitation on prices for, trading in
securities on the New York Stock Exchange.
5.2 Conditions to the Obligations of the Holding Company. The
obligations of the Holding Company to proceed with the Closing under this
Agreement are subject to the fulfillment prior to or upon the Effective Date of
the following conditions (any one or more of which may be waived in whole or in
part by the Holding Company at the Holding Company's option):
(a) Bringdown of Representations and Warranties. The
representations and warranties of ESIF contained in this Agreement
shall be true and correct in all material respects on and as of the
Effective Date, with the same force and effect as though such
representations and warranties had been made on, as of and with
reference to such time, and the Holding Company shall have received a
certificate to such effect signed by an authorized officer of ESIF.
(b) Performance and Compliance. ESIF shall have
performed in all material respects all of the covenants and complied
with all of the provisions required by this Agreement to be performed
or complied with by it prior to or upon the Effective Date, and the
Holding Company shall have received a certificate to such effect
signed by an authorized officer of ESIF.
(c) HSR Act. The applicable waiting period under the HSR
Act (and any extension thereof) shall have expired or been terminated,
if a filing under the HSR Act is required by applicable law.
(d) Regulatory and Member Approval. The Florida
Department and the Voting Policyholders shall have approved the Plan
and all transactions contemplated thereby or in connection therewith,
and the Plan shall have become effective.
(e) No Litigation. No order of any court or
administrative agency shall be in effect which enjoins or prohibits
the transactions contemplated hereby or
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<PAGE> 8
which would limit or materially adversely affect the Holding Company's
ownership or control of the Stock Company or the business of the
Holding Company and its subsidiaries, and there shall not have been
threatened, nor shall there be pending, any action or proceeding by or
before any governmental authority (i) reasonably likely to enjoin or
prohibit any of the transactions contemplated by this Agreement or
seeking significant monetary relief by reason of the consummation of
such transactions or (ii) which might have a material adverse effect
on the future conduct of the business of the Holding Company and its
subsidiaries.
(f) Certified Copies of Resolutions. ESIF and the Stock
Company shall have delivered to the Holding Company copies, certified
by the duly qualified and acting Secretary or Assistant Secretary of
ESIF and the Stock Company, respectively, of resolutions adopted by
the Trustees of ESIF and the Board of Directors of the Stock Company
approving this Agreement and the consummation of the transactions
contemplated hereby.
(g) Catastrophic Events. There shall not have occurred
and be continuing: (i) any outbreak of war directly or indirectly
involving the United States, (ii) any banking moratorium or suspension
of payments in respect of banking in the United States, or (iii) any
general suspension of, or limitation on prices for, trading in
securities on the New York Stock Exchange.
ARTICLE 6
TERMINATION OF AGREEMENT
6.1 Termination. Notwithstanding any other provision of this
Agreement, this Agreement may be terminated, and the transactions contemplated
hereby may be abandoned, at any time prior to Closing as follows:
(a) by mutual consent of the Trustees of ESIF and the
Board of Directors of the Holding Company; or
(b) by either ESIF or the Holding Company if the Closing
shall not have occurred within one year from the date that the order
of the Department approving the Plan becomes effective; provided that
such period may be extended for up to an additional six months if
requested by the Trustees or for such longer period as the Department
may approve.
6.2 Effect of Termination. In the event of termination of this
Agreement by either ESIF or the Holding Company, as provided above, this
Agreement shall forthwith terminate and there shall be no liability on the part
of any party or any party's officers, directors or trustees, except for
liabilities arising from a breach of this Agreement prior to such termination;
provided, however, that the obligations of the Holding Company pursuant to
Article VII shall survive termination of this Agreement.
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<PAGE> 9
ARTICLE 7
INDEMNIFICATION
7.1 Indemnification by the Holding Company. If the Closing
occurs, the Holding Company agrees to indemnify, to the extent permitted by
law, the present officers and Trustees of ESIF (the "Indemnified Persons")
against any and all losses, claims, liabilities, obligations, damages or
deficiencies (including reasonable attorneys' fees and all other expenses
incurred in investigating, preparing, defending or settling any litigation or
proceeding, commenced or threatened) (collectively "Damages") to which they, or
any of them, may become subject insofar as such Damages arise directly out of
this Agreement or the transactions contemplated herein or the solicitation of
proxies from Voting Policyholders; provided, however, that such indemnification
shall be effective only after all other sources of indemnification have been
exhausted without fully indemnifying the Indemnified Persons from any and all
such Damages; and provided, further, that such indemnification shall be subject
to the limitations set forth in the following paragraphs:
(a) In no case will the Holding Company indemnify against
any liability (other than any investigation, attorneys' fees, legal
and other expenses reasonably incurred in connection with any action,
suit or proceeding or any claim asserted) resulting from any final and
binding judgment of a court with jurisdiction of the matter and from
which no further appeal can be taken, determining that such persons
did not act in good faith and in a manner they reasonably believed to
be in the best interests of ESIF; or such persons had reasonable cause
to believe their conduct was unlawful; or such persons are liable for
intentional misconduct in the performance of their duties for ESIF.
(b) The Holding Company shall not provide any
indemnification pursuant to this Article 7 with respect to any action
of the Indemnified Persons occurring after the Closing; provided,
however, that such Indemnified Persons, to the extent they are
officers or directors of the Holding Company or any of its
subsidiaries after the Closing, may be entitled to indemnification
pursuant to and in accordance with the Holding Company's Bylaws.
(c) The rights of indemnification provided for herein
shall not cease by reason of the resignation from or other cessation
of service for ESIF by any Indemnified Person whether prior to or
after the Closing. The rights of indemnification provided for herein
shall inure to the benefit of the heirs and legal representatives of
the Indemnified Persons.
7.2 Indemnification Procedures. Any Indemnified Person who
proposes to assert the right to indemnification under this Article 7 shall,
promptly after receipt of a claim or a notice of commencement of any action,
suit or proceeding against such person in respect of which a claim is to be
made against the Holding Company under this Article 7, notify the Holding
Company of the claim or the commencement of such action, suit or proceeding,
enclosing a copy of all papers received by or served upon such person, but the
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<PAGE> 10
failure to so notify the Holding Company shall not relieve the Holding Company
from its indemnification obligations hereunder except to the extent that the
Holding Company is prejudiced by such failure of notification. The Holding
Company shall be entitled to participate at its own expense in the defense of
any such claim, action, suit or proceeding (any "Action") or if it so elects
within a reasonable time after receipt of notice of any such Action, jointly
with any other indemnifying party, assume the defense thereof, with counsel
reasonably satisfactory to the Indemnified Person, and after notice from the
Holding Company to the Indemnified Person of its election to so assume the
defense thereof, the Holding Company shall not be liable to the Indemnified
Person for the fees and expenses of any additional legal counsel thereafter
retained by the Indemnified Person, except as provided below and except for the
reasonable costs of investigation subsequently incurred by the Indemnified
Person in connection with the defense thereof. In the event that the Holding
Company assumes the defense of any such Action, the Indemnified Person shall
have the right to employ its own counsel in any such Action, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Person
unless (i) the employment of such additional counsel by such Indemnified Person
has been authorized in writing by the Holding Company, (ii) the Indemnified
Person shall have reasonably concluded that there may be a conflict of interest
between the Holding Company and the Indemnified Person in the conduct of the
defense of such Action (in which case the Holding Company shall not have the
right to direct the defense of such Action on behalf of the Indemnified
Person), or (iii) the Holding Company shall not in fact have employed counsel
to assume the defense of such Action, in each of which cases the fees and
expenses of counsel shall be at the expense of the Holding Company. The
Holding Company shall not be liable for any settlement of any Action effected
without its prior written consent.
ARTICLE 8
MISCELLANEOUS
8.1 Information and Confidentiality.
(a) Information. From the date hereof to the Effective
Date, ESIF agrees to furnish to the Holding Company and its authorized
representatives full access during normal business hours to the
properties, books, records and personnel of ESIF as the Holding
Company may from time to time reasonably request.
(b) Confidentiality. Each party shall hold in strict
confidence all documents and information furnished in connection with
consummation of the transactions contemplated hereby which are of a
confidential nature.
8.2 Nature and Survival of Representations. The representations,
warranties, covenants and agreements of the parties contained in this Agreement
shall survive the Closing and shall not merge in the performance of any
obligation by any party hereto.
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<PAGE> 11
8.3 Amendment. This Agreement may not be amended or modified
without the prior written consent of both parties.
8.4 Waiver. Failure to insist upon strict compliance with any of
the terms or conditions of this Agreement at any one time shall not be deemed a
waiver of such term or condition at any other time; nor shall any waiver or
relinquishment of any right or power granted herein at any time be deemed a
waiver or relinquishment of the same or any other right or power at any other
time.
8.5 Governing Law. Notwithstanding the place where this Agreement
may be executed by any of the parties, the parties expressly agree that this
Agreement shall in all respects be governed by, and construed in accordance
with, the laws of the State of Florida, without regard for its conflict of laws
doctrine.
8.6 Notices. Any notice or other communication to be given
hereunder shall be in writing and shall be deemed sufficient when (i) mailed by
United States certified mail, return receipt requested, (ii) mailed by
overnight express mail, (iii) sent by facsimile or telecopy machine, followed
by confirmation mailed by first-class mail or overnight express mail, or (iv)
delivered in person, at the address set forth below, or such other address as a
party may provide to the other in accordance with the procedure for notices set
forth in this Section:
If to ESIF:
Employers Self Insurance Fund
2310 A-Z Park Road
Lakeland, Florida 33801
Attn: Greg C. Branch, Chairman
Telephone: 941-665-6060
Telecopy: 941-665-2926
If to the Holding Company:
Summit Holding Southeast, Inc.
2310 A-Z Park Road
Lakeland, Florida 33801
Attn: William B. Bull, President and CEO
Telephone: 941-665-6060
Telecopy: 941-665-2926
8.7 Invalid Provision. If any provision of this Agreement shall
be determined by any court of competent jurisdiction or the Department to be
invalid or unenforceable, this Agreement shall be deemed amended to delete such
provision and the remainder of this Agreement shall be enforceable by its
terms.
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<PAGE> 12
8.8 Assignment. This Agreement may not be assigned or delegated
by any party without the prior written consent of all other parties, which
consent shall not be unreasonably withheld or delayed.
8.9 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective permitted
successors and assigns.
8.10 Further Assurances. Each party agrees to execute and deliver
all such further instruments and do all such further acts as may be reasonably
necessary or appropriate to effectuate this Agreement.
8.11 Headings. Headings and captions contained in this Agreement
are inserted only as a matter of convenience and for reference and in no way
define, limit, extend or prescribe the scope of this Agreement or the intent of
any provision.
8.12 Person and Gender. The masculine gender shall include the
feminine and neuter genders and the singular shall include the plural.
8.13 Entire Agreement. This Agreement constitutes the entire
agreement of the parties with respect to matters set forth in this Agreement
and supersedes any prior understanding or agreement, oral or written, with
respect to such matters.
8.14 No Third-Party Beneficiaries. This Agreement is for the sole
benefit of the parties hereto and nothing herein expressed or implied shall
give or be construed to give to any Person, other than the parties hereto, any
legal or equitable rights hereunder.
8.15 Effect of Conversion. Upon the effectiveness of the
Conversion, all the representations, warranties, covenants, undertakings and
other commitments of ESIF contained herein shall be deemed to be
representations, warranties, covenants, undertakings and commitments of the
Stock Company, to the same extent as if made by the Stock Company.
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<PAGE> 13
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
EMPLOYERS SELF INSURERS FUND
Witness:
By:
- ----------------------------------- --------------------------------
Greg C. Branch
Chairman, Board of Trustees
SUMMIT HOLDING SOUTHEAST, INC.
Attest:
By:
- ----------------------------------- --------------------------------
Secretary William B. Bull
President and Chief Executive Officer
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<PAGE> 1
EXHIBIT 3.3
FORM OF
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES A PREFERRED STOCK
OF
SUMMIT HOLDING SOUTHEAST, INC.
Summit Holding Southeast, Inc., a Florida corporation (hereinafter
called the "Corporation"), hereby certifies as follows:
FIRST: The Articles of Incorporation of the Corporation authorize the
issuance of Five Million (5,000,000) shares of Preferred Stock, par value $10
per share ("Preferred Stock"), and further authorize the Board of Directors of
the Corporation (the "Board of Directors"), by resolution or resolutions, at any
time and from time to time, to divide and establish any or all of the unissued
shares of Preferred Stock not then allocated to any class or series of Preferred
Stock into one or more classes or series, and without limiting the generality of
the foregoing, to fix and determine the designation of each such class or
series, the number of shares which shall constitute such class or series, such
voting powers, and such preferences and relative participating, optional or
other special rights, and qualifications, limitations or restrictions thereof of
the shares of each class or series so established.
SECOND: The following resolutions authorizing the creation and issuance
of a series of said Preferred Stock to be known as Series A Preferred Stock
were duly adopted by the Board of Directors on the 20th day of November, 1996,
in accordance with Section 607.0602 of the Florida Business Corporation Act.
RESOLVED, that the Board of Directors, pursuant to authority vested in
it by the provisions of the Articles of Incorporation of the
Corporation, hereby authorizes the issue of a series of the
Corporation's Preferred Stock, par value $10 per share, and hereby
fixes the number, designation, preferences, rights, limitations and
restrictions thereof in addition to those set forth in said Articles of
Incorporation as follows:
1. NUMBER AND DESIGNATION.
A series of the Corporation's Preferred Stock is designated as
"Series A Preferred Stock" (the "Series A Preferred Stock") and the
maximum number of shares of Series A Preferred Stock shall be One
Million Seven Hundred and Fifty Thousand (1,750,000) and no more. The
Corporation shall issue only whole shares, and shall not issue any
fractional shares, of Series A Preferred Stock.
<PAGE> 2
2. RANK.
The Series A Preferred Stock shall, with respect to dividend
rights and rights on liquidation, dissolution and winding up, rank
prior to all classes or series of equity securities of the
Corporation, including the Corporation's common stock, no par value
("Common Stock"). All equity securities of the Corporation to which the
Series A Preferred Stock ranks prior (whether with respect to
dividends or upon liquidation, dissolution, winding up or otherwise),
including the Common Stock, are collectively referred to herein as the
"Junior Securities." The definition of Junior Securities shall also
include any rights or options exercisable for or convertible into any
of the Junior Securities as the case may be. The Series A Preferred
Stock shall be subject to the creation of Junior Securities.
3. DIVIDENDS.
(a) The holders of shares 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 from day to day whether
or not declared by the Board of Directors but shall be payable only as
and when declared by the 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 (as defined in Section
4 below) as set forth herein. Such dividends shall cumulate from the
date of issue, whether or not the payment of such dividends is
declared by the Board of Directors and whether or not there shall be
funds of the Corporation legally available for the payment of such
dividends. Each dividend for which payment is declared by the Board
of Directors shall be payable to the holders of record of shares of
the Series A Preferred Stock, as they appear on the stock records of
the Corporation at the close of business on the date that is ten (10)
days prior to any dividend payment date established by the Board of
Directors (the "Record Date").
(b) Holders of shares of Series A Preferred Stock
shall not be entitled to any dividends, whether payable in cash,
property or stock, in excess of cumulated dividends, as herein
provided, on the Series A Preferred Stock. No interest, or sum of
money in lieu of interest, shall be payable in respect of any
cumulated but unpaid dividends.
(c) So long as any shares of the Series A Preferred
Stock are outstanding, no dividends (other than dividends or
distributions paid in shares of, or options, warrants or rights to
subscribe for or purchase shares of, Junior Securities) shall be
declared or paid or set apart for payment or other distribution
declared or made upon Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired (all such
dividends,
-2-
<PAGE> 3
distributions, redemptions or purchases being hereinafter referred to
as a "Junior Securities Distribution") for any consideration (or any
moneys be paid to or made available for a sinking fund for the
redemption of any shares of any such stock) by the Corporation,
directly or indirectly (except by conversion into or exchange for
Junior Securities), unless in each case the full cumulated dividends on
all outstanding shares of the Series A Preferred Stock shall have been
paid or set apart for payment with respect to the Series A Preferred
Stock.
4. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary (a
"Liquidation"), after payment or provision for payment of the debts and
other liabilities of the Corporation, and before any payment or
distribution of the assets of the Corporation (whether capital or
surplus) shall be made to or set apart for the holders of Junior
Securities, the holders of the shares of Series A Preferred Stock
shall be entitled to receive $10 per whole share of Series A Preferred
Stock (the "Liquidation Preference") plus an amount equal to all
dividends cumulated and unpaid thereon to the date of final
distribution to such holders; but such holders shall not be entitled
to any further payment. If, upon any Liquidation, the assets of the
Corporation, or proceeds thereof, distributable among the holders of
the shares of Series A Preferred Stock shall be insufficient to pay in
full the Liquidation Preference, then such assets, or the proceeds
thereof, shall be distributed among the holders of shares of Series A
Preferred Stock ratably in accordance with the respective amounts that
would be payable on such shares of Series A Preferred Stock if all
amounts payable thereon were paid in full. For the purposes of this
Section 4, no transaction that is included within the definition of
"Business Combination" in Section 10 shall be deemed to be a
Liquidation.
(b) After payment shall have been made in full to the
holders of the Series A Preferred Stock, as provided in this Section
4, any other series or class of Junior Securities shall, subject to
the respective terms and provisions (if any) applying thereto, be
entitled to receive any and all assets remaining to be paid or
distributed, and the holders of the Series A Preferred Stock shall
not be entitled to share therein.
(c) Written notice of any Liquidation stating a
payment date and the place where the distributive amounts shall be
payable, shall be given by mail, postage prepaid, not less than thirty
(30) days prior to the payment date stated therein, to the holders of
record of the Series A Preferred Stock at their respective addresses
as the same shall appear on the books of the Corporation.
-3-
<PAGE> 4
5. REDEMPTION.
(a) The Series A Preferred Stock shall be redeemable
by the Corporation at any time and from time to time in whole or in
part (but if in part, each such redemption shall be of no less than
one hundred (100) shares on any one date), at the election of the
Corporation by resolution of its Board of Directors, out of funds
legally available therefor.
(b) The redemption price for any redemption of
Series A Preferred Stock shall be the Liquidation Preference per
whole share, together with an amount equal to all cumulated and unpaid
dividends thereon to the date of redemption.
(c) Shares of Series A Preferred Stock which have
been issued and reacquired in any manner, including shares purchased
or redeemed, shall (upon compliance with any applicable provisions of
the Florida Business Corporation Act) have the status of authorized
and unissued shares of the class of Preferred Stock undesignated as to
series and may be redesignated and reissued as part of any series of
the Preferred Stock; provided that no such issued and reacquired
shares of Series A Preferred Stock shall be reissued or sold as
Series A Preferred Stock.
(d) Notwithstanding the foregoing provisions of this
Section 5, unless full cumulated cash dividends on all outstanding
shares of Series A Preferred Stock shall have been paid or
contemporaneously are paid or set apart for payment for all Dividend
Periods terminating on or prior to the applicable redemption date,
none of the shares of Series A Preferred Stock shall be redeemed, and
no sum shall be set aside for such redemption, unless shares of Series
A Preferred Stock are redeemed pro rata, provided, however, that the
foregoing shall not prevent the purchase or acquisition of shares of
Series A Preferred Stock by conversion into or exchange for Junior
Securities.
-4-
<PAGE> 5
6. PROCEDURE FOR REDEMPTION.
(a) In the event that the Corporation shall elect to
redeem fewer than all the outstanding shares of Series A Preferred
Stock, the number of shares to be redeemed shall be determined by the
Board of Directors or by a duly authorized committee thereof, and the
shares to be redeemed shall be selected pro rata (with any fractional
shares being rounded to the nearest whole share) as may be determined
by the Board of Directors or by a duly authorized committee thereof.
(b) Notice of redemption of shares of Series A
Preferred Stock shall be given by first class mail, postage prepaid,
mailed not less than thirty (30) days nor more than sixty (60) days
prior to the redemption date, to each holder of record of the
shares to be redeemed at such holder's address as the same appears on
the stock register of the Corporation on the tenth (10h) day preceding
the date of such notice; provided that neither the failure to give such
notice nor any defect therein shall affect the validity of the giving
of notice for the redemption of any share of Series A Preferred Stock
to be redeemed except as to the holder to whom the Corporation has
failed to give said notice or except as to the holder whose notice was
defective. Each such notice shall state: (i) the redemption date; (ii)
the number of shares of Series A Preferred Stock to be redeemed and,
if fewer than all the shares held by such holder are to be redeemed,
the number of shares to be redeemed from such holder; (iii) the
redemption price specifying the amount of cumulated and unpaid
dividends to be included therein; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the
redemption price; and (v) that dividends on the shares to be redeemed
will cease to cumulate on such redemption date.
(c) Notice having been mailed as aforesaid, from and
after the redemption date (unless default shall be made by the
Corporation in providing money for the payment of the redemption price
of the shares called for redemption), dividends on the shares of Series
A Preferred Stock so called for redemption shall cease to cumulate,
and all rights of the holders thereof as stockholders of the
Corporation (except the right to receive from the Corporation the
redemption price) shall cease. Upon surrender in accordance with said
notice of the certificates for any shares so redeemed (properly
endorsed or assigned for transfer, if the Board of Directors of the
Corporation or a duly authorized committee thereof shall so require and
the notice shall so state), such shares shall be redeemed by the
Corporation at the redemption price aforesaid. In case fewer than all
the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares without
cost to the holder thereof.
-5-
<PAGE> 6
7. OFFER TO PURCHASE IN CONNECTION WITH CERTAIN
BUSINESS COMBINATIONS.
(a) So long as any shares of Series A Preferred
Stock remain outstanding, the Corporation will not enter into a
Business Combination or permit a Business Combination to occur unless
the Corporation or some other Person shall have made an offer to
purchase (a "Business Combination Purchase Offer") any or all of the
outstanding shares of Series A Preferred Stock for cash at a purchase
price equal to the Liquidation Preference plus an amount equal to
cumulated and unpaid dividends to the date of purchase, and shall have
consummated the purchase of all shares of Series A Preferred Stock
properly tendered pursuant to such Business Combination Purchase Offer
at the closing of such Business Combination in accordance with the
procedures set forth in Section 8(b); provided that, the Corporation's
obligation to make any payment in respect of a Business Combination
Purchase Offer shall be subject to the prior payment of any amounts
owed by the Corporation or any of its Subsidiaries for any
indebtedness for borrowed money.
(b) At the commencement of a Business Combination
Purchase Offer, a written notice (the "Business Combination
Purchase Notice") of such Business Combination Purchase Offer shall be
mailed to each holder of record of shares of Series A Preferred Stock
addressed to such holder at its mailing address as shown on the
records of the Corporation. The Business Combination Purchase Notice
shall be accompanied by a copy of the most recently available report
or other information regarding the Corporation required to be
delivered to the holders of Series A Preferred Stock pursuant to
Section 9 hereof, even if such report or other information has been
previously mailed to such holder in accordance with Section 9 hereof.
Each such Business Combination Purchase Notice shall contain all
instructions and materials necessary to enable such holder of Series A
Preferred Stock to tender its shares pursuant to the Business
Combination Purchase Offer and shall state:
(i) that the Business Combination Purchase Offer
is being made pursuant to this Section 7 and that all shares of Series
A Preferred Stock properly tendered will be accepted for payment;
(ii) the parties to the Business Combination and
the terms and timing of the Business Combination;
(iii) the Liquidation Preference;
(iv) the date (the "Business Combination
Purchase Date") on which the Corporation shall purchase shares duly
tendered pursuant to the Business Combination Purchase Offer, and the
amount of cumulated and
-6-
<PAGE> 7
unpaid dividends on a share of Series A Preferred Stock to and
including the Business Combination Purchase Date;
(v) that, unless the Corporation defaults in
making the payment pursuant to the Business Combination Purchase Offer,
any shares of Series A Preferred Stock accepted for payment pursuant
to the Business Combination Purchase Offer shall cease to cumulate
dividends after the Business Combination Purchase Date;
(vi) that any shares of Series A Preferred
Stock not tendered or accepted for payment will continue to cumulate
dividends at the Dividend Rate;
(vii) that stockholders electing to have shares
purchased pursuant to the Business Combination Purchase Offer will be
required to surrender the certificate or certificates representing such
shares, together with a form entitled "Option of Stockholder to Elect
Purchase" (or other appropriate form letter of transmittal) to be
mailed to the holders with such Business Combination Purchase Notice,
to the Corporation at the address specified in the Business Combination
Purchase Notice prior to the close of business on the Business Day next
preceding the Business Combination Purchase Date;
(viii) that each stockholder will be entitled to
withdraw its election if the Corporation receives, not later than the
close of business on the third Business Day next preceding the Business
Combination Purchase Date (or such other later date as may be required
by law), a letter executed with such formalities as the Corporation in
its sole discretion deems reasonably appropriate or, at the
Corporation's option, a telegram, telex or facsimile transmission, in
each case setting forth the name of the stockholder, the number of
shares of Series A Preferred Stock previously delivered for purchase
and a statement that such stockholder does thereby withdraw its
election to have such shares purchased;
(ix) that stockholders whose shares are
purchased only in part will be issued a new certificate representing
the unpurchased shares so surrendered; and
(x) such other information as the Corporation in
its sole discretion deems appropriate.
(c) In the event of a material change in the parties
to, or the terms or the timing of any Business Combination, the
Corporation shall give the holders of the Series A Preferred Stock
written notice in accordance with Section 7(b) describing such
material change at least five (5) Business Days prior to the Business
Combination Purchase Date (subject, with respect to such
-7-
<PAGE> 8
five Business Day limitation, to any applicable law or regulation
requiring a longer notice or waiting period).
(d) The Business Combination Purchase Date shall be a
date occurring no earlier than twenty (20) Business Days and no later
than forty (40) Business Days after the mailing of the Business
Combination Purchase Notice (subject, with respect to such 40 Business
Day limitation, to Section 7(c) and any applicable law or regulation
requiring a longer notice or waiting period).
(e) On the Business Combination Purchase Date, the
Corporation shall (i) accept for payment shares of Series A
Preferred Stock properly tendered pursuant to the Business Combination
Purchase Offer and (ii) set aside in a separate account, for the
benefit of holders whose shares of Series A Preferred Stock are to be
purchased, at a federally insured bank or savings institution doing
business in the City of Orlando, Florida and having consolidated
capital and surplus of not less than $50 million, money sufficient to
pay the purchase price of all shares of Series A Preferred Stock so
accepted. The Corporation shall promptly mail or deliver to the
holders of Series A Preferred Stock so purchased payment in an amount
equal to the purchase price and promptly mail or deliver to such
stockholders a new certificate for Series A Preferred Stock
representing the unpurchased shares surrendered. The Corporation shall
publicly announce the results of the Business Combination Purchase
Offer on or as soon as practicable after the Business Combination
Purchase Date.
8. VOTING RIGHTS.
(a) The holders of record of shares of Series A
Preferred Stock shall not be entitled to any voting rights except as
hereinafter provided in this Section 8 or as otherwise provided by law.
(b) Without the written consent of a majority of the
outstanding shares of Series A Preferred Stock or the vote of
holders of a majority of the outstanding shares of Series A Preferred
Stock at a meeting of the holders of Series A Preferred Stock called
for such purpose, the Corporation will not amend, alter or repeal any
provision of the Articles of Incorporation (by merger or otherwise) so
as to affect adversely the preferences, rights or powers of the Series
A Preferred Stock; provided that any such amendment that changes the
dividend payable on or the Liquidation Preference of the Series A
Preferred Stock shall require the affirmative vote at a meeting of
holders of Series A Preferred Stock called for such purpose or written
consent of the holder of each share of Series A Preferred Stock.
-8-
<PAGE> 9
(c) Without the written consent of a majority of the
outstanding shares of Series A Preferred Stock or the vote of
holders of a majority of the outstanding shares of Series A Preferred
Stock at a meeting of such holders called for such purpose, the
Corporation will not issue any additional Series A Preferred Stock.
(d) In exercising the voting rights set forth in this
Section 8, each share of Series A Preferred Stock shall have
one vote per share, except that when any other series of Preferred
Stock shall have the right to vote with the Series A Preferred Stock
as a single class on any matter, then the Series A Preferred Stock and
such other series shall have with respect to such matters one vote per
$10 of stated Liquidation Preference. Except as otherwise required by
applicable law or as set forth herein, the shares of Series A
Preferred Stock shall not have any relative, participating, optional
or other special voting rights and powers and the consent of the
holders thereof shall not be required for the taking of any corporate
action.
9. REPORTS.
So long as the Series A Preferred Stock remains outstanding,
the Corporation shall cause its annual reports to stockholders
and any quarterly or other financial reports and information furnished
by it to stockholders pursuant to the requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), to be mailed to
the holders of the Series A Preferred Stock (no later than the date
such materials are mailed to the holders of the Corporation's common
stock) at their addresses appearing on the books of the Corporation.
If the Corporation is not required to furnish annual or quarterly
reports to its stockholders pursuant to the Exchange Act, it shall
cause its financial statements, including any notes thereto (and with
respect to annual reports, an auditors' report by a nationally
recognized firm of independent certified public accountants), to be
mailed to the holders of the Series A Preferred Stock within one
hundred twenty (120) days after the end of each of the Corporation's
fiscal years and within sixty (60) days after the end of each of its
first three fiscal quarters.
10. GENERAL PROVISIONS.
(a) "Business Combination" means the consolidation or
merger of the Corporation with or into any other Person, a share
exchange in which the outstanding voting securities of the Corporation
are exchanged for money, property or securities of any Person, or the
transfer (by lease, assignment, sale or otherwise) of all or
substantially all of the properties and assets of the Corporation, in a
single transaction or through a series of related transactions, to
another Person or group of affiliated Persons or the entering into any
such transaction or transactions by any Subsidiary of the Corporation
if such transaction or
-9-
<PAGE> 10
transactions in the aggregate would result in a sale of all or
substantially all of the assets of the Corporation and its Subsidiaries
on a consolidated basis.
(b) "Business Day" means any day other than a
Saturday, a Sunday, any day on which the New York Stock Exchange is
closed or any other day on which banking institutions in New York, New
York are authorized or required by law to be closed.
(c) "Capital Stock" means any and all shares,
interests, participations or other equivalents (however designated) of
corporate stock or any and all equivalent ownership interests in a
Person (other than a corporation).
(d) The term "outstanding," when used with reference
to shares of stock, shall mean issued shares, excluding shares held by
the Corporation or a Subsidiary thereof.
(e) "Person" means any individual, corporation,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
(f) "Subsidiary" means, with respect to any Person,
any corporation, limited or general partnership, trust, association or
other business entity of which an aggregate of 50% or more of the
outstanding Capital Stock or other interests entitled to vote in the
election of the board of directors of such corporation (irrespective of
whether, at the time, Capital Stock of any other class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency), managers, trustees or other controlling
Persons, or an equivalent controlling interest therein, of such Person
is, at the time, directly or indirectly, owned by such Person and/or
one or more Subsidiaries of such Person.
(g) The headings of the Sections, subsections,
clauses and subclauses of this Certificate of Designation are for
convenience of reference only and shall not define, limit or affect any
of the provisions hereof.
AND FURTHER RESOLVED, that, before the Corporation shall issue any
shares of the Series A Preferred Stock, articles of amendment
pursuant to Section 607.0602 of the Florida Business Corporation Act
shall be made, executed, acknowledged, filed and recorded in
accordance with the provisions of said Section 607.0602, and the
proper officers of the Corporation are hereby authorized and directed
to do all acts and things which may be necessary or proper in their
opinion to carry into effect the purposes of and intent of this and
the foregoing resolutions.
-10-
<PAGE> 11
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed in its name and on its behalf and attested on this
_______ day of ________________, 1997 by duly authorized officers of the
Corporation.
SUMMIT HOLDING SOUTHEAST, INC.
By:
-------------------------------------
William B. Bull
President and Chief Executive Officer
ATTEST:
- ----------------------------------------
Russell L. Wall, Secretary
-11-
<PAGE> 1
EXHIBIT 4.1
NUMBER SHARES
SH_______
SUMMIT HOLDING SOUTHEAST, INC.
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 866078 10 8
INCORPORATED UNDER THE LAWS OF THE STATE OF FLORIDA
This Certifies That
is the owner of
SHARES OF ONE CENT (1 CENT) PAR VALUE EACH OF THE COMMON STOCK OF
SUMMIT HOLDING SOUTHEAST, INC.
fully paid and non-assessable, transferable on the books of the Corporation by
the holder hereof in person or by Attorney, upon surrender of this Certificate
properly endorsed. This Certificate is not valid until countersigned by the
Transfer Agent.
In Witness Whereof, the said Corporation has caused this Certificate to
be signed by its duly authorized officers and to be sealed with the Seal of the
Corporation.
Dated:
CORPORATE
SEAL
SECRETARY PRESIDENT
COUNTERSIGNED:
ChaseMellon Shareholder Services, L.L.C.
TRANSFER AGENT
BY
AUTHORIZED SIGNATURE
<PAGE> 2
SUMMIT HOLDING SOUTHEAST, INC.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO
REQUESTS, THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES, AND LIMITATIONS
APPLICABLE TO EACH CLASS OF STOCK OF THE CORPORATION AND THE VARIATIONS IN
RIGHTS, PREFERENCES, AND LIMITATIONS DETERMINED FOR EACH SERIES (AND THE
AUTHORITY OF THE BOARD OF DIRECTORS TO DETERMINE VARIATIONS FOR FUTURE
SERIES). SUCH REQUEST MAY BE MADE TO THE CORPORATION AT ITS PRINCIPAL
OFFICE.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be contrued as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM --- as tenants in common UNIF TRANS MIN ACT Custodian
TEN ENT --- as tenants by the entireties ----------------------------------
JT TEN --- as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
-----------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received,______________________________________________hereby
sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated_______________________
________________________________________________________
NOTICE: The signature of this assignment must correspond
with the name as written upon the face of the
certificate in every particular, without alteration or
enlargement or any change whatever.
SIGNATURE(S) GUARANTEED:
________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION, BANK, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17 Ad-15.
<PAGE> 1
EXHIBIT 4.2
NUMBER SHARES
SHP_______
SUMMIT HOLDING SOUTHEAST, INC.
CUSIP 866078 20 7
SERIES A SEE REVERSE FOR
PREFERRED STOCK CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF FLORIDA
This Certifies That
is the owner of
SHARES OF TEN DOLLAR ($10.00) PAR VALUE EACH OF THE SERIES A
PREFERRED STOCK OF
SUMMIT HOLDING SOUTHEAST, INC.
fully paid and non-assessable, transferable on the books of the Corporation by
the holder hereof in person or by Attorney, upon surrender of this Certificate
properly endorsed. This Certificate is not valid until countersigned by the
Transfer Agent.
In Witness Whereof, the said Corporation has caused this Certificate to
be signed by its duly authorized officers and to be sealed with the Seal of the
Corporation.
Dated:
CORPORATE
SEAL
SECRETARY PRESIDENT
COUNTERSIGNED:
ChaseMellon Shareholder Services, L.L.C.
TRANSFER AGENT
BY
AUTHORIZED SIGNATURE
<PAGE> 2
SUMMIT HOLDING SOUTHEAST, INC.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO
REQUESTS, THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES, AND LIMITATIONS
APPLICABLE TO EACH CLASS OF STOCK OF THE CORPORATION AND THE VARIATIONS IN
RIGHTS, PREFERENCES, AND LIMITATIONS DETERMINED FOR EACH SERIES (AND THE
AUTHORITY OF THE BOARD OF DIRECTORS TO DETERMINE VARIATIONS FOR FUTURE
SERIES). SUCH REQUEST MAY BE MADE TO THE CORPORATION AT ITS PRINCIPAL
OFFICE.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM --- as tenants in common UNIF TRANS MIN ACT Custodian
TEN ENT --- as tenants by the entireties ----------------------------------
JT TEN --- as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
-----------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received,______________________________________________hereby
sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated_______________________
________________________________________________________
NOTICE: The signature of this assignment must correspond
with the name as written upon the face of the
certificate in every particular, without alteration or
enlargement or any change whatever.
SIGNATURE(S) GUARANTEED:
________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION, BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17 Ad-15.
<PAGE> 1
Exhibit 5.1
[McCONNAUGHHAY, ROLAND, MAIDA & CHERR, P.A. LETTERHEAD]
January 7, 1997
Summit Holding Southeast, Inc.
2310 A-Z Park Road
Lakeland, Florida 33801
Re: Registration Statement on Form S-1 (No. 333-16499)
Ladies and Gentlemen:
We have acted as Florida insurance regulatory counsel to Employers Self
Insurers Fund ("ESIF"), a Florida group self-insurance fund authorized pursuant
to section 624.4621, Florida Statutes, in connection with its proposed
conversion to a stock insurance company ("Stock Insurer") pursuant to sections
624.461, 628.6013 and 628.6017, Florida Statutes. Upon the effectiveness of the
Amended Plan of Conversion and Recapitalization (the "Plan of Conversion"),
Stock Insurer will become a wholly owned subsidiary of Summit Holding
Southeast, Inc. (the "Company"). The Company intends, following the
effectiveness of the above-referenced Registration Statement (the "Registration
Statement"), to (i) issue shares of Series A Preferred Stock in the Company
(the "Preferred Shares") to all eligible policyholders of ESIF and (ii) issue
and sell shares of Common Stock (the "Common Shares") to those eligible
policyholders of ESIF who subscribe therefor and, to the extent that eligible
policyholders do not subscribe for all the Common Shares, to the several
underwriters (the "Underwriters") named in Schedule I to the Underwriting
Agreement (the "Underwriting Agreement") to be entered into by and among the
Company and the Underwriters. The Common Shares and the Preferred Shares are
hereinafter referred to collectively as the "Shares."
We have examined the Articles of Incorporation of the Company
(including the Certificate of Designation, Preferences and Rights of Series A
Preferred Stock), the Bylaws of the Company, records of proceedings of the
Board of Directors, or committees thereof, and the shareholders of the Company
deemed by us to be relevant to this opinion letter, the proposed
<PAGE> 2
Summit Holding Southeast, Inc.
January 7, 1997
Page 2
form of the Plan of Conversion, the Registration Statement and the proposed
form of the Underwriting Agreement. We also have examined originals or copies,
certified or otherwise identified to our satisfaction, of such other corporate
records of the Company, such other agreements and instruments, such
certificates of public officials, officers of the Company and other persons, and
such other documents as we have deemed necessary or appropriate as a basis for
the opinions hereinafter expressed. In such examination, we have assumed the
genuineness of all signatures, the legal capacity of all natural persons, the
authenticity and completeness of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified,
conformed, photostatic or facsimile copies, and the authenticity of the
originals of such copies, and we have assumed all certificates of public
officials to have been properly given and to be accurate.
As to factual matters relevant to this opinion letter, we have relied
upon the representations and warranties as to factual matters contained in
certificates and statements of officers of the Company and certain public
officials. Except to the extent expressly set forth herein, we have made no
independent investigations with regard thereto, and, accordingly, we do not
express any opinion as to matters that might have been disclosed by
independent verification.
On the basis of the foregoing, the subject to the limitations set forth
herein, we are of the opinion that, upon the effectiveness of the Plan of
Conversion, the due execution and delivery of the Underwriting Agreement by the
parties thereto (to the extent that all of the Common Shares are not subscribed
for by eligible policyholders) and the issuance and delivery of the Shares in
accordance with the terms of the Plan of Conversion and the Underwriting
Agreement (if applicable), the Shares will be validly issued, fully paid and
nonassessable by the Company.
Members of this firm are licensed to practice law in the State of
Florida, and we express no opinion with regard to any law other than the laws
of the State of Florida.
We consent to the filing of this opinion letter as an exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Matters" therein. In giving such consent, we do not thereby admit that we are
within the category of persons whose consent is required under Section 7 of the
Act or the rules and regulations of the Commission thereunder.
This opinion letter is being furnished by us to the Company and the
Commission solely for the benefit of the Company and the Commission in
connection with the Registration Statement and is not to be used, circulated,
quoted or otherwise relied upon by any other person, or by the Company or the
Commission for any other purpose, without our express written consent. The
only opinion rendered by us consists of those matters set forth in the fourth
paragraph hereof, and no opinion may be implied or inferred beyond those
expressly
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Summit Holding Southeast, Inc.
January 7, 1997
Page 3
stated. This opinion letter is rendered as of the date hereof, and we have no
obligation to update this opinion letter.
Sincerely,
McCONNAUGHHAY, ROLAND, MAIDA
& CHERR, P.A.
By: /s/ Thomas J. Maida
--------------------------------
Shareholder
<PAGE> 1
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EXHIBIT 10.3
================================================================================
CREDIT AGREEMENT
among
SUMMIT HOLDING SOUTHEAST, INC.
THE LENDERS NAMED HEREIN,
AND
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
as Agent
$38,000,000 Credit Facilities
Dated as of , 19
================================================================================
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
RECITALS
ARTICLE I
DEFINITIONS
1.1 Defined Terms .................................................... 2
1.2 Use of Defined Terms .............................................. 25
1.3 Cross References; Headings ........................................ 25
1.4 Accounting Terms .................................................. 25
1.5 Time References .................................................. 25
1.6 Other Definitional Provisions .................................... 25
ARTICLE II
TERM LOANS
2.1 Term Loans. ...................................................... 26
2.2 Term Notes. ...................................................... 26
2.3 Scheduled Repayment of Term Loans.................................. 26
2.4 Mandatory Prepayment of Term Loans. .............................. 27
2.5 Voluntary Prepayment of Term Loans. .............................. 27
2.6 LIBOR Breakage; Interest; Etc...................................... 27
ARTICLE III
REVOLVING CREDIT FACILITY
3.1 Loans ............................................................ 27
3.2 Voluntary Termination; Reduction of Commitments.................... 29
3.3 Voluntary Prepayments.............................................. 30
3.4 Mandatory Repayment of Loans. .................................... 31
3.5 Unused Commitment Fee.............................................. 31
3.6 Revolving Credit Notes ............................................ 31
ARTICLE IV
INTEREST; ADDITIONAL PROVISIONS
4.1 Interest Rates .................................................... 31
4.2 Interest Payment Dates ............................................ 32
4.3 Computation of Rates .............................................. 32
4.4 Default Rate; PostPetition Interest................................ 32
4.5 Maximum Interest Rate ............................................ 32
</TABLE>
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<TABLE>
<S> <C> <C>
4.6 Conversion to and Renewal of LIBOR Loans ................. 32
4.7 Restrictions on Interest Rate Options ................... 33
4.8 Illegality ............................................... 34
4.9 Limitation on LIBOR Loans ............................... 34
4.10 Procedures Regarding Payments ........................... 34
4.11 Payment Not at End of Interest Period ................... 35
4.12 Increased Costs ......................................... 36
4.13 Taxes ................................................... 36
4.14 Application of Payments; Pro Rata Funding ............... 37
4.15 Recordkeeping ........................................... 38
ARTICLE V
CONDITIONS OF CLOSING AND BORROWIN
5.1 Closing ................................................. 38
5.2 Conditions to the Closing ............................... 38
5.2.1 Loan and Security Documents ............................. 38
5.2.2 Certificates; Opinions ................................... 39
5.2.3 Other Documents ......................................... 40
5.2.4 Investment Portfolio ..................................... 41
5.2.5 Litigation ............................................... 41
5.2.6 No Material Adverse Event ............................... 41
5.2.7 Discontinued Operations ................................. 41
5.3 Continuing Conditions..................................... 42
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
6.1 Corporate Organization and Power ......................... 42
6.2 Certain Agreements ....................................... 43
6.3 Litigation; Government Regulation ....................... 43
6.4 Taxes ................................................... 43
6.5 Conflicts With Other Instruments, Laws ................... 43
6.6 Governmental Compliance ................................. 44
6.7 Default ................................................. 44
6.8 Margin Securities ....................................... 44
6.9 Insurance ............................................... 44
6.10 Ownership of Properties; Subsidiaries ................... 44
6.11 Business Locations ....................................... 45
6.12 Accuracy of Information ................................. 45
6.13 Subsidiaries; Affiliates ................................. 45
6.14 Investment Company Act ................................... 45
6.15 Employee Plans; ERISA ................................... 45
6.16 Pro Forma Balance Sheet ................................. 46
6.17 GAAP Financial Statements................................. 46
6.18 Statutory Financial Statements. ......................... 47
</TABLE>
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<TABLE>
<S> <C> <C>
6.19 Projections ............................................. 48
6.20 Solvency ................................................. 48
6.21 Environmental Matters ................................... 48
6.22 Assets for Conduct of Business ........................... 48
6.23 Trade Relations ......................................... 49
6.24 Securities Laws ......................................... 49
6.25 Compliance with Laws ..................................... 49
6.26 Employees and Labor ..................................... 49
6.27 First Priority ........................................... 50
6.28 Material Contracts ....................................... 50
6.29 Reinsurance ............................................. 50
6.30 Policies of Insurance ................................... 50
6.31 No Burdensome Restrictions. ............................. 50
6.32 Plan of Conversion ....................................... 51
ARTICLE VII
AFFIRMATIVE COVENANTS
7.1 Repayment of Obligations; Certain Prepayments ........... 51
7.2 Performance Under Credit Documents; Use of Proceeds ..... 52
7.3 Reports, Certificates and Other Information ............. 52
7.4 Corporate Existence; Foreign Qualification ............... 57
7.5 Books, Records and Inspections ........................... 58
7.6 Insurance; Assets......................................... 58
7.7 Taxes and Liabilities ................................... 58
7.8 Employee Benefit Plans ................................... 58
7.9 COBRA ................................................... 58
7.10 Pledge and Security Agreements ........................... 58
7.11 Compliance with Laws ..................................... 58
7.12 Maintenance of Permits ................................... 59
7.13 Interest Rate Protection ................................. 59
7.14 Dividends ............................................... 59
7.15 Key Man Life Insurance ................................... 59
7.16 Business Activities ..................................... 59
7.17 Disbursement Instructions ............................... 59
7.18 Further Assurances ....................................... 60
7.19 Certain Fees ............................................. 60
ARTICLE VIII
FINANCIAL COVENANTS
8.1 Borrower Financial Covenants ............................. 60
8.2 Summit Holding Financial Covenants ....................... 61
8.3 Insurance Subsidiary Financial Covenants ................. 61
8.4 Capital Expenditures ..................................... 62
</TABLE>
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<TABLE>
<S> <C> <C>
ARTICLE VIIIA
NEGATIVE COVENANTS
8A.1. Reinsurance Agreements ................................... 62
8A.2. Guarantees, Loans, Advances and Investments ............. 62
8A.3 Mergers, Consolidations and Sales ....................... 62
8A.4 Change in Control; Issuance of Stock ..................... 63
8A.5 Leases ................................................... 63
8A.7 Subsidiaries; Investment of Proceeds ..................... 63
8A.8 Business Activities ..................................... 63
8A.9 Transactions with Affiliates ............................. 64
8A.10 Indebtedness ............................................. 64
8A.11 Liens ................................................... 64
8A.12 Restricted Payments ..................................... 64
8A.13 Negative Pledge Agreements ............................... 65
8A.14 No Amendment of Documents ............................... 65
8A.15 Fiscal Year ............................................. 65
8A.16 Certain Investments ..................................... 65
8A.17 Hazardous Materials ..................................... 65
ARTICLE IX
EVENTS OF DEFAULT
9.1 Events of Default ....................................... 66
ARTICLE X
RIGHTS AND REMEDIES AFTER EVENT OF DEFAULT;
INTERCREDITOR PROVISIONS
10.1 Rights and Remedies ..................................... 69
10.2 Rights and Remedies Cumulative; Nonwaiver; Etc ........... 69
10.3 Rights in Property Held by the Lenders ................... 69
10.4 Crosscollateralization; No Marshalling ................... 69
10.5 Setoff ................................................... 70
10.6 Intercreditor Provisions ................................. 70
ARTICLE XI
PAYMENT OF FEES AND EXPENSES
11.1 Fees and Expenses ....................................... 71
11.2 Administrative Fee ....................................... 72
</TABLE>
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<TABLE>
<S> <C> <C>
ARTICLE XII
THE AGENT
12.1 Appointment ............................................. 72
12.2 Nature of Duties ......................................... 72
12.3 Absence of Reliance on the Agent ......................... 72
12.4 Certain Rights of the Agent ............................. 73
12.5 Notice of Default ....................................... 74
12.6 Reliance by Agent ....................................... 74
12.7 Indemnification ......................................... 74
12.8 The Agent in its Individual Capacity ..................... 74
12.9 Holders ................................................. 75
12.10 Successor Agent ......................................... 75
12.11 Collateral Matters ....................................... 75
12.12 Nonreceipt of Funds by the Agent ......................... 75
ARTICLE XIII
ASSIGNMENT AND PARTICIPATION
13.1 Assignments ............................................. 76
13.2 Participations ........................................... 77
13.3 Miscellaneous ............................................ 78
ARTICLE XIV
MISCELLANEOUS
14.1 Survival of Agreements ................................... 78
14.2 Governing Law; Consent to Jurisdiction ................... 79
14.3 Arbitration; Remedies ................................... 79
14.4 Notice ................................................... 80
14.5 Indemnification of the Agent and the Lenders ............. 81
14.6 Waivers by the Borrower ................................. 81
14.7 Assignment and Sale ..................................... 82
14.8 Amendment or Waiver ..................................... 82
14.9 Severability ............................................. 82
14.10 Entire Agreement ......................................... 82
14.11 Binding Effect ........................................... 83
14.12 Execution in Counterparts ............................... 83
14.13 Conflict of Terms ....................................... 83
14.14 Injunctive Relief ....................................... 83
</TABLE>
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TABLE OF EXHIBITS AND SCHEDULES
EXHIBITS
Exhibit A Form of Assignment and Acceptance
Exhibit B Form of Compliance Certificate
Exhibit C Excess Cash Flow Calculation
Exhibit D Form of Interest Rate Election Notice
Exhibit E Form of Notice of Borrowing
Exhibit F Form of Revolving Credit Note
Exhibit G Form of Term Note
SCHEDULES
Schedule 6.3 Claims Against Borrower
Schedule 6.6 Compliance; Jurisdictions of Borrower Affiliates
Schedule 6.9 Insurance Policies
Schedule 6.10 Ownership of Properties
Schedule 6.11 Borrower Affiliate Offices
Schedule 6.13 Borrower Affiliates
Schedule 6.15 Employee Plans
Schedule 6.21 Environmental Matters
Schedule 6.22 Certain Assets
Schedule 6.28 Material Contracts
Schedule 6.29 Reinsurance Agreements
Schedule 7.16 Business Activities
Schedule 8A.1 Certain Reinsurers
Schedule 8A.2 Contingent Liabilities
Schedule 8A.9 Certain Affiliate Transactions
<PAGE> 8
Page 2
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of the _____ day of _________, 199_
(the "Credit Agreement" or the "Agreement"), is by and between SUMMIT HOLDING
SOUTHEAST, INC., a Florida corporation with its principal offices in Lakeland,
Florida (the "Borrower"); the banking and financial institutions listed on the
signature pages hereof or that become parties hereto after the date hereof in
their respective capacities as lenders hereunder (collectively, the "Lenders");
and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association
with its principal offices in Charlotte, North Carolina, acting in the manner
and to the extent described in ARTICLE XII hereof (in such capacity, the
"Agent").
RECITALS
A.
The Borrower is the corporate parent of Summit Holding Corporation ("Summit
Holding").
B.
Summit Holding has been party to that certain Credit Agreement, dated as of
January 16, 1996, with the Agent and the Lenders (as amended, the "Summit
Holding Credit Agreement"), originally providing for the extension of a
$36,000,000 term loan facility and a $8,000,000 revolving credit facility to
Summit Holding by the Lenders.
C.
As of November 21, 1996, the Lenders' commitments under the Summit Holding
Credit Agreement were reduced to an aggregate amount equal to $38,000,000
(consisting of $33,000,000 in respect of term loans and $5,000,000 in respect
of revolving loans).
D.
Summit Holding, the Borrower and their affiliates desire to effect a corporate
restructuring pursuant to which (i) Employers Self Insurers Fund, a Florida
self-insurance fund that is the owner of all of the capital stock of Summit
Holding ("ESIF"), would be converted to a stock insurance company to be named
"Bridgefield Employers Insurance Company" ("Bridgefield Employers"), (ii) the
Borrower would acquire ownership of Summit Holding and Bridgefield Employers
and complete an initial public offering of its capital stock and (iii) the
capital stock of Bridgefield Casualty Insurance Company ("Bridgefield
Casualty") would be contributed to Bridgefield Employers.
E.
Summit Holding and the Borrower desire that the Borrower assume Summit
Holding's repayment obligations under the Summit Holding Credit Agreement (but
only upon consummation of such transactions), and the Agent and the Lenders are
willing to permit such assumption on the terms set forth herein and in the
other Loan Documents.
<PAGE> 9
Page 3
F.
Certain Subsidiaries of the Borrower will jointly and severally guarantee the
Obligations of the Borrower hereunder.
G.
The Obligations of the Borrower will be secured by a perfected first priority
lien on and security interest in the Collateral pledged to the Agent (for the
benefit of the Lenders) by the Borrower and its Subsidiaries, all as more
particularly set forth herein and in the other Loan Documents.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower, the Lenders and the
Agent hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1
"Defined Terms". For purposes of this Credit Agreement, in addition to the
terms defined elsewhere herein, the following terms shall have the meanings set
forth below:
"Account Designation Letter" shall mean a letter from the Borrower to the
Agent, duly completed and signed by an Authorized Officer and in form and
substance satisfactory to the Agent, listing any one or more accounts to which
the Borrower may from time to time request the Agent to forward the proceeds of
any Loans made hereunder.
"Actuarial Report" shall mean an actuarial review and valuation statement of an
Insurance Subsidiary's or a Fund's loss and loss adjustment expense reserve
positions as of the end of such Person's fiscal year (or such other date
requested by the Agent) with respect to the insurance business in force, as
prepared in connection with such Person's Annual Statement and covering such
other subjects as are customary in actuarial reviews and reasonably requested
by the Agent, prepared by an independent actuarial firm acceptable to the Agent
in accordance with reasonable actuarial assumptions and procedures, not
inconsistent with the assumptions and procedures previously employed, and
accompanied by a report prepared by such actuarial firm reviewing the adequacy
of loss reserves of an Insurance Subsidiary or Fund, as appropriate (which firm
shall be provided access to or copies of all reserves analyses and valuations
relating to the insurance business of each such Insurance Subsidiary or Fund)
together with its opinion affirming the adequacy of such loss reserves.
<PAGE> 10
Page 4
"Adjusted Base Rate" shall mean, at any time with respect to any Loan, a rate
per annum equal to the Base Rate plus the Applicable Margin for Base Rate
Loans, each as in effect at such time.
"Adjusted LIBOR Rate" shall mean, at any time with respect to any Loan, a rate
per annum equal to the LIBOR Rate plus the Applicable Margin for LIBOR Loans,
each as in effect at such time.
"Admitted Assets" shall mean, as to an Insurance Subsidiary, the amount, as of
any date, shown on line 21, page 2 column 1 of the 1995 Annual Statement of
such Insurance Subsidiary (or any similar line, page and column reference in
any subsequent Annual Statement), or the amount determined in a consistent
manner for any date other than one as of which an Annual Statement is prepared.
"Advance" shall mean an advance of funds by a Lender to the Agent pursuant to
the Revolving Credit Commitment of such Lender, to be disbursed by the Agent to
the Borrower as a Revolving Loan from such Lender.
"Affiliate" shall mean, as to any Person, each of the Persons that directly or
indirectly, through one or more intermediaries, owns or controls, or is
controlled by or under common control with, such Person. For the purpose of
this definition, "control" means the possession, direct or indirect, of the
power to direct or cause the direction of management and policies, whether
through the ownership of voting securities, by contract or otherwise, provided
that in any event: (a) any Person which owns directly or indirectly 20% or more
of the Securities having ordinary voting power for the election of directors or
other governing body of a corporation or 20% or more of the partnership or
other ownership interests of any other Person (other than as a limited partner
of such other Person) will be deemed to control such corporation or other
Person, and (b) each director and executive officer of the Borrower or any
Subsidiary of the Borrower shall be deemed to be an Affiliate of the Borrower.
"Agent" shall mean First Union and any successor agents appointed pursuant to
ARTICLE XII.
"Agreement" shall mean this Credit Agreement, together with any amendments,
modifications, supplements, exhibits and schedules hereto and restatements
hereof, in whole or in part.
"Annual Statement" shall mean an annual financial statement of an Insurance
Subsidiary or of a Fund, as appropriate, as required to be filed with the
insurance commissioner (or similar authority) of its state of domicile,
together with all exhibits and schedules filed therewith, prepared in
conformity with SAP.
"Applicable Margin" shall mean, at any time with respect to any Loan, the
applicable percentage as determined under the following matrix with reference
to the ratio of the Borrower's Fee/Commitment Ratio as provided below:
<PAGE> 11
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<TABLE>
<CAPTION>
Fee/Commitment Ratio Base Rate Loans LIBOR Loans
-------------------------------------- --------------- -----------
But Less than
-------------
Greater than or Equal to
------------ -----------
<S> <C> <C> <C>
1.35 to 1.00 2.00 to 1.00 1.00% 3.00%
2.00 to 1.00 2.50 to 1.00 0.50% 2.50%
2.50 to 1.00 _______ 0.00% 2.00%
</TABLE>
Notwithstanding any provision herein to the contrary, from the Closing Date
until the date on which the Borrower shall have delivered to the Lenders a
Compliance Certificate demonstrating that the Borrower shall have attained a
Fixed Charge Coverage Ratio of not less than 1.50 to 1.00 as of the end of the
most recently completed fiscal quarter (for the period of four consecutive
fiscal quarters then ending, it being understood that, with respect to the
period prior to Closing, the Fixed Charge Coverage Ratio will be determined by
reference to such ratio of Summit Holding as computed under Section 8.3 of the
Summit Holding Credit Agreement) after the satisfaction of the requirements set
forth in SECTION 5.2.3(f) with respect to the IPO or another equity offering,
the Loans shall bear interest at the Base Rate plus one percent (1.00%). Once
the Borrower attains the Fixed Charge Coverage Ratio specified above, the Loans
will bear interest in accordance with the matrix set forth above, and
accordingly will be reset from time to time within 10 Business Days after
delivery by the Borrower in accordance with SECTION 7.3(a)(i) of financial
statements together with a Compliance Certificate (reflecting the computation
of the Borrower's Fee/Commitment Ratio as of the last day of the preceding
fiscal quarter, beginning with the fiscal quarter ending March 31, 1997) that
provides for different Applicable Margins than those then in effect.
"Approved Stock Plan" shall mean the Summit Holding Southeast, Inc.
1996 Long-Term Incentive Plan adopted by the Borrower's management effective as
of __________________, pursuant to which certain employees of the Borrower may
acquire up to 500,000 shares of the Borrower's common stock.
"Assignment and Acceptance" shall mean an Assignment and Acceptance
Agreement between any Lender and an Eligible Assignee, pursuant to which such
Lender assigns to such assignee, and such assignee accepts, all or a portion of
such Lender's rights and obligations under this Credit Agreement, substantially
in the form of EXHIBIT A hereto.
"Authorized Officer" shall mean the president or chief financial
officer of the Borrower or any other officer of the Borrower authorized by
resolution of the board of directors of the Borrower to engage in the activity
specified herein with respect to such officer and whose signatures and
incumbency shall have been certified to the Agent pursuant to SECTION 5.2.2(b).
"Bankruptcy Code" shall mean 11 U.S.C. Section Section 101 et seq.,
as amended from time to time, and any successor statute.
"Base Rate" shall mean the per annum interest rate publicly announced
from time to time by First Union from its principal office in Charlotte, North
Carolina to be its prime rate, which may not necessarily be its best lending
rate, and adjusted to conform to changes as of the opening of business on the
date of any such change in such prime rate. In the event First Union shall
abolish or abandon the practice of announcing its prime rate or should the same
be unascertainable, the Agent, with the consent
<PAGE> 12
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of the Required Lenders, shall designate a reasonably comparable reference rate
that shall be deemed to be the Base Rate under this Credit Agreement and the
other Credit Documents.
"Base Rate Loan" shall mean, at any time, any outstanding Loan that
bears interest at the Adjusted Base Rate.
"Borrower" shall mean Summit Holding Southeast, Inc., a Florida
corporation and its successors and assigns.
"Borrower Affiliate" shall mean the Borrower or any of its
Subsidiaries.
"Borrower Cash Flow" shall mean, for any period, (a) the sum of (i)
EBITDA (Borrower-Stand Alone), (ii) EBITDA (Summit Holding), (iii) the amount
of all dividends actually paid to the Borrower by Bridgefield Employers in
compliance with all applicable Requirements of Law and (iv) the amount of all
payments made by Bridgefield Employers and Summit Holding pursuant to the Tax
Sharing Agreements, all for such period, minus (b) Capital Expenditures for
such period, minus (c) the total amount of cash taxes actually paid by the
Borrower during such period.
"Borrower Pledge Agreement" shall mean the pledge agreement, dated as
of the Closing Date, between the Borrower and the Agent (for the benefit of the
Lenders), together with any amendments, modifications and supplements thereto,
any replacements, restatements, renewals and extensions thereof, and any
substitutes therefor, in whole or in part.
"Borrower Security Agreement" shall mean the security agreement, dated
as of the Closing Date, between the Borrower and the Agent (for the benefit of
the Lenders), together with any amendments, modifications and supplements
thereto, any replacements, restatements, renewals and extensions thereof, and
any substitutes therefor, in whole or in part.
"Borrowing" shall mean the incurrence by the Borrower on a given date
of Loans pursuant to ARTICLE II OR III.
"Borrowing Date" shall mean any Business Day on which a Borrowing is
made, as provided in ARTICLE II or III hereof.
"Bridgefield Casualty" shall mean Bridgefield Casualty Insurance
Company, a Florida property and casualty insurance corporation.
"Bridgefield Casualty Management Agreement" shall mean the Managing
General Agent Agreement, dated December 29, 1995, between the Bridgefield
Casualty and Summit Consulting, together with any amendments, modifications and
supplements thereto, any replacements, restatements, renewals or extensions
thereof and any substitutes therefor, in whole or in part.
"Bridgefield Employers" shall mean Bridgefield Employers Insurance
Company, a Florida property and casualty insurance company and a successor in
interest to ESIF.
"Bridgefield Employers Management Agreements" shall mean the Summit
Claims Management Agreement and the Summit Loss Management Agreement (which
agreements were identified as the "ESIF Management Agreements" under the Summit
Holding Credit Agreement), or any Managing General Agent Agreement, in form and
substance satisfactory to the Required Lenders, as entered into
<PAGE> 13
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after the date hereof.
"Bridgefield Employers Tax Sharing Agreement" shall mean the Tax
Sharing Agreement, dated ___________________, between Bridgefield Employers and
the Borrower (which agreement shall be in form and substance satisfactory to
the required Lenders), together with any amendments, modifications and
supplements thereto, any replacements, restatements, renewals or extensions
thereof and any substitutes therefor, in whole or in part.
"Business Day" shall mean (a) for all purposes other than as covered
by clause (b) below, any day excluding Saturday, Sunday and any day that shall
be in the City of Charlotte, North Carolina, a legal holiday or a day on which
banking institutions are authorized by law or other governmental actions to
close, and (b) with respect to all determinations and notices in connection
with, and payments of principal and interest on, LIBOR Loans, any day that is a
Business Day described in clause (a) and that is also a day for trading by and
between banks in Dollar deposits in the London interbank market.
"CICF" shall mean Commercial Insurance of Central Florida, Inc., a Florida
corporation.
"Capital Expenditures" shall mean, for any fiscal year of the
Borrower, the aggregate cost (less the amount of trade-in allowance included in
such cost) of all capital assets acquired by any of the Borrower Affiliates
during such fiscal year, exclusive of Capital Lease Obligations, each
calculated in accordance with GAAP.
"Capital Lease" shall mean any lease of any property that would, in
accordance with GAAP, be required to be classified and accounted for as a
capital lease on a balance sheet of the lessee.
"Capital Lease Obligations" shall mean, with respect to any Capital
Lease, the amount of the obligation of the lessee thereunder that would, in
accordance with GAAP, appear on a balance sheet of such lessee in respect of
such Capital Lease.
"Carolina Med" shall mean Carolina Med Summit, Inc., a North Carolina
corporation.
"Carolina Summit" shall mean Carolina Summit Healthcare, Inc., a North
Carolina corporation.
"Cash Equivalents" shall mean (a) securities issued or unconditionally
guaranteed by the United States of America or any agency or instrumentality
thereof, backed by the full faith and credit of the United States of America
and maturing within one year from the date of acquisition; (b) securities
issued by any state of the United States of America or any political
subdivision or public instrumentality thereof, maturing within one year from
the date of acquisition and, at the time of acquisition, having the highest
rating obtainable from Standard & Poor's Corporation and Moody's Investors
Service, Inc. (the "Rating Agencies"); (c) commercial paper issued by any
Person organized under the laws of the United States of America, maturing no
more than one year from the date of acquisition and, at the time of
acquisition, having a rating of at least A-1 or the equivalent thereof by
Standard & Poor's Corporation and at least P-1 or the equivalent thereof by
Moody's Investors Service, Inc.; (d) time deposits and certificates of deposit
that are insured by the Federal Deposit Insurance Corporation (the "FDIC") or
any successor instrumentality of the government of the United States of America
up to the applicable limit on insurance granted by the FDIC or such other
instrumentality with respect to such instruments (it being understood that the
amount invested in such instrument may not exceed the limit on such insurance),
maturing within one year from the date of issuance and issued by a bank or
trust company organized under the laws of the United States of America or any
state thereof and having combined capital and
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surplus of at least $250,000,000; (e) repurchase obligations with a term not
exceeding seven (7) days with respect to underlying securities of the types
described in clause (a) above entered into with any bank or trust company
meeting the qualifications specified in clause (d) above; and (f) money market
funds substantially all of whose assets are comprised of securities of the
types described in clauses (a) through (e) above.
"Change in Control" shall mean the occurrence of one or more of the
following events: (i) a majority of the members of the board of directors
shall not constitute Continuing Directors; (ii) the board of directors of the
Borrower shall approve any plan or proposal for the liquidation or dissolution
of the Borrower or all or substantially all of its assets; or (iii) any
"Person" (as defined in Section 13(d) of the Exchange Act and the regulations
promulgated thereunder) or group of such Persons, together with any Affiliates
thereof, shall as a result of a tender or exchange offer, open market
purchases, privately negotiated purchases or otherwise, have become the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Borrower representing 20% of the
voting stock of such corporation.
"Closing" shall mean the consummation of the transactions contemplated
by this Credit Agreement and the other Credit Documents upon the satisfaction
of the conditions set forth in Article V hereof.
"Closing Date" shall mean ____________________, or such other date as
is agreed upon by the parties hereto (but in no event later than
__________________).
"Collateral" shall mean and include all the assets, property or
interests in property of the Borrower and its Subsidiaries (excluding assets
owned by any Insurance Subsidiary), whether now owned or hereafter acquired or
created, securing the Obligations pursuant to the Credit Documents, and all
other property and interests in personal property that shall from time to time
secure the Obligations.
"Commission" shall mean the Securities and Exchange Commission.
"Commitment" shall mean, at any time for any Lender, such Lender's
Term Loan Commitment plus its Revolving Credit Commitment.
"Compliance Certificate" shall mean a certificate duly executed by an
Authorized Officer substantially in the form of EXHIBIT B, with such changes as
the Agent may from time to time reasonably request, for the purpose of
monitoring the Borrower's compliance herewith.
"Consent Order" shall mean that certain Consent Order, dated November
15, 1996, issued by the Florida Department of Insurance, a true and complete
copy of which has been delivered to the Agent (as amended, modified or
supplemented from time to time).
"Consolidated Indebtedness" shall mean the Indebtedness of Borrower
and its Subsidiaries determined on a consolidated basis in accordance with GAAP
(provided, however, that such amount will be limited to Indebtedness that is
funded as of the date of determination and, accordingly, will exclude any
portion of the Revolving Line of Credit that is unused as of such date).
"Consolidating" shall mean, with respect to Financial Statements of
the Borrower and its Subsidiaries, financial statements containing the relevant
information for the Borrower, Bridgefield Employers and Summit Holding
(including appropriate entries (through footnotes or otherwise) for
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Summit Heritage and Summit Consulting).
"Contingent Liability" shall mean any agreement, undertaking or
arrangement by which any Person guarantees, endorses, acts as surety for or
otherwise becomes or is contingently liable for (by direct or indirect
agreement, contingent or otherwise, to provide funds for payment, to supply
funds to, or otherwise to invest in, a debtor, or otherwise to assure a
creditor against loss) the debt, obligation or other liability of any other
Person (other than by endorsements of instruments in the course of collection),
or for the payment of dividends or other distributions upon the shares of any
other Person or undertakes or agrees (contingently or otherwise) to purchase,
repurchase or otherwise acquire or become responsible for any Indebtedness,
obligation or liability or any security therefor, or to provide funds for the
payment or discharge thereof (whether in the form of loans, advances, stock
purchases, capital contributions or otherwise), or to maintain solvency,
assets, level of income, or other financial condition of any other Person, or
to make payment or transfer property to any other Person other than for value
received; provided, however, that obligations entered into in the ordinary
course of an Insurance Subsidiary's business under insurance policies or
contracts issued by it or to which it is a party, including reinsurance
treaties (and security posted by any such Insurance Subsidiary in the ordinary
course of its business to secure obligations thereunder) shall not be deemed to
be Contingent Liabilities of such Subsidiary or the Borrower for the purposes
of this Credit Agreement.
"Continuing Director" shall mean, at any time as to any Person, (i)
any member of the board of directors who is a director of such Person at the
Closing Date, or (ii) any Person who becomes a member of the board of directors
if such person was appointed or nominated for election to the board of
directors by a majority of the Continuing Directors.
"Contractual Obligation" shall mean, relative to any Person, any
obligation, commitment or undertaking under any agreement or other instrument
to which such Person is a party or by which it or any of its property is bound
or subject.
"Conversion" shall mean the conversion of ESIF to a Florida stock
insurance company pursuant to the Plan of Conversion.
"Credit Documents" shall mean and collectively refer to this
Agreement, each of the Notes, the Borrower Security Agreement, the Borrower
Pledge Agreement, the Guaranty, the Subsidiary Pledge Agreement, the Subsidiary
Security Agreement, all Supplemental Documentation and any and all amendments,
modifications, replacements, substitutes and supplements to such documents,
together with any other documents executed by or on behalf of the Borrower, its
Subsidiaries or other Affiliates in connection with any of the foregoing or
that designate themselves Credit Documents under this Credit Agreement.
"Current Assets" shall mean, as of any date, the aggregate (without
duplication) of the current assets of Summit Holding and its Subsidiaries as of
such date, as determined in compliance with GAAP.
"Current Liabilities" shall mean, as of any date, the aggregate
(without duplication) of the current liabilities of Summit Holding and its
Subsidiaries as of such date, determined on a consolidated basis in accordance
with GAAP.
"Default" shall mean any of the events or conditions specified in
ARTICLE IX, regardless of whether there shall have occurred any passage of time
or giving of notice or both that would be necessary to constitute such event or
condition an Event of Default.
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"Default Rate" shall mean, with respect to any Loan, an interest rate
equal to the sum of (a) the higher of the Elected Rate for such Loan or the
Adjusted Base Rate, plus (b) two (2) percentage points.
"Department" shall mean (a) with respect to an Insurance Subsidiary
and FRF, the Florida Department of Insurance or such other Governmental
Authority of its state of domicile charged with regulating insurance companies
or insurance holding companies, (b) with respect to KRF, the Kentucky
Department of Workers' Claims, and (c) with respect to LRA and LESA, the
Louisiana Department of Insurance.
"Discontinued Operations" shall mean the businesses conducted by
Meritec, Healthcare Holdings, Carolina Summit and Carolina Med.
"Dollars" or "$" shall mean dollars of the United States of America.
"EBITDA (Borrower-Stand Alone)" shall mean, with respect to the
Borrower for any period, the sum of (a) Net Income for such period, (b)
Interest Expense for such period, (c) federal, state and local income and
franchise taxes deducted from revenue in determining Net Income for such period
and (d) depreciation and amortization deducted from revenue in determining Net
Income for such period; less (e) to the extent included in Net Income, the sum
of (i) all income distributed by Bridgefield Employers as dividends in
compliance with all applicable Requirements of Law for such period, (ii) all
undistributed income of the Borrower's Insurance Subsidiaries for such period
and (iii) EBITDA (Summit Holding) for such period (provided, however, that the
calculation of EBITDA will exclude items attributable to the Discontinued
Operations).
"EBITDA (Summit Holding)" shall mean, for any period, the sum of (a)
net income of Summit Holding and its Subsidiaries determined in accordance with
GAAP on a consolidated basis for such period, (b) interest expense of Summit
Holding for such period, (c) payments made (i) in respect of federal, state and
local income and franchise taxes deducted from revenue in determining such net
income for the period prior to the Closing Date and (ii) to the Borrower under
the Summit Holding Tax Sharing Agreement for the period from and after the
Closing Date and (d) depreciation and amortization deducted from revenue in
determining such net income; less (e) to the extent included in such net
income, the sum of (i) all income distributed by any Insurance Subsidiary as
dividends in compliance with all applicable Requirements of Law and (ii) all
undistributed income of any Insurance Subsidiaries (provided, however, that the
calculation of EBITDA will exclude items attributable to the Discontinued
Operations).
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, and any successor statute of similar import, together with the
regulations thereunder, as amended, reformed or otherwise modified and in
effect from time to time. References to sections of ERISA shall be construed
to also refer to successor sections.
"ERISA Event" shall mean, with respect to any Person, (a) a Reportable
Event (other than a Reportable Event not subject to the provision for 30-day
notice to the Pension Benefit Guaranty Corporation under regulations issued
under Section 4043 of ERISA), (b) the withdrawal of such Person or any
Affiliate of such Person from an Employee Plan during a plan year in which it
was a "substantial employer" as defined in Section 4001(a)(92) of ERISA if such
withdrawal would have a Material Adverse Effect on such Person, (c) the filing
of a notice of intent to terminate an Employee Plan under a distress
termination or the treatment of a Plan amendment as a distress termination
under Section 4041(c)
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of ERISA, (d) the institution of proceedings to terminate an Employee Plan by
the Pension Benefit Guaranty Corporation under Section 4042 of ERISA, (e) the
failure to make required contributions that would result in the imposition of a
lien under Section 412 of the Internal Revenue Code or Section 302 of ERISA, or
(f) any other event or condition which constitutes grounds under Section 4042
of ERISA for the termination of, or the appointment of a trustee to administer,
any Employee Plan.
"ESIF" shall mean Employers Self Insurers Fund, a group self insurance
fund organized under the laws of the State of Florida.
"Effective Federal Funds Rate" shall mean, for any day, the interest
rate per annum equal to the weighted average of the rates of overnight federal
funds transactions with members of the Federal Reserve System arranged by
federal funds brokers, as published for such day (or, if such day is not a
Business Day, for the next preceding Business Day) by the Federal Reserve Bank
of Richmond, or if such rate is not so published on the relevant Business Day,
the average of the quotations for such day on such transactions received by the
Agent from three federal funds brokers of recognized standing selected by the
Agent.
"Elected Rate" shall mean the rate of interest with respect to a Loan
as selected by the Borrower, or as may apply as a result of a conversion, in
either case pursuant to ARTICLE IV hereof.
"Eligible Assignee" shall mean shall mean (a) a commercial bank
organized under the laws of the United States or any state thereof and having
total assets in excess of $5,000,000,000, (b) a commercial bank organized under
the laws of any other country that is a member of the OECD or a political
subdivision of any such country and having total assets in excess of
$5,000,000,000, provided that such bank is acting through a branch or agency
located in the United States, in the country under the laws of which it is
organized or in another country that is also a member of the OECD, (c) the
central bank of any country that is a member of the OECD, (d) a finance
company, mutual fund, insurance company or other financial institution that is
engaged in making, purchasing or otherwise investing in commercial loans in the
ordinary course of its business and having total assets in excess of
$3,000,000,000, (d) any Affiliate of an existing Lender or (f) any other Person
(other than an Affiliate of the Borrower) approved by the Agent and the
Borrower, which approval shall not be unreasonably withheld.
"Employee Plan" shall mean any "employee benefit plan" within the
meaning of Section 3(3) of ERISA maintained by the Borrower or its
Subsidiaries.
"Employment Agreements" shall mean, collectively, the Employment and
Confidentiality Agreement dated ____________ between the Borrower and William
B. Bull, the Employment and Confidentiality Agreement dated ____________
between ____________ and Russell L. Wall, the Employment and Confidentiality
Agreement dated January 16, 1996 between Summit Loss and Allen C. Bennett and
the Employment and Confidentiality Agreement dated of January 16, 1996 between
Summit Claims and Rick T. Hodges, as such agreements may be amended, modified,
supplemented, restated or restated from time to time.
"Environmental Law" shall mean any federal, state or local law,
statute, ordinance, rule, regulation, permit, license, approval,
interpretation, order, guidance or other legal requirement (including without
limitation any subsequent enactment, amendment or modification) relating to the
protection of human health or the environment, including, but not limited to,
any requirement pertaining to the manufacture, processing, distribution, use,
treatment, storage, disposal, transportation, handling,
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reporting, licensing, permitting, investigation or remediation of materials
that are or may constitute a threat to human health or the environment.
Without limiting the foregoing, each of the following is an Environmental Law:
the Comprehensive Environmental Response, Compensation, and Liability Act (42
U.S.C. Section 9601 et. seq.) ("CERCLA"), the Hazardous Material
Transportation Act (49 U.S.C. Section 1801 et. seq.), the Resource
Conservation and Recovery Act (42 U.S.C. Section 6901 et. seq.) ("RCRA"), the
Federal Water Pollution Control Act (33 U.S.C. Section 1251 et. seq.), the
Clean Air Act (42 U.S.C. Section 7401 et. seq.), the Toxic Substances Control
Act (15 U.S.C. Section 2601 et. seq.), the Safe Drinking Water Act (42 U.S.C.
Section 300, et. seq.), and the Occupational Safety and Health Act (29 U.S.C.
Section 651 et. seq.) ("OSHA"), as such laws have been amended or
supplemented, and each similar federal, state and local statute, and each rule
and regulation promulgated under such federal, state and local laws.
"Event of Default" shall have the meaning specified in ARTICLE IX
hereof.
"Excess Cash Flow" shall mean, for any fiscal year, an amount
determined as follows: (a) Operating Cash Flow (Summit Holding) for such fiscal
year, plus (b) the amount of any dividends paid by Bridgefield Employers to the
Borrower during such year, plus (c) the positive difference, if any, of the
aggregate amount of all payments made to the Borrower under the Tax Sharing
Agreements, minus the total amount paid to Governmental Authorities in respect
of taxes during such year, minus (d) Capital Expenditures made during such
year, minus (e) any principal payments and prepayments actually made by the
Borrower in respect of (i) the Term Loans or (ii) the Revolving Loans to the
extent such payments permanently reduce the Revolving Credit Commitment, and
minus (f) the aggregate amount of any operating expenses paid by the Borrower
during such fiscal year, all as calculated pursuant to SECTION 7.1(c) on an
Excess Cash Flow Calculation executed and delivered to the Agent by the
Borrower.
"Excess Cash Flow Calculation" shall mean the Borrower's calculation
of Excess Cash Flow for any fiscal year substantially in the form of EXHIBIT C,
delivered to the Agent pursuant to SECTION 7.1(c).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"FRF" shall mean Florida Retail Federation Self Insurers Fund, a group
self insurance fund organized under the laws of the State of Florida.
"FRF Management Agreement" shall mean the Administrator's Contract,
dated December 1, 1978, and as amended by Addenda dated December 9, 1982 and
August 22, 1985, between Summit Consulting and FRF, together with any
amendments, modifications and supplements thereto, any replacements,
restatements, renewals or extensions thereof and any substitutes therefor, in
whole or in part.
"Fee/Commitment Ratio" shall mean, as of the date of determination,
the ratio of (i) Fee Income during the period of four consecutive fiscal
quarters ending on such date, to (ii) the Total Commitment as of such date.
"Fee Income" shall mean for any period, the amount reflected as "Gross
Fee Revenue" on Summit Holding's consolidated income statement for such period
(as calculated in a manner consistent with that applicable to the Borrower's
audited income statements), which amount is attributable to income arising out
of the Management Agreements and any other agreements generating fee income in
the ordinary course of business.
"Financials" or "Financial Statements" shall mean the consolidated and
Consolidating balance
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sheet and statements of income and cash flow, to be delivered to the Lenders by
the Borrower pursuant to SECTIONS 6.17, 6.18, 7.3(a) and 7.3(b) hereof,
including without limitation any interim Financial Statements.
"Financing Statements" shall mean the UCC-1 financing statements
executed and delivered by the Borrower Affiliates or other Affiliates of the
Borrower to the Agent in respect of the Collateral, together with any
replacements thereof or any amendments thereto.
"First Union" shall mean First Union National Bank of North Carolina,
a national banking association with its principal offices in Charlotte, North
Carolina.
"Fixed Charge Coverage Ratio" shall mean, for the applicable
Measurement Period, the ratio determined by dividing (a) the amount of
Borrower Cash Flow for such period by (b) the sum of (i) the Borrower's
Historical Debt Service for such period and (ii) any amounts actually paid by
the Borrower in respect of its Series A preferred capital stock during such
period.
"Funds" shall mean LRA, KRF, LESA and FRF.
"Generally Accepted Accounting Principles" or "GAAP" shall mean
generally accepted accounting principles, as recognized by the American
Institute of Certified Public Accountants, consistently applied and maintained
on a consistent basis for a Person throughout the period indicated and
consistent with the prior financial practice of such Person.
"Governmental Authority" shall mean any nation or government, any
state or other political subdivision thereof, and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government, including, without limitation, the Department or any
similar body or agency.
"Guaranty" shall mean the guaranty agreement, dated the Closing Date,
of Summit Holding, Summit Consulting, CICF, Summit Claims, Summit Loss, and
Healthcare Holdings in favor of the Agent (for the benefit of the Lenders),
together with any amendments, new guarantor accessions, modifications and
supplements thereto, any replacements, restatements, renewals or extensions
thereof, and any substitutes therefor, in whole or in part.
"Hazardous Substance" shall mean any substance or material meeting any
one or more of the following criteria: (a) it is or contains a substance
designated as a hazardous waste, hazardous substance, hazardous material,
pollutant, contaminant or toxic substance under any Environmental Law; (b) it
is toxic, explosive, corrosive, reactive, ignitable, infectious, radioactive,
mutagenic, dangerous or otherwise hazardous; (c) its presence at some quantity
requires investigation, notification or remediation under any Environmental Law
or common law; (d) it constitutes a danger, a nuisance, a trespass or a health
or safety hazard to persons or property; or (e) it is or contains, without
limiting the foregoing, asbestos, polychlorinated biphenyls, petroleum
hydrocarbons, petroleum derived substances or waste, crude oil or any fraction
thereof, nuclear fuel, natural gas or synthetic gas.
"Healthcare Holdings" shall mean Summit Healthcare Holdings, Inc., a
Florida corporation.
"Heritage Summit" shall mean Heritage/Summit Healthcare of Florida,
Inc., a Florida corporation.
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"Historical Debt Service" shall mean, with respect to the Borrower,
and for any Measurement Period, an amount equal to the total of all scheduled
principal (exclusive of any amounts of the Loans reborrowed pursuant to this
Agreement and exclusive of any amounts prepaid pursuant to Section 7.1(c)) and
Interest Expense paid by the Borrower in respect of all Indebtedness of the
Borrower during such period.
"IPO" shall mean the initial public offering of the Borrower's Series
A preferred stock and its common stock in connection with its registration
statement on Form S-1 as filed with the Commission on November 20, 1996
(Commission File No. 333-16499), as amended by an amendment dated December 9,
1996 and as otherwise amended from time to time.
"Increased Costs" is defined in SECTION 4.12(a).
"Indebtedness" of a Person shall mean (a) indebtedness of such Person
for borrowed money including without limitation all obligations evidenced by
bonds, debentures, notes or other similar instruments (including, with respect
to the Borrower, all indebtedness in respect of the Loans and with respect to
Revolving Loans, including the Total Revolving Credit Commitment whether or not
the Borrower has borrowed the entire amount thereof), (b) indebtedness of such
Person for the deferred purchase price of services or property (except for such
deferred obligations owed in respect of such purchases made in the ordinary
course of business, to the extent such amounts are ultimately paid in
accordance with the terms of such purchases), (c) obligations of such Person
under Capital Leases, (d) indebtedness of such Person arising under acceptance
facilities, (e) all obligations of such Person in respect of the Rate
Protection Agreement (it being understood that the amount of Indebtedness of
such Person under such Rate Protection Agreement as of any date shall be deemed
to equal the termination value payable by such Person if such Rate Protection
Agreement were terminated on such date), (f) indebtedness of such Person
consisting of unpaid and overdue reimbursement obligations in respect of all
obligations under letters of credit issued for the account of such Person, (g)
all unfunded pension fund obligations and liabilities, and (h) all Contingent
Liabilities of such Person in respect of any of the foregoing (including,
without limitation, with respect to each of the foregoing clauses (a) through
(g), any such indebtedness or obligation that is non-recourse to the credit of
such Person but is secured by assets of such Person, but only to the extent of
the value of such assets).
"Insurance Code" shall mean, as to any Insurance Subsidiary, the
Insurance Code of the state of domicile of such Insurance Subsidiary and any
successor statute of similar import, together with the regulations thereunder,
as amended or otherwise modified and in effect from time to time. References
to sections of the Insurance Code shall be construed to also refer to successor
sections.
"Insurance Holding Company Systems Act" shall mean the Florida
Insurance Holding Company Systems Act, Florida Insurance Code Section 628.801
et seq.
"Insurance Policies" shall mean policies purchased from insurance
companies by either the Borrower or any Subsidiary for its own account to
insure against its own liability and property loss (including, without
limitation, casualty, liability and workers' compensation insurance), other
than Reinsurance Agreements.
"Insurance Subsidiary" shall mean any of Bridgefield Casualty,
Bridgefield Employers or U.S. Employers, as applicable, and its successors and
assigns.
"Interest Coverage Ratio" shall mean, as of the date of determination,
the ratio of (i) EBITDA
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(Summit Holding) for the fiscal quarter ending on such date, less the total of
all Capital Expenditures made by Summit Holding during such quarter to (ii)
Interest Expense for such quarter.
"Interest Expense" shall mean, with respect to the Borrower for any
period, the sum of (a) gross interest expense of the Borrower and its
Subsidiaries for such period, including (i) the amortization of debt discounts,
(ii) the amortization of all fees payable in connection with the incurrence of
Indebtedness to the extent included in interest expense and (iii) the portion
of any payments or accruals with respect to Capital Lease Obligations allocable
to interest expense, (b) any amounts paid during such period in respect of the
Rate Protection Agreement (except for any payments required to be made upon the
early termination thereof) and (c) any other capitalized interest of the
Borrower and its Subsidiaries for such period, in all cases determined on a
consolidated basis in accordance with GAAP consistently applied.
"Interest Period" shall mean, relative to any LIBOR Loan, the period
that begins on (and includes) the date on which such LIBOR Loan is made or
continued as, or converted into, a LIBOR Loan pursuant to SECTION 4.6 and,
unless the maturity of such LIBOR Loan is accelerated, ends on (but excludes)
the day which numerically corresponds to such date one, two or three months
thereafter, as the Borrower may select in its relevant notice pursuant to
SECTION 4.6; provided, however, that:
(a) all LIBOR Loans comprising a single Borrowing shall at all
times have the same Interest Period;
(b) if there exists no numerically corresponding day in such
month, such Interest Period shall end on the last Business Day of such month;
(c) if such Interest Period would otherwise end on a day which is
not a Business Day, such Interest Period shall end on the next following
Business Day (unless such next following Business Day is the first Business Day
of a calendar month, in which case such Interest Period shall end on the
Business Day next preceding such numerically corresponding day);
(d) no LIBOR Loans may be incurred prior to the third Business Day
after the Closing Date;
(e) if the Borrower shall fail to provide in an Interest Rate
Election Notice an appropriate duration of an Interest Period, then the
Borrower shall be deemed to have selected the Adjusted Base Rate; and
(f) the Borrower shall not be permitted to select, and there shall
not be applicable, any Interest Period that would end later than the Loan
Termination Date.
"Interest Rate Election Notice" shall mean a notice in the form
attached hereto as EXHIBIT D to be delivered by the Borrower to the Agent
pursuant to SECTION 3.1(b) and SECTION 4.6.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986,
and any successor statute of similar import, together with the regulations
thereunder, as amended, reformed or otherwise modified and in effect from time
to time. References to sections of the Internal Revenue Code shall be
construed to also refer to successor sections.
"Invested Assets" shall mean, as to any Insurance Subsidiary, the
amount shown on line 8A, page 2, column 1 of the 1995 Annual Statement of such
Insurance Subsidiary (or any similar line, page and column reference in any
subsequent Annual Statement), or an amount determined in a consistent
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manner for any date other than one as of which an Annual Statement is prepared.
"Investment Grade Securities" shall mean (a) U.S. Government
Obligations; (b) any certificate of deposit, maturing not more than 365 days
after the date of acquisition, issued by, or time deposit of, a commercial
banking institution that has combined capital and surplus of not less than
$250,000,000 or its equivalent in foreign currency, whose debt is rated at the
time as of which any investment there is made, of "A" (or higher) according to
Standard & Poor's Corporation ("S&P") and "A2" by Moody's Investors Services,
Inc. ("Moody's"); (c) commercial paper, maturing not more than 270 days after
the date of acquisition, issued by a corporation (other than an Affiliate or
Subsidiary of the Borrower) with a rating, at the time as of which any
investment therein is made, of "A1" (or higher) according to S&P and "P-1" (or
higher) according to Moody's; (d) any bankers' acceptances or any market
deposit accounts, in each case, issued or offered by any commercial bank having
capital and surplus in excess of $250,000,000 or its equivalent in foreign
currency, whose debt is rated at the time as of which any investment there is
made, of "A" (or higher) according to S&P and "A2" by Moody's; (e) non-equity
securities that are rated "BBB-" or better by S&P and "Baa3" or better by
Moody's, or "2" or better by the SVO; and (f) any fund investing exclusively in
investments of the types described in clauses (a) through (e) above. For this
purpose, "U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act of 1933, as amended), as custodian with respect
to any such U.S. Government Obligation or a specific payment of principal of or
interest on any such U.S. Government Obligation held by such custodian for the
account of the holder of such depository receipt; provided that (except as
required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the U.S. Government Obligation or the
specific payment of principal of or interest on the U.S. Government Obligation
evidenced by such depository receipt.
"Issuer Group" shall mean any Person and each of the Persons that
directly or indirectly, through one or more intermediaries, owns or controls,
is controlled by or under common control with, such Person. For the purpose of
this definition, with respect to any Person that is controlled through the
voting of Securities, "control" means the possession, direct or indirect, of
the power to vote 50% or more of the Securities having ordinary voting power
for the election of directors or other managers of such person. Such term
shall not include a Person that is a governmental unit, political subdivision
thereof or any government agency.
"KRF" shall mean Kentucky Retail Federation Self Insurers Fund, a
group self insurance fund organized under the laws of the State of Kentucky.
"KRF Management Agreement" shall mean the Administrator's Contract,
dated August 9, 1995, between Summit Consulting and KRF, together with any
amendments, modifications and supplements thereto, any replacements,
restatements, renewals or extensions thereof and any substitutes therefor, in
whole or in part.
"Key Man Life Insurance Policy" shall mean the $2,000,000 life
insurance policy covering the life of William B. Bull, together with any
amendments or replacements thereof, endorsements thereto or substitutes
therefor, in whole or in part.
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Page 17
"LESA" shall mean Louisiana Employers Safety Association Self Insurers
Fund, a group self insurance fund organized under the laws of the State of
Louisiana.
"LESA Management Agreement" shall mean the Administrator's Contract
dated March 23, 1982 and as amended by an Addendum dated August 1, 1982,
between Summit Consulting and LESA, together with any amendments, modifications
and supplements thereto, any replacements, restatements, renewals or extensions
thereof and any substitutes therefor, in whole or in part.
"LRA" shall mean Louisiana Retailers Association Self Insurers Fund, a
group self insurance fund organized under the laws of the State of Louisiana.
"LRA Management Agreement" shall mean the Administrator's Contract,
dated June 24, 1980 and as amended by an Addendum dated February 10, 1983,
between Summit Consulting and LRA, together with any amendments, modifications
and supplements thereto, any replacements, restatements, renewals or extensions
thereof and any substitutes therefor, in whole or in part.
"LIBOR" means the rate for deposits in Dollars for a period equal to
the Interest Period selected by the Borrower, which rate appears on the
Telerate Page 3750 at approximately 11:00 a.m. London time, two (2) Business
Days prior to the commencement of the applicable Interest Period. If, for any
reason, such rate is not available, then "LIBOR" shall mean the rate per annum
at which, as determined by the Agent, Dollars in the amount of $5,000,000 are
being offered to leading banks at approximately 11:00 a.m. London time, two (2)
Business Days prior to the commencement of the applicable Interest Period for
settlement in immediately available funds by leading banks in the London
interbank market for a period equal to the Interest Period selected.
"LIBOR Loan" shall mean, at any time, any Loan that bears interest at
such time at the Adjusted LIBOR Rate.
"LIBOR Rate" means a rate per annum (rounded upwards, if necessary, to
the next higher 1/100th of 1%) determined by the Agent pursuant to the
following formula:
LIBOR Rate = LIBOR
-------------------------------
1 minus the Reserve Requirement
"Lender" shall mean each financial institution signatory hereto and
each other financial institution that may become a party to this Agreement
pursuant to SECTION 13.1 hereof, and its successors or assigns.
"Leverage Ratio" shall mean a ratio, determined as of the last day of
each fiscal quarter of the Borrower, equal to (a) Consolidated Indebtedness at
such time, to (b) Total Capitalization of the Borrower at such time.
"Licenses" is defined in SECTION 6.6.
"Loan Termination Date" shall mean the earliest of (a) June 30, 2002
or such earlier date on which the Loans are required to be repaid in full
pursuant hereto, adjusted as the result of any mandatory or voluntary
prepayments hereunder, (b) the date of termination by the Required Lenders
after the occurrence and during the continuance of an Event of Default; (c)
such date of termination as is mutually agreed upon by the Lenders and the
Borrower; and (d) the date after all Obligations have been paid in full
<PAGE> 24
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and the Lenders are no longer obligated to make Advances on Revolving Loans
hereunder.
"Loans" shall mean the Term Loans and the Revolving Loans made by the
Lenders pursuant to ARTICLES II and III hereof.
"Management Agreement" shall mean any of the Bridgefield Employers
Management Agreements, the LESA Management Agreement, the LRA Management
Agreement, the KRF Management Agreement, the FRF Management Agreement and the
Bridgefield Casualty Management Agreement, in each case together with any
amendments, modifications and supplements thereto, any replacements,
restatements, renewals or extensions thereof and any substitutes therefor, in
whole or in part.
"Margin Stock" shall have the meaning provided in Regulation U.
"Material Adverse Effect" shall mean, relative to any occurrence, of
whatever nature (including any determination in litigation, arbitration or
governmental proceeding or investigation), of a materially adverse effect on:
(a) the assets, business, financial condition, operations
or prospects of a Borrower Affiliate;
(b) any Management Agreement;
(c) the ability of any Person to perform any of its
payment or other obligations under this Credit Agreement, any of the
Notes, or any of the other Credit Documents.
Except where otherwise expressly indicated, the term "Material Adverse
Effect" shall refer to such an effect on the Borrower and its Subsidiaries,
taken as a whole.
"Material Asset" shall mean (a) any asset or line of business of any
Borrower Affiliate material to the operations or financial condition of such
Borrower Affiliate, including, but not limited to the following types of
assets: (i) as to any Borrower Affiliate, any asset or group of assets to which
10% or more of the Borrower Affiliate's gross revenues (on a stand alone basis)
are attributable, and (ii) as to an Insurance Subsidiary, (A) any insurance
product line to which greater than five percent (5%) of such Subsidiary's Net
Written Premiums in the prior fiscal year are attributable, or (B) any asset or
group of assets to which ten percent (10%) of such Subsidiary's Admitted Assets
are attributable, and (b) the Stock or other Securities of any Subsidiary of
the Borrower.
"Measurement Period" shall have the meaning assigned to such term in
Section 8.1 hereof.
"Meritec" shall mean Meritec Solutions, Inc., a Georgia corporation.
"Multiemployer Plan" shall mean any "multiemployer plan" within the
meaning of Section 4001(a)(3) of ERISA to which any Borrower Affiliate is
required to make contributions.
"NAIC" shall mean the National Association of Insurance Commissioners,
or any successor thereto.
"Net Cash Proceeds" shall mean, with respect to the issuance and sale
by the Borrower of any
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capital stock or other equity securities of the Borrower (or any rights,
warrants or options relating thereto), cash payments received net of reasonable
accounting, legal and recording expenses, selling and brokerage commissions and
discounts and underwriting fees and discounts and other reasonable fees and
expenses incurred in connection with such issuance and sale.
"Net Income" shall mean, for any period, net income (or loss) for the
Borrower and its Subsidiaries on a consolidated basis for such period,
determined in accordance with GAAP.
"Net Worth" shall mean, as to any Person and as of any date, the
consolidated stockholders' equity of such Person and its Subsidiaries
determined on a consolidated basis in accordance with GAAP, excluding the
effect of FASB 115.
"Net Written Premiums" shall mean as to any Insurance Subsidiary, as
of any date, the total amount of premiums written after deducting or adding
premiums on business ceded to or assumed from others as shown on line 32,
column 4, Part 2B of page 8 of the 1995 Annual Statements (or any similar line,
page and column reference in any subsequent Annual Statement), or an amount
determined in a consistent manner for any date other than one as of which an
Annual Statement is prepared.
"Note" shall mean any Term Note or any Revolving Credit Note.
"Notice of Borrowing" shall mean a notice from the Borrower to the
Agent indicating the Borrower's desire to effect a Borrowing under the
Revolving Line of Credit, substantially in the form of EXHIBIT E.
"OECD" shall mean the Organization for Economic Cooperation and
Development and any successor thereto.
"Obligations" shall mean and include the Loans and all other loans,
advances, indebtedness, liabilities, obligations, covenants and duties
(including post-petition interest on the foregoing, to the extent lawful)
owing, arising, due or payable jointly or severally, from the Borrower to any
Lender, of any kind or nature, present or future, howsoever evidenced, created,
incurred, acquired or owing, whether arising under this Credit Agreement, the
Notes, the Borrower Pledge Agreement, the Borrower Security Agreement, the
Subsidiary Pledge Agreement, the Subsidiary Security Agreement or the other
Credit Documents, whether direct or indirect (including those acquired by
assignment), absolute or contingent, primary or secondary, due or to become
due, now existing or hereafter arising and however acquired. The term
includes, without limitation, all interest, charges, expenses, fees, attorneys'
fees and any other sums chargeable to the Borrower by any Lender under this
Credit Agreement or any of the other Credit Documents.
"Operating Cash Flow (Summit Holding)" shall mean, for any period, an
amount determined as follows: (a) EBITDA (Summit Holding) for such period, plus
(b) any Working Capital Decreases for such period, plus (c) any amounts paid by
Summit Holding to the Borrower pursuant to the Summit Holding Tax Sharing
Agreement during such period, plus (d) any non-cash expenses and charges
reducing income for such period, minus (e) any Working Capital Increases for
such period, and minus (f) any non-cash items increasing income for such
period.
"Other Taxes" is defined in SECTION 4.13(b).
"Payment Date" shall mean (a) with respect to any LIBOR Loan, the last
day of each Interest
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Period with respect thereto, and (b) with respect to any Base Rate Loan, each
March 31, June 30, September 30 and December 31, commencing March 31, 1997,
until the Loans are fully repaid.
"Pension Benefit Guaranty Corporation" shall mean the Pension Benefit
Guaranty Corporation or any entity succeeding to any or all of its functions.
"Permitted Indebtedness" shall mean (a) the Loans, (b) current
accounts payable arising in the ordinary course of business and not overdue,
(c) non-current accounts payable being contested in good faith and by
appropriate proceedings, and with respect to which adequate reserves have been
established, and are being maintained, in accordance with GAAP, (d) current
amounts due within seven Business Days to or from brokers for securities
transactions in the ordinary course of business, (e) Capital Lease Obligations
the total amount of which shall not at any time exceed $500,000, (f) deferred
taxes accrued in the ordinary course of business that are reflected as a
liability in accordance with GAAP, (g) the Rate Protection Agreement, the total
amount of which Indebtedness (as specifically defined in clause (e) of the
definition of "Indebtedness") may not at any time exceed $3,000,000, and (h)
any Indebtedness underlying Permitted Liens.
"Permitted Liens" shall mean any of the following liens securing any
Indebtedness of the Borrower on its property, real or personal, whether now
owned or hereafter acquired:
(a) liens securing the Obligations of the Borrower;
(b) liens of carriers, warehousemen, mechanics and
materialmen incurred in the ordinary course of business for sums not
yet due and payable;
(c) liens incurred in the ordinary course of business in
connection with workers' compensation, unemployment insurance or other
forms of governmental insurance or benefits, or to secure the
performance of letters of credit, bids, tenders, statutory
obligations, leases and contracts (other than for borrowed funds)
entered into in the ordinary course of business or to secure
obligations on surety or appeal bonds;
(d) (i) liens for current taxes, assessments or other
governmental charges that are not delinquent or remain payable without
any penalty or that are being contested in good faith and with due
diligence by appropriate proceedings but do not in any Lender's
judgment adversely affect such Lender's rights or the priority of such
Lender's lien in the Collateral, and if the Borrower has established
adequate reserves with respect thereto in accordance with GAAP, or
(ii) with respect to liens arising in connection with income tax
withholding, the Borrower has established reserves satisfactory to
such Lender with respect thereto;
(e) statutory liens of banks and other financial
institutions arising during the collection of instruments in the
ordinary course of business; and
(f) purchase money security interests or retention of
title to any property by the vendor (or equipment financing company)
thereof solely to secure payment for such property, which liens shall
not secure indebtedness in excess of an aggregate amount of $1,000,000
at any time.
"Person" shall mean a corporation, an association, a joint venture, a
partnership, an organization, a business, an individual, a trust or a
government or political subdivision thereof or any government agency.
<PAGE> 27
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"Plan of Conversion" shall mean the Amended Plan of Conversion and
Recapitalization of ESIF as adopted by ESIF's members on _______ and as
approved by the Department on __________, as amended from time to time.
"Pledge Agreements" shall mean the Borrower Pledge Agreement and the
Subsidiary Pledge Agreement and all the pledge agreements executed and
delivered to the Agent at any time by any Borrower Affiliate, together with any
amendments, modifications and supplements thereto, any replacements,
restatements, renewals and extensions thereof, and any substitutes therefor, in
whole or in part.
"Pro Rata Share" of any amount shall mean, with respect to any Lender
at any time, the product of (a) a fraction the numerator of which is the amount
of such Lender's Commitment at such time and the denominator of which is the
Total Commitment at such time, times (b) such amount; provided that if the Pro
Rata Share of any Lender is to be determined after the Commitments have been
terminated, then such Pro Rata Share shall be determined immediately prior (and
without giving effect) to such termination.
"Prohibited Transaction" shall have the meaning given such term under
ERISA or Section 4975 of the Internal Revenue Code.
"Projections" shall mean the financial projections described in
SECTION 6.19 hereof.
"Rate Protection Agreement" shall mean that certain [NAME OF EXISTING
SWAP AGREEMENT], dated ____________, between Summit Holding and First Union,
which agreement was entered into in accordance with the terms of the Summit
Holding Credit Agreement.
"Realty" any real property owned or leased by any Borrower Affiliate.
"Register" is defined in SECTION 13.1(b) hereof.
"Regulation D" shall mean Regulation D of the Board of Governors of
the Federal Reserve System, 12 C.F.R. Part 204, or any successor or other
regulation relating to reserve requirements applicable to member banks of the
Federal Reserve System.
"Regulation G" shall mean Regulation G of the Board of Governors of
the Federal Reserve System, 12 C.F.R. Part 207, or any successor or other
regulation relating to reserve requirements applicable to member banks of the
Federal Reserve System.
"Regulation T" shall mean Regulation T promulgated by the Board of
Governors of the Federal Reserve System, 12 C.F.R. Parts 220.3 and 220.4, or
any successor or other regulation hereafter promulgated by said Board to
replace the prior Regulation T and having substantially the same function.
"Regulation U" shall mean Regulation U promulgated by the Board of
Governors of the Federal Reserve System, 12 C.F.R. Part 221, or any successor
or other regulation hereafter promulgated by said Board to replace the prior
Regulation U and having substantially the same function.
"Regulation X" shall mean Regulation X promulgated by the Board of
Governors of the Federal Reserve System, 12 C.F.R. Part 224, or any successor
or other regulation hereafter promulgated by said Board to replace the prior
Regulation X and having substantially the same function.
<PAGE> 28
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"Regulatory Change" shall mean, relative to any Lender any change in
(or the adoption, implementation, phase-in or commencement of effectiveness of)
any federal, state or foreign law applicable to such Lender, or regulation,
interpretation, directive, requirement or request applicable to such Lender of
any court or Governmental Authority charged with the interpretation or
administration of any such law or of any fiscal, monetary or other authority
having jurisdiction over such Lender, or any change in the application to such
Lender of any such existing law, regulation, interpretation, directive,
requirement or request, occurring after the Closing Date.
"Reinsurance Agreements" shall mean any agreement, contract, treaty,
certificate or other arrangement whereby an Insurance Subsidiary or a Fund
agrees to transfer, cede or retrocede to another insurer or reinsurer all or
part of the liability assumed by such an Insurance Subsidiary or Fund under a
policy or policies of insurance issued by such Insurance Subsidiary or under an
insurance obligation of a Fund.
"Reportable Event" shall have the meaning given such term in ERISA.
"Required Lenders" shall mean the Lenders having in the aggregate a
Voting Percentage of 100%; provided, however, that if as of the end of the
fiscal quarter following the one year anniversary of the IPO, there shall not
have occurred (from the Closing Date through such quarter end) an Event of
Default described in Section 9.1(a) or 9.1(b), then, effective as of such
quarter end, such term shall mean the Lenders having in the aggregate a Voting
Percentage of 66-2/3%
"Requirement of Law" for any Person shall mean the articles of
incorporation and bylaws or other organizational or governing documents of such
Person, and any federal, state or local law (whether statutory, judicial or
administrative), treaty, rule, ordinance or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person
or any of its property is subject.
"Reserve Requirement" shall mean, with respect to any Interest Period,
that reserve percentage (expressed as a decimal), as provided by the Board of
Governors of the Federal Reserve System (or any successor governmental body)
applied for determining the maximum reserve requirements (including without
limitation, basic, supplemental, marginal and emergency reserves) under
Regulation D with respect to "Eurocurrency liabilities" as currently defined in
Regulation D, or under any similar or successor regulation with respect to
Eurocurrency liabilities or Eurocurrency funding. Each determination by a
Lender of the Reserve Requirement shall, in the absence of manifest error, be
conclusive and binding.
"Revolving Credit Commitment" shall mean, with respect to any Lender
at any time, the amount set forth opposite such Lender's name on its signature
page under the caption "Revolving Credit Commitment" or, if such Lender has
entered into one or more Assignment and Acceptances, the amount set forth for
such Lender at such time in the Register maintained by the Agent pursuant to
this Agreement, in either case as such amount may be reduced from time to time
pursuant hereto.
"Revolving Credit Note" shall mean a promissory note of the Borrower
substantially in the form of EXHIBIT F, executed and delivered to the Agent for
the benefit of a Lender pursuant to SECTION 3.6 hereof or, in connection with
an Assignment and Acceptance, pursuant to SECTION 13.1(d), together with any
amendments, modifications and supplements thereto and restatements thereof, in
whole or in part.
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"Revolving Line of Credit" shall mean the revolving line of credit
established by the Lenders under SECTION 3.1(a) hereof.
"Revolving Loans" shall have the meaning assigned to such term in
SECTION 3.1 hereof.
"SVO" shall mean the Securities Valuation Office of the NAIC, or any
successor thereto.
"Securities" shall mean common and preferred stock, partnership units
and participations, certificates of equity contribution, limited liability
company membership interests, notes, bonds, debentures, surplus debentures or
notes, trust receipts and other obligations, instruments or evidences of
indebtedness, including debt instruments of public and private issuers and
tax-exempt securities (including, without limitation, warrants, rights, put and
call options and other options relating thereto or any combination thereof),
guarantees of indebtedness, choses in action, other property or interests
commonly regarded as securities or any form of interest or participation
therein (whether certificated or uncertificated) or any instruments convertible
into any of the foregoing.
"Security Agreements" shall mean the Borrower Security Agreement and
the Subsidiary Security Agreement.
"Solvent" shall mean, with respect to any Person at any time, that
such Person (a) has capital sufficient to carry on its business as presently
conducted, (b) has assets with a fair saleable value at such time (i) not less
than the amount required to pay the probable liability on its then existing
debts as they become absolute and matured and (ii) greater than the total
amount of its liabilities (including identified contingent liabilities) at such
time, and (c) does not then intend to, and does not then believe that it will,
incur debts or liabilities beyond its ability to pay such debts and liabilities
as they mature, and, in the case of a Subsidiary, such term shall mean that
such Subsidiary, at such time, satisfies the minimum capital requirements of
any relevant Department.
"Statutory Accounting Principles" or "SAP" shall mean the statutory
accounting practices prescribed or permitted by the insurance commissioner (or
other similar authority) in the State of Florida for the preparation of Annual
Statements and other financial reports by insurance corporations of the same
type as the Insurance Subsidiaries, as applied by each Insurance Subsidiary on
a basis consistent with prior periods.
"Statutory Financial Statements" is defined in SECTION 6.18(a).
"Statutory Liabilities" shall mean, as to any Insurance Subsidiary, as
of any date, the total amount shown on line 21, page 3, column 1 of the 1995
Annual Statements (or any similar line, page and column reference in any
subsequent Annual Statement), or an amount determined in a consistent manner
for any date other than one as of which an Annual Statement is prepared.
"Statutory Surplus" shall mean, as to any Insurance Subsidiary, as of
any date, the total amount of capital and surplus shown on line 32, page 4,
column 1 of the 1995 Annual Statement (or any similar line, page and column
reference in any subsequent Annual Statement), or an amount determined in a
consistent manner for any date other than one as of which an Annual Statement
is prepared.
"Stock" shall mean all shares, options, interests or other equivalents
(howsoever designated) of or in a corporation, whether voting or non-voting,
including, without limitation, common stock, warrants, preferred stock,
convertible debentures and all agreements, instruments and documents
convertible, in
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whole or in part, into any one or more or all of the foregoing.
"Subsidiary" shall mean a corporation of which the indicated Person
and/or its other Subsidiaries, individually or in the aggregate, own, directly
or indirectly, such number of outstanding shares as have at the time of any
determination hereunder more than 50% of the ordinary voting power for the
election of directors (or their equivalent under the laws of the jurisdiction
of organization of such corporation). Except where otherwise expressly
indicated, references herein to "Subsidiary" shall mean a Subsidiary of the
Borrower.
"Subsidiary Pledge Agreement" shall mean the pledge agreement, dated
as of the Closing Date, between Summit Consulting, Summit Healthcare and the
Agent (for the benefit of the Lenders), together with any amendments,
modifications and supplements thereto, any replacements, restatements, renewals
and extensions thereof, and any substitutes therefor, in whole or in part.
"Subsidiary Security Agreement" shall mean the security agreement,
dated as of the closing date, between certain Subsidiaries of the Borrower and
the Agent, (for the benefit of the Lenders), together with any together with
any amendments, modifications and supplements thereto, any replacements,
restatements, renewals and extensions thereof, and any substitutes therefor, in
whole or in part.
"Summit Claims" shall mean Summit Claims Management, Inc., a Florida
corporation.
"Summit Claims Management Agreement" shall mean the Agreement, dated
January 1, 1994, between Summit Claims and ESIF, together with any amendments,
modifications and supplements thereto, any replacements, restatements, renewals
or extensions thereof and any substitutes therefor, in whole or in part, as
assigned by ESIF to Bridgefield Employers.
"Summit Consulting" shall mean Summit Consulting, Inc., a Florida
corporation.
"Summit Holding" is defined in the Recitals.
"Summit Holding Credit Agreement" is defined in the Recitals.
"Summit Holding Tax Sharing Agreement" shall mean the Tax Sharing
Agreement, dated ___________________, between Summit Holding and the Borrower
(which agreement shall be in form and substance satisfactory to the required
Lenders), together with any amendments, modifications and supplements thereto,
any replacements, restatements, renewals or extensions thereof and any
substitutes therefor, in whole or in part.
"Summit Loss" shall mean Summit Loss Control Services, Inc., a Florida
corporation.
"Summit Loss Management Agreement" shall mean the Contract, as amended
by an Addendum dated October 15, 1987, between Summit Loss and ESIF, together
with any amendments, modifications and supplements thereto, any replacements,
restatements, renewals or extensions thereof and any substitutes therefor, in
whole or in part, as assigned by ESIF to Bridgefield Employers.
"Supplemental Documentation" shall mean all agreements, instruments,
documents, financing statements, notices of assignment of accounts, schedules
of accounts assigned, mortgages, deeds of trust, certificates of title and
other written matter necessary or requested by the Agent or the Lenders to
perfect and maintain perfected each Lender's security interest in the
Collateral and to consummate the
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transactions contemplated by this Credit Agreement and the other Credit
Documents.
"Taxes" is defined in SECTION 4.13(a).
"Tax Sharing Agreement" shall mean either of the Summit Holding Tax
Sharing Agreement or the Bridgefield Employers Tax Sharing Agreement.
"Term Loan Commitment" shall mean, with respect to any Lender at any
time, the amount set forth opposite such Lender's name on its signature page
under the caption "Term Loan Commitment" or, if such Lender has entered into
one or more Assignment and Acceptances, the amount set forth for such Lender at
such time in the Register maintained by the Lender pursuant to this Agreement,
in either case, as such amount may be reduced from time to time pursuant hereto.
"Term Loans" shall have the meaning given to such term in SECTION 2.1
hereof.
"Term Note" shall mean a promissory note of the Borrower substantially
in the form of EXHIBIT G, executed and delivered to a Lender pursuant to
SECTION 2.2 hereof or, in connection with an Assignment and Acceptance,
pursuant to SECTION 13.1(d), together with any amendments, modifications and
supplements thereto and restatements thereof, in whole or in part.
"Total Capitalization" shall mean, with respect to any Person, and as
of any date, the sum of (a) the amount of such Person's Consolidated
Indebtedness as of such date and (b) the amount of such Person's Net Worth as
of such date.
"Total Commitment" shall mean, at any time, the sum of the Term Loan
Commitments and the Revolving Credit Commitments, which shall not exceed
$38,000,000 in the aggregate for all Lenders, as reduced from time to time
pursuant to ARTICLES II and III hereof.
"Total Revolving Credit Commitment" shall mean, at any time, the sum
of the Revolving Credit Commitments of the Lenders at such time, which shall
not exceed $5,000,000 in the aggregate (as reduced from time to time as
required hereunder).
"Total Term Loan Commitment" shall mean, at any time, the sum of the
Term Loan Commitments of the Lenders at such time, which shall not exceed
$33,000,000 in the aggregate.
"U.S. Employers" shall mean U.S. Employers Insurance Company, a Cayman
property and casualty insurance company.
"U.S. Government Securities" shall mean obligations of, or guaranteed
as to principal and interest by, the United States Government.
"Voting Percentage" shall mean, with respect to each Lender, a
percentage equal, at the time of computation, to the quotient (expressed as a
percentage) of the Loans advanced by such Lender divided by the total amount of
the Loans then outstanding.
"Welfare Plan" shall mean any "employee welfare benefit plan" as such
term is defined in ERISA, as to which the Borrower or its Subsidiaries has any
liability.
"Working Capital" shall mean, for any period, the excess of Current
Assets (less cash and any
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Cash Equivalents) over Current Liabilities as of the last day of such period.
"Working Capital Decrease" shall mean, for any period, the amount, if
any, by which Working Capital as of the end of such period is less than Working
Capital as of the end of the immediately preceding period.
"Working Capital Increase" shall mean, for any period, the amount, if
any, by which Working Capital as of the end of such period is more than Working
Capital as of the end of the immediately preceding period.
1.2 Use of Defined Terms. Unless otherwise defined or the context
otherwise requires, terms for which meanings are provided in this Credit
Agreement shall have such meanings when used in the schedules hereto, the
Credit Documents, the exhibits and any other communications delivered from time
to time in connection with this Credit Agreement.
1.3 Cross References; Headings. The words "hereof," "herein" and
"hereunder" and words of similar import, when used in this Credit Agreement or
in any of the Credit Documents shall refer to this Credit Agreement or such
Credit Document as a whole and not to any particular provision of this Credit
Agreement or such Credit Document. Section, schedule and exhibit references
contained in this Credit Agreement are references to sections, schedules and
exhibits in or to this Credit Agreement unless otherwise specified. Any
reference in any section or definition to any clause is, unless otherwise
specified, to such clause of such section or definition. The various headings
in this Credit Agreement and the Credit Documents are inserted for convenience
only and shall not affect the meaning or interpretation of this Credit
Agreement or such Credit Document or any provision hereof or thereof.
1.4 Accounting Terms. Any accounting terms used in this Credit
Agreement that are not specifically defined shall have the meanings customarily
given them in accordance with GAAP or, if used in the context of an Insurance
Subsidiary, Statutory Accounting Principles (or if any such term has no
customary meaning under Statutory Accounting Principles, then such term shall
have the meaning customarily given it in accordance with GAAP); provided,
however, that, in the event that changes in GAAP shall be mandated by the
Financial Accounting Standards Board, changes in Statutory Accounting
Principles shall be mandated by applicable Governmental Authorities or the NAIC
or any similar accounting body of comparable standing, or any change in
accounting practices shall be recommended, by the Borrower's independent
certified public accountants, and to the extent that such changes would modify
or could modify such accounting terms or the interpretation or computation
thereof, such changes shall be followed in defining such accounting terms only
from and after the date the Borrower, the Agent and the Lenders shall have
amended this Credit Agreement to the extent necessary to reflect any such
changes in the financial covenants and other terms and conditions of this
Credit Agreement. References to amounts on particular exhibits, schedules,
lines, pages and columns of the Annual Statement are based on the format
promulgated by the NAIC for the 1994 Annual Statements. If such format is
changed in future years so that different information is contained in such
items or they no longer exist, it is understood that the reference is to
information consistent with that reported in the referenced item in the
Insurance Subsidiaries' 1994 Annual Statements.
1.5 Time References. Any reference in this Agreement or in any
other Credit Document to the time of day shall mean such time in Charlotte,
North Carolina.
1.6 Other Definitional Provisions. Unless the context otherwise
requires, words in the singular include the plural and words in the plural
include the singular. In addition, when used herein,
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the terms "best knowledge of" or "to the best knowledge of" any Person shall
mean matters within the actual knowledge of such Person (or an executive
officer or general partner of such Person) or which should have been known by
such Person after reasonable inquiry.
ARTICLE II
TERM LOANS
2.1 Term Loans. The parties acknowledge that as of the date
hereof, there is outstanding under the Summit Holding Credit Agreement an
aggregate principal balance of $33,000,000 in respect of the term loan facility
thereunder (together with interest thereon in an amount equal to
$________________). Effective as of the Closing Date, the Borrower
unconditionally assumes Summit Holding's obligation to repay such amounts
(together with any other amounts accruing with respect thereto after the date
hereof to and including the Closing Date), and such term loans assumed by the
Borrower shall be deemed to be converted to Term Loans hereunder. Once repaid
or prepaid, Term Loans (or any portion thereof) may not be reborrowed.
2.2 Term Notes. A Term Loan made by a Lender shall be evidenced
by a Term Note appropriately completed in substantially the form of EXHIBIT F.
Each Term Note shall (a) be executed by the Borrower, (b) be payable to the
order of such Lender, (c) be dated as of the Closing Date (or, in the case of
Term Notes issued pursuant to an Assignment and Acceptance, as of the date
thereof), (d) be in a stated principal amount equal to such Lender's Term Loan
Commitment, (e) bear interest in accordance with the provisions of ARTICLE IV,
as the same may be applicable to the Loans made by such Lender from time to
time, and (f) be entitled to all of the benefits of this Agreement and the
other Credit Documents and subject to the provisions hereof and thereof.
2.3 Scheduled Repayment of Term Loans. (a) Except to the extent
due or made sooner pursuant to the terms and conditions of this Agreement,
including pursuant to SECTIONS 2.4 and 2.5, the Borrower will repay the
aggregate outstanding principal amount of the Term Loans in the amounts and on
the dates set forth below:
Date Principal Payment
March 31, 1997 325,000
June 30, 1997 700,000
September 30, 1997 700,000
December 31, 1997 450,000
March 31, 1998 900,000
June 30, 1998 1,600,000
September 30, 1998 1,400,000
December 31, 1998 1,100,000
March 31, 1999 1,100,000
June 30, 1999 1,600,000
September 30, 1999 1,600,000
December 31, 1999 1,300,000
March 31, 2000 1,450,000
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June 30, 2000 1,900,000
September 30, 2000 1,975,000
December 31, 2000 2,200,000
March 31, 2001 2,250,000
June 30, 2001 2,250,000
September 30, 2001 2,250,000
December 31, 2001 2,500,000
March 31, 2002 2,000,000
June 30, 2002 1,450,000
(b) Notwithstanding any other provision in this Agreement, the
then aggregate outstanding principal amount of the Term Loans shall be due and
payable in full on June 30, 2002.
2.4 Mandatory Prepayment of Term Loans.
(a) The Borrower shall make prepayments of the Term Loans as
required by SECTIONS 7.1(b) and (c).
(b) The Borrower shall repay the Term Loans, in full, upon the
occurrence of an Event of Default and acceleration of the Obligations by the
Required Lenders pursuant to ARTICLE X hereof, or upon the occurrence of an
Event of Default under SECTIONS 9.1(g), (h) or (i) and the automatic
acceleration thereunder.
2.5 Voluntary Prepayment of Term Loans. The Borrower may, from
time to time on any Business Day, make a voluntary prepayment, in whole or in
part, of the outstanding principal amount of the Term Loans; provided, however,
that (a) no such prepayment of any LIBOR Loan may be made on any day other than
the last day of the Interest Period for such Loan unless the Borrower
compensates the Lenders as provided in SECTION 4.11, (b) all such voluntary
prepayments shall require at least three (3) Business Days' prior written
notice to the Agent, (c) all such voluntary prepayments shall be in a minimum
amount of $500,000 and an integral multiple of $100,000 (or, if less, the
outstanding principal amount of the Term Loans then outstanding) and (d) each
such prepayment shall be applied to reduce the scheduled repayments on the Term
Loans in inverse order of maturity. Each such notice of prepayment shall
specify the proposed date of such prepayment, the aggregate principal amount
thereof and whether the Term Loans to be prepaid are Base Rate Loans or LIBOR
Loans, and shall be irrevocable and shall bind the Borrower to make such
prepayment on the terms specified therein.
2.6 LIBOR Breakage; Interest; Etc. Each payment or prepayment of
the Term Loans made pursuant to SECTION 2.3, 2.4 or 2.5 shall be subject to the
provisions of SECTION 4.11. Interest accruing to the date of prepayment in
respect of any amount of principal prepaid pursuant to SECTION 2.4 or 2.5 shall
be paid on the earlier of (i) the next succeeding Payment Date or (ii) the Loan
Termination Date.
ARTICLE III
REVOLVING CREDIT FACILITY
3.1 Loans. (a) The Lenders hereby establish, on the terms and
conditions of this Agreement
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and in reliance upon the representations and warranties made hereunder, a
revolving line of credit in favor of the Borrower in the aggregate principal
amount up to the Total Revolving Credit Commitment and agree to make and remake
one or more Loans ("Revolving Loans") to the Borrower, upon the terms and
conditions set forth in this ARTICLE III, from time to time on any Business Day
during the period from the date hereof through the Loan Termination Date.
Subject to the provisions of this Agreement (including, without limitation, the
schedule of reduction of Revolving Credit Commitments contained in SECTION
3.2(b) hereof), the Borrower may borrow, repay (without penalty except for
LIBOR breakage costs under SECTION 4.11) and reborrow any amount of the
Revolving Loans, provided that the aggregate principal amount of Revolving
Loans outstanding at any one time may not exceed the Total Revolving Credit
Commitment at such time; and provided further that the amount advanced by any
Lender hereunder at any time shall not exceed such Lender's Revolving Credit
Commitment at such time. Notwithstanding the foregoing, no Lender shall have
any obligation to lend funds at any time when an Event of Default exists or
when there exists any event or condition that, with the lapse of time, giving
of notice or making of such advance, would constitute an Event of Default. The
parties acknowledge that as of the date hereof, there is outstanding under the
Summit Holding Credit Agreement an aggregate principal balance of $__________
in respect of the revolving credit facility thereunder (together with interest
thereon in an amount equal to $________________). Effective as of the Closing
Date, the Borrower unconditionally assumes Summit Holding's obligation to repay
such amounts (together with any other amounts accruing with respect thereto
after the date hereof to and including the Closing Date), and such revolving
loans assumed by the Borrower shall be deemed to be converted to Revolving
Loans hereunder.
(b) Whenever the Borrower desires to borrow under the Revolving
Line of Credit, the Borrower shall give the Agent prior to 12:00 noon at least
three (3) Business Days' prior notice of each LIBOR Loan and at least one (1)
Business Day's prior notice of each Base Rate Loan to be made hereunder,
pursuant to a Notice of Borrowing. Each such Notice of Borrowing shall be
irrevocable and shall specify (i) the aggregate principal amount of the
Revolving Loans to be made pursuant to such Borrowing, and (ii) the requested
date of the Borrowing (the "Borrowing Date") (which shall be a Business Day)
and shall include an Interest Rate Election Notice. Upon the receipt of such
Notice of Borrowing from the Borrower, the Agent shall promptly notify each
Lender thereof.
Each Lender will make the amount of its Pro Rata Share of each
Revolving Loan available to the Agent for the account of the Borrower in the
form of an Advance at the office of the Agent in immediately available funds
prior to 1:00 p.m. on the Borrowing Date. All wire transfers to the Agent
shall be sent to the account described on the Agent's signature page hereto,
unless otherwise instructed by the Agent. The proceeds of all such Advances
will then be made available by 2:00 p.m. on the Borrowing Date to the Borrower
by the Agent at the office of the Agent specified in SECTION 14.4 by crediting
the aggregate amount of such Advances to the account of the Borrower on the
books of such office or pursuant to other instructions of the Borrower as
provided under subsection (c) below.
Unless the Agent has been notified to the contrary prior to 1:00 p.m.
on any Borrowing Date, the Agent may assume that each Lender has made an
Advance in the amount of its Pro Rata Share of each Revolving Loan to the Agent
on such Borrowing Date, and the Agent may, in reliance upon such assumption,
make available to the Borrower a corresponding amount as part of a Revolving
Loan. If any Lender shall not have made its required Advance available to the
Agent in the manner set forth herein, such Lender agrees to pay to the Agent,
on demand, such Advance, together with interest thereon for each day from the
date such corresponding Revolving Loan amount is made available to the
Borrower, until the date such Loan amount is repaid to the Agent, at the
Effective Federal Funds Rate. If such Lender shall reimburse to the Agent its
pro rata share of such Revolving Loan amount within three (3)
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Business Days after the Borrowing Date, such amount so reimbursed shall
constitute such Lender's Advance as part of such Revolving Loan for purposes of
this Agreement. If such Lender does not make its Advance available to the
Agent within three (3) Business Days after the Borrowing Date, the Borrower (to
the extent the proceeds of the corresponding Revolving Loan amount have been
made available by the Agent, on behalf of such Lender, to the Borrower) agrees
to repay to the Agent on demand an amount equal to such defaulted Advance
together with interest thereon at the rate applicable to the Revolving Loans
disbursed on the Borrowing Date, for each date such amount is made available to
the Borrower until such amount is repaid to the Agent. The failure of any
Lender to make its required Advance available to the Agent shall not relieve
any other Lender of its obligation hereunder to make its Advance on the
respective Borrowing Date, or relieve the Lender who failed to make such
Advance to subsequently make such Advance, or relieve any Lender (including the
Lender who failed to make such Advance) of its obligation, if any, hereunder to
make its Advance as part of any subsequent Revolving Loans, but no Lender shall
be responsible for the failure of any other Lender to make the Advance of any
other Lender as part of any Revolving Loan.
(c) The Borrower hereby irrevocably authorizes the Agent to
disburse the proceeds of each Revolving Loan under this Agreement (i) in
accordance with the terms of any written instructions from the Borrower
(provided that the Agent shall not be obligated under any circumstances to
forward amounts to any account not listed in an Account Designation Letter),
(ii) pursuant to SECTION 4.10 hereof, to advance to the Lenders principal and
interest payable hereunder, fees payable under SECTION 3.5 and any Lender's
fees for cash management services provided by such Lender from time to time to
the Borrower, or (iii) to the Borrower's controlled disbursement or depository
accounts with its bank in an amount equal to the sum necessary to cover checks
or other items of payment drawn by the Borrower upon such account and presented
for payment, but in no event shall the Agent, on behalf of the Lenders, be
obligated to make advances hereunder in amounts necessary to cover any such
checks or other items of payment presented to the extent that the Borrower is
not otherwise entitled to receive the proceeds of Revolving Loans in such
amounts from the Agent, on behalf of the Lenders. The Borrower may at any time
deliver to the Agent an Account Designation Letter listing any additional
accounts or deleting any accounts listed in a previous Account Designation
Letter.
(d) Each request for a Revolving Loan and each Advance made by a
Lender for the benefit of the Borrower shall constitute a new certification by
the Borrower as of the date of such request or Advance (i) that the
representations and warranties of the Borrower contained in ARTICLE VI remain
true and correct as of such date (except where such representation or warranty
speaks as of a specified date) and (ii) that, with respect to and after giving
effect to such Advance, no Event of Default, nor any event or condition that
with notice, lapse of time or the making of any such Advance would constitute
an Event of Default, has occurred and is continuing as of such date.
(e) Notwithstanding any provision herein to the contrary, as an
additional covenant of the Borrower hereunder, the Borrower shall maintain a
zero ($0.00) balance under the Revolving Line of Credit for a period of at
least five consecutive Business Days during each fiscal quarter, beginning with
the fiscal quarter ending March 31, 1997.
3.2 Voluntary Termination; Reduction of Commitments.
(a) At any time and from time to time during the term of this
Agreement, upon at least three (3) Business Days' prior written notice to the
Agent, the Borrower may terminate in whole or reduce in part the Total
Revolving Credit Commitment, provided that any such partial reduction shall be
in an
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aggregate amount of not less than $300,000 or, if greater, shall be in an
integral multiple of $100,000 in excess thereof. The amount of any termination
or reduction made under this subsection (a) may not thereafter be reinstated
(and any reduction shall be applied in inverse order of scheduled reduction).
(b) On each date set forth below, the Total Revolving Credit
Commitment shall automatically be permanently reduced to the lower of (i) the
amount set forth below opposite such date or (ii) the amount to which the Total
Revolving Credit Commitment has been previously reduced pursuant to subsection
(a) above or subsection (c) below:
Date
Credit Commitment
June 30, 2000
3,500,000
June 30, 2001
2,000,000
June 30, 2002
0
(c)
The Total Revolving Credit Commitment (and each Lender's Revolving Credit
Commitment) shall also be reduced as provided in SECTIONS 7.1(b) below.
(d)
The Total Revolving Credit Commitment, and the Revolving Credit Commitment of
each Lender, shall terminate in its entirety on the Loan Termination Date
unless sooner terminated pursuant to subsection (a) above or SECTION 10.1
hereof.
(e)
Each reduction of the Total Revolving Credit Commitment under this Section
shall be applied ratably to the Revolving Credit Commitments of the Lenders
according to their respective Revolving Credit Commitments. After any such
reduction, the fee required under SECTION 3.5 shall be calculated with respect
to the reduced Total Revolving Credit Commitment.
(f)
Upon each reduction of the Total Revolving Credit Commitment under this SECTION
3.2, the Borrower will pay to the Agent on the date of such reduction, for the
ratable benefit of the Lenders, an amount equal to the positive difference, if
any, of (i) the aggregate principal amount outstanding under the Revolving
Loans as of such date, minus (ii) the amount to which the Total Revolving
Credit Commitment is being reduced as of such date, together with any loss or
expenses required under SECTION 4.11. Interest accruing to the date of
prepayment in respect of any amount of principal prepaid pursuant to this
Section
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3.2 shall be paid on the earlier of (i) the next succeeding Payment Date or
(ii) the Loan Termination Date.
3.3
Voluntary Prepayments. The Borrower may, from time to time on any Business
Day, make a voluntary prepayment, in whole or in part, of the outstanding
principal amount of the Loans and (subject to the other provisions of this
ARTICLE III such amounts may be reborrowed from time to time); provided,
however, that (a) no such prepayment of any LIBOR Loan may be made on any day
other than the last day of the Interest Period for such Loan unless the
Borrower compensates the Lenders as provided in SECTION 4.11, (b) all such
voluntary prepayments resulting in a permanent reduction of the Total Revolving
Credit Commitment shall require at least three (3) Business Days' prior written
notice to the Agent, (c) all such voluntary prepayments shall be in a minimum
amount of $300,000 and an integral multiple of $100,000 (or, if less, the
outstanding principal amount of the Revolving Loans then outstanding).
Interest accruing to the date of prepayment in respect of any amount of
principal prepaid pursuant to this SECTION 3.3 shall be paid on the earlier of
(i) the next succeeding Payment Date or (ii) the Loan Termination Date.
3.4
Mandatory Repayment of Loans. The Borrower shall repay the Revolving Loans:
(a)
In full, upon the occurrence of an Event of Default and acceleration
of the Obligations by the Required Lenders pursuant to ARTICLE X
hereof, or upon the occurrence of an Event of Default under SECTIONS
9.1(g), (h) and (i) and the automatic acceleration thereunder; and
(b)
In part, immediately in the event that the total principal amount
outstanding at any time under the Revolving Loans exceeds the amount
of the Total Revolving Credit Commitment at such time, in the amount
of such excess.
(c)
In part, as provided in SECTION 7.1(b).
3.5
Unused Commitment Fee. During the term of this Agreement, the Borrower shall
pay to the Agent, for the ratable benefit of the Lenders, an unused commitment
fee at the rate of .375% per annum on the average daily undisbursed portion of
the Total Revolving Credit Commitment (calculated based on a year consisting of
360 days). Such fee shall accrue from and include the Closing Date to and
including the Loan Termination Date, shall be payable (a) on the last Business
Day of each fiscal quarter beginning with the fiscal quarter ending March 31,
1997, and (b) on the Loan Termination Date.
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3.6
Revolving Credit Notes. On the Closing Date, the Borrower shall execute and
deliver to each of the Lenders then party hereto, and on the date that any
other Person becomes a Lender, the Borrower shall execute and deliver to such
Lender, a Revolving Credit Note to evidence such Lender's Revolving Loans.
Each Revolving Credit Note shall (a) be substantially in the form of EXHIBIT E
hereto, (b) be payable to the order of the appropriate Lender and be dated the
date such Person becomes a Lender (except that the Notes of the Persons who are
Lenders as of the Closing Date shall be dated the Closing Date), (c) be in the
stated principal amount of such Lender's Revolving Credit Commitment and (d)
bear interest in accordance with the applicable provisions of ARTICLE IV
hereof. The amount of principal owing on each Revolving Credit Note at any
given time shall be the aggregate amount of all Revolving Loans made under such
Revolving Credit Note, less all payments of principal theretofore made by the
Borrower and applied to such Revolving Credit Note in accordance with the terms
hereof.
ARTICLE IV
INTEREST; ADDITIONAL PROVISIONS
4.1
Interest Rates. The Borrower covenants and agrees to pay to the Agent, for the
ratable credit of the Lenders, interest on the unpaid principal amount of the
Loans for the period commencing on the date each such Loan is made until such
Loan is paid in full, at the rates per annum specified below:
(a)
On that portion of the outstanding principal amount of the Loans maintained
from time to time as Base Rate Loans, interest shall accrue at the Adjusted
Base Rate; and
(b)
On that portion of the outstanding principal amount of the Loans maintained
from time to time as LIBOR Loans, interest shall accrue at a rate per annum
equal to the Adjusted LIBOR Rate from time to time in effect for each Interest
Period.
Notwithstanding any provision herein to the contrary, from the Closing Date
until the date on which the Borrower shall have delivered to the Lenders a
Compliance Certificate demonstrating that the Borrower shall have attained a
Fixed Charge Coverage Ratio of not less than 1.50 to 1.00 as of the end of the
most recently completed fiscal quarter (for the period of four consecutive
fiscal quarters then ending, it being understood that, with respect to the
period prior to Closing, the Fixed Charge Coverage Ratio will be determined by
reference to such ratio of Summit Holding as computed under Section 8.3 of the
Summit Holding Credit Agreement) after the satisfaction of the requirements set
forth in SECTION 5.2.3(f) with respect to the IPO or another equity offering,
the Loans shall bear interest at the Base Rate plus one percent (1.00%).
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4.2
Interest Payment Dates. Accrued interest on the Loans shall be paid on the
Payment Dates, commencing with the first such date following the Closing Date.
4.3
Computation of Rates.
(a)
The Agent, upon determining the interest rate for any Borrowing for any
Interest Period, shall promptly notify the Borrower and the Lenders thereof.
The Agent shall promptly notify the Borrower and the Lenders of any change in
the Base Rate and the effective date thereof. Failure of the Agent to provide
the Borrower or the Lenders with any notice described in this SECTION 4.3(a)
shall not affect any obligations of the Borrower or the Lenders hereunder nor
will such failure result in any liability on the part of the Agent to the
Borrower or any Lender.
(b)
Interest on each Loan, whether maintained as a Base Rate Loan or a LIBOR Loan,
shall be computed on the basis of actual days elapsed and a year consisting of
360 days.
4.4
Default Rate; Post-Petition Interest. Notwithstanding any other provision of
this Agreement, upon and during the continuance of any Event of Default,
without any required notice to the Borrower, all outstanding principal amounts
of the Loans, and to the full extent permitted by law, all interest accrued on
the Loans, shall bear interest at the Default Rate, and such default interest
shall be payable on demand. Additionally, and notwithstanding any other
provision of this Agreement, at the option of the Required Lenders, all LIBOR
Loans then outstanding shall immediately and automatically be converted into
Base Rate Loans. To the full extent permitted by applicable law, interest
shall continue to accrue on the Notes after the filing by or against the
Borrower of any petition seeking any relief in bankruptcy or under any act or
law pertaining to insolvency or debtor relief, whether state, federal or
foreign.
4.5
Maximum Interest Rate. Nothing contained in this Credit Agreement or in any
Note shall be deemed to establish or require the payment of interest to any
Lender at a rate in excess of the maximum rate permitted in the jurisdiction of
enforcement of this Credit Agreement or such Note. In the event that the rate
of interest required to be paid under other provisions of this Credit Agreement
or a Note exceeds the maximum rate permitted in such jurisdiction, the rate of
interest required to be paid hereunder and under such Note shall be
automatically reduced to the maximum rate permitted in such jurisdiction, and
any amounts collected in excess of the permissible amount shall be deemed a
voluntary prepayment of principal of the Term Loans or Revolving Loans,
whichever is applicable.
4.6
Conversion to and Renewal of LIBOR Loans. On the terms and subject to the
conditions of this Agreement, the Borrower may elect (a) at any time to convert
a Loan that is a Base Rate Loan into a LIBOR Loan, or (b) at the end of any
Interest Period with respect to a LIBOR Loan, to convert such
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LIBOR Loan into a Base Rate Loan or to renew such LIBOR Loan for an additional
Interest Period. Except as set forth in SECTION 4.7, Loans may be renewed or
converted in whole or in part. Each such election shall be made by the
Borrower delivering to the Agent an Interest Rate Election Notice executed by
an Authorized Officer of Borrower prior to 12:00 noon at least three Business
Days prior to the effective date of any conversion to or renewal of a LIBOR
Loan and at least one Business Day prior to the effective date of any
conversion to a Base Rate Loan, specifying (x) in the case of a conversion to
or a renewal of a LIBOR Loan, the Interest Period; (y) the date of conversion
or renewal (which date shall be a Business Day, and in the case of a conversion
from a LIBOR Loan to a Base Rate Loan, the last day of the Interest Period
therefor); and (z) the amount and type of conversion or renewal. Upon timely
receipt of an Interest Rate Election Notice, the Agent shall promptly notify
the Borrower and the Lenders of the applicable Elected Rate for the Interest
Periods selected in such Interest Rate Election Notice; provided, however, that
the failure by the Agent to provide any such notice shall not, in any way,
affect or diminish the Borrower's obligations to any Lender, or any Lender's
rights under this Agreement, the Notes or any of the other Credit Documents.
If, within the time period required under this SECTION 4.6, the Agent shall not
have received an Interest Rate Election Notice from the Borrower of an election
to renew a LIBOR Loan for an additional Interest Period, then, upon the
expiration of the Interest Period therefor, such LIBOR Loan shall be converted
automatically to a Base Rate Loan.
4.7
Restrictions on Interest Rate Options. Notwithstanding any provision herein to
the contrary, the right of the Borrower to elect the interest rate option
applicable to any Loan or Loans shall be subject to the following restrictions:
(a)
the aggregate principal amount of each Borrowing hereunder (y) in the case of
Borrowings comprised of Base Rate Loans, shall not be less than $500,000 and,
if greater, shall be in an integral multiple of $100,000 in excess thereof, and
(z) in the case of Borrowings comprised of LIBOR Loans, shall not be less than
$1,000,000 and, if greater, shall be in an integral multiple of $[100,000] in
excess thereof.
(b)
if the Borrower shall have failed to designate the type of Loans comprising a
Borrowing, the Borrower shall be deemed to have requested a Borrowing comprised
of Base Rate Loans.
(c)
A continuation or conversion of a LIBOR Loan or any conversion of a Base Rate
Loan to a LIBOR Loan must be in an amount such that the aggregate amount of the
succeeding LIBOR Loan made by the Lenders complies with paragraph 4.7(a) above;
(d)
The Interest Period for each LIBOR Loan shall be either one, two or three
months in duration, if available, and if the Borrower shall have failed to
select the duration of the Interest Period to be applicable to any Borrowing of
LIBOR Loans, then the Borrower shall be deemed to have selected an Interest
Period with a duration of one month.
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(e)
No portion of the outstanding principal amount of any Loan may be renewed as,
or be converted into, a LIBOR Loan if any Default or Event of Default has
occurred and is continuing;
(f)
No portion of the outstanding principal amount of any Loan may be made or
renewed as, or be converted into, a LIBOR Loan if, after giving effect to such
action, the Interest Period applicable thereto shall extend beyond the date of
any mandatory prepayment of any Loans unless a sufficient principal amount of
such Loan is being maintained as a Base Rate Loan or as a LIBOR Loan having an
Interest Period ending on or prior to the date of any such scheduled mandatory
prepayment to permit such repayment to be applied in full to Base Rate Loans;
and
(g)
LIBOR Loans may not be outstanding under more than three (3) separate Interest
Periods at any one time (for which purpose Interest Periods will be deemed
separate even if they are coterminous).
4.8
Illegality. Notwithstanding any other provision of this Credit Agreement, if
as the result of any Regulatory Change, any Lender shall determine that it is
unlawful for such Lender to make, renew, or maintain any Loan as, or to convert
any Loan into, a LIBOR Loan, the obligations of all Lenders to make, renew or
maintain any portion of the principal amount of any Loan as, or to convert any
Loan into, a LIBOR Loan shall be, upon such determination (and telephonic
notice thereof, confirmed in writing, to the Agent and the Borrower), forthwith
suspended until such Lender shall notify the Agent that the circumstances
causing such suspension no longer exist, and all LIBOR Loans shall
automatically convert into Base Rate Loans in accordance with SECTION 4.6.
4.9
Limitation on LIBOR Loans. Anything herein to the contrary notwithstanding,
if, on or prior to the date on which all or any portion of a Loan is to be made
or renewed as, or converted into, a LIBOR Loan:
(i)
the Agent or any Lender shall have determined (which
determination shall be conclusive) that quotations of
interest rates for the relevant deposits are not
being provided by the relevant Persons in the
relevant amounts or for the relevant maturities for
purposes of determining the rate of interest for such
LIBOR Loans under this Credit Agreement, or
(ii)
the Agent or any Lender determines that the rate of
interest referred to in the definition of Adjusted
LIBOR Rate in SECTION 1.1 hereof upon the basis of
which the rate of interest on any LIBOR Loan for such
period is determined does not accurately reflect the
cost to such Lender of making or maintaining such
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LIBOR Loans for such period,
then the Agent or such Lender shall give the Borrower and the other Lenders
prompt notice thereof, and the obligations of all Lenders hereunder to make or
renew any portion of the principal amount of any Loan as, or convert any
portion of any Loan into, LIBOR Loans shall be suspended until the Agent shall
notify the Lenders that the circumstances causing such suspension no longer
exist.
4.10 Procedures Regarding Payments.
(a) All payments (including prepayments) by the Borrower on
account of principal, interest and fees due hereunder and under the Notes shall
be made, in immediately available funds, to the Agent, for the account of the
Lenders, at the address of the Agent set forth in SECTION 14.4, prior to 12:00
noon, on the date payment is due, or at such other place as is designated in
writing by the Agent. The Agent shall thereafter cause to be distributed on
the same day (if payment was actually received by 12:00 noon on such day) like
funds relating to payment of principal, interest or fees ratably to the Lenders
entitled to receive any such payment in accordance with the terms of this
Credit Agreement. Any payments under this Credit Agreement that are made later
than 12:00 noon shall be deemed to have been made on the next succeeding
Business Day. The Agent shall notify the Borrower and the Lenders of the
amounts distributed to each Lender.
(b) If any payment of principal, interest or fees is otherwise
required by this Credit Agreement to be made on any day that is not a Business
Day, payment shall be deemed required on the next succeeding Business Day;
provided, however, that this SECTION 4.10(b) shall not affect the determination
of the expiration of an Interest Period for a LIBOR Loan.
(c) Each of the Lenders agrees, for the benefit of all of the
Lenders, that if, at any time following the acceleration of any of the
Obligations, it should receive any amount payable under this Credit Agreement
or a Note (including without limitation any voluntary payment, realization upon
security, exercise of the right of set-off or banker's lien, counterclaim or
cross action, enforcement of any right under the Credit Documents) that is
applicable to the payment of any of the Obligations, of a sum that with respect
to the related sum or sums received by other Lenders is in a greater proportion
than the total of such Obligations then owed and due to such Lender bears to
the total of such Obligations then owed and due to all of the Lenders
immediately prior to such receipt, then such Lender receiving such excess
payment shall purchase for cash without recourse or warranty from the other
Lenders an interest in the Obligations of the Borrower to such Lenders in such
amount as shall result in a proportional participation by all of the Lenders in
such amount; provided, that if all or any portion of such excess amount is
thereafter recovered from such Lender, such purchase shall be rescinded and the
purchase price restored to the extent of such recovery, but without interest.
(d) The Borrower hereby irrevocably authorizes the Agent to
advance to the Lenders principal and interest payable hereunder, fees payable
under SECTION 3.5 and any Lender's standard fees for cash management services
provided by such Lender from time to time to the Borrower, all payable by
drawing such amounts under the Revolving Line of Credit provided under this
Agreement as of the respective due dates of such principal, interest and fees;
provided that the failure of the Agent so to advance and pay any such amounts
by drawing under the Loans will not affect the Borrower's obligation to pay
such principal, interest and fees as and when due and payable.
4.11 Payment Not at End of Interest Period. The Borrower shall pay
the Agent, for the credit of the Lenders, such amount or amounts as shall
compensate each Lender for any loss, cost or expense
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incurred by such Lender as a result of:
(i) any payment or prepayment by the Borrower of a LIBOR
Loan on a date other than the last day of an Interest
Period for such LIBOR Loan; or
(ii) any failure by the Borrower to borrow a LIBOR Loan on
the effective date for such borrowing specified in
the relevant Interest Rate Election Notice electing
the Adjusted LIBOR Rate as the Elected Rate;
such compensation to include, without limitation, an amount equal to the
excess, if any, of (a) the amount of interest that would have accrued on the
amount so paid or prepaid or not borrowed for the period from the date of such
payment, prepayment or failure to borrow to the last day of the then current
Interest Period for such LIBOR Loan (or, in the case of a failure to borrow,
the Interest Period for such LIBOR Loan that would have commenced on the date
of such failure to borrow) at the applicable rate over (b) the amount of
interest (as reasonably determined by such Lender, which determination shall,
absent manifest error, be conclusive) such Lender would have paid on such
deposits of comparable amounts having terms comparable to such period.
4.12 Increased Costs.
(a) If at any time after the date hereof, and from time to time,
any Lender determines that the adoption or modification of any applicable
federal, state, local or foreign law, rule or regulation regarding such
Lender's required levels of reserves, insurance or capital (including any
allocation of capital requirements or conditions, but excluding federal income
tax liability), or similar requirements, or any interpretation or
administration thereof by any court, governmental authority, central bank or
comparable agency charged with the interpretation, administration or compliance
of such Lender with any of such requirements, has or would have the effect of
(i) increasing such Lender's net costs relating to the Loans (including LIBOR
Loans) hereunder (which, with respect to any Base Rate Loan, such increase in
costs is not reflected in an increase in the Adjusted Base Rate as determined
by such Lender in its reasonable discretion), (ii) reducing the yield or rate
of return of such Lender on the Loans (including LIBOR Loans) hereunder, to a
level below that which such Lender could have achieved but for the adoption or
modification of any such requirements, (iii) changing the basis of taxation of
payments to such Lender of the principal or interest on any LIBOR Loan or other
amounts payable under this Credit Agreement in respect thereof or (iv) imposing
of any reserve, special deposit or similar requirements relating to any
extensions of credit on other assets of, or any deposits with or other
liabilities of, such Lender (such increases or reductions collectively referred
to as "Increased Costs"), the Borrower shall, within fifteen (15) days of any
request by Lender, pay to such Lender an amount equal to such Increased Costs.
No failure by any Lender to demand payment of any additional amounts payable
hereunder shall constitute a waiver of such Lender's right to demand payment of
any amounts arising at any subsequent time. Nothing herein contained shall be
construed or so operate as to require the Borrower to pay any interest, fees,
costs or charges greater than is permitted by applicable law.
(b) Without limiting the effect of SECTION 4.12(a), in the event
that, by reason of any Regulatory Change, any Lender either (i) incurs
increased costs based on or measured by the excess above a specified level of
the amount of a category of deposits or other liabilities of such Lender that
includes deposits by reference to which the interest rate on LIBOR Loans is
determined as provided in this Credit Agreement or a category of extensions of
credit or other assets of such Lender that includes LIBOR Loans or (ii) becomes
subject to restrictions on the amount of such category of liabilities or assets
that it may hold, then, if such Lender so elects by notice to the Borrower and
the Agent, the
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obligation of such Lender to make, renew and convert Loans of any other type
into, LIBOR Loans hereunder, shall be suspended until the date such Regulatory
Change ceases to be in effect (and all LIBOR Loans then outstanding shall be
converted into Base Rate Loans in accordance with SECTION 4.6 hereof).
(c) Determinations by any Lender for purposes of SECTIONS 4.8 or
4.12 of the effect of any Regulatory Change on its costs or legality of making
or maintaining LIBOR Loans or on amounts receivable by it in respect of LIBOR
Loans, and of the additional amounts required to compensate such Lender in
respect of any Increased Costs, shall, absent manifest error, be conclusive.
4.13 Taxes.
(a) Any and all payments by the Borrower hereunder or under the
Notes shall be made, in accordance with the terms hereof and thereof, free and
clear of and without deduction for any and all present or future taxes, levies,
imposts, deductions, charges or withholdings, and all liabilities with respect
thereto, excluding taxes measured by net income and franchise taxes, imposed on
any Lender by the jurisdiction under the laws of which such Lender is organized
or transacting business or any political subdivision thereof (all such
non-excluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If the Borrower shall
be required by law to deduct any Taxes from or in respect of any sum payable
hereunder to such Lender, (i) the sum payable shall be increased as may be
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this SECTION 4.13) such Lender
receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions, (iii) the
Borrower shall pay the full amount deducted to the relevant taxation authority
or other authority for the account of such Lender in accordance with applicable
law, and (iv) the Borrower shall deliver to such Lender evidence of such
payment to the relevant taxation authority or other authority.
(b) In addition, the Borrower agrees to pay any and all present or
future intangibles, stamp or documentary taxes or any other excise or property
taxes, charges or similar levies of the United States or any state or political
subdivision thereof or any applicable foreign jurisdiction that arise from any
payment made hereunder or from the execution, delivery or registration of, or
otherwise with respect to, this Credit Agreement (hereinafter referred to as
"Other Taxes").
(c) The Borrower hereby agrees to indemnify the Agent and each
Lender for the full amount of Taxes or Other Taxes (including without
limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts
payable under this SECTION 4.13) paid by the Agent and any Lender (as the case
may be) and any liability (including penalties, interest and expenses, but
excluding any amounts arising out of Agent's or any Lender's gross negligence,
willful misconduct or noncompliance with any applicable tax laws) arising
therefrom or with respect thereto. This indemnification shall be made within
30 days from the date any Lender makes written demand therefor.
(d) Within 30 days after the date of any payment of Taxes by the
Borrower pursuant to this SECTION 4.13, the Borrower will furnish to the
relevant Lender the original or a certified copy of a receipt evidencing
payment thereof.
(e) Without prejudice to the survival of any other agreement of
the Borrower hereunder, the agreements and obligations of the Borrower
contained in this SECTION 4.13 shall survive the payment in full of principal
and interest hereunder.
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4.14 Application of Payments; Pro Rata Funding. (a) Except as
otherwise specifically set forth in this Agreement and unless the Agent is
specifically instructed by the Borrower, all payments made by the Borrower
shall be applied (i) first, to the payment of amounts due under SECTION 4.11,
(ii) second, to the payment of accrued and unpaid fees and interest on the Term
Notes, (iii) third, to the payment of accrued and unpaid fees and interest on
the Revolving Credit Notes, (iv) fourth, to the payment of unpaid principal on
the Term Notes and (v) fifth, to the payment of unpaid principal on the
Revolving Credit Notes. Payments of principal on the Notes shall be applied to
such Loans outstanding as directed by the Borrower or, in the absence of any
such direction, shall be applied first to the payment of Base Rate Loans and
second to the payment of LIBOR Loans in the order of the soonest to mature. If
there is more than one LIBOR Loan maturing on any one day, then, in the absence
of contrary directions from the Borrower, payment shall be applied to the LIBOR
Loan bearing the higher rate of interest. Notwithstanding the foregoing,
during the continuance of an Event of Default, the Agent shall apply all such
payments to the Obligations in any amounts and in any priority as the Required
Lenders in their sole discretion determine.
(b) All Loans hereunder shall be funded by the Lenders pro rata on
the basis of their Revolving Credit Commitments and their Term Loan
Commitments, as the case may be, rounded to the nearest penny.
4.15 Recordkeeping. The Agent shall record in its records the
respective Commitments of the Lenders, the principal amount of the Loans, the
amount of the Loans that are Base Rate Loans and LIBOR Loans and each repayment
thereof. The aggregate unpaid principal amount so recorded shall be rebuttable
presumptive evidence of the principal amount owing and unpaid on the Notes.
The failure so to record any such information or any error in such recording of
any information shall not, however, limit or otherwise affect the actual
obligations of the Borrower hereunder or under the Notes to repay the principal
amount of the Loans together with all interest accruing thereon. Each Lender
will record on its internal records the amount of each Loan made by it and each
payment in respect thereof. Failure to make any such recordation, or any error
in such recordation, shall not affect the Borrower's Obligations in respect of
such Loans.
ARTICLE V
CONDITIONS OF CLOSING AND BORROWING
5.1 Closing. The Closing shall take place on the Closing Date, or
at such other time as the parties hereto shall mutually agree, at the offices
of Robinson, Bradshaw & Hinson, P.A., 1900 Independence Center, 101 North Tryon
Street, Charlotte, North Carolina 28246. Upon the Closing of the transaction
contemplated hereby, the Summit Holding Credit Agreement shall be deemed
superseded by the terms hereof.
5.2 Conditions to the Closing. The Closing by the Lenders and the
obligation of the Lenders to consummate the transactions contemplated hereby on
the Closing Date shall be subject to the prior or concurrent satisfaction
(except as expressly provided otherwise in form and substance satisfactory to
the Agent) of each of the conditions precedent set forth below (it being
understood that (i) until all such conditions are either fulfilled or waived in
writing by the Lenders, the Summit Holding Credit Agreement will remain in full
force and effect, and (ii) in the event all such conditions are not either
fulfilled or waived in writing by the Lenders by __________________, then this
Agreement will be
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terminated and of no further force or effect, and the terms of the Summit
Holding Credit Agreement will remain in full force and effect.)
5.2.1 Loan and Security Documents. The Agent shall have received
all of the following, each duly executed and dated the Closing Date (or such
earlier date as shall be satisfactory to the Lenders), in form and substance
satisfactory to the Lenders and in full force and effect with no default
existing thereunder as of the Closing Date:
(a) the Term Notes and the Revolving Credit Notes (each payable to
the Lender to whom such Note is issued pursuant to SECTIONS 2.2 and 3.6 hereof);
(b) the Borrower Pledge Agreement (together with stock
certificates representing the Securities pledged thereunder, accompanied by
stock powers duly executed in blank);
(c) the Borrower Security Agreement;
(d) the Guaranty;
(e) the Subsidiary Pledge Agreement (together with stock
certificates representing the Securities pledged thereunder, accompanied by
stock powers duly executed in blank);
(f) the Subsidiary Security Agreement;
(g) the Financing Statements and all other filings or recordings
necessary to perfect the security interests of the Agent in the Collateral; and
(h) the Key Man Life Insurance Policy, duly and validly assigned
to the Agent for the benefit of the Lenders pursuant to documentation in form
and substance satisfactory to the Agent.
5.2.2 Certificates; Opinions.
(a) Certificate of Borrower. The Agent shall have received a
certificate dated as of the Closing Date from the president or the chief
financial officer of the Borrower, in form and substance satisfactory to the
Agent, to the effect that all representations and warranties of the Borrower
contained in this Agreement and the other Credit Documents are true, correct
and complete; that the conditions set forth in Sections 5.2.5 have been
fulfilled; that no Borrower Affiliate is in violation of any of the covenants
contained in this Agreement and the other Credit Documents; that, after giving
effect to the transactions contemplated by this Agreement, no Default or Event
of Default has occurred and is continuing; and that the Borrower has satisfied
in all material respects each of the closing conditions set forth in this
ARTICLE V.
(b) Secretary's Certificate. The Agent shall have received a
certificate dated as of the Closing Date of the corporate secretary or an
assistant secretary of each Borrower Affiliate certifying: (i) that attached
thereto is a true and complete copy of the bylaws of such Borrower Affiliate as
in effect on the date of such certification; (ii) to the extent applicable,
that attached thereto is a true and complete copy of resolutions adopted by the
Board of Directors of such Borrower Affiliate, authorizing the borrowings
contemplated hereunder (in the case of the Borrower only) and the execution,
delivery and performance of the Credit Documents to which it is a party; and
(iii) to the extent applicable, as to the incumbency and genuineness of the
signature of each officer of such Borrower Affiliate executing any of
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the Credit Documents.
(c) Articles of Incorporation. The Agent shall have received
copies of the articles of incorporation and all amendments thereto of each
Borrower Affiliate, each certified as of a recent date by the Secretary of
State of its state of incorporation, together with a certification by the
corporate secretary or an assistant secretary of each such Borrower Affiliate
that such articles of incorporation have not been amended since such date.
(d) Certificates of Good Standing. The Agent shall have received
short-form certificates as of a recent date of the good standing of each
Borrower Affiliate under the laws of its state of incorporation and each state
in which it is qualified to conduct business as a foreign corporation.
(e) Certificate of Authority. The Agent shall have received a
certificate of authority for each Insurance Subsidiary issued by the relevant
Department no earlier than thirty (30) days prior to the Closing Date.
(f) Opinion of Counsel. The Agent shall have received an executed
legal opinion of Alston & Bird, special counsel to Borrower, and McConnaughay,
Roland, Maida & Cherr, regulatory counsel to the Borrower, each dated as of the
Closing Date and addressed to the Agent and the Lenders, in form and substance
reasonably satisfactory to the Lenders.
(g) Account Designation Letter. The Agent shall have received an
Account Designation Letter, together with written instructions from an
Authorized Officer, including wire transfer information, directing the payment
of the proceeds of the initial Loans to be made hereunder.
5.2.3 Other Documents. The Agent shall have received, in form and
substance reasonably satisfactory to the Agent:
(a) Financial Statements. Evidence that the Borrower shall have
delivered to the Lenders prior to the Closing Date the pro forma consolidated
and Consolidating balance sheets and income statements required by SECTION 6.16
(it being understood that the financial statements contained in the Borrower's
registration statement described in the definition of "IPO" satisfy such
condition), each of the Financial Statements required by SECTION 6.17, the
Statutory Financial Statements required by SECTION 6.18, the Projections
required by SECTION 6.19 and the most recently prepared financial statements
for U.S. Employers.
(b) Insurance. Evidence that the Borrower and its Subsidiaries
are maintaining the Insurance Policies, which are in compliance with SECTION
6.9 hereof.
(c) Consents. Certified copies of each material consent, license
and approval required in connection with (i) the execution, delivery,
performance, validity and enforceability of this Credit Agreement and the other
Credit Documents, (ii) the consummation of the Conversion and the IPO and (iii)
the conduct by the Borrower Affiliates of their respective businesses after the
Closing Date, including in each case without limitation, any required approvals
of the commissioners of insurance (or similar authorities) of the State of
Florida and any other Governmental Authority whose approval is required by law
(such consents, licenses and approvals, if any, to be in full force and effect,
and all of the consents required to be obtained or made on or before the
consummation of the transactions contemplated hereby).
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(d) Financial Condition Certificate. A certificate certified as
accurate by the Borrower's chief financial officer, as to the financial
condition of the Borrower.
(e) UCC Search. The Agent shall have received the results of a
search of all filings made against each Borrower Affiliate under the Uniform
Commercial Code as in effect in any state in which any assets of such Borrower
Affiliate are located indicating that such assets are free and clear of any
lien or encumbrances except for Permitted Liens.
(f) IPO; Conversion. Evidence satisfactory to the Agent that (i)
the Borrower's registration statement on Form S-1 as initially filed with the
Commission on November 20, 1996 (and as amended on December 9, 1996 and on
_________, which amendments are deemed approved by the Lenders) (A) shall not
have been further amended except as approved by the Lenders and (B) shall have
become effective, (ii) the IPO or another equity offering on terms acceptable
to the Lenders (yielding proceeds net of transaction expenses of not less than
$40,000,000), and (iii) the Plan of Conversion shall not have been amended
except as approved by the Lenders and the Conversion shall have been
consummated (such that the Borrower is the legal and beneficial owner of all of
the Stock and Securities of Bridgefield Employers, and Bridgefield Employers is
the legal and beneficial owner of all of the Stock and Securities of
Bridgefield Casualty).
(g) Fairness Opinion. The agent shall have received a true and
complete copy of the fairness opinion of Chicago Corporation delivered in
connection with the Conversion.
(h) Employment Agreements. True, correct and complete copies of
each of the Employment Agreements, each duly and validly authorized by each
party thereto.
(i) Management Agreements. True, correct and complete copies of
each of the Management Agreements, each duly and validly authorized by each
party thereto.
(j) Consent Order. The Consent Order shall be in full force and
effect and shall not have been terminated or amended (except as approved by the
Required Lenders).
(k) Tax Sharing Agreements. A true, correct and complete copy of
each of the Tax Sharing Agreements, duly and validly authorized by each party
thereto.
(l) Other. Such other documents as the Agent may reasonably
request.
5.2.4 Investment Portfolio. The Borrower shall have caused each
Insurance Subsidiary to deliver to the Agent such information necessary to
disclose to the Agent such entity's investment portfolio as of the calendar
month-end immediately preceding the Closing Date, together with a listing of
all securities transactions in the investment portfolio from the date of such
information through the Closing Date, and no change which would have a Material
Adverse Effect shall have occurred with respect to such investment portfolio
since the date of such disclosure.
5.2.5 Litigation. No litigation (including, without limitation,
derivative actions), arbitration, governmental investigation or proceeding or
inquiry (a) shall be, on the Closing Date, pending, or to the knowledge of the
Borrower, threatened, that seeks to enjoin or otherwise prevent the
consummation of, or to recover any damages or to obtain relief as a result of,
the Loans, the consummation of the Conversion or the IPO, or (b) shall exist
that in the reasonable opinion of the Agent could be expected to have a
Material Adverse Effect on any Borrower Affiliate or any of the Funds.
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5.2.6 No Material Adverse Event. No event shall have occurred since
September 30, 1996 that individually or in the aggregate has had or could be
expected to have a Material Adverse Effect on any Borrower Affiliate.
5.2.7 Discontinued Operations. The Agent shall have received
evidence in form and substance satisfactory to it that (a) all Borrower
Affiliates' investments in the Discontinued Operations shall have been
terminated, (b) Meritec, Carolina Med and Carolina Summit shall have been
liquidated and dissolved (and their operations wound-up) in accordance with all
applicable Requirements of Law (provided, however, that Meritec and [Carolina
Med] will be permitted to maintain their respective corporate existences and to
remain parties to their real property leases so long as such properties are
subleased to third parties on terms satisfactory to the Agent) and (c) the
Borrower's corporate airplane shall have been sold.
5.3 Continuing Conditions. The following shall be conditions to
the Lenders' obligations to make Loans on the Closing Date and the dates of
each Borrowing thereafter, and each request for a Borrowing hereunder shall
constitute a certification by the Borrower that:
(a) No Default. No Default or Event of Default shall have
occurred and be continuing or will result from the making of the Loans
hereunder; and
(b) Warranties and Representations. (i) All warranties and
representations contained in this Credit Agreement and the Credit Documents
shall be true and correct as of such date with the same effect as though made
on the date of and concurrently with the making of such Loan (except where such
representations speak as of a specified date) and (ii) all covenants contained
herein in this Credit Agreement and the Credit Documents to be performed by
each of the parties thereto (other than the Agent or the Lenders) prior to such
date shall have been performed.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
To induce the Lenders to enter into this Credit Agreement and to make
the Loans, the Borrower makes the following warranties and representations to
the Agent and the Lenders, all of which shall be true and correct as of the
date hereof, the Closing Date and any other date on which any Loans are made
hereunder (except where any such representation speaks only as of a specified
date):
6.1 Corporate Organization and Power. Each Borrower Affiliate (a)
is a corporation duly organized, validly existing and in good standing under
the laws of its state of incorporation, (b) is duly qualified to do business
and in good standing in each jurisdiction where, because of the nature of its
activities or properties, the failure to so qualify would have a Material
Adverse Effect on such Borrower Affiliate, (c) has the requisite corporate
power and authority and the right to own and operate its properties, to lease
the property it operates under lease, and to conduct its business as now and
proposed to be conducted and (d) has obtained all material licenses, permits,
consents or approvals from or by, and
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has made all material filings with, and given all notices to, all Governmental
Authorities having jurisdiction, to the extent required for such ownership,
operation and conduct (including, without limitation, the consummation of the
Conversion and the IPO and the transactions contemplated by this Credit
Agreement and the other Credit Documents) as to each of the foregoing. The
execution, delivery and performance by each Borrower Affiliate of each Credit
Document to which it is a party and the consummation of the transactions
contemplated hereby and thereby are within its corporate powers and have been
duly authorized by all necessary corporate action (including, without
limitation, shareholder approval, if required). Each Borrower Affiliate has
received all material governmental and other consents and approvals (if any
shall be required) necessary for such execution, delivery and performance of
this Credit Agreement and the other Credit Documents, and such execution,
delivery and performance do not and will not contravene or conflict with, or
create a lien or right of termination or acceleration under, any Requirement of
Law or Contractual Obligation binding upon any Borrower Affiliate. This Credit
Agreement and each of the Credit Documents is (or when executed and delivered
will be) the legal, valid, and binding obligation of each Borrower Affiliate
party thereto, enforceable against such Borrower Affiliate in accordance with
its respective terms.
6.2 Certain Agreements. There have been delivered to the Agent,
on behalf of each Lender, true, correct and complete copies of each of the
Credit Agreement, such Lender's Notes, and each of the other Credit Documents
and any other material documents required to be delivered by the Borrower in
connection therewith, as amended to the date hereof, and all exhibits and
schedules delivered in connection therewith. Each of the Credit Documents
existing as of the Closing Date is in full force and effect, and each Borrower
Affiliate party thereto has performed all of its material obligations
thereunder required to be performed on or prior to the date hereof.
6.3 Litigation; Government Regulation. No claim, litigation
(including, without limitation, derivative actions), arbitration, or
governmental investigation, proceeding or inquiry is pending or, to the
knowledge of the Borrower, threatened against any Borrower Affiliate or any
Fund (a) that would, if adversely determined, have a Material Adverse Effect on
such Borrower Affiliate or (b) that relates to any of the transactions
contemplated hereby, and there is no basis known to the Borrower for any of the
foregoing. SCHEDULE 6.3 sets forth all claims, litigation, arbitration, and
governmental investigations, proceedings or inquiries pending or, to the
knowledge of the Borrower, threatened against any Borrower Affiliate and any
Fund as of the date hereof and the Closing Date, and none of such actions,
individually or in the aggregate, if adversely determined would have a Material
Adverse Effect on such Borrower Affiliate or any such Fund. No Borrower
Affiliate has any material contingent liabilities not provided for or referred
to in the Financial Statements and Statutory Financial Statements delivered
pursuant to SECTIONS 6.17, 6.18 and 7.3.
6.4 Taxes. No Borrower Affiliate is delinquent in the payment of
any taxes that have been levied or assessed by any Governmental Authority
against it or its assets. Each Borrower Affiliate has timely filed all tax
returns that are required by law to be filed, and has paid all taxes shown on
said returns and all other assessments or fees levied upon such Borrower
Affiliate, or upon its respective properties to the extent that such taxes,
assessments or fees have become due and if not due, such taxes have been
adequately provided for or are being contested in good faith by appropriate
proceedings. No controversy in respect of income taxes is pending or, to the
Borrowers's knowledge, threatened, against any Borrower Affiliate. As used in
this SECTION 6.4, the term "taxes" includes all taxes of any nature whatsoever
and however denominated, including, without limitation, income, sales, use, and
excise taxes, import and governmental fees, duties and all other charges, as
well as additions to tax, penalties and interest thereon, imposed by any
government or instrumentality.
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6.5 Conflicts With Other Instruments, Laws. Neither the
execution, delivery or performance of the Credit Documents executed by any
Borrower Affiliate nor its compliance therewith: (a) conflicts or will
conflict with or results or will result in any breach of, or constitutes or
will constitute, with the passage of time or the giving of notice or both, a
default under, or requires the consent or approval of any Person with respect
to, (i) the articles of incorporation or bylaws of any Borrower Affiliate, (ii)
any law, rule, statute or regulation or any order, writ, injunction or decree
of any court or governmental authority (including the Consent Order) or (iii)
any material agreement or instrument to which any Borrower Affiliate is a party
or by which such Borrower Affiliate, or its respective properties, is bound or
(b) results or will result in the creation or imposition of any lien, charge or
encumbrance upon its properties pursuant to any such agreement or instrument,
except the liens and security interests created by the Credit Documents.
6.6 Governmental Compliance. (a) Each Borrower Affiliate has been
and is in good standing with respect to all material governmental approvals,
licenses, permits, certificates, inspections, consents and franchises necessary
to continue to conduct its business as heretofore conducted and to own or lease
and operate its properties as now owned or leased by them. Except as set forth
in SCHEDULE 6.6, none of such approvals, licenses, permits, certificates,
consents or franchises contains any term, provision, condition or limitation
more burdensome than such as are generally applicable to Persons engaged in the
same or similar business as either such Borrower Affiliate.
(b) SCHEDULE 6.6 lists all of the jurisdictions in which either
any Insurance Subsidiary, as of the date hereof, holds licenses, permits or
authorizations to transact its business, or in which either such entity has
applied for any licenses, permits or authorizations (including, without
limitation, licenses or certificates of authority from any Departments)
(collectively, as in effect on the Closing Date and at any time thereafter, the
"Licenses"), except where failure to hold any such License would not have a
Material Adverse Effect. No License is the subject of a proceeding for
suspension, revocation or limitation or any similar proceedings, there is no
sustainable basis for such a suspension, revocation or limitation, and no such
suspension, revocation or limitation is threatened by any Governmental
Authority, except where failure to hold any such License would not have a
Material Adverse Effect. SCHEDULE 6.6 indicates the line or lines of insurance
in which each of the Insurance Subsidiaries (or its predecessors) is permitted
to be engaged with respect to each License therein listed, or each line of
business in which management of the Borrower intends (as of the Closing Date)
such Subsidiaries to be engaged with respect to Licenses to be applied for.
Neither of the Insurance Subsidiaries (nor any of its predecessors) transacts
any business, directly or indirectly, in any state other than those enumerated
on SCHEDULE 6.6 hereto, where such business requires any license, permit,
governmental approval, consent or other authorization, except where failure to
hold any such License would not have a Material Adverse Effect.
6.7 Default. No event has occurred and is continuing that
constitutes a Default or an Event of Default.
6.8 Margin Securities. Neither the making of any Loan hereunder,
nor the use of the proceeds thereof, will violate or be inconsistent with the
provisions of Regulation G, T, U or X of the Board of Governors of the Federal
Reserve System, and no part of the proceeds of any Loans will be used to
purchase or carry any Margin Stock in violation of Regulation U or to extend
credit for the purpose of purchasing or carrying any Margin Stock in violation
of Regulation U.
6.9 Insurance. SCHEDULE 6.9 sets forth a true and correct summary
of all Insurance Policies in place as of the date hereof and the Closing Date.
Each Borrower Affiliate is adequately
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insured for its benefit under the Insurance Policies, with coverage of types
and in amounts as are customary in the Borrower Affiliates' respective
businesses, which policies are issued by insurers of recognized responsibility.
No notice of any pending or threatened cancellation or premium increase has
been received by a Borrower Affiliate with respect to any such Insurance
Policies. Each Borrower Affiliate is in substantial compliance with all
material conditions contained in such Insurance Policies.
6.10 Ownership of Properties; Subsidiaries. On the date of any
Loan, each Borrower Affiliate will have good title to all of its properties and
assets, real and personal, of any nature whatsoever reflected in the Financial
Statements and Statutory Financial Statements. Except as set forth in SCHEDULE
6.10, as of the Closing Date (and thereafter) Borrower will own 100% of the
outstanding Stock and Securities of Summit Holding and Bridgefield Employers;
Summit Holding will own 100% of the outstanding Stock and Securities of Summit
Consulting and Healthcare Holdings; Healthcare Holdings will own 100% of the
Stock of Heritage Summit; Summit Consulting will own 100% of the Stock and
Securities of each of CICF, Summit Claims and Summit Loss; and Bridgefield
Employers will own 100% of the outstanding Stock and Securities of Bridgefield
Casualty and U.S. Employers, in each case free and clear of all liens,
encumbrances and charges whatsoever.
6.11 Business Locations. SCHEDULE 6.11 lists each of the locations
where each of the Borrower Affiliates maintains an office, a place of business
or any records.
6.12 Accuracy of Information. All factual written information
furnished heretofore or contemporaneously herewith by any Borrower Affiliate or
known by any Borrower or Borrower Affiliate to have been furnished on its
behalf to the Agent or the Lenders for purposes of or in connection with this
Credit Agreement or any of the transactions contemplated hereby, as
supplemented to the date hereof, is, and all other such factual written
information hereafter furnished by or on behalf of any Borrower Affiliate to
the Agent or the Lenders will be, true and accurate in every material respect
on the date as of which such information is dated or certified and not
incomplete by omitting to state any material fact necessary to make such
information not misleading, and the Borrower has notified the Lenders of all
events that have occurred since such date that would render such information
incomplete or misleading in any material respect; provided, however, that
projections and other forward-looking information have been prepared as stated
in SECTION 6.19 hereof and are not otherwise warranted by Borrower hereunder.
6.13 Subsidiaries; Affiliates. As of the Closing Date, the
Borrower will have no Subsidiaries other than Summit Holding, Summit
Consulting, CICF, Summit Claims, Summit Loss, Healthcare Holdings, Heritage
Summit, Bridgefield Employers, Bridgefield Casualty and U.S. Employers, and no
Affiliates other than as set forth on SCHEDULE 6.13 hereto.
6.14 Investment Company Act. No Borrower Affiliate is an
"investment company" or a company "controlled by an investment company," within
the meaning of the Investment Company Act of 1940, as amended.
6.15 Employee Plans; ERISA.
(a) Set forth on SCHEDULE 6.15 is a list of all Employee Plans
that are maintained with respect to employees of each Borrower Affiliate, and a
list of all Multiemployer Plans, all Welfare Plans and all other Employee Plans
that each Borrower Affiliate adopted. All such plans that are subject to ERISA
are in compliance therewith.
(b) Except as set forth in SCHEDULE 6.15, no accumulated funding
deficiency (as defined in
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Section 302 of ERISA and Section 412 of the Internal Revenue Code), whether or
not waived, has occurred with respect to any Employee Plan, and no ERISA Event
has occurred or is reasonably expected to occur with respect to any Employee
Plan. Except as set forth in SCHEDULE 6.15, the present value of all accrued
benefits under each Employee Plan (based on those assumptions used to fund such
Employee Plan) did not, as of the most recent valuation date, exceed the then
current value of the assets of such Employee Plan allocable to such benefits.
Except as set forth in SCHEDULE 6.15, full payment has been made on or before
the due date thereof of all amounts that any Borrower Affiliate is required
under the terms of each such Employee Plan to have paid as contributions to
such plan.
(c) Except as set forth in SCHEDULE 6.15, no Borrower Affiliate
has incurred any withdrawal liability under Section 4201 of ERISA.
(d) No Borrower Affiliate has participated in any Prohibited
Transaction that has subjected, or may subject, it to any material civil
penalty or tax imposed by Section 502(i) of ERISA or Section 4975 of the
Internal Revenue Code, respectively. Except as set forth in SCHEDULE 6.15, no
Borrower Affiliate has incurred, or is reasonably expected to incur, any
liability to the Pension Benefit Guaranty Corporation (other than for insurance
premiums, which have been paid when due).
(e) The present value (determined using actuarial and other
assumptions that are reasonable in respect of the benefits provided and the
employees participating) of the liability of any Borrower Affiliate for
post-retirement benefits to be provided to their current and former employees
under all Welfare Plans does not, in the aggregate, exceed the assets under all
such plans allocable to such benefits by an amount that would materially and
adversely affect the financial condition of such Borrower Affiliate or the
Borrower's ability to perform its obligations hereunder.
(f) The execution and delivery of this Credit Agreement will not
involve any transaction that is subject to the prohibitions of Section 406 of
ERISA or in connection with which a tax could be imposed pursuant to Section
4975 of the Internal Revenue Code.
(g) Except as set forth in SCHEDULE 6.15, no Borrower Affiliate is
making or has ever made or been required to make any contributions to a
Multiemployer Plan.
6.16 Pro Forma Balance Sheet. The pro forma consolidated and
Consolidating balance sheets and income statements of the Borrower and its
Subsidiaries as of September 30, 1996 (true and complete copies of which have
been delivered to the Agent and which give effect to the Conversion and the
IPO) (a) give effect to the Loans (as though the amount of the Total Commitment
had been borrowed), and the other transactions contemplated by this Agreement
and the other Credit Documents, (b) appropriately reflect the pro forma
financial condition of the Borrower and its Subsidiaries as of such date and
(c) are prepared in accordance with GAAP (subject to the absence of footnotes
required by GAAP and subject to year-end audit adjustments), in good faith and
based upon stated assumptions having a reasonable basis.
6.17 GAAP Financial Statements. Prior to the Closing Date the
Borrower has delivered to the Agent the Financial Statements consisting of the
audited consolidated balance sheets of the predecessor to Summit Holding and
its Subsidiaries as of December 31, 1995, December 31, 1994, December 31, 1993
and December 31, 1992 and the related statements of income and cash flows for
the fiscal years then ended, and the unaudited consolidated balance sheets of
Summit Holding and its Subsidiaries as of September 30, 1995 and the related
statements of income and cash flows for the nine-month period then ended. All
Financial Statements delivered to the Lenders have been prepared by
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the Borrower in accordance with GAAP, and they contain no material misstatement
or omission and fairly present in all material respects the financial position,
assets and liabilities of Summit Holding (or its predecessors as appropriate)
and its Subsidiaries, on a consolidated basis, as of the respective dates
thereof and the results of operations of Summit Holding (or its predecessors as
appropriate) and its Subsidiaries, on a consolidated basis, for the respective
periods then ended. Since December 31, 1995, there has been no material
adverse change in the assets, liabilities or financial position of any Borrower
Affiliate or in the results of any such Borrower Affiliate's operations, and no
Borrower Affiliate has incurred any obligation or liability that could
materially and adversely affect its financial condition, business operations or
the Collateral.
6.18 Statutory Financial Statements.
(a) The Annual Statements of each Insurance Subsidiary including,
without limitation, the provisions made therein for investments and the
valuation thereof, losses (reserves), and Statutory Liabilities, as filed with
the Department and delivered to Agent pursuant hereto (collectively, the
"Statutory Financial Statements"), have been prepared in accordance with SAP.
Each such Statutory Financial Statement was in compliance with applicable law
when filed. The Statutory Financial Statements fairly present the financial
position, the results of operations, changes in equity and changes in financial
position of each Insurance Subsidiary as of and for the respective dates and
periods indicated therein in accordance with SAP, except as set forth in the
notes thereto. Except for liabilities and obligations disclosed or provided
for in the Statutory Financial Statements, including, without limitation,
losses (reserves) and Statutory Liabilities (all of which have been computed in
accordance with SAP), no Insurance Subsidiary had as of the respective dates of
each of such Statutory Financial Statements, any liabilities or obligations
(whether absolute or contingent and whether due or to become due) that in
conformity with SAP would have been required to be or should be disclosed or
provided for in such Statutory Financial Statements. All books of account of
each of the Insurance Subsidiaries fully and fairly disclose all of the
transactions, properties, assets, investments, liabilities and obligations of
each Insurance Subsidiary, and all of such books of account are in the
possession of each Insurance Subsidiary, and are true, correct and complete in
all material respects.
(b) The investments of each Insurance Subsidiary and for each Fund
reflected in the most recently prepared Annual Statements comply in all
material respects with all applicable requirements of the Department as well as
those of any other Governmental Authority with jurisdiction over the investment
of such Person's funds.
(c) The amounts shown in the most recently prepared Annual
Statement for each Insurance Subsidiary and for each Fund for (i) aggregate
losses (reserves) and loss adjustment expenses for insurance policies and
contracts (set forth in lines 1 and 2, column 1, of page 3 thereof), (ii)
agents' balances and uncollected premiums (as set forth in lines 9.1, 9.2 and
9.3, column 1, of page 2 thereof) and (iii) Statutory Liabilities were computed
in accordance with commonly accepted actuarial standards consistently applied
and were fairly stated in accordance with sound actuarial principles, were
based on actuarial assumptions that were in accordance with or more stringent
than those called for in the insurance policies and contracts and in the
related reinsurance, co-insurance or similar contracts of such Insurance
Subsidiaries, were computed on the basis of assumptions consistent with those
of the preceding fiscal year or Quarter, as the case may be, and met the
requirements of the Department, as applicable, as well as those of any other
applicable Governmental Authority. Such losses (reserves) established by each
Insurance Subsidiary and each Fund were adequate as of such date for the
payment by such Insurance Subsidiary of all insurance benefits, losses, claims
and investigative expenses of such Insurance Subsidiary and each Fund, as
appropriate.
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(d) Marketable securities and short term investments reflected in
each Insurance Subsidiary's and each Fund's Annual Statement are valued at
cost, amortized cost or market value, as required by applicable law or
regulation.
6.19 Projections. Prior to the date hereof, the Borrower has
delivered to the Lenders projected statements of income and balance sheets of
the Borrower Affiliates, on a consolidated and Consolidating basis, and after
giving effect to the making of the Loans and the other transactions
contemplated hereby, covering the period through December 31, 2002 (the
"Projections"). Such Projections have been prepared by the executive and
financial personnel of the Borrower Affiliates, in the light of the past
business of the Borrower Affiliates and on the basis of the assumptions that
are set forth therein. Such Projections have been prepared in good faith, have
a reasonable basis and represent the good faith opinion of the Borrower and
senior management of the Borrower Affiliates and constitute a reasonable basis
for the assessment of future performance of the Borrower Affiliates. Except as
otherwise noted therein, the practices followed in preparing such Projections
do not differ materially from financial planning practices usually followed by
the Borrower Affiliates in good faith and in the regular course of business.
6.20 Solvency. The Borrower is Solvent, and will not, as a result
of the transactions contemplated hereby become not Solvent or be left with
unreasonably small capital.
6.21 Environmental Matters. (a) The Realty owned or operated by
each Borrower Affiliate currently or in the past (all of which Realty owned or
operated by any Borrower Affiliate as of the date hereof or on the Closing Date
being listed in SCHEDULE 6.21), including without limitation the improvements
thereon and the soil and groundwater thereunder: (i) does not contain and is
not contaminated by any Hazardous Substance; (ii) does not contain and has not
previously contained any asbestos or underground storage tanks; and (iii) (A)
has never been the subject of any activities representing a violation or
alleged violation of any Environmental Law or any report to or action by a
governmental authority pursuant to any Environmental Law; (B) has not had any
release of any Hazardous Substance from, on, in or upon it; and (C) has never
been the subject of an environmental audit or assessment, or remedial action
for an environmental problem; provided, however, that the foregoing
representations, to the extent they relate to the period prior to the time the
Realty in question was owned or operated by a Borrower Affiliate, shall be
limited to the knowledge of the Borrower Affiliates. With respect to any
Realty owned or operated by any Borrower Affiliate in the past, but not
currently owned or operated by such Borrower Affiliate, the representations set
forth above in this SECTION 6.21 shall be deemed to apply as of the last date
that such Borrower Affiliate owned or operated the property in question.
(b) The Borrower and each Insurance Subsidiary: (i) have never
sent a Hazardous Substance to a site that is contaminated by any Hazardous
Substance or that, pursuant to any Environmental Law, (1) has been placed on
the "National Priorities List", the "CERCLIS" list, or any similar state or
federal list, or (2) is subject to or the source of a claim, an administrative
order or other request to take "removal", "remedial", "corrective" or any other
"response" action, as defined in any Environmental Law, or to pay for the costs
of any such action at the site; (ii) are in compliance in all material respects
with all Environmental Laws in all of their activities and operations; and
(iii) are not involved in any suit or proceeding and have not received any
notice or request for information from any governmental authority or other
third party with respect to a release or threatened release of any Hazardous
Substance or a violation or alleged violation of any Environmental Law, and
have not received notice of any claims from any person or entity relating to
property damage or to personal
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injuries from exposure to any Hazardous Substance.
6.22 Assets for Conduct of Business. Each of the Borrower
Affiliates possesses adequate assets, contract rights, patents, patent
applications, copyrights, trademarks, servicemarks and trade names, or licenses
thereto, to continue to conduct its business as heretofore conducted, without
any material conflict with the rights of others, and all such patents, patent
applications, copyrights, trademarks, servicemarks, trade names and licenses in
existence on the date hereof are listed on SCHEDULE 6.22 attached hereto.
6.23 Trade Relations. There exists no actual or, to the best of
the Borrower's knowledge following due inquiry, threatened termination,
cancellation or limitation of, or any modification or change in, the business
relationship of any Borrower Affiliate with any customer or any group of
customers whose purchases individually or in the aggregate are material to the
business of such Borrower Affiliate (including, with respect to any of the
Management Agreements, business relationships with any of the Funds and
business relationships with any employees that are members of any of the
Funds), or with any insurance agent or insurance agency or group of insurance
agents or insurance agencies, whose business relationship is individually or in
the aggregate material to the business of such Borrower Affiliate, and there
exists no present condition or state of facts or circumstances that would have
a Material Adverse Effect on any Borrower Affiliate or prevent such Borrower
Affiliate from conducting its business after the consummation of the
transactions contemplated by this Credit Agreement in substantially the same
manner in which it has heretofore been conducted.
6.24 Securities Laws. No Borrower Affiliate, nor anyone acting on
behalf of any such Person, has directly or indirectly offered any interest in
any Note or any other Obligation for sale to, or solicited any offer to acquire
any such interest from, or has sold any such interest to, any Person that would
subject the issuance or sale of such Note or any other liability to
registration under the Securities Act of 1933, as amended.
6.25 Compliance with Laws. No Borrower Affiliate is in violation
of any law, ordinance, rule, regulation, order, policy, guideline or other
requirement of any Governmental Authority, if the effect of such violation, or
cumulative effect of such violations, could reasonably be expected to have a
Material Adverse Effect on such Borrower Affiliate and, to the best of the
Borrower's knowledge, no such violation has been alleged, and each Borrower
Affiliate (a) has filed in a timely manner all reports, documents and other
materials required to be filed by it with any Governmental Authority, if such
failure to so file could reasonably be expected to have a Material Adverse
Effect on such Borrower Affiliate, and the information contained in each of
such filings is true, correct and complete in all material respects, and (b)
has retained all records and documents required to be retained by it pursuant
to any law, ordinance, rule, regulation, order, policy, guideline or other
requirement of any Governmental Authority, if the failure to so retain such
records and documents could reasonably be expected to have a Material Adverse
Effect on such Borrower Affiliate.
6.26 Employees and Labor. There is no unfair labor practice
complaint against any Borrower Affiliate pending before the National Labor
Relations Board or any state or local agency and there is not a labor strike or
other labor dispute pending or, to the best of the Borrower's knowledge,
threatened, affecting any of the foregoing that if adversely resolved would
have a Material Adverse Effect on such Borrower Affiliate and, to the best of
the Borrower's knowledge, there are no organizational attempts affecting any of
the employees of any Borrower Affiliate that could have a Material Adverse
Effect on any Borrower Affiliate. There is no grievance, labor dispute or work
stoppage involving or affecting any Borrower Affiliate pending or, to the best
of the Borrower's
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knowledge, threatened that could have a Material Adverse Effect on any Borrower
Affiliate.
6.27 First Priority. Each of the Pledge Agreements and each of the
Security Agreements (assuming possession by the Agent of certificates
representing Collateral consisting of Securities and proper and timely filing
of the Financing Statements and continuation statements in the locations set
forth in the Schedules to the Security Agreements) creates a valid and
perfected first priority security interest and lien in and to the Collateral
described therein, in each case enforceable against the Borrower Affiliate
party thereto and all third parties in all relevant jurisdictions and securing
the payment of all Obligations purported to be secured thereby.
6.28 Material Contracts. SCHEDULE 6.28 lists all existing
contracts, agreements and commitments of each Borrower Affiliate as of the date
hereof and on the Closing Date (including without limitation any commitments in
respect of any Indebtedness), whether written or oral, that (a) extend for one
(1) year or more and involve the receipt or payment of more than $100,000 (b)
relate to employment or labor matters (except individual employment contracts),
or (c) are material to the business, property, assets, operations or condition,
financial or otherwise, of any Borrower Affiliate. No Borrower Affiliate is in
default with respect to any agreement listed on SCHEDULE 6.28 or any indenture,
loan agreement, mortgage, lease, deed or similar agreement relating to the
borrowing of monies to which such Borrower Affiliate is a party or by which it
is bound.
6.29 Reinsurance. SCHEDULE 6.29 lists all existing Reinsurance
Agreements (as of the date hereof and on the Closing Date) of each Insurance
Subsidiary and of each Fund entered into since January 1, 1993. As of the date
hereof all such Reinsurance Agreements are in full force and effect. No party
to any such agreements is in default in any material respect as to any
provision thereof, and no such agreement contains any provision providing that
the other party thereto may terminate such agreement by reason of the
transactions contemplated by the Credit Agreement. To the knowledge of the
Borrower, there is no reason to believe that the financial condition of any
other party to any such Reinsurance Agreement is impaired with the result that
a default thereunder may reasonably be anticipated.
6.30 Policies of Insurance. Except with respect to terms
specifically negotiated with policyholders, if any, all policies of insurance
issued by any Insurance Subsidiary as now in force are, to the extent required
under applicable law, on forms approved by the appropriate Governmental
Authorities in the jurisdictions where issued or have been filed with and not
objected to by such Governmental Authorities within the period provided for
objection. None of the terms embraced by the exception contained in the
preceding sentence could reasonably be expected to have a Material Adverse
Effect on the enforceability of any such policies or jeopardizes, or could
reasonably be expected to jeopardize, the License of any Insurance Subsidiary
in any jurisdiction. Any rates for premiums required to be filed with or
approved by any Governmental Authority have been so filed or approved, and such
premiums charged by each Insurance Subsidiary conform thereto.
6.31 No Burdensome Restrictions. There exists no restriction or
encumbrance on (i) the creation or assumption of any Lien upon the assets or
properties of any Borrower Affiliate as security, directly or indirectly, for
the Obligations, or (ii) the ability of any Subsidiary (other than either of
the Insurance Subsidiaries which are subject to certain regulatory
restrictions, including those contained in the Consent Order) to make any
dividend payments or other distributions in respect of its capital stock or any
other interest or participation in its profits owned by the Borrower, or to
make loans or advances thereto, except for the terms of this Agreement and the
other Credit Documents, or customary provisions restricting subletting or
assignment of any lease governing a leasehold interest of any Borrower
Affiliate; and no Borrower Affiliate is a party to or bound by any other
restriction, encumbrance or obligation,
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whether pursuant to its articles or certificate of incorporation, bylaws,
contract or any applicable Requirement of Law, that could reasonably be
expected to have a Material Adverse Effect.
6.32 Plan of Conversion. With respect to the Plan of Conversion,
the Borrower hereby represents and warrants as follows:
(a) The Borrower has delivered to the Agent a true, complete and
correct copy of such document, together with all amendments and modifications
thereto. Such plan (as amended) comprises a full and complete statement of the
transactions contemplated thereby, and there are no agreements or
understandings, written or oral, or side agreements not contained therein that
modify the substance thereof.
(b) Such plan has been duly authorized by all necessary corporate
or other action on the part of the Borrower Affiliates party thereto, has been
validly executed and delivered by the Borrower Affiliates party thereto and is
the legal, valid and binding obligation of the Borrower Affiliates party
thereto, enforceable in accordance with its terms.
(c) As of the Closing Date such plan will be in full force and
effect and, except with the Lenders' prior approval, has not been amended or
modified, and no provision thereof has been waived by any party thereto.
(d) As of the Closing Date, each of the transactions contemplated
by such agreement shall have been consummated and all of the conditions to the
consummation thereof (as provided therein and as provided in the Department's
consent with respect thereto) have been fully satisfied or waived, such that,
as of the Closing Date hereof, ESIF shall have been converted to Bridgefield
Employers, which shall have become a wholly owned Subsidiary of the Borrower.
ARTICLE VII
AFFIRMATIVE COVENANTS
Until payment in full of all Obligations of the Borrower to each of
the Lenders, the Borrower covenants and agrees that, unless the Required
Lenders consent otherwise in writing, the Borrower shall:
7.1 Repayment of Obligations; Certain Prepayments. (a) Promptly
repay the Obligations when due, including without limitation the amounts due
under the Notes, according to the terms of this Credit Agreement and the other
Credit Documents.
(b) Promptly upon its receipt thereof, but in any event not later
than two (2) Business Days after the date thereof, the Borrower will make a
mandatory prepayment of the aggregate outstanding principal amount of the Term
Loans in an amount equal to 100% of the Net Cash Proceeds from the issuance,
sale or other disposition of its capital stock or other equity securities or of
any rights, warrants or options to purchase or acquire any shares of its
capital stock or other equity securities (in any such case, a "Sale"), provided
that such Sale yields Net Cash Proceeds of $2,000,000 or more; provided,
however, that the Borrower will have no such obligations in respect of the IPO
or any other equity offering satisfying the requirements set forth in SECTION
5.2.3(f). Any such payments shall be applied to
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the Term Loans in inverse order of maturity and, once such Term Loans have been
repaid in full, such payments shall be applied to the Revolving Loans in
inverse order of scheduled reduction, and any such prepayment, to the extent
applied to the Revolving Loans, will result in permanent reductions to the
Total Revolving Credit Commitment (and corresponding reductions in each Lender's
Revolving Credit Commitment).
(c) Concurrently with the delivery of its annual Financial
Statements after the end of each fiscal year of the Borrower pursuant to
SECTION 7.3(a)(ii), beginning with the fiscal year ending December 31, 1996,
but in any event not later than ninety days (90) after the last day of each
such fiscal year, the Borrower will make a mandatory principal prepayment of
the aggregate outstanding principal amount of the Term Loans (with a
corresponding reduction in the Total Term Loan Commitment) in an amount equal
to 75% of Excess Cash Flow, if any, for such fiscal year. Each such prepayment
shall be accompanied by the Borrower's Excess Cash Flow Calculation for such
period, certified by the Borrower's chief financial officer, which calculation
shall be subject to the reasonable approval of the Required Lenders. Any such
prepayments shall be applied to the Term Loans in inverse order of maturity.
(d) In the event the Borrower raises proceeds (net of transaction
expenses) in excess of $55,000,000 in connection with the IPO or another equity
offering satisfying the requirements set forth in Section 5.2.3(f), the
Borrower will make a mandatory prepayment of the aggregate outstanding
principal amount of the Term Loans in an amount equal to fifty percent (50%) of
the aggregate amount of such total net proceeds in excess of $55,000,000. Any
such payments shall be applied to the Term Loans in inverse order of maturity.
7.2 Performance Under Credit Documents; Use of Proceeds. (a)
Perform, and cause its Subsidiaries to perform, all obligations required to be
performed by each such Borrower Affiliate, as applicable, under the terms of
this Credit Agreement and the other Credit Documents and any other agreements
now or hereafter existing or entered into between any such Borrower Affiliate
and the Lenders, subject to notice and cure provisions contained therein.
(b) Use the proceeds of the Revolving Loans solely for general
corporate purposes in the ordinary course of the Borrower's business as
historically conducted.
7.3 Reports, Certificates and Other Information. Furnish or cause
to be furnished to the Agent and the Lenders:
(a) GAAP Financial Statements.
(i) Within 45 days after the end of each of the first
three fiscal quarters of each fiscal year of the Borrower, (A) a copy
of the unaudited consolidated and Consolidating balance sheet of the
Borrower and its Subsidiaries, as of the close of such fiscal quarter,
and (B) a copy of the unaudited consolidated and Consolidating
statements of income, retained earnings and cash flows of the Borrower
and its Subsidiaries for such fiscal quarter and for the elapsed
portion of the fiscal year, all prepared in accordance with GAAP
(subject to normal year-end adjustments and except that footnote and
schedule disclosure may be abbreviated) and accompanied by the
certification of the chief executive officer or chief financial
officer of the Borrower that all such Financial Statements are
complete and correct and present fairly, in all material respects, in
accordance with GAAP (subject to normal year-end adjustments) the
financial position
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and results of operations of the Borrower and its Subsidiaries as at
the end of such fiscal quarter, and for such fiscal quarter and for
the elapsed portion of the fiscal year.
(ii) Within 90 days after the close of each fiscal year, a
copy of the annual audited consolidated and unaudited Consolidating
Financial Statements of the Borrower, consisting of the audited
consolidated and unaudited Consolidating balance sheets and statements
of income, changes in stockholders equity and cash flows, setting
forth in comparative form in each case the consolidated and
Consolidating figures for the previous fiscal year, which Financial
Statements shall be prepared in accordance with GAAP, and in the case
of audited Financial Statements accompanied by a report of the
independent certified public accountants regularly retained by the
Borrower, or any other firm of independent certified public
accountants of recognized national standing selected by the Borrower,
that contains an opinion that is not qualified and that is reasonably
acceptable to the Required Lenders, to the effect that all such
Financial Statements present fairly in all material respects in
accordance with GAAP the consolidated financial position and the
consolidated results of operations and cash flows of the Borrower and
its Subsidiaries as at the end of such fiscal year and for such fiscal
year, and in the case of unaudited Financial Statements, such
Financial Statements shall be prepared in accordance with GAAP
accompanied by the certification of the chief executive officer or
chief financial officer of the Borrower that all such Financial
Statements are complete and correct and present fairly in all material
respects in accordance with GAAP the Consolidating financial position
and the Consolidating results of operations and cash flows of the
Borrower its Subsidiaries as at the end of such fiscal year and for
such fiscal year.
(iii) Within 30 days after the end of each month,
(A) a copy of the unaudited consolidated and Consolidating balance
sheet of the Borrower and its Subsidiaries, as of the close of such
month, and (B) a copy of the unaudited consolidated and Consolidating
statements of income, retained earnings and cash flows of the Borrower
and its Subsidiaries for such month, all prepared in accordance with
GAAP (subject to normal year-end adjustments)
(b) SAP Financial Statements.
(i) As soon as possible, but in any event within 75 days
after the end of each fiscal year of each Insurance Subsidiary (and,
with respect to the Funds, within 180 days after the end of each
fiscal year of the Funds), a copy of the Annual Statement of such
Insurance Subsidiary and each Fund for such fiscal year prepared in
accordance with SAP and, in the case of each Insurance Subsidiary,
accompanied by the certification of the chief financial officer or
chief executive officer of such Subsidiary that such financial
statement is complete and correct and presents fairly in all material
respects in accordance with SAP the financial position of such
Subsidiary for such fiscal year.
(ii) If reasonably requested by the Required Lenders by
written notice delivered to the Borrower within 45 days after delivery
of each Insurance Subsidiary's or a Fund's Annual Statement pursuant
to SECTION 7.3(b)(i), within 90 days after the date of such request, a
copy of such Insurance Subsidiary's or Fund's Annual Statement
prepared in accordance with SAP, certified, in the case of an
Insurance Subsidiary, without
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qualification by the independent certified public accountants
regularly retained by such Insurance Subsidiary, or any other firm of
independent certified public accountants of recognized national
standing selected by the Borrower and reasonably acceptable to the
Required Lenders that such Annual Statement is complete and correct
and presents fairly in all material respects in accordance with SAP
such Insurance Subsidiary's financial position for such fiscal year
and continuing consolidated and consolidating financial statements.
(iii) As soon as possible, but in any event within 45 days
after the end of each of the first three fiscal quarters of each
fiscal year of such Insurance Subsidiary and each Fund (and, in the
case of each Fund, within 45 days after the fourth fiscal quarter of
each fiscal year of each Fund), a copy of such Insurance Subsidiary's
and each Fund's quarterly statement for such fiscal quarter, all
prepared in accordance with SAP and, in the case of an Insurance
Subsidiary, accompanied by the certification of such Insurance
Subsidiary's chief financial officer or chief executive officer that
all such financial statements are complete and correct and present
fairly in all material respects in accordance with SAP such Insurance
Subsidiary's financial position for the periods then ended.
(iv) Within 90 days after the end of each fiscal year of
each Insurance Subsidiary and the Funds, a copy of such Insurance
Subsidiary's and each Fund's "Statement of Actuarial Opinion" which is
provided to the relevant Department (or equivalent information should
the Department not require such a statement) as to the adequacy of
such Insurance Subsidiary's and the Fund's loss reserves. Such
opinion shall be in the format prescribed by the applicable Insurance
Code.
(v) Within 90 days after the end of each fiscal year, an
Actuarial Report prepared by an independent actuary acceptable to the
Required Lenders and certified as to the reserve position as of such
fiscal year end by such independent actuary for (A) each Insurance
Subsidiary and (B) each of the Funds.
(vi) Within 30 days of filing with the Department, each
Insurance Subsidiary's management discussion and analysis.
(c) Compliance Certificates. Within 45 days of the end of each
fiscal quarter of Borrower or within 90 days of the end of a fiscal quarter
that is also the end of a fiscal year of Borrower, and at any other time no
later than 30 days following a written request of the Agent, a duly completed
Compliance Certificate, signed by the chief financial officer of the Borrower,
containing, among other things, a computation of, and showing compliance with,
each of the applicable financial ratios and financial restrictions contained in
ARTICLE VIII and to the effect that, to the best of such officer's knowledge,
as of such date no Default or Event of Default has occurred and is continuing.
(d) Notice of Default. As soon as practicable, but in any event
within five (5) Business Days after the Borrower becomes aware of the existence
of any Default or Event of Default, or any development that would have a
Material Adverse Effect on any Borrower Affiliate, telephonic, facsimile, or
telegraphic notice specifying the nature of such Default, Event of Default or
development, including the anticipated effect thereof, which notice shall be
promptly confirmed in writing within two (2) Business Days, other than
developments that affect the economy of the United States generally or the
insurance industry generally.
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(e) Additional Information. The following documentation and other
information:
(i) Documentation. Except as otherwise expressly
indicated, promptly upon receipt by a Borrower Affiliate:
(A) Not later than sixty (60) days after the
updating thereof, and in any event not less
frequently than annually and not later than
sixty (60) days prior to the end of each
fiscal year of the Borrower, a copy of the
consolidated and Consolidating projections of
cash flow, balance sheets and income
statements covering the period through the
Loan Termination Date, substantially in the
form of the materials delivered to the
Lenders pursuant to SECTION 6.19 hereof.
(B) Not later than sixty (60) days prior to the
end of each fiscal year of the Borrower, new
business plans (or budgets) for the Borrower
Affiliates for the following fiscal year.
(C) A copy of any reports on examination or
similar reports, financial examination
reports or market conduct examination reports
by a Governmental Authority with respect to
any Borrower Affiliate's business.
(D) Copies of all Insurance Holding Company
Systems Act filings with Governmental
Authorities by any Borrower Affiliate not
later than five (5) Business Days after such
filings are made, including, without
limitation, filings that seek approval of
Governmental Authorities with respect to
transactions between any Borrower Affiliate
and any Affiliates thereof.
(E) Copies of all material detailed financial and
management reports regarding any Borrower
Affiliate submitted to any such entity by
independent public accountants in connection
with each annual or interim audit report made
by such accountants of the books of such
entity.
(F) Promptly upon the sending, filing or receipt
thereof, copies of (i) all financial
statements, reports, notices and proxy
statements that the Borrower or any of its
Subsidiaries shall send or make available
generally to its shareholders, and (ii) all
reports on Form 10-Q, Form 10-K or Form 8-K
(or their successor forms) or registration
statements and prospectuses (other than on
Form S-8 or its successor form) that the
Borrower or any of its Subsidiaries shall
render to or file with the Securities and
Exchange Commission, the National Association
of Securities Dealers, Inc. or any national
securities exchange.
(G) Not later than 45 days after the end of each
fiscal quarter, statements of the sales and
renewals for each of the Funds, Bridgefield
Casualty and Bridgefield Employers.
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(ii) Notices. Within five (5) Business Days after a
Borrower Affiliate obtains knowledge thereof, notice of:
(A) Actual suspension, termination, limitation or
revocation of any material license of any
Borrower Affiliate by any Governmental
Authority or of receipt of notice from any
Governmental Authority notifying a Borrower
Affiliate of a hearing relating to such a
suspension, termination, limitation or
revocation, including any request by a
Governmental Authority that commits any
Borrower Affiliate to take, or refrain from
taking, any action or that otherwise
materially and adversely affects the
authority of such Borrower Affiliate to
conduct its business.
(B) Any pending or threatened inquiry,
investigation or regulatory proceeding (other
than routine periodic inquiries,
investigations or reviews) by any
Governmental Authority concerning the
business, practices or operations of any
Borrower Affiliate or any Fund.
(C) Any actual or, to the best of the Borrower's
knowledge, formally proposed material changes
in the Insurance Code governing the
investment or dividend practices of Florida
domiciled insurance companies or any change
in any Requirement of Law that would
reasonably be expected to have a Material
Adverse Effect on the business, financial
condition or prospects of any Borrower
Affiliate.
(D) Any change or modification to any Reinsurance
Agreement whether entered into before or
after the Closing Date including Reinsurance
Agreements, if any, that are in a runoff mode
on the Closing Date, which change or
modification could reasonably be expected to
have a Material Adverse Effect on any
Borrower Affiliate, or any written notice
received by any Borrower Affiliate of denial
of coverage, litigation, claim or arbitration
arising out of any Reinsurance Agreement to
which such entity is a party.
(E) (i) The institution of, or any adverse
determination in, any litigation, arbitration
proceeding or governmental proceeding
(including any Internal Revenue Service or
Department of Labor proceeding with respect
to any Employee Plan or Welfare Plan) that
could, if adversely determined, be reasonably
expected to have a Material Adverse Effect on
any Borrower Affiliate, (ii) the failure of
any Borrower Affiliate timely to make a
required contribution to any Employee Plan if
such failure is sufficient to give rise to a
lien under section 302(f)(1) of ERISA, or
(iii) the institution of any steps by any
Borrower Affiliate to withdraw from, or the
institution of any steps by any Borrower
Affiliate to terminate under a distress
termination, any Employee Plan or the taking
of any action with respect to an Employee
Plan that could result in the requirement
that the Borrower Affiliate furnish a bond or
other security to such Employee Plan, or the
occurrence of any event with respect to any
Employee Plan that could result in the
incurrence by any
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Borrower Affiliate of any material liability
(other than a liability for contributions or
premiums), fine or penalty.
(F) Any change in the name or principal place of
business of any Borrower Affiliate.
(G) Any other matter or event that has, or could
be reasonably likely to have, a Material
Adverse Effect on any Borrower Affiliate or
any Fund.
(f) Other Information. From time to time such other information
concerning any Borrower Affiliate as the Agent may reasonably request.
7.4 Corporate Existence; Foreign Qualification. Do and cause to
be done at all times all things necessary to (a) maintain and preserve the
corporate existence of each Borrower Affiliate, (b) be, and ensure that each
Borrower Affiliate is, duly qualified to do business and be in good standing as
a foreign corporation in each jurisdiction where because of the nature of such
Borrower Affiliate's business, the failure to so qualify would have a Material
Adverse Effect on such Borrower Affiliate, (c) comply, and cause each other
Borrower Affiliate to comply, with all material Contractual Obligations and
Requirements of Law binding upon such entity, and (d) do or cause to be done
all things reasonably necessary to preserve and keep in full force and effect
required for each Borrower Affiliate to be engaged in each business in which
such Borrower Affiliate is so engaged.
7.5 Books, Records and Inspections. (a) Maintain, and cause its
Subsidiaries to maintain books and records which are complete and accurate in
all material respects, (b) permit, and cause each other Borrower Affiliate to
permit access at reasonable times and upon reasonable prior notice by the Agent
to its books and records (except for any instance of noncompliance that could
reasonably be expected to have a Material Adverse Effect), (c) permit, and
cause each other Borrower Affiliate to permit, the Agent to inspect at
reasonable times its properties and operations, and (d) permit, and cause each
other Borrower Affiliate to permit, the Agent to discuss its business,
operations and financial condition with such Borrower Affiliate's officers.
7.6 Insurance; Assets.
(a) Maintain, and cause each other Borrower Affiliate to maintain,
such Insurance Policies as may be required by law or as are customarily
maintained by prudent companies similarly situated.
(b) Maintain fire and casualty insurance on its personal property
and leasehold improvements at least equal to the current level of coverage in
place as of the Closing Date as set forth in SCHEDULE 6.9.
(c) Keep all properties of the Borrower Affiliates in reasonably
good working order and condition in the manner customary for companies of like
size in similar businesses and as may be required for the continued conduct of
their respective businesses, except to the extent that the failure to so keep
any such property, together with the failure to so keep all other such
properties, would not have a Material Adverse Effect on the prospects,
business, operations, properties or financial condition of the Borrower and its
Subsidiaries, taken as a whole.
7.7 Taxes and Liabilities. Pay, and cause each other Borrower
Affiliate to pay, when due, all material taxes, assessments and other material
liabilities except as contested in good faith and by appropriate proceedings,
with respect to which reserves have been established, and are being maintained,
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in accordance with GAAP, if and so long as such contest could not reasonably be
expected to have a Material Adverse Effect on any Borrower Affiliate.
7.8 Employee Benefit Plans. Maintain, and cause each other
Borrower Affiliate to maintain, each Employee Plan and Welfare Plan in
compliance in all material respects with all applicable Requirements of Law.
7.9 COBRA. Operate, and cause each other Borrower Affiliate to
operate, each Employee Plan of such Borrower Affiliate in such a manner that
such Borrower Affiliate will not incur any material tax liability under Section
4980B of the Internal Revenue Code or any material liability to any qualified
beneficiary as defined in such Section 4980B.
7.10 Pledge and Security Agreements. From and after the Closing
Date cause each of the Security Agreements, each of the Pledge Agreements and
the Guaranty to be and remain valid, and to maintain first priority perfected
security interests in all of the Collateral described therein in favor of the
Agent for the benefit of the Lenders.
7.11 Compliance with Laws. Comply, and cause each other Borrower
Affiliate to comply, with all federal, state and local laws, rules and
regulations related to its businesses (including, without limitation, the
establishment of all insurance reserves required to be established under SAP
and applicable laws restricting the Insurance Subsidiaries' investments, and
compliance by the Borrower Affiliates with the terms of the Consent Order).
7.12 Maintenance of Permits. Maintain, and cause each other
Borrower Affiliate to maintain, all material Licenses as may be required for
the conduct of its business by any state, federal or local government agency or
instrumentality.
7.13 Interest Rate Protection. As of the Closing Date, the
Borrower shall take all steps necessary to cause the Rate Protection Agreement
to be assigned to the Borrower, with all amendments incident thereto as are in
form and substance satisfactory to the Agent. Except for such Rate Protection
Agreement, the Borrower shall not enter into (a) any interest rate protection
agreement, interest rate future agreement, interest rate option agreement,
interest rate swap agreement, interest rate collar agreement, interest rate
hedge agreement, basis swap agreement, forward rate agreement or other similar
agreement or arrangement designed to protect any Person against fluctuations in
interest rates (including any option to enter into any of the foregoing and any
master agreement for any of the foregoing); (b) any foreign exchange contract,
forward foreign exchange agreement, currency swap agreement, cross-currency
rate swap agreement, currency option or other similar agreement or arrangement
designed to protect any Person against fluctuations in currency values
(including any option to enter into any of the foregoing and any master
agreement for any of the foregoing); or (c) to the extent not covered by
clauses (a) and (b) above, any derivative instrument, agreement or product used
or entered into by any Person in the ordinary course of selling, issuing or
underwriting insurance or reinsurance.
7.14 Dividends. The Borrower shall from time to time cause each of
its Subsidiaries to declare and pay dividends to the Borrower to the extent
necessary to satisfy the Obligations hereunder (such amounts to include,
without limitation, Net Income received by any Borrower Affiliates in respect
of the Management Agreements) to the extent allowed by law. The Lenders
acknowledge and agree that the ability of each Insurance Subsidiary to declare
or pay dividends is subject to limitations as set forth in the Consent Order,
but the Borrower (no less frequently than annually) shall request any approvals
of the Department necessary to permit the payment of such dividends.
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7.15 Key Man Life Insurance. The Borrower will exercise its
reasonable best efforts to maintain the Key Man Life Insurance Policy at all
times during the term hereof and, in the event of any termination of such
policy, to obtain another policy in form or substance acceptable to the
Required Lenders.
7.16 Business Activities. The Borrower will, and will cause each
of its Subsidiaries to, remain in substantially the same lines of business in
which they are engaged as of the Closing Date (which lines of business are
described on SCHEDULE 7.16 hereto); provided, that no Borrower Affiliate may
re-enter any business previously conducted in connection with the Discontinued
Operations (provided, however, that Meritec and Carolina Med may maintain their
respective corporate existences and remain parties to their real property
leases so long as such properties are subleased to third parties on terms
satisfactory to the Agent).
7.17 Disbursement Instructions. The Borrower will notify the Agent
in writing (in an instrument substantially in the form of the Account
Designation Letter) of any changes in the information contained in the Account
Designation Letter.
7.18 Further Assurances. The Borrower will, and will cause each of
its Subsidiaries to, make, execute, endorse, acknowledge and deliver to the
Agent and the Lenders any amendments, modifications or supplements hereto or
restatements hereof and any other agreements, instruments, financing
statements, certificates, stock powers or other documents or instruments, and
take any and all such other actions, as may from time to time be reasonably
requested by the Agent or any Lender to perfect and maintain the validity and
priority of the liens granted pursuant to the Credit Documents and to effect,
confirm or further assure or protect and preserve the interests, rights and
remedies of the Lenders and the Agent under this Agreement and the other Credit
Documents and to secure payment and performance of the Obligations.
Furthermore, the Borrower will, and will cause each of its Subsidiaries to,
exercise their respective best efforts to ensure that all Obligations are
performed as required hereunder.
7.19 Certain Fees. As consideration for the Lenders' agreement to
enter into this Agreement, (i) in the event the Borrower and its Affiliates
have not raised net proceeds of $40,000,000 or more in connection with the IPO
or any other any equity offering on or before September 30, 1997, the Borrower
will pay to the Agent, for the ratable benefit of the Lenders, a fee equal to
$665,000 (which amount shall be due and payable on or before December 31,
1997), or (ii) in the event the Borrower and its Affiliates have raised net
proceeds of $40,000,000 or more in connection with the IPO or any such equity
offering on or before September 30, 1997, the Borrower will pay to the Agent,
for the ratable benefit of the Lenders, a fee of $285,000 (payable at the
Closing hereof). In the event the Loans are repaid in full on or before
December 31, 1997, then payment of any such theretofore unpaid fees will be
waived by the Lenders.
ARTICLE VIII
FINANCIAL COVENANTS
Until payment in full of all Obligations of the Borrower to each of
the Lenders, the Borrower
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covenants and agrees that, unless the Required Lenders consent in writing, the
Borrower shall not, and shall not permit any Borrower Affiliate, to:
8.1 Borrower Financial Covenants.
(a) Net Worth. Permit the Borrower's Net Worth to be less than
(i) $70,000,000 at any time from and after the Closing Date through and
including December 31, 1997; (ii) $75,000,000 at any time from and after
January 1, 1998 through and including December 31, 1998; (iii) $85,000,000 at
any time from and after January 1, 1999 through and including December 31,
1999; and (iv) $95,000,000 at any time thereafter.
(b) Fixed Charge Coverage Ratio. (a) As of the end of any fiscal
quarter of the Borrower (i) with respect to the period from January 1, 1997
through September 30, 1997, for the number of consecutive fiscal quarters
having elapsed as of the end of such fiscal quarter, and (ii) from and after
October 1, 1997, for the period of four consecutive fiscal quarters ending with
such fiscal quarter (each, a "Measurement Period"), permit the Fixed Charge
Coverage Ratio to be less than (x) 1.45 to 1.0 for any Measurement Period
ending on or before September 30, 1997, or (y) 1.35 to 1.0 for any subsequent
Measurement Period (it being understood that the fees contemplated by Section
7.19 hereof will not be included in any such calculations); provided, further,
that the Borrower shall not permit the Fixed Charge Coverage Ratio for any
single fiscal quarter (beginning with the quarter ending March 31, 1997) to be
less than 1.0 to 1.0.
(c) Leverage Ratio. Permit the Leverage Ratio as of the end of
any fiscal quarter to be more than (A) .30 to 1.0 as of the end of any fiscal
quarter from and after the Closing Date through December 31, 1998; (B) .25 to
1.0 as of the end of any subsequent fiscal quarter through December 31, 1999;
(C) .20 to 1.0 as of the end of any subsequent fiscal quarter through December
31, 2000; and (D) .15 to 1.0 as of the end of any fiscal quarter thereafter.
8.2 Summit Holding Financial Covenants.
(a) Fee/Commitment Ratio. As of the end of any fiscal quarter
during the following periods, permit the Fee/Commitment Ratio to be less than
the following;
Period Minimum
December 31, 1996 1.35 to 1.0
through March 31, 1997
June 30, 1997 through 1.45 to 1.0
December 31, 1997
March 31, 1998
through December 31, 1998 1.50 to 1.0
Thereafter 2.00 to 1.0
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(b) Minimum Fee Income. Permit Fee Income for any fiscal quarter
(i) from the quarter ending March 31, 1997 through the fiscal quarter ending
December 31, 1997, to be less than $10,000,000, (ii) from January 1, 1998
through the fiscal quarter ending December 31, 1998, to be less than
$12,000,000 or (iii) thereafter, to be less than $14,000,000.
(c) Interest Coverage Ratio. Permit the Interest Coverage Ratio
as of the end of the quarter ending December 31, 1996 to be less than 1.75 to
1.0.
8.3 Insurance Subsidiary Financial Covenants.
(a) Operating Leverage. Permit the ratio of (a) any Insurance
Subsidiary's Net Written Premiums in any fiscal year to (b) the Statutory
Surplus of such Insurance Subsidiary as of the end of such fiscal year, to
exceed (i) 3.0 to 1.0 for each fiscal year through the fiscal year ending
December 31, 1998, and (ii) 2.5 to 1.0 for each fiscal year thereafter.
(b) Risk-Based Capital. Permit Total Adjusted Capital of the
Insurance Subsidiary at any time from and after the Closing Date to be less
than 150% of the Company Action Level RBC. For purposes of this Section,
"Total Adjusted Capital" and "Company Action Level RBC" shall have the meanings
assigned to such terms under the NAIC Risk-Based Capital Model Act as
promulgated by the NAIC as of the date hereof (it being understood that in the
event the Florida Department adopts risk-based capital standards during the
term hereof, the Borrower, the Agent and the Required Lenders will amend this
Agreement to provide for a replacement covenant substantially consistent
herewith).
(c) Statutory Net Worth. Permit the aggregate Statutory Surplus
of all Insurance Subsidiaries, collectively, to be less than (i) $45,000,000 at
any time from and after the Closing Date through and including December 31,
1997; (ii) $50,000,000 at any time from and after January 1, 1998 through and
including December 31, 1998; (iii) $55,000,000 at any time from and after
January 1, 1999 through and including December 31, 1999; and (iv) $60,000,000
at any time thereafter.
8.4 Capital Expenditures. Make any Capital Expenditure if, after
giving effect to such Capital Expenditure, the aggregate amount of all such
Capital Expenditures made by the Borrower Affiliates for the period of four
consecutive fiscal quarters ending as of the end of the then-current fiscal
quarter shall exceed $500,000.
ARTICLE VIIIA
NEGATIVE COVENANTS
Until payment in full of all Obligations of the Borrower to each of
the Lenders, the Borrower covenants and agrees that, unless the Required
Lenders consent in writing, the Borrower shall not, and shall not permit any
Borrower Affiliate, to:
8A.1. Reinsurance Agreements. Permit Summit Consulting to place any
new Reinsurance Agreements involving FRF, LESA, LRA, or KRF, or permit any
Insurance Subsidiary to be party to any new Reinsurance Agreement, with any
reinsurer (other than those reinsurers set forth on SCHEDULE 8A.1, as to which
no rating requirement shall apply) that is not rated "A-" or better by A.M.
Best & Company, Inc.
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8A.2. Guarantees, Loans, Advances and Investments. Incur any
Contingent Liability or become or be responsible in any manner (whether by
agreement to purchase any obligations, stock, assets, goods or services, or to
supply or advance any funds, assets, goods or services, or otherwise) with
respect to any undertaking of any other Person, or make or permit to exist any
loans or advances to, or investments in, any other Person, except for (a) the
endorsement, in the ordinary course of collection, of instruments payable to it
or to its order, (b) investments in Subsidiaries as described in SECTION 6.10
hereof, (c) with respect to each Insurance Subsidiary, such investments as are
not in violation of SECTION 8A.16, (d) relocation loans, travel and petty cash
advances and other similar advances to the employees of a Borrower Affiliate in
the ordinary course of business, (e) current amounts due within seven Business
Days to or from brokers for securities transactions in the ordinary course of
business and (f) Contingent Liabilities set forth on SCHEDULE 8A.2;
notwithstanding any provision herein to the contrary, no loan, advance or
investment may result in any reduction in cash, Cash Equivalents, or Net Worth
of the Borrower and its Subsidiaries on a consolidated basis; provided,
however, that any Subsidiary may make any loans, or advances to or investments
in the Borrower.
8A.3 Mergers, Consolidations and Sales.
(a) Merge or consolidate with, or purchase or otherwise acquire,
or permit any Borrower Affiliate to merge or consolidate with, or purchase or
otherwise acquire, all or substantially all of the assets or stock of any class
of, or any partnership or joint venture interest in, any Person.
(b) Sell, transfer, convey or lease, or permit any other Borrower
Affiliate to sell, convey or lease, any Material Asset to any Person.
(c) Transfer, dispose of, pledge or otherwise encumber, or permit
any Borrower Affiliate to transfer, dispose of, pledge or otherwise encumber,
any Stock of any of its Subsidiaries to any Person other than pursuant to any
of the Pledge Agreements.
8A.4 Change in Control; Issuance of Stock. (a) Permit a Change in
Control to occur without the prior written consent of the Required Lenders,
which may withhold their consent in their absolute discretion; or
(b) Except in connection with the IPO (or another equity offering
meeting the requirements set forth in SECTION 5.2.3(f), issue any Stock, or
permit any other Borrower Affiliate to issue any Stock, options or warrant or
other rights to purchase such Stock, to any Person without the prior written
consent of the Required Lenders, which may withhold consent in their absolute
discretion; provided, however, that Borrower shall be permitted to issue its
Stock, or options or warrants to purchase its Stock, to any Person if and only
if 100% of the Net Cash Proceeds from such offering are paid to the Lenders as
a prepayment of the Loans in accordance with SECTION 7.1(b) hereof; provided,
further, that from time to time the Borrower may issue shares of its Stock to
such entity's employees under the Approved Stock Plan.
8A.5 Leases. Incur or permit to exist any obligation or liability
under any lease other than in the ordinary course of business and, subject to
the definition of "Permitted Indebtedness," other than Capital Lease
Obligations.
8A.6 Unconditional Purchase Obligations. Enter into any contract
for the purchase of materials, supplies or other property or services, if such
contract requires that payment be made by it regardless of whether delivery is
ever made of such materials, supplies or other property or services.
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8A.7 Subsidiaries; Investment of Proceeds. (a) Create or permit
to exist any Subsidiary, other than Summit Holding, Summit Consulting, CICF,
Summit Claims, Summit Loss, Healthcare Holdings, Heritage Summit, Bridgefield
Employers or Bridgefield Casualty, unless (i) the consent of the Required
Lenders is obtained, (ii) the Stock of such Subsidiary is pledged to the Agent
pursuant to a pledge agreement satisfactory in form and substance to the Agent
(together with the delivery to the Agent of legal opinions, in form and
substance satisfactory to the Agent, as to the effectiveness of such pledge and
the perfection of the liens granted thereby), and (iii) this Agreement is
amended, at Borrower's expense, to the satisfaction of the Required Lenders, to
take into account any such additional Subsidiary; or
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(b) Contribute any proceeds of the Revolving Loans to the capital
(on a permanent basis) of any Subsidiary.
8A.8 Business Activities. Engage in any business other than the
businesses conducted by the Borrower and its Subsidiaries as of the date hereof
(subject to the proviso contained in SECTION 7.16), or engage in the business
of writing insurance policies other than through the Insurance Subsidiaries, or
conduct any business through or on behalf of any Discontinued Operation.
8A.9 Transactions with Affiliates. Except as set forth on SCHEDULE
8A.9, enter into, or permit any Borrower Affiliate to enter into, or cause,
suffer or permit to exist, directly or indirectly, any arrangement, transaction
(or series of related transactions) or contract with or for the benefit of any
of its Affiliates or any Affiliate of any other Borrower Affiliate (or any
officer, director or shareholder thereof) unless (a) such arrangement,
transaction or contract is in the ordinary course of business, reasonably
intended to satisfy the reasonable business requirements of such Borrower
Affiliate, and only on terms and conditions at least as favorable to such
Borrower Affiliate as the terms and conditions that would apply in a similar
arrangement, transaction or contract with a Person not an Affiliate, (b) such
transaction has been approved by a majority of the disinterested directors of
the Borrower and (c) with respect to any transaction or series of related
transactions involving aggregate payments in excess of [$1,000,000,] the
Borrower receives an opinion from a nationally recognized investment banking
firm, or other nationally or regionally recognized appraisal firm, that such
transaction is fair to the Borrower Affiliate from a financial point of view.
8A.10 Indebtedness. Incur or permit to exist any Indebtedness
except Permitted Indebtedness.
8A.11 Liens. Pledge, grant any lien or security interests in or
otherwise encumber, or permit any Subsidiary to pledge, grant any lien or
security interest in or otherwise encumber, any assets or other properties now
owned or thereafter acquired by such Borrower Affiliate (including, without
limitation, any Stock or Securities owned by such Borrower Affiliate), other
than Permitted Liens.
8A.12
Restricted Payments. The Borrower will not, and will not permit or cause any
of its Subsidiaries to, directly or indirectly, declare or make any dividend
payment, or make any other distribution of cash, property or assets, in respect
of any of its Stock or Securities or other ownership interests or any warrants,
rights or options to acquire its Stock or Securities or other ownership
interests, or purchase, redeem, retire or otherwise acquire for value any
shares of its Stock or Securities or other ownership interests or any warrants,
rights or options to acquire its Stock or Securities or other ownership
interests (any such payments or distributions being referred to herein as
"Restricted Payments"), or set aside funds for any of the foregoing, or enter
into any agreement (other than this Agreement) that restricts its ability to
declare or make any Restricted Payments, except that:
(a)
the Borrower may declare and make dividend payments
or other distributions payable solely in its common
stock;
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(b)
any direct or indirect wholly owned Subsidiary of the
Borrower may declare and make dividend payments or
other distributions to the Borrower or another wholly
owned Subsidiary of the Borrower; and
(c)
the Borrower may declare and pay dividends in respect
of its Series A preferred capital stock to the extent
of any Excess Cash Flow not required to be prepaid
pursuant to SECTION 7.1(c) (so long as no Default or
Event of Default has occurred and is continuing or
would result therefrom).
Notwithstanding any provision herein to the contrary, no Borrower Affiliate may
make any payment of cash or distribution of any other property to any Insurance
Subsidiary.
8A.13
Negative Pledge Agreements. Except as set forth in SCHEDULE 6.10, create,
incur, assume or suffer to exist any agreement, other than this Credit
Agreement and the Credit Documents, that places any restrictions (a) upon the
right of a Borrower Affiliate to sell, pledge or otherwise dispose of any
material portion of its properties now owned or thereafter acquired other than
as permitted herein, except for such restrictions imposed by federal or state
securities laws, (b) upon the right of a Borrower Affiliate to sell, pledge or
otherwise dispose of any Stock or Securities owned by it, or (c) upon the right
or ability of any Subsidiary to pay dividends or make any other distributions
on its Stock held by the Borrower, respectively, or to pay any obligation owed
to the Borrower.
8A.14
No Amendment of Documents. Enter into or permit to exist any amendment,
modification or waiver to or termination of any of the Credit Documents, the
Plan of Conversion, any Tax Sharing Agreement or any of the Management
Agreements, or the termination (other than any termination pursuant to the
terms of any Employment Agreement) of any noncompetition, confidentiality or
similar restrictive provisions of the Employment Agreements, except with the
consent of the Required Lenders.
8A.15
Fiscal Year. Change its fiscal year from a fiscal year ending on December 31
(it being understood that Bridgefield Employers shall change its fiscal year
from one ending on March 31 to one ending on December 31, as contemplated by
the Department.
8A.16
Certain Investments. Permit the assets of any Insurance Subsidiary to be
invested at any time in violation of the following limitations:
(a)
All investments shall be in compliance with the Insurance Code as applicable to
each of the Insurance Subsidiaries as well as the applicable insurance laws and
regulations of any other applicable jurisdiction relating to investments by
each Insurance Subsidiary.
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(b)
No less than one hundred (100%) of any Insurance Subsidiary's investments in
bonds or similar instruments (the "Bond Portfolio") shall be Investment Grade
Securities; provided, however, that in the event any Investment Grade
Securities become non-Investment Grade Securities while held by such Insurance
Subsidiary ("Downgraded Investments"), such Subsidiary shall be permitted to
hold such Downgraded Investments without regard to the foregoing limitation,
but only to the extent that no more than one percent of the aggregate value of
the Bond Portfolio is invested at any time in Downgraded Investments.
(c)
No more than ten percent (10%) of the Invested Assets shall be invested, in the
aggregate, in real estate, mortgages, or any Securities (including investments
in Affiliates but excluding Investment Grade Securities); provided, however,
that there shall be no limit on the amount that any Insurance Subsidiary may
loan to or invest in the Borrower.
(d)
No more than two percent (2%) of Invested Assets shall be invested, taking all
forms of investment into account, in any single Issuer Group.
8A.17
Hazardous Materials. The Borrower will not, and will not permit or cause any
Borrower Affiliate to, (a) permit any Hazardous Substances to be brought on to
or located on any real property owned or operated by the Borrower or any
Insurance Subsidiary, except in full compliance with all applicable
Environmental Laws and then only as needed in connection with typical insurance
business activities, or (b) violate any Environmental Law.
ARTICLE IX
EVENTS OF DEFAULT
9.1 Events of Default. The occurrence of any one or more of the
following events shall constitute an "Event of Default" under this Credit
Agreement, the Notes and the other Credit Documents:
(a)
The Borrower shall fail to pay any principal or interest on the Loans,
any fees or any other Obligations when due;
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(b)
The Borrower or any Borrower Affiliate shall fail or neglect to
observe, perform or comply with any term, provision, condition or
covenant contained in SECTIONS 3.1(e), 7.1, 7.2(b) 7.3(c), 7.4(a),
7.10, 7.15, 7.16 or in ARTICLE VIII OR VIIIA of this Credit Agreement;
provided, however, that any Defaults arising under SECTIONS 8.1(a),
8.1(c), 8.3(a), 8.3(b), 8.3(c) and SECTION 8A.16 shall be subject to
the cure period set forth in SECTION 9.1(c) below, and Defaults
arising under SECTIONS 7.10, 8A.11 and 8A.13 shall also be subject to
such cure period but only to the extent so provided in the last clause
of SECTION 9.1(c);
(c)
The Borrower shall fail or neglect to observe, perform or comply with
any other term, provision, condition or covenant contained in this
Credit Agreement, except those enumerated in SECTIONS 9.1(a) or 9.1(b)
above, and the same is not cured to the Required Lenders' satisfaction
within thirty (30) days after the Borrower acquires knowledge thereof
(it being understood that any Defaults arising under any of SECTIONS
7.10, 8A.11 or 8A.13 shall be subject to the cure period contemplated
by this paragraph (c) if and to the extent such Liens or restrictions
are involuntary and not the result of affirmative conduct of a
Borrower Affiliate);
(d)
Any representation or warranty made in writing by or on behalf of any
Borrower Affiliate in this Credit Agreement or the other Credit
Documents or in any certificate, instrument or document delivered in
connection herewith or therewith, or in connection with the
transactions contemplated hereby or thereby, shall prove to have been
false or incorrect in any material respect at the time as of which
such representation or warranty was made;
(e)
Any Borrower Affiliate shall fail to observe, perform or comply with
any term, condition or covenant contained in any of the Credit
Documents other than this Agreement, and such failure shall continue
unremedied for any grace period specifically applicable thereto;
(f)
Any Borrower Affiliate shall fail to pay when due, whether by
scheduled maturity, acceleration or otherwise (taking into account any
applicable grace period), any principal of, interest on or other
amount payable in respect of any Indebtedness (other than the
Indebtedness incurred pursuant to this Agreement) having an aggregate
principal amount of at least $500,000; any other default or event of
default shall occur under the terms of any agreement or instrument
pursuant to which a Borrower Affiliate has incurred any such
Indebtedness, the effect of which default or event of default is to
accelerate, or permit acceleration of (after any applicable grace
period, notice or lapse of time), the maturity of at least $500,000 in
principal amount of such Indebtedness; or any such Indebtedness of a
Borrower Affiliate shall be declared to be due and payable or required
to be prepaid or redeemed (other than pursuant to a regular schedule
therefor), purchased or defeased, or an offer to prepay, redeem,
purchase or defease shall be required to be made, in each case prior
to the stated maturity thereof;
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(g)
The institution of an action or proceeding by any Governmental
Authority seeking to place any Borrower Affiliate under supervision,
conservation or rehabilitation, or the appointment of a receiver of
any such entity;
(h)
Any Borrower Affiliate shall (i) file a voluntary petition or commence
a voluntary case seeking liquidation, reorganization, dissolution,
arrangement, readjustment of debts or any other relief under the
Bankruptcy Code or under any other applicable bankruptcy, insolvency
or similar law now or hereafter in effect, (ii) consent to the
appointment of or taking possession by a custodian, trustee, receiver
or similar official for or of all or a substantial part of its
properties (or any of the Collateral), (iii) fail generally to pay its
debts as they become due or admit in writing its inability to pay its
debts generally as they become due, (iv) make a general assignment for
the benefit of creditors or (v) take any corporate action to authorize
or approve any of the actions described above;
(i)
Any involuntary petition or case shall be filed or commenced against a
Borrower Affiliate seeking liquidation, reorganization, dissolution,
arrangement, readjustment of debts, the appointment of a custodian,
trustee, receiver or similar official for it or all or a substantial
part of its properties (or any of the Collateral) or any other relief
under the Bankruptcy Code or under any other applicable bankruptcy,
insolvency or similar law now or hereafter in effect, which petition
or case is not dismissed, bonded or discharged within sixty (60) days
of the date of filing; or an order for relief (including, without
limitation, the appointment of a custodian, trustee, receiver or
similar official) shall be entered in any such proceeding, which order
is not immediately stayed or made subject to other similar relief;
(j)
Any Borrower Affiliate shall (i) cease to be Solvent, or (ii) be
enjoined, restrained or in any way prevented by order of court or any
other Governmental Authority from conducting all or any material part
of its business affairs (except for the Discontinued Operations);
(k)
Any one or more judgments, writs or warrants of attachment, executions
or similar processes involving an aggregate amount in excess of
$500,000 shall be entered or filed against any Borrower Affiliate or
any of its respective properties, and all such judgments and processes
shall not be paid, dismissed, vacated, stayed, discharged or bonded
within thirty (30) days or in any event later than five (5) days prior
to the date of any proposed sale thereunder, and, if bonded, such bond
(or a replacement bond) shall not continue in effect at all times
until such judgment is dismissed or discharged;
(l)
Any lien, levy or assessment, or notice thereof, shall be filed of
record with respect to all or any portion of the assets of any
Borrower Affiliate by the United States, or any department, agency or
instrumentality thereof, or by any other Governmental Authority,
including, without limitation,
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the Pension Benefit Guaranty Corporation; such lien, levy or
assessment, taken together with all other Liens, levies or assessments
then of record with respect to the assets of the Borrower Affiliates,
taken as a whole, exceeds $500,000; and such lien, levy or assessment
shall be executed upon or shall not be paid, dismissed, vacated,
stayed, released, bonded or discharged within thirty (30) days after
the same becomes a lien or, in the case of a lien involving ad valorem
taxes, prior to the last day when payment may be made without penalty;
(m)
Any one or more licenses, permits or authorizations now or hereafter
held by any Borrower Affiliate shall be terminated, suspended or
revoked or shall not be renewed, which terminations, suspensions,
revocations or failures to renew would, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect;
(n)
Any Credit Document, at any time after execution and delivery thereof,
shall for any reason cease to be a legal, valid and binding obligation
of any Borrower Affiliate or other Affiliate that is a party thereto
(including any party that becomes a party thereto after the Closing
Date), enforceable against such party, or to give the Agent the
rights, powers and remedies purported to be created thereby,
including, without limitation, a valid, first priority perfected
security interest in and lien upon all of the Collateral purported to
be covered thereby, subject only to Permitted Liens, in each case
unless any such cessation is due to any act or failure to act on the
part of the Agent or any Lender;
(o)
Any Subsidiary of the Borrower or any Person acting on behalf of any
such Subsidiary shall deny or disaffirm such Subsidiary's obligations
under the Guaranty;
(p)
The occurrence of any of the following events: (i) the happening of a
Reportable Event (which is not waived by the Pension Benefit Guaranty
Corporation) with respect to any Employee Plan; (ii) the termination
of any Employee Plan in a "distress termination" under the provisions
of section 4041 of ERISA; (iii) the appointment of a trustee by an
appropriate United States District Court to administer any Employee
Plan; (iv) the institution of any proceedings by the Pension Benefit
Guaranty Corporation to terminate any Employee Plan or to appoint a
trustee to administer any such plan; and (v) the failure of the
Borrower to notify the Agent promptly upon receipt by a Borrower
Affiliate of any notice of the institution of any proceeding or any
other actions that may result in the termination of any such plan;
(q)
Either of the Pledge Agreements or either of the Security Agreements
ceases, for any reason other than as a result of action taken or
omitted to be taken by the Agent, to be in full force and effect;
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(r)
The cancellation, termination or expiration, prior to repayment in
full of the Loans, of any one or more of the Management Agreements
representing ten percent (10%) or more of the gross fee revenues paid
in the aggregate to Summit Consulting, CICF, Summit Claims or Summit
Loss, as appropriate, by the Funds under the Management Agreements, by
Bridgefield Employers to the service providers under the Bridgefield
Employers Management Agreements and by Bridgefield Casualty to Summit
Consulting under the Bridgefield Casualty Management Agreement (as
calculated on an annual basis);
(s)
The ceasing of any person party to any Employment Agreement to be
employed by the Borrower, if such person is not replaced within 90
days following such termination with a person reasonably acceptable to
the Required Lenders; and
(t)
The failure of any new reinsurer of any Insurance Subsidiary to carry
a rating of "A-" or better by A.M. Best & Company, Inc.
ARTICLE X
RIGHTS AND REMEDIES AFTER EVENT OF DEFAULT;
INTERCREDITOR PROVISIONS
10.1
Rights and Remedies. Upon and after the occurrence of any Event of Default,
the Agent shall, upon request of the Required Lenders, by notice to the
Borrower, take any or all of the following actions, without prejudice to the
rights of any Lender to enforce its claims against the Borrower, except as
otherwise specifically provided for in this Credit Agreement: (a) declare the
Total Commitment terminated, whereupon the Revolving Credit Commitment of each
Lender shall forthwith terminate immediately and any fees payable in respect
thereof shall forthwith become due and payable without any other notice of any
kind; (b) declare all or any part of the Obligations owing hereunder
immediately due and payable, whereupon such Obligations shall become
immediately due and payable without presentment, demand, protest, notice or
legal process of any kind, all of which are hereby expressly waived by the
Borrower and/or (c) exercise all of the rights and remedies of the Lenders
under this Credit Agreement, the Guaranty, any of the Pledge Agreements, any of
the Security Agreements, the other Credit Documents and applicable law), in
order to satisfy all of the Borrower's Obligations, including, but not limited
to, the enforcement of any or all liens and security interests created pursuant
to the Credit Documents; provided, however, that all obligations shall
automatically become due and payable upon the occurrence of an Event of Default
pursuant to SECTIONS 9.1(g), (h) or (i) hereof.
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10.2
Rights and Remedies Cumulative; Non-waiver; Etc. The enumeration of the
Lenders' rights and remedies set forth in this Credit Agreement is not
intended to be exhaustive and the exercise by any Lender of any right or remedy
shall not preclude the exercise of any other rights or remedies, all of which
shall be cumulative, and shall be in addition to any other right or remedy
given hereunder, under the Credit Documents or under any other agreement
between any of the Borrower Affiliates and any of the Lenders or which may now
or hereafter exist in law or in equity or by suit or otherwise. No delay or
failure to take action on the part of the Agent or any Lender in exercising any
right, power or privilege shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right, power or privilege preclude other
or further exercise thereof or the exercise of any other right, power or
privilege or shall be construed to be a waiver of any Event of Default. No
course of dealing between the Borrower and the Agent or any Lender or the
agents or employees of either of them shall be effective to change, modify or
discharge any provision of this Agreement or to constitute a waiver of any
Default or Event of Default.
10.3
Rights in Property Held by the Lenders. As additional security for the
Obligations, the Borrower hereby assigns, transfers and sets over to the Agent,
for the benefit of the Lenders, all of its right, title, and interest in and
to, and grants the Agent, for the benefit of the Lenders, a lien on and a
security interest in, all amounts that may be owing from time to time by any
Lender or any of its Affiliates to the Borrower in any capacity, including
without limitation any balance or share belonging to the Borrower, or any
deposit or other account with such Lender or any of its Affiliates, which lien
and security interest shall be independent of, and in addition to, any right of
set-off that any Lender has under this Agreement or otherwise.
10.4
Cross-collateralization; No Marshalling. The Collateral and all other
collateral that the Lenders or any of them may at any time acquire from the
Borrower or its Subsidiaries in connection with any of its Obligations under
the Credit Documents shall constitute cross-collateral for all of its
Obligations, without apportionment or designation as to any particular
Obligation, and the Agent shall have the right, in its sole discretion, to
determine the order in which the Lenders' rights in or remedies against such
Collateral are to be exercised and which types of such Collateral or which
portions of such Collateral are to be proceeded against and the order of
application of proceeds of such Collateral as against particular Obligations of
the Borrower. The Agent and the Lenders shall have no obligation to marshall
any such Collateral or apply the same in any fashion.
10.5
Set-off. The Borrower agrees that, in addition to any rights now or hereafter
granted under applicable law or otherwise, the Agent and each of the Lenders
shall have, and are hereby granted by the Borrower and authorized to exercise,
all rights of set-off provided by applicable law (to the fullest extent
thereof) and, in addition thereto, the Borrower agrees that at any time (a) any
payment or amount owing by the Borrower or any of its Subsidiaries under or in
connection with this Credit Agreement or the Credit Documents is then due or
(b) any Event of Default exists, each Lender or the Agent, without advance
notice to the Borrower of any kind (any such notice being expressly waived by
the Borrower), may set-off and apply to the payment of such payment or other
amount any and all balances, credits, deposits, accounts or moneys (general or
special, time or demand, provisional or final) at any time held and any other
Indebtedness at any time owing by the Agent or any Lender to or for the credit
or the account of the
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Borrower against any or all of the Obligations of the Borrower to the Agent or
any Lender under this Credit Agreement or any other Credit Document, now or
hereafter existing, whether or not such Obligations have matured. The Agent
and each Lender agree promptly to notify the Borrower after any such set-off or
application by it, provided that the failure to give such notice shall not
affect the validity of such set-off or application.
10.6
Intercreditor Provisions. (a) Upon the occurrence and during the continuance
of an Event of Default, the proceeds of any sale, disposition or other
realization upon all or any part of the Collateral (including any proceeds of
Collateral) payable to the Agent, for the benefit of the Lenders, and all
payments made to the Agent, for the benefit of the Lenders, under this
Agreement, the Notes and any of the other Credit Documents, shall be applied by
the Agent in the following order:
(i) First, to the payment in full of all
reasonable costs and expenses incurred by the
Agent in connection with the sale,
disposition or other realization upon the
Collateral, including, without limitation,
out-of-pocket costs, court costs, attorneys'
fees and all liabilities and advances
incurred by the Agent in connection
therewith, and all other fees, expenses and
amounts due to the Agent hereunder and under
the other Credit Documents;
(ii) Second, to the payment in full of all
reasonable costs and expenses incurred by the
Lenders in connection with the sale,
disposition or other realization upon the
Collateral, including, without limitation,
out-of-pocket costs, court costs, attorneys'
fees (to the extent actually incurred) and
all liabilities and advances incurred by the
Lenders in connection therewith, but only to
the extent that such costs and expenses are
required to be paid hereunder and under the
other Credit Documents;
(iii) Third, to the payment in full of all interest
with respect to the Obligations accrued and
unpaid as of the date of the Agent's receipt
of such proceeds, pro rata to each Lender
based on the percentage that the amount of
such interest owed to such Lender bears to
the aggregate amount of such interest owed to
all Lenders;
(iv) Fourth, to the payment in full of all
remaining Obligations (including, without
limitation, principal on the Loans)
outstanding and unpaid as of the date of the
Agent's receipt of such proceeds, pro rata to
each Lender based on the percentage that the
amount of such Obligations owed to such
Lender bears to the aggregate amount of such
Obligations owed to all Lenders; and
(v) The balance, to the Borrower or to such other
Persons as may be required by law.
(b) Each Lender agrees that it shall not, unless
specifically requested to do so by the Agent, commence or cause to be
commenced against the Borrower any enforcement proceeding with respect
to a Note or this Credit Agreement.
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ARTICLE XI
PAYMENT OF FEES AND EXPENSES
11.1 Fees and Expenses. Whether or not the transactions
contemplated by this Agreement shall be consummated, the Borrower shall be
obligated:
(a) to pay or reimburse the Agent upon demand and after notice in
accordance with SECTION 14.4 for all reasonable expenses (including, without
limitation, reasonable attorneys' fees) incurred or paid by the Agent in
connection with: (i) the preparation, execution, delivery, interpretation,
modification, syndication, amendment or termination of this Agreement or the
other Credit Documents or any consent or waiver requested by the Borrower
hereunder or thereunder; (ii) charges for appraisers, examiners, environmental
consultants, auditors or similar Persons whom the Agent may engage with respect
to rendering opinions concerning the financial condition of the Borrower and
its Subsidiaries; and (iii) any commercially reasonable attempt to inspect,
verify, protect, preserve, collect, sell, liquidate or otherwise dispose of the
Collateral or any other assets of any Borrower Affiliate;
(b) to pay or reimburse the Agent and each Lender upon demand and
after notice in accordance with SECTION 14.4 for all reasonable expenses
(including, without limitation, reasonable attorneys' fees, but excluding
salaries of the Agent's or such Lender's regularly employed personnel and
overhead) incurred or paid by the Agent or such Lender in good faith in
connection with: (i) any litigation, contest, dispute, suit or proceeding or
action (whether instituted by the Agent, the Lenders, or any of them, the
Borrower or any other Person) in any way relating to this Agreement or the
other Credit Documents or to the Borrower's or any Subsidiary's affairs (other
than a dispute solely between or among the Lenders); (ii) any attempt by the
Agent or such Lender to enforce any of its rights against the Borrower or any
other Person that may be obligated to the Agent or such Lender by virtue of
this Agreement or the other Credit Documents; and (iii) any refinancing or
restructuring of the credit arrangement provided under this Agreement in the
nature of a "work-out" or in any insolvency or bankruptcy proceeding;
(c) to pay and hold the Agent and each Lender harmless from and
against any and all liability and loss with respect to or resulting from the
nonpayment or delayed payment of any and all intangibles, documentary stamp and
other similar taxes, fees and excises, if any, including any interest and
penalties, that may be, or be determined to be, payable in connection with the
transactions contemplated by this Agreement and the other Credit Documents or
in any modification hereof or thereof; and
(d) to pay and hold the Agent and each Lender harmless from and
against any and all finder's or brokerage fees and commissions that may be
payable in connection with the transactions contemplated by this Agreement and
the other Credit Documents, other than any fees or commissions of finders or
brokers engaged by the Agent or any Lender.
11.2 Administrative Fee. Pay to the Agent the administrative fee
in the amount and manner set forth in the supplemental fee letter, dated
December __, 1995, executed in connection with the Summit Holding Credit
Agreement.
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ARTICLE XII
THE AGENT
12.1 Appointment. The Lenders hereby designate and appoint First
Union as Agent to act as specified herein and in the other Credit Documents.
Each Lender hereby authorizes, and each holder of any Note by the acceptance of
such Note shall be deemed to authorize, the Agent to take such action as agent
on its behalf under the provisions of this Agreement and the other Credit
Documents and any other instruments and agreements referred to herein or
therein, and to exercise such powers and to perform such duties hereunder and
thereunder, as are specifically delegated to or required of the Agent by the
terms hereof or thereof and such other powers as are reasonably incidental
thereto. The Agent may execute any of its duties under this Agreement or any
other Credit Document by or through agents or attorneys-in-fact and shall not
be responsible for the negligence or misconduct of any agents or
attorneys-in-fact that it selects with reasonable care.
12.2 Nature of Duties. The Agent shall have no duties or
responsibilities other than those expressly set forth in this Agreement and the
other Credit Documents. Neither the Agent nor any of its officers, directors,
employees or agents shall be liable for any action taken or omitted by it or
them as such hereunder or under any other Credit Document or in connection
herewith or therewith, unless caused by its or their gross negligence or
willful misconduct. The duties of the Agent shall be mechanical and
administrative in nature; the Agent shall not have by reason of this Agreement
or any other Credit Document a fiduciary relationship in respect of any Lender
or the holder of any Note; and nothing in this Agreement or any other Credit
Document, express or implied, is intended to or shall be so construed as to
impose upon the Agent any obligations or liabilities in respect of this
Agreement or any other Credit Document except as expressly set forth herein or
therein.
12.3 Absence of Reliance on the Agent.
(a) Each Lender acknowledges that neither the Agent nor any of its
officers, directors, employees or agents has made any representation or
warranty to it and that no act by the Agent hereinafter taken, including any
review of the affairs of the Borrower and its Subsidiaries, shall be deemed to
constitute any representation or warranty by the Agent to any Lender.
(b) Each Lender acknowledges that, independently and without
reliance upon the Agent or any other Lender and based on such documents and
information as it has deemed and may deem appropriate, (i) it has made its own
appraisal of and investigation into the business, prospects, operations,
properties, financial and other condition and creditworthiness of the Borrower
and its Subsidiaries in connection with its decision to enter into this
Agreement and extend credit to the Borrower hereunder, and (ii) it will
continue to make its own credit analysis, appraisals and decisions in taking or
not taking action hereunder.
(c) Except as expressly provided in this Agreement, the Agent
shall have no duty or responsibility, either initially or on a continuing
basis, to provide any Lender or the holder of any Note with any credit or other
information concerning the business, prospects, operations, properties,
financial
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or other condition or creditworthiness of the Borrower, its Subsidiaries or any
other Person that may come into its possession, whether before the making of
the initial Loans or at any time or times thereafter.
(d) The Agent shall not be responsible to any Lender or the holder
of any Note for any recitals, statements, information, representations or
warranties herein or in any other Credit Document or in any document,
instrument, certificate or other writing delivered in connection herewith or
therewith or for the execution, effectiveness, genuineness, validity,
enforceability, perfection, priority or sufficiency of this Agreement or any
other Credit Document or the financial condition of the Borrower, its
Subsidiaries or any other Person, or be required to make any inquiry concerning
either the performance or observance of any of the terms, provisions or
conditions of this Agreement or any other Credit Document, or the financial
condition of the Borrower, its Subsidiaries or any other Person or the
existence or possible existence of any Default or Event of Default.
(e) The Agent shall be under no obligation or duty to take any
action under this Agreement or any other Credit Document if taking such action
(i) would subject the Agent to a tax in any jurisdiction where it is not then
subject to a tax, (ii) would require the Agent to qualify to do business in any
jurisdiction where it is not then so qualified, unless the Agent receives
security or indemnity satisfactory to it against any tax or other liability in
connection with such qualification or resulting from the taking of such action
in connection therewith or (iii) would subject the Agent to in personam
jurisdiction in any location where it is not then so subject.
12.4 Certain Rights of the Agent. If the Agent shall request
instructions from the Required Lenders with respect to any act or action
(including failure to act) in connection with this Agreement or any other
Credit Document, the Agent shall be entitled to refrain from such act or taking
such action unless and until it shall have received such instructions, and the
Agent shall incur no liability by reason of so refraining. The Agent shall not
be obligated to take any action hereunder or under any other Credit Document
(a) if such action would, in the reasonable opinion of the Agent, be contrary
to applicable law or this Agreement or the other Credit Documents, (b) if it
shall not receive such advice or concurrence of the Required Lenders as it
reasonably deems appropriate or (c) if it shall not first be indemnified to its
satisfaction by the Lenders requesting such action against any and all
liability and expense that may be incurred by it by reason of taking or
continuing to take any such action. Without limiting the foregoing, no Lender
or holder of any Note shall have any right of action whatsoever against the
Agent as a result of the Agent's acting or refraining from acting hereunder or
under any other Credit Document in accordance with the instructions of the
Required Lenders.
12.5 Notice of Default. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Event of Default, other
than any Default or Event of Default arising out of the failure to pay any
principal, interest, fees or other amounts payable to the Agent for the account
of the Lenders, unless the Agent has received written notice from the Borrower
or a Lender describing such Default or Event of Default and stating that such
notice is a "notice of default." In the event that the Agent receives such a
notice, the Agent shall give notice thereof to the Lenders as soon as
reasonably practicable; provided, however, that if any such notice has also
been furnished to the Lenders, the Agent shall have no obligation to notify the
Lenders with respect thereto. Each Lender shall promptly give the Agent such a
notice upon its actual knowledge of a Default or an Event of Default; provided,
however, that the failure of any Lender to deliver such notice in the absence
of gross negligence or willful misconduct shall not affect its rights hereunder
or under the other Credit Documents.
12.6 Reliance by Agent. The Agent shall be entitled to rely, and
shall be fully protected in
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relying, upon any note, writing, resolution, notice, statement, consent,
certificate, telex, teletype or facsimile message, order or other documentary,
teletransmission or telephone message believed by it in good faith to be
genuine and correct and to have been signed, sent or made by the proper Person.
The Agent may consult with legal counsel (including counsel for the Borrower),
independent public accountants and other experts selected by it with respect to
all matters pertaining to this Agreement and the other Credit Documents and its
duties hereunder and thereunder and shall not be liable for any action taken or
omitted to be taken by it in good faith in accordance with the advice of such
counsel, accountants or experts.
12.7 Indemnification. To the extent the Agent is not reimbursed by
or on behalf of the Borrower, and without limiting the obligation of the
Borrower to do so, the Lenders will reimburse and indemnify the Agent, in
proportion to their respective percentages as used in determining the Required
Lenders, from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses (including
attorneys' fees and expenses) or disbursements of any kind or nature whatsoever
that may at any time (including at any time following the indefeasible
repayment in full of the Loans) be imposed on, incurred by or asserted against
the Agent in any way relating to or arising out of this Agreement or any other
Credit Document or the transactions contemplated hereby or thereby or any
action taken or omitted by the Agent under or in connection with any of the
foregoing, and in particular will reimburse the Agent for out-of-pocket
expenses promptly upon demand by the Agent therefor; provided, however, that no
Lender shall be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements finally determined by a court of competent jurisdiction and not
subject to any appeal (or pursuant to arbitration as set forth in SECTION 14.3)
to have resulted from the Agent's gross negligence or willful misconduct.
12.8 The Agent in its Individual Capacity. With respect to its
Commitments, the Loans made by it and the Notes issued to it, the Agent shall
have the same rights and powers under the Credit Documents as any other Lender
or holder of a Note and may exercise the same as though it were not performing
the agency duties specified herein; and the terms "Lenders," "Required
Lenders," "holders of Notes" and any similar terms shall, unless the context
clearly otherwise indicates, include the Agent in its individual capacity. The
Agent may accept deposits from, lend money to and generally engage in any kind
of banking, trust, financial advisory or other business with the Borrower or
any of its Subsidiaries or any of their respective Affiliates as if it were not
performing the agency duties specified herein, and may accept fees and other
consideration from the Borrower for services in connection with this Agreement
and otherwise without having to account for the same to the Lenders.
12.9 Holders. The Agent may deem and treat the payee of any Note
as the holder thereof for all purposes hereof unless and until a written notice
of the assignment, transfer or endorsement thereof, as the case may be, shall
have been filed with the Agent. Any request, authority or consent of any
Person that, at the time of making such request or giving such authority or
consent, is the holder of any Note, shall be conclusive and binding on any
subsequent holder, transferee, assignee or endorsee, as the case may be, of
such Note or of any Note or Notes issued in exchange therefor.
12.10 Successor Agent. The Agent may resign at any time upon sixty
(60) days' prior written notice to the Borrower and the Lenders. Such
resignation shall take effect upon the appointment of a successor Agent as
provided hereinbelow. Upon any such notice of resignation, the Required
Lenders (so long as no Default or Event of Default has occurred and is
continuing, with the consent of the Borrower, which consent shall not be
unreasonably withheld) will appoint from among the Lenders a successor Agent.
If no successor Agent shall have been appointed within such sixty-day period,
the Agent may appoint, after consulting with the Lenders and the Borrower, a
successor agent from among
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the Lenders, who shall serve as Agent until such time, if any, as the Required
Lenders shall have appointed a successor Agent as provided hereinabove. Upon
the written acceptance of any appointment as Agent hereunder by a successor
Agent, such successor Agent shall thereupon succeed to and become vested with
all the rights, powers, privileges and duties of the retiring Agent, and the
retiring Agent shall be discharged from its duties and obligations hereunder
and under the other Credit Documents. After any retiring Agent's resignation
as Agent, the provisions of this Article shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent. Until Borrower
is duly notified of a successor Agent, all payments and notices provided to
Agent shall be deemed duly made and given under this Agreement.
12.11 Collateral Matters.
(a) The Agent is hereby authorized on behalf of all the Lenders,
without the necessity of any notice to or further consent from the Lenders,
from time to time (but without any obligation) to take any action with respect
to the Collateral and the Credit Documents that may be necessary to perfect and
maintain perfected the liens upon the Collateral granted pursuant to the Credit
Documents.
(b) The Lenders hereby irrevocably authorize the Agent, at its
option and in its discretion, to release any lien granted to or held by the
Agent upon any Collateral (i) upon termination of the Commitments and
indefeasible payment in full of all Obligations, (ii) constituting property
sold or to be sold or disposed of as part of or in connection with a
disposition permitted hereunder, (iii) constituting property in which neither
the Borrower nor any Subsidiary owned any interest at the time such lien was
granted or at any time thereafter or (iv) if approved, authorized or ratified
in writing by the Lenders or the Required Lenders, as may be required with
respect to any such release in accordance with SECTION 14.8. Upon request by
the Agent at any time, the Lenders will confirm in writing the Agent's
authority to release Collateral pursuant to this subsection (b).
12.12 Non-receipt of Funds by the Agent. Unless the Agent shall
have been notified by a Lender or the Borrower (any such party being herein
called the "Payor") prior to the date on which such Payor is to make payment to
the Agent of the proceeds of the Loan to be made by it hereunder (in the case
of a Lender) or such Payor is to make a payment hereunder or under the Note to
the Agent for the account of the Lenders (in the case of the Borrower), as the
case may be (such payment being herein called the "Required Payment"), which
notice shall be effective upon receipt, that the Payor does not intend to make
the Required Payment to the Agent, the Agent may assume that the Required
Payment has been made and may, in reliance upon such assumption (but shall not
be required to), make the amount thereof available to the intended recipient on
such date and, if the Payor has not in fact made the Required Payment to the
Agent, the recipient of such payment (and, if such recipient is the Borrower
and the Lender which is the Payor fails to pay the amount thereof to the Agent
forthwith upon such demand, the Borrower) shall, on demand, repay to the Agent
the amount made available to it, together with interest thereon in respect of
each day during the period commencing on the date such amount was so made
available by the Agent until the date the Agent recovers such amount, at a rate
per annum equal to (a) in the case of the Borrower, the Default Rate, provided,
that if the Borrower has to repay such amount through no fault of its own, the
Borrower shall pay the Base Rate and (b) in the case of a Lender, for the first
three (3) Business Days the rate set by interbank custom and practice for the
correction of errors among banks and for every day thereafter the Default Rate.
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ARTICLE XIII
ASSIGNMENT AND PARTICIPATION
13.1 Assignments. (a) With the prior consent of the Agent and the
Borrower, which consent shall not be unreasonably withheld, each Lender may
assign to one or more other Persons all or a portion of its rights and
obligations under this Agreement (including, without limitation, all or a
portion of its Commitments, the outstanding Loans made by it and the Note or
Notes held by it); provided, however, that (i) except in the case of an
assignment to an Affiliate of such Lender or a Person that, immediately prior
to such assignment, was a Lender, the amount of the Commitments of such
assigning Lender being assigned pursuant to each such assignment (determined as
of the date of the Assignment and Acceptance with respect to each such
assignment) shall in no event be less than the lesser of (y) the aggregate
Commitments of such Lender immediately prior to such assignment or (z)
$5,000,000, (ii) each such assignment shall be to an Eligible Assignee, (iii)
each such assignment shall be of an equal, pro rata percentage of such Lender's
rights and obligations (including its Commitment) under each of the Term Loans
and the Revolving Loans, and (iv) the parties to each such assignment will
execute and deliver to the Agent, for its acceptance and recording in the
Register, an Assignment and Acceptance, together with any Note or Notes subject
to such assignment, and will pay a processing fee of $3,000 to the Agent for
its own account. Upon such execution, delivery, acceptance and recording of
the Assignment and Acceptance, from and after the effective date specified
therein (a) the assignee thereunder shall be deemed a party hereto and, to the
extent that rights and obligations hereunder have been assigned to it pursuant
to such Assignment and Acceptance, shall have the rights and obligations of
such Lender hereunder with respect thereto and (b) the assigning Lender shall,
to the extent that rights and obligations hereunder have been assigned by it
pursuant to such Assignment and Acceptance, relinquish its rights and be
released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of such
assigning Lender's rights and obligations under this Agreement, such Lender
shall cease to be a party hereto).
(b) By executing and delivering an Assignment and Acceptance, the
assigning Lender and the assignee thereunder confirm to and agree, with each
other and with the other parties hereto, as follows: (i) other than as may be
provided in such Assignment and Acceptance, such assigning Lender makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or any other Credit Document or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement or any
other Credit Document or any other instrument or document furnished hereto or
pursuant thereto; (ii) such assigning Lender makes no representation or
warranty and assumes no responsibility with respect to the financial condition
of the Borrower or any of its Subsidiaries or the performance or observance by
the Borrower or any of its Subsidiaries of any of their respective obligations
under this Agreement or any other Credit Document or any other instrument or
document furnished pursuant hereto or thereto; (iii) such assignee confirms
that it has received a copy of this Agreement, together with copies of the
Financial Statements and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into this
Agreement; (iv) such assignee will, independently and without reliance upon the
Agent, the assigning Lender or any other Lender, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Agreement; (v)
such assignee confirms that it is an Eligible Assignee; (vi) such assignee
appoints and authorizes the Agent to take such action as agent on its behalf
and to exercise such powers and discretion under this Agreement
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and the other Credit Documents and any other instruments and agreements
referred to herein or therein, and to exercise such powers and to perform such
duties hereunder and thereunder, as are specifically delegated to or required
of the Agent by the terms hereof or thereof and such other powers as are
reasonably incidental thereto; and (vii) such assignee agrees that it will
perform in accordance with their terms all of the obligations that by the terms
of this Agreement are required to be performed by it as a Lender.
(c) The Agent will maintain a copy of each Assignment and
Acceptance delivered to and accepted by it and a register for the recordation
of the names and addresses of the Lenders and the Commitments of, and principal
amount of the Loans owing to, each Lender from time to time (the "Register").
The entries in the Register shall be conclusive and binding for all purposes,
absent manifest error, and the Borrower, the Agent and the Lenders may treat
each Person whose name is recorded in the Register as a Lender hereunder for
all purposes of this Agreement. The Register shall be available for inspection
by the Borrower or any Lender at any reasonable time and from time to time upon
reasonable prior notice.
(d) Upon its receipt of an Assignment and Acceptance executed by
an assigning Lender and an assignee, together with any Note or Notes subject to
such assignment, the Agent will, if such Assignment and Acceptance has been
completed and is in substantially the form of EXHIBIT A, (i) accept such
Assignment and Acceptance, (ii) record the information contained therein in the
Register and (iii) give notice thereof to the Borrower. Within five (5)
Business Days after its receipt of such notice, the Borrower, at its own
expense, will execute and deliver to the Agent in exchange for the surrendered
Note or Notes a new Note or Notes to the order of such assignee in an amount
equal to the Commitment or Commitments assumed by it pursuant to such
Assignment and Acceptance and, to the extent the assigning Lender has retained
its Commitments hereunder, a new Note or Notes to the order of the assigning
Lender in an amount equal to the Commitment or Commitments retained by it
hereunder. Such new Note or Notes shall be in an aggregate principal amount
equal to the aggregate principal amount of such surrendered Note or Notes,
shall be dated the effective date of such Assignment and Acceptance and shall
otherwise be in substantially the forms of EXHIBIT F or G, as appropriate.
13.2 Participations. Each Lender may sell to one or more other
Persons participations in any portion comprising less than all of its rights
and obligations under this Agreement (including, without limitation, a portion
of its Commitments, the outstanding Loans made by it and the Note or Notes held
by it); provided, however, that (a) such Lender's obligations under this
Agreement shall remain unchanged, (b) such Lender shall remain solely
responsible for the performance of such obligations, (c) the Borrower, the
Agent and the other Lenders shall continue to deal solely and directly with
such Lender in connection with such Lender's rights and obligations under this
Agreement, (d) any such participation shall be in an amount of not less than
$5,000,000, (e) no Lender shall sell any participation that, when taken
together with all other participations, if any, sold by such Lender, covers all
of such Lender's rights and obligations under this Agreement (including,
without limitation, all of its Commitments, the outstanding Loans made by it
and the Note or Notes held by it), (f) each such participation shall be of an
equal, pro rata percentage of such Lender's rights and obligations (including
its Commitments) under the Term Loans and the Revolving Loans, and (g) no
Lender shall permit any participant to have any voting rights or any right to
control the vote of such Lender with respect to any amendment, modification,
waiver, consent or other action hereunder or under any other Credit Document
except as to actions of the type described in SECTION 14.8(a). In the case of
a participation, the participant shall not have any rights under this Agreement
or any of the other Credit Documents, the participant's rights against the
granting Lender in respect of such participation to be those set forth in the
participation agreement, and all amounts payable by the Borrower hereunder
shall be determined as if such Lender had not sold such
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participation; provided, however, that each such participant shall have the
rights of a Lender for purposes of SECTIONS 4.11, 4.12, 4.13, 10.2 and 10.5,
and shall be entitled to the benefits thereto, to the extent that the Lender
selling such participation would be entitled to such benefits if the
participation had not been sold.
13.3 Miscellaneous. (a) The Agent and each Lender may, in
connection with any assignment or participation or proposed assignment or
participation pursuant to this Section, disclose to the assignee or
participant, or proposed assignee or participant, any information relating to
the Borrower and its Subsidiaries furnished to it by or on behalf of any other
party hereto.
(b) Nothing herein shall prohibit the pledging by any Lender of
any Note to any Federal Reserve Bank in connection with borrowings from the
Federal Reserve Bank (provided that any such pledge shall not affect the
obligations of such Lender hereunder).
ARTICLE XIV
MISCELLANEOUS
14.1 Survival of Agreements. All agreements, representations and
warranties contained herein or made in writing by or on behalf of the Borrower
in connection with the transactions contemplated hereby shall survive the
execution and delivery of this Credit Agreement and the other Credit Documents.
No termination or cancellation (regardless of cause or procedure) of this
Credit Agreement shall in any way affect or impair the powers, obligations,
duties, rights and liabilities of the parties hereto in any way with respect to
(a) any transaction or event occurring prior to such termination or
cancellation, (b) the Collateral or (c) any of the Borrower's undertakings,
agreements, covenants, warranties and representations contained in this Credit
Agreement and the other Credit Documents and all such undertakings, agreements,
covenants, warranties and representations shall survive such termination or
cancellation until payment in full of the Obligations. The Borrower further
agrees that to the extent the Borrower makes a payment or payments to the
Lenders, which payment or payments or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to a trustee, receiver or any other party under any
bankruptcy, insolvency or similar state or federal law, common law or equitable
cause, then, to the extent of such payment or repayment, the Obligation or part
thereof intended to be satisfied shall be revived and continued in full force
and effect as if such payment had not been received by the Lenders.
14.2 Governing Law; Consent to Jurisdiction. THIS AGREEMENT HAS
BEEN EXECUTED, DELIVERED AND ACCEPTED AT, AND SHALL BE DEEMED TO HAVE BEEN MADE
IN, NORTH CAROLINA AND SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF
THE PARTIES HERETO DETERMINED, IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED
TO CONFLICTS OF LAW PROVISIONS) OF THE STATE OF NORTH CAROLINA. AS PART OF THE
CONSIDERATION FOR NEW VALUE THIS DAY RECEIVED, THE BORROWER HEREBY CONSENTS TO
THE JURISDICTION OF ANY STATE COURT WITHIN MECKLENBURG COUNTY, NORTH CAROLINA
OR ANY FEDERAL COURT LOCATED WITHIN THE WESTERN DISTRICT OF THE STATE OF
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NORTH CAROLINA FOR ANY PROCEEDING INSTITUTED HEREUNDER OR UNDER ANY OF THE
OTHER CREDIT DOCUMENTS, OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT
OR ANY OF THE OTHER CREDIT DOCUMENTS, OR ANY PROCEEDING TO WHICH THE LENDER OR
THE BORROWER IS A PARTY, INCLUDING ANY ACTIONS BASED UPON, ARISING OUT OF, OR
IN CONNECTION WITH ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER
ORAL OR WRITTEN) OR ACTIONS OF THE LENDER OR THE BORROWER. THE BORROWER
IRREVOCABLY AGREES TO BE BOUND (SUBJECT TO ANY AVAILABLE RIGHT OF APPEAL) BY
ANY JUDGMENT RENDERED OR RELIEF GRANTED THEREBY AND FURTHER WAIVES ANY
OBJECTION THAT IT MAY HAVE BASED ON LACK OF JURISDICTION OR IMPROPER VENUE OR
FORUM NON CONVENIENS TO THE CONDUCT OF ANY SUCH PROCEEDING. THE BORROWER
CONSENTS THAT ALL SERVICE OF PROCESS BE MADE BY REGISTERED OR CERTIFIED MAIL
DIRECTED TO IT AT ITS ADDRESS SET FORTH HEREINBELOW, AND SERVICE SO MADE SHALL
BE DEEMED TO BE COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT THEREOF OR FIVE
(5) DAYS AFTER DEPOSIT IN THE UNITED STATES MAILS, PROPER POSTAGE PREPAID AND
PROPERLY ADDRESSED. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT TO SERVE
LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF THE
LENDER TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER IN THE COURTS OF
ANY OTHER JURISDICTION.
14.3 Arbitration; Remedies. (a) Upon demand of any party hereto,
whether made before or after institution of any judicial proceeding, any
dispute, claim or controversy arising out of, connected with or relating to
this Agreement or any of the Credit Documents ("Disputes") between or among
parties hereto or thereto shall be resolved by binding arbitration as provided
herein. Institution of a judicial proceeding by a party does not waive the
right of that party to demand arbitration hereunder. Disputes may include,
without limitation, tort claims, counterclaims, claims brought as class
actions, claims arising from documents executed in the future, or claims
arising out of or connected with the transaction contemplated by this Agreement
or any of the Credit Documents. Arbitration shall be conducted under and
governed by the Commercial Financial Disputes Arbitration Rules (the
"Arbitration Rules") of the American Arbitration Association (the "AAA") and
Title 9 of the U.S. Code. All arbitration hearings shall be conducted in
Charlotte, North Carolina. The expedited procedures set forth in Rule 51 et
seq. of the Arbitration Rules shall be applicable to claims of less than
$1,000,000. All applicable statutes of limitation shall apply to any Dispute.
A judgment upon the award may be entered in any court having jurisdiction. The
panel from which all arbitrators are selected shall be comprised of licensed
attorneys. The single arbitrator selected for expedited procedure shall be a
retired judge from the highest court of general jurisdiction, state or federal,
of the state where the hearing will be conducted. Notwithstanding the
foregoing, this arbitration provision does not apply to disputes under or
related to any Hedge Agreements.
(b) Notwithstanding the foregoing, Borrower, Agent and Lenders
agree to preserve, without diminution, certain remedies that any party hereto
may employ or exercise freely, either alone, in conjunction with or during a
Dispute. Borrower, Agent and Lenders shall have the right to proceed in any
court of proper jurisdiction or by self-help to exercise or prosecute the
following remedies, as applicable: (i) all rights to foreclose against any
real or personal property or other security by exercising a power of sale
granted under any Credit Documents or under applicable law or by judicial
foreclosure and sale, including a proceeding to confirm the sale; (ii) all
rights of self-help including peaceful occupation of real property and
collection of rents, set-off, and peaceful possession of personal property;
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(iii) obtaining provisional or ancillary remedies including injunctive relief,
sequestration, garnishment, attachment, appointment of receiver and filing an
involuntary bankruptcy proceeding; and (iv) when applicable, a judgment by
confession of judgment. Preservation of these remedies does not limit the
power of an arbitrator to grant similar remedies that may be requested by a
party in a Dispute.
Borrower, Agent and Lenders agree that they shall not have a remedy of
punitive or exemplary damages against the other in any Dispute and hereby waive
any right or claim to punitive or exemplary damages they have now or which may
arise in the future in connection with any Dispute whether the Dispute is
resolved by arbitration or judicially.
14.4 Notice. All notices and other communications hereunder shall
be in writing and shall be deemed to have been validly served, given or
delivered five (5) days after deposit in the United States mails with postage
prepaid, and addressed to the party to be notified as follows (it being
understood that the below-described copies of notices being sent to Persons
other than the parties to be notified shall not themselves constitute notice
hereunder):
If to the Borrower: Summit Holding Corporation
2310 A-Z Park Road
Lakeland, Florida 33801
Attn: William B. Bull
Facsimile Number: (941) 665-2926
Telephone Number: (941) 665-6060
with copies to: Alston & Bird
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attn: Susan Wilson
Facsimile Number: (404) 881-7777
Telephone Number: (404) 881-7000
If to the Agent at: First Union National Bank of
North Carolina
One First Union Center, TW-10
301 South College Street
Charlotte, North Carolina 28288-0735
Attn: Agency Services
Facsimile Number: (704) 383-0288
Telephone Number: (704) 383-0281
with copies to: First Union National Bank of
North Carolina
One First Union Center, DC-5
301 South College Street
Charlotte, North Carolina 28288--0735
Attn: John E. Guenther
Facsimile Number: (704) 383-7611
Telephone Number: (704) 383-3560
<PAGE> 91
Page 85
Robinson, Bradshaw & Hinson, P.A.
101 North Tryon Street, Suite 1900
Charlotte, North Carolina 28246
Attn: Haynes P. Lea
Facsimile Number: (704) 378-4000
Telephone Number: (704) 377-2536
and if to any Lender, at its address specified for such Lender on its signature
page hereto or to such other address as each party may designate for itself by
like notice, or shall be deemed to have been validly served, given or delivered
on the date of delivery to such party at such address, if notice is given or
delivered by hand, telex, telegram or facsimile transmitter.
14.5 Indemnification of the Agent and the Lenders. From and at all
times after the date of this Agreement, and in addition to the fees, costs and
expenses payable under SECTION 11.1 and all of the Agent's and the Lenders'
other rights and remedies, the Borrower agrees to indemnify, defend and hold
harmless the Agent and each Lender and each of their respective directors,
officers, employees, agents and Affiliates (each, an "Indemnified Person")
against any and all claims, losses, damages, liabilities, requirements,
judgments, liens, costs and expenses of any kind or nature whatsoever,
including, without limitation, reasonable attorneys' fees and expenses
(collectively, "Indemnified Costs"), actually incurred by or asserted against
any such Indemnified Person from and after the date hereof, whether direct,
indirect or consequential, as a result of or arising from or in any way
relating to any action, suit or proceeding (including any inquiry or
investigation) by any Person, whether threatened or initiated, arising from or
in connection with the negotiation, preparation, execution, breach, performance
or enforcement of this Agreement, any of the other Credit Documents, the
exercise of any right or remedy hereunder or thereunder, including, without
limitation, the actual or alleged (a) generation, presence, transport, disposal
or release of any Hazardous Substance by any Borrower Affiliate on, to, in,
about or from any real property owned or operated by any Borrower Affiliate
(currently or in the past), or (b) violation of any Environmental Law by any
Borrower Affiliate, in any case whether or not any such Indemnified Person is a
party to any such action, suit or proceeding or a subject of any such inquiry
or investigation; provided, however, that no Indemnified Person shall have the
right to be indemnified hereunder for any Indemnified Costs to the extent
resulting from the gross negligence or willful misconduct of such Indemnified
Person as finally determined pursuant to SECTION 14.3. All of the foregoing
Indemnified Costs of any Indemnified Person shall be paid or reimbursed by the
Borrower, as and when incurred and upon demand, and shall be additional
Obligations hereunder.
14.6 Waivers by the Borrower. Except as otherwise provided for in
this Credit Agreement, the Borrower waives (a) presentment, demand and protest
and notice of presentment, protest, default, non-payment, maturity and all
other notices; (b) notice prior to taking possession or control of the
Collateral or any bond or security that might be required by any court prior to
allowing the Agent or any Lender to exercise any of the Lenders' remedies under
this Credit Agreement or the other Credit Documents; and (c) the benefit of all
valuation, appraisement and exemption laws.
14.7 Assignment and Sale. The Borrower may not sell, assign or
transfer this Credit Agreement, or the other Credit Documents or any portion
thereof, including without limitation, the Borrower's rights, title, interests,
remedies, powers, and duties hereunder or thereunder. The Borrower hereby
consents to any of the Lenders' participation, sale, assignment, transfer or
other disposition at any time or times hereafter of this Credit Agreement or
the other Credit Documents or of the Borrower's Obligations, or of any portion
hereof or thereof, including without limitation, such Lender's rights, title,
<PAGE> 92
Page 86
interests, remedies, powers and duties hereunder or thereunder.
14.8 Amendment or Waiver. Except as may be otherwise specifically
set forth in this Agreement or the other Credit Documents, neither this
Agreement nor any other Credit Document nor any provision hereof or thereof may
be amended, modified, waived, discharged or terminated, and no consent to any
departure by the Borrower from any provision hereof or thereof may be given,
except in a writing signed by the Required Lenders; provided, however, that:
(a) no such amendment, modification, waiver, discharge,
termination or consent shall, without the consent of each Lender holding
Obligations directly affected thereby, (i) reduce the principal amount of, or
rate of interest on, any Loan, or reduce any fees or other Obligations (other
than fees payable to the Agent for its own account) or any obligations of any
Person now or hereafter primarily or contingently liable with respect to the
Obligations or (ii) postpone any date fixed for any payment of principal,
interest (other than additional interest payable hereunder during the
continuance of an Event of Default), fees (other than fees payable to the Agent
for its own account) or any other Obligations;
(b) no such amendment, modification, waiver, discharge,
termination or consent shall, without the consent of all Lenders, (i) increase
the Commitments of any Lender (it being understood that a waiver of any Default
or Event of Default or of any mandatory reduction in the Total Commitment shall
not constitute such an increase), (ii) change the definition of "Required
Lenders" or otherwise change the number or percentage of Lenders that shall be
required for the Lenders or any of them to take or approve, or direct the Agent
to take, any action hereunder, (iii) amend, modify or waive any of the
provisions for extending, or take action to extend, the term of the (iv) amend
any provision of this Section or of SECTIONS 4.11, 4.12, 4.13, 10.2 or 10.5,
(vi) release any of the Collateral or (vii) consent to the assignment or
transfer by the Borrower, or by any other Person now or hereafter primarily or
contingently liable with respect to the Obligations, of any of its rights and
obligations under this Agreement or any of the other Credit Documents;
(c) no provision relating to the rights or obligations of the
Agent under this Agreement or any of the other Credit Documents may be amended,
modified or waived without the consent of the Agent.
14.9 Severability. To the extent any provision of this Agreement
is prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Credit Agreement.
14.10 Entire Agreement. This Credit Agreement and the other
documents, certificates and instruments referred to herein constitute the
entire agreement between the parties and supersede and rescind any prior
agreements relating to the subject matter hereof, including, without
limitation, the Commitment Letter.
14.11 Binding Effect. All of the terms of this Credit Agreement and
the other Credit Documents, as the same may from time to time be amended, shall
be binding upon, inure to the benefit of and be enforceable by the respective
successors and assigns of the Borrower, the Agent and the Lenders. This
provision, however, shall not be deemed to modify SECTION 14.7.
14.12 Execution in Counterparts. This Credit Agreement may be
executed in two or more counterparts, which when assembled shall constitute one
and the same agreement.
<PAGE> 93
Page 87
14.13 Conflict of Terms. The provisions of the exhibits hereto and
the other Credit Documents and any schedule or annex hereto are incorporated in
this Credit Agreement by this reference thereto. Except as otherwise provided
in this Credit Agreement and except as otherwise provided in the other Credit
Documents, if any provision contained in this Credit Agreement is in conflict
with, or inconsistent with, any provision of the other Credit Documents, the
provision contained in this Credit Agreement shall control.
14.14 Injunctive Relief. The Borrower recognizes that in the event
the Borrower fails to perform, observe or discharge any of its obligations or
liabilities under this Credit Agreement, any remedy of law may prove to be
inadequate relief to the Lenders. The Borrower therefore agrees that the
Lenders, if the Lenders so request, shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages.
<PAGE> 94
Page 88
IN WITNESS WHEREOF, the parties hereto have caused this Credit
Agreement to be executed in their corporate names by their duly authorized
corporate officers as of the date first above written.
SUMMIT HOLDING SOUTHEAST, INC.
By:
---------------------------------------
Title:
---------------------------------------
(signatures continued)
<PAGE> 95
Page 89
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA, as Agent and as Lender
Term Loan Commitment: By:
---------------------------------------
$ Title:
--------------------- ---------------------------------------
Revolving Credit Commitment:
$ [Insert address and payment information]
---------------------
(signatures continued)
<PAGE> 96
Page 90
BANK ONE, TEXAS, N.A.
Term Loan Commitment: By:
---------------------------------------
Title:
---------------------------------------
$
---------------------
Revolving Credit Commitment: [Insert address and payment information]
$
---------------------
(signatures continued)
<PAGE> 97
Page 91
UNION BANK OF CALIFORNIA, N.A.
Term Loan Commitment: By:
---------------------------------------
Title:
---------------------------------------
$
---------------------
Revolving Credit Commitment: [Insert address and payment information]
$
---------------------
(signatures continued)
<PAGE> 98
Page 92
SOUTHTRUST BANK OF ALABAMA,
NATIONAL ASSOCIATION
Term Loan Commitment: By:
---------------------------------------
Title:
---------------------------------------
$
---------------------
Revolving Credit Commitment: [Insert address and payment information]
$
---------------------
<PAGE> 99
Exhibit 10.3
November 19, 1996
Summit Holding Corporation
2310 A-Z Park Road
Lakeland, Florida 33801
Attention: William B. Bull
Re: Proposed Initial Public Offering
Ladies and Gentlemen:
This letter refers to the credit agreement (the "Credit Agreement") and
amended as of the date hereof, dated as of January 16, 1996, between Summit
Holding Corporation (the "Borrower"), First Union National Bank of North
Carolina ("First Union"), SouthTrust Bank of Alabama, National Association
("South Trust"), Union Bank of California, N.A. ("Union Bank") and Bank One
Texas, N.A. ("Bank One") (First Union, SouthTrust, Union Bank and Bank One being
collectively referred to as the "Lenders") and First Union in its capacity as
agent (the "Agent"). Capitalized terms will have the meanings given them in the
Credit Agreement.
The Leaders and the Agent have considered certain proposals of the Borrower
concerning its ownership structure and understand that the Borrower and
Employers Self Insurers Fund ("ESIF") desire to effect a corporate
reorganization pursuant to which (i) ESIF would be converted (the "Conversion")
to a stock insurance company to be named "Bridgefield Employers Insurance
Company" ("Bridgefield Employers"), (ii) ESIF would organize a new corporation
named Summit Holding Southeast, Inc. ("Summit Southeast") that would acquire
ownership of Borrower and Bridgefield Employers and complete an initial public
offering and/or private placement of its capital stock (the "IPO") and (iii) the
capital stock of Bridgefield Casualty Insurance Company ("Bridgefield Casualty")
would be contributed to Bridgefield Employers ("the Capital Contribution"). The
Conversion, the IPO, and the Capital Contribution are referred to collectively
as the "Transactions". The Borrower has requested that the Lenders consent to
the restructuring of the Loans to accommodate the Transactions.
The Lenders confirm to the Borrower that they are willing to consider and
discuss the restructuring of the Loans such that Summit Southeast would succeed
the Borrower as borrower under the Credit Agreement (and the waiver of the
prepayment requirement of Section 7.1(b) of the Credit Agreement). The Lenders
emphasize, however, that the foregoing is intended only as a non-binding
expression of their present willingness to consider such restructuring, and that
any binding agreement to agree on a restructuring would be subject to the
conditions customarily relied upon by lenders in similar transactions.
In connection with the Transactions, these conditions would include (but
would not be limited to) the following: (a) the Leaders would need to have
approved of the final pro forma corporate organization, capital structure and
capitalization of each of the Borrower and its Affiliates; (b) the Lenders shall
have been permitted to conduct a due diligence review with respect to the
Transactions so that each is comfortable with the pro forma corporate and
capital structure and the Transactions generally; (c) the Lenders shall be
satisfied that the Management Agreements will remain unchanged after giving
effect to the Transactions in a manner satisfactory to the Lenders; and (d) the
parties shall have entered into satisfactory loan documentation containing such
changes to the existing credit agreement and such collateral as are deemed
necessary by the Lenders. In addition, any agreement of the Lenders to
restructure the Loans would be contingent on the receipt of any required
regulatory approvals relating to the Transactions, the loan documentation and
the Management Agreements.
In addition, the Lenders require, as an additional condition, that the
Borrower file its initial registration statement on Form S-1 with the Securities
and Exchange Commission in connection with the IPO within seven days from the
date hereof.
The Lenders agree that the restructuring of the Loans will include, among
other changes, restoring the applicable interest rates on the Loans to those
set forth in the Credit Agreement before the amendment effective on the date
hereof.
<PAGE> 100
This letter does not constitute a modification, amendment or waiver of any
provision of Credit Agreement, which shall remain in force and effect on the
terms thereof.
This letter agreement may be executed in two or more counterparts, each of
which shall constitute an original, but all of which when taken together shall
constitute but one instrument.
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA (AS AGENT AND LENDER)
BY:
--------------------------------------
TITLE:
--------------------------------------
SOUTHTRUST BANK OF ALABAMA,
NATIONAL ASSOCIATION
BY:
--------------------------------------
TITLE:
--------------------------------------
UNION BANK OF CALIFORNIA, N.A.
BY:
--------------------------------------
TITLE:
--------------------------------------
BANK ONE, TEXAS, N.A.
BY:
--------------------------------------
TITLE:
--------------------------------------
<PAGE> 101
AGREED TO AND ACCEPTED:
SUMMIT HOLDING CORPORATION
BY:
- ----------------------------------------------------
TITLE:
- --------------------------------------------------
<PAGE> 1
EXHIBIT 10.8
FLORIDA RETAIL FEDERATION SELF INSURERS FUND
ADMINISTRATOR'S CONTRACT
WHEREAS, the Florida Retail Federation is desirous of forming a self
insurers fund for workmen's compensation and,
WHEREAS, the Federation recognizes the need to engage a qualified,
experienced administrator for the purpose of assisting in the formation of the
fund and managing the fund thereafter and,
WHEREAS, C.C. Dockery, President of Summit Consulting, Inc., has agreed
to serve as administrator.
NOW THEREFORE, for and in consideration of the mutual covenants,
premises and obligations herein contained, which are given to and accepted by
the parties hereto, the parties of this instrument stipulate and agree as
follows:
(1) That the Florida Retail Federation appoints C.C. Dockery, President
of Summit Consulting, Inc., as administrator of the Florida Retail Federation
Self Insurers Fund and as agent for the Fund and its members.
(2) That the administrator shall put forth all good and necessary
efforts to establish the Fund and thereafter manage the Fund for a minimum
period of five years; and thereafter on a continuing basis as mutually agreed
upon, in accordance with the policies adopted by the trustees of the Fund. The
administrator shall advise the trustees on policy matters; insure that the
provisions of the trustees contracts for services are met; establish and
maintain a resident address for the fund; set up policies and maintain a set of
books for the Fund; collect all sums due the Fund; pay all items of expense in
accordance with the policies of the trustees of the Fund; invest Fund surpluses;
and properly account for all funds so handled at such reasonable times and
places as the trustees shall designate but not less than once annually.
(3) In exchange for these services the Fund shall pay to the
administrator an amount equal to 30 percent of the earned normal premium,
payable on a monthly basis, plus the investment income for the first two years,
and thereafter an amount equal to 1 percent of the earned normal premium to be
paid from investment income. In consideration of the administrator's fees, the
administrator shall provide to
<PAGE> 2
the Florida Retail Federation Self Insurers Fund: (1) An annual audit of the
Fund by a certified public accountant. (2) The surety bond of the Fund to be
posted with the Florida Department of Labor and Employment Security. (3)
Fidelity bond of the administrator indemnifying the trustees. (4) An annual
individual member's payroll audit as necessary to insure the proper operation of
the fund. (5) Specific and aggregate reinsurance policies. (6) Service contracts
for claims handling and safety engineering. (7) Bookkeeping services, loss fund
reports to members, office space and office supplies. (8) And will pay taxes and
all other expenses except those authorized for disbursement from the claims fund
to handle claims as provided by the reinsurance carrier.
(4) The administrator agrees to pay to the Florida Retail Federation an
amount equal to one percent of the earned normal premium for and in
consideration of the Federation's expenses in helping publicize and promote the
program.
(5) This contract becomes effective upon the execution of the contract
by the parties and remains in force from the date the Fund commences operation.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
executed this 1st day of December A.D., 1978.
WITNESS: Accepted:
/s/ Charles R. Wintz /s/
- --------------------------- ----------------------------------
FLORIDA RETAIL FEDERATION
WITNESS:
/s/ Charles R. Wintz /s/ C.C. Dockery
- --------------------------- ----------------------------------
C.C. Dockery, President
Summit Consulting, Inc.
-2-
<PAGE> 3
ASSIGNMENT
By this Agreement dated this 15th day of July, 1982, I hereby delegate
to Summit Consulting, Inc. all of my duties and obligations of performance under
a contract dated December 1, 1978, together with addenda thereto between Florida
Retail Federation Self Insurers Fund and C.C. Dockery, President of Summit
Consulting, Inc. concerning administration of the Florida Retail Federation Self
Insurers Fund.
/s/ C.C. Dockery
------------------------------------------
C.C. Dockery, President
Summit Consulting, Inc.
ACCEPTANCE
In consideration of the right, title and interest that are being
assigned to the undersigned, Summit Consulting, Inc. hereby accepts the
foregoing Assignment, and agrees to assume and perform all duties and
obligations to be performed by C.C. Dockery, President of Summit Consulting,
Inc., under the contract referred to in the foregoing Assignment as if the
undersigned had been an original party to the Contract, and agrees to indemnify
and hold C.C. Dockery harmless from any liability for performance or
non-performance of the duties and obligations assumed herein.
This 15th day of July, 1982.
ATTEST: SUMMIT CONSULTING, INC.
/s/ C.C. Dockery By: /s/ C.C. Dockery
- --------------------------- ------------------------------
Secretary
-3-
<PAGE> 4
ADDENDUM TO FLORIDA RETAIL FEDERATION
SELF INSURERS FUND ADMINISTRATOR'S CONTRACT
This addendum entered into the 9th day of December, 1982, by and
between the Florida Retail Federation Self Insurers Fund (fund) and Summit
Consulting, Inc. (administrator).
WHEREAS, the Administrator's Contract was executed by the parties on
December 1, 1978, and
WHEREAS, the parties are desirous of clarifying Paragraph 2 of the
Administrator's Contract, dated December 1, 1978, with respect to the continuing
nature of the agreement, and
WHEREAS, the parties are desirous of clarifying Paragraph 3 of the
Administrator's Contract, dated December 1, 1978, with respect to certain
payments;
NOW THEREFORE, in consideration of the mutual covenants and promises
contained in the Administrator's Contract, dated December 1, 1978, those
covenants and promises contained herein, the parties agree as follows:
1. RENEWAL - The Administrator's Contract, dated December 1,
1978, will automatically renew unless terminated by either party in accordance
with provisions of this addendum.
2. TERMINATION - Either party may terminate the Administrator's
Contract, dated December 1, 1978, by giving sixty days written notice of said
intended termination to the other. The fund may terminate the administrator for
good cause shown as follows:
1. Failure to provide an annual audit of the fund by
a certified public accountant.
2. Failure to provide a surety bond for the fund to
be posted with the Florida Department of Labor and Employment
Security, unless the fund has posted other assets in lieu of
the bond.
3. Failure to provide a fidelity bond.
4. Failure to provide an annual individual member's
payroll audit as necessary to insure the proper operation of
the fund.
<PAGE> 5
5. Failure to provide specific and aggregate
reinsurance policies in the minimum amounts required by the
Florida Department of Labor and Employment Security.
6. Failure to provide for the handling of claims
incurred by the fund.
7. Failure to provide safety engineering services to
the fund members.
8. Failure to provide bookkeeping services for the
fund, loss reports to fund members, office space and office
supplies as are necessary for the proper operation of the
fund.
9. Failure to put forth a good and reasonable
marketing effort on behalf of the fund and to pay any
commissions due in accordance with any agreement entered into
between the administrator and any producing agent.
10. Failure to make tax and assessment payments to
the Florida Department of Labor, with the fund bearing the
expense, out of the loss fund or other income resources, of
the special disability assessment and the administrator
bearing the expense of the administrative assessment.
11. Fraud or theft.
12. Bankruptcy.
Upon receipt of notice of termination as contemplated in this addendum,
the administrator shall have not less than 90 days nor more than 180 days to
correct any deficiency in performance. If administrator should correct the
deficiency that gave rise to the fund's cause for termination, as set forth in
the fund's notice, then and in that event, the notice of termination shall be
null and void and of no further effect.
3. LOCAL, STATE, OR FEDERAL TAX LEVIES - Should, at any time, any
local, state, federal authority determine that the fund is subject to and liable
for the payment of any local, state, or federal income tax, such obligation for
payment shall accrue to the fund and not the administrator.
-2-
<PAGE> 6
Ratified by the Board of Trustees of the Florida Retail Federation Self
Insurers Fund this 9th day of December, 1982.
By: /s/ William Kundrat, Jr. By: /s/ C.C. Dockery
------------------------------ ------------------------------
William Kundrat, Jr., Chairman C.C. Dockery, President
Board of Trustees Summit Consulting, Inc.
-3-
<PAGE> 7
ADDENDUM TO FLORIDA RETAIL FEDERATION
SELF INSURERS FUND ADMINISTRATOR'S CONTRACT
WHEREAS. the Administrator's Contract was executed by the parties on
December 1, 1978, and
WHEREAS, the rules governing the operation of self insurers funds
promulgated by the Florida Department of Labor and Employment Security, Division
of Workers' Compensation, now require that "any agreement or contract with the
administrator or fiscal agent, shall require that the records of the
administrator or fiscal agent which pertain to fund operations, assets or
liabilities under Chapter 440, Florida Statutes, shall be open to inspection by
authorized representatives of the Division during regular business hours."
NOW THEREFORE, be it resolved that the contract existing between the
Florida Retail Federation Self Insurers Fund and Summit Consulting, Inc., as of
this date, is hereby amended to require that the records which pertain to fund
operations, assets or liabilities under Chapter 440, Florida Statutes, shall be
open to inspection by authorized representatives of the Division during regular
business hours.
Ratified by the Board of Trustees of the Florida Retail Federation Self
Insurers Fund this 22nd day of August, 1985.
By: /s/ William Kundrat, Jr. By: /s/ Thomas S. Petcoff
------------------------------ ---------------------------------
William Kundrat, Jr., Chairman Thomas S. Petcoff, President
Board of Trustees Summit Consulting, Inc.
<PAGE> 1
EXHIBIT 10.9
LOUISIANA EMPLOYERS SAFETY ASSOCIATION SELF INSURERS FUND
ADMINISTRATOR'S CONTRACT
WHEREAS, the Louisiana Employers Safety Association is desirous of
forming a self insurers fund for workers' compensation and,
WHEREAS, the Association recognizes the need to engage a qualified,
experienced administrator for the purpose of assisting in the formation of the
fund and managing the fund thereafter, and,
WHEREAS, Summit Consulting, Inc. has agreed to serve as administrator.
NOW, THEREFORE, for and in consideration of the mutual covenants,
premises and obligations herein contained, which are given to and accepted by
the parties hereto, the parties of this instrument stipulate and agree as
follows:
(1) That the Louisiana Employers Safety Association appoints Summit
Consulting, Inc. as administrator of the Louisiana Employers Safety Association
Self Insurers Fund and as attorney-in-fact for the fund and its members.
(2) That the administrator shall put forth all good and necessary
efforts to establish the Fund and thereafter manage the Fund for a minimum
period of five years; and thereafter on a continuing basis as mutually agreed
upon, in accordance with the policies adopted by the trustees of the Fund. The
administrator shall advise the trustees on policy matters; insure that the
provisions of the trustees' contracts for services are met; establish and
maintain a resident address for the Fund; set up policies and maintain a set of
books for the Fund; collect all sums due the Fund; pay all items of expense in
accordance with the policies of the trustees of the Fund; invest fund surpluses;
and properly account for all funds so handled at such reasonable times and
places as the trustees shall designate but not less than once annually.
(3) In exchange for these services, the Fund shall pay to the
administrator an amount equal to 30 percent of the earned normal premium,
payable on a monthly basis, plus any amounts allocated to the discount retention
fund, plus any applicable charges for loss and expense constants which may be
applied to members' premiums in accordance with fund policy and the manual for
workers' compensation
<PAGE> 2
published by the National Council on Compensation Insurance. In consideration of
the administrator's fees, the administrator shall provide to the Louisiana
Employers Safety Association Self Insurers Fund: (1) An annual audit of the Fund
by a certified public accountant. (2) The surety bond of the Fund to be posted
with the Louisiana Insurance Commissioner. (3) Fidelity bond of the
administrator indemnifying the trustees. (4) An annual individual member's
payroll audit as necessary to insure the proper operation of the Fund. (5)
Specific and aggregate reinsurance policies. (6) Service contracts for claims
handling and safety engineering. (7) Bookkeeping services, loss fund reports to
members, office space and office supplies. (8) And will pay all other expenses
except those authorized for disbursement from the claims fund to handle claims
as provided by the reinsurance carrier or other expenses as may be authorized by
the trustees for payment from the Fund.
(4) This contract becomes effective upon the execution of the contract
by the parties and remains in force from the date the Fund commences operation.
IN WITNESS WHEREOF, the parties have caused these presents to be
executed this 23rd day of March, A.D., 1982.
WITNESS: ACCEPTED:
/s/ By: /s/ Thomas S. Petcoff
- ---------------------------- ----------------------------
Thomas S. Petcoff, President
LOUISIANA EMPLOYERS SAFETY
ASSOCIATION
WITNESS: ACCEPTED:
/s/ By: /s/ C.C. Dockery
- ---------------------------- ----------------------------
C.C. Dockery, President
SUMMIT CONSULTING, INC.
-2-
<PAGE> 3
ADDENDUM TO LOUISIANA EMPLOYERS SAFETY ASSOCIATION
SELF INSURERS FUND ADMINISTRATORS CONTRACT
This addendum entered into this 1st day of August, 1982, by and between
the Louisiana Employers Safety Association, Inc. (Association) and Summit
Consulting, Inc. (Administrator).
WHEREAS, the Administrator's Contract was executed by the parties on
March 23, 1982, and
WHEREAS, the parties considered that Paragraph 2 of the Administrator's
Contract, dated March 23, 1982, is vague with respect to the continuing nature
of the Agreement, and
WHEREAS, the parties are desirous of clarifying any ambiguity in the
Administrator's Contract, dated March 23, 1982, with respect to its continuing
nature.
NOW THEREFORE, in consideration of the mutual covenants and promises
contained in the Administrator's Contract, dated March 23, 1982, those covenants
and promises contained herein, the parties agree as follows:
1. RENEWAL - The Administrator's Contract, dated March 23, 1982, will
automatically renew for successive five year terms unless terminated by either
party in accordance with provisions of this Addendum.
2. TERMINATION - Either party may terminate the Administrator's
Contract, dated March 23, 1982, by giving thirty days written notice of said
intended termination to the other. Provided, however, that the Association may
only terminate the Administrator for good cause shown as follows:
1. Failure to maintain a resident address for the Fund.
2. Failure to maintain a current set of books for the Fund.
3. Failure to collect all amounts due the Fund, except those
covered by provisions for bad debts.
4. Failure to properly account for all funds handled by the
Administrator.
5. Failure to provide an annual audit of the Fund by a
Certified Public Accountant.
<PAGE> 4
6. Failure to post a surety bond or cash assets for the Fund
with the State of Louisiana in accordance with State rules.
7. Failure to provide a fidelity bond.
8. Failure to provide an annual individual member's payroll
audit, as necessary, to insure the proper operation of the
Fund.
9. Failure to provide timely estimated annual billings for
the Fund.
10. Failure to invoice members of the Fund on a timely basis
for amounts due.
11. Failure to make arrangements for specific and aggregate
reinsurance, when required to do so, in amounts acceptable
by the State of Louisiana.
12. Failure to make tax and assessment payments to the
Louisiana Department of Labor on behalf of the Fund on a
timely basis.
13. Failure to make periodic reports about the financial
condition of the Fund to the State of Louisiana as may be
required from time to time.
14. Fraud or theft.
15. Bankruptcy.
It is the intention of the parties herein that the foregoing constitute
all causes which could result in the Administrator's termination.
4. CURE - Upon receipt of Notice of Termination as contemplated in
Paragraph 2 above, the Administrator shall have not less than 90 days nor more
than 180 days to correct any deficiency in performance. If Administrator should
correct the deficiency that gave rise to the Association's cause for
termination, as set forth in the Association's Notice, then and in that event,
the Notice of Termination shall be null and void and of no further effect.
-2-
<PAGE> 5
LOUISIANA EMPLOYERS SAFETY SUMMIT CONSULTING, INC.
ASSOCIATION, INC.
By: /s/ Thomas Petcoff By: /s/ C.C. Dockery
------------------------- ---------------------------
THOMAS PETCOFF C.C. DOCKERY
President President
Ratified by the Board of Trustees of the Louisiana Employers Safety Association
Self Insurers Fund this ____ day of __________, 1982.
- -------------------------
-3-
<PAGE> 1
EXHIBIT 10.10
LOUISIANA RETAILERS ASSOCIATION SELF INSURERS FUND
ADMINISTRATOR'S CONTRACT
WHEREAS, the Louisiana Retailers Association is desirous of forming a
self insurers fund for workers' compensation and,
WHEREAS, the Association recognizes the need to engage a qualified,
experienced administrator for the purpose of assisting in the formation of the
fund and managing the fund thereafter, and,
WHEREAS, Summit Consulting, Inc., represented by C.C. Dockery,
President, has agreed to serve as administrator.
NOW THEREFORE, for and in consideration of the mutual covenants,
premises and obligations herein contained, which are given to and accepted by
the parties hereto, the parties of this instrument stipulate and agree as
follows:
(1) That the Louisiana Retailers Association appoints C.C. Dockery,
President of Summit Consulting, Inc., as administrator of the Louisiana
Retailers Association Self Insurers Fund and as attorney-in-fact for the Fund
and its members.
(2) That the administrator shall put forth all good and necessary
efforts to establish the Fund and thereafter manage the Fund for a minimum
period of five years; and thereafter on a continuing basis as mutually agreed
upon, in accordance with the policies adopted by the trustees of the Fund. The
administrator shall advise the trustees on policy matters; insure that the
provisions of the trustees contracts for services are met; establish and
maintain a resident address for the Fund; set up policies and maintain a set of
books for the Fund; collect all sums due the Fund; pay all items of expense in
accordance with the policies of the trustees of the Fund; invest fund surpluses;
and properly account for all funds so handled at such reasonable times and
places as the trustees shall designate but not less than once annually.
(3) In exchange for these services, the Fund shall pay to the
administrator an amount equal to 30 percent of the earned normal premium,
payable on a monthly basis, plus an amount equal to one percent of the earned
normal premium to be paid from investment income or the discount retention fund.
<PAGE> 2
In consideration of the administrator's fees, the administrator shall provide to
the Louisiana Retailers Association Self Insurers Fund: (1) An annual audit of
the Fund by a certified public accountant. (2) The surety bond of the Fund to be
posted with the Louisiana Insurance Commissioner. (3) Fidelity bond of the
administrator indemnifying the trustees. (4) An annual individual member's
payroll audit as necessary to insure the proper operation of the Fund. (5)
Specific and aggregate reinsurance policies. (6) Service contracts for claims
handling and safety engineering. (7) Bookkeeping services, loss fund reports to
members, office space and office supplies. (8) And will pay all other expenses
except those authorized for disbursement from the claims fund to handle claims
as provided by the reinsurance carrier or other expenses as may be authorized by
the trustees for payment from the Fund.
(4) The administrator agrees to pay to the Louisiana Retailers
Association an amount equal to one percent of the earned normal premium for and
in consideration of the Association's expenses in helping publicize and promote
the program.
(5) This contract becomes effective upon the execution of the contract
by the parties and remains in force from the date the Fund commences operation.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
executed this 24th day of June, A.D., 1980.
WITNESS: ACCEPTED:
/s/ Thomas Petcoff By: /s/ Carl R. Carstens
- --------------------------- -------------------------------
Carl R. Carstens, Chairman
LOUISIANA RETAILERS ASSOCIATION
WITNESS:
/s/ Thomas Petcoff By: /s/ C.C. Dockery
- --------------------------- -------------------------------
C.C. Dockery, President
SUMMIT CONSULTING, INC.
-2-
<PAGE> 3
ADDENDUM TO
LOUISIANA RETAILERS ASSOCIATION SELF INSURERS FUND
ADMINISTRATOR'S CONTRACT
This addendum entered into the 10th day of February, 1983, by and
between the Louisiana Retailers Association Self Insurers Fund (fund) and Summit
Consulting, Inc. (administrator).
WHEREAS, the Administrator's Contract was executed by the parties on
June 24, 1980, and
WHEREAS, the parties are desirous of clarifying Paragraph 2 of the
Administrator's Contract, dated June 24, 1980, with respect to the continuing
nature of the agreement, and
WHEREAS, the parties are desirous of clarifying Paragraph 3 of the
Administrator's Contract, dated June 24, 1980, with respect to certain payments;
NOW THEREFORE, in consideration of the mutual covenants and promises
contained in the Administrator's Contract, dated June 24, 1980, those covenants
and promises contained herein, the parties agree as follows:
1. RENEWAL - The Administrator's Contract, dated June 24, 1980, will
automatically renew unless terminated by either party in accordance with
provisions of this addendum.
2. TERMINATION - Either party may terminate the Administrator's
Contract, dated June 24, 1980, by giving sixty days written notice of said
intended termination to the other. The fund may terminate the administrator for
good cause shown as follows:
a. Failure to provide an annual audit of the fund by
a certified public accountant.
b. Failure to provide a surety bond for the fund to
be posted with the office of the insurance commissioner, State
of Louisiana, unless the fund has posted other assets in lieu
of the bond.
c. Failure to provide a fidelity bond.
d. Failure to provide an annual individual member's
payroll audit as necessary to insure the proper operation of
the fund.
<PAGE> 4
e. Failure to provide specific and aggregate
reinsurance policies in the minimum amounts required by the
State of Louisiana insurance commissioner.
f. Failure to provide for the handling of claims
incurred by the fund.
g. Failure to provide safety engineering services to
the fund members.
h. Failure to provide bookkeeping services for the
fund, loss reports to fund members, office space and office
supplies as are necessary for the proper operation of the
fund.
i. Failure to put forth a good and reasonable
marketing effort on behalf of the fund and to pay any
commissions due in accordance with any agreement entered into
between the administrator and any producing agent.
j. Failure to make tax and assessment payments to the
office of the insurance commissioner, State of Louisiana, with
the fund bearing the expense, out of the loss fund or other
income resources, of the special disability assessment and the
administrator bearing the expense of the administrative
assessment.
k. Fraud or theft.
l. Bankruptcy.
Upon receipt of notice of termination as contemplated in this addendum,
the administrator shall have not less than 90 days nor more than 180 days to
correct any deficiency in performance. If administrator should correct the
deficiency that gave rise to the fund's cause for termination, as set forth in
the fund's notice, then and in that event, the notice of termination shall be
null and void and of no further effect.
3. LOCAL, STATE, OR FEDERAL TAX LEVIES - Should, at any time, any
local, state, or federal authority determine that the fund is subject to and
liable for the payment of any local, state, or federal income tax, such
obligation for payment shall accrue to the fund and not the administrator.
Ratified by the Board of Trustees of the Louisiana Retailers
Association Self Insurers Fund this 10th day of February, 1983.
-2-
<PAGE> 5
By: /s/ Carl R. Carstens By: /s/ C.C. Dockery
----------------------------- ---------------------------
Carl R. Carstens, Chairman C.C. Dockery, President
Board of Trustees Summit Consulting, Inc.
-3-
<PAGE> 1
EXHIBIT 10.11
ADMINISTRATOR'S CONTRACT
THIS Agreement is entered into on this 9th day of August, 1995 by and
between KENTUCKY RETAIL FEDERATION SELF INSURERS FUND ("KRFSIF") and SUMMIT
CONSULTING, INC.
("Summit").
WHEREAS, KRFSIF is a self insurers fund organized and established
pursuant to the laws of the State of Kentucky for the purpose of providing
worker's compensation coverage to KENTUCKY RETAIL FEDERATION, INC. members; and
WHEREAS, KRFSIF desires to engage Summit as its Administrator to manage
said fund in accordance with applicable law; and
WHEREAS, Summit is engaged in the business of administering self
insurers funds and agrees to serve as Administrator of KRFSIF and provide
administrative services to the extent referenced below;
NOW, THEREFORE, and in consideration of the mutual covenants herein
contained, Summit and KRFSIF agree as follows.
1. During the term of this Agreement, Summit wilt:
a. Manage the affairs of KRFSIF in accordance with
the policies adopted by the trustees of KRFSIF.
b. Advise KRFSIF's trustees on policy matters
pertaining to self insurance.
c. Put forth its best effort to ensure that the
provisions of contracts by KRFSIF's trustees with third
parties are met.
d. Provide underwriting for, set up and issue, and
endorse policies providing insurance coverages as required by
KRFSIF to carry out the business of KRFSIF.
e. Submit bills relating to the policies issued by
KRFSIF to its members and secure premium audit services and
related filings regarding said audits and make reasonable
efforts to collect the resulting sums due KRFSIF.
<PAGE> 2
f. Maintain the books and records of KRFSIF at
Summit's place of business, which location shall be designated
as the address of KRFSIF except as otherwise may be required
by the State of Kentucky.
g. Secure all necessary actuarial services as may be
required to manage the affairs of KRFSIF at the expense of
KRFSIF.
h. Secure if requested, at the expense of KRFSIF, an
annual audit of KRFSIF prepared by a certified public
accountant.
i. Secure, at the expense of KRFSIF, all surety bonds
which may be required by the State of Kentucky relating to the
operation of KRFSIF.
j. Receive all funds due KRFSIF and pay all expenses
incurred by it and account for such to the Board of Trustees
of KRFSIF.
k. Invest all funds of KRFSIF in a manner authorized
by the State of Kentucky and approved by the Board of Trustees
of KRFSIF.
l. Put forth a reasonable marketing effort on behalf
of KRFSIF, including the payment of commissions to producing
agents, said commissions not to exceed six percent (6%) of
premium. Additional commissions, if any, are to be at the
expense of KRFSIF, or as mutually agreed to by the parties.
m. Prepare filings as may be required of KRFSIF by
the State of Kentucky.
n. Assist in securing all specific and aggregate
insurance coverages as required by the State of Kentucky
regarding the operation of KRFSIF, the cost of which Summit
shall bear to the extent same does not exceed, for any given
policy period, that premium which would have been generated by
applying the percentage of earned normal premium required as
of July 1, 1995.
o. Provide claims, risk management and loss control
services as may be required to competently administer KRFSIF,
it being understood and agreed that such
-2-
<PAGE> 3
services may be sub-contracted by Summit to qualified
persons or organizations at Summit's expense. In this regard,
Summit, or its sub-contractor will:
(i) Receive and accept notice of all
worker's compensation and employer's liability claims
as reported by the members of KRFSIF (including those
claims reported to the preceding administrator), and
service, investigate and adjust such reported claims
for a period not to exceed twenty-four (24) months
from the date of termination at this Agreement. In
the event KRFSIF desires such services beyond the
referenced twenty-four (24) month period, such shall
be subject to further negotiation by the parties.
(ii) Issue checks on a special revolving
account to be funded and provided by KRFSIF for
payment of claims against KRFSIF if, in the judgment
of Summit, said claims are covered by the Kentucky
Worker's Compensation and Employer's Liability Laws,
including compensation to an injured party, medical
payments, rehabilitative costs, and properly
allocated claims expenses as defined below. Expenses
of employees of Summit, or its subcontractor, in
carrying out this Agreement, shall none be considered
as a claim expense for the purpose of this paragraph.
(iii) Allocate to expenses chargeable as
"claims expense" the following:
A) fees for service at process;
B) fees to attorneys;
C) the costs of services of
undercover agents and/or detectives.
D) the cost of employing expert
witnesses for the purpose of preparing maps,
photographs, diagrams, chemical or physical
analyses and testimony in regard thereto;
-3-
<PAGE> 4
E) The costs of transcripts of
testimony, depositions, recorded statements
and court reporters, as might be necessary
to carry out the obligations of this
Agreement;
F) Rehabilitative services for
injured employees; and
G) Direct cost pertaining to the
defense of a particular claim or to the
protection of subrogation rights of KRFSIF.
H) Any fees for an approved managed
care or health care arrangements.
(iv) If necessary, defend worker's
compensation and employer's liability claim against
members of KRFSIF, in the name of or on behalf of
KRFSIF, in any suit or other proceedings which may at
the time be instituted against any member of KRFSIF
as a result of injuries or death which are within the
purview of the laws of Kentucky, even though such
suits or other proceedings contain allegations or
demands which may be groundless, false or fraudulent.
All costs and expenses in providing such services,
including legal and expert witness fees, shall be
paid through an account provided for that purpose by
KRFSIF, upon which amount Summit, or its
subcontractor, shall have the authority to make
payment of just claims and bills as necessary.
(v) Keep and maintain at all times complete
records of all claims and related payments, which
records shall be opened at all reasonable times for
inspection and copying by KRFSIF, its agents,
servants and employees.
(vi) Provide office space, personnel
experienced in worker's compensation claims,
equipment and supplies, as necessary to carry out the
terms of this Agreement.
-4-
<PAGE> 5
(vii) Provide a claims kit to all new
members of KRFSIF within ten (10) working days of
receiving notice of such new member, said kit to
contain such forms and data as recommended and
authorized by Summit.
(viii) Provide a monthly loss report and
such other reports as the State of Kentucky shall
require, including statistical data as may be
reasonably required by KRFSIF, as such relates to
claims handling.
(ix) Keep confidential the directory of
members of KRFSIF.
(x) Select reasonable and competent legal
counsel as regards all claims matters and oversee
legal proceedings pertaining to any claim which may
be litigated an behalf of KRFSIF.
2. In exchange for the services referenced above, KRFSIF will pay to
Summit an amount equal to thirty-one percent (31%) of earned normal premium
relating to the operation of KRFSIF, said fee to be computed on a monthly basis
and paid to Summit by the 15th of the following month. In this regard, earned
normal premium is defined as earned standard premium, less allowable discounts,
but in no event shall the discount exceed fifteen percent (15%) of the
cumulative standard premiums of all members of KRFSIF. Changes in the earned
normal premium resulting from payroll audits will be taken into consideration
end adjustments necessary will be made on a quarterly basis.
3. The initial term of this Agreement shall be for five (5) years
beginning on the date referenced above. The Agreement will automatically be
renewed under the same terms and conditions for an additional five (5) years
unless written notice of termination is provided by Summit to KRFSIF at least
180 days prior to the expiration at the initial term of the Agreement.
4. Notwithstanding the preceding paragraph of this Agreement, either
party hereto may terminate the Agreement with proper notice to the other for
just cause. Just cause for the purpose of this provision of the Agreement
consists of any of the following:
A. The filing of a Bankruptcy Petition by either
party to this Agreement.
B. Fraud perpetrated by one party to this Agreement
upon the other.
-5-
<PAGE> 6
C. Failure of a party to this Agreement to perform
contractual duties as outlined herein, subject, however, to
the party seeking to terminate the Agreement providing written
notice of its intent to do so to the other party, said notice
detailing the duties it contends the other party has failed to
perform. Subsequent to receiving said notice, the recipient
shall have ninety (90) days thereafter to correct the noted
deficiencies and, in the event said corrections are made
within that time, termination will not be available pursuant
to this provision.
5. In the event of a dispute between the parties to this Agreement, the
parties hereto agree that prior to either initiating legal proceedings that each
will in good faith seek to resolve said dispute through mediation by a mediator
to be agreed upon. In the event the dispute is not resolved through mediation
and litigation results therefrom, the parties agree that venue of such action
shall be Polk County, Florida and that all costs of such litigation, including
attorneys' fees and court costs both in the lower court and on appeal shall be
reimbursed and taxable against the non-prevailing party to the litigation.
6. This Agreement may not be varied or amended except by an instrument
in writing executed by both parties.
7. The provisions of this Agreement shall be governed by the laws of
the State of Florida.
8. This Agreement is non-assignable by either party.
9. All notices provided for under this Agreement shall be delivered
either personally or by receipted mail. The address for purposes of giving such
notice to KRFSIF is: 512 Capitol Avenue, Frankfurt, Kentucky 40601; and to
Summit is: Post Office Drawer 988, Lakeland, Florida 33802-0988.
IN WITNESS WHEREOF. the parties have executed this Administrator's
Contract on the date set forth above.
-6-
<PAGE> 7
KENTUCKY RETAIL FEDERATION
SELF INSURERS FUND
By: /s/
-------------------------------
Chairman - Board of Trustees
In the presence of:
/s/
- ----------------------------------
/s/
- ----------------------------------
SUMMIT CONSULTING, INC.
By: /s/ William B. Bull
-------------------------------
William B. Bull, President
In the presence of:
/s/
- ----------------------------------
/s/
- ----------------------------------
-7-
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1993 1993 1994 1995 1996 1995 1996
------ ------ ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL
Net income from continuing operations........... $6,844 $2,953 $ 8,885 $19,163 $ 382 $ 5,374 $ 3,651
Income tax (benefit)............................ 462 (208) 4,534 10,990 (505) 2,390 2,400
------ ------ ------- ------- ------- ------- -------
Income before income taxes...................... $7,306 $2,745 $13,419 $30,153 $ (123) $ 7,764 $ 6,051
====== ====== ======= ======= ======= ======= =======
Fixed charges
Interest expense.............................. $ 847 $ -- $ 1,831
Estimated interest factor on operating
leases..................................... 88 -- 195
------ ------ ------- ------- ------- ------- -------
Total fixed charges........................ $ -- $ -- $ -- $ -- $ 935 $ -- $ 2,026
====== ====== ======= ======= ======= ======= =======
Earnings:
Income before income taxes.................... $7,306 $2,745 $13,419 $30,153 $ (123) $ 7,764 $ 6,051
Fixed charges................................. -- -- -- -- 935 -- 2,026
------ ------ ------- ------- ------- ------- -------
Total earnings............................. $7,306 $2,745 $13,419 $30,153 $ 812 $ 7,764 $ 8,077
====== ====== ======= ======= ======= ======= =======
Ratio of earnings to fixed charges(a)(b)........ -- -- -- -- .87 -- 3.99
PRO FORMA -- GIVING PRO FORMA EFFECT ONLY TO
PREFERRED STOCK DIVIDENDS(C)
Net income from continuing operations........... $ 382 $ 5,374 $ 3,651
Income tax (benefit)............................ (505) 2,390 2,400
------- ------- -------
Income before income taxes...................... $ (123) $ 7,764 $ 6,051
======= ======= =======
Fixed charges
Interest expense.............................. $ 847 $ -- $ 1,831
Estimated interest factor on operating
leases..................................... 88 -- 195
Dividends on preferred stock.................... 656 328 328
Income tax impact on nondeductibility of
preferred stock dividends.................. 402 201 201
------- ------- -------
Dividends on preferred stock, grossed up for
tax impact of nondeductibility............. 1,058 529 529
------- ------- -------
Total fixed charges and preferred stock
dividends................................ 1,993 529 2,555
======= ======= =======
Earnings:
Income before income taxes.................... $ (123) $ 7,764 $ 6,051
Fixed charges................................. 935 -0- 2,026
------- ------- -------
Total earnings............................. 812 7,764 8,077
======= ======= =======
Ratio of earnings to fixed charges(a)(e)........ .41 14.68 3.16
</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 SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
--------- -----------------
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........... $ 3,645 $ 7,791 $ 5,037
Income tax...................................... 1,484 3,872 3,201
------- ------- -------
Income before income taxes...................... $ 5,129 $11,663 $ 8,238
======= ======= =======
Fixed charges
Interest expense.............................. $ 3,978 $ 2,029 $ 1,831
Estimated interest factor on operating
leases..................................... 436 225 195
Dividends on preferred stock.................... 656 328 328
Income tax impact of nondeductibility of
preferred stock dividends.................. 402 201 201
------- ------- -------
Dividends on preferred stock, grossed up for
tax impact of nondeductibility............. 1,058 529 529
------- ------- -------
Total fixed charges and preferred
stock dividends..................... $ 5,472 $ 2,783 $ 2,555
======= ======= =======
Earnings:
Income before income taxes.................... $ 5,129 $11,663 $ 8,238
Fixed charges................................. 4,414 2,254 2,026
------- ------- -------
Total earnings........................ $ 9,543 $13,917 $10,204
======= ======= =======
Ratio of earnings to fixed charges(a)........... 1.74 5.00 4.02
</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 six months ended September 30, 1995 assume
the Acquisition and Conversion occurred on April 1, 1995. The pro forma
information for the six months ended September 30, 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 1,639,866 shares of Series A Preferred Stock.
ERNST & YOUNG LLP
Jacksonville, Florida
January 7, 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
January 7, 1997
