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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
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[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From April 1, 1997 to December 31, 1997
COMMISSION FILE NUMBER 0-21933
SUMMIT HOLDING SOUTHEAST, INC.
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 59-3409855
(State of Incorporation) (I.R.S. Employer
Identification Number)
2310 A-Z PARK ROAD, LAKELAND, FLORIDA 33801
(Address of Principal Executive Offices, including Zip Code)
(941) 665-6060
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
SERIES A PREFERRED STOCK, $10.00 PAR VALUE
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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The aggregate market value of the Registrant's outstanding Common Stock held by
non-affiliates of the Registrant on March 26, 1998 was approximately
$128,265,000. There were 5,791,100 shares of Common Stock outstanding as of
March 26, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
NONE
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SUMMIT HOLDING SOUTHEAST, INC.
TRANSITION REPORT ON FORM 10-K FOR THE
TRANSITION PERIOD FROM APRIL 1, 1997 TO DECEMBER 31, 1997
TABLE OF CONTENTS
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Item Page
Number Number
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PART I
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1. Business......................................................................................... 4
2. Properties....................................................................................... 27
3. Legal Proceedings................................................................................ 27
4. Submission of Matters to a Vote of Security Holders.............................................. 28
PART II
5. Market for Registrant's Common Equity and Related Shareholder Matters............................ 29
6. Selected Financial Data.......................................................................... 31
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 33
7A. Quantitative and Qualitative Disclosures About Market Risk....................................... 45
8. Financial Statements and Supplementary Data...................................................... 45
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure....................................................................................... 46
PART III
10. Directors and Executive Officers of the Registrant............................................... 46
11. Executive Compensation........................................................................... 47
12. Security Ownership of Certain Beneficial Owners and Management................................... 47
13. Certain Relationships and Related Transactions................................................... 47
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................. 47
SIGNATURES......................................................... 52
INDEX OF FINANCIAL STATEMENTS ..................................... F-1
INDEX OF FINANCIAL STATEMENT SCHEDULES............................. F-1
</TABLE>
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PART I
ITEM 1. BUSINESS
OVERVIEW
Please carefully consider and evaluate all of the information provided
in this report. In addition to historical information, this report includes
forward-looking statements and information that are based on management's
beliefs, plans, expectations and assumptions and on information currently
available to management. The words "may," "should," "expect," "anticipate,"
"intend," "plan," "continue," "believe," "seek," "estimate" and similar
expressions used in this report that do not relate to historical facts are
intended to identify forward-looking statements. The forward-looking statements
in this report are not guarantees of future performance and involve certain
risks, uncertainties and assumptions, including but not limited to those
described in "Item 1. BUSINESS" and "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." Many of such factors
are beyond the Company's ability to control or predict. As a result, the
Company's future actions, financial condition, results of operations and stock
price could differ materially from those expressed in any forward-looking
statements made by the Company, and undue reliance should not be placed on
forward-looking statements. The Company does not intend to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Summit Holding Southeast, Inc. ("Summit" or, together with its
subsidiaries unless the context requires otherwise, the "Company") provides a
variety of managed care workers' compensation products and administrative
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 three self-insurance funds, which are entities formed to provide
workers' compensation coverage for self-insured employer groups on a pooled
basis (the "Funds"), and a non-affiliated mutual insurance company (together
with the Funds, the "Non-affiliated Entities"), 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 Non-affiliated Entities and the Insurance
Subsidiaries, including sales and agency relations, marketing, underwriting,
claims administration, loss control, policy administration and financial
management. 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 Non-affiliated Entities.
The Insurance Subsidiaries, which consist of Bridgefield Employers
Insurance Company ("Bridgefield") (formerly, Employers Self Insurers Fund or
"ESIF") and Bridgefield Casualty Insurance Company ("Bridgefield Casualty"),
underwrite and assume the underwriting risk with respect to workers'
compensation insurance policies for Florida employers of all sizes, primarily in
the construction, manufacturing, wholesale and retail and service industries. As
of December 31, 1997, in the aggregate, the Company's insurance products and
administrative services were provided to approximately 17,400 employers
representing approximately $198 million in premiums, including approximately $80
million in premiums attributable to the Non-affiliated Entities and $118 million
in premiums attributable to the Insurance Subsidiaries.
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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
may 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 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,
Bridgefield (formerly ESIF), 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 and became the administrator of the
Funds located in Florida and Louisiana, and in 1995, SCI became the
administrator of a Fund located in Kentucky. None of the Non-affiliated Entities
are related to the Company, except that certain of the directors of Summit are
trustees of certain of the Non-affiliated Entities. See "Item 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS." Until January 16, 1996, Bridgefield was
also unrelated to SCI. Effective on that date, Bridgefield acquired SCI, its
holding company, Summit Holding Corporation ("SHC"), and all of their affiliates
(the "Acquisition").
Summit was formed in November 1996 in connection with the conversion of
ESIF (the "Conversion") from a Florida group self-insurance fund to a Florida
stock insurance company, which is now Bridgefield. Pursuant to ESIF's Amended
Plan of Conversion and Recapitalization, which was approved by the policyholders
or members of ESIF, all of the membership interests in ESIF were extinguished
and, in exchange for such membership interests, Summit issued to each eligible
policyholder shares of Summit's Series A Preferred Stock and subscription rights
to purchase shares of Summit's Common Stock. On the date of the Conversion,
Summit issued a total of 1,639,701 shares of its Series A Preferred Stock to
eligible policyholders and sold 5,000,000 shares of its Common Stock to
subscribing eligible policyholders, to directors, officers and certain other
management employees of the Company (the "Management Group") and to purchasers
in Summit's initial public offering. Simultaneously, Bridgefield issued all of
its capital stock to Summit and thereby became a wholly owned subsidiary of
Summit. At the same time, in connection with a recapitalization to simplify the
Company's corporate structure, all of the capital stock of SHC, which had been
owned by ESIF and one of its subsidiaries prior to the Conversion, was acquired
by Summit, and SHC also became a wholly owned subsidiary of Summit. As a result,
Summit conducts the business of the Insurance Subsidiaries through Bridgefield
and conducts the business of the Administrative Subsidiaries through SHC. The
Conversion and related recapitalization became effective on May 28, 1997.
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
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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.
The Florida workers' compensation market accounted for more than 90% of
the Company's total revenue for the period from April 1, 1997 to December 31,
1997. Florida is the fourth largest state in terms of population behind
California, New York and Texas and, according to the Department of Insurance of
the State of Florida (the "Florida DOI"), the Florida workers' compensation
market approximated $3.4 billion in premiums in 1996. 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. Because of the
heavy concentration of the Company's business in the State of Florida, the
Company may be adversely affected by economic downturns, significant
unemployment, regulatory developments and other conditions that may occur from
time to time in Florida and which may not affect the Company's more
geographically diversified competitors.
MANAGED CARE
Over the past eight years, the Company has implemented a managed care
approach to workers' compensation. The Company's managed care strategy reduces
costs through loss prevention, early intervention and proactive management of
claims. The Company's focus on loss prevention includes helping employers
establish workplace safety programs, making on-site visits to the workplace and
coordinating among the Company's underwriting, loss control, claims management
and sales and marketing groups. Once a claim occurs, the Company's early
intervention procedures enable the Company to identify injuries that have the
potential of resulting in significant expenses and controlling these expenses
from the outset. The Company generally uses a three-point contact system with
the goal of contacting each of the injured employee, the employer and the health
care provider within 24 hours after notification of an initial claim. The
Company's SMART(TM) (Summit Medical Alert Reaction Team) coordinates a medical
claim from inception to completion in order to provide quality health care to
the injured employee so that he or she may return to work as quickly as
possible. The Company believes returning an employee to the job quickly is an
effective means of controlling indemnity payments for lost wages, typically the
largest component of workers' compensation costs as well as medical expenses.
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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. 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 a substantial reduction in the amount the Company pays for medical
bills submitted.
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 Non-affiliated Entities 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 150 claims adjusting personnel based at the Company's headquarters
and 15 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 Non-affiliated Entities, 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 one of the Non-affiliated Entities, or for
issuance of a policy, those employers who fit the Company's underwriting
criteria. Prior to recommending that the client or the Insurance Subsidiaries
accept a risk, the Company's underwriters review the employer's prior loss
experience and safety record, premium payment and credit history,
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employment classifications and physical operation. As part of the Company's
ongoing loss control efforts, each employer undergoes a periodic review (not
less than annually) 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 employers 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 review the employer's operations with the
respective employer 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. The Company's products and the Non-affiliated
Entities' memberships are sold through more than 1,000 independent insurance
agencies. As of December 31, 1997, the Company's top ten independent agencies
accounted for approximately 18% of the Company's direct in-force premiums, with
the top independent insurance agency accounting for approximately 3%. These
agencies offer and sell competitors' products, as well as the Company's
products. As a result, the Company's business depends in part on the marketing
efforts of these agencies and on the Company's ability to offer workers'
compensation insurance products and services that meet the requirements of these
agencies and their customers. In addition, if the Company expands into
additional states, it must establish a network of independent agencies in such
states if it is to successfully market its products. Failure of independent
insurance agencies to market the Company's products and services successfully
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's sales and agency relations department and telemarketing
department work with the more than 1,000 independent insurance agencies that
sell the Company's products. 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.
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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 Non-affiliated
Entities 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 Non-affiliated Entities member and their employees with timely
and quality service. The Company maintains a team 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 team of approximately 20 individuals
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
are accurately reflected in the premium amounts charged for coverage. The field
auditors generally conduct a premium audit for every insured on an annual basis.
Primary Customers. The Company's primary customers for its
administrative services are its own Insurance Subsidiaries and the four
Non-affiliated Entities, including the Florida Retail Federation Self Insurers
Fund ("FRF"), Louisiana Employers Mutual Insurance Company ("LEMIC"), formerly
known as the Louisiana Employers Safety Association Self Insurers Fund ("LESA"),
the Louisiana Retailers Association Self Insurers Fund ("LRA"), and the Kentucky
Retail Federation Self Insurers Fund ("KRF"). 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. Each of the
Non-affiliated Entities 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 of the Non-affiliated Entities has a board of
trustees, but no officers or employees, and the board of trustees of each of the
Non-affiliated Entities has contracted with SCI to perform most aspects of the
daily operations of such Non-affiliated Entities.
Each of the Non-affiliated Entities 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 respective Non-affiliated Entity. 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 Non-affiliated Entities 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 Non-affiliated Entities . For these
reasons and because the Non-affiliated Entities 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 Non-affiliated Entities to
cancel their contracts with the Company or move the business to a new
administrator. The administrator's agreement between the Company and LESA was
replaced with a managing general agent agreement, pursuant to which SCI
continues to manage the day-to-day operations of LEMIC.
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Annual administrative fee revenues are generally a contractually agreed
upon percentage of each Non-affiliated Entity'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.
Administrative fee revenue from the Non-affiliated Entities for the nine months
ended December 31, 1997 was approximately $22.8 million.
The following describes certain information about each of the four
Non-affiliated Entities:
Florida Retail Federation Self Insurers Fund. FRF was
established in 1979 as a workers' compensation self-insurance fund targeted
specifically to retailers, service providers, wholesalers and retail-related
businesses in Florida. As of December 31, 1997, FRF had approximately 6,900
member employers and annual premiums in excess of $62 million. FRF memberships
renew each year on January 1.
Louisiana Employers Mutual Insurance Company. LEMIC, through
its predecessor LESA, was established in 1982 and currently provides coverage to
over 700 member employers in Louisiana. As of December 31, 1997, LEMIC had
annual premiums of approximately $9 million. On January 1, 1998 LESA completed a
conversion from a group self-insurance fund to LEMIC, a non-assessable mutual
insurance company.
Louisiana Retailers Association Self Insurers Fund. LRA was
established in 1980 as a workers' compensation self-insurance fund targeting
specifically wholesalers and retail-related businesses in Louisiana. As of
December 31, 1997, LRA had over 1,100 retail member employers and annual
premiums of approximately $6 million. LRA memberships renew each year on July 1.
Kentucky Retail Federation Self Insurers Fund. KRF is a
workers' compensation self-insurance fund for selected Kentucky retail
businesses, and SCI assumed administration of KRF in August 1995. As of December
31, 1997, KRF had over 1,400 members and annual premiums of approximately $3
million. KRF memberships renew each year on January 1.
INSURANCE OPERATIONS.
Bridgefield has maintained a relatively steady risk distribution of
business groups. A breakdown of all business segments is shown below:
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BRIDGEFIELD'S RISK DISTRIBUTION
AS OF DECEMBER 31, 1997
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APPROXIMATE % OF TOTAL
INDUSTRY PREMIUMS WRITTEN
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Construction............................................................................ 52%
Manufacturing........................................................................... 13%
Wholesale and retail.................................................................... 11%
Service................................................................................. 13%
Transportation.......................................................................... 5%
Agriculture............................................................................. 6%
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Total 100%
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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 December 31, 1997, is a guaranteed cost
contract, in which the premium for each employer is set in advance and varies
based upon changes in the client's operations, payroll and safety and drug-free
workplace programs. 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 collected. At the
fiscal year ended March 31, 1997 and for the period from April 1, 1997 to
December 31, 1997, the Company accrued retrospective premium refund amounts of
$11.4 million and $10.7 million, respectively. Retrospective rated policies
accounted for 30%, 31% and 30%, respectively, of total premiums during the
fiscal years ended March 31, 1996 and 1997 and during the period from April 1,
1997 to December 31, 1997.
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.
Bridgefield currently maintains specific excess of loss policies
("Excess Reinsurance") with several reinsurers, under which the reinsurers have
agreed to pay claims and claims expenses over
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a specific dollar amount per occurrence. Bridgefield currently maintains Excess
Reinsurance agreements with John Hancock Mutual Life Insurance Company, Lincoln
National Life Insurance Company, Republic Western Mutual Insurance Company and
National Union Fire Insurance Company, and policies providing coverage for prior
years with several other reinsurers, pursuant to which each of such reinsurers
agrees to pay claims and expenses above a certain amount and up to a specified
limit per claim. The aggregate effect of such agreements is that claims and
claims expenses in excess of $50,000 per claim and up to the statutory amount
per claim will be paid by one or more of such reinsurers in accordance with the
terms of such agreements, subject to certain deductibles.
Further, Bridgefield has entered into Quota Share Reinsurance
agreements, effective April 1, 1997, with American Re-Insurance Company ("Am
Re"), St. Paul Fire and Marine Insurance Co., Constitution Reinsurance Corp. and
Transatlantic Reinsurance Co. under which Bridgefield has ceded to such
reinsurers, in the various proportions taken by each of them, an aggregate of
75% of the net premiums on workers' compensation policies earned during such
period, and such insurers, in the respective proportions taken by each of them,
have assumed that same percentage of risks under such policies. The portions
taken by each of such reinsurers is as follows: Am Re--35%; St. Paul Fire and
Marine Insurance Co.--15%; Constitution Reinsurance Corporation--20%; and
Transatlantic Reinsurance Company-5%.
Bridgefield Casualty has an Excess Reinsurance agreement with John
Hancock Mutual Life Insurance Company and Continental Casualty Company under
which such reinsurers have agreed to pay claims and claims expenses up to
statutory limits per claim, to the extent each claim exceeds $50,000. In
addition, Bridgefield Casualty has a Quota Share Reinsurance agreement in effect
with Am Re under which Bridgefield Casualty cedes to Am Re 80% of all earned
workers' compensation premiums and Am Re assumes that same percentage of risks.
All of the reinsurers that are party to the Excess Reinsurance
agreements or the Quota Share Reinsurance agreements are rated A or better by AM
Best Company ("A.M. Best"). Nevertheless, any failure on the part of the
Company's reinsurers, as well as any inability of the Company 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.
Certain detailed information regarding the Company's total reinsurance
recoverable is set forth in Note 5 of Notes to Consolidated Financial Statements
contained in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
Under the terms of its administrative services contracts, the Company
advises the Non-affiliated Entities regarding their reinsurance needs and places
such reinsurance. The Company currently has placed Excess Reinsurance on behalf
of each of the Non-affiliated Entities. The Company pays the Non-affiliated
Entities' reinsurance premiums out of the Company's administrative fee revenues.
The Company brokers all of its reinsurance and the reinsurance
purchased for the Non-affiliated Entities through a wholly owned reinsurance
agency, which employs one agent. The Company receives a brokerage fee from the
reinsurers.
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The Company has not experienced any material difficulties in collecting
reinsurance recoverables from any of its reinsurers, including, without
limitation, Crossroads Insurance Company, Ltd. ("Crossroads") and Lloyds of
London. However, no assurance can be given as to the future ability of any of
the Company's reinsurers to meet their obligations. In recent years, Lloyds of
London has reported substantial aggregate losses which have had adverse effects
on it in general and on the underwriting capacity of its syndicates in
particular. These losses and other adverse developments could affect the ability
of certain Lloyds of London syndicates to continue to trade and the ability of
insureds to continue to place business with particular syndicates. To the
Company's knowledge, the Lloyds of London syndicates with which the Company has
contractual relationships have not experienced any inability to pay their
reinsurance obligations as and when due. However, it is not possible for the
Company to predict what effects the circumstances described above may have on
Lloyds of London and the Company's contractual relationship with Lloyds of
London syndicates in future years.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The Insurance Subsidiaries are required to maintain reserves to cover
their estimated liabilities for incurred losses and loss adjustment (claim
settlement) expenses ("LAE") with regard to reported and unreported claims. Such
loss reserves are estimates established by management based upon, among other
factors, (i) results of actuarial reviews which incorporate the Company's
experience with similar cases, estimates of future claim trends, and historical
trends such as recurring loss payment and reporting patterns, claim closures and
product mixes; (ii) facts known to the Company; and (iii) regulatory
requirements. These reserves are continually reviewed and, as adjustments become
necessary, such adjustments are included in the results of current operations.
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. There can be no assurance that there will not be deficiencies or
adjustments in the future, resulting from numerous factors including, for
example, any instability in the regulatory environment and loss data
inadequacies. 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.
The following table shows changes in the historical loss and LAE
reserves for ESIF for the nine fiscal years beginning with the year ended March
31, 1989 and for the nine-month period ended December 31, 1997. The top line
shows the reserves recorded at the end of each period stated. Such amount
represents an estimate of unpaid losses and LAE occurring in that period as well
as future payments on claims occurring in prior periods. The upper portion of
the table (cumulative paid) presents the cumulative amounts paid during
subsequent years on those losses for which reserves were carried as of each
specific year. The lower portion (reserves re-estimated) shows the re-estimated
amounts of the previously recorded reserves based on experience as of the end of
each succeeding year. The re-estimate changes as more information
-13-
<PAGE> 14
becomes known about the actual losses for which the initial reserve was carried.
An adjustment to the carrying value of unpaid losses for a prior year will also
be reflected in the adjustments for each subsequent year. For example, an
adjustment made in the fiscal year ended March 31, 1996 for loss reserves in the
fiscal year ended March 31, 1993 will be reflected in the re-estimated ultimate
net loss for each of the fiscal years ended March 31, 1993 through March 31,
1996. The cumulative redundancy (deficiency) line represents the cumulative
change in estimates since the initial reserves were established. It is equal to
the difference between the initial reserves and the latest re-estimated reserves
amount.
-14-
<PAGE> 15
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-------------------------------------------------------------------------
1989 1990 1991 1992 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Reserve for losses and
LAE at end of period .... $ 125,065 $ 169,004 $ 209,601 $ 169,474 $ 257,307
Cumulative paid as of
One year later ......... $ 57,482 $ 74,481 $ 88,815 $ 71,364 $ 73,839
Two years later ........ 100,883 133,064 138,546 118,326 122,411
Three years later ...... 135,490 160,896 170,259 149,424 149,175
Four years later ....... 146,825 176,483 190,179 165,628 163,261
Five years later ....... 151,683 185,759 199,556 175,079 174,668
Six years later ........ 154,668 189,948 205,762 183,712
Seven years later ...... 158,802 193,066 212,332
Eight years later ...... 161,815 196,925
Eight years, nine
months later ........... 165,672
Reserves re-estimated
as of end of year
One year later ......... $ 141,132 $ 184,334 $ 202,489 $ 233,631 $ 237,318
Two years later ........ 156,080 178,786 237,767 214,381 238,014
Three years later ...... 161,652 214,630 231,823 225,238 247,328
Four years later ....... 182,010 209,894 239,113 235,163 255,854
Five years later ....... 178,810 209,196 248,352 244,113 261,810
Six years later ........ 178,042 215,984 255,232 250,454
Seven years later ...... 184,986 219,629 261,432
Eight years later ...... 188,622 225,146
Eight years, nine
months later ........... 194,137
Cumulative redundancy
(deficiency)
Dollars ................ $ (69,072) $ (56,142) $ (51,831) $ (80,980) $ (4,503)
Percentage ............. -55.23% -33.22% -24.73% -47.78% -1.75%
<CAPTION>
NINE
MONTHS
ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------------------------------- ------------
1994 1995 1996 1997 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Reserve for losses and
LAE at end of period .... $ 274,102 $ 259,085 $ 277,995 $ 269,670 $ 235,557
Cumulative paid as of
One year later ......... $ 71,915 $ 64,882 $ 72,976 $ 55,585
Two years later ........ 114,097 102,227 97,681
Three years later ...... 136,646 129,815
Four years later ....... 153,422
Five years later .......
Six years later ........
Seven years later ......
Eight years later ......
Eight years, nine
months later ...........
Reserves re-estimated
as of end of year
One year later ......... $ 247,737 $ 267,885 $ 276,437 $ 268,828
Two years later ........ 257,002 271,738 275,190
Three years later ...... 264,364 271,962
Four years later ....... 266,077
Five years later .......
Six years later ........
Seven years later ......
Eight years later ......
Eight years, nine
months later ...........
Cumulative redundancy
(deficiency)
Dollars ................ $ 8,025 $ (12,877) $ 2,805 842
Percentage ............. 2.93% -4.97% 1.01% 0.31%
<CAPTION>
<S> <C> <C> <C> <C>
Net reserves .............................. $ 259,085 $ 277,995 $ 269,670 $ 235,557
Ceded reserves ............................ 108,306 109,637 89,074 111,511
--------- --------- --------- ---------
Gross reserves ............................ $ 367,391 $ 387,632 $ 358,744 $ 347,068
========= ========= ========= =========
Net reserves re-estimated ................. $ 271,962 $ 275,190 $ 268,828 $ --
Ceded reserves re-estimated ............... 91,248 90,691 86,453 --
--------- --------- --------- ---------
Gross reserves re-estimated ............... $ 363,210 $ 365,881 $ 355,281 $ --
========= ========= ========= =========
Gross cumulative redundancy (deficiency)
Dollars ................................ $ 4,181 $ 21,751 $ 3,463
Percentage ............................. 1.14% 5.61% 0.97%
</TABLE>
As seen in the above table, Bridgefield's reserve estimates for the
fiscal years ended March 31, 1993 and after demonstrate an improving loss and
LAE development. At March 31, 1997, the cumulative loss and LAE was a redundancy
of $0.8 million, or 0.3%.
-15-
<PAGE> 16
The following table contains summary reconciliations of the beginning
and ending insurance reserves, displayed individually for the years ended March
31, 1996 and 1997 and the nine months ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED DECEMBER 31,
-------------------------- ------------------------------
1996 1997 1996 1997
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Net reserves for losses
and LAE at beginning of
period $ 259,085 $ 277,995 $ 277,995 $ 269,670
Less: Recoverable from
Florida SDTF(1) (15,879) (20,060) (20,060) (20,979)
--------- --------- --------- ---------
Net reserves for losses
and LAE less SDTF
recoverable assets at
beginning of period 243,206 257,935 257,935 248,691
Add provision for claims
occurring in:
The current period 84,058 69,014 53,698 13,003
Prior period 10,786 (3,862) (3,462) (551)
--------- --------- --------- ---------
Incurred losses during
the current period 94,844 65,152 50,236 12,452
Deduct payments for claims
occurring in:
The current period 15,432 14,131 8,378 2,481
Prior period 64,683 60,265 48,137 46,938
--------- --------- --------- ---------
Claim payments during
the current period 80,115 74,396 56,515 49,419
Net reserves for losses
and LAE less SDTF
recoverable assets at
end of period 257,935 248,691 251,656 211,724
Add: Recoverable from
Florida SDTF(1) 20,060 20,979 21,138 23,833
--------- --------- --------- ---------
Net reserves for losses
and LAE at end of period 277,995 269,670 272,794 235,557
Add: Reinsurance recoverables
(exclusive of recoverables
on paid losses) 109,637 89,074 104,129 111,511
--------- --------- --------- ---------
Gross reserves for losses
and LAE at end of period
(GAAP basis) $ 387,632 $ 358,744 $ 376,923 $ 347,068
========= ========= ========= =========
</TABLE>
- ---------------
-16-
<PAGE> 17
(1) 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.
The change in the SDTF recoverable asset is included in incurred losses
in the Statement of Income.
A reconciliation of the loss and LAE reserves determined on the basis
of generally accepted accounting principles ("GAAP") with the reserves recorded
on the statutory basis financial statements provided to state regulatory
authorities is as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------- ------------
1996 1997 1996 1997
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
GAAP basis loss and LAE
reserves $ 387,632 $ 358,744 $ 376,923 $ 347,068
Reinsurance recoverables
included in GAAP loss
and LAE reserves (106,812) (86,338) (103,508) (124,266)
Adjustment for the effect
of computing GAAP basis
loss reserves using paid
losses gross of SDTF
recoveries (31,376) (25,965) (28,832) (27,523)
Discounting of indemnity
portion of permanent
disability claims 4,667 4,367 4,235 -0-
--------- --------- --------- ---------
Statutory basis loss and
LAE reserves $ 254,111 $ 250,808 $ 248,818 $ 195,279
========= ========= ========= =========
</TABLE>
The Company's GAAP basis balance sheet also includes the following
amounts related to the SDTF:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------- ------------
1996 1997 1996 1997
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Recoverable from SDTF $20,060 $20,979 $21,138 $23,833
Reinsurance recoverable
related to SDTF $11,781 $ 5,737 $ 8,445 $ 4,441
</TABLE>
-17-
<PAGE> 18
The recoverable from SDTF asset has been recorded based on
Bridgefield's historical collection experience and the amount of claims
identified as subject to SDTF recovery. The SDTF reinsurance recoverable was
calculated using loss and LAE reserves computed using paid losses gross of SDTF
recoveries and in consideration of expected recoveries from the SDTF. Certain of
the claims used in the determination of the SDTF recoverable are of an amount
which will pierce reinsurance layers, and the Company will pursue recovery of
such claims under the provisions of its reinsurance agreements. Subsequently, as
the Company remits the claims to the SDTF, and ultimately collects these claims
from SDTF, the Company will remit to the reinsurers their portion of the SDTF
recoveries. The aggregate recoverable from SDTF asset and the SDTF related
reinsurance recoverable, which approximates the amount of the increase in loss
reserves resulting from determining the GAAP basis loss reserves using paid loss
data gross of SDTF recoveries, represents management's best estimate of the
aggregate amounts that will be recovered.
The Company received $5.6 million from the SDTF for the fiscal year
ended March 31, 1996, $7.5 million for the fiscal year ended March 31, 1997 and
$3.5 million for the nine-month period ended December 31, 1997. In order to
quantify the amounts recoverable from the SDTF, which are management's best
estimates of the amounts that will be recovered, Bridgefield reviewed its claims
that have been identified as subject to SDTF recovery considering Bridgefield's
historical recovery experience on claims submitted to the SDTF. Bridgefield
believes it will be reimbursed over a number of years.
For additional information regarding the SDTF, see "--Regulation-
Special Disability Trust Fund."
INVESTMENT PORTFOLIO
In general, the Company's investment policy focuses on: (i) safety of
principal; (ii) timing of maturities to match assets and liabilities; (iii)
diversification; and (iv) regulatory compliance. 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 five years. This duration, when coupled with
the Company's cash and cash equivalents, short-term investments and equity
securities, approximates the historical claims liability duration of three
years. A secondary objective is to maximize after-tax total return, within the
constraints of the insurance regulations of the State of Florida (together with
all applicable regulations (the "Florida Insurance Code") and the quality and
allocation constraints of the Company's investment guidelines.
-18-
<PAGE> 19
The fair value basis of the Company's investment portfolio, including
short-term investments and cash and cash equivalents, is comprised as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1997
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agency bonds $ 55,246 25.5% $ 73,578 28.8%
Municipal bonds 83,317 38.5% 95,099 37.3%
Corporate debt securities 41,512 19.2% 47,098 18.5%
Other debt securities -- -- 5,453 2.1%
-------- ------ -------- -----
Total bonds 180,075 83.1% 221,228 86.7%
-------- ------ -------- -----
Preferred stocks 4,547 2.1% 3,006 1.2%
Common stocks 13,739 6.3% 18,685 7.3%
-------- ------ -------- -----
Total equity securities 18,286 8.4% 21,691 8.5%
-------- ------ -------- -----
Short-term investments 14,733 6.8% 6,537 2.6%
Cash and cash equivalents 3,578 1.7% 5,757 2.2%
-------- ------ -------- -----
Total portfolio $216,672 100.0% $255,213 100.0%
======== ====== ======== =====
</TABLE>
As of December 31, 1997, approximately 71% of the Company's investment
in bonds (fixed maturities) were rated "AA" or better by Standard & Poor's
("S&P") and approximately 93% were rated "A-" or better by S&P.
Shareholders' equity will continue to fluctuate in accordance with
market interest rates due to the effect of Statement of Financial Accounting
Standards ("SFAS") No. 115. In accordance with this Statement, the Company has
classified all of its investments in debt and equity securities as
"available-for-sale" and, as a result, unrealized gains and losses of such
securities are reported as a separate component of shareholders' equity, net of
applicable deferred income taxes. As of March 31, 1997 and December 31, 1997,
net unrealized investment gains reported in shareholders' equity was $0.5
million and $6.2 million, respectively, an increase of $5.7 million. This
increase was due primarily to the continued rise in the U.S. stock markets
during 1997.
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. The Insurance Subsidiaries do not offer
multi-line insurance products that are offered by some of such
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<PAGE> 20
competitors. In addition, 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
"--A.M. Best Rating" below.
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 or that any such rating 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. See
"--Competition" above.
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.
-20-
<PAGE> 21
The Company's business is subject to state-by-state regulation of
workers' compensation insurance and workers' compensation insurance management
services (which in some instances includes rate regulation and mandatory fee
schedules). 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
workers' compensation insurance companies, administrators or shareholders. 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. 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. 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 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 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.
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. 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.
-21-
<PAGE> 22
Unlike Florida, 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.
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. The Company currently meets 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." In addition, in connection with the
Conversion, 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. In connection with the Conversion, the Florida DOI
requires that all dividends proposed to be paid by the Insurance Subsidiaries be
approved in advance by the Florida DOI. However, 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
-22-
<PAGE> 23
capital available to Summit for debt service, expansion, dividend payments to
shareholders and other purposes.
The National Association of Insurance Commissioners ("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 the 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. In July 1997, the Florida
legislature adopted the provisions of the risk-based capital standards. The
Company exceeds 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 $5.7 million, $5.6 million, $7.5 million and $3.5 million for the
fiscal years ended March 31, 1995, 1996 and 1997 and for the nine months ended
December 31, 1997, respectively. The Company's SDTF assessments were
approximately $4.7 million, $5.6 million, $5.1 million and $4.1 million for the
fiscal years ended March 31, 1995, 1996 and 1997 and for the nine months ended
December 31, 1997, respectively. In addition, the Company's consolidated balance
sheet as of December 31, 1997 included an asset of approximately $23.8 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 has not prefunded its claims liability, and no reserves
currently exist to satisfy future claims. Under a recent enactment of the
Florida legislature, the SDTF law has been amended so that claims arising from
accidents occurring on or after January 1, 1998 will not be accepted for
reimbursement by the SDTF. The bill states the SDTF will be liable for
reimbursement for applicable injuries that occur prior to January 1, 1998 and
that assessments are to continue for funding purposes.
In addition, the Florida DOI participated with the Florida legislature
in the review of statutory accounting treatments of SDTF projected recoveries,
and with respect to how an insurer may include such estimated recoveries in its
admitted asset and loss reserve calculations in statutory financial statements.
Under the law referred to above, the anticipated SDTF recoveries that an insurer
can take into account when computing loss reserves in its statutory financial
-23-
<PAGE> 24
statements will be limited to recoveries for which a claim has been accepted by
the SDTF for payment. Credit for all other anticipated recoveries will be capped
at the total SDTF recovery amount used by the insurer in 1996, and this capped
amount will be phased out over a five-year period, commencing with statutory
financial statements filed in the year 2000 (20% per year reduction of 1996
capped amount).
While it is not possible to predict other legislative or regulatory
initiatives which might affect the SDTF, changes in the SDTF's operations or
funding which decrease the availability of recoveries or increase assessments
payable by the Company could have a material adverse effect on the Company's
business, financial condition or results of operations.
Subject to the enactment set forth above, the SDTF recoverable recorded
on the Company's balance sheet is the amount the Company expects to recover from
the SDTF based on eligible claims. The Company has a dedicated claims unit that
handles the tracking, submission and collection process with the SDTF. In the
event that there are adverse developments in SDTF collection experience, the
recorded recoverable balance will accordingly be adjusted.
With respect to collection patterns, the SDTF reviews reimbursement
requests on a claim by claim basis, with actual collection payments tied to the
paid loss development over a claim's life. The payments are not made ratably or
in any other predictable pattern. A prior actuarial review of the SDTF indicated
the average time frame for collection of a claim made to the SDTF is 6 to 8
years.
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 also is 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. 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
-24-
<PAGE> 25
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.
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.
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 employed approximately 424 full-time employees as of
December 31, 1997. Approximately 395 employees are based in Florida, while 25
are based in Louisiana and 4 in Kentucky.
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<PAGE> 26
ITEM 1(A). EXECUTIVE OFFICERS OF THE REGISTRANT.
The following sets forth certain biographical information regarding the
executive officers and certain key employees of the Company:
EXECUTIVE OFFICERS:
William B. Bull, age 49, 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
and Florida Group Risk Administrators Association. Mr. Bull's term as a director
of Summit expires at the 2000 Annual Meeting of Shareholders.
Russell L. Wall, age 54, 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 and financial management
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.
KEY EMPLOYEES:
Allen C. Bennett, age 48, 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, age 53, 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.
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<PAGE> 27
Timothy J. Ermatinger, age 49, 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 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, age 44, 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
Adjuster Board Certification Program in Florida.
ITEM 2. 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 2,000 square feet in
Lexington, Kentucky; and approximately 1,000 square feet in Ft. Lauderdale,
Florida.
ITEM 3. 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.
The Internal Revenue Service is currently conducting an audit of SHC.
The Company cannot predict the results of the audit, and no assurance can be
given that the results of the audit will not have a material adverse effect on
the Company's business, financial condition or results of operations.
-27-
<PAGE> 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of common shareholders of Summit Holding Southeast,
Inc. was held October 15, 1997, at which time the following matters were brought
before and voted upon by the shareholders.
1. The election of directors to serve until the year 2000 Annual Meeting
of shareholders. Duly elected were William B. Bull, John A. Gray and
Thomas S. Petcoff.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
5,139,481 0 5,300
</TABLE>
2. The appointment of the firm of Ernst & Young, LLP, independent public
accountants, as auditors of the company for the fiscal year ending
December 31, 1997 was ratified and approved.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
5,142,037 1,500 1,244
</TABLE>
-28-
<PAGE> 29
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
STOCK PRICE
Since the Company's initial public offering (at $11.00 per share) on
May 22, 1997, the Common Stock has traded on the Nasdaq National Market under
the symbol "SHSE." The following table sets forth for the periods indicated the
high and low sale prices per share of the Common Stock as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
1997 HIGH LOW
---- ---- ---
<S> <C> <C>
May 22 - June 30.............................................. $ 19.25 $12.75
July 1 - September 30......................................... $21.375 $16.50
October 1 - December 31....................................... $ 22.50 $15.00
</TABLE>
SHAREHOLDERS
As of March 26, 1998, the Company had approximately 1,300 beneficial
holders of the Common Stock. Of that total, 128 were shareholders of record.
DIVIDENDS
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
and other factors, including economic conditions, regulatory restrictions and
tax considerations.
Should Summit consider paying dividends on the Common Stock in the
future, the source of funds for payment of such dividends would be dividends
from the Insurance Subsidiaries and the Administrative Subsidiaries to Summit,
dependent on such subsidiaries' earnings. Summit currently expects to cause the
Insurance Subsidiaries to retain all of their earnings to provide capital for
their operations and business. In addition, under the Florida Insurance Code and
conditions imposed by the Florida DOI in connection with the Conversion, the
Insurance Subsidiaries may not be permitted to pay cash dividends to Summit
generally in excess of the lesser of 10% of surplus or net income exclusive of
realized capital gains, without prior approval of the Florida DOI. In addition,
if any shares of the Company's 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 "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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<PAGE> 30
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital
Resources" and "ITEM 1. BUSINESS--Regulation--Financial and Investment
Restrictions."
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 of 1933, as
amended, pursuant to Section 4(2) of the Securities Act of 1933, as amended, and
Regulation D thereunder. On the date of the Conversion, the seven shares were
redeemed by Summit for an amount equal to the original purchase price.
USE OF PROCEEDS FROM REGISTERED SECURITIES
On May 28, 1997, Summit completed the Conversion. As part of the
Conversion, Summit issued to each eligible policyholder or member of ESIF shares
of Summit's Series A Preferred Stock and subscription rights to purchase shares
of Summit's Common Stock in exchange for their membership interests in ESIF. On
the date of the Conversion, Summit issued a total of 1,639,701 shares of its
Series A Preferred Stock to such eligible policyholders and sold an aggregate of
5,000,000 shares of its Common Stock to subscribing eligible policyholders, to
the Management Group and to purchasers in Summit's initial public offering. The
aforementioned offerings were conducted pursuant to a registration statement
(Registration Number 333-16499) filed under the Securities Act of 1933, as
amended, and declared effective by the Securities and Exchange Commission on May
21, 1997. The initial public offering was underwritten by Raymond James &
Associates, Inc. and ABN AMRO Chicago Corporation, as managing underwriters.
After giving effect to the over-allotment option, an aggregate of 5,750,000
shares of Common Stock was sold for an aggregate of $63.3 million. In connection
with the Conversion, the Company incurred an aggregate of $4.0 million in
underwriting discounts and commissions and an additional $1.6 million in
additional expenses related to the issuance and distribution of the securities,
for an aggregate of $5.6 million in total expenses, which resulted in net
offering proceeds to the Company of $57.7 million. From the effective date of
such Conversion through December 31, 1997, the Company has used $9.3 million of
the net proceeds to repay indebtedness on a prior credit facility and $48.0
million as funding capital for Bridgefield, as required by the Florida
Department of Insurance. None of such payments were made to directors, officers,
persons owing 10% or more of any class of equity securities of the Company or
their affiliates.
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<PAGE> 31
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been taken from, or derived
from, the Company's consolidated financial statements, including the related
notes thereto. The Company's consolidated financial statements as of and for the
years ended March 31, 1996 and 1997, and as of and for the nine months ended
December 31, 1997, have been audited by Ernst & Young LLP, independent auditors,
whose report thereon appears elsewhere in this report. The consolidated
financial statements of ESIF (predecessor to Bridgefield) as of March 31, 1994
and 1995, and for the years then ended, have been audited by Brinton & Mendez,
certified public accountants. The selected financial data provided as of and for
the nine months ended December 31, 1996 is unaudited but in the opinion of
management contains 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.
-31-
<PAGE> 32
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------------------- ------------------------
1994 1995 1996(1) 1997 1996 1997
---- ---- ------- ---- ---- ----
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Premiums earned ............. $ 148,441 $ 128,489 $ 114,893 $ 97,321 $ 74,509 $ 19,532
Net investment income ....... 10,510 12,205 13,210 12,770 9,606 11,117
Administrative fees ......... -- -- 7,665 33,303 25,762 22,828
Realized investment gains .... -- -- 4,354 687 366 1,551
Other income ................. 121 206 692 568 229
--------- --------- --------- --------- --------- ---------
Total revenue ................ 158,951 140,815 140,328 144,773 110,811 55,257
--------- --------- --------- --------- --------- ---------
Losses and loss adjustment
expenses .................. 108,411 69,116 94,844 65,152 50,236 12,452
Other underwriting, general
and administrative
expenses .................. 37,121 41,546 43,657 60,675 45,837 24,765
Interest expense ............ -- -- 847 3,521 2,719 1,935
Amortization and
depreciation .............. 1,103 4,733 3,729 3,417
--------- --------- --------- --------- --------- ---------
Income (loss) from
continuing operations
before income taxes ....... 13,419 30,153 (123) 10,692 8,290 12,688
Income tax expense (benefit). 4,534 10,990 (505) 3,717 3,057 4,138
Loss from discontinued
operations ................ -- -- 197 1,250 1,250 --
Extraordinary charge for
conversion costs -- -- -- 1,485 785 --
--------- --------- --------- --------- --------- ---------
Net income ................... $ 8,885 $ 19,163 $ 185 $ 4,240 $ 3,198 $ 8,550
========= ========= ========= ========= ========= =========
Basic earnings per common
share .................... $ 1.43
Diluted earnings per common
share .................... $ 1.40
OTHER DATA:(2)
Net loss ratio(3) ........... 73.0% 53.8% 82.5% 66.9% 67.4% 63.8%
Expense ratio(4) ............ 25.0% 32.3% 34.1% 35.1% 33.4% 34.8%
Combined ratio(5) ........... 98.0% 86.1% 116.6% 102.0% 100.8% 98.6%
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------------------------------------------- -------------------------
1994 1995 1996(1) 1997 1996 1997
---- ---- ------- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and invested assets..... $201,688 $224,956 $220,266 $216,672 $225,319 $255,213
Premiums receivable.......... 71,520 50,391 38,093 42,397 39,828 63,077
Reinsurance recoverable...... 95,851 110,141 111,519 94,009 107,058 117,722
Recoverable from SDTF........ 9,929 15,879 20,060 20,979 21,138 23,833
Total assets................. 405,765 425,206 491,844 458,008 476,972 534,651
Loss and loss adjustment
expense reserves........... 368,000 367,391 387,632 358,744 376,923 347,068
Debt......................... -- -- 44,000 32,675 33,000 16,540
Total equity................. 2,480 20,065 23,154 26,416 27,378 98,334
</TABLE>
- ------------
-32-
<PAGE> 33
(1) Includes the Acquisition as of January 16, 1996.
(2) Ratio for Insurance Subsidiaries
(3) Net loss ratio is the ratio of losses and LAE 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.
ITEM 7. 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 "ITEM 6.
SELECTED FINANCIAL DATA," the Consolidated Financial Statements and the
accompanying Notes to the Consolidated Financial Statements included elsewhere
herein.
OVERVIEW
As of May 28, 1997, the successor entity to ESIF, as described below,
became a wholly owned subsidiary to the Company. On such date ESIF completed a
conversion from a group self-insurance fund to a stock property and casualty
insurance company. Concurrent with this conversion ESIF's name was changed to
Bridgefield Employers Insurance Company and Summit, a new holding company,
issued $16.4 million of preferred stock to the former policyholders or members
of ESIF for the extinguishment of their membership interests. At the same time,
in connection with a recapitalization of the Company's corporate structure, all
of the capital stock of Summit Holding Corporation ("SHC"), which had been owned
by ESIF and one of its subsidiaries prior to the conversion, was acquired by
Summit and SHC became a wholly subsidiary of Summit.
The conversion and recapitalization transactions described above are
considered to be similar to pooling of interests transactions. The historical
cost basis accounting of the predecessor companies has been retained and the
Company's financial statements have been presented using pooling of interests
basis accounting. The conversion and recapitalization transactions had no impact
upon previously reported net income of the consolidated entities.
The Company's managed care workers' compensation insurance operations
are comprised primarily of the Administrative Subsidiaries and the Insurance
Subsidiaries. The Company's income is generated principally from three sources:
fees earned from the management of the Non-affiliated Entities, 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.
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
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<PAGE> 34
Florida. 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 all 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.
Based in part upon the elimination of the managed care premium credit
(10%) and upon other rate-making factors, the Florida DOI ordered an 11.2%
overall workers' compensation insurance rate reduction, which applies to new and
renewal policies written on and after January 1, 1997.
The Insurance Subsidiaries have entered into certain Quota Share
Reinsurance agreements pursuant to which 75% of Bridgefield and 80% of
Bridgefield Casualty's net premiums have been ceded to the respective
reinsurers. While such reinsurance agreements have enabled the Insurance
Subsidiaries to underwrite a larger number of policies than they could otherwise
write, the ceding of a percentage of the premiums of such policies to the
reinsurers has resulted in lower premium income, as well as lower losses and
LAE, to the Company than in prior years. However, the Company has received a
ceding commission related to the Quota Share Reinsurance agreements which is
reflected as a reduction of operating expenses. Management does not currently
anticipate that the net income of the Company will be adversely effected by such
agreements.
Historically, ESIF was not operated for the purpose of accumulating
profits, but it retained a portion of its earnings and profits to avoid making
assessments against its members.
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<PAGE> 35
ESIF occasionally during its operating history paid distributions of profits to
its members, but it never made an assessment against its members. ESIF's
indemnity agreements indemnified the member employers against loss or liability
relating to workers' compensation insurance risks.
Prior to the Acquisition, ESIF and SHC were unaffiliated entities.
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. The discussion below
in "--Results of Operations" includes SHC from and after the date of the
Acquisition.
On August 20, 1997, the Board of Directors of Summit determined to
change the fiscal year end of Summit from March 31 to December 31.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997
REVENUE. Revenue was $110.8 million and $55.3 million for the nine
months ended December 31, 1996 and 1997, respectively. The revenues decreased
primarily due to the ceding of $67.9 million of premium in quota share
agreements. Set forth below is a discussion of the composition of revenue for
the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31
---------------------------------------------
1996 1997
---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
REVENUE:
Premiums earned $ 74,509 $ 19,532
Administrative fees 25,762 22,828
Net investment income 9,606 11,117
Realized investment gains 366 1,551
Other income 568 229
-------- --------
Total revenue $110,811 $ 55,257
======== ========
</TABLE>
Premiums Earned. Premiums earned during the nine months ended December
31, 1997 declined by $55.0 million, or 73.8%, from that of the nine-month period
ended December 31, 1996. This decline is attributable primarily to the 75% quota
share reinsurance agreement entered into by Bridgefield effective April 1, 1997.
During the nine months ended December 31,
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<PAGE> 36
1996 and 1997, the Company ceded $4.7 million and $67.9 million, respectively,
of earned premiums under reinsurance agreements. This increase in ceded premiums
of $63.2 million had a corresponding decreasing effect upon earned premiums of
the same amount. For the nine months ended December 31, 1996 and 1997, premiums
earned before the effect of ceded premiums were $79.2 million and $87.5 million,
respectively. This was an increase of $8.3 million or 10.5%
Premiums earned were also impacted by an 11.2% rate reduction and the
elimination of the 10% managed care credit which became effective January 1,
1997 for new and renewal policies. The net effect of these changes was a
decrease in premium rates of approximately 4.5%.
Administrative Fees. During the nine months ended December 31, 1997,
the Company's administrative fee income decreased $2.9 million, or 11.4%, from
that of the nine months ended December 31, 1996. This decline resulted from the
premiums of the administrative subsidiaries' non-affiliated clients, upon which
the Company's administrative fees are based, being adversely affected by both
the aforementioned 11.2% premium rate reduction and the increased competitive
environment within the self-insurance workers' compensation marketplace.
Net Investment Income. Net investment income increased $1.5 million, or
15.7%, to $11.1 million for the nine months ended December 31, 1997 compared to
$9.6 million for the same period in 1996. This increase was due to the increase
in investment assets generated by the public offering on May 22, 1997 which
provided net proceeds of approximately $57.8 million. The investment income
included $2.6 million and $3.3 million from the municipal bond portfolio for the
nine months ended December 31, 1996 and 1997, respectively.
Net Realized Investment Gains. Net realized investment gains increased
$1.2 million during the nine months ended December 31, 1997 compared to the
nine-month period ended December 31, 1996. For the nine months ended December
31, 1996 and 1997, the Company's proceeds on sales of fixed maturity and equity
investments were $67.2 million and $68.3 million, respectively. Though the
overall investment sales volume remained level, gains realized from the sale of
equity securities were $0.7 million and $1.5 million for the nine months ended
December 31, 1996 and 1997, respectively. The sale of stocks accounted for $0.8
million of the total $1.2 million increase. This result is primarily due to the
continued strength in the United States stock markets.
LOSSES AND EXPENSES. The losses and expenses for the nine months ended
December 31, 1996 and 1997 were $102.5 and $42.6 million, respectively. Set
forth below is a breakdown of such expenses.
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<PAGE> 37
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------
1996 1997
---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Losses and loss adjustment expenses $ 50,236 $ 12,452
Underwriting, general and administrative
expenses 45,837 24,765
Amortization and depreciation 3,729 3,417
Interest expense 2,719 1,935
-------- -------
Total losses and expenses $102,521 $42,569
======== =======
</TABLE>
Losses and Loss Adjustment Expenses. Losses and LAE decreased by $37.8
million from the nine-month period ended December 31, 1996 to the nine-month
period ended December 31, 1997. This change was in large part due to the ceding
of losses and LAE under the reinsurance agreements. The amount of losses ceded
was $9.1 million and $51.2 million for the nine-month period ended December 31,
1996 and 1997, respectively. Before the effect of reinsurance transactions, the
Company's losses and LAE expense were $59.3 million and $63.6 million during the
nine-month period ended December 31, 1996 and 1997, respectively. This increase
of $4.3 million corresponds favorably to the growth of premium earned between
the nine-month periods ended December 31, 1996 and 1997.
Another factor contributing to the decrease in losses and LAE for the
Insurance Subsidiaries was the improvement of the loss ratio from 67.4% to 63.8%
for the nine months ended December 31, 1996 and 1997, respectively.
Underwriting, General and Administrative Expenses. During the nine
months ended December 31, 1997 the Company's other underwriting, general and
administrative expenses declined by $21.1 million, or 46.0%, from that for the
nine-month period ended December 31 1996. A major factor contributing to this
change was the ceding commissions received by the Insurance Subsidiaries
corresponding to the quota share reinsurance agreements, and, particularly, the
75% quota share agreement entered into by Bridgefield effective April 1, 1997.
Such ceding commissions are recorded as reductions to other underwriting,
general and administrative expenses. During the nine months ended December 31,
1996 and 1997, the Company recognized ceding commissions in the amount of $1.2
million and $27.0 million, respectively
During the period ended December 31, 1997, an accrual for the 1998
assessment for the Florida Workers' Compensation Guaranty Association of
approximately $2.0 million was recorded.
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<PAGE> 38
Amortization and Depreciation. Amortization and depreciation expense
decreased $0.3 million between the nine-month period ended December 31, 1996 and
1997. The relative consistency in this expense is due to the lack of significant
purchase and sale activity of property and equipment assets and intangibles.
This decline of $0.3 million is primarily due to certain property and equipment
assets becoming fully depreciated during the nine-month periods ended December
31, 1996 and 1997.
Interest Expense. In connection with the Acquisition, SHC borrowed $44
million from a commercial lender. In December 1997, a new $30 million revolver
was negotiated with a different lender at more favorable terms. The outstanding
debt at December 31, 1997 was approximately $16.5 million. The combination of
the paydown on the debt and the new more favorable rates decreased the interest
expense by $0.8 million to $1.9 million for the nine months ended December 31,
1997.
NET INCOME. The Company realized net income during the nine months
ended December 31, 1997 of $8.6 million, or $1.40 per common share (on a diluted
basis), compared to $3.2 million for the nine months ended December 31, 1996.
Earnings per share is inapplicable to the 1996 period as it was prior to the
Company's public offering. As explained above, this increase in net income is
due primarily to growth in premium revenues written and earned, improvement in
the Company's loss ratio, favorable reinsurance arrangements, and investment
gains realized as a result of the continued strength in the U.S. security
markets. Net income for the nine month ended December 31, 1996 was also reduced
by a $1.2 million loss from discontinued operations and a $0.8 million
extraordinary charge related to the costs of the Conversion.
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 1996 AND 1997
REVENUE. Revenue was $140.3 million and $144.8 million for the fiscal
years ended March 31, 1996 and 1997, respectively. Revenue increased by $4.5
million for the fiscal year ended March 31, 1997 as a result of $33.3 million of
administrative fees generated by SHC in the 1997 period compared to $7.7 million
of administrative fees generated by SHC in the 1996 period (January 16,
1996-March 31, 1996). Set forth below is a discussion of the composition of
revenue for the periods indicated.
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<PAGE> 39
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
REVENUE:
Premiums earned $114,893 $ 97,321
Net investment income 13,210 12,770
Realized investment gains 4,354 687
Administrative fees 7,665 33,303
Other income 206 692
-------- --------
Total revenue $140,328 $144,773
======== ========
</TABLE>
Premiums Earned. Premiums earned decreased by $17.6 million, or 15.3%,
for the year ended March 31, 1997. These declines in premiums resulted in large
part from: (i) lost accounts due to the market's increasing preference for
non-assessable products, which ESIF, as a Florida group self-insurance fund, was
unable to offer; (ii) increased competition; (iii) the effects of increasing
participation in the premium credit programs; (iv) an adjustment in estimation
of accrued retrospective premiums which reduced reported premiums for the fiscal
year ended March 31, 1996 by approximately $9.3 million; and (v) a rate decrease
of 11.2% effective January 1, 1997.
As discussed in the table below, in the fiscal years ended March 31,
1996 and 1997, the premium credit programs in the aggregate accounted for
approximately $14.1 million and $16.6 million, respectively, in credits.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Managed care credits $ 8,811 $10,874
All other credits 5,250 5,746
------- -------
Total premium credits $14,061 $16,620
======= =======
</TABLE>
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 from $13.2
million for the fiscal year ended March 31, 1996 to $12.8 million for the fiscal
year ended March 31, 1997. The decrease in investment income for the fiscal year
ended March 31, 1997 was due in part to a reduction of invested assets and a
larger portion of those assets invested in municipal bonds.
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<PAGE> 40
The decrease for the fiscal year ended March 31, 1997 was primarily due to an
increase in assets invested in municipal bonds from 32% in 1996 to 38% in 1997.
Realized Investment Gains. Realized investment gains decreased from
$4.4 million for the fiscal year ended March 31, 1996 to $0.7 million for the
fiscal year ended March 31, 1997 as a result of the sale of certain invested
assets to finance the Acquisition.
Administrative Fees. The Administrative Subsidiaries generate
administrative fees primarily through contracts with the Non-affiliated
Entities, 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 Non-affiliated
Entities' premiums. For the period beginning on the date of the Acquisition,
January 16, 1996, and ended on March 31, 1996, the administrative fees were $7.7
million. For the fiscal year ended March 31, 1997, the administrative fees were
$33.3 million. Administrative fees represented 23.0% of total revenue for the
fiscal year ended March 31, 1997.
LOSSES AND EXPENSES. The Company's losses and expenses decreased from
$140.5 million for the fiscal year ended March 31, 1996 to $134.1 million for
the fiscal year ended March 31, 1997. Set forth below is a breakdown of the
total annual expenses.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Losses and loss adjustment expenses $ 94,844 $ 65,152
Underwriting, general and administrative
expenses 43,657 60,675
Interest expense 847 3,521
Amortization and depreciation 1,103 4,733
-------- --------
Total losses and expenses $140,451 $134,081
======== ========
</TABLE>
Losses and Loss Adjustment Expenses. The Company establishes reserves
to cover its estimated liabilities for losses from claims and for LAE incurred.
Such loss reserves are estimates established by management based upon, among
other factors: (i) results of actuarial reviews which incorporate the Company's
experience with similar cases, estimates of future claim trends, and historical
trends such as recurring loss payment and reporting patterns, claim closures,
and product mixes; (ii) facts known to the Company; and (iii) regulatory
requirements. Losses and LAE incurred for the fiscal year ended March 31, 1996
were $94.8 million compared to $65.2 million for the fiscal year ended March 31,
1997.
Prior to the fiscal year ended March 31, 1995, management had recorded
reserves in excess of reserve levels required by actuarial reports because the
actuarial estimates for fund years
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<PAGE> 41
1991 and earlier had a history of increasing (or "adversely developing") as the
fund years matured and more actual loss data became known. During the fiscal
year ended March 31, 1995, ESIF began to record reserves at levels primarily
supported by actuarial reviews since the actuarial estimates had by that time
evidenced a trend of less adverse development with the maturity of the fund
years. Management's determination that it was no longer necessary to increase
reserves over the actuarial estimates, together with a reduction in premiums
earned and a lower actuarial loss ratio, resulted in a $39.3 million decrease in
losses and LAE 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. In the fiscal year ended March 31,
1997, losses and LAE decreased by $29.7 million as compared to the fiscal year
ended March 31, 1996 primarily as a result of (i) the abnormally high losses and
LAE in 1996 due to prior year adjustments all recorded in that year, and (ii) a
reduction in premiums earned. The net loss ratio for the fiscal years ended
March 31, 1996 and 1997 was 82.5%, and 66.9%, respectively.
Underwriting, General and Administrative Expenses. The increase in
these expenses from $43.7 million to $60.7 million in the fiscal year ended
March 31, 1997 was primarily due to the inclusion of the Acquisition as of
January 16, 1996.
Interest Expense. In connection with the Acquisition, SHC borrowed
$44.0 million from a commercial lender, and as a result, interest expense on a
consolidated basis for the fiscal years ended March 31, 1996 and 1997 was $0.8
million and $3.5 million, respectively.
Amortization and Depreciation. In connection with the Acquisition, SHC
recorded certain intangibles including software, noncompete agreements, customer
contracts and goodwill. For the fiscal years ended March 31, 1996 and 1997,
amortization of these intangible assets was $1.1 million and $3.8 million,
respectively. The expense associated with amortization of these intangible
assets is not deductible for federal income tax purposes.
NET INCOME. Income from continuing operations was $0.4 million, and
$7.0 million for the fiscal years ended March 31, 1996 and 1997, respectively.
The $6.6 million increase resulted from the stability of losses and LAE during
that year and the depressed net income for the fiscal year ended March 31, 1996
resulting from adjustments of loss reserves in that year.
Losses from discontinued operations of $0.2 million and $1.3 million
were incurred for the years ended March 31, 1996 and 1997, respectively. In
addition, an extraordinary charge of $1.5 million was incurred during the year
ended March 31, 1997 related to the conversion of ESIF from a group of
self-insurance fund to a stock insurance company. After inclusion of these
nonrecurring items, net income was $0.2 million and $4.2 million for the years
ended March 31, 1996 and 1997, respectively.
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<PAGE> 42
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 the Insurance Subsidiaries and the Non-affiliated Entities. The
cash requirements of the Insurance Subsidiaries are primarily for the payment of
claims, commissions, reinsurance premiums, administration fees and the purchase
of investment securities. The cash requirements of the Administrative
Subsidiaries are primarily for the payment of salaries, employee benefits, debt
obligations and other operating expenses. Due to the uncertainty regarding
settlement of unpaid claims, the liquidity requirements of the Company vary,
and, consequently, the Company has attempted to structure its investment
portfolio to take into account historical payout patterns. See "ITEM 1.
BUSINESS--Investment Portfolio." The Company purchases reinsurance to mitigate
the effect of catastrophic claims and to help stabilize demands on its
liquidity. See "ITEM 1.
BUSINESS--Reinsurance."
In connection with the Acquisition, SHC acquired a bank term loan and
procured a revolving bank credit facility. On May 28, 1997, the date of ESIF's
conversion, Summit entered into a new credit facility with First Union National
Bank of North Carolina whereby the then-existing debt was restructured. Under
this new credit facility, the outstanding debt pertaining to the term loan was
established at $32.7 million, and the maximum amount available for borrowings
under a revolving line of credit was established at $5.0 million. The interest
rate applicable to this debt package was also established at the prime lending
rate plus 1%.
In December 1997, Summit secured, with SunTrust Bank of Tampa Bay, a
$30.0 million revolving line of credit which offered more favorable terms and
greater flexibility than that of the existing debt. Of this line of credit,
$25.0 million was utilized to extinguish all other debt. At December 31, 1997,
the balance outstanding under this revolving line of credit was $16.5 million.
Interest on this revolving debt ranges from LIBOR plus 1.5% to LIBOR plus 2.25%.
Availability under this revolving line of credit reduces by $4.0 million
annually until the loan maturity date which is the last business day of 2003.
As collateral for the debt outstanding at December 31, 1997, Summit has
pledged all of the issued and outstanding capital stock of two subsidiaries of
SHC, Summit Consulting, Inc. and Summit Healthcare Holdings, Inc. As a condition
for this debt, the Company must comply with certain financial convenants and
operating restrictions, to which the Company has so complied.
For the fiscal years ended March 31, 1996 and 1997, net cash provided
by operating activities was $10.8 million and $5.7 million, respectively, while
net cash used in investing activities was $47.1 million and $1.5 million,
respectively. During the year ended March 31, 1996, cash of $44.0 million was
provided through debt proceeds, and most of these proceeds were utilized in
financing activities relating to the Acquisition. In the year ended March 31,
1997,
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<PAGE> 43
cash of $11.3 million was used to reduce this debt. During the nine months ended
December 31, 1996, net cash provided by operations was $10.7 million while net
cash of $13.3 million was utilized in operations during the nine-month period
ended December 31, 1997. For this 1996 period, the net cash provided was
primarily due to the collection of $9.7 million of income taxes recoverable. The
utilization of cash during the 1997 nine-month period was related primarily to
the increase in reinsurance recoverables and the reduction of loss and LAE
reserves.
Relating to investing activities, cash was utilized in net amounts of
$3.0 million and $26.0 million during the nine months ended December 31, 1996
and 1997, respectively, primarily the result of net purchases of investments.
Cash of $11.0 million was used in financing activities during the nine months
ended December 31, 1996 representing payments on debt. During the nine months
ended December 31, 1997, net cash of $41.6 million was generated from financing
activities. Of this amount, $16.1 million was used to reduce the Company's debt
obligation and $57.7 million was provided as net proceeds on the sales of the
Company's capital stock. 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 1997, and
December 31, 1996 and 1997, reflect recoverables from the SDTF in an amount of
$20.1 million, $21.0 million, $21.1 million and $23.8 million, respectively. The
Company received $5.6 million and $7.5 million in actual recoveries from the
SDTF during the years ended March 31, 1996 and 1997, respectively, and $6.5
million and $3.5 million during the nine months ended December 31, 1996 and
1997, respectively.
Although the SDTF has not charged adequate assessments to actuarially
fund its claims liability, under a recent legislative enactment the SDTF law has
been amended so that claims arising from accidents occurring on or after January
1, 1998 will not be accepted for reimbursement by the SDTF. The new legislation
states the SDTF will be liable for reimbursement for applicable injuries that
occur prior to January 1, 1998 and that assessments are to continue for funding
purposes. 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
thereof. Should the SDTF fail to met such obligations, 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 "ITEM 1. BUSINESS--Regulation--Special Disability Trust
Fund."
As a self-insurance fund, ESIF recorded for statutory reporting an
asset of $47.4 million and $44.4 million at March 31, 1996 and March 31, 1997,
respectively, for future investment income determined by discounting loss and
LAE reserves at a statutorily prescribed rate. Following its conversion to a
stock insurance company, Bridgefield is permitted to record discounts only on
permanent disability cases. The amount of such discount, combined with that
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<PAGE> 44
of Bridgefield Casualty, is estimated at approximately $4.7 million, $4.4
million and $4.1 million at March 31, 1996, March 31, 1997 and December 31,
1997, respectively. ESIF's statutory basis surplus as a self-insurance fund was
approximately $21.8 million at March 31, 1997. Following its conversion to a
stock insurance company and the related public offering of the Company's Common
Stock which resulted in net proceeds contributed to Bridgefield of approximately
$48 million, plus $7.1 million of additional statutory capital which resulted
from the simultaneous reorganization, Bridgefield's statutory basis surplus as a
stock insurance company was approximately $53.8 million at December 31, 1997.
Such capital and surplus is considered adequate to satisfy the requirements of
the Florida Insurance Code. 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.
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 become effective in Florida under a
bill recently passed by the Florida legislature, 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. In July 1997, the Florida
legislature adopted the provisions of these risk-based capital standards. The
Company exceeds 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 conditions imposed by the Florida DOI in connection with the
Conversion require that all dividends or distributions by the Insurance
Subsidiaries be approved by the Florida DOI in advance, but provide 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.
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<PAGE> 45
Year 2000
Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculation causing disruptions of operations, including, among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activities.
The Company has completed an assessment and will have to modify or
replace portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The total Year
2000 project for the Company is estimated to cost approximately $0.5 million and
is anticipated to be completed prior to the year 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and the
report of independent auditors thereon are set forth following the Index of
Financial Statements on page F-1 of this report:
Consolidated Balance Sheets as of March 31, 1997 and December 31,
1997
Consolidated Statements of Income for the years ended March 31,
1996 and 1997 and the nine months ended December 31, 1996
(unaudited) and December 31, 1997
Consolidated Statements of Changes in Equity for the years ended
March 31, 1996 and 1997 and the nine months ended December 31,
1996 (unaudited) and December 31, 1997
Consolidated Statements of Cash Flows for the years ended March 31,
1996 and 1997 and the nine months ended December 31, 1996
(unaudited) and December 31, 1997
Notes to Consolidated Financial Statements
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<PAGE> 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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 of ESIF 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
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors of the Company will be set forth
under the captions "Proposal 1--Election of Directors--Nominees" in the
Company's Proxy Statement for its 1998 Annual Meeting of Stockholders to be held
on May 27, 1998 (the "1998 Proxy Statement"). Such information is incorporated
herein by reference. Pursuant to Instruction 3 to Item 401(b) of Regulation S-K
and General Instruction G(3) to Form 10-K, information relating to the executive
officers of the Company is set forth in Part I, Item 4(A) of this report under
the caption "Executive Officers of the Registrant." Information regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, by directors and executive officers of the Company and beneficial
owners of more than 10% of the Company's Common Stock will be set forth under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
1998 Proxy Statement. Such information is incorporated herein by reference. The
1998 Proxy
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<PAGE> 47
Statement will be filed with the Securities and Exchange Commission within 120
days after December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation will be set forth under
the captions "Proposal 1--Election of Directors" and "Executive Compensation" in
the 1998 Proxy Statement. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of the Company's securities by certain
persons will be set forth under the caption "Stock Ownership" in the 1998 Proxy
Statement. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and transactions between
the Company and certain non-employee directors of the Company will be set forth
under the captions "Proposal 1--Election of Directors--Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" in the 1998
Proxy Statement. Such information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of This Report.
1. Financial Statements
The following consolidated financial statements of the
Company and the independent auditors' report thereon set
forth immediately following the Index of Financial Statements
which appears on page F-1 of this report:
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1997
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<PAGE> 48
Consolidated Statements of Income for the years ended
March 31, 1996 and 1997 and the nine months ended
December 31, 1996 (unaudited) and December 31, 1997
Consolidated Statements of Changes in Equity for the years
ended March 31, 1996 and 1997 and the nine months ended
December 31, 1996 (unaudited) and December 31, 1997
Consolidated Statements of Cash Flows for the years ended
March 31, 1996 and 1997 and the nine months ended
December 31, 1996 (unaudited) and December 31, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following financial statement schedules are set forth
beginning on page S-1 of this report:
Schedule I - Summary of Investments
Schedule II - Condensed Financial Statements of Registrant
Schedule IV - Reinsurance
Schedule V - Supplemental Information Concerning Insurance
Operations
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission have been omitted because such schedules
are not required under the related instructions or are
inapplicable or because the information required is included
in the consolidated financial statements or notes thereto.
3. Exhibits
The following exhibits are filed with or incorporated by
reference in this report. Where such filing is made by
incorporation by reference to a previously filed registration
statement or report, such registration statement or report is
identified in parentheses. The Company will furnish any
exhibit upon request to Russell L. Wall, Vice President of
Finance and Chief Financial Officer of the
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<PAGE> 49
Company, 2310 A-Z Park Road, Lakeland, Florida 33801.
There is a charge of $.50 per page to cover expenses of
copying and mailing.
2.1 Amended Plan of Conversion and Recapitalization of
Employers Self Insurers Fund. (Exhibit 2.1 of
Registration Statement on Form S-1 (File No.
333-16499)).
2.2 Recapitalization Agreement between Summit and
Employers Self Insurers Fund. (Exhibit 2.2 of
Registration Statement on Form S-1 (File No.
333-16499)).
2.3 Order of the Florida DOI approving the Plan of
Conversion. (Exhibit 2.3 of Registration Statement on
Form S-1 (File No. 333-16499)).
3.1 Articles of Incorporation of Summit. (Exhibit 3.1 of
Registration Statement on Form S-1 (File No.
333-16499)).
3.2 Bylaws of Summit. (Exhibit 3.2 of Registration
Statement on Form S-1 (File No. 333-16499)).
3.3 Form of Certificate of Designation, Preferences and
Rights of Series A Preferred Stock of Summit.
(Exhibit 3.3 of Registration Statement on Form S-1
(File No. 333-16499)).
4.1 Specimen Stock Certificate of the Common Stock of
Summit. (Exhibit 4.1 of Registration Statement on
Form S-1 (File No. 333-16499)).
4.2 Specimen Stock Certificate of the Series A Preferred
Stock of Summit. (Exhibit 4.2 of Registration
Statement on Form S-1 (File No. 333-16499)).
10.1 Employment Agreement between Summit and William B.
Bull. (Exhibit 10.1 of the Form 10-K for the fiscal
year ended March 31, 1997).
10.2 Employment Agreement between Summit and Russell L.
Wall. (Exhibit 10.2 to the Form 10-K for the fiscal
year ended March 31, 1997).
10.3 Credit Agreement dated May 28, 1997 among Summit, the
Lenders named therein and First Union National Bank
of North Carolina, as Agent. (Exhibit 10.1 of Current
Report on Form 8-K (Date of Report: May 21, 1997)).
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<PAGE> 50
10.4 Credit Agreement among Summit and the Subsidiaries of
Summit (other than Insurance Subsidiaries) and
SunTrust Bank, Tampa Bay, dated as of December 11,
1997.
10.5 Summit 1996 Long-Term Incentive Plan. (Exhibit 10.4
of Registration Statement on Form S-1 (File No.
333-16499)).
10.6 The Summit Consulting, Inc. Retirement Plan. (Exhibit
10.5 of Registration Statement on Form S-1 (File No.
333-16499)).
10.7 Amendment No. 1 to The Summit Consulting, Inc.
Retirement Plan. (Exhibit 10.6 of Registration
Statement on Form S-1 (File No. 333-16499)).
10.8 Amendment No. 2 to The Summit Consulting, Inc.
Retirement Plan. (Exhibit 10.7 of Registration
Statement on Form S-1 (File No. 333-16499)).
10.9 Third Amendment to The Summit Consulting, Inc.
Retirement Plan. (Exhibit 10.8 to the Form 10-K for
the fiscal year ended March 31, 1997).
10.10 Summit Retirement Plan, Amended and Restated
Effective September 1, 1997.
10.11 Florida Retail Federation Self Insurers Fund
Administrator's Contract, with Assignment and
Addendum. (Exhibit 10.8 of Registration Statement on
Form S-1 (File No. 333-16499)).
10.12 Louisiana Employers Safety Association Self Insurers
Fund Administrator's Contract, with Addendum.
(Exhibit 10.9 of Registration Statement on Form S-1
(File No. 333-16499)).
10.13 Louisiana Retailers Association Self Insurers Fund
Administrator's Contract, with Addendum. (Exhibit
10.10 of Registration Statement on Form S-1 (File No.
333-16499)).
10.14 Managing General Agent Agreement By and Between
Summit Consulting, Inc. of Louisiana and Louisiana
Employers Mutual Insurance Company, dated May 29,
1997.
10.15 Kentucky Retail Federation Self Insurers Fund
Administrator's Contract. (Exhibit 10.11 of
Registration Statement on Form S-1 (File No.
333-16499)).
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<PAGE> 51
16.1 Letter from Brinton & Mendez relating to change in
accountants. (Exhibit 16.1 of Registration Statement
on Form S-1 (File No. 333-16499)).
21.1 Subsidiaries of Summit. (Exhibit 21.1 of Registration
Statement on Form S-1 (File No. 333-16499)).
23.1 Consent of Ernst & Young, LLP
27.1 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K. No Current Reports on Form 8-K were filed
by the Company during the quarter ended December 31, 1997.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
-51-
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March ___, 1998.
SUMMIT HOLDING SOUTHEAST, INC.
By:
-------------------------------------
William B. Bull
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March __, 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
- ------------------------------------- President, Chief Executive Officer,
William B. Bull and Director (principal executive officer)
- ------------------------------------- Chairman of the Board of Directors
Greg C. Branch
- ------------------------------------- Director
C. C. Dockery
- ------------------------------------- Director
John A. Gray
- ------------------------------------- Director
Robert L. Noojin, Jr.
- ------------------------------------- Director
Thomas s. Petcoff
- ------------------------------------- Director
Robert Siegel
- ------------------------------------- Vice President of Finance
Russell L. Wall (principal financial and
accounting officer)
</TABLE>
-52-
<PAGE> 53
SUMMIT HOLDING SOUTHEAST, INC.
INDEX OF EXHIBITS
The following exhibits are filed with or incorporated by reference in
this report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration statement
or report is identified in parenthesis.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
2.1 Amended Plan of Conversion and Recapitalization of Employers Self Insurers
Fund. (Exhibit 2.1 of Registration Statement on Form S-1 (File No. 333-16499)).
2.2 Recapitalization Agreement between Summit and Employers Self Insurers Fund.
(Exhibit 2.2 of Registration Statement on Form S-1 (File No. 333-16499)).
2.3 Order of the Florida DOI approving the Plan of Conversion. (Exhibit 2.3 of
Registration Statement on Form S-1 (File No. 333-16499)).
3.1 Articles of Incorporation of Summit. (Exhibit 3.1 of Registration
Statement on Form S-1 (File No. 333-16499)).
3.2 Bylaws of Summit. (Exhibit 3.2 of Registration Statement on Form S-1
(File No. 333-16499)).
3.3 Form of Certificate of Designation, Preferences and Rights of Series A Preferred
Stock of Summit. (Exhibit 3.3 of Registration Statement on Form S-1
(File No. 333-16499)).
4.1 Specimen Stock Certificate of the Common Stock of Summit . (Exhibit 4.1
of Registration Statement on Form S-1 (File No. 333-16499)).
4.2 Specimen Stock Certificate of the Series A Preferred Stock of Summit.
(Exhibit 4.2 of Registration Statement on Form S-1 (File No. 333-16499)).
10.1 Employment Agreement between Summit and William B. Bull. (Exhibit 10.1 of the Form
10-K for the fiscal year ended March 31, 1997).
10.2 Employment Agreement between Summit and Russell L. Wall. (Exhibit 10.2 to the Form
10-K for the fiscal year ended March 31, 1997).
</TABLE>
-53-
<PAGE> 54
10.3 Credit Agreement dated May 28, 1997 among Summit, the Lenders named
therein and First Union National Bank of North Carolina, as Agent.
(Exhibit 10.1 of Current Report on Form 8-K (Date of Report: May 21,
1997)).
10.4 Credit Agreement among Summit and the Subsidiaries of Summit (other
than Insurance Subsidiaries) and SunTrust Bank, Tampa Bay, dated as of
December 11, 1997.
10.5 Summit 1996 Long-Term Incentive Plan. (Exhibit 10.4 of Registration
Statement on Form S-1 (File No. 333-16499)).
10.6 The Summit Consulting, Inc. Retirement Plan. (Exhibit 10.5 of
Registration Statement on Form S-1 (File No. 333-16499)).
10.7 Amendment No. 1 to The Summit Consulting, Inc. Retirement Plan.
(Exhibit 10.6 of Registration Statement on Form S-1 (File No.
333-16499)).
10.8 Amendment No. 2 to The Summit Consulting, Inc. Retirement Plan.
(Exhibit 10.7 of Registration Statement on Form S-1 (File No.
333-16499)).
10.9 Third Amendment to The Summit Consulting, Inc. Retirement Plan (Exhibit
10.8 to the Form 10-K for the fiscal year ended March 31, 1997).
10.10 Summit Retirement Plan, Amended and Restated Effective September 1,
1997.
10.11 Florida Retail Federation Self Insurers Fund Administrator's Contract,
with Assignment and Addendum. (Exhibit 10.8 of Registration Statement
on Form S-1 (File No. 333-16499)).
10.12 Louisiana Employers Safety Association Self Insurers Fund
Administrator's Contract, with Addendum. (Exhibit 10.9 of Registration
Statement on Form S-1 (File No. 333-16499)).
10.13 Louisiana Retailers Association Self Insurers Fund Administrator's
Contract, with Addendum. (Exhibit 10.10 of Registration Statement on
Form S-1 (File No. 333-16499)).
10.14 Managing General Agent Agreement By and Between Summit Consulting, Inc.
of Louisiana and Louisiana Employers Mutual Insurance Company, dated
May 29, 1997.
10.15 Kentucky Retail Federation Self Insurers Fund Administrator's Contract.
(Exhibit 10.11 of Registration Statement on Form S-1 (File No.
333-16499)).
-54-
<PAGE> 55
16.1 Letter from Brinton & Mendez relating to change in accountants.
(Exhibit 16.1 of Registration Statement on Form S-1 (File No.
333-16499)).
21.1 Subsidiaries of Summit. (Exhibit 21.1 of Registration Statement on Form
S-1 (File No. 333-16499)).
23.1 Consent of Ernst & Young, LLP
27.1 Financial Data Schedule - (for SEC use only).
-55-
<PAGE> 56
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP........................................... F-2
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1997.............................................. F-3
Consolidated Statements of Income for the years ended
March 31, 1996 and 1997 and the nine months ended
December 31, 1996 (unaudited) and 1997............................. F-4
Consolidated Statements of Changes in Equity for the years
ended March 31, 1996 and 1997 and the nine months ended
December 31, 1996 (unaudited) and 1997............................. F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1996 and 1997 and the nine months ended
December 31, 1996 (unaudited) and 1997............................. F-6
Notes to Consolidated Financial Statements............................ F-7
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Summit Holding Southeast, Inc.
We have audited the accompanying consolidated balance sheets of Summit Holding
Southeast, Inc. and subsidiaries (the "Company") as of March 31, 1997 and
December 31, 1997, and the related consolidated statements of income, changes in
equity, and cash flows for the years ended March 31, 1996 and 1997, and for the
nine months ended December 31, 1997. Our audits also included the financial
statement schedules listed in the Index at Item 14(a). These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based
on our audits.
We conducted our audits in accordance with generally accepting 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 accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at March
31, 1997 and December 31, 1997, and the results of their operations and their
cash flows for the years ended March 31, 1996 and 1997, and for the nine months
ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
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
March 6, 1998
F-2
<PAGE> 58
SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1997
---- ----
<S> <C> <C>
ASSETS
Investments:
Fixed maturities ............................................ $180,075 $221,228
Equity securities ........................................... 18,286 21,691
Short-term investments ...................................... 14,733 6,537
-------- --------
Total investments .................................... 213,094 249,456
Cash and cash equivalents ..................................... 3,578 5,757
Premiums receivable (net of $2,566 and $2,672
allowance for doubtful accounts, respectively) .............. 42,397 63,077
Reinsurance recoverable ....................................... 94,087 117,722
Recoverable from Florida Special Disability Trust Fund ........ 20,979 23,833
Deferred policy acquisition costs ............................. -- 973
Accrued investment income ..................................... 3,129 3,906
Property and equipment, net ................................... 1,452 1,333
Goodwill, net ................................................. 44,651 43,242
Other intangible assets, net .................................. 11,078 9,498
Deferred income taxes ......................................... 14,869 11,701
Other assets .................................................. 8,694 4,153
-------- --------
Total assets ......................................... $458,008 $534,651
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss and loss adjustment expense reserves ................... $358,744 $347,068
Debt ........................................................ 32,675 16,540
Unearned premiums ........................................... 5,794 36,633
Other policyholders' funds .................................. 16,786 14,015
Accounts payable and accrued expenses ....................... 13,093 15,000
Deferred revenue ............................................ 3,915 4,653
Income taxes payable ........................................ 585 2,408
-------- --------
Total liabilities .................................... 431,592 436,317
-------- --------
Shareholders' equity:
Common stock, $.01 par; 20,000,000 shares authorized;
5,791,100 shares issued and outstanding ................... -- 58
Additional paid-in capital .................................. -- 57,643
Series A, 4% cumulative preferred stock, $10.00 par;
5,000,000 authorized; 1,639,701 shares issued
and outstanding ........................................... -- 16,397
Retained earnings ........................................... 25,899 18,052
Net unrealized appreciation of available-for-sale
securities, less applicable deferred income taxes ......... 517 6,184
-------- --------
Total shareholders' equity ........................... 26,416 98,334
-------- --------
Total liabilities and shareholders' equity ........... $458,008 $534,651
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 59
SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31 DECEMBER 31
-------- -----------
1996 1997 1996 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Premiums earned .................................... $ 114,893 $ 97,321 $ 74,509 $ 19,532
Administrative fees ................................................. 7,665 33,303 25,762 22,828
Net investment income ............................................... 13,210 12,770 9,606 11,117
Net realized investment gains ....................................... 4,354 687 366 1,551
Other income ........................................................ 206 692 568 229
--------- --------- --------- ---------
Total revenue ................................................ 140,328 144,773 110,811 55,257
--------- --------- --------- ---------
Losses and expenses:
Losses and loss adjustment expenses ................................. 94,844 65,152 50,236 12,452
Other underwriting, general and administrative
expenses .......................................................... 43,657 60,675 45,837 24,765
Amortization and depreciation ....................................... 1,103 4,733 3,729 3,417
Interest expense .................................................... 847 3,521 2,719 1,935
--------- --------- --------- ---------
Total losses and expenses .................................... 140,451 134,081 102,521 42,569
--------- --------- --------- ---------
Income (loss) from continuing operations
before federal income taxes ................................... (123) 10,692 8,290 12,688
Federal income tax expense (benefit) ............................ (505) 3,717 3,057 4,138
--------- --------- --------- ---------
Income from continuing operations ............................... 382 6,975 5,233 8,550
--------- --------- --------- ---------
Discontinued operations:
Loss from discontinued operations (net of
income tax benefit of $121, $460 and $460, respectively)..... (197) (893) (893) --
Loss on disposal of discontinued operations
(net of tax benefit of $184 and $184 respectively)............ -- (357) (357) --
--------- --------- --------- ---------
Loss from discontinued operations ............................... (197) (1,250) (1,250) --
--------- --------- --------- ---------
Income before extraordinary charge .............................. 185 5,725 3,983 8,550
Extraordinary charge for conversion costs
(net of income tax benefit of $328 ........................... -- (1,485) (785) --
and $474, respectively --------- --------- --------- ---------
Net income ............................................. $ 185 $ 4,240 $ 3,198 $ 8,550
========= ========= ========= =========
Basic earnings per common share ................................. $ 1.43
=========
Diluted earnings per common share................................ $ 1.40
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 60
SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED MARCH 31, 1996 AND 1997
AND THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET
UNREALIZED
APPRECIATION
(DEPRECIATION)
OF AVAILABLE-
ADDITIONAL FOR-SALE
COMMON PAID-IN PREFERRED RETAINED SECURITY
STOCK CAPITAL STOCK EARNINGS INVESTMENTS TOTAL
-------- --------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
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
Net income ................. -- -- -- 3,198 -- 3,198
Change in net unrealized
investment gains ....... -- -- -- -- 1,026 1,026
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996 -- -- -- 24,857 2,521 27,378
Net income ................. -- -- -- 1,042 -- 1,042
Change in net unrealized
investment gains ....... -- -- -- -- (2,004) (2,004)
-------- -------- -------- -------- -------- --------
Balance at March 31, 1997 .. -- -- -- 25,899 517 26,416
Issuance of common stock ... 58 57,643 -- -- -- 57,701
Issuance of preferred stock -- -- 16,397 (16,397) -- --
Net income ................. -- -- -- 8,550 -- 8,550
Change in net unrealized
investment gains ....... -- -- -- -- 5,667 5,667
-------- -------- -------- -------- -------- --------
Balance at December 31, 1997 $ 58 $ 57,643 $ 16,397 $ 18,052 $ 6,184 $ 98,334
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 61
SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31 DECEMBER 31
-------- -----------
1996 1997 1996 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 185 $ 4,240 $ 3,198 $ 8,550
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and depreciation .......................... 1,103 4,733 3,729 3,417
Net realized gains ..................................... (4,354) (687) (366) (1,551)
Allowance for doubtful accounts ........................ (600) 1,066 1,014 106
(Increase) decrease in premiums receivable ............. 12,898 5,943 (2,749) (20,786)
(Increase) decrease in reinsurance recoverable ......... (1,377) 17,510 4,460 (23,636)
Increase in Special Disability Trust Fund recoverable .. (4,181) (919) (1,078) (2,854)
Increase in deferred policy acquisition costs........... -- -- -- (973)
(Increase) decrease in accrued investment income ....... 473 (193) (100) (777)
(Increase) decrease in income taxes recoverable ........ (9,690) -- 9,690 --
(Increase) decrease in deferred income taxes ........... 4,239 602 699 (248)
(Increase) decrease in other assets .................... (7,776) 9,944 675 4,542
(Increase) decrease in discontinued operations ......... (588) 588 588 --
Increase (decrease) in loss and loss adjustment expenses 20,240 (28,888) (10,709) (11,677)
Increase in unearned premiums .......................... 1,042 4,752 8,872 30,839
Decrease in other policyholders' funds.................. (2,273) (18,086) -- (2,769)
Increase (decrease) in accounts payable and accrued
expenses ............................................. (935) 7,942 (4,137) 1,908
Increase (decrease) in deferred revenue ................ 7,298 (3,469) (3,371) 737
Increase (decrease) in income taxes payable ............ (4,878) 585 303 1,823
--------- --------- --------- --------
Net cash provided by (used in) operating activities ...... 10,826 5,663 10,718 (13,349)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities ........................ (979,829) (238,324) (201,739) (102,938)
Disposal and maturity of investment securities ........... 972,918 236,188 198,203 77,208
Purchase of property and equipment ....................... (2,697) (669) (518) (317)
Proceeds from sales of property and equipment ............ -- 1,343 1,067 9
Purchase of Summit Holding Corporation ................... (37,500) -- -- --
--------- --------- --------- --------
Net cash used in investing activities .................... (47,108) (1,462) (2,987) (26,038)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt ....................................... 44,000 -- -- 25,040
Payments on debt ......................................... -- (11,325) (11,000) (41,175)
Net proceeds from sales of capital stock.................. -- -- -- 57,701
--------- --------- --------- ---------
Net cash provided by (used in) financing activities ...... 44,000 (11,325) (11,000) 41,566
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents ..... 7,718 (7,124) (3,269) 2,179
Beginning cash and cash equivalents ...................... 2,984 10,702 10,702 3,578
--------- --------- --------- ---------
Ending cash and cash equivalents ......................... $ 10,702 $ 3,578 $ 7,433 $ 5,757
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 62
SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1997 AND DECEMBER 31, 1996 AND 1997
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Summit Holding Southeast, Inc. ("Summit") is the holding company for
Bridgefield Employers Insurance Company ("Bridgefield"), the successor, as of
May 28, 1997, to Employers Self Insurers Fund ("ESIF"), and for Summit Holding
Corporation ("SHC"). On May 28, 1997, ESIF completed a conversion from a group
self-insurance fund to a stock property and casualty insurance company.
Concurrent with this conversion, ESIF's name was changed to Bridgefield, and the
new holding company, Summit, issued (i) 1.64 million shares of its Series A
preferred stock to the eligible former policyholders or members of ESIF in
exchange for the extinguishment of the membership interests of such
policyholders of ESIF, including the elimination of the assessability feature of
the membership interests, and (ii) 5.79 million shares of its common stock to
subscribing former policyholders or members of ESIF, certain members of
management, and the public in a subscription offering and subsequent public
offerings. At the same time, and in connection with a recapitalization to
simplify Summit's corporate structure, all of the capital stock of SHC, which
had been owned by ESIF and one of its subsidiaries prior to the conversion, was
acquired by Summit, and SHC became a wholly owned subsidiary of Summit. In
addition, as part of the recapitalization, SHC's ownership of Bridgefield
Casualty Insurance Company ("Bridgefield Casualty") was transferred to
Bridgefield.
The conversion and recapitalization transactions described above are
considered to be similar to pooling of interests transactions. The historical
cost basis accounting of the predecessor companies has been retained, and the
Company's financial statements have been presented using pooling of interests
basis accounting. The conversion and recapitalization transactions had no impact
upon previously reported net income of the consolidated entities.
The terms and details of these transactions, and the preferred stock
and common stock issued by Summit in connection therewith, are more fully
described in Summit's Registration Statement on Form S-1 (No. 333-16499).
In the accompanying notes to financial statements, the "Company" refers
to the consolidated financial statements of Summit and its consolidated
subsidiaries.
Subsequent to the conversion and recapitalization, the Company's
business is comprised of two major operating segments. Summit's insurance
subsidiaries, Bridgefield and Bridgefield Casualty (the "insurance
subsidiaries"), continue to underwrite and assume the underwriting risks with
respect to workers' compensation insurance policies for Florida employers and
are regulated by the Department of Insurance of the State of Florida (the
"Florida DOI"). Summit's
F-7
<PAGE> 63
administrative subsidiaries (SHC and subsidiaries) (the "administrative
subsidiaries") continue to provide administrative services (including sales and
agency relations, underwriting, claims administration, loss control, policy
administration, and financial management) to the insurance subsidiaries and
several unaffiliated self-insurance funds.
ESIF was formed in 1978 for the stated purpose of providing statutory
workers' compensation coverage for Florida employers of all sizes, primarily in
the construction, manufacturing, wholesale and retail, and service industries.
An indemnity agreement issued by ESIF indemnified the member employer against
loss or liability relating to workers' compensation insurance risks. Any
employer that obtained workers' compensation coverage from ESIF automatically
became a member of ESIF with certain rights, including voting privileges and
rights to receive any distributions of profits or surplus if so declared by
ESIF's Trustees or upon liquidation. However, all members of ESIF were subject
to joint and several liability for the obligations of ESIF. ESIF did not operate
for the purpose of generating profits, but it did retain a portion of its
earnings and profits in order to avoid making assessments against its members.
Occasionally during its operating history, ESIF did pay a distribution of
profits to its members, but it never made an assessment against its members.
Bridgefield also wholly owns a Grand Cayman Island domiciled
reinsurance subsidiary, U.S. Employers Insurance, Inc. ("USEI"), whose
underwriting operations are eliminated in consolidation (see Note 5).
Consolidation and Presentation
The accompanying consolidated financial statements include the
accounts, after intercompany eliminations, of Summit 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.
In August 1997, Bridgefield changed its fiscal year end from March 31
to December 31 in order to better facilitate the consolidated reporting with
Summit, its subsidiaries, and affiliates. Accordingly, the accompanying
financial statements include a consolidated balance sheet and a consolidated
statement of income as of and for the nine months ended December 31, 1997. A
consolidated statement of income for the nine months ended December 31, 1996 is
also provided for comparison purposes.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect amounts
reported in the financial statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes known which
could impact the amounts reported and disclosed herein.
Recognition of Revenues
Workers' compensation insurance premiums are based on rates established
by the National Council on Compensation Insurance. Premium revenues generally
are recognized over the life of the related policies on the daily pro rata
method with a reserve for unearned premiums established for the unexpired
portion of the premiums applicable to those policies. Similarly,
F-8
<PAGE> 64
premiums ceded under reinsurance contracts are recognized on a daily pro rata
basis corresponding earned premiums subject to such contracts. Adjustments to
revenue for premium audits are recognized in the period in which such audits are
finalized.
For retrospectively rated policies, the ultimate premium for a period
is determined on the basis of the insured's loss experience. If an insured's
incurred losses are less than expected, the Company may be required to refund a
portion of the premiums previously collected. The Company 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 recognized in current
operations.
Administrative fee revenue is recognized based upon a contractual
administrative fee percentage of premiums earned by the unaffiliated
self-insurance funds to whom the Company's administrative subsidiaries provides
services. Fees for administrative services provided to the Company's insurance
subsidiaries have been eliminated in the accompanying consolidated income
statements.
Deferred Policy Acquisition Costs
All indemnity contracts issued by Bridgefield (formerly ESIF) prior to
March 31, 1997 had a common anniversary date of April 1, and consequently, for
Bridgefield, there was no deferred policy acquisition costs asset nor a
liability for unearned premiums at March 31, 1997. The reserve for unearned
premiums included in the accompanying balance sheet at March 31, 1997 pertains
to Bridgefield Casualty, for which the related agent commissions were incurred
as the premiums were earned, and other acquisition-related costs were
insignificant.
Policy acquisition costs represent costs directly related to the
production or acquisition of new or renewal business, including agent
commissions and Florida Department of Labor administration fees. These costs are
deferred to the extent recoverable and are amortized over the period during
which premiums are earned. The deferred policy acquisition costs asset reported
in the accompanying balance sheet at December 31, 1997 represents the portion of
policy acquisition costs corresponding to unearned premium reserves of the
Company's insurance subsidiaries.
Income Taxes
Income taxes have been provided using the liability method in
accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") 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 SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". This Statement requires that debt
investment securities are to be classified as
F-9
<PAGE> 65
either "held-to-maturity" (carried at amortized cost), "trading" (carried at
fair value with unrealized gains and losses reported in income), or
"available-for-sale" (carried at fair value with unrealized gains and losses
reported as a component of shareholders' equity). Equity securities are to be
classified as either trading or available-for-sale.
The Company recognizes there may be occasions where it is necessary and
appropriate to sell a security prior to its maturity in response to changes in
circumstances. Recognizing this need for the ability to proactively respond to
changes in tax position and in market conditions, the Company has classified its
entire investment portfolio as available-for-sale.
Accordingly, all investments in the accompanying consolidated balance
sheets are reported at estimated fair value with the corresponding net
unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity. Gains and losses realized through the sale of investments
are included as a separate component in the accompanying consolidated statements
of income. The cost of fixed maturities sold is determined principally on the
specific identification method, while the cost of equity securities sold is
based on the first-in-first-out method.
Short-term investments are reported at cost.
In the normal course of business, the Company is party to financial
instruments, none of which have significant off-balance-sheet risks.
Loss and Loss Adjustment Expense Reserves
The reserves for unpaid losses and loss adjustment expenses ("LAE")
represent management's best estimate of the ultimate cost of the losses and LAE
that are unpaid at the balance sheet date including incurred but not reported
claims. Such reserves are established by management based upon (i) results of
actuarial reviews which incorporate the Company's experience with similar cases,
estimates of future claim trends, and historical trends such as recurring loss
payment and reporting patterns, claim closures and product mixes; (ii) facts
known to the Company, and (iii) regulatory requirements. These reserves are
continually reviewed and as adjustments become necessary, such adjustments are
included in current operations.
The reserves for permanent indemnity disability claims have been
discounted at a rate of 4% as permitted under section 625.091, Florida Statutes,
with such discount computed based upon the Company's anticipated payout
patterns. The amount of this discount was $4.4 million and $4.0 million at March
31, 1997 and December 31, 1997, 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 liabilities net of reinsurance.
Accordingly, amounts recoverable from reinsurers are reported
F-10
<PAGE> 66
separately as assets in the accompanying consolidated balance sheets, and loss
and LAE reserves are reported exclusive of such recoverable amounts (also see
Note 5).
In the accompanying consolidated statements of income, premiums earned
and losses incurred are reported net of reinsurance ceded (also see Note 5).
Reinsurance arrangements allow management to control exposure to potential
losses arising from large risks. All of the insurance subsidiaries' reinsurance
is effected under quota share and excess of loss reinsurance contracts, the
general terms of which are described in Note 5. Losses and LAE recoverable from
reinsurers are estimated in a manner consistent with the loss and LAE reserves
associated with the reinsured policies. Similarly, reinsurance premiums 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
Under Florida law, the Company's insurance subsidiaries are subject to
state guaranty fund assessments, the purpose of which is to collect money from
solvent insurance companies and self-insurance funds to cover certain losses to
policyholders or members of insolvent insurance companies or self-insurance
funds, after assessment of the policyholders or members of such insolvent
companies or funds. This type of guaranty fund is separate from the Florida
Special Disability Trust Fund (the "SDTF") which is designed to reimburse
insurers for certain benefits paid to previously injured workers as discussed in
the accompanying Note 13 to these consolidated financial statements.
Florida Statutes limit the guaranty fund assessment to a maximum of 2%
of direct written premiums annually. However, due to the many uncertainties
regarding the ultimate amount of assessments, if any, the Company's policy is to
recognize its obligation for guaranty fund assessments upon the receipt of
notice thereof. Guaranty fund assessments charged to expense during the years
ending March 31, 1996 and 1997 were $1.6 million and $1.4 million, respectively.
In November 1997, based upon a recommendation of the Board of Directors of the
Florida Workers' Compensation Insurance Guaranty Association, the Florida DOI
certified an assessment in the amount of 1.5% of insurers' net direct written
premiums for 1997. Accordingly, assessments charged to expense by the insurance
subsidiaries during the nine months ended December 31, 1997 were $2.0 million.
Concentrations of Credit or Financial Risk
Florida law currently allows the Company's insurance subsidiaries to
write policies only in the State of Florida. Therefore, all of the insurance
subsidiaries' premium revenues reported in the accompanying consolidated income
statements were derived from policies offered to customers located in Florida.
Accordingly, the Company could be adversely affected by economic downturns,
significant unemployment, regulatory developments and other conditions that may
occasionally occur in Florida and which may not as significantly affect its more
geographically diversified competition.
F-11
<PAGE> 67
' SHC has significant amounts of administrative revenue associated with
its third-party processing as a result of its contracts with several
unaffiliated self-insurance funds. Changes with respect to these contracts could
adversely affect the Company's business, financial condition, and results of
operations.
As further described in Note 5, the insurance subsidiaries have
significant amounts recoverable and reported in the accompanying consolidated
balance sheets as a result of ceding reinsurance under excess of loss and quota
share reinsurance contracts.
Intangible Assets
The majority of the Company's intangible assets were recorded in
connection with the January 1996 acquisition of SHC (see Note 14). These
intangible assets principally consist of customer accounts and contracts,
purchased software, and the excess of costs over the fair value of identifiable
net assets acquired (goodwill). The customer accounts and contracts, as well as
the purchased software, are being amortized on a straight-line basis over the
related estimated lives and contract periods which range from three to ten
years. The excess of costs over the fair value of identifiable net assets
acquired is being amortized on a straight-line basis over 25 years.
Periodically, the Company evaluates the recoverability of the costs in
excess of the fair value of net assets acquired and the costs associated with
customer listings through a comparison of forecasted undiscounted cash flows of
SHC and the remaining asset balances.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. Expenditures for improvements are capitalized, and
expenditures for maintenance and repairs are charged to operations as incurred.
Upon sale or retirement, the cost and related accumulated depreciation and
amortization are removed from the accounts and the resulting gain or loss, if
any, is reflected in income. Depreciation has been provided using the
straight-line method over the estimated useful lives of the related assets which
range from five to ten years. Leasehold improvements are amortized on the
straight-line method over the term of the related leases.
Cash and Cash Equivalents
Cash and cash equivalents principally consists of demand deposits with
financial institutions and highly liquid investments having original maturities
of three months or less when purchased.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on the Company's
experience with uncollectible premiums receivable and represents the Company's
best estimate of the ultimate uncollectible amounts incurred through the balance
sheet date.
F-12
<PAGE> 68
Earnings Per Share
Earnings per share amounts, determined in accordance with SFAS 128, "Earnings
Per Share", are presented for the period in 1997 subsequent to the Company's
initial public offering.
Reclassifications
Certain amounts in the financial statements as of and for the year
ended March 31, 1997 have been reclassified to better conform with the
presentation in the financial statements as of and for the nine months ended
December 31, 1997.
2. INVESTMENTS
The amortized cost and estimated fair value of available-for-sale fixed
maturity investments are summarized as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
AT MARCH 31, 1997
U.S. Treasury and other U.S.
government agencies............. $ 56,265 $ 123 $ 1,142 $ 55,246
States and political subdivisions... 83,455 421 559 83,317
Corporate debt securities........... 41,861 173 522 41,512
-------- ------- ------- --------
Total debt securities................. $181,581 $ 717 $ 2,223 $180,075
======== ======= ======= ========
AT DECEMBER 31, 1997
U.S. Treasury and other U.S.
government agencies............. $ 71,977 $ 1,685 $ 84 $ 73,578
States and political subdivisions... 93,005 2,316 222 95,099
Corporate debt securities........... 45,733 1,441 76 47,098
Other debt securities............... 5,601 26 174 5,453
-------- ------- ------- --------
Total debt securities................. $216,316 $ 5,468 $ 556 $221,228
======== ======= ======= ========
</TABLE>
Refer to Note 17 regarding the fair value of the Company's investment
securities.
The amortized cost and estimated fair value of fixed maturities at
December 31, 1997, 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>
ESTIMATED
AMORTIZED FAIR
COST VALUE
---- -----
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less....................... $ 5,176 $ 5,196
After one through five............ 83,569 84,918
After five through ten............ 108,402 111,506
After ten......................... 19,169 19,608
-------- --------
Total............................... $216,316 $221,228
======== ========
</TABLE>
F-13
<PAGE> 69
Like that for fixed maturities, unrealized gains and losses on
investments in available-for-sale equity securities are reported directly in
shareholders' equity, net of applicable deferred income taxes, and do not affect
results of operations. The gross unrealized gains, gross unrealized losses, cost
and estimated fair value of these investments are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
AT MARCH 31, 1997
Preferred stocks.................. $ 4,452 $ 95 $ -- $ 4,547
Common stocks..................... 11,517 2,511 289 13,739
------- ------ ---- -------
Total equity securities............. $15,969 $2,606 $289 $18,286
======= ====== ==== =======
AT DECEMBER 31, 1997
Preferred stocks.................. $2,782 224 $ -- $ 3,006
Common stocks..................... 13,929 4,992 236 18,685
------- ------ ---- -------
Total equity securities............. $16,711 $5,216 $236 $21,691
======= ====== ==== =======
</TABLE>
Proceeds from the sales of investments, and resulting realized gains
and losses, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
NET
GROSS GROSS REALIZED
YEAR ENDED SECURITY SALES REALIZED REALIZED GAINS
MARCH 31 TYPE SOLD PROCEEDS GAINS LOSSES (LOSSES)
-------- --------- -------- ----- ------ --------
<S> <C> <C> <C> <C> <C>
1996 Fixed maturities $195,500 $ 3,235 $ 616 $ 2,619
Equities 12,293 1,782 47 1,735
-------- ------- ------- -------
Total $207,793 $ 5,017 $ 663 $ 4,354
======== ======= ======= =======
1997 Fixed maturities $ 78,430 $ 637 $ 1,030 $ (393)
Equities 6,981 1,300 220 1,080
-------- ------- ------- -------
Total $ 85,411 $ 1,937 $ 1,250 $ 687
======== ======= ======= =======
<CAPTION>
NINE MONTHS
ENDED
DECEMBER 31
-----------
<S> <C> <C> <C> <C> <C>
1996 (1) Fixed maturities $ 62,666 $ 732 $ 953 $ (221)
Equities 4,515 695 108 587
-------- ------- ------- -------
Total $ 67,181 $ 1,427 $ 1,061 $ 366
======== ======= ======= =======
1997 Fixed maturities $ 60,533 $ 423 $ 254 $ 169
Equities 7,786 1,532 150 1,382
-------- ------- ------- -------
Total $ 68,319 $ 1,955 $ 404 $ 1,551
======== ======= ======= =======
</TABLE>
- ----------------
(1) Unaudited
F-14
<PAGE> 70
Major categories of net investment income are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31 ENDED DECEMBER 31
------------------- -----------------
1996 1997 1996 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Income from:
Fixed maturities................... $10,923 $10,500 $ 7,805 $ 9,489
Equity securities.................. 534 874 434 461
Short-term investments and cash.... 1,753 1,396 1,367 1,167
------- ------- ------- -------
Net investment income................ $13,210 $12,770 $ 9,606 $11,117
======= ======= ======= =======
</TABLE>
In compliance with insurance regulations, at December 31, 1997 the
Company has $5.1 million and $0.3 million of its investments and cash pledged
to and on deposit with the Florida DOI.
3. PROPERTY AND EQUIPMENT
The major components of property and equipment are as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1997
---- ----
<S> <C> <C>
Furniture, fixtures and equipment......... $1,794 $2,065
Leasehold improvements.................... 103 115
Software.................................. 270 284
------ ------
2,167 2,464
Less accumulated depreciation
and amortization...................... 715 1,131
------ ------
$1,452 $1,333
====== ======
</TABLE>
Depreciation and amortization expense for the years ended March 31,
1996 and 1997 was $0.2 million and $0.7 million, and for the nine months ended
December 31, 1996 and 1997 was $0.6 million and $0.4 million, respectively.
Substantially all property and equipment was acquired in the January 1996
acquisition of SHC (See Note 14).
F-15
<PAGE> 71
4. INTANGIBLES
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1997
---- ----
<S> <C> <C>
Goodwill.................................. $47,239 $46,916
Other intangible assets:
Customer accounts and contracts......... 6,608 6,608
Purchased software...................... 6,300 6,300
Capitalized debt acquisition costs...... 757 757
------- -------
60,904 60,581
Less accumulated amortization............. 5,175 7,841
------- -------
$55,729 $52,740
======= =======
</TABLE>
5. REINSURANCE
In accordance with general practice in the insurance industry, the
insurance subsidiaries are engaged in reinsurance transactions to cede portions
of their risks to other insurers. These reinsurance agreements do not relieve
the insurance subsidiaries from their primary obligation to policyholders, but
they do make the assuming reinsurers liable to the insurance subsidiaries for
the reinsurance ceded. Therefore, the Company is subject to credit risk with
respect to the obligations of its reinsurers, and any failure on the part of
these reinsurers could have a material adverse effect on the Company's business,
financial condition, and results of operations.
Effective April 1, 1997, Bridgefield entered into quota share
reinsurance agreements, in addition to existing excess of loss reinsurance
agreements, with American Re-Insurance Company, St. Paul Fire and Marine
Insurance Company, Constitution Reinsurance Corp., and Transatlantic Reinsurance
Company. Accordingly, beginning on that date and for the nine months ended
December 31, 1997, Bridgefield ceded an aggregate of 75% of the net premiums
earned on workers' compensation during such period, and the reinsurers, in their
respective proportions, have assumed that same percentage of the risks under
such policies. In addition, Bridgefield recognized $22.9 million, during the
nine months ended December 31, 1997, of ceding commissions under this quota
share arrangement, and such commissions were recorded as a reduction to other
underwriting, general and administrative expenses.
The ceding of 75% of net premiums earned by Bridgefield during the nine
months ended December 31, 1997, and the recognition of corresponding ceding
commissions, resulted in significant reductions to earned premium revenue,
losses and LAE, and other underwriting, general and administrative expenses from
that recognized in the prior periods reported in the accompanying consolidated
statements of income.
Pertaining to the year ended March 31, 1997 and the nine months
ended December 31, 1997, the largest net amount of risk retained by the
insurance subsidiaries on any one occurrence is $500,000 and $50,000 with
deductibles of $500,000 and $500,000, respectively. The insurance subsidiaries
currently maintain the following coverage under specific excess of loss,
aggregate excess of loss, and quota share reinsurance agreements:
F-16
<PAGE> 72
SPECIFIC REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
SPECIFIC
YEAR ENDED SPECIFIC OCCURRENCE
MARCH 31 REINSURER ATTACHMENT LIMIT
-------- --------- ---------- -----
<S> <C> <C> <C>
1996 Federal Insurance Co.(2) 500 500
Federal Insurance Co.(2) 1,000 1,000
Continental Casualty Co. (2) 2,000 Statutory
1997 Lloyd's (2) 500 1,500
National Union Fire Insurance Co.(2) 2,000 Statutory
Continental Casualty Co. (1) 500 Statutory
NINE MONTHS ENDED
DECEMBER 31
-----------
1997 John Hancock Mutual Life Insurance Co.(2) 50 450
Lincoln National Life Insurance Co.(2) 500 500
Republic Western Insurance Co.(2) 1,000 1,000
National Union Fire Insurance Co.(2) 2,000 Statutory
John Hancock Mutual Life Insurance Co.(1) 50 450
Continental Casualty Co.(1) 500 Statutory
</TABLE>
AGGREGATE REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AGGREGATE AGGREGATE
MARCH 31 REINSURER ATTACHMENT LIMIT
-------- --------- ---------- -----
<S> <C> <C> <C>
1996 Crossroads (2) 115,018 27,063
</TABLE>
QUOTA SHARE REINSURANCE
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31 REINSURER PARTICIPATION
-------- --------- -------------
<S> <C> <C>
1997 American Re-Insurance Co.(1) 80%
NINE MONTHS ENDED
DECEMBER 31
-----------
1997 American Re-Insurance Co.(2) 35%
St. Paul Fire and Marine Insurance 15%
Co.(2)
Constitution Reinsurance Co.(2) 20%
Transatlantic Reinsurance Co.(2) 5%
American Re-Insurance Co.(1) 80%
</TABLE>
- -------------
(1) Pertains to Bridgefield Casualty
(2) Pertains to Bridgefield
F-17
<PAGE> 73
Insurance premiums for the years ended March 31, 1996 and 1997
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Direct premiums earned................. $119,028 $105,044
Reinsurance ceded...................... 4,135 7,723
-------- --------
Net premiums earned.................... $114,893 $ 97,321
======== ========
1996 1997
---- ----
Gross premiums written................. $130,528 $132,321
Reinsurance ceded...................... 9,232 15,278
-------- --------
Net premiums written................... $121,296 $117,043
======== ========
</TABLE>
Insurance premiums for the nine months ended December 31, 1996 and 1997
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
(UNAUDITED)
<S> <C> <C>
Direct premiums earned................. $ 79,201 $ 86,852
Reinsurance assumed.................... -- 618
Reinsurance ceded...................... 4,692 67,938
-------- --------
Net premiums earned.................... $ 74,509 $ 19,532
======== ========
<CAPTION>
<CAPTION>
1996 1997
---- ----
(UNAUDITED)
<S> <C> <C>
Gross premiums written................. $113,369 $117,409
Reinsurance assumed.................... -- 618
Reinsurance ceded...................... 5,060 85,947
-------- --------
Net premiums written................... $108,309 $ 32,080
======== ========
</TABLE>
Incurred losses and LAE are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31 DECEMBER 31
-------------------- ------------------------
1996 1997 1996 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Direct losses and LAE................. $102,832 $ 77,979 $ 59,298 $ 63,312
Reinsurance assumed................... -- -- -- 330
Reinsurance ceded..................... 7,988 12,827 9,062 51,190
-------- -------- -------- --------
Net losses and LAE incurred........... $ 94,844 $ 65,152 $ 50,236 $ 12,452
======== ======== ======== ========
</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
Bridgefield to Crossroads as described in the following paragraph.
F-18
<PAGE> 74
Of the reinsurance ceded amounts above for the nine months ended
December 31, 1997, losses and LAE of $1.9 million, and no related premium, are
attributable to reinsurance agreements with Crossroads, a Bermuda domiciled
insurance company in which a director of Summit has an ownership interest.
Crossroads is licensed to do business in Florida and is a member of the Florida
Workers' Compensation Insurance Guaranty Association. Fifty percent of business
ceded to Crossroads has been retroceded by Crossroads to USEI, and USEI does not
assume or directly underwrite any business other than that assumed from
Crossroads. At March 31, 1997 and December 31, 1997 loss and LAE reserves
recoverable of approximately $9.9 million and $7.2 million, respectively (net of
amounts retroceded to USEI), are attributable to excess reinsurance agreements
with Crossroads. For the years ending March 31, 1987, 1988, 1991, 1992 and 1993,
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 year ended March 31, 1997 and the nine months ended December 31,
1997, the insurance subsidiaries did not commute any ceded reinsurance nor enter
into or engage in any loss portfolio transfers. The insurance subsidiaries
remain obligated for amounts ceded in the event that the reinsurers do not meet
their obligations.
The reinsurance recoverable asset at December 31, 1997 is comprised of
amounts related to reinsurance agreements with the following insurers (in
thousands):
<TABLE>
<CAPTION>
PAID UNPAID
REINSURANCE CARRIER RATING(1) CLAIMS CLAIMS TOTAL
------------------- -------- ------ ------ -----
<S> <C> <C> <C> <C>
American Re........................... A+ XV $2,819 $ 13,148 $ 15,967
Constitution Re....................... A+ IX 973 3,932 4,905
Continental Casualty.................. A XV 0 8,982 8,982
Crossroads(2)......................... N/R 293 7,192 7,485
Employers Re.......................... A++ XV 379 6,937 7,316
Federal Insurance Co.................. A++ XV 0 6,384 6,384
INA................................... A- XIII 289 5,120 5,409
John Hancock.......................... A++ XV 412 6,146 6,558
Lincoln National...................... A+ XV 64 2,371 2,435
Lloyds of London...................... N/R 0 11,788 11,788
National Union........................ A++ XV 3 4,768 4,771
Old Republic.......................... A+ X 5 6,950 6,955
Republic Western...................... A VIII 0 1,623 1,623
St Paul Fire & Marine................. A+ XV 730 2,956 3,686
Transatlantic Re...................... A++ XI 243 990 1,233
Transamerica.......................... A XI 1 22,224 22,225
------ -------- --------
Total....................... $6,211 $111,511 $117,722
====== ======== ========
</TABLE>
- --------------
(1) 1997 Best's Key Rating Guide -- Property-Casualty Edition.
(2) Based on filings with the Florida DOI, Crossroads maintains trust fund
assets sufficient to fund its reinsurance obligations, although no
specific recoverable from Crossroads is directly secured by such trust
fund assets.
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, aggregate and quota share
reinsurance agreements and using ultimate losses by accident year consistent
with the reported loss and LAE liabilities.
F-19
<PAGE> 75
6. FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return. A formal
tax sharing agreement exists between Summit and its subsidiaries, Bridgefield
and SHC, such that the amount of taxes or tax benefits are shared as if separate
returns were filed. In addition, Bridgefield has a similar agreement with its
subsidiary, Bridgefield Casualty; however, Bridgefield does not have a tax
sharing agreement with its subsidiary USEI. Bridgefield does not collect from or
refund to this subsidiary the amount of income taxes or benefits which would
result if the entities filed separate returns.
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 year ended March 31, 1996 operations loss
to prior years, federal income taxes of $6.9 million and $12.2 million for
years ended March 31, 1994 and 1995, 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 were $0.8
million, $0.7 million, and $0.6 million for the years ended March 31, 1996 and
1997 and the nine months ended December 31, 1997, 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 Company's deferred tax liabilities and
assets, as calculated in accordance with SFAS 109, are as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Unrealized investment gains ................ $ 840 $ 3,708
Special Disability Trust Fund
recoverables ............................. 283 --
Reinsurance premium adjustment ............. 898 1,671
Intangible assets .......................... 4,038 3,491
------- -------
Total deferred tax liabilities ............... 6,059 8,870
Deferred tax assets:
Discount on loss and LAE reserves .......... 18,470 16,308
Unallocated remittances .................... 180 966
Uncollectible premiums ..................... 941 1,005
Special Disabilities Trust Fund
recoverables ............................. -- 1,321
Other ...................................... 789 971
Unrealized investment losses ............... 548 --
------- -------
Total deferred tax assets .................... 20,928 20,571
------- -------
Net deferred tax assets ...................... $14,869 $11,701
======= =======
</TABLE>
F-20
<PAGE> 76
The Company 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. The Company
also has significant tax loss carryback potential for the years ended March 31,
1994 and 1995. For those reasons, a deferred tax valuation allowance is not
considered necessary.
The Company's consolidated federal income tax liability (asset) is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1997
---- ----
<S> <C> <C>
Current................................. $ 585 $ 2,408
Deferred................................ (14,869) (11,701)
-------- --------
Total net asset......................... $(14,284) $ (9,293)
======== ========
</TABLE>
Significant components of the provision for income taxes attributable
to continuing operations are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31 DECEMBER 31
--------- -----------------
1996 1997 1996 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Current tax expense..................... $ 1,425 $ 3,152 $ 3,006 $ 3,924
Deferred taxes (benefit)................ (1,930) 565 51 214
------- ------- ------- -------
Total income tax expense (benefit) ..... $ (505) $ 3,717 $ 3,057 $ 4,138
======= ======= ======= =======
</TABLE>
Income taxes paid by the Company totaled $11.2 million and $3.3 million
for the years ended March 31, 1996 and 1997, respectively, and $2.6 million for
the nine months ended December 31, 1997.
The reconciliation of income tax expense (benefit) 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>
YEAR ENDED NINE MONTHS ENDED
MARCH 31 DECEMBER 31
-------- -----------
1996 1997 1996 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Income tax (at 35% of pretax income or loss)... $ (43) $ 3,742 $ 2,902 $ 4,441
Tax-exempt investment income................... (1,067) (1,245) (932) (1,071)
Non taxable/deductible (income) expenses....... 32 404 62 80
Intangibles amortization....................... 177 539 450 504
State income taxes............................. 495 263 346 412
Other items, net............................... (99) 14 229 (228)
------- ------- ------- -------
Provision (credit) for federal income tax
expense (benefit)............................ $ (505) $ 3,717 $ 3,057 $ 4,138
======= ======= ======= =======
</TABLE>
The Internal Revenue Service is currently conducting an audit of SHC.
The Company cannot predict the results of the audit, and no assurance can be
given that the results of this audit will not have a material adverse effect on
the Company's business, financial condition, or results of operations.
F-21
<PAGE> 77
7. 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 necessarily as experience develops or new
information becomes known; such adjustments are included in current operations.
The following table provides a reconciliation of the beginning and
ending reserve balances for losses and LAE (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31 DECEMBER 31
-------- -----------
1996 1997 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net reserves for losses and LAE at beginning
of period ................................... $ 259,085 $ 277,995 $ 277,995 $ 269,670
Less: Recoverable from Florida SDTF(1) ........ (15,879) (20,060) (20,060) (20,979)
--------- --------- --------- ---------
Net reserves for losses and LAE less SDTF
recoverable asset at beginning of period .... 243,206 257,935 257,935 248,691
Add provision for claims occurring in:
The current period .......................... 84,058 69,014 53,698 13,003
Prior periods ............................... 10,786 (3,862) (3,462) (551)
--------- --------- --------- ---------
Incurred losses during the current period ..... 94,844 65,152 50,236 12,452
Deduct payments for claims occurring in:
The current period .......................... 15,432 14,131 8,378 2,481
Prior periods ............................... 64,683 60,265 48,137 46,938
--------- --------- --------- ---------
Claim payments during the current period ...... 80,115 74,396 56,515 49,419
Net reserves for losses and LAE less SDTF
recoverable asset at end of period .......... 257,935 248,691 251,656 211,724
Add: Recoverable from Florida SDTF(1) ........ 20,060 20,979 21,138 23,833
--------- --------- --------- ---------
Net reserves for losses and LAE at end of
period ...................................... 277,995 269,670 272,794 235,557
Add: Reinsurance recoverables (exclusive of
recoverables on paid losses) ................ 109,637 89,074 104,129 111,511
--------- --------- --------- ---------
Gross reserves for losses and LAE at end of
period (GAAP basis) ......................... $ 387,632 $ 358,744 $ 376,923 $ 347,068
========= ========= ========= =========
</TABLE>
- --------------------
(1) The change in the SDTF Recoverable asset is included in incurred losses
and LAE in the accompanying consolidated income statements.
The foregoing reconciliation shows that a strengthening of the March
31, 1995 reserves, in the amount of $10.8 million, occurred during the year
ended March 31, 1996. This increase in losses and LAE expense resulted
principally from settling case reserves established in prior years for more than
previously anticipated.
F-22
<PAGE> 78
The foregoing reconciliation also shows that reserve redundancies of
$3.9 million, $3.5 million, and $0.6 million emerged during the year ended March
31, 1997 and the nine-month period ended December 31, 1996 and 1997,
respectively. These amounts represent the release of certain loss reserves
previously carried which were determined, based on comparisons to actuarially
projected amounts, to be redundant.
Statutory basis loss reserves were determined using paid loss data net
of historic SDTF recoveries; GAAP basis loss reserves were determined using paid
loss data gross of SDTF recoveries. This adjustment increased loss reserves by
$31.4 million, $26.0 million, $28.8 million, and $27.5 million at March 31, 1996
and 1997, and December 31, 1996 and 1997, respectively, and increased
reinsurance recoverables by $11.8 million, $5.7 million, $8.4 million, and $4.4
million as of the same respective dates. In addition, Bridgefield 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, 1996 and 1997, and
December 31, 1996 and 1997, was $20.1 million, $21.0 million, $21.1 million, and
$23.8 million, respectively. In order to quantify the amounts recoverable from
the SDTF, Bridgefield reviews its claims that have been identified as subject to
SDTF recovery considering Bridgefield's historical recovery experience on claims
submitted to the SDTF.
The SDTF reinsurance recoverable was calculated using loss and LAE
reserves computed using paid losses gross of SDTF recoveries and in
consideration of expected recoveries from the SDTF. Certain of the claims used
in the determination of the SDTF recoverable are of an amount which will pierce
reinsurance layers, and the Company will pursue recovery of such claims under
the provisions of its reinsurance agreements. Subsequently, as the Company
remits the claims to the SDTF, and ultimately collects these claims from the
SDTF, the Company will remit to the reinsurers their portion of the SDTF
recoveries. The aggregate recoverable from SDTF asset and the SDTF related
reinsurance recoverable, which approximates the amount of the increase in loss
reserves resulting from determining the GAAP basis loss reserves using paid loss
data gross of SDTF recoveries, represents management's best estimate of the
aggregate amounts that will be recovered.
F-23
<PAGE> 79
8. ACCRUED RETROSPECTIVE PREMIUMS
The Company offers several types of retrospectively rated policies for
which the ultimate premium is determined by the insured's loss experience. This
determined premium, upon comparison with premiums previously collected from the
insured, generally results in additional accrued premium income or a premium
refund to be recognized. Accrued retrospectively rated premiums and refunds,
including those relating to bulk incurred but not reported losses, have been
determined by individual policyholder accounts. Included as premiums receivable
in the accompanying balance sheets are accrued retrospective premiums of $23.1
million and $20.2 million as of March 31, 1997 and December 31, 1997,
respectively. Included as a part of other policyholders' funds liability in the
accompanying balance sheets are accrued retrospective premium refunds of $11.4
million and $10.7 million as of March 31, 1997 and December 31, 1997,
respectively.
9. EQUITY
Of the Company's retained earnings as of December 31, 1997 reported in
the accompanying consolidated balance sheet, approximately $0.4 million is
restricted as such amount represents the aggregate value of the preferred stock
preferences, including liquidation and unpaid cumulative dividend preferences,
in excess of the stated value of preferred stock reported in such balance sheet.
In addition, Bridgefield is subject to 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. At December 31, 1997, under statutory regulations applicable to
stock property and casualty insurance companies, $5.4 million of Bridgefield's
statutory net assets of $53.8 million could be transferred to Summit as a
dividend. Consequently, of the Company's retained earnings at December 31, 1997
reported in the accompanying consolidated balance sheet, $12.2 million is not
available to be distributed as dividends to the Company's shareholders.
Consolidated statutory equity of the insurance subsidiaries, determined
in accordance with statutory accounting practices, was $21.8 million and $53.8
million as of March 31, 1997 and December 31, 1997, respectively. Bridgefield's
statutory basis net income (loss) for the years ended March 31, 1996 and 1997,
and the nine months ended December 31, 1996 and 1997, was $(4.7) million, $9.0
million, $12.9 million and $23.3 million, respectively.
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. In
F-24
<PAGE> 80
July 1997, the Florida legislature adopted the provisions of the RBC model law.
At December 31, 1997, both Bridgefield and Bridgefield Casualty had achieved
statutory basis equity significantly in excess of that required by the Florida
RBC law.
10. EARNINGS PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 replaces Accounting Principles Board Opinion No. 15, "Earnings
Per Share" ("APB 15") and requires disclosure of basic earnings per share and
diluted earnings per share. Basic earnings per share excludes all potentially
dilutive securities from the calculation and is calculated by dividing net
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. The diluted earnings
per share computation is computed similarly to the fully diluted earnings per
share calculation under APB 15. The following table reconciles the numerators
and denominators for the basic and diluted earnings per share calculations for
the nine months ended December 31, 1997 (in thousands except per share data).
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Net income $8,550
Less: Preferred stock dividend requirement (403)
Weighted average common shares outstanding 5,697
------ -----
Income available to common shareholders $8,147 5,697
Basic earnings per share $1.43
=====
Dilutive effect of stock options 142
------ -----
Income available to common
shareholders plus assumed conversions $8,147 5,839
Diluted earnings per share $1.40
=====
</TABLE>
Because there were no common or preferred shares outstanding during the
fiscal years ended March 31, 1996 and 1997, or the nine-month period ended
December 31, 1996, the presentation of earnings per share is not applicable to
those consolidated financial statements.
11. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities 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 the lessor's operating expenses and other charges. The
Company anticipates that most leases will be renewed or replaced upon
expiration.
Future minimum annual payments at December 31, 1997 for all
noncancellable leases are (in thousands):
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31:
1998.................................... $1,647
1999.................................... 1,289
2000.................................... 323
2001.................................... 1
------
Total minimum future lease payments.......... 3,260
Income from subleases.................... (75)
------
Net minimum future lease payments............ $3,185
======
</TABLE>
In excess of 80% of the future lease commitments relates to rented
office facilities from certain directors of Summit.
Rental expense, under operating leases, was $0.4 million, $1.7 million,
$1.3 million, and $1.2 million for the fiscal years ending March 31, 1996 and
1997 and the nine months ended December 31, 1996 and 1997, respectively.
The Company, 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 the Company in
estimating the loss and LAE reserves. The Company's management believes that the
resolution of those actions will not have a material effect on the Company's
financial position or results of operations.
F-25
<PAGE> 81
12. CHANGE IN ACCOUNTING ESTIMATE
During the year ended March 31, 1996 and prior to its
conversion, ESIF refined its method of estimating accrued retrospective premiums
and refunds. Prior to that year, ESIF estimated the accrued retrospective
premiums and refunds 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. This revised methodology was implemented
by management in order to more accurately estimate the accrued retrospective
premium and refund 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 operating results for the year
ended March 31, 1997 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. The SDTF recently underwent legislative review. Under a recent
enactment of the Florida legislature, the SDTF law has been amended so that
claims arising from accidents occurring on or after January 1, 1998 will not be
accepted for reimbursement by the SDTF. The bill states the SDTF will be liable
for reimbursement for applicable injuries that occur prior to January 1, 1998
and that assessments are to continue for funding purposes. Changes in the SDTF's
operations which decrease the availability of recoveries from the SDTF, or
increase the SDTF assessments payable by Bridgefield, or changes in regulations
which further limit Bridgefield's ability to reduce statutory basis loss
reserves for a portion of SDTF future recoverable amounts, may have a material
adverse effect on Bridgefield's business, financial condition or results of
operations.
Loss and LAE reserves included in the accompanying financial statements
are presented gross of future SDTF recoveries and have been determined using
historical loss data which excludes SDTF recoveries.
F-26
<PAGE> 82
Bridgefield has recorded an SDTF recoverable of $21.0 million and
$23.8 million at March 31, 1997 and December 31, 1997, respectively, for the
estimated amounts expected to be received from the SDTF. The estimated amount of
recoveries, which is management's best estimate of the amount that will be
recovered, was based on claims identified as subject to SDTF recovery as well as
Bridgefield's recovery experience.
Amounts recovered from SDTF for the years ended March 31, 1996
and 1997 were $5.6 million and $7.5 million, respectively. Assessments paid by
Bridgefield to the SDTF were $5.6 million and $5.1 million for the years ended
March 31, 1996 and 1997, respectively. Amounts recovered from SDTF for the nine
months ended December 31, 1996 and 1997 were $6.5 million and $3.5 million,
respectively. Assessments paid by Bridgefield to the SDTF were $3.9 million and
$4.1 million for the nine months ended December 31, 1996 and 1997, respectively.
Bridgefield records assessments from the SDTF as premiums are written.
14. ACQUISITION OF SHC
In January 1996, ESIF (prior to its conversion and becoming
Bridgefield) purchased all of the outstanding capital stock of SHC. SHC and its
subsidiaries comprise a third-party administrator which provides insurance
related services to the insurance subsidiaries and several unaffiliated
self-insurance funds located in Florida, Louisiana, and Kentucky.
The acquisition was accounted for using the purchase method, and the
results of operations of SHC, after intercompany eliminations, are included in
the accompanying consolidated income statements from the date of acquisition.
The following unaudited pro forma information presents the consolidated results
of operations of ESIF and SHC for the year ended March 31, 1996 as if the
acquisition had been effective at April 1, 1995 after giving effect to
adjustments to reflect the acquisition. This data is provided for informational
purposes only and may not be indicative of future results of operations.
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1996
--------------
(IN THOUSANDS)
<S> <C>
Total revenues......................... $169,178
Income before income tax expense....... $ 3,330
Net income............................. $ 2,496
</TABLE>
15. DEBT
In connection with the January 1996 purchase of SHC by ESIF (see Note
14), SHC acquired a bank term loan and procured a revolving bank credit
facility. On May 28, 1997, the date of ESIF's conversion, Summit entered into a
new credit facility with First Union National Bank of North Carolina (FUNB)
whereby the then-existing debt was restructured. Under this
F-27
<PAGE> 83
new credit facility, the outstanding debt pertaining to the term loan was
established at $32.7 million, and the maximum amount available for borrowings
under a revolving line of credit was established at $5.0 million. The interest
rate applicable to this debt package was also established at the prime lending
rate plus 1%.
In December 1997, Summit secured, with SunTrust Bank of Tampa Bay,
access to $30.0 million under a revolving line of credit which offered more
favorable terms and greater flexibility than that of the existing debt. Of this
line of credit, $25.0 million was utilized to extinguish all other debt. At
December 31, 1997, the balance outstanding under this revolving line of credit
was $16.5 million. Interest on this revolving debt ranges from LIBOR plus 1.5%
to LIBOR plus 2.25%. Interest paid on debt during the nine months ended
December 31, 1997 was $1.9 million. Availability under this revolving line of
credit reduces by $4.0 million annually until the loan maturity date which is
the last business day of 2003.
As collateral for the debt outstanding at December 31, 1997, Summit
has pledged all of the issued and outstanding capital stock of two subsidiaries
of SHC, Summit Consulting, Inc. and Summit Healthcare Holdings, Inc. As a
condition for this debt, the Company must comply with certain financial
covenants and operating restrictions, to which the Company has so complied.
16. EMPLOYEE BENEFIT PLANS
The Company has a deferred savings and profit-sharing plan (the
"401(k)") covering substantially all of its employees. Under the 401(k), the
Company makes contributions equal to 75% of the participant's contributions, not
to exceed 6% of the participant's annual compensation. The Company's matching
contributions to the 401(k) totaled $0.3 million for the nine months ended
December 31, 1997.
In addition, the Company contributed 100 shares of its capital stock
to the 401(k) on behalf of each employee in employment on the date of the
conversion. The Company's stock contribution totaled $0.5 million.
17. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
- Cash and cash equivalents, short-term investments: The
carrying amounts reported in the accompanying consolidated
balance sheets for these instruments approximate fair values.
- Investment securities: Estimated fair values for debt and
equity security investments are based on quoted market prices.
- Premiums and accounts receivable: The carrying amounts of the
Company's receivables approximate fair values.
F-28
<PAGE> 84
- Debt: Summit has $16.5 million of debt outstanding at
December 31, 1997 which approximates its fair value.
- Reinsurance recoverable: The carrying amounts of the Company's
reinsurance recoverables approximate fair values.
18. DISCONTINUED OPERATIONS
Effective July 31, 1996, the Company decided to discontinue its
computer software development operation. As of December 31, 1996 all assets have
been disposed and the Company has recognized an after tax loss of approximately
$1.2 million on the disposition of this operation (including estimated operating
losses to the disposition date).
The operating results of the computer software development subsidiary
for the period in 1996 until disposition were as follows (in thousands):
<TABLE>
<S> <C>
Revenue................................. $ 660
Expenses................................ 2,013
-------
Loss before income taxes................ (1,353)
Income tax benefit...................... 460
-------
Net loss................................ $ (893)
=======
</TABLE>
19. DISPOSITION
Effective July 31, 1996, the Company 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 was completed during the second quarter
of 1997.
The operating results of the healthcare subsidiary for the year ended
March 31, 1997 were as follows (in thousands):
<TABLE>
<S> <C>
Revenue.................................. $ 114
Expenses................................. 701
-------
Loss before income taxes................. (587)
Income tax benefit....................... 200
-------
Net loss................................. $ (387)
=======
</TABLE>
F-29
<PAGE> 85
20. SEGMENT INFORMATION
The Company's operations prior to the January 1996 acquisition of SHC
(see Note 14) were solely in the workers' compensation insurance industry
segment. As a result of this acquisition, the Company also operates in the
insurance administration segment. Financial information by industry segment for
revenues, income before income taxes, and identifiable assets are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
WORKERS'
COMPENSATION INSURANCE INTERCOMPANY
TOTAL INSURANCE ADMINISTRATION ELIMINATION
----- --------- -------------- -----------
<S> <C> <C> <C> <C>
Year Ended March 31, 1996
Revenues ........................ $ 140,328 $ 132,393 $ 15,051 $ (7,116)
Income (loss) from
continuing operations
before income taxes ........... $ (123) $ (1,559) $ 1,436 --
Identifiable assets ............. $ 491,844 $ 401,679 $ 90,165 --
Year Ended March 31, 1997
Revenues ........................ $ 144,773 $ 110,733 $ 55,935 $ (21,895)
Income (loss) from
continuing operations
before income taxes ........... $ 10,692 $ 11,387 $ (695) --
Identifiable assets ............. $ 447,617 $ 379,179 $ 68,438 --
Nine Months Ended December 31, 1996
(Unaudited)
Revenues ........................ $ 110,811 $ 83,245 $ 43,517 $ (15,951)
Income (loss) from
continuing operations
before income taxes ........... $ 8,290 $ 9,023 $ (733) --
Identifiable assets ............. $ 472,388 $ 472,388 $ -- --
Nine Months Ended December 31, 1997
Revenues ........................ $ 55,257 $ 31,776 $ 45,460 $ (21,979)
Income (loss) from
continuing operations
before income taxes ........... $ 12,688 $ 11,758 $ 930 --
Identifiable assets ............. $ 534,651 $ 479,602 $ 55,049 --
</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-30
<PAGE> 86
21. RELATED PARTY TRANSACTIONS
As more fully described in Note 11, the Company has entered into office
premises and automobile lease agreements with certain directors of Summit.
As more fully described in Note 5, the Company has entered into
reinsurance agreements with an insurance company in which a director of Summit
has an ownership interest. Included as reinsurance recoverable in the
accompanying balance sheets are recoverables from this insurance company in
amount of $11.9 million and $7.5 million as of March 31, 1997 and December 31,
1997, respectively.
Entities in which Summit's president and chief executive officer held
ownership interests have provided certain transportation related services to the
Company. Fees paid by the Company to these entities approximated $0.4 million
and $0.03 million for the years ended March 31, 1996 and 1997 and $0.2 million
and $0.9 million for the nine months ended December 31, 1996 and 1997,
respectively.
Summit's president and chief executive officer is also a member of the
Board of Directors of Florida Retail Federation (the "Association"), which is
the sponsoring trade association for Florida Retail Federation Self Insurers
Fund ("FRF"), one of the group self-insurance funds administered by SHC. The
Association, as the fund sponsor, is entitled to a fee equal to 1% of FRF's
premiums earned in each year, and SHC is obligated to pay such fee out of the
administrative fee it receives from FRF. During the fiscal years ended March 31,
1996 and 1997, SHC paid approximately $0.9 million and $0.6 million to the
Association for such fees. During the nine months ended December 31, 1996 and
1997, SHC paid approximately $0.6 million and $0.5 million, respectively, to the
Association for such fees. During the years ended March 31, 1996 and 1997, FRF
paid to SHC fees for administrative services of approximately $27.7 million and
$24.5 million, respectively. During the nine months ended December 31, 1996 and
1997, FRF paid SHC fees for administration services of approximately $19.0
million and $15.5 million, respectively.
22. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly results of operations for each of the years ended December
31, 1997 and 1996 are as follows (in thousands except per share data):
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------
March 31 June 30 September 30 December 31
1997 1997 1997 1997
-------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $33,962 $17,225 $18,368 $19,664
Income from continuing
operations $ 1,742 $ 2,539 $ 3,065 $ 2,946
Net income $ 1,042 $ 2,539 $ 3,065 $ 2,946
Diluted earnings per
common share -- $ 0.46 $ 0.48 $ 0.46
<CAPTION>
March 31 June 30 September 30 December 31
1996 1996 1996 1996
-------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $37,242 $37,109 $35,939 $37,763
Income (loss) from
continuing operations $(4,790) $ 1,274 $ 2,377 $ 1,582
Net income (loss) $(4,802) $ 1,022 $ 1,364 $ 812
</TABLE>
Earnings per share ("EPS") data is presented beginning with the quarter
in which the Company's public offering was completed. Prior to this time there
were no common shares outstanding. EPS amounts for the quarters ended June 30,
1997 and September 30, 1997 in the above table were restated for SFAS 128.
The decrease in revenues beginning in the quarter ended June 30, 1997
is primarily attributable to Bridgefield entering into a quota share reinsurance
agreement, effective April 1, 1997, under which 75% of premiums and losses
related to policies issued subsequent to that date are ceded to third party
reinsurers.
23. STOCK OPTION PLAN
The Company has a Long-Term Incentive Plan (the "Incentive Plan") which
provides 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 interest of their directors, officers and
key employees to those of Summit's shareholders and by providing their
directors, officers and key employees with an incentive for outstanding
performance.
The Incentive Plan is administered by the Compensation Committee of the
Board of Directors of Summit, consisting of three non-employee directors. Such
committee determines, in its discretion, 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 will become exercisable and, subject
to certain conditions, the price and duration of such options. As of December
31, 1997, 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" 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 the 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;
(1) options intended to qualify as incentive stock options under Section 422 of
the Tax Code, or (2) 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.
On the date of conversion of Bridgefield, Summit granted stock options
to the directors and executive officers of Summit to purchase 500,000 shares of
common stock at a price of $11 per share. The options granted (168,065) to the
executive officers, are incentive stock options, and 50% of such options vested
180 days after the grant date of May 28, 1997, and the remaining 50% of such
options will vest on the first anniversary of the grant date, provided that such
executive officers remain employed by Summit. The options granted to the
directors are non-qualified stock options and vested on the date of the
conversion.
The Company has elected to follow Accounting Principals Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided under SFAS 123,
"Accounting for Stock Based Compensation", requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that SFAS. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997; risk free interest rate of 5%, volatility factor of the
expected market price of the Company's common stock of .10, a weighted average
expected life of the options of 5 years, and no assumed dividend yield.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value.
For purposes of pro forma disclosure the estimated fair value of the
incentive stock options is amortized to expense over the options' vesting
period. The Company's pro forma information is as follows (in thousands except
per share data):
<TABLE>
<CAPTION>
As Pro
Reported Forma
- --------------------------------------------------------------------
<S> <C> <C>
Net Income $8,550 $8,212
Basic Earnings Per Share $1.43 $1.37
Diluted Earnings Per Share $1.40 $1.34
</TABLE>
The following schedule summarizes activity in the Incentive Plan during
the nine months ended December 31, 1997.
<TABLE>
<CAPTION>
Incentive Non-Qualified
Stock Stock
Options Options
--------- -------------
Number Market Number Market
of Price at of Price at
Shares Date Given Shares Date Given
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding 3/31/97 -- -- -- --
Awarded 168,065 $11 331,935 $11
Exercised -- -- -- --
Forfeited -- -- -- --
- ------------------------------------------------------------------------
Outstanding 12/31/97 168,065 -- 331,935 --
========================================================================
</TABLE>
F-31
<PAGE> 87
INDEX OF FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Schedule I - Summary of Investments......................... S-2
Schedule II - Condensed Financial Information of Summit
Holding Southeast, Inc......................... S-3
Schedule IV - Reinsurance.................................... S-5
Schedule VI - Supplemental Information Concerning
Insurance Operations........................... S-6
</TABLE>
S-1
<PAGE> 88
SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
SCHEDULE I -- SUMMARY OF INVESTMENTS
(IN THOUSANDS)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
-------- -------- -------- --------
AMOUNT AT
COST OR ESTIMATED WHICH SHOWN
AMORTIZED FAIR IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------ ---- ----- -------------
<S> <C> <C> <C>
Fixed maturities:
U.S. Government and other
U.S. government agencies.......................... $ 71,977 $ 73,578 $ 73,578
States, municipalities and political
subdivisions...................................... 93,005 95,099 95,099
Corporate obligations............................... 45,733 47,098 47,098
Other debt securities............................... 5,601 5,453 5,453
-------- -------- --------
Total fixed maturities......................... 216,316 221,228 221,228
-------- -------- --------
Equity securities:
Common stocks:
Public utilities.................................... 1,162 1,449 1,449
Banks, trusts and insurance companies............... 2,134 3,200 3,200
Industrial and miscellaneous........................ 10,633 14,036 14,036
-------- -------- --------
Total common stocks............................ 13,929 18,685 18,685
Non redeemable preferred stock......................... 2,782 3,006 3,006
-------- -------- --------
Total equity securities........................ 16,711 21,691 21,691
Short-term investments................................... 6,537 6,537 6,537
-------- -------- --------
Total investments.............................. $239,564 $249,456 $249,456
======== ======== ========
</TABLE>
S-2
<PAGE> 89
SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION
OF SUMMIT HOLDING SOUTHEAST, INC.
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
ASSETS
Cash......................................................... $ 194
Other assets................................................. 2,132
Investment in subsidiaries................................... 112,791
-----------
Total assets............................................... $ 115,117
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt......................................................... $ 16,540
Other liabilities............................................ 243
-----------
Total liabilities.......................................... 16,783
-----------
Common stock................................................. 58
Additional paid-in-capital................................... 57,643
Preferred stock.............................................. 16,397
Retained earnings............................................ 18,052
Net unrealized appreciation of available-for-
sale securities held by subsidiaries, net
of applicable deferred income taxes 6,184
-----------
Total shareholders' equity................................. 98,334
-----------
Total liabilities and shareholders' equity................. $ 115,117
===========
</TABLE>
See accompanying note to condensed financial information.
S-3
<PAGE> 90
SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION
OF SUMMIT HOLDING SOUTHEAST, INC. - CONTINUED
CONDENSED STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Revenue:
Net investment income.............................................. $ 221
Expenses:
General and administrative......................................... 359
Interest expense................................................... 1,434
Amortization and depreciation...................................... 108
-----------
Total expenses................................................... 1,901
-----------
Loss before income taxes and equity in net income of
subsidiaries....................................................... (1,680)
Income tax benefit................................................... 643
-----------
(1,037)
Equity in net income of subsidiaries................................. 9,587
-----------
Net income ........................................................ $ 8,550
===========
</TABLE>
See accompanying note to condensed financial information.
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
CASH FROM OPERATING ACTIVITIES: $ 8,174
CASH USED IN INVESTING ACTIVITIES:
Purchase of and contributions to subsidiaries......................... (82,221)
CASH FROM FINANCING ACTIVITIES:
Net proceeds from sales of capital stock.............................. 57,701
Proceeds from debt.................................................... 57,715
Payments on debt...................................................... (41,175)
----------
Net cash provided by financing activities........................... 74,241
----------
Net increase in cash.................................................... 194
Cash at beginning of period............................................. --
----------
Cash at December 31, 1997............................................... $ 194
============
</TABLE>
See accompanying note to condensed financial information.
S-4
<PAGE> 91
SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF SUMMIT HOLDING SOUTHEAST, INC. - CONTINUED
NOTE TO CONDENSED FINANCIAL INFORMATION
1. Basis of Presentation
Summit Holding Southeast, Inc. ("Summit") began operations on May 28, 1997
in connection with Employers Self Insurers Fund's conversion from a group
self-insurance fund to a stock property and casualty insurance company as is
more fully explained in Note 1 to the accompanying consolidated financial
statements. Accordingly, parent company-only financial statements are not
applicable prior to that date.
In the accompanying parent company-only financial statements, Summit's
investment in subsidiaries is stated at cost plus equity in undistributed
earnings and net unrealized investment gains of subsidiaries since the date of
acquisition. These parent company-only financial statements should be read in
conjunction with the accompanying consolidated financial statements and notes
thereto.
SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------- -------- -------- -------- --------
ASSUMED % OF
CEDED TO FROM AMOUNT
OTHER OTHER ASSUMED
DESCRIPTION DIRECT COMPANIES COMPANIES NET TO NET
----------- ------ --------- --------- --- ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1996:
Premiums -- Workers'
Compensation......... $119,028 $ 4,135 $ 0 $114,893 0%
YEAR ENDED MARCH 31, 1997:
Premiums -- Workers'
Compensation......... $105,044 $ 7,723 $ 0 $ 97,321 0%
NINE MONTHS ENDED DECEMBER 31, 1996:
Premiums -- Workers'
Compensation......... $ 79,201 $ 4,692 $ 0 $ 74,059 0%
NINE MONTHS ENDED DECEMBER 31, 1997:
Premiums -- Workers'
Compensation......... $ 86,852 $67,938 $618 $ 19,532 3%
</TABLE>
S-5
<PAGE> 92
SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
SCHEDULE VI -- SUPPLEMENTAL INFORMATION CONCERNING INSURANCE OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
-------- -------- -------- -------- -------- -------- -------- --------
RESERVES CLAIMS & CLAIMS
FOR UNPAID SETTLEMENT EXPENSES
DEFERRED CLAIMS AND INCURRED RELATED TO
POLICY CLAIM DISCOUNT NET -------------------
ACQUISITION SETTLEMENT DEDUCTED UNEARNED NET EARNED INVESTMENT CURRENT PRIOR
YEAR ENDED SEGMENT COST EXPENSES IN COL C PREMIUMS PREMIUMS INCOME YEAR YEARS
- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1996..... Workers'
Compensation
Insurance $ 0 $387,632 $4,668 $ 1,042 $114,893 $13,209 $84,058 $10,786
March 31, 1997..... Workers'
Compensation
Insurance $ 0 $358,744 $4,367 $ 5,794 $ 97,321 $12,770 $69,014 $(3,862)
NINE MONTHS ENDED
- -----------------
December 31, 1996.. Workers'
Compensation
Insurance $ 0 $376,923 $4,235 $23,506 $ 74,509 $ 9,606 $53,698 $(3,462)
December 31, 1997.. Workers'
Compensation
Insurance $973 $347,068 $4,077 $36,633 $ 19,532 $11,117 $13,003 $ (551)
<CAPTION>
COLUMN I COLUMN J COLUMN K
-------- -------- --------
AMORTIZATION NET PAID
OF DEFERRED CLAIMS &
POLICY CLAIMS NET
ACQUISITION SETTLEMENT PREMIUMS
COSTS EXPENSES WRITTEN
YEAR ENDED
- ----------
<S> <C> <C> <C>
March 31, 1996..... $9,707 $80,115 $121,296
March 31, 1997..... $9,655 $74,396 $117,043
NINE MONTHS ENDED
- -----------------
December 31, 1996.. $7,250 $56,515 $108,309
December 31, 1997.. $2,731 $49,419 $ 32,080
</TABLE>
S-6
<PAGE> 1
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
among
SUMMIT HOLDING SOUTHEAST, INC.,
as Borrower,
AND
THE SUBSIDIARIES OF SUMMIT HOLDING SOUTHEAST, INC.
(OTHER THAN INSURANCE SUBSIDIARIES),
as Guarantors,
AND
SUNTRUST BANK, TAMPA BAY,
as Lender
DATED AS OF DECEMBER 11, 1997
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
CONTENTS
<TABLE>
<CAPTION>
SECTION 1
<S> <C>
DEFINITIONS AND ACCOUNTING TERMS ....................................... 1
1.1 Definitions ..................................................... 1
1.2 Computation of Time Periods and Other Definitional Provisions ... 16
1.3 Accounting Terms ................................................ 16
SECTION 2
CREDIT FACILITY ........................................................ 16
2.1 Revolving Loan .................................................. 16
2.2 Letter of Credit Subfacility .................................... 17
SECTION 3
GENERAL PROVISIONS APPLICABLE TO LOAN AND LETTERS OF CREDIT ............ 20
3.1 Interest; Conversions and Continuations; Minimum Amounts ........ 20
(a) Interest Rate ............................................... 20
(b) Default Rate of Interest .................................... 20
(c) Interest Payments ........................................... 20
3.2 Place and Manner of Payments .................................... 21
3.3 Mandatory Prepayments ........................................... 22
3.4 Fees ............................................................ 22
3.5 Payment in Full at Maturity ..................................... 23
3.6 Computations of Interest ........................................ 23
3.7 Capital Adequacy ................................................ 24
3.8 Inability to Determine Interest Rate ............................ 24
3.9 Illegality ...................................................... 25
3.10 Requirements of Law ............................................. 25
3.11 Taxes ........................................................... 26
3.12 Indemnity ....................................................... 27
SECTION 4
GUARANTY ............................................................... 28
4.1 Guaranty of Payment ............................................. 28
4.2 Obligations Unconditional ....................................... 28
4.3 Modifications ................................................... 29
4.4 Waiver of Rights ................................................ 29
4.5 Reinstatement ................................................... 29
4.6 Remedies ........................................................ 30
4.7 Limitation of Guaranty .......................................... 30
SECTION 5
CONDITIONS PRECEDENT ................................................... 30
5.1 Closing Conditions .............................................. 30
5.2 Conditions to All Extensions of Credit .......................... 33
</TABLE>
- i -
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
SECTION 6
REPRESENTATIONS AND WARRANTIES ......................................... 34
6.1 Financial Condition ............................................. 34
6.2 No Material Change .............................................. 34
6.3 Organization and Good Standing .................................. 34
6.4 Due Authorization ............................................... 35
6.5 No Conflicts .................................................... 35
6.6 Consents ........................................................ 35
6.7 Enforceable Obligations ......................................... 35
6.8 No Default ...................................................... 35
6.9 Ownership ....................................................... 35
6.10 Indebtedness .................................................... 35
6.11 Litigation ...................................................... 36
6.12 Taxes ........................................................... 36
6.13 Compliance with Law ............................................. 36
6.14 ERISA ........................................................... 36
6.15 Subsidiaries .................................................... 37
6.16 Use of Proceeds; Margin Stock ................................... 37
6.17 Government Regulation ........................................... 37
6.18 Environmental Matters ........................................... 38
6.19 Intellectual Property ........................................... 39
6.20 Solvency ........................................................ 39
6.21 Investments ..................................................... 39
6.22 Locations of Collateral; Chief Executive Offices ................ 39
6.23 Disclosure ...................................................... 40
6.24 Licenses, etc ................................................... 40
6.25 No Burdensome Restrictions ...................................... 40
6.26 Collateral Documents ............................................ 40
6.27 Discontinued Operations ......................................... 40
SECTION 7
AFFIRMATIVE COVENANTS .................................................. 40
7.1 Information Covenants ........................................... 40
7.2 Financial Covenants ............................................. 44
7.3 Books and Records ............................................... 45
7.4 Compliance with Law ............................................. 45
7.5 Payment of Taxes and Other Indebtedness ......................... 45
7.6 Insurance ....................................................... 45
7.7 Maintenance of Property ......................................... 46
7.8 Performance of Obligations ...................................... 46
7.9 Collateral ...................................................... 47
7.10 Use of Proceeds ................................................. 47
7.11 Audits/Inspections .............................................. 47
7.12 Additional Credit Parties ....................................... 47
7.13 Main Operating Bank Accounts .................................... 48
7.14 Significant Changes in Operations ............................... 48
</TABLE>
- ii -
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
7.15 Activation of Discontinued Operations ........................... 48
SECTION 8
NEGATIVE COVENANTS ..................................................... 48
8.1 Indebtedness .................................................... 48
8.2 Liens ........................................................... 49
8.3 Nature of Business .............................................. 49
8.4 Consolidation and Merger ........................................ 49
8.5 Sale or Lease of Assets ......................................... 49
8.6 Sale Leasebacks ................................................. 50
8.7 Advances, Investments and Loan .................................. 50
8.8 Dividends ....................................................... 50
8.9 Transactions with Affiliates .................................... 50
8.10 Fiscal Year; Organizational Documents ........................... 50
8.11 Limitations ..................................................... 50
8.12 Cancellation of Indebtedness .................................... 51
SECTION 9
EVENTS OF DEFAULT ...................................................... 51
9.1 Events of Default ............................................... 51
9.2 Acceleration; Remedies .......................................... 54
9.3 Allocation of Payments After Event of Default ................... 54
SECTION 10
MISCELLANEOUS ........................................................... 55
10.1 Notices ......................................................... 55
10.2 Right of Set-Off ................................................ 55
10.3 Benefit of Agreement ............................................ 55
10.4 No Waiver; Remedies Cumulative .................................. 56
10.5 Payment of Expenses; Indemnification ............................ 56
10.6 Amendments, Waivers and Consents ................................ 57
10.7 Counterparts .................................................... 57
10.8 Headings ........................................................ 57
10.9 Survival of Indemnification and Representations and Warranties .. 57
10.10 Governing Law; Jurisdiction ..................................... 57
10.11 Waiver of Jury Trial ............................................ 58
10.12 Time ............................................................ 58
10.13 Severability .................................................... 58
10.14 Entirety ........................................................ 58
10.15 Binding Effect .................................................. 59
10.16 Confidentiality ................................................. 59
</TABLE>
- iii -
<PAGE> 5
EXHIBITS
Exhibit 2.1(c) Form of Notice of Borrowing
Exhibit 2.1(f) Form of Revolving Note
Exhibit 3.1(d) Form of Notice of Continuation
Exhibit 7.1(c) Form of Officer's Certificate
Exhibit 7.12 Form of Joinder Agreement
Exhibit 10.3 Form of Assignment Agreement
SCHEDULES
Schedule 6.10 Indebtedness
Schedule 6.11 Litigation
Schedule 6.15 Subsidiaries
Schedule 6.18 Environmental Matters
Schedule 6.19 Intellectual Property
Schedule 6.22(a) Locations of Collateral
Schedule 6.22(b) Chief Executive Offices
Schedule 7.6 Insurance
Schedule 8.2 Liens
Schedule 8.7 Investments
Schedule 10.1 Notices
- iv -
<PAGE> 6
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (this "CREDIT AGREEMENT"), is entered into as of
December 11, 1997, among SUMMIT HOLDING SOUTHEAST, INC., a Florida corporation
(the "BORROWER"), each of BORROWER'S SUBSIDIARIES (OTHER THAN INSURANCE
SUBSIDIARIES) (individually a "GUARANTOR", and collectively the "GUARANTORS"),
and SUNTRUST BANK, TAMPA BAY (the "LENDER").
RECITALS
WHEREAS, Borrower desires that Lender extend financing to enable Borrower
to refinance obligations owing under that certain Credit Agreement dated as of
May 28, 1997 by and among the Borrower, the financial institutions party thereto
as "Lenders" and First Union National Bank, formerly known as First Union
National Bank of North Carolina, as Agent (the "EXISTING FACILITY"), and to
provide funds for the working capital of the Borrower, to the extent permitted
by this Agreement, such financing to be comprised of an annually reducing
revolving line of credit loan facility (the "CREDIT FACILITY") established by
this Agreement; and
WHEREAS, the Lender has agreed to make the Credit Facility available to
the Borrower on the terms and conditions set forth herein and in the other
Credit Documents (as herein defined).
NOW, THEREFORE, in consideration of the promises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1
DEFINITIONS AND ACCOUNTING TERMS
1.1 DEFINITIONS. As used herein, the following terms shall have the
meanings herein specified unless the context otherwise requires. Defined terms
herein shall include in the singular number the plural and in the plural the
singular:
"ADDITIONAL CREDIT PARTY" means each Person that becomes a Guarantor
after the Closing Date, as provided in Section 7.12.
"ADJUSTED BASE RATE" means the Base Rate plus the Applicable Margin.
"ADJUSTED EURODOLLAR RATE" means the Eurodollar Rate plus the Applicable
Margin.
"ADJUSTED PRIME RATE" means the Prime Rate minus the Applicable Margin.
<PAGE> 7
"AFFILIATE" means, with respect to any Person, any other Person directly
or indirectly controlling (including but not limited to all directors and
officers of such Person), controlled by or under direct or indirect common
control with such Person. A Person shall be deemed to control a corporation if
such Person possesses, directly or indirectly, the power (i) to vote 20% or more
of the securities having ordinary voting power for the election of directors of
such corporation or (ii) to direct or cause direction of the management and
policies of such corporation, whether through the ownership of voting
securities, by contract or otherwise.
"ANNUAL REDUCTION DATE" shall mean the last Business Day of each calendar
year commencing with 1998 and each year thereafter, prior to the Revolving Loan
Maturity Date.
"APPLICABLE MARGIN" means the appropriate applicable percentages
corresponding to the Outstanding Level in effect as of the most recent
Calculation Date as shown below:
<TABLE>
<CAPTION>
=================================================================================
Applicable Applicable Applicable
Pricing Outstanding Margin for Margin for Margin for
Level Level Eurodollar Loan Base Rate Loan Prime Rate Loan
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
I <=$30,000,000 and 2.25% 2.25% .75%
>$26,000,000
- ---------------------------------------------------------------------------------
II <=$26,000,000 and 2.00% 2.00% .75%
>$22,000,000
- ---------------------------------------------------------------------------------
III <=$22,000,000 and 1.75% 1.75% .75%
>$18,000,000
- ---------------------------------------------------------------------------------
IV <=$18,000,000 1.50% 1.50% .75%
=================================================================================
</TABLE>
The Applicable Margin for the Loan, or any portion thereof, shall be determined
and adjusted on the last Business Day of each month and shall apply to the
following month (each a "CALCULATION DATE"); provided that the initial
Applicable Margin for the Loan shall be based on Pricing Level I (as shown
above) and shall remain at Pricing Level I until the first Calculation Date
subsequent to the Closing Date and, thereafter, the Pricing Level shall be
determined by the then current Outstanding Level. Each Applicable Margin shall
be effective from one Calculation Date until the next Calculation Date.
"ASSET DISPOSITION" means the disposition of any or all of the assets (or
the sale of the stock of a Subsidiary) of the Borrower or any of its
Subsidiaries whether by sale, lease, transfer or otherwise other than: (a)
sales, leases, transfers or other dispositions of assets from one Credit Party
to another; (b) sales of inventory or other assets in the ordinary course of
business; and (c) dispositions of obsolete equipment not used or useful in the
business of the selling Credit Party.
"BANKRUPTCY CODE" means the Bankruptcy Code in Title 11 of the United
States Code, as amended, modified, succeeded or replaced from time to time.
"BASE RATE" means, for any day, the rate per annum, fluctuating daily,
equal to the Eurodollar Rate in effect for a Eurodollar Loan with a one (1)
month Interest Period.
- 2 -
<PAGE> 8
"BASE RATE LOAN" means any Loan, or portion thereof, bearing interest at
a rate determined by reference to the Base Rate.
"BORROWER" means Summit Holding Southeast, Inc., a Florida corporation,
together with any successors and permitted assigns.
"BUSINESS DAY" means any day other than a Saturday, a Sunday, a legal
holiday or a day on which banking institutions are authorized or required by law
or other governmental action to close in Tampa, Florida; provided that with
respect to a Eurodollar Loan, such day is also a day on which dealings between
banks are carried on in U.S. dollar deposits in the London interbank market.
"CALCULATION DATE" has the meaning set forth in the definition of
Applicable Margin.
"CAPITAL EXPENDITURES" means all expenditures of the Credit Parties and
their Subsidiaries which, in accordance with GAAP, would be classified as
capital expenditures, including, without limitation, Capital Leases.
"CAPITAL LEASE" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) by that Person as lessee which, in
accordance with GAAP, is or should be accounted for as a capital lease on the
financial statements of that Person.
"CASH EQUIVALENTS" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof) having maturities of not more
than twelve months from the date of acquisition, (b) U.S. dollar denominated
time and demand deposits and certificates of deposit of (i) the Lender, (ii) any
domestic commercial bank having capital and surplus in excess of $500,000,000,
or (iii) any bank whose short-term commercial paper rating from S&P is at least
A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent
thereof (any such bank being an "APPROVED BANK"), in each case with maturities
of not more than two hundred seventy (270) days from the date of acquisition,
(c) commercial paper and variable or fixed rate notes issued by any Approved
Bank (or by the parent company thereof) or any variable rate notes issued by, or
guaranteed by, any domestic corporation rated A-1 (or the equivalent thereof) or
better by S&P or P-1 (or the equivalent thereof) or better by Moody's and
maturing within six months of the date of acquisition, (d) repurchase agreements
with a bank or trust company (including the Lender) or securities dealer having
capital and surplus in excess of $500,000,000 for direct obligations issued by
or fully guaranteed by the United States of America in which the Borrower shall
have a perfected first priority security interest (subject to no other Liens)
and having, on the date of purchase thereof, a fair market value of at least
100% of the amount of the repurchase obligations, and (e) investments,
classified in accordance with GAAP as current assets, in money market investment
programs registered under the Investment Company Act of 1940, as amended, which
are administered by financial institutions having capital of at least
$500,000,000 and the portfolios of which are limited to investments of the
character described in the foregoing subdivisions (a) through (d).
- 3 -
<PAGE> 9
"CHANGE OF CONTROL" means either of the following events: (a) any
"person" or "group" (within the meaning of Sections 13(d) or 14(d) of the
Exchange Act) has become, directly or indirectly, the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person
shall be deemed to have "beneficial ownership" of all shares that any such
Person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time), by way of merger, consideration or
otherwise, of 30% or more of the voting power of the Voting Stock of the
Borrower on a fully-diluted basis, after giving effect to the conversion and
exercise of all outstanding warrants, options and other securities of the
Borrower (whether or not such securities are then currently convertible or
exercisable).
"CLOSING DATE" means the date hereof.
"CODE" means the Internal Revenue Code of 1986, and the rules and
regulations promulgated thereunder, as amended, modified, succeeded or replaced
from time to time.
"COLLATERAL" means all collateral referred to in and covered by the
Collateral Documents.
"COLLATERAL DOCUMENTS" means the Security Agreements, the Pledge
Agreements and such other documents executed and delivered in connection with
the attachment and perfection of the Lender's security interests in the assets
of the Credit Parties, including without limitation, UCC financing statements
and trademark filings.
"COMMITMENT" means the commitment of the Lender with respect to the
Revolving Committed Amount.
"COMMITMENT FEE" means the fee payable to the Lender pursuant to Section
3.4(b).
"CONSOLIDATED NET WORTH" means at any time, the net worth of the Borrower
and its Subsidiaries on a consolidated basis, as determined in accordance with
GAAP.
"CREDIT DOCUMENTS" means this Credit Agreement, the Note, any Joinder
Agreement, the Collateral Documents, the LOC Documents and all other related
agreements and documents issued or delivered hereunder or thereunder or pursuant
hereto or thereto.
"CREDIT PARTIES" means the Borrower and the Guarantors, and "CREDIT
PARTY" means any one of them.
"CREDIT PARTY OBLIGATIONS" means, without duplication all of the
obligations of the Credit Parties to the Lender, whenever arising, under this
Credit Agreement, the Note, the Collateral Documents or any of the other Credit
Documents to which the Borrower or any other Credit Party is a party.
- 4 -
<PAGE> 10
"DEBT ISSUANCE" means the issuance of any Indebtedness for borrowed money
by a Credit Party or any of its Subsidiaries, other than Indebtedness permitted
by Section 8.1.
"DEBT SERVICE COVERAGE RATIO" shall mean the ratio determined pursuant to
the following formula:
Debt Service Coverage = EBITDA - Capital Expenditures
----------------------------------------
Interest Expense (on Borrower's
Consolidated GAAP Statements) +
$4,000,000 + any debt service associated
with Indebtedness of the Borrower or any
Subsidiary
"DEFAULT" means any event, act or condition which with notice or lapse of
time, or both, would constitute an Event of Default.
"DISCONTINUED OPERATIONS" means Meritec Solutions, Inc., Carolina Med
Summit, Inc., Employers Safety Group Association, Inc. and Carolina Summit
Healthcare, Inc.
"DOLLARS" and "$" means dollars in lawful currency of the United States
of America.
"EBITDA" means, for any fiscal period of the Borrower, an amount equal to
(a) Net Income of such Person for such period plus (b) an amount which, in the
determination of Net Income for such fiscal period has been deducted for (i)
interest expense to such fiscal period, (ii) total Federal, State, foreign and
other income taxes for such period, and (iii) all depreciation and amortization
for such period, all as determined in accordance with GAAP.
"EFFECTIVE DATE" means the date on which the conditions set forth in
Section 5.1 shall have been fulfilled (or waived in the sole discretion of the
Lender) and on which the initial Loan shall have been made, and/or the initial
Letter of Credit shall have been issued.
"ELIGIBLE ASSIGNEE" means (a) the Lender or Affiliate or subsidiary of
the Lender and (b) any other commercial bank, financial institution,
institutional lender or "accredited investor" (as defined in Regulation D of the
Securities and Exchange Commission, except any accredited investor which is in
direct competition with the Borrower or any of its Subsidiaries) with capital of
at least $1 billion and with an office in the United States.
"ENVIRONMENTAL CLAIM" means any investigation, written notice, violation,
written demand, written allegation, action, suit, injunction, judgment, order,
consent decree, penalty, fine, lien, proceeding, or written claim whether
administrative, judicial, or private in nature arising (a) pursuant to, or in
connection with, an actual or alleged violation of, any Environmental Law, (b)
in connection with any Hazardous Material, (c) from any assessment, abatement,
removal, remedial, corrective, or other response action in connection with an
Environmental Law or other order of a Governmental Authority or (d) from any
actual or
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<PAGE> 11
alleged damage, injury, threat, or harm to health, safety, natural resources, or
the environment.
"ENVIRONMENTAL LAWS" means any current or future legal requirement of any
Governmental Authority pertaining to (a) the protection of the indoor or outdoor
environment, (b) the conservation, management, or use of natural resources and
wildlife, (c) the protection or use of surface water and groundwater or (d) the
management, manufacture, possession, presence, use, generation, transportation,
treatment, storage, disposal, release, threatened release, abatement, removal,
remediation or handling of, or exposure to, any hazardous or toxic substance or
material, or (e) pollution (including any release to land surface water and
groundwater) and includes, without limitation, the comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended by the Superfund
Amendments and Reauthorization Act of 1986, 42 USC 9601 ET SEQ., Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976
and Hazardous and Solid Waste Amendment of 1984, 42 USC 6901 ET SEQ., Federal
Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 USC
1251 ET SEQ., Clean Air Act of 1966, as amended, 42 USC 7401 ET SEQ., Toxic
Substances Control Act of 1976, 15 USC 2601 ET SEQ., Hazardous Materials
Transportation Act, 49 USC App. 1801 ET SEQ., Oil Pollution Act of 1990, 33 USC
2701 ET SEQ., Emergency Planning and Community Right-to-Know Act of 1986, 42 USC
11001 ET SEQ., National Environmental Policy Act of 1969, 42 USC 4321 ET SEQ.,
Safe Drinking Water Act of 1974, as amended, 42 USC 300(f) ET SEQ., any
analogous implementing or successor law, and any amendment, rule, regulation,
order, or directive issued thereunder.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute thereto, as interpreted by the rules and
regulations thereunder, all as the same may be in effect from time to time.
References to sections of ERISA shall be construed also to refer to any
successor sections.
"ERISA AFFILIATE" means an entity which is under common control with any
Borrower within the meaning of Section 4001(a)(14) of ERISA, or is a member of a
group which includes the Borrower and which is treated as a single employer
under Sections 414(b) or (c) of the Code. In addition, for purposes of this
Agreement that relates to Code Section 412, the term ERISA Affiliate shall mean
any entity aggregated with the Borrower under Code Sections 414(b), (c), (m) or
(o).
"EXECUTIVE OFFICER" means any chief executive officer, chief financial
officer, executive vice president or senior vice president.
"EURODOLLAR LOAN" means any Loan, or portion thereof, bearing interest at
a rate determined by reference to the Eurodollar Rate and not the Base Rate.
"EURODOLLAR RATE" means, for the Interest Period for each Eurodollar Loan
comprising part of the same borrowing (including conversions, extensions and
renewals), a per annum interest rate determined pursuant to the following
formula:
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<PAGE> 12
Eurodollar Rate = London Interbank Offered Rate
---------------------------------
1 - Eurodollar Reserve Percentage
"EURODOLLAR RESERVE PERCENTAGE" means, for any day, that percentage
(expressed as a decimal) which is in effect from time to time under Regulation D
of the Board of Governors of the Federal Reserve System (or any successor), as
such regulation may be amended from time to time or any successor regulation, as
the maximum reserve requirement (including, without limitation, any basic,
supplemental, emergency, special, or marginal reserves) applicable to the Lender
with respect to Eurocurrency Liabilities as that term is defined in Regulation
D, whether or not Lender has any Eurocurrency Liabilities subject to such
reserve requirement at that time. Eurodollar Loan shall be deemed to constitute
Eurocurrency Liabilities and as such shall be deemed subject to reserve
requirements without benefits of credits for proration, exceptions or offsets
that may be available from time to time to a Lender. The Eurodollar Rate shall
be adjusted automatically on and as of the effective date of any change in the
Eurodollar Reserve Percentage.
"EVENT OF DEFAULT" means the occurrence of any of the events or
circumstances described in Section 9.1.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder, as amended, modified,
succeeded or replaced from time to time.
"EXTENSION OF CREDIT" means the making of a Loan or issuing of a Letter
of Credit by the Lender.
"FEDERAL FUNDS RATE" means for any day the rate per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Business Day next
succeeding such day; provided that (a) if such day is not a Business Day, the
Federal Funds Rate for such day shall be such rate on such transactions on the
next preceding Business Day and (b) if no such rate is so published on such next
preceding Business Day, the Federal Funds Rate for such day shall be the average
rate quoted to the Lender on such day on such transactions as determined by the
Lender.
"GAAP" means generally accepted accounting principles in the United
States applied on a consistent basis and subject to Section 1.3.
"GOVERNMENTAL AUTHORITY" means any Federal, state, local, provincial or
foreign court or governmental agency, authority, instrumentality or regulatory
body.
"GUARANTOR" means each of the Subsidiaries (other than Insurance
Subsidiaries and Discontinued Operations) of the Borrower and each Additional
Credit Party, now owned or
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<PAGE> 13
hereinafter acquired, which has executed a Joinder Agreement, together with
their successors and assigns.
"GUARANTY OBLIGATIONS" means, with respect to any Person, without
duplication, any obligations (other than endorsements in the ordinary course of
business of negotiable instruments for deposit or collection) guaranteeing any
Indebtedness of any other Person in any manner, whether direct or indirect, and
including without limitation any obligation, whether or not contingent, (a) to
purchase any such Indebtedness or other obligation or any property constituting
security therefor, (b) to advance or provide funds or other support for the
payment or purchase of such Indebtedness or to maintain working capital,
solvency or other balance sheet condition of such other Person (including,
without limitation, maintenance agreements, comfort letters, take or pay
arrangements, put agreements or similar agreements or arrangements) for the
benefit of the holder of such Indebtedness of such other Person, (c) to lease or
purchase property, securities or services primarily for the purpose of assuring
the holder of such Indebtedness of the repayment thereof, or (d) to otherwise
assure or hold harmless the holder of such Indebtedness or obligation against
loss in respect thereof. The amount of any Guaranty Obligation hereunder shall
(subject to any limitations set forth therein) be deemed to be an amount equal
to the outstanding amount of the Indebtedness in respect of which such Guaranty
Obligation is made.
"HAZARDOUS MATERIALS" means any substance, material or waste defined or
regulated in or under any Environmental Laws.
"INDEBTEDNESS" of any Person means, without duplication, (a) all
obligations of such Person for borrowed money, (b) all obligations of such
Person evidenced by bonds, debentures, notes or similar instruments, or upon
which interest payments are customarily made, (c) all obligations of such Person
under conditional sale or other title retention agreements relating to property
purchased by such Person to the extent of the value of such property (other than
customary reservations or retentions of title under agreements with suppliers
entered into in the ordinary course of business), (d) all obligations, other
than intercompany items, of such Person issued or assumed as the deferred
purchase price of property or services purchased by such Person which would
appear as liabilities on a balance sheet of such Person (other than trade debt
incurred in the ordinary course of business), (e) all Indebtedness of others
secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien on, or payable out of the
proceeds of production from, property owned or acquired by such Person, whether
or not the obligations secured thereby have been assumed, (f) all Guaranty
Obligations of such Person, (g) the principal portion of all obligations of such
Person under (i) Capital Leases and (ii) any synthetic lease, tax retention
operating lease, off-balance sheet loan or similar off-balance sheet financing
product of such Person where such transaction is considered borrowed money
indebtedness for tax purposes but is classified as an operating lease in
accordance with GAAP, (h) all obligations of such Person in respect of interest
rate protection agreements, foreign currency exchange agreements, or other
interest or exchange rate or commodity price hedging agreements, (i) the maximum
amount of all performance and standby letters of credit issued or bankers'
acceptances facilities created for the account of such Person and, without
duplication,
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<PAGE> 14
all drafts drawn thereunder (to the extent unreimbursed), (i) all preferred
stock issued by such Person and required by the terms thereof to be redeemed
upon the demand of the holder thereof, or for which mandatory sinking fund
payments are due, by a fixed date, and (j) the aggregate amount of uncollected
accounts receivable of such Person subject at such time to a sale of receivables
(or similar transaction) regardless of whether such transaction is effected
without recourse to such Person or in a manner that would not be reflected on
the balance sheet of such Person in accordance with GAAP. The Indebtedness of
any Person shall include the Indebtedness of any partnership or unincorporated
joint venture in which such Person is legally obligated with respect thereto.
"INSURANCE SUBSIDIARIES" shall mean Bridgefield Employers Insurance
Company; Bridgefield Casualty Insurance Company; U.S. Employers Insurance, Inc.;
and any other Subsidiary of the Borrower which is engaged in the insurance
business.
"INTEREST EXPENSE" means, for any period, with respect to the Credit
Parties and their Subsidiaries on a consolidated basis, all net interest
expense, including the interest component under Capital Leases, as determined in
accordance with GAAP.
"INTEREST PAYMENT DATE" means (a) as to Base Rate Loans, the last day of
every month and the Revolving Loan Maturity Date, (b) as to Eurodollar Loans,
the last day of each applicable Interest Period and the Revolving Loan Maturity
Date, and (c) as to Prime Rate Loans, the last day of every month and the
Revolving Loan Maturity Date.
"INTEREST PERIOD" means, as to a Eurodollar Loan, or any portion thereof,
a period of one or three months' duration, as the Borrower may elect,
commencing, in each case, on the date of the borrowing (including continuations
and conversions thereof); provided, however, (a) if any Interest Period would
end on a day which is not a Business Day, such Interest Period shall be extended
to the next succeeding Business Day (except that where the next succeeding
Business Day falls in the next succeeding calendar month, then on the
immediately preceding Business Day), (b) no Interest Period shall extend beyond
the Revolving Loan Maturity Date, and (c) where an Interest Period begins on a
day for which there is no numerically corresponding day in the calendar month in
which the Interest Period is to end, such Interest Period shall end on the last
Business Day of such calendar month.
"INVESTMENT" in any Person means (a) the acquisition (whether for cash,
property, services, assumption of Indebtedness, securities or otherwise) of
shares of capital stock, bonds, notes, debentures, partnership, joint ventures
or other ownership interests or other securities of such other Person, or (b)
any deposit with, or advance, loan or other extension of credit to, such Person
(other than deposits made in connection with the purchase of equipment or other
assets in the ordinary course of business), or (c) any other capital
contribution to or investment in such Person, including, without limitation, any
Guaranty Obligation incurred for the benefit of such Person.
"JOINDER AGREEMENT" means a Joinder Agreement substantially in the form
of EXHIBIT 7.13.
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<PAGE> 15
"LENDER" means SunTrust Bank, Tampa Bay, together with its successors and
permitted assigns.
"LETTER OF CREDIT" means a Letter of Credit issued for the account of a
Credit Party by the Lender pursuant to Section 2.2, as such Letter of Credit may
be amended, modified, extended, renewed or replaced.
"LETTER OF CREDIT FEES" has the meaning set forth in Section 3.4(b).
"LIEN" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, security interest, encumbrance, lien (statutory or otherwise),
preference, priority or charge of any kind, including, without limitation, any
agreement to give any of the foregoing, any conditional sale or other title
retention agreement, and any lease in the nature thereof.
"LOAN" means the Revolving Loan (or a portion thereof).
"LOC DOCUMENTS" means, with respect to any Letter of Credit, such Letter
of Credit, any amendments thereto, any documents delivered by a Credit Party in
connection therewith, any application therefor, and any agreements, instruments,
guarantees or other documents (whether general in application or applicable only
to such Letter of Credit) governing or providing for (a) the rights and
obligations of the parties hereto, or (b) any collateral security for such
obligations.
"LOC OBLIGATIONS" means, at any time, the sum of (a) the maximum amount
which is, or at any time thereafter may become, available to be drawn under
Letters of Credit then outstanding, assuming compliance with all requirements
for drawings referred to in such Letters of Credit plus (b) the aggregate amount
of all drawings under Letters of Credit honored by the Issuing Lender but not
theretofore reimbursed.
"LONDON INTERBANK OFFERED RATE" means, with respect to any Base Rate Loan
or Eurodollar Loan for the Interest Period applicable thereto, the rate of
interest per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%)
quoted in the Wall Street Journal on the day that is one (1) Business Day prior
to the first day of such Interest Period for a term comparable to such Interest
Period; provided, however, if more than one rate is specified in the Wall Street
Journal, the applicable rate shall be the arithmetic mean of all such rates.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the
operations, financial condition or business of the Credit Parties and their
Subsidiaries taken as a whole, (b) the ability of a Credit Party to perform its
respective obligations under this Credit Agreement or any of the other Credit
Documents, or (c) the validity or enforceability of this Credit Agreement, any
of the other Credit Documents, or the rights and remedies of the Lender
hereunder or thereunder taken as a whole.
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<PAGE> 16
"MOODY'S" means Moody's Investors Service, Inc., or any successor or
assign of the business of such company in the business of rating securities.
"MULTIEMPLOYER PLAN" means a Plan of a Credit Party or ERISA Affiliate
covered by Title IV of ERISA which is a multiemployer plan as defined in Section
3(37) or 4001(a)(3) of ERISA.
"MULTIPLE EMPLOYER PLAN" means a Plan covered by Title IV of ERISA, other
than a Multiemployer Plan, which any Credit Party or any ERISA Affiliate and at
least one employer other than a Credit Party or any ERISA Affiliate are
contributing sponsors.
"NET CASH PROCEEDS" means the gross cash proceeds (including cash
actually received (but only when received) by way of deferred payment pursuant
to a promissory note, receivable, or otherwise) received from an Asset
Disposition or a Debt Issuance net of (a) transaction costs payable to third
parties, (b) a good faith estimate of the taxes payable with respect to such
proceeds, including, without duplication, withholding taxes and any taxes
payable to a third party in connection with distribution of such proceeds from a
Subsidiary of the Borrower to the Borrower, and (c) any repayments by the
applicable Credit Party of Indebtedness (other than Indebtedness under any of
the Credit Documents) to the extent that such Indebtedness is secured by a Lien
on the property that is the subject of such Asset Disposition.
"NET INCOME" means, for any period, the net income for such period of the
Borrower and its Subsidiaries on a consolidated basis, as determined in
accordance with GAAP.
"NON-EXCLUDED TAXES" has the meaning set forth in Section 3.11.
"NOTE" means the Revolving Note.
"NOTICE OF BORROWING" means a request by the Borrower for a Revolving
Loan, in the form of EXHIBIT 2.1(b).
"NOTICE OF CONTINUATION/CONVERSION" means a request by the Borrower to
continue an existing Eurodollar Loan to a new Interest Period or to convert a
Eurodollar Loan to a Base Rate Loan or to a Prime Rate Loan; to convert a Base
Rate Loan or a Prime Rate Loan to a Eurodollar Loan; or to convert a Prime Rate
Loan to a Base Rate Loan or to a Eurodollar Loan, in the form of EXHIBIT 3.1(D).
"OPERATING LEASE" means, as to any Person, any lease of any property
(whether real, personal or mixed) by that Person as lessee which, in accordance
with GAAP, is or should be accounted for as an operating lease.
"OUTSTANDING LEVEL" means the actual aggregate outstanding principal
balance of the Revolving Loan on the applicable Calculation Date.
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<PAGE> 17
"PBGC" means the Profit Benefit Guaranty Corporation established pursuant
to Subtitle A of Title IV of ERISA and any successor thereto.
"PERMITTED INDEBTEDNESS" means any indebtedness permitted pursuant to
Section 6.10 and Section 8.1 herein.
"PERMITTED INVESTMENTS" means Investments which are (a) cash or Cash
Equivalents, (b) accounts receivable created, acquired or made in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms, (c) inventory, raw materials and general intangibles (to the extent
such general intangible is not a Capital Expenditure) acquired in the ordinary
course of business, (d) Investments by one Credit Party in another Credit Party,
(e) the Investments set forth on SCHEDULE 8.7, (f) Investments in Capital
Expenditures, (g) inventory acquired in the ordinary course of business, (h)
Investments in the form of Indebtedness permitted under Section 8.1 or any other
provisions of any Credit Document and (i) loans and advances to officers and
employees of Credit Parties for moving, entertainment, travel and other similar
expenses in the ordinary course of business consistent with past practices; and
(j) Investments resulting from transactions permitted under Section 8.4 hereof.
"PERMITTED LIENS" means (a) Liens securing Credit Party Obligations, (b)
Liens for taxes not yet due or Liens for taxes being contested in good faith by
appropriate proceedings for which adequate reserves determined in accordance
with GAAP have been established (and as to which the property subject to any
such Lien is not yet subject to foreclosure, sale or loss on account thereof),
(c) Liens in respect of property imposed by law arising in the ordinary course
of business such as materialmen's, mechanics', warehousemen's, carrier's,
landlords' and other nonconsensual statutory Liens which are not yet due and
payable or which are being contested in good faith by appropriate proceedings
for which adequate reserves determined in accordance with GAAP have been
established (and as to which the property subject to any such Lien is not yet
subject to foreclosure, sale or loss on account hereof), (d) Pledges or deposits
made in the ordinary course of business to secure payment of worker's
compensation insurance, unemployment insurance, pensions or social security
programs, (e) Liens arising from good faith deposits in connection with or to
secure performance of tenders, bids, leases, government contracts, performance
and return of money bonds and other similar obligations incurred in the ordinary
course of business (other than obligations in respect of the payment of borrowed
money, (f) Liens arising from good faith deposits in connection with or to
secure performance of statutory obligations and surety and appeal bonds, (g)
easements, rights-of-way, restrictions (including zoning restrictions), matters
of plat, minor defects or irregularities in title and other similar charges or
encumbrances not, in any material respect, impairing the use of the encumbered
property for its intended purposes, (h) judgment Liens that would constitute an
Event of Default, (i) Liens in connection with Indebtedness allowed under
Section 8.1, (j) Liens arising by virtue of any statutory or common law
provision relating to banker's liens, rights of setoff or similar rights as to
deposit accounts or other funds maintained with a creditor depository
institution, and (k) Liens existing on the date hereof and identified on
SCHEDULE 8.2, provided that no such Lien shall extend to any property other than
the property subject thereto on the Closing Date.
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<PAGE> 18
"PERSON" means any individual, partnership, joint venture, firm,
corporation, limited liability company, association, trust or other enterprise
(whether or not incorporated), or any Governmental Authority.
"PLAN" means any employee benefit plan (as defined in Section 3(3) of
ERISA) which is covered by ERISA.
"PLEDGE AGREEMENTS" means any Pledge Agreement executed and delivered by
a Credit Party in favor of the Lender, to secure its obligations under the
Credit Documents, as amended, modified, extended, renewed or replaced from time
to time.
"PRIME RATE" means for any day, the rate per annum (rounded upwards, if
necessary, to the nearest whole multiple of 1/100th of 1%) equal to the greater
of (a) the Federal Funds Rate in effect on any such day plus 1/2 of 1%, or (b)
the rate of interest established from time to time by SunTrust Banks of Florida,
Inc. at its principal office in Orlando, Florida (or such other principal office
of the Lender as communicated in writing to the Borrower) as its "prime rate" in
effect on such day. Any change in the interest rate resulting from a change in
the Prime Rate shall become affective as of 12:01 a.m. of the Business Day on
which each change in the Prime Rate is announced by the Lender. The Prime Rate
is a reference rate used by the Lender in determining interest rates on certain
loans and is not intended to be the lowest rate of interest charged on any
extension of credit to any debtor. The Lender may make commercial or other loans
at rates of interest at, above, or below the Lender's prime lending rate. If for
any reason the Lender shall have determined (which determination shall be
conclusive absent manifest error) that it is unable after due inquiry to
ascertain the Federal Funds Rate for any reason, including the inability or
failure of the Lender to obtain sufficient quotations in accordance with the
terms hereof, the Base Rate shall be determined without regard to clause (a) of
the first sentence of this definition until the circumstances giving rise to
such inability no longer exist.
"PRIME RATE LOAN" means any Loan, or portion thereof, bearing interest at
a rate determined by reference to the Prime Rate.
"REAL PROPERTIES" means all real property currently owned by the Borrower
or any of its Subsidiaries or acquired by the Borrower or any of its
Subsidiaries in the future.
"REGULATION D, G, U OR X" means Regulation D, G, U or X, respectively, of
the Board of Governors of the Federal Reserve System as from time to time in
effect and any successor to all or a portion thereof.
"REPORTABLE EVENT" means a "reportable event" as defined in Section 4043
of ERISA with respect to which the notice requirements to the PBGC have not been
waived.
"REQUIREMENT OF LAW" means, as to any Person, the articles or certificate
of incorporation and by-laws or other organizational or governing documents of
such Person, and
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<PAGE> 19
any law, treaty, rule or regulation or final, non-appealable determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or to which any of its material property is
subject.
"REVOLVING COMMITTED AMOUNT" means THIRTY MILLION DOLLARS ($30,000,000)
or such lesser amount as the Revolving Committed Amount may be reduced pursuant
to Section 2.1(b) or Section 2.1(e).
"REVOLVING LOAN" means the revolving loan, or any portion thereof, made
to the Borrower pursuant to Section 2.1.
"REVOLVING LOAN MATURITY DATE" means the last Business Day of December,
2003.
"REVOLVING NOTE" means the promissory note of the Borrower in favor of
the Lender evidencing the Revolving Loan provided pursuant to Section 2.1, as
such promissory notes may be amended from time to time and as evidenced in the
form of EXHIBIT 2.1(F).
"S&P" means Standard & Poor's Ratings Group, a division of McGraw-Hill,
Inc., or any successor or assignee of the business of such division in the
business of rating securities.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"SECURITY AGREEMENTS" means any Security Agreement executed and delivered
by a Credit Party in favor of the Lender to secure its obligations under the
Credit Documents, as such may be amended, modified, extended, renewed, restated
or replaced from time to time.
"SENIOR DEBT" means, as of any date, the total Indebtedness of the
Borrower and its Subsidiaries other than that subordinated in right of payment
to the Borrower's Obligations hereunder.
"SENIOR DEBT TO CAPITAL RATIO" shall be the percentage determined
pursuant to the following formula:
Senior Debt to Capital Ratio = Senior Debt
------------------------------------
Senior Debt + Consolidated Net Worth
"SINGLE EMPLOYER PLAN" means any Plan of a Credit Party or ERISA
Affiliate which is covered by Title IV of ERISA, but which is not a
Multiemployer Plan.
"SOLVENT" means, with respect to any Person as of a particular date, that
on such date (a) such Person is able to pay its debts and other liabilities,
contingent obligations and other commitments as they mature in the normal course
of business, (b) such Person does not intend to, and does not believe that it
will, incur debts or liabilities beyond such Person's ability to pay as such
debts and liabilities mature in their ordinary course, (c) such Person is not
engaged
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<PAGE> 20
in a business or a transaction, and is not about to engage in a business or a
transaction, for which such Person's assets would constitute unreasonably small
capital after giving due consideration to the prevailing practice in the
industry in which such Person is engaged or is to engage, (d) the fair value of
the assets of such Person is greater than the total amount of liabilities,
including, without limitation, contingent liabilities, of such Person, and (e)
the present fair saleable value of the assets of such Person is not less than
the amount that will be required to pay the probable liability of such Person on
its debts as they become absolute and matured. In computing the amount of
contingent liabilities at any time, it is intended that such liabilities will be
computed at the amount which, in light of all the facts and circumstances
existing at such time, represents the amount that can reasonably be expected to
become an actual or matured liability.
"SUBSIDIARY" means, as to any Person, (a) any corporation more than 50%
of whose stock of any class or classes having by the terms thereof ordinary
voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time, any class or classes of such
corporation shall have or might have voting power by reason of the happening of
any contingency) is at the time owned by such Person directly or indirectly
through Subsidiaries, and (b) any partnership, association, joint venture or
other entity in which such person directly or indirectly through Subsidiaries
has more than a 50% interest at any time.
"TERMINATION EVENT" means (a) with respect to any Single Employer Plan,
the occurrence of a Reportable Event or the substantial cessation of operations
(within the meaning of Section 4062(e) of ERISA); (b) the withdrawal of any
Credit Party or any ERISA Affiliate from a Multiple Employer Plan during a plan
year in which it was a substantial employer (as such term is defined in Section
4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan, (c) the
distribution of a notice of intent to terminate or the actual termination of a
Single Employer Plan pursuant to Section 4041(a)(2) or 4041A of ERISA; (d) the
institution of proceedings to terminate or the actual termination of a Single
Employer Plan by the PBGC under Section 4042 of ERISA; (e) any event or
condition which might reasonably constitute grounds under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any
Single Employer Plan; or (f) the complete or partial withdrawal of any Credit
Party or any ERISA Affiliate from a Multiemployer Plan.
"UNUSED REVOLVING COMMITMENT" means, for any period, the amount by which
(a) the then applicable aggregate Revolving Committed Amount exceeds (b) the
actual daily outstanding aggregate principal amount of the Revolving Loan, plus
the aggregate amount of the LOC Obligations outstanding.
"UNUSED REVOLVING LOAN COMMITMENT FEES" means the fees payable to the
Lender pursuant to Section 3.4(a).
"VOTING STOCK" of a corporation means all classes of the capital stock of
such corporation then outstanding and normally entitled to vote in the election
of directors.
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1.2 COMPUTATION OF TIME PERIODS AND OTHER DEFINITIONAL PROVISIONS. For
purposes of computation of periods of time hereunder, the word "from" means
"from and including" and the words "to" and "until" each mean "to but
excluding." References in this Agreement to "Articles", "Schedules" or
"Exhibits" shall be to Articles, Sections, Schedules or Exhibits of or to this
Agreement unless otherwise specifically provided.
1.3 ACCOUNTING TERMS. Except as otherwise expressly provided herein, all
accounting terms used herein shall be interpreted, and all financial statements
and certificates and reports as to financial matters required to be delivered to
the Lender hereunder shall be prepared, in accordance with GAAP applied on a
consistent basis. All financial statements delivered to the Lender hereunder
shall be accompanied by a statement from the Borrower that GAAP has not changed
since the most recent financial statements delivered by the Borrower to the
Lender or if the GAAP has changed described such changes in detail and
explaining how such changes affect the financial statements. All calculations
made for the purposes of determining compliance with this Credit Agreement shall
(except as otherwise expressly provided herein) be made by application of GAAP
applied on a basis consistent with the most recent annual or quarterly financial
statements delivered pursuant to Section 7.1 (or, prior to the delivery of the
first financial statements pursuant to Section 7.1, consistent with the
financial statements described in Section 5.1(d)); provided, however, if (a) the
Borrower shall object to determining such compliance on such basis at the time
of delivery of such financial statements due to any change in GAAP or the rules
promulgated with respect thereto or (b) the Lender shall so object in writing
within sixty (60) days after delivery of such financial statements (or after the
Lender has been informed of the change in GAAP affecting such financial
statements, if later), then such calculations shall be made on a basis
consistent with the most recent financial statements delivered by the Borrower
to the Lender as to which no such objection shall have been made.
Notwithstanding any of the foregoing, all financial statements and financial
matters of or regarding any Insurance Subsidiary shall be prepared, construed or
made (as applicable) in accordance with the statutory accounting principles
prescribed or permitted by the State of Florida Department of Insurance.
SECTION 2
CREDIT FACILITY
2.1 REVOLVING LOAN.
(a) Revolving Loan Commitment. Subject to the terms and conditions set
forth herein, the Lender agrees to make loans (collectively, the "REVOLVING
LOAN") to the Borrower, in Dollars, at any time and from time to time, during
the period from and including the Effective Date to but not including the
Revolving Loan Maturity Date (or such earlier date if the Revolving Committed
Amount has been terminated as provided herein); provided, however, that (i) the
sum of the aggregate amount of the Revolving Loan outstanding plus the aggregate
amount of LOC Obligations outstanding shall not exceed the Revolving Committed
Amount, as adjusted pursuant to Section 2.1(b) and Section 2.1(e). Subject to
the terms of
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this Credit Agreement (including Section 3.3), the Borrower may borrow, repay
and reborrow the Revolving Loan.
(b) Annual Reduction of Revolving Committed Amount. Annually, the
Revolving Committed Amount shall be reduced by $4,000,000 on each Annual
Reduction Date.
(c) Method of Borrowing for Revolving Loan. By no later than 2:00 p.m.
(Tampa, Florida time) the same Business Day of any requested borrowing of the
Revolving Loan, the Borrower shall submit a written Notice of Borrowing
substantially in the form of EXHIBIT 2.1(C) to the Lender setting forth (A) the
amount requested, (B) whether such Revolving Loan shall accrue interest at the
Adjusted Base Rate, the Adjusted Prime Rate or the Adjusted Eurodollar Rate, (C)
with respect to a Revolving Loan that will be a Eurodollar Loan, the Interest
Period applicable thereto, and (D) certification that the Borrower has complied
in all respects with Section 5.2. Any amount of the outstanding Revolving Loan
for which Borrower has not selected interest at the Adjusted Prime Rate or the
Adjusted Eurodollar Rate shall be considered a Base Rate Loan.
(d) Funding of Revolving Loan. Upon receipt of a Notice of Borrowing, the
amount of the requested portion of the Revolving Loan will then be made
available to the Borrower by the Lender by crediting the account of the Borrower
on the books of the Lender or by such other manner as the Borrower and the
Lender may agree.
(e) Reductions of Revolving Committed Amount. Upon at least five (5)
Business Days' notice, the Borrower shall have the right to permanently
terminate or reduce the aggregate unused amount of the Revolving Committed
Amount at any time or from time to time; provided that (i) each partial
reduction shall be in an aggregate amount at least equal to $1,000,000 and in
integral multiples of $1,000,000 above such amount, and (ii) no reduction shall
be made which would reduce the Revolving Committed Amount to an amount less than
the aggregate amount of the outstanding Revolving Loan. Any reduction in (or
termination of) the Revolving Committed Amount shall be permanent and may not be
reinstated.
(f) Revolving Note. The Revolving Loan made by the Lender shall be
evidenced by a duly executed promissory note of the Borrower to the Lender in
the face amount of the Revolving Loan in substantially the form of EXHIBIT
2.1(F).
2.2 LETTER OF CREDIT SUBFACILITY.
(a) Issuance. Subject to the terms and conditions hereof and of the LOC
Documents, if any, and any other terms and conditions which the Lender may
reasonably require (so long as such terms and conditions do not impose any
financial obligation on or require any Lien (not otherwise contemplated by this
Agreement) to be given by any Credit Party or conflict with any obligation of,
or detract from any action which may be taken by, any Credit Party or their
Subsidiaries under this Agreement), Lender shall issue letters of credit (the
"LETTERS OF CREDIT") for the account of the Borrower or any of its Subsidiaries,
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from the Effective Date until the Revolving Loan Maturity Date; provided,
however, that (i) the aggregate amount of LOC Obligations shall not at any time
exceed One Million and No/100 Dollars ($1,000,000), and (ii) the sum of the
aggregate amount of LOC Obligations outstanding plus the Revolving Loan
outstanding shall not exceed the Revolving Committed Amount. The issuance and
expiry date of each Letter of Credit shall be a Business Day. Except as
otherwise expressly permitted by the Lender, no Letter of Credit shall have an
original expiry date more than one year from the date of issuance, or as
extended, shall have an expiry date extending beyond the Revolving Loan Maturity
Date. Each Letter of Credit shall be either (x) a standby letter of credit
issued to support the obligations (including pension or insurance obligations),
contingent or otherwise, of the Borrower or any of its Subsidiaries, or (y) a
commercial letter of credit in respect of the purchase of goods or services by
the Borrower or any of its Subsidiaries in the ordinary course of business. Each
Letter of Credit shall comply with the related LOC Documents.
(b) Notice. The request for the issuance of a Letter of Credit shall be
submitted to the Lender at least three (3) Business Days prior to the requested
date of issuance.
(c) Reimbursement. In the event of any drawing under any Letter of
Credit, the Lender will promptly notify the Borrower. Unless the Borrower shall
immediately notify the Lender of its intent to otherwise reimburse the Lender,
the Borrower shall be deemed to have requested a Revolving Loan at the Adjusted
Base Rate in the amount of the drawing as provided in subsection (e) hereof, the
proceeds of which will be used to satisfy the reimbursement obligations. The
Borrower shall reimburse the Lender on the day of the drawing under any Letter
of Credit either with the proceeds of a Revolving Loan obtained hereunder or
otherwise in same day funds as provided herein or in the LOC Documents. If the
Borrower shall fail to reimburse the Lender as provided hereinabove, the
unreimbursed amount of such drawing shall bear interest at a per annum rate
equal to five percent (5%) plus the Prime Rate. The Borrower's reimbursement
obligations hereunder shall be absolute and unconditional under all
circumstances irrespective of (but without wavier of) any rights of set-off,
counterclaim or defense to payment the applicable account party or the Borrower
may claim or have against the Lender, the beneficiary of the Letter of Credit
drawn upon or any other Person, including without limitation, any defense based
on any failure of the applicable account party, the Borrower or any other Credit
Party to receive consideration or the legality, validity, regularity or
unenforceability of the Letter of Credit.
(d) Modification and Extension. The issuance of any supplement,
modification, amendment, renewal, or extensions to any Letter of Credit shall,
for purposes hereof, be treated in all respects the same as the issuance of a
new Letter of Credit hereunder.
(e) Uniform Customs and Practices. The Lender may have the Letters of
Credit be subject to The Uniform Customs and Practices for Documentary Credits,
as published as of the date of issue by the International Chamber of Commerce
(Publication No. 500 or the most recent publications, the "UCP"), in which case
the UCP may be incorporated therein and deemed in all respects to be a part
thereof.
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<PAGE> 24
(f) Conflict with LOC Documents. In the event of any conflict between
this Credit Agreement and any LOC Document, this Credit Agreement shall govern.
(g) Indemnification of Lender.
(i) In addition to its other obligations under this Credit
Agreement, the Borrower hereby agrees to protect, indemnify, pay and hold
the Lender harmless from and against any and all claims, demands,
liabilities, damages, losses, costs, charges and expenses (including
reasonable attorneys' fees actually incurred) that the Lender may incur
or be subject to as a consequence, direct or indirect, of (A) the
issuance of any Letter of Credit, or (B) the failure of the Lender to
honor a drawing under a Letter of Credit as a result of any act or
omission, whether rightful or wrongful, of any present or future de jure
or de facto government or governmental authority (all such acts or
omissions herein called "GOVERNMENT ACTS").
(ii) As between the Borrower and the Lender, the Borrower shall
assume all risks of the acts, omissions or misuse of any Letter of Credit
by the beneficiary thereof. The Lender shall not be responsible for
(except in the case of (A), (B), and (C) below if the Lender has actual
knowledge to the contrary): (A) the form, validity, sufficiency,
accuracy, genuineness or legal effect of any document submitted by any
party in connection with the application for and issuance of any Letter
of Credit, even if it should in fact prove to be in any or all respects
invalid, insufficient, inaccurate, fraudulent or forged; (B) the validity
or sufficiency of any instrument transferring or assigning or purporting
to transfer or assign any Letter of Credit or the rights or benefits
thereunder or proceeds thereof, in whole or in part, that may prove to be
invalid or ineffective for any reason; (C) failure of the beneficiary of
a Letter of Credit to comply fully with conditions required in order to
draw upon a Letter of Credit; (D) errors, omissions, interruptions or
delays in transmission or delivery of any messages, by mail, cable,
telegraph, telex or otherwise, whether or not they be in cipher; (E)
errors in interpretation of technical terms; (F) any loss or delay in the
transmission or otherwise of any document required in order to make a
drawing under a Letter of Credit or of the proceeds thereof; and (G) any
consequences arising from causes reasonably beyond the control of the
Lender, including, without limitation, any Government Acts. None of the
above shall affect, impair, or prevent the vesting of the Lender's rights
or powers hereunder.
(iii) In furtherance and extension and not in limitation of the
specific provisions hereinabove set forth, any action taken or omitted by
the Lender, under or in connection with any Letter of Credit or the
related certificates, if taken or omitted in good faith, shall not put
the Lender under any resulting liability to the Borrower or any other
Credit Party. It is the intention of the parties that this Credit
Agreement shall be construed and applied to protect and indemnify the
Lender against any and all risks involved in the issuance of the Letters
of Credit, all of which risks are hereby assumed by the Borrower,
including, without limitation, any and all risks of the acts or
omissions, whether rightful or wrongful, of any present or future
Government Acts.
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<PAGE> 25
The Lender shall not, in any way, be liable for any failure by the Lender
or anyone else to pay any drawing under any Letter of Credit as a result
of any Government Acts or any other cause reasonably beyond the control
of the Lender.
(iv) Nothing in this subjection (j) is intended to limit the
reimbursement obligation of the Borrower contained in this Section 2.2.
The obligations of the Borrower under this subjection (j) shall survive
the termination of this Credit Agreement. No act or omission of any
current or prior beneficiary of a Letter of Credit shall in any way
affect or impair the rights of the Lender to enforce any right, power or
benefit under this Credit Agreement.
(v) Notwithstanding anything to the contrary contained in this
subsection (j), the Borrower shall have no obligation to indemnify the
Lender in respect of any liability incurred by the Lender to the extent
arising out of the gross negligence or willful misconduct of the Lender,
as determined by a court of competent jurisdiction. Nothing in this
Agreement shall relieve the Lender of any liability to the Borrower in
respect of any action taken by the Lender which action constitutes gross
negligence or willful misconduct of the Lender or a violation of the UCP
or Uniform Commercial Code (as applicable), as determined by a court of
competent jurisdiction.
SECTION 3
GENERAL PROVISIONS APPLICABLE TO LOAN AND LETTERS OF CREDIT
3.1 INTEREST; CONVERSIONS AND CONTINUATIONS; MINIMUM AMOUNTS.
(a) Interest Rate. Any Base Rate Loan shall accrue interest at the
Adjusted Base Rate, any Eurodollar Loan shall accrue interest at the Adjusted
Eurodollar Rate applicable to such Eurodollar Loan and any Prime Rate Loan shall
accrue interest at the Adjusted Prime Rate.
(b) Default Rate of Interest. Upon the occurrence, and during the
continuance, of an Event of Default, the principal of and, to the extent
permitted by law, interest on the aggregate amount of the outstanding Loan and
any other amounts owing hereunder or under the other Credit Documents (including
without limitation fees and expenses) shall bear interest, payable on demand, at
a per annum rate equal to 5% plus the Prime Rate.
(c) Interest Payments. Interest on any Loan shall be due and payable in
arrears on each Interest Payment Date. If an Interest Payment Date falls on a
date which is not a Business Day, such Interest Payment Date shall be deemed to
be the next succeeding Business Day, except that in the case of a Eurodollar
Loan where the next succeeding Business Day falls in the next succeeding
calendar month, then on the next preceding Business Day.
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<PAGE> 26
(d) Continuations and Conversions. Subject to the terms of Section 5.2,
the Borrower shall have the option, on any Business Day, to continue an existing
Eurodollar Loan for a subsequent Interest Period, to convert a Base Rate Loan
into a Prime Rate Loan or into a Eurodollar Loan; to convert a Eurodollar Loan
into a Base Rate Loan or into a Prime Rate Loan, or to convert a Prime Rate Loan
into a Eurodollar Loan or into a Base Rate Loan; provided, however, that (i)
each such continuation or conversion must be requested by the Borrower pursuant
to a written Notice of Continuation/Conversion, substantially in the form of
EXHIBIT 3.1(D), in compliance with the terms set forth below, (ii) if a
Eurodollar Loan is continued or converted into a Base Rate Loan or into a Prime
Rate Loan on a day other than the last day of the Interest Period applicable
thereto, the Borrower shall pay the amount, if any, due under Section 3.12,
(iii) a Eurodollar Loan may not be continued nor may a Base Rate Loan or a Prime
Rate Loan be converted into a Eurodollar Loan during the existence and
continuation of an Event of Default, and (iv) any request to continue a
Eurodollar Loan that fails to comply with the terms hereof or any failure to
request a continuation of a Eurodollar Loan at the end of an Interest Period
shall constitute a conversion to a Base Rate Loan on the last day of the
applicable Interest Period. Each continuation/conversion must be requested by
the Borrower no later than 2:00 p.m. (Tampa, Florida time) the same Business Day
for such requested continuation/conversion pursuant to a written Notice of
Continuation/Conversion submitted to the Lender which shall set forth (x)
whether the Borrower wishes to continue or convert such Loan, or portion
thereof, and (y) if the request is to continue a Eurodollar Loan, to convert a
Base Rate Loan to a Eurodollar Loan or to convert a Prime Rate Loan to a
Eurodollar Loan, the Interest Period applicable thereto.
(e) Minimum Amounts. Each request for a Eurodollar Loan borrowing,
conversion or continuation shall be subject to the requirements that (i) each
Eurodollar Loan shall be in a minimum amount of $1,000,000 and in integral
multiples of $500,000, or the remaining amount available under the Revolving
Committed Amount, and (ii) no more than six (6) Eurodollar Loan borrowings shall
be outstanding hereunder at any one time. For the purposes of this Section, all
or any portion of a Eurodollar Loan with the same Interest Periods shall be
considered as one Eurodollar Loan, but each Eurodollar Loan borrowing with
different Interest Periods, even if they begin on the same date, shall be
considered as separate Eurodollar Loans.
3.2 PLACE AND MANNER OF PAYMENTS. All payments of principal, interest,
fees, expenses and other amounts to be made by a Credit Party under this
Agreement shall be received not later than 2:00 p.m. (Tampa, Florida time) on
the date when due, in Dollars and in immediately available funds, by the Lender
at its office in Tampa, Florida. Payments received after such time shall be
deemed to have been received on the next Business Day (but so long as received
by 5:00 p.m. (Tampa, Florida time) on the date due shall not result in an Event
of Default or Default). The Borrower shall, at the time it makes any payment
under this Agreement, specify to the Lender, the Loan, Letters of Credit, fees
or other amounts payable by the Borrower hereunder to which such payment is to
be applied (and in the event that it fails to specify, or if such application
would be inconsistent with the terms hereof, the Lender shall, allocate such
payment in such manner as the Lender may reasonably deem appropriate). Whenever
any payment hereunder shall be stated to be due on a day which is not a Business
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<PAGE> 27
Day, the due date thereof shall be extended to the next succeeding Business Day
(subject to accrual of interest and fees for the period of such extension),
except that in the case of Eurodollar Loan, if the extension would cause the
payment to be made in the next following calendar month, then such payment shall
instead be made on the next preceding Business Day.
3.3 MANDATORY PREPAYMENTS.
(a) Annual Reduction Date. On each Annual Reduction Date, the Borrower
shall make a principal payment to the Lender in the manner and in an amount
necessary to prevent the sum of the aggregate amount of the Revolving Loan
outstanding plus Letters of Credit outstanding from exceeding the Revolving
Commitment Amount as it shall be reduced on the Annual Reduction Date pursuant
to Section 2.1(b).
(b) Revolving Committed Amount Exceeded. If at any time the sum of the
aggregate amount of the Revolving Loan outstanding plus LOC Obligations
outstanding exceeds the Revolving Committed Amount, the Borrower shall
immediately make a principal payment to the Lender in the manner and in an
amount necessary to be in compliance with Section 2.1.
(c) Asset Dispositions. Immediately upon receipt by a Credit Party of Net
Cash Proceeds in excess of $500,000 annually from any Asset Disposition, the
Borrower shall forward 100% of the Net Cash Proceeds of such Asset Disposition
to the Lender as a prepayment of the Loan.
(d) ssuances of Debt. Immediately upon receipt by a Credit Party or any
of its Subsidiaries of proceeds from any Debt Issuance in excess of $500,000
annually, the Borrower shall forward 100% of the Net Cash Proceeds of such Debt
Issuance to the Lender as a payment of the Loan.
3.4 FEES.
(a) Unused Revolving Loan Commitment Fees. In consideration of the
Revolving Committed Amount being made available by the Lender hereunder, the
Borrower agrees to pay to the Lender a fee equal to 0.25% on the Unused
Revolving Commitment. The Unused Revolving Loan Commitment Fees will be
calculated on the basis of a 360-day year for the actual number of days elapsed.
The Unused Revolving Loan Commitment Fees shall commence to accrue on the
Effective Date and shall be due and payable in arrears on each January 1, April
1, July 1 and October 1 (as well as on the Revolving Loan Maturity Date and on
any date that the Revolving Committed Amount is reduced) for the immediately
preceding fiscal quarter (or portion thereof), beginning with the first of such
dates to occur after the Closing Date.
(b) Letter of Credit Fees. The Borrower shall pay to the Lender (A) a fee
as agreed upon between the Lender and the Borrower, such fee to be paid
quarterly in arrears 15 days after the end of each fiscal quarter of the
Borrower (as well as on the Revolving Loan
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Maturity Date), and (B) the customary and reasonable charges from time to time
to the Lender (of which the Credit Parties have been notified in writing) for
its services in connection with the issuance, amendment, payment, transfer,
administration, cancellation and conversion of, and drawings under, such Letters
of Credit (collectively, the "LETTER OF CREDIT FEES").
(c) Upfront Fee. In consideration of the Revolving Committed Amount being
made available by the Lender hereunder, the Borrower has paid to the Lender an
upfront fee pursuant to the terms of that certain commitment letter dated
November 5, 1997 and accepted by Borrower November 20, 1997.
3.5 PAYMENT IN FULL AT MATURITY. On the Revolving Loan Maturity Date, the
entire outstanding principal balance of the Revolving Loan, together with
accrued but unpaid interest and all other sums owing with respect thereto, shall
be due and payable in full, unless accelerated sooner pursuant to Section 9.
3.6 COMPUTATIONS OF INTEREST.
(a) All computations of interest for Eurodollar Loans hereunder shall be
made on the basis of the actual number of days elapsed over a year of 360 days.
Interest shall accrue from and include the date of borrowing (or continuation or
conversion) but exclude the date of payment.
(b) All computations of interest for a Base Rate Loan or a Prime Rate
Loan hereunder shall be made on the basis of the actual number of days elapsed
over a year of 360 days. Interest shall accrue from and include the date of
borrowing (or conversion) but exclude the date of payment.
(c) It is the intent of the Lender and the Credit Parties to conform to
and contract in strict compliance with applicable usury law from time to time in
effect. All agreements between the Lender and the Borrower are hereby limited by
the provisions of this paragraph which shall override and control all such
agreements, whether now existing or hereafter arising and whether written or
oral. In no way, nor in any event or contingency (including but not limited to
prepayment or acceleration of the maturity of any obligation), shall the
interest taken, reserved, contracted for, charged, or received under this Credit
Agreement, under the Note or otherwise, exceed the maximum nonusurious amount
permissible under applicable law. If, from any possible construction of any of
the Credit Documents or any other document, interest would otherwise be payable
in excess of the maximum nonusurious amount, any such construction shall be
subject to the provisions of this paragraph and such documents shall be
automatically reduced to the maximum nonusurious amount permitted under
applicable law, without the necessity of execution of any amendment or new
document. If the Lender shall ever receive anything of value which is
characterized as interest on the Loan under applicable law and which would,
apart from this provision, be in excess of the maximum lawful amount, an amount
equal to the amount which would have been excessive interest shall, without
penalty, be applied to the reduction of the principal amount owing on the Loan
and not to the payment of interest, or refunded to the Borrower or the other
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<PAGE> 29
payor thereof if and to the extent such amount which would have been excessive
exceeds such unpaid principal amount of the Loan. The right to demand payment of
the Loan or any other indebtedness evidenced by any of the Credit Documents does
not include the right to receive any interest which has not otherwise accrued on
the date of such demand, and the Lender does not intend to charge or receive any
unearned interest in the event of such demand. All interest paid or agreed to be
paid to the Lender with respect to the Loan shall, to the extent permitted by
applicable law, be amortized, prorated, allocated, and spread throughout the
full stated term (including any renewal or extension) of the Loan so that the
amount of interest on account of such indebtedness does not exceed the maximum
nonusurious amount permitted by applicable law.
3.7 CAPITAL ADEQUACY. If, after the date hereof, the Lender has
reasonably determined that the adoption or the becoming effective of, or any
change in, or any change by a Governmental Authority, central bank or comparable
agency charged with the interpretation or administration of any applicable law,
rule or regulation regarding capital adequacy, or compliance by the Lender, or
its parent corporation, with any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency, has or would have the effect of reducing the rate of return
on the Lender's (or parent corporation's) capital or assets as a consequence of
its commitments or obligations hereunder to a level below that which the Lender,
or its parent corporation, could have achieved but for such adoption,
effectiveness, change or compliance (taking into consideration the Lender's (or
parent corporation's) policies with respect to capital adequacy), then, upon
notice from the Lender to the Borrower within one hundred eighty (180) days of
such determination by Lender, the Borrower shall be obligated to pay to the
Lender such additional amount or amounts as will compensate the Lender on an
after-tax basis (after taking into account applicable deductions and credits in
respect of the amount indemnified) for such reduction. Each determination by the
Lender of amounts owing under this Section shall be prima facie evidence of such
amounts.
3.8 INABILITY TO DETERMINE INTEREST RATE. If prior to the first day of
any Interest Period, the Lender shall have determined in good faith (which
determination shall be conclusive and binding upon the Borrower) that, by reason
of circumstances affecting the relevant market, adequate and reasonable means do
not exist for ascertaining the Eurodollar Rate for such Interest Period, the
Lender shall give telecopy or telephonic notice thereof to the Borrower as soon
as practicable thereafter. If such notice is given (a) any Eurodollar Loan or
Base Rate Loan requested to be made on the first day of such Interest Period
shall be made as a Prime Rate Loan, (b) any Loan, or portion thereof, that was
to have been converted on the first day of such Interest Period to or continued
as a Eurodollar Loan or a Base Rate Loan shall be converted to or continued to a
Prime Rate Loan, and (c) any outstanding Eurodollar Loan shall be converted, on
the first day of such Interest Period, to a Prime Rate Loan and any outstanding
Base Rate Loan shall be converted to a Prime Rate Loan. Until the Lender has
given the Borrower notice that such conditions no longer exist (which the Lender
agrees to do promptly), no further Eurodollar Loan or Base Rate Loan shall be
made or continued as such, nor shall the Borrower have the right to convert any
Loan to a Base Rate Loan or to a Eurodollar Loan.
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3.9 ILLEGALITY. Notwithstanding any other provision herein, if the
adoption of or any change in any Requirement of Law or in the interpretation or
application thereof occurring after the Closing Date shall make it unlawful for
the Lender to make or maintain a Base Rate Loan or a Eurodollar Loan as
contemplated by this Credit Agreement, (a) the Lender shall promptly give
written notice of such circumstances to the Borrower (which notice shall be
promptly withdrawn by the Lender whenever such circumstances no longer exist),
(b) the commitment of the Lender hereunder to make a Eurodollar Loan, continue a
Eurodollar Loan or a Base Rate Loan as such and convert a Base Rate Loan to
Eurodollar Loan or a Eurodollar Loan to a Base Rate Loan shall forthwith be
suspended and, until such time as it shall no longer be unlawful for the Lender
to make or maintain a Base Rate Loan or a Eurodollar Loan, the Lender shall then
have a commitment only to make a Prime Rate Loan when a Base Rate Loan or a
Eurodollar Loan is requested, and (c) the Lender's Loan then outstanding as a
Base Rate Loan or a Eurodollar Loan, if any, shall be converted automatically to
a Prime Rate Loan on the respective last days of the then current Interest
Periods with respect to such Loan or within such earlier period as required by
law. If any such conversion of a Base Rate Loan or a Eurodollar Loan occurs on a
day which is not the last day of the then current Interest Period with respect
thereto, the Borrower shall pay to the Lender such amounts, if any, as may be
required pursuant to Section 3.12.
3.10 REQUIREMENTS OF LAW. If the adoption of or any change in any
Requirement of Law or in the interpretation or application thereof applicable to
the Lender, or compliance by the Lender with any request or directive (whether
or not having the force of law) from any central bank or other Governmental
Authority, in each case made subsequent to the Closing Date:
(a) shall subject the Lender to any tax of any kind whatsoever with
respect to any Letter of Credit, Base Rate Loan or Eurodollar Loan made
by it or its obligation to make a Base Rate Loan or a Eurodollar Loan, or
change the basis of taxation of payments to the Lender in respect thereof
(except for Non-Excluded Taxes covered by Section 3.11 (including
Non-Excluded Taxes imposed solely by reason of any failure of the Lender
to comply with its obligations under Section 3.11(b)) and changes in
taxes measured by or imposed upon the overall net income, or franchise
tax (imposed in lieu of such net income tax), of the Lender or its
applicable lending office, branch, or any affiliate thereof);
(b) shall impose, modify or hold applicable any reserve, special
deposit, compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances, loans
or other extensions of credit by, or any other acquisition of funds by,
any office of the Lender which is not otherwise included in the
determination of the Base Rate or Eurodollar Rate hereunder; or
(c) shall impose on the Lender any other condition (excluding any
tax of any kind whatsoever);
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<PAGE> 31
and the result of any of the foregoing is to increase the cost to the Lender, by
an amount which the Lender reasonably deems to be material, of making,
converting into, continuing or maintaining a Base Rate Loan or a Eurodollar Loan
or to reduce any amount receivable hereunder in respect thereof, then, in any
such case, upon notice to the Borrower from the Lender in accordance herewith
within one hundred eighty (180) days of the date Lender becomes aware of such
adoption or such change, the Borrower shall be obligated to promptly pay the
Lender, upon its demand, any additional amounts reasonably necessary to
compensate the Lender on an after-tax basis (after taking into account
applicable deductions and credits in respect of the amount indemnified) for such
increased cost or reduced amount receivable, provided that, in any such case,
the Borrower may elect to convert the Base Rate Loan or Eurodollar Loan made by
the Lender hereunder to a Prime Rate Loan by giving the Lender at least one
Business Day's notice of such election, in which case the Borrower shall
promptly pay to the Lender, upon demand, without duplication, such amounts, if
any, as may be required pursuant to Section 3.12. If the Lender becomes entitled
to claim any additional amounts pursuant to this Section 3.10, it shall provide
prompt notice thereof to the Borrower certifying (x) that one of the events
described in this Section 3.10 has occurred and describing in reasonable detail
the nature of such event, (y) as to the increased cost or reduced amount
resulting from such event, and (z) as to the additional amount demanded by the
Lender and a reasonably detailed explanation of the calculation thereof. Such a
certificate as to any additional amounts payable pursuant to this Section 3.10
submitted by the Lender to the Borrower shall be prima facie evidence of the
matters contained therein. This covenant shall survive the termination of this
Credit Agreement and the payment of the Loan and all other amounts payable
hereunder.
3.11 TAXES.
(a) Except as provided below in this Section 3.12, all payments made by
the Borrower under this Credit Agreement and any Note shall be made free and
clear of, and without deduction or withholding for or on account of, any present
or future income, stamp or other taxes, levies, imposts, duties, charges, fees,
deductions or withholdings, now or hereafter imposed, levied, collected,
withheld or assessed by any court, or governmental body, agency or other
official, excluding (x) taxes measured by or imposed upon the overall net income
of the Lender or its applicable lending office, or any branch or affiliate
thereof, and (y) all franchise taxes, branch taxes, taxes on doing business or
taxes on the overall capital or net worth of the Lender or its applicable
lending office, or any branch or affiliate thereof, in each case imposed in lieu
of net income taxes: (i) by the jurisdiction under the laws of which the Lender,
applicable lending office, branch or affiliate is organized or is located, or in
which its principal executive office is located, or any nation within which such
jurisdiction is located or any political subdivision thereof; or (ii) by reason
of any connection between the jurisdiction imposing such tax and the Lender,
applicable lending office, branch or affiliate other than a connection arising
solely from the Lender having executed, delivered or performed its obligations,
or received payment under or enforced, this Credit Agreement or any Note. If any
such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or
withholdings ("NON-EXCLUDED TAXES") are required to be withheld from any amounts
payable to the Lender hereunder or under any Note, (A) the amounts so payable to
the Lender
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shall be increased to the extent necessary to yield to the Lender (after payment
of all Non-Excluded Taxes) interest or any such other amount payable hereunder
at the rates or in the amounts specified in this Credit Agreement and any Note;
provided, however, that the Borrower shall be entitled to deduct and withhold
any Non-Excluded Taxes whenever any Non-Excluded Taxes are payable by the
Borrower, and (B) as promptly as possible after the Lender's request, the
Borrower shall send to the Lender proof of payment thereof in a form acceptable
to Lender. If the Borrower fails to pay any Non-Excluded Taxes when due to the
appropriate taxing authority or fails to remit to the Lender the required
receipts or other required documentary evidence, the Borrower shall indemnify
the Lender for any incremental taxes, interest or penalties that may become
payable by the Lender as a result of any such failure. The agreements in this
subsection shall survive the termination of this Credit Agreement and the
payment of the Loan and all other amounts payable hereunder.
(b) In connection with this transaction there may or may not be due
certain documentary stamp taxes and/or intangible taxes imposed by the State of
Florida (the "FLORIDA TAXES"). In addition to (and not in limitation of) the
indemnification with respect to tax liabilities set forth above, the Borrower
agrees to indemnify the Lender, its directors, officers, agents and employees
from and against any and all liability, damage, loss, cost, expense, or
reasonable attorney fees actually incurred or sustained by the Lender or its
directors, officers, agents or employees on account of or arising from any claim
or action raised by, filed or brought by or in the name of any Florida
governmental or administrative department with respect to non-payment of the
Florida Taxes against the Lender, or any of its directors, officers, agents or
employees.
3.12 INDEMNITY. The Borrower promises to indemnify the Lender and to hold
the Lender harmless from any loss or expense which the Lender may sustain or
incur (other than through the Lender's gross negligence or willful misconduct)
as a consequence of (a) default by the Borrower in making a borrowing of,
conversion into or continuation of a Eurodollar Loan after the Borrower has
given notice thereof in accordance with the provisions of this Credit Agreement,
(b) default by the Borrower in making any prepayment of a Eurodollar Loan after
the Borrower has given notice thereof in accordance with the provisions of this
Credit Agreement, and (c) the making of a prepayment of a Eurodollar Loan on a
day which is not the last day of an Interest Period with respect thereto. Such
indemnification may include an amount equal to (i) the amount of interest which
would have accrued on the amount so prepaid, or not so borrowed, converted or
continued, for the period from the date of such prepayment or of such failure to
borrow, convert or continue to the last day of the applicable Interest Period
(or, in the case of a failure to borrow, convert or continue, the Interest
Period that would have commenced on the date of such failure) in each case at
the applicable rate of interest for such Eurodollar Loan provided for herein
(excluding, however, the Applicable Margin included therein, if any) minus (ii)
the amount of interest (as reasonably determined by the Lender) which would have
accrued to the Lender on such amount by placing such amount on deposit for a
comparable period with leading banks in the interbank Eurodollar market. The
agreements in this Section shall survive the termination of this Credit
Agreement and the payment of the Loan and all other amounts payable hereunder.
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SECTION 4
GUARANTY
4.1 GUARANTY OF PAYMENT. Subject to Section 4.7 below, each of the
Guarantors hereby, jointly and severally, unconditionally guarantees to the
Lender, the prompt payment of the Credit Party Obligations in full when due
(whether at stated maturity, as a mandatory prepayment, by acceleration or
otherwise). The Guarantors additionally, jointly and severally, unconditionally
guarantee to the Lender the timely performance of all other obligations under
the Credit Documents. This Section 4 Guaranty (the "GUARANTY") is a guaranty of
payment and not of collection and is a continuing guaranty and shall apply to
all Credit Party Obligations whenever arising.
4.2 OBLIGATIONS UNCONDITIONAL. The obligations of the Guarantors
hereunder are absolute and unconditional, irrespective of the value,
genuineness, validity, regularity or enforceability of any of the Credit
Documents, or any other agreement or instrument referred to therein, to the
fullest extent permitted by applicable law, irrespective of any other
circumstance whatsoever (other than payment in full or complete performance
hereunder; subject to any provisions herein which expressly survive the
termination of this Credit Agreement and the payment of the Loan and all other
amounts payable hereunder) which might otherwise constitute a legal or equitable
discharge or defense of a surety or guarantor. Each Guarantor agrees that this
Guaranty may be enforced by the Lender without the necessity at any time of
resorting to or exhausting any other security or collateral and without the
necessity at any time of having recourse to the Note or any of the other Credit
Documents or any collateral, if any, hereafter securing the Credit Party
Obligations or otherwise and each Guarantor hereby waives the right to require
the Lender to proceed against the Borrower or any other Person (including a
co-guarantor) or to require the Lender to pursue any other remedy or enforce any
other right. Each Guarantor further agrees that it shall have no right of
subrogation, indemnity, reimbursement or contribution against the Borrower or
any other Guarantor of the Credit Party Obligations for amounts paid under this
Guaranty until such time as the Lender has been paid in full and the Commitment
has been terminated. Each Guarantor further agrees that nothing contained herein
shall prevent the Lender from suing on the Note or any of the other Credit
Documents or foreclosing its security interest in or Lien on any collateral, if
any, securing the Credit Party Obligations or from exercising any other rights
available to it under this Credit Agreement, the Note, any of the other Credit
Documents, or any other instrument of security, if any, and the exercise of any
of the aforesaid rights and the completion of any foreclosure proceedings shall
not constitute a discharge of any of any Guarantor's obligations hereunder; it
being the purpose and intent of each Guarantor that its obligations hereunder
shall be absolute, independent and unconditional under any and all
circumstances. Neither any Guarantor's obligations under this Guaranty nor any
remedy for the enforcement thereof shall be impaired, modified, changed or
released in any manner whatsoever by an impairment, modification, change,
release or limitation of the liability of the Borrower or by reason of the
bankruptcy or insolvency of the Borrower. Each Guarantor waives any and all
notice of the creation, renewal, extension or accrual of any of the Credit Party
Obligations and notice of or proof of reliance by the Lender upon this Guaranty
or
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acceptance of this Guaranty. The Credit Party Obligations, and any of them,
shall conclusively be deemed to have created, contracted or incurred, or
renewed, extended, amended or waived, in reliance upon this Guaranty. All
dealings between the Borrower and any of the Guarantors, on the one hand, and
the Lender, on the other hand, likewise shall be conclusively presumed to have
been had or consummated in reliance upon this Guaranty.
4.3 MODIFICATIONS. Each Guarantor agrees that (a) all or any part of the
security now or hereafter held for the Credit Party Obligations, if any, may be
exchanged, compromised or surrendered from time to time; (b) the Lender shall
not have any obligation to protect, perfect, secure or insure any such security
interests, liens or encumbrances now or hereafter held, if any, for the Credit
Party Obligations or the properties subject thereto; (c) the time or place of
payment of the Credit Party Obligations may be changed or extended, in whole or
in part, to a time certain or otherwise, and may be renewed or accelerated, in
whole or in part; (d) the Borrower and any other party liable for payment under
the Credit Documents may be granted indulgences generally; (e) any of the
provisions of the Note or any of the other Credit Documents may be modified,
amended or waived; (f) any party (including any co-guarantor) liable for the
payment thereof may be granted indulgences or be released; and (g) any deposit
balance for the credit of the Borrower or any other party liable for the payment
of the Credit Party Obligations or liable upon any security therefor may be
released, in whole or in part, at, before or after the stated, extended or
accelerated maturity of the Credit Party Obligations, all without notice to or
further assent by such Guarantor, which shall remain bound thereon,
notwithstanding any such exchange, compromise, surrender, extension, renewal,
acceleration, modification, indulgence or release.
4.4 WAIVER OF RIGHTS. Each Guarantor expressly waives to the fullest
extent permitted by applicable law: (a) notice of acceptance of this Guaranty by
the Lender and of all extensions of credit to the Borrower by the Lender; (b)
presentment and demand for payment or performance of any of the Credit Party
Obligations; (c) protest and notice of dishonor or of default (except as
specifically required in the Credit Agreement) with respect to the Credit Party
Obligations or with respect to any security therefor; (d) notice of the Lender
obtaining, amending, substituting for, releasing, waiving or modifying any
security interest, lien or encumbrance, if any, hereafter securing the Credit
Party Obligations, or the Lender's subordinating, compromising, discharging or
releasing such security interests, liens or encumbrances, if any; (e) all other
notices to which such Guarantor might otherwise be entitled; and (f) demand for
payment under this Guaranty.
4.5 REINSTATEMENT. The obligations of the Guarantors under this Section 4
shall be automatically reinstated if and to the extent that for any reason any
payment by or on behalf of any Person in respect of the Credit Party Obligations
is rescinded or must be otherwise restored by any holder of any of the Credit
Party Obligations, whether as a result of any proceedings in bankruptcy or
reorganization or otherwise, and each Guarantor agrees that it will indemnify
the Lender on demand for all reasonable costs and expenses (including, without
limitation, reasonable fees of counsel) actually incurred by the Lender in
connection with such rescission or restoration, including any such costs and
expenses incurred in defending against
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any claim alleging that such payment constituted a preference, fraudulent
transfer or similar payment under any bankruptcy, insolvency or similar law.
4.6 REMEDIES. The Guarantors agree that, as between the Guarantors, on
the one hand, and the Lender, on the other hand, the Credit Party Obligations
may be declared to be forthwith due and payable as provided in Section 9 (and
shall be deemed to have become automatically due and payable in the
circumstances provided in Section 9) notwithstanding any stay, injunction or
other prohibition preventing such declaration (or preventing such Credit Party
Obligations from becoming automatically due and payable) as against any other
Person and that, in the event of such declaration (or such Credit Party
Obligations being deemed to have become automatically due and payable), such
Credit Party Obligations (whether or not due and payable by any other Person)
shall forthwith become due and payable by the Guarantors. The Guarantors
acknowledge and agree that their obligations hereunder are secured in accordance
with the terms of the Security Agreements and the other Collateral Documents and
that the Lender may exercise its remedies thereunder in accordance with the
terms thereof.
4.7 LIMITATION OF GUARANTY. Notwithstanding any provision to the contrary
contained herein or in any of the other Credit Documents, to the extent the
obligations of any Guarantor shall be adjudicated to be invalid or unenforceable
for any reason (including, without limitation, because of any applicable state
or federal law relating to fraudulent conveyances or transfers) then the
obligations of such Guarantor hereunder shall be limited to the maximum amount
that is permissible under applicable law (whether federal or state and
including, without limitation, the Bankruptcy Code).
SECTION 5
CONDITIONS PRECEDENT
5.1 CLOSING CONDITIONS. The obligation of the Lender to make the initial
Extension of Credit is subject to satisfaction of the following conditions:
(a) Executed Credit Documents. Receipt by the Lender of duly executed
copies of: (i) this Credit Agreement; (ii) the Note; (iii) the Collateral
Documents and (iv) all other Credit Documents, each in form and substance
reasonably acceptable to the Lender.
(b) Corporate Documents. Receipt by the Lender of the following:
(i) CHARTER DOCUMENTS. Copies of the articles or certificates of
incorporation or other charter documents of each Credit Party certified
to be true and complete as of a recent date by the appropriate
Governmental Authority of the state or other jurisdiction of its
incorporation and certified by a secretary or assistant secretary of such
Credit Party to be true and correct as of the Effective Date.
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(ii) BYLAWS. A copy of the bylaws of each Credit Party certified by
a secretary or assistant secretary of such Credit Party to be true and
correct as of the Effective Date.
(iii) RESOLUTIONS. Copies of resolutions of the Board of Directors
of each Credit Party approving and adopting the Credit Documents to which
it is a party, the transactions contemplated therein and authorizing
execution and delivery thereof, certified by a secretary of assistant
secretary of such Credit Party to be true and correct and in force and
effect as of the Effective Date.
(iv) GOOD STANDING. Copies of (A) certificates of good standing,
existence or its equivalent with respect to each Credit Party certified
as of a recent date by the appropriate Governmental Authorities of the
state or other jurisdiction of incorporation and each other jurisdiction
in which the failure to so qualify and be in good standing would have a
Material Adverse Effect on the business or operations of a Credit Party
in such jurisdiction and (B) to the extent available, a certificate
indicating payment of all corporate franchise taxes certified as of a
recent date by the appropriate governmental taxing authorities.
(v) INCUMBENCY. An incumbency certificate of each Credit Party
certified by a secretary or assistant secretary to be true and correct as
of the Effective Date.
(c) Certified Copies. Certified copies of all documents evidencing any
necessary corporate action, authorizations, consents, approvals, registrations
and filings required to be made or obtained by each Credit Party with respect to
the Credit Documents.
(d) Financial Statements. Receipt by the Lender of the quarterly
consolidated financial statements of the Credit Parties for the fiscal quarter
ending September 30, 1997, prepared by Borrower.
(e) Opinion of Counsel. Receipt by the Lender of an opinion, or opinions
(which shall cover, among other things, authority, legality, validity, binding
effect, enforceability and attachment and perfection of liens), reasonably
satisfactory to the Lender, addressed to the Lender and dated as of the
Effective Date, from legal counsel to the Credit Parties.
(f) Personal Property Collateral. The Lender shall have received, in form
and substance reasonably satisfactory to the Lender:
(i) searches of Uniform Commercial Code ("UCC") filings in the
jurisdiction of the chief executive office of each Credit Party and each
jurisdiction where any Collateral is located or where a filing would need
to be made in order to perfect the Lender's security interest in the
Collateral or where the Lender deems
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appropriate; copies of the financing statements on file in such
jurisdictions and evidence that no Liens exist other than Permitted
Liens;
(ii) duly executed UCC financing statements for each appropriate
jurisdiction as is necessary, in the Lender's sole discretion, to perfect
the Lender's security interest in the Collateral;
(iii) searches of ownership of intellectual property in the
appropriate governmental offices and such patent/trademark/copyright
filings as requested by the Lender in order to perfect the Lender's
security interest in the Collateral;
(iv) all stock certificates evidencing the stock pledged to the
Lender pursuant to the Pledge Agreements, together with duly executed in
blank undated stock powers attached thereto;
(v) all instruments and chattel paper in the possession of a Credit
Party, as required by the Security Agreements, together with allonge or
assignments as may be necessary or appropriate to perfect the Lender's
security interest in the Collateral;
(vi) at the request of the Lender, copies of the Assigned Agreements
(as defined in the Security Agreement), together with assignments and
third party consents as may be necessary or appropriate to perfect the
Lender's security interest in such Assigned Agreements; and
(g) Evidence of Insurance. Receipt by the Lender of certificates of
insurance of the Credit Parties evidencing that all property of the Credit
Parties has been insured in amounts and against risks customarily insured
against by similar businesses in such localities where the Credit Parties are
located. Said insurance shall include, but not be limited to, liability and
casualty insurance meeting the requirements set forth in the Credit Documents,
including, but not limited to, naming the Lender as loss payee on all casualty
policies and as an additional insured on all liability policies.
(h) Material Adverse Effect. There shall not have occurred a change since
June 30, 1997, that has had or could reasonably be expected to have a Material
Adverse Effect.
(i) Litigation. There shall not exist any pending or threatened action,
suit, investigation or proceeding against a Credit Party or any of their
Subsidiaries that would have or could reasonably be expected to have a Material
Adverse Effect.
(j) Fees and Expenses. Payment by the Credit Parties of all fees and
expenses owed by them to the Lender.
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(k) Pay-Off Letters - Indebtedness. The Lender shall have received
pay-off letters with respect to all outstanding Indebtedness except for any
Permitted Indebtedness permitted pursuant to Section 6.10 and Section 8.1.
(l) Pay-Off Letters - Liens. The Lender shall have received pay-off
letters and releases and UCC Termination Statements (or satisfactory assurances
with respect thereto) with respect to existing liens and encumbrances affecting
the Collateral.
(m) Payment of Indebtedness. The Lender shall have received evidence of
repayment of all outstanding Indebtedness under Borrower's existing credit
agreements and termination of commitments thereunder except for any permitted
pursuant to Section 6.10 and Section 8.1.
(n) Other. Receipt by the Lender of such other documents, instruments,
agreements or information as may be reasonably and timely requested by the
Lender, including, but not limited to, information regarding litigation, tax,
accounting, labor, insurance, pension liabilities (actual or contingent), real
estate leases, material contracts, debt agreements, property ownership and
contingent liabilities of the Borrower and its Subsidiaries.
5.2 CONDITIONS TO ALL EXTENSIONS OF CREDIT. In addition to the conditions
precedent stated elsewhere herein, the Lender shall not be obligated to make a
distribution of the Loan or to issue or extend a Letter of Credit unless:
(a) Notice. The Borrower shall have delivered in the case of any new
Revolving Loan distribution, a Notice of Borrowing, duly executed and completed,
by the time specified in Section 2.1.
(b) Representations and Warranties. The representations and warranties
made by the Credit Parties in any Credit Document are true and correct in all
material respects at and as if made as of such date except to the extent they
expressly relate to an earlier date;
(c) No Default. No Default or Event of Default shall exist or be
continuing either prior to or after giving effect thereto;
(d) No Material Adverse Effect. No occurrence or lack thereof shall have
caused any Material Adverse Effect; and
(e) Availability. Immediately after giving effect to the making of a
Revolving Loan distribution (and the application of the proceeds thereof) or to
the issuance of a Letter of Credit, the aggregate outstanding principal balance
of the Revolving Loan plus LOC Obligations outstanding shall not exceed the
Revolving Committed Amount.
The delivery of each Notice of Borrowing and each request for issuance of a
Letter of Credit shall constitute a representation and warranty by the Borrower
of the correctness of the matters specified in subsections (b), (c), (d) and (e)
above.
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SECTION 6
REPRESENTATIONS AND WARRANTIES
The Credit Parties hereby represent to the Lender that:
6.1 FINANCIAL CONDITION. The financial statements delivered to the Lender
pursuant to Section 5.1(d) and Sections 7.1(a) and (b): (a) have been prepared
in accordance with GAAP and (b) present fairly, in all material respects, the
consolidated and consolidating (as applicable) financial condition, results of
operations and cash flows of the Credit Parties and their Subsidiaries as of
such date and for such periods. Since June 30, 1997, there has been no sale,
transfer or other disposition by any Credit Party or any of their Subsidiaries
of any material part of the business or property of the Credit Parties, taken as
a whole, and no purchase or other acquisition by any of them of any business or
property (including any capital stock of any other Person) material in relation
to the consolidated financial condition of the Credit Parties, taken as a whole,
in each case, which is not (i) reflected in the most recent financial statements
delivered to the Lender pursuant to Section 5.1(d) or Section 7.1 or in the
notes thereto or (ii) otherwise permitted by the terms of this Credit Agreement.
6.2 NO MATERIAL CHANGE. Since June 30, 1997, there has been no
development or event relating to or affecting a Credit Party or any of their
Subsidiaries which has had or could reasonably be expected to have a Material
Adverse Effect.
6.3 ORGANIZATION AND GOOD STANDING. Each Credit Party (a) is a
corporation or other legal entity duly organized or formed, validly existing and
in good standing under the laws of the state of its incorporation or formation;
(b) is duly qualified as a foreign corporation or other legal entity and in good
standing under the laws of each jurisdiction where its ownership or lease of
property or the conduct of its business requires such qualification (except for
jurisdictions in which such failure to so qualify or to be in good standing
could not reasonably be expected to have a Material Adverse Effect); (c) has the
requisite corporate power and authority and the legal right to own, pledge,
mortgage or otherwise encumber and operate its properties, to lease the property
it operates under lease, and to conduct its business as now, heretofore and
proposed to be conducted; (d) has all licenses, permits, consents or approvals
from or by, and has or will have made all filings with, and has or will have
given all notices to, all governmental authorities having jurisdiction, to the
extent required for such ownership, operation and conduct (except for such
licenses, etc., the absence of which, and such filings and notices, as to which
the failure to make or give, could not reasonably be expected to have a Material
Adverse Effect); (e) is in compliance with its certificate or articles of
incorporation and by-laws; and (f) is in compliance with all applicable
provisions of law, statute, order, rule, regulation, or judgment entered by any
court, including, without limitation, ERISA, those regarding the collection,
payment and deposit of employees' income, unemployment and Social Security taxes
and those relating to environmental matters where the failure to comply could
reasonably be expected to have a Material Adverse Effect.
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6.4 DUE AUTHORIZATION. Each Credit Party (a) has the requisite corporate
power and authority to execute, deliver and perform its respective obligations
under this Credit Agreement and the other Credit Documents to which it is a
party and to incur its respective obligations herein and therein provided for
and (b) is duly authorized to, and has been authorized by all necessary
corporate action, to execute, deliver and perform this Credit Agreement and the
other Credit Documents to which it is a party.
6.5 NO CONFLICTS. Neither the execution and delivery of the Credit
Documents, nor the consummation of the transactions contemplated therein, nor
performance of and compliance with the terms and provisions thereof by such
Credit Party will (a) violate or conflict with any provision of its articles or
certificate of incorporation or bylaws, (b) violate, contravene or conflict with
any Requirement of Law or any other law, regulation (including, without
limitation, Regulation U or Regulation X), order, writ, judgment, injunction,
decree or permit applicable to it, (c) violate, contravene or conflict with
contractual provisions of, or cause an event of default under, any indenture,
loan agreement, mortgage, deed of trust, contract or other agreement or
instrument to which it is a party or by which it may be bound, the violation of
which could reasonably be expected to have a Material Adverse Effect, or (d)
result in or require the creation of any Lien (other than those contemplated in
or created in connection with the Credit Documents) upon or with respect to its
properties.
6.6 CONSENTS. Except for consents, approvals and authorizations which
have been obtained, no consent, approval, authorization or order of, or filing,
registration or qualification with, any court or Governmental Authority or third
party in respect of any Credit Party is required in connection with the
execution, delivery or performance of this Credit Agreement or any of the other
Credit Documents by such Credit Party.
6.7 ENFORCEABLE OBLIGATIONS. This Credit Agreement and the other Credit
Documents have been duly executed and delivered by each Credit Party thereto and
constitute legal, valid and binding obligations of each Credit Party thereto
enforceable against such Credit Party in accordance with their respective terms,
except as may be limited by bankruptcy or insolvency laws or similar laws
affecting creditors' rights generally or by general equitable principles.
6.8 NO DEFAULT. No Credit Party is in default in any respect under any
contract, lease, loan agreement, indenture, mortgage, security agreement or
other agreement or obligation to which it is a party or by which any of its
properties is bound which default could have or could reasonably be expected to
have a Material Adverse Effect. No Default or Event of Default has occurred or
exists except as previously disclosed in writing to the Lender.
6.9 OWNERSHIP. Each Credit Party is the owner of, and has good and
marketable title to, all of its respective assets and none of such assets is
subject to any Lien other than Permitted Liens.
6.10 INDEBTEDNESS. As of the date hereof, the Credit Parties have no
Indebtedness except as set forth on SCHEDULE 6.10.
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6.11 LITIGATION. Except as disclosed in SCHEDULE 6.11, there are no
actions, suits or legal, equitable, arbitration or administrative proceedings,
pending or, to the knowledge of any Credit Party, threatened against, the
Borrower or any of its Subsidiaries which could reasonably be expected to have a
Material Adverse Effect.
6.12 TAXES. Each Credit Party has filed, or caused to be filed, all tax
returns (federal, state, local and foreign) required to be filed (other than
those the failure to file could not reasonably be expected to have a Material
Adverse Effect) and paid (a) all amounts of taxes shown thereon to be due
(including interest and penalties) and (b) all other taxes, fees, assessments
and other governmental charges (including mortgage recording taxes, documentary
stamp taxes and intangible taxes) owing by it, except for such taxes (i) which
are not yet delinquent or (ii) that are being contested in good faith and by
proper proceedings, or (iii) for which adequate reserves are being maintained in
accordance with GAAP.
6.13 COMPLIANCE WITH LAW. Each Credit Party is in compliance with all
Requirements of Law and all other laws, rules, regulations, orders and decrees
(including without limitation Environmental Laws) applicable to it, or to its
properties, unless such failure to comply could not reasonably be expected to
have a Material Adverse Effect.
6.14 ERISA. Except as could not reasonably be expected to result in a
Material Adverse Effect:
(a) During the five-year period prior to the date on which this
representation is made or deemed made: (i) no Termination Event has occurred,
and, to the best knowledge of the Credit Parties, no event or condition has
occurred or exists as a result of which any Termination Event could reasonably
be expected to occur, with respect to any Plan of a Credit Party or ERISA
Affiliate; (ii) no "accumulated funding deficiency" as such term is defined in
Section 302 of ERISA and Section 412 of the Code, whether or not waived, has
occurred with respect to any Plan of a Credit Party or ERISA Affiliate; (iii)
each Plan of a Credit Party has been maintained, operated, and funded in
compliance with its own terms and in material compliance with the provisions of
ERISA, the Code, and any other applicable federal or state laws; and (iv) no
lien in favor or the PBGC or a Plan has arisen or is reasonably likely to arise
on account of any Plan of a Credit Party.
(b) The accumulated benefit obligation ("ABO") of each Single Employer
Plan of a Credit Party (determined in accordance with generally accepted
accounting principles) as of the most recent annual audited financial statements
is equal to or exceeds the current value of the assets of such Single Employer
Plan.
(c) Neither the Credit Parties nor any ERISA Affiliate has incurred, or,
to the best of knowledge of the Credit Parties, are reasonably expected to
incur, any withdrawal liability under ERISA to any Multiemployer Plan or
Multiple Employer Plan. Neither the Credit Parties nor any ERISA Affiliate has
received any notification that any Multiemployer Plan is in reorganization
(within the meaning of Section 4241 of ERISA), is insolvent (within the meaning
of Section 4245 of ERISA), or has been terminated (within
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<PAGE> 42
the meaning of Title IV of ERISA), and no Multiemployer Plan is, to the best
knowledge of the Credit Parties, reasonably expected to be in reorganization,
insolvent, or terminated.
(d) No prohibited transaction (within the meaning of Section 406 of ERISA
or Section 4975 of the Code) or breach of fiduciary responsibility has occurred
with respect to a Plan of the Credit Parties which has subjected or is
reasonably likely to subject the Credit Parties to any liability under Sections
406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Code, or under any
agreement or other instrument pursuant to which the Credit Parties have agreed
or is required to indemnify any person against any such liability.
(e) The present value (determined using actuarial and other assumptions
which are reasonable with respect to the benefits provided and the employees
participating) of the liability of the Credit Parties for post-retirement
welfare benefits to be provided to their current and former employees under
Plans of the Credit Parties which are welfare benefit plans (as defined in
Section 3(1) of ERISA), net of all assets under all such Plans allocable to such
benefits, are reflected on the Financial Statements in accordance with FASB 106.
(f) Each plan which is a welfare plan (as defined in Section 3(1) of
ERISA) to which Sections 601-609 of ERISA and Section 4980B of the Code apply
has been administered in compliance in all material respects with such sections.
6.15 SUBSIDIARIES. Set forth on SCHEDULE 6.15 is a complete and accurate
list of all Subsidiaries of each Credit Party as of the date hereof. Information
on SCHEDULE 6.15 includes jurisdiction of incorporation, the number of shares of
each class of capital stock or other equity interests outstanding, the number
and percentage of outstanding shares of each class owned (directly or
indirectly) by such Credit Party; and the number and effect, if exercised, of
all outstanding options, warrants, rights of conversion or purchase and all
other similar rights with respect thereto. The outstanding capital stock and
other equity interests of all such Subsidiaries is validly issued, fully paid
and non-assessable and is owned by each such Credit Party, directly or
indirectly, free and clear of all Liens (other than those arising under or
contemplated in connection with the Credit Documents). Other than as set forth
in SCHEDULE 6.15, no Subsidiary of any Credit Party has outstanding any
securities convertible into or exchangeable for its capital stock nor does any
such Person have outstanding any rights to subscribe for or to purchase or any
options for the purchase of, or any agreements providing for the issuance
(contingent or otherwise) of, or any calls, commitments or claims of any
character relating to its capital stock. The list of Subsidiaries shall be
updated from time to time by the Borrower by giving written notice thereof to
the Lender.
6.16 USE OF PROCEEDS; MARGIN STOCK. The proceeds of the Loan hereunder
will be used solely for the purposes specified in Section 7.10. None of the
Credit Parties owns any "margin stock" as defined in Regulation U or Regulation
G.
6.17 GOVERNMENT REGULATION. No Credit Party is subject to regulation
under the Public Utility Holding Company Act of 1935, the Federal Power Act, the
Investment
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<PAGE> 43
Company Act of 1940 or the Interstate Commerce Act, each as amended. In
addition, no Credit Party is (a) an "investment company" registered or required
to be registered under the Investment Company Act of 1940, as amended, or
controlled by such a company, or (b) a "holding company," or a "Subsidiary
company" of a "holding company," or an "affiliate" of a "holding company" or of
a "Subsidiary" or a "holding company," within the meaning of the Public Utility
Holding Company Act of 1935, as amended. To the best of the Borrower's
knowledge, no director, executive officer or individual shareholder beneficially
owing five percent (5%) or more of the common stock of the Borrower or any of
its Subsidiaries is a director, executive officer or principal shareholder of
the Lender as of the date hereof. For the purposes hereof the terms "director"
and "executive officer" (when used with reference to the Lender) have the
respective meanings assigned thereto in Regulation O issued by the Board of
Governors of the Federal Reserve System.
6.18 ENVIRONMENTAL MATTERS. To the best of Borrower's knowledge, except
as set forth on SCHEDULE 6.18 and except as could not reasonably be expected to
have a Material Adverse Effect:
(a) Each of the Real Properties and all operations at the Real
Properties are in compliance with all applicable Environmental Laws, and
there is no violation of any Environmental Law with respect to the Real
Properties or the businesses operated by the Borrower or any of their
Subsidiaries (the "BUSINESSES"), and there are no conditions relating to
the Businesses or Real Properties that could reasonably be expected to
give rise to liability under any applicable Environmental Laws.
(b) No Credit Party has received any written notice of, or inquiry
from any Governmental Authority regarding, any violation, alleged
violation, non-compliance, liability or potential liability regarding
Hazardous Materials or compliance with Environmental Laws with regard to
any of the Real Properties or the Businesses, nor does the Borrower or
any of its Subsidiaries have knowledge that any such notice is being
threatened.
(c) Hazardous Materials have not been transported or disposed of
from the Real Properties, or generated, treated, stored or disposed of
at, on or under any of the Real Properties or any other location, in each
case by, or on behalf or with the permission of, the Borrower or any of
its Subsidiaries in a manner that could reasonably be expected to give
rise to liability under any applicable Environmental Law.
(d) No judicial proceeding or governmental or administrative action
is pending or threatened, under any Environmental Law to which Borrower
or any of its Subsidiaries is or will be named as a party, nor are there
any consent decrees or other decrees, consent orders, administrative
orders or other orders, or other administrative or judicial requirements
outstanding under any Environmental Law with respect to the Borrower or
any of its Subsidiaries, the Real Properties or the Businesses, in any
amount reportable under the federal Comprehensive Environmental Response,
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<PAGE> 44
Compensation and Liability Act or any analogous state law, except
releases in compliance with any Environmental Laws.
(e) There has been no material release or threat of release of
Hazardous Materials at or from the Real Properties, or arising from or
related to the operations (including, without limitation, disposal) of
the Borrower or any of its Subsidiaries in connection with the Real
Properties or otherwise in connection with the Businesses.
(f) None of the Real Properties contains, or has previously
contained, any Hazardous Materials at, on or under the Real Properties in
amounts or concentrations that, if released, constitute or constituted a
violation of, or could give rise to liability under, Environmental Laws
and that would have a Material Adverse Effect on any of the parties
hereto or their Subsidiaries.
(g) No Credit Party has assumed any liability of any Person (other
than another Credit Party) under any Environmental Law.
6.19 INTELLECTUAL PROPERTY. Each Credit Party owns, or has the legal
right to use, all patents, trademarks, tradenames, copyrights, licenses,
technology, know-how and processes, or other intellectual property rights (the
"INTELLECTUAL PROPERTY") necessary for each of them to conduct its business as
currently conducted except for those the failure to own or have such legal right
to use could not have or reasonably be expected to have a Material Adverse
Effect. Each Credit Party's ownership and rights pertaining to such Intellectual
Property are free from all burdensome restrictions. Set forth on SCHEDULE 6.19
is a list of all Intellectual Property owned by each Credit Party or that any
Credit Party has the right to use as of the date hereof. Except as provided on
SCHEDULE 6.19, no claim has been asserted and is pending by any Person
challenging or questioning the use of any such Intellectual Property or the
validity or effectiveness of any such Intellectual Property, nor does any Credit
Party know of any such claim, and to the Credit Parties' knowledge the use of
such Intellectual Property by the Borrower or any of its Subsidiaries does not
infringe on the rights of any Person, except for such claims and infringements
that in the aggregate, could not have or reasonably be expected to have a
Material Adverse Effect.
6.20 SOLVENCY. Each Credit Party is and, after consummation of the
transactions contemplated by this Credit Agreement, will be Solvent.
6.21 INVESTMENTS. All Investments of each Credit Party are either
Permitted Investments or otherwise permitted by the terms of this Credit
Agreement.
6.22 LOCATIONS OF COLLATERAL; CHIEF EXECUTIVE OFFICES. Set forth on
SCHEDULE 6.22(A) is a list of all locations where, as of the date hereof, any
tangible and intangible assets of a Credit Party are located, including county
and state where located. Set forth on SCHEDULE 6.22(B) is the chief executive
office and principal place of business of each Credit Party, as of the date
hereof.
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<PAGE> 45
6.23 DISCLOSURE. Neither this Agreement nor any financial statements
delivered to the Lender nor any other document, certificate or written statement
furnished to the Lender by or on behalf of any Credit Party in connection with
the transactions contemplated hereby contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
contained therein or herein not misleading.
6.24 LICENSES, ETC. The Credit Parties have obtained and hold in full
force and effect, all franchises, licenses, permits, certificates,
authorizations, qualifications, accreditations, easements, rights of way and
other rights, consents and approvals which are necessary for the operation of
their respective businesses as presently conducted, except where the failure to
obtain same could not be reasonably expected to have a Material Adverse Effect.
6.25 NO BURDENSOME RESTRICTIONS. No Credit Party is a party to any
agreement or instrument or subject to any other obligation or any charter or
corporate restriction or any provision of any applicable law, rule or regulation
which, individually or in the aggregate could reasonably be expected to have a
Material Adverse Effect.
6.26 COLLATERAL DOCUMENTS. The Collateral Documents create valid security
interests in the Collateral purported to be covered thereby, which security
interests and Liens are and will remain perfected security interests and Liens,
prior to all other Liens other than Permitted Liens. Each of the representations
and warranties made by the Borrower and its Subsidiaries in the Collateral
Documents is true and correct in all material respects.
6.27 DISCONTINUED OPERATIONS. The Discontinued Operations have been
wound-up and are no longer in operation; provided, however, Meritec Solutions,
Inc. is in existence for the purpose of being parties to leases that are in
force as of the date hereof (and any subleases relating thereto, but excluding
any leases of any other real property).
SECTION 7
AFFIRMATIVE COVENANTS
Each Credit Party hereby covenants and agrees that so long as this Credit
Agreement is in effect and until the Loan and LOC Obligations, together with
interest and fees and other obligations hereunder, have been paid in full and
the Commitment and Letters of Credit hereunder shall have terminated:
7.1 INFORMATION COVENANTS. The Borrower will furnish, or cause to be
furnished, to the Lender:
(a) Annual Financial Statements. The earlier of ten (10) days from the
date of completion or within one hundred thirty (130) days after the close of
each fiscal year of the Borrower, financial statements which shall include a
consolidated balance sheet and income statement of the Borrower and its
Subsidiaries, as of the end of such fiscal year, together with related
consolidated statements of operation and retained earnings and of cash flows for
such
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<PAGE> 46
fiscal year, setting forth in comparative form consolidated figures for the
preceding fiscal year, all such financial information described above
accompanied by a certificate (with supporting details) to be in reasonable form
and detail and audited by independent certified public accountants of recognized
national standing reasonably acceptable to the Lender and whose opinion shall be
to the effect that such financial statements have been prepared in accordance
with GAAP (except for changes with which such accountants concur) and shall not
be limited as to the scope of the audit or qualified in any manner unacceptable
to the Lender.
(b) Quarterly Financial Statements. The earlier of ten (10) days from the
date of completion or within sixty (60) days after the close of each fiscal
quarter of the Borrower, (i) a consolidated balance sheet and income statement
of the Borrower and its Subsidiaries, as of the end of such fiscal quarter,
together with related consolidated statements of operations and retained
earnings and of cash flows for such fiscal quarter in each case setting forth in
comparative form consolidated figures for (A) the corresponding period of the
preceding fiscal year and (B) management's proposed budget for such period, all
such financial information described above to be in reasonable form and detail
and reasonably acceptable to the Lender, and accompanied by a compliance
certificate (with supporting details) of the chief financial officer of the
Borrower to the effect that such quarterly financial statements fairly present
in all material respects the financial condition of the Borrower and its
Subsidiaries and have been prepared in accordance with GAAP, subject to changes
resulting from audit and normal year-end audit adjustments and (ii) a management
discussion and analysis of operating results for such fiscal quarter.
(c) Officer's Certificate. At the time of delivery of the financial
statements provided for in Sections 7.1(a) and 7.1(b) above, a certificate of
the chief financial officer of the Borrower substantially in the form of EXHIBIT
7.1(C), (i) demonstrating compliance with Sections 8.1(d), 8.5, 8.6 and 8.7 and
with the financial covenants contained in Section 7.2 by calculation thereof as
of the end of each such fiscal period, and (ii) stating that no Default or Event
of Default exists, or if any Default or Event of Default does exist, specifying
the nature and extent thereof and what action the Borrower proposes to take with
respect thereto.
(d) Compliance With Certain Provisions of the Credit Agreement. Within
one hundred thirty (130) days after the end of each fiscal year of the Borrower,
a certificate of the chief financial officer of the Borrower containing
information regarding the amount of any Asset Dispositions in excess of
$500,000, and Debt Issuances that were made during the prior fiscal year.
(e) Accountant's Certificate. Within the period for delivery of the
annual financial statements provided in Section 7.1(a), a certificate of the
accountants conducting the annual audit stating that they have reviewed this
Credit Agreement as to financial matters and stating further whether, in the
course of their audit, they have become aware of any Default or Event of Default
and, if any such Default or Event of Default exists, specifying the nature and
extent thereof.
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<PAGE> 47
(f) Auditor's Reports. Promptly upon receipt thereof, a copy of any
"management letter" submitted by independent accountants to the Borrower or any
of its Subsidiaries in connection with any annual, interim or special audit of
the books of the Borrower or any of its Subsidiaries.
(g) Reports.
(i) promptly upon transmission thereof, copies of all effective
registration statements (other than the exhibits thereto and any
registration statements on Form S-8 or its equivalent), and all reports
on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower
shall file with the Securities and Exchange Commission; and
(ii) promptly upon the Lender's written request, (a) copies of any
other filings and registrations with, and reports to or from, the
Securities and Exchange Commission, or any successor agency, and copies
of all financial statements, proxy statements, notices and reports as the
Borrower or any of its Subsidiaries shall send to its shareholders
generally; and (b) all reports and written information to and from the
United Stated Environmental Protection Agency, or any state or local
agency responsible for environmental matters, or any successor agencies
or authorities concerning environmental matters.
(h) Notices. Upon an Executive Officer of a Credit Party obtaining
knowledge thereof, such Credit Party will give written notice to the Lender
immediately of (a) the occurrence of a Default or Event of Default, specifying
the nature and existence thereof and what action the Borrower proposes to take
with respect thereto, and (b) the occurrence of any of the following with
respect to the Borrower or any of its Subsidiaries (i) the pendency or
commencement of any litigation, arbitral or governmental proceeding against the
Borrower or any of its Subsidiaries which could reasonably be expected to have a
Material Adverse Effect, or (ii) the institution of any proceedings against the
Borrower or any of its Subsidiaries with respect to, or the receipt of notice by
such Person of potential liability or responsibility for violation, or alleged
violation of any federal, state or local law, rule or regulation, including but
not limited to, Environmental Laws, the violation of which could reasonably be
expected to have a Material Adverse Effect.
(i) ERISA. Upon any of the Credit Parties obtaining knowledge thereof,
Borrower will give written notice to the Lender promptly (and in any event
within ten (10) Business Days) of: (i) any event or condition, including, but
not limited to, any Reportable Event, that constitutes, or might reasonably lead
to, a Termination Event; (ii) with respect to any Multiemployer Plan, the
receipt of notice as prescribed in ERISA or otherwise of any withdrawal
liability assessed against the Borrower or any of its ERISA Affiliates, or of a
determination that any Multiemployer Plan is in reorganization or insolvent
(both within the meaning of Title IV of ERISA); (iii) the failure to make full
payment on or before the due date (including extensions) thereof of all amounts
which the Credit Party or ERISA Affiliates is required to contribute to each
Single Employer Plan pursuant to its terms and as required to
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<PAGE> 48
meet the minimum funding standard set forth in ERISA and the Code with respect
thereto which failure could result in the imposition of a lien or could result
in a reporting obligation to the PBGC or a participant with respect to such
failure; and (iv) any change in the funding status of any Single Employer Plan
that could have a Material Adverse Effect; together, with a description of any
such event or condition or a copy of any such notice and a statement by the
principal financial officer of the Borrower briefly setting forth the details
regarding such event, condition, or notice, and the action, if any, which has
been or is being taken or is proposed to be taken by the Credit Parties with
respect thereto. Promptly upon request, the Borrower shall furnish the Lender
with such additional information concerning any Plan of a Credit Party or ERISA
Affiliate as may be reasonably requested, including, but not limited to, copies
of each annual report/return (Form 5500 series), as well as all schedules and
attachments thereto required to be filed with the Department of Labor and/or the
Internal Revenue Service pursuant to ERISA and the Code, respectively, for each
"plan year" (within the meaning of Section 3(39) of ERISA).
(j) Environmental. Each Credit Party will conduct and complete all
investigations, studies, sampling and testing and all remedial, removal, and
other actions necessary to address all Hazardous Materials on, from, or
affecting any real property owned or leased by a Credit Party to the extent
necessary to be in compliance with all Environmental Laws and all other
applicable federal, state, and local laws, regulations, rules and policies and
with the orders and directives of all Governmental Authorities exercising
jurisdiction over such real property to the extent any failure could reasonably
be expected to have a Material Adverse Effect.
(k) Insurance Subsidiaries.
(i) The ratio of Net Premiums Written to Surplus as regards to
Policyholders shall not exceed 3.00:1.00. (Measured annually for each
individual Insurance Subsidiary).
(ii) The Borrower shall deliver to the Lender the following
financial statements of each Insurance Subsidiary: (1) its annual
statutory financial statements, in the same form as provided to the State
of Florida Department of Insurance, the earlier of (a) ten (10) days
after completion or (b) within one hundred thirty (130) days after the
end of each fiscal year and (2) its quarterly financial statement in the
same form as provided to the State of Florida Department of Insurance the
earlier of ten (10) days from completion or within sixty (60) days after
the end of each quarter. In addition to the annual and quarterly
statements, the Borrower shall deliver to the Lender a copy of the IRIS
ratios and Risk Based Capital material as submitted by each Insurance
Subsidiary to the NAIC and the State of Florida Department of Insurance
promptly upon the submission thereof.
(iii) The Insurance Subsidiaries shall maintain Total Adjusted
Capital, as defined by the State of Florida Department of Insurance, at
no less than 200% of the
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<PAGE> 49
Authorized Control Level Risked Based Capital
(RBC) for the life of the loan (measured annually).
(iv) The Insurance Subsidiaries, on a combined basis, shall maintain
a minimum surplus as regards to policyholders as follows: (measured
annually)
Beginning with the fiscal year ending December 31, 1997, a minimum
surplus of $35,000,000 shall be required. Annually thereafter the
minimum surplus shall increase, but not be reduced, by one-half of
the net income of such Insurance Subsidiaries as reported on the
Consolidated Statutory Statement. The above figure shall be adjusted
to reflect any changes promulgated by the State of Florida Department
of Insurance in the manner by which Surplus as regards to
policyholders is to be calculated.
(v) Insurance Subsidiaries shall only transact business with new
reinsurers who maintain an A.M. Best rating of B+ or better without prior
written consent of Lender. Notwithstanding anything to the contrary,
Lloyds of London shall be excluded from the aforementioned clause (it
being the intent of the parties that insurance Subsidiaries shall be
entitled to transact business with Lloyds of London regardless of Lloyds
of London's A.M. Best rating or lack thereof).
(vi) Any capitalized terms in this Section 7.1(k) which are not
otherwise defined in this Credit Agreement, shall be defined in
accordance with the policies of the State of Florida Department of
Insurance.
(l) Other Information. With reasonable promptness upon any such request,
such other information regarding the business, properties or financial condition
of the Credit Parties as the Lender may reasonably request.
7.2 FINANCIAL COVENANTS.
(a) Senior Debt to Capital Ratio. The Senior Debt to Capital Ratio, as of
the end of each fiscal quarter, measured quarterly on a consolidated basis,
shall not be greater than thirty percent (30%).
(b) Debt Service Coverage Ratio. The Debt Service Coverage Ratio, as of
the end of each fiscal quarter of the Borrower shall not be less than the ratio
of 2.00:1.00, measured on a cumulative quarter basis as provided in the table
below, beginning with the Borrower's consolidated financial statement for the
fiscal quarter ending March 31, 1998 through the quarter ending September 30,
1998. Beginning with the Borrower's fiscal quarter ending December 31, 1998 and
each fiscal quarter ending thereafter, the Debt Service Coverage Ratio will be
measured quarterly for the four fiscal quarter period then ended, based upon the
Borrower's consolidated financial statement for such applicable period.
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<PAGE> 50
<TABLE>
<CAPTION>
===========================================================================================================
<S> <C> <C> <C>
3 months ending 6 months ending 9 months ending
March 31, 1998 June 30, 1998 September 30, 1998
- -----------------------------------------------------------------------------------------------------------
EBITDA Actual EBITDA for the 3 Actual EBITDA for the 6 Actual EBITDA for the 9
months months months
- -----------------------------------------------------------------------------------------------------------
Capital Expenditures Actual Capital Actual Capital Actual Capital
Expenditures for the 3 Expenditures for the 6 Expenditures for the 9
months months months
- -----------------------------------------------------------------------------------------------------------
Interest Actual Interest for the 3 Actual Interest for the 6 Actual Interest for the 9
months months months
- -----------------------------------------------------------------------------------------------------------
Principal $1,000,000 + (d)* $2,000,000 + (d)* $3,000,000 + (d)*
===========================================================================================================
</TABLE>
(d)* equals any debt service associated with the Indebtedness of the Borrower
or any if its Subsidiaries.
7.3 BOOKS AND RECORDS. Each of the Credit Parties will keep complete and
accurate books and records of its transactions in accordance with good
accounting practices on the basis of GAAP (including the establishment and
maintenance of appropriate reserves).
7.4 COMPLIANCE WITH LAW. Each of the Credit Parties will comply with all
laws, rules, regulations and orders, and all applicable restrictions imposed by
all Governmental Authorities, applicable to it and its property (including,
without limitation, Environmental Laws), the failure with which to comply could
reasonably be expected to have a Material Adverse Effect.
7.5 PAYMENT OF TAXES AND OTHER INDEBTEDNESS. Each of the Credit Parties
will pay, settle or discharge (a) all taxes, assessments and governmental
charges or levies imposed upon it, or upon its income or profits, or upon any of
its properties, before they shall become delinquent, (b) all lawful claims
(including claims for labor, materials and supplies) which, if unpaid, might
give rise to a Lien upon any of its properties, and (c) except as prohibited
hereunder, all of its other Indebtedness as it shall become due; provided,
however, that a Credit Party shall not be required to pay any such tax,
assessment, charge, levy, claim or Indebtedness which is being contested in good
faith by appropriate proceedings and as to which adequate reserves therefor have
been established in accordance with GAAP, unless the failure to make any such
payment (i) could give rise to an immediate right to foreclose on a Lien
securing such amounts or (ii) could reasonably be expected to have a Material
Adverse Effect.
7.6 INSURANCE. Each of the Credit Parties will at all times maintain in
full force and effect insurance (including, but not limited to, worker's
compensation insurance, liability insurance, casualty insurance and business
interruption insurance) in such amounts, covering such risks and liabilities and
with such deductibles or self-insurance retentions as are in accordance with
normal industry practice. All liability policies shall have the Lender as an
additional insured and all casualty policies shall have the Lender as loss
payee.
In the event there occurs any material loss, damage to or destruction of
the Collateral of any Credit Party or any part thereof, such Credit Party shall
promptly give written notice
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<PAGE> 51
thereof to the Lender generally describing the nature and extent of such damage
or destruction. Subsequent to any loss, damage to or destruction of the
Collateral of any Credit Party or any part thereof, such Credit Party, whether
or not the insurance proceeds, if any, received on account of such damage or
destruction shall be sufficient for that purpose, at such Credit Party's cost
and expense, will promptly repair or replace the Collateral of such Credit Party
so lost, damaged or destroyed; provided, however, that such Credit Party need
not repair or replace the Collateral of such Credit Party so lost, damaged or
destroyed to the extent the failure to make such repair or replacement (a) is
desirable to the proper conduct of the business of such Credit Party in the
ordinary course and otherwise is in the best interest of such Credit Party and
(b) would not materially impair the rights and benefits of the Lender under this
Credit Agreement or any other Credit Document. In the event a Credit Party shall
receive any insurance proceeds, as a result of any loss, damage or destruction,
in a net amount in excess of $1,000,000, such Credit Party will immediately pay
over such proceeds to the Lender as cash collateral for the Credit Party
Obligations. The Lender agrees to release such insurance proceeds to such Credit
Party for replacement or restoration of the portion of the Collateral of such
Credit Party lost, damaged or destroyed if (A) within fifteen (15) days from the
date the Lender receives such insurance proceeds, the Lender has received
written application for such release from such Credit Party together with
evidence reasonably satisfactory to it that the Collateral lost, damaged or
destroyed has been or will be replaced or restored to its condition (or by
Collateral having a value at least equal to the condition of the asset subject
to the loss, damage or destruction) immediately prior to the loss, destruction
or other event giving rise to the payment of such insurance proceeds and (B) on
the date of such release no Default or Event of Default exists. If the
conditions in the preceding sentence are not met, the Lender shall, on the first
Business Day subsequent to the date thirty (30) days after it received such
insurance proceeds, apply such insurance proceeds as a mandatory prepayment of
the Credit Party Obligations for application in accordance with the terms of
Section 3.3(b). All insurance proceeds shall be subject to the security interest
of the Lender under the Collateral Documents.
The insurance coverage of the Borrower and its Subsidiaries as of the
date hereof is outlined as to carrier, policy number, expiration date, type and
amount on SCHEDULE 7.6.
7.7 MAINTENANCE OF PROPERTY. Each of the Credit Parties will maintain and
preserve its properties and equipment in good repair, working order and
condition, normal wear and tear excepted (subject to damage by casualties), and
will make, or cause to be made, in such properties and equipment from time to
time all repairs, renewals, replacements, extensions, additions, betterments and
improvements thereto as may be needed or proper, to the extent and in the manner
customary for companies in similar businesses.
7.8 PERFORMANCE OF OBLIGATIONS. Each of the Credit Parties will perform
in all material respects all of its obligations under the terms of all
agreements, indentures, mortgages, security agreements, pledge agreements or
other debt instruments to which it is a party or by which it is bound and of
which failure to perform could reasonably be expected to have a Material Adverse
Effect.
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<PAGE> 52
7.9 COLLATERAL. If, subsequent to the Closing Date, a Credit Party shall
acquire any intellectual property, securities, instruments, chattel paper or
other tangible or intangible property required to be delivered to the Lender as
Collateral hereunder or under any of the Collateral Documents, the Borrower
shall immediately notify the Lender of same. Each Credit Party shall take such
action (including, but not limited to, the actions set forth in Section 5.1(h)),
as reasonably requested by the Lender and at its own expense, to ensure that the
Lender has a first priority perfected Lien in all tangible and intangible assets
of the Credit Parties (whether now owned or hereafter acquired, but excluding
any interest in real property), subject only to Permitted Liens. Each Credit
Party shall adhere to the covenants regarding the location of tangible and
intangible assets as set forth in the Security Agreements.
7.10 USE OF PROCEEDS. The Credit Parties will use the proceeds of the
Revolving Loan solely (a) to refinance the Existing Facility, (b) to pay related
fees and expenses in connection with this Credit Agreement and the Credit
Documents, and (c) to provide general working capital. None of the proceeds of
the Loan will be used for the purpose of purchasing or carrying any "margin
stock" as defined in Regulation U or Regulation G, or for the purpose of
reducing or retiring any Indebtedness which was originally incurred to purchase
or carry "margin stock" or any "margin security" or for any other purpose which
might constitute this transaction a "purpose credit" within the meaning of
Regulation U, Regulation X, Regulation G or Regulation T.
7.11 AUDITS/INSPECTIONS. Upon reasonable prior notice and during normal
business hours and in manner that will not unreasonably interfere with its
business operations, each Credit Party will permit representatives appointed by
the Lender, including, without limitation, independent accountants, agents,
attorneys and appraisers to visit and inspect such Credit Party's property,
including its books and records, its accounts receivable and inventory, its
facilities and its other business assets, and to make photocopies or photographs
thereof and to write down and record any information such representative obtains
and shall permit the Lender or its representatives to investigate and verify the
accuracy of information provided to the Lender, including, without limitation,
the performance of collateral valuation reviews from time to time, and to
discuss all such matters with the officers, employees and representatives of the
Credit Parties.
7.12 ADDITIONAL CREDIT PARTIES. At the time any Person becomes a
Subsidiary of a Credit Party, the Borrower shall so notify the Lender and
promptly thereafter (but in any event within thirty (30) days after the date
thereof) shall cause such Person (other than insurance Subsidiaries) to (a)
execute a Joinder Agreement in substantially the same form as EXHIBIT 7.12, (b)
cause all of the capital stock of such Person owned by the Borrower or any other
Credit Party to be delivered to the Lender (together with undated stock powers
signed in blank) and pledged to the Lender pursuant to an appropriate pledge
agreement in substantially the form of the Pledge Agreement and otherwise in a
form reasonably acceptable to the Lender, (c) pledge all of its assets to the
Lender pursuant to a security agreement in substantially the form of the
Security Agreement and otherwise in a form reasonably acceptable to the Lender,
(d) if such Person has any Subsidiaries, (i) deliver all of the capital stock of
such Subsidiaries owned by such Person (together with undated stock powers
signed
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in blank) to the Lender and (ii) execute a pledge agreement in substantially the
form of the Pledge Agreement and otherwise in a form reasonably acceptable to
the Lender, and (e) deliver such other documentation as the Lender may
reasonably request in connection with the foregoing, including, without
limitation, appropriate UCC-1 financing statements, certified resolutions and
other organizational and authorizing documents of such Person and favorable
opinion of counsel to such Person (which shall cover, among other things, the
legality, validity, binding effect and enforceability of the documentation
referred to above), all in form, content and scope reasonably satisfactory to
the Lender.
7.13 MAIN OPERATING BANK ACCOUNTS. No later than sixty (60) days after
the Closing Date Borrower shall establish and thereafter maintain all of
Borrower's main operating bank accounts with the Lender; provided, however, once
such accounts are established, Lender shall service such accounts in a
commercially acceptable fashion.
7.14 SIGNIFICANT CHANGES IN OPERATIONS. The Borrower shall within ten
(10) days notify Lender of any significant changes in operations of Borrower or
its Subsidiaries, including but not limited to, changes in management and
changes in reinsurance programs.
7.15 ACTIVATION OF DISCONTINUED OPERATIONS. The Borrower shall within ten
(10) days of any Discontinued Operations again conducting business activities,
other than those activities mentioned in Section 6.26 herein, cause any
Discontinued Operations to execute a Joinder Agreement as provided in Section
7.12 and become a Guarantor hereof.
SECTION 8
NEGATIVE COVENANTS
Each Credit Party hereby covenants and agrees that so long as this Credit
Agreement is in effect and until the Loan and LOC Obligations, together with
interest, fees and other obligations hereunder, have been paid in full and the
Commitment and Letters of Credit hereunder shall have terminated:
8.1 INDEBTEDNESS. No Credit Party will, nor will it permit any of its
Subsidiaries (other than Insurance Subsidiaries) to, contract, create, incur,
assume or permit to exist any Indebtedness, except:
(a) Indebtedness arising under this Credit Agreement and the other
Credit Documents;
(b) Indebtedness in respect of current accounts payable and accrued
expenses incurred in the ordinary course of business including, to the
extent not current, accounts payable and accrued expenses that are
subject to bona fide dispute;
(c) Indebtedness owing by one Credit Party to another Credit Party;
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(d) purchase money Indebtedness (including Capital Leases) incurred
by the Borrower or any of its Subsidiaries to finance the purchase of
equipment, real property (and improvements thereon) or fixed assets;
provided that (i) the total of all such Indebtedness for all such Persons
taken together shall not exceed an aggregate principal amount of $500,000
per calendar year (excluding any such Indebtedness referred to in
subsections (a), (b) and (c) above); (ii) such Indebtedness when incurred
shall not exceed the purchase price of the asset(s) financed; and (iii)
no such Indebtedness shall be refinanced for a principal amount in excess
of the principal balance outstanding thereon at the time of such
refinancing; and
8.2 LIENS. No Credit Party will, nor will it permit its Subsidiaries to
contract, create, incur, assume or permit to exist any Lien with respect to any
of its property or assets of any kind (whether real or personal, tangible or
intangible), whether now owned or after acquired except for Permitted Liens.
8.3 NATURE OF BUSINESS. No Credit Party will alter in any material
respect the character of its business from that conducted as of the Closing Date
or engage in any business other than the business conducted as of the Closing
Date.
8.4 CONSOLIDATION AND MERGER. No Credit Party will acquire all or
substantially all of the assets or capital stock of another Person, or merge or
consolidate with any other Person, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution); provided that notwithstanding the
foregoing provisions of this Section 8.4, (x) the Borrower may enter into
acquisitions, so long as (a) no Event of Default has occurred or is continuing
or would result as a result of the acquisition (for four quarters, historical
and projected), (b) the acquisitions are within Borrower's current line of
business, (c) the aggregate acquisitions plus the aggregate of any loans to
agents and suppliers permitted in Section 8.7 shall not exceed $2,000,000 in
capital outlay annually, unless approved in writing by the Lender (which shall
not be unreasonably withheld), and (d) the Borrower shall immediately upon the
consummation of such acquisition provide Lender with audited financial
statements of the acquired entity, if then available; (y) Subsidiaries of the
Borrower may merge or consolidate with the Borrower or other Subsidiaries of the
Borrower and (z) any Subsidiary may dissolve or liquidate so long as the assets
of such Subsidiary at the time of such dissolution or liquidation are
transferred to such Subsidiary's shareholder and such shareholder assumes all of
the liabilities of such Subsidiary at the time of such dissolution or
liquidation. Notwithstanding anything to the contrary, the $2,000,000 referenced
in this Section 8.4 and in Section 8.7 below is an aggregate amount pertaining
to both Section 8.4 and Section 8.7 and nothing shall be deemed to permit
$4,000,000 in annual capital outlay.
8.5 SALE OR LEASE OF ASSETS. No Credit Party will convey, sell, lease,
transfer or otherwise dispose of, in one transaction or a series of
transactions, all or substantially all of its assets other than the sale, lease,
transfer or other disposal by a Credit Party (other than the Borrower) of any or
all of its assets to the Borrower or another Credit Party.
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Upon a sale of assets permitted by this Section 8.5, the Lender shall
promptly deliver to the Borrower, upon the Borrower's request and at the
Borrower's expense, such documentation as is reasonably necessary to evidence
the release of the Lender's security interest in such assets, including, without
limitation, amendments or terminations of UCC financing statements.
8.6 SALE LEASEBACKS. No Credit Party will directly or indirectly become
liable as lessee or as guarantor or other surety with respect to any lease of
any property (whether real or personal or mixed), whether now owned or hereafter
acquired, (a) which such Credit Party has sold or transferred or is to sell or
transfer to any other Person other than a Credit Party or (b) which such Credit
Party intends to use for substantially the same purpose as any other property
which has been sold or is to be sold or transferred by such Credit Party to any
Person in connection with such lease.
8.7 ADVANCES, INVESTMENTS AND LOAN. No Credit Party will make any
Investments, except for Permitted Investments. No Credit Party will make any
advances or loans, except loans to agents (excluding insurance Subsidiaries,
officers and employees) and suppliers of which the aggregate loans plus the
aggregate of any acquisitions permitted in Section 8.4 shall not exceed
$2,000,000 in capital outlay annually.
8.8 DIVIDENDS. No Credit Party will directly or indirectly, (a) declare
or pay any dividends or make any other distribution upon any shares of its
common stock or (b) purchase, redeem or otherwise acquire or retire or make any
provisions for redemption, acquisition or retirement of any shares of its common
stock of any class or any warrants or options to purchase any such shares;
provided that any Subsidiary of the Borrower may pay dividends to the Borrower.
8.9 TRANSACTIONS WITH AFFILIATES. Except for transactions with
Subsidiaries (other than Insurance Subsidiaries), no Credit Party will enter
into any transactions or series of transactions, whether or not in the ordinary
course of business, with any officer, director, shareholder, Subsidiary or
Affiliate other than on terms and conditions substantially as favorable as would
obtainable in a comparable arm's-length transaction with a Person other than an
officer, director, shareholder, Subsidiary or Affiliate.
8.10 FISCAL YEAR; ORGANIZATIONAL DOCUMENTS. No Credit Party will (a)
change its fiscal year or (b) change its articles or certificate of
incorporation or its bylaws if such change could reasonably be expected to have
a Material Adverse Effect.
8.11 LIMITATIONS. No Credit Party will directly or indirectly, create or
otherwise cause, incur, assume, suffer or permit to exist or become effective
any consensual encumbrance or restriction of any kind on the ability of any such
Person to (a) pay dividends or make any other distribution on any of such
Person's capital stock, (b) pay any Indebtedness owed to the Borrower or any
other Credit Party, (c) make loans or advances to any other Credit Party or (d)
transfer any of its property to any other Credit Party, except for encumbrances
or restrictions existing under or by reason of (i) customary non-assignment or
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net worth provisions in any lease governing a leasehold interest, (ii) any
agreement or other instrument of a Person existing at the time it becomes a
Subsidiary of the Borrower; provided that such encumbrance or restriction is not
applicable to any other Person, or any property of any other Person, other than
such Person becoming a Subsidiary of the Borrower and was not entered into in
contemplation of such Person becoming a Subsidiary of the Borrower, and (iii)
this Credit Agreement and the other Credit Documents.
8.12 CANCELLATION OF INDEBTEDNESS. Borrower shall not and shall not
permit any Subsidiary of Borrower to cancel any claim or debt owing to it,
except for reasonable consideration or in the ordinary course of business.
8.13 PREFERRED STOCK. No Credit Party shall issue any additional
preferred stock not issued as of the date hereof.
SECTION 9
EVENTS OF DEFAULT
9.1 EVENTS OF DEFAULT. An Event of Default shall exist upon the
occurrence of any of the following specified events (each an "EVENT OF
DEFAULT"):
(a) Payment. Any Credit Party shall default in the payment (i) when due
of any principal of any of the Loan or any reimbursement obligation arising from
drawings under Letters of Credit or (ii) within three (3) days of when due of
any interest on the Loan or any fees or other amounts owing hereunder, under any
of the other Credit Documents or in connection therewith.
(b) Representations. Any written representation, warranty or statement
made or deemed to be made by any Credit Party herein, in any of the other Credit
Documents, or in any statement or certificate delivered or required to be
delivered pursuant hereto or thereto shall prove untrue in any material respect
on the date as of which it was made or deemed to have been made.
(c) Covenants. Any Credit Party shall:
(i) default in the default performance or observance of any term,
covenant or agreement contained in Sections 7.2, 7.5, 7.6, 7.8, 7.9,
7.10, 7.11, 7.12, 7.13, 7.14 or 8.1 through 8.15 inclusive; or
(ii) default in the due performance or observance by it of any term,
covenant or agreement contained in Section 7.1 and such default shall
continue unremedied for a period of five (5) Business Days after the
earlier of an Executive Officer of a Credit Party becoming aware of such
default or notice thereof given by the Lender; or
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(iii) default in the due performance or observance by it of any term,
covenant or agreement (other than those referred to in subsections (a),
(b) or (c)(i) or (ii) of this Section 9.1) contained in this Credit
Agreement and such default shall continue unremedied for a period of at
least thirty (30) days after the earlier of an Executive Officer of a
Credit Party becoming aware of such default or notice thereof given by
the Lender.
(d) Other Credit Documents. (i) Any Credit Party shall default in the due
performance or observance of any term, covenant or agreement in any of the other
Credit Documents and such default shall continue unremedied for a period of at
least thirty (30) days after the earlier of an Executive Officer of a Credit
Party becoming aware of such default or notice thereof given by the Lender, or
(ii) any Credit Document shall fail to be in full force and effect or any Credit
Party shall so assert or any Credit Document shall fail to give the Lender the
security interests, liens, rights, powers and privileges purported to be created
thereby.
(e) Guaranties. The guaranty given by the Credit Parties hereunder or by
any Additional Credit Party hereafter or any provision thereof shall cease to be
in full force and effect, or any guarantor thereunder or any Person acting by or
on behalf of such guarantor shall deny or disaffirm such Guarantor's obligations
under such guaranty.
(f) Bankruptcy, etc. As used in this Section 9.1(f), "MATERIAL
SUBSIDIARY" means any Subsidiary of the Borrower which (a) has total assets
greater than or equal to 5% of total assets of the Borrower and its Subsidiaries
determined on a consolidated basis or (b) has net earnings greater than or equal
to 10% of the net earnings of the Borrower and its Subsidiaries determined on a
consolidated basis (or any combination of Subsidiaries, which in the aggregate,
for the term of this Agreement, have total assets greater than or equal to 5% of
total assets of the Borrower and its Subsidiaries determined on a consolidated
basis or have net earnings greater than or equal to 10% of the net earnings of
the Borrower and its Subsidiaries determined on a consolidated basis). The
occurrence of any of the following with respect to the Borrower or any Material
Subsidiary (i) a court or governmental agency having jurisdiction in the
premises shall enter a decree or order for relief in respect of the Borrower or
any Material Subsidiary in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or appoint a
receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Borrower or any Material Subsidiary or for any substantial part
of its property or ordering or winding up or liquidation of its affairs; or (ii)
an involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect is commenced against the Borrower or any Material
Subsidiary and such petition remains unstayed and in effect for a period of
sixty (60) consecutive days; or (iii) the Borrower or any Material Subsidiary
shall commence a voluntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, or consent to the entry of an
order for relief in an involuntary case under any such law, or consent to the
appointment or taking possession by a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of such Person or any substantial part
of its property or make any general assignment for the benefit of creditors; or
(iv) the Borrower or any Material
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Subsidiary shall admit in writing its inability to pay its debts generally as
they become due or any action shall be taken by such Person in furtherance of
any of the aforesaid purposes.
(g) Defaults under Other Agreements. With respect to any Indebtedness
(other than Indebtedness outstanding under this Credit Agreement) of the
Borrower or any of its Subsidiaries in an aggregate principal amount in excess
of $500,000, (i) a Credit Party shall (A) default in any payment (beyond the
applicable grace period with respect thereto, if any) with respect to any such
Indebtedness, or (B) default (after giving effect to any applicable grace
period) in the observance or performance relating to such Indebtedness or
contained in any instrument or agreement evidencing, securing or relating
thereto, or any other event or condition shall occur or condition exist, the
effect of which default or other event or condition is to cause, or permit, the
holder or holders of such Indebtedness (or trustee or agent on behalf of such
holders) to cause (determined without regard to whether any notice or lapse of
time is required) any such Indebtedness to become due prior to its stated
maturity; or (ii) any such Indebtedness shall be declared due and payable, or
required to be prepaid other than by a regularly scheduled required prepayment
prior to the stated maturity thereof; or (iii) any such Indebtedness shall
mature and remain unpaid.
(h) Judgments. One or more judgments, orders, or decrees shall be entered
against any one or more of the Credit Parties involving a liability of
$1,000,000 or more, in the aggregate, (to the extent not paid or covered by
insurance provided by a carrier who has acknowledged coverage) and such
judgments, orders or decrees (i) are the subject of any enforcement proceeding
commenced by any creditor or (ii) shall continue unsatisfied, undischarged and
unstayed for a period ending on the first to occur of (A) the last day on which
such judgment, order or decree becomes final and appealable or (B) sixty (60)
days.
(i) ERISA. The occurrence of any of the following event or conditions
which event or conditions could reasonably be expected to have a Material
Adverse Effect: (A) any "accumulated funding deficiency," as such term is
defined in Section 302 of ERISA and Section 412 of the Code, whether or not
waived, shall exist with respect to any Plan of a Credit Party or ERISA
Affiliate, or any lien shall arise on the assets of the Credit Party or any
ERISA Affiliate in favor of the PBGC or a Plan of a Credit Party or ERISA
Affiliate; (B) a Termination Event shall occur with respect to a Single Employer
Plan, which is, in the reasonable opinion of the Lender, likely to result in the
termination of such Plan for purposes of Title IV of ERISA; (C) a Termination
Event shall occur with respect to a Multiemployer Plan or Multiple Employer
Plan, which is, in the reasonable opinion of the Lender, likely to result in (i)
the termination of such Plan for purposes of Title IV of ERISA, or (ii) the
Credit Party or any ERISA Affiliate incurring any liability in connection with a
withdrawal from, reorganization of (within the meaning of Section 4241 of
ERISA), or insolvency (within the meaning of Section 4245 of ERISA) of such
Plan; or (d) any prohibited transaction (within the meaning of Section 406 of
ERISA or Section 4975 of the Code) or breach of fiduciary responsibility shall
occur which may subject the Credit Party to any liability under Sections 406,
409, 502(i), or 502(l) of ERISA or Section 4975 of the Code, or under any
agreement or other instrument pursuant to which the Credit Party has agreed or
is required to indemnify any person against any such liability.
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(j) Ownership. There shall occur a Change of Control.
9.2 ACCELERATION; REMEDIES. Upon the occurrence of an Event of Default,
and at any time thereafter unless and until such Event of Default has been
waived in writing by the Lender, the Lender shall, by written notice to the
Borrower, take any of the following actions without prejudice to the rights of
the Lender to enforce its claims against the Credit Parties, except as otherwise
specifically provided for herein:
(a) Termination of Commitment. Declare the Commitment terminated
whereupon the Commitment shall be immediately terminated.
(b) Acceleration of Loan. Declare the unpaid principal of and any accrued
interest in respect of the Loan, any reimbursement obligations arising from
drawings under Letters of Credit and any and all other indebtedness or
obligations of any and every kind owing by a Credit Party to the Lender
hereunder to be due whereupon the same shall be immediately due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Credit Parties.
(c) Enforcement of Rights. Enforce any and all rights and interests
created and existing under the Credit Documents, including, without limitation,
all rights and remedies existing under the Collateral Documents, all rights and
remedies against a Guarantor and all rights of set-off.
Notwithstanding the foregoing, if an Event of Default specified in
Section 9.1(f) shall occur, then the Commitment shall automatically terminate
and the Loan, all reimbursement obligations under Letters of Credit, all accrued
interest in respect thereof, all accrued and unpaid fees and other indebtedness
or obligations owing to the Lender hereunder shall immediately become due and
payable without the giving of any notice or other action by the Lender, which
notice or other action is expressly waived by the Credit Parties.
9.3 ALLOCATION OF PAYMENTS AFTER EVENT OF DEFAULT. Notwithstanding any
other provisions of this Credit Agreement, after the occurrence and during the
continuance of an Event of Default, all amounts collected or received by the
Lender on account of amounts outstanding under any of the Credit Documents or in
respect of the Collateral shall be paid over or delivered as follows:
FIRST, to the payment of all reasonable out-of-pocket costs and
expenses (including without limitation reasonable attorneys' fees
actually incurred) of the Lender in connection with enforcing the rights
of the Lender under the Credit Documents and any protective advances made
by the Lender with respect to the Collateral under or pursuant to the
terms of the Collateral Documents;
SECOND, to payment of any fees owed to the Lender;
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THIRD, to the payment of all accrued interest payable to the Lender
hereunder;
FOURTH, to the payment of the outstanding principal amount of the
Loan and to the payment or cash collateralization of the outstanding LOC
Obligations;
FIFTH, to all other obligations which shall have become due and
payable under the Credit Documents and not repaid pursuant to clauses
"FIRST" through "FOURTH" above; and
SIXTH, to the payment of the surplus, if any, to whoever may be
lawfully entitled to receive such surplus.
In carrying out the foregoing, (a) amounts received shall be applied in
the numerical order provided until exhausted prior to application to the next
succeeding category.
SECTION 10
MISCELLANEOUS
10.1 NOTICES. Except as otherwise expressly provided herein, all notices
and other communications shall have been duly given and shall be effective only
when delivered to the respective parties at the address or telecopy numbers set
forth on SCHEDULE 10.1, or at such other address as such party may specify by
written notice to the other parties hereto.
10.2 RIGHT OF SET-OFF. In addition to any rights now or hereafter granted
under applicable law or otherwise, and not by way of limitation of any such
rights, upon the occurrence and during the continuance of an Event of Default
and the commencement of remedies described in Section 9.2, the Lender is
authorized at any time and from time to time, without presentment, demand,
protest or other notice of any kind (all of which rights being hereby expressly
waived), to set-off and to appropriate and apply any and all deposits (general
or special) and any other indebtedness at any time held or owing by the Lender
(including, without limitation, branches, agencies or Affiliates of the Lender
wherever located) to or for the credit or the account of any Credit Party
against obligations and liabilities of such Credit Party to the Lender
hereunder, under the Note, the other Credit Documents, irrespective of whether
the Lender shall have made any demand hereunder and although such obligations,
liabilities or claims, or any of them, may be contingent or unmatured, and any
such set-off shall be deemed to have been made immediately upon the occurrence
of an Event of Default even though such charge is made or entered on the books
of the Lender subsequent thereto. The Credit Parties hereby agree that any
Person purchasing a participation in the Loan and Commitment hereunder pursuant
to Section 10.3(c) may exercise all rights of set-off with respect to its
participation interest as fully as if such Person were a Lender hereunder.
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10.3 BENEFIT OF AGREEMENT.
(a) Generally. This Credit Agreement shall be binding upon and inure to
the benefit of and be enforceable by the respective successors and permitted
assigns of the parties hereto; provided that none of the Credit Parties may
assign and transfer any of its interests (except as permitted by Section 8.5)
without the prior written consent of the Lender; and provided further that the
rights of the Lender to transfer, assign or grant participations in its rights
and/or obligations hereunder shall be limited as set forth below in subsections
(b) and (c) of this Section 10.3. Notwithstanding the above (including anything
set forth in subsections (b) and (c) of this Section 10.3), nothing herein shall
restrict, prevent or prohibit the Lender from (A) pledging its Loan hereunder to
a Federal Reserve Bank in support of borrowings made by the Lender from such
Federal Reserve Bank, or (B) granting assignments or participations in the
Lender's Loan and/or Commitment hereunder to its parent company and/or to any
Affiliate of the Lender.
(b) Assignments. The Lender may, with the prior written consent of the
Borrower (provided that no consent of the Borrower shall be required during the
existence and continuation of an Event of Default), which consent shall not be
unreasonably withheld or delayed, assign all of its rights and obligations
hereunder pursuant to an assignment agreement substantially in the form of
EXHIBIT 10.3 to one or more Eligible Assignees. Along such lines the Borrower
agrees that upon notice of any such assignment and surrender of the appropriate
Note, it will promptly provide to the Lender and to the assignee separate
promissory notes in the amount of their respective interests substantially in
the form of the original Note (but with notation thereon that it is given in
substitution for and replacement of the original Note or any replacement notes
thereof).
(c) Participations. The Lender may sell, transfer, grant or assign
participations in all or any part of the Lender's interests and obligations
hereunder to any Person which qualifies as an Eligible Assignee.
10.4 NO WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of
the Lender in exercising any right, power or privilege hereunder or under any
other Credit Document and no course of dealing between the Borrower or any
Credit Party and the Lender shall operate as a waiver thereof; nor shall any
single or partial exercise of any right, power or privilege hereunder or under
any other Credit Document preclude any other or further exercise thereof or the
exercise of any other right, power or privilege hereunder or thereunder. The
rights and remedies provided herein are cumulative and not exclusive of any
rights or remedies which the Lender would otherwise have. No notice to or demand
on any Credit Party in any case shall entitle any Credit Party to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the Lender to any other or further action in any
circumstances without notice or demand.
10.5 PAYMENT OF EXPENSES; INDEMNIFICATION. The Credit Parties agree to:
(a) pay all reasonable out-of-pocket costs and expenses of (i) the Lender in
connection with (A) the negotiation, preparation, execution and delivery and
administration, which does not include normal expenses during non-default
periods, of this Credit Agreement and the other Credit Documents and the
documents and instruments referred to therein as provided in the
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Commitment Letter dated November 5, 1997, including but not limited to legal
fees (of which the legal fees of the Lender's counsel shall be capped at
$17,500.00), State of Florida sales tax, intangible taxes, documentary stamp
taxes, and all recording costs, and (B) any amendment, waiver or consent
relating hereto and thereto including, but not limited to, any such amendments,
waivers or consents resulting from or related to any work-out, renegotiation or
restructure relating to the performance by the Credit Parties under this Credit
Agreement and (ii) the Lender in connection with (A) enforcement of the Credit
Documents and the documents and instruments referred to therein, including,
without limitation, in connection with any such enforcement, the reasonable and
actual fees and disbursements of counsel for the Lender, and (B) any bankruptcy
or insolvency proceeding of a Credit Party of any of its Subsidiaries; and (b)
indemnify the Lender, its officers, directors, employees, representatives and
agents from and hold each of them harmless against any and all losses,
liabilities, claims, damages or expenses incurred by any of them as a result of,
or arising out of, or in any way related to, or by reason of, any investigation,
litigation or other proceeding (whether or not the Lender is a party thereto)
related to (i) the entering into and/or performance of any Credit Document or
the use of proceeds of any Loan (including other extensions of credit) hereunder
or the consummation of any other transactions contemplated in any Credit
Document, including, without limitation, the reasonable fees and disbursements
of counsel actually incurred in connection with any such investigation,
litigation or other proceeding (but excluding any such losses, liabilities,
claims, damages or expenses to the extent incurred by reason of gross negligence
or willful misconduct on the part of the Person to be indemnified), (ii) any
Environmental Claim and (iii) any claims for Non-Excluded Taxes or Florida
Taxes.
10.6 AMENDMENTS, WAIVERS AND CONSENTS. Neither this Credit Agreement nor
any other Credit Document nor any of the terms hereof or thereof may be amended,
changed, waived, discharged or terminated unless such amendment, change, waiver,
discharge or termination is in writing and signed by the Lender and the then
Credit Parties.
10.7 COUNTERPARTS. This Credit Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall constitute one and the same instrument. It shall not be
necessary in making proof of this Credit Agreement to produce or account for
more than one such counterpart.
10.8 HEADINGS. The headings of the sections and subsections hereof are
provided for convenience only and shall not in any way affect the meaning or
construction of any provision of this Credit Agreement.
10.9 SURVIVAL OF INDEMNIFICATION AND REPRESENTATIONS AND WARRANTIES. All
indemnities set forth herein shall survive the repayment of the Loan, the LOC
Obligations, and other obligations and the termination of the Commitment
hereunder. All representations and warranties made herein shall survive the
execution and delivery of this Credit Agreement, the making of the Loan and the
issuance of the Letters of Credit.
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<PAGE> 63
10.10 GOVERNING LAW; JURISDICTION.
(a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA.
Any legal action or proceeding with respect to this Agreement or any other
Credit Document may be brought in the courts of the State of Florida (including
the Hillsborough County, Florida Circuit Court) or of the United States for the
Middle District of Florida, Tampa division and, by execution and delivery of
this Credit Agreement, each Credit Party hereby irrevocably accepts for itself
and in respect of its property, generally and unconditionally, the jurisdiction
of such courts. Each Credit Party further irrevocably consents to the service of
process out of any of the aforementioned courts in any such action or proceeding
in accordance with the laws of the State of Florida, by the mailing of copies
thereof by registered or certified mail, postage prepaid, to it at the address
for notices pursuant to Section 10.1. Nothing herein shall affect the right of
the Lender to serve process in any other manner permitted by law or to commence
legal proceedings or to otherwise proceed against a Credit Party in any other
jurisdiction. Each Credit Party agrees that a final judgment in any action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law; provided that
nothing in this Section 10.10(a) is intended to impair a Credit Party's right
under applicable law to appeal or seek a stay of any judgment.
(b) Each Credit Party hereby irrevocably waives any objection which it
may now or hereafter have to the laying of venue of any of the aforesaid actions
or proceedings arising out of or in connection with this Agreement or any other
Credit Document brought in the courts referred to in subsection (a) hereof and
hereby further irrevocably waives and agrees not to plead or claim in any such
court that any such action or proceeding brought in any such court has been
brought in an inconvenient forum.
10.11 WAIVER OF JURY TRIAL. TO THE EXTENT PERMITTED BY APPLICABLE LAW,
EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
10.12 TIME. All references to time herein shall be references to Eastern
Standard Time or Eastern Daylight Time, as the case may be, unless specified
otherwise.
10.13 SEVERABILITY. If any provision of any of the Credit Documents is
determined to be illegal, invalid or unenforceable, such provision shall be
fully severable and the remaining provisions shall remain in full force and
effect and shall be construed without giving effect to the illegal, invalid or
unenforceable provisions.
10.14 ENTIRETY. This Credit Agreement together with the other Credit
Documents represent the entire agreement of the parties hereto and thereto, and
supersede all prior agreements and understandings, oral or written, if any,
including any commitment letters or
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<PAGE> 64
correspondence relating to the Credit Documents or the transactions contemplated
herein and therein.
10.15 BINDING EFFECT. This Credit Agreement shall become effective at
such time when all of the conditions set forth in Section 5.1 have been
satisfied or waived by the Lender and it shall have been executed by the
Borrower, the Guarantors and the Lender, and thereafter this Credit Agreement
shall be binding upon and inure to the benefit of the Borrower, the Guarantors,
the Lender and their respective successors and permitted assigns.
10.16 CONFIDENTIALITY. The Lender shall utilize all non-public
information regarding the Borrower or any of its Subsidiaries obtained pursuant
to the requirements of any Credit Document in accordance with the Lender's
customary procedure for handling confidential information of this nature and in
accordance with safe and sound banking practices but in any event may make
disclosure: (a) to any of its affiliates (provided they shall agree to keep such
information confidential in accordance with the terms of this Section); (b) as
reasonably required by any bona fide participant or other transferee in
connection with the contemplated transfer of the Commitment or participations
therein as permitted hereunder (provided they shall agree to keep such
information confidential in accordance with the terms of this Section); (c) as
required by any Governmental Authority or representative thereof or pursuant to
legal process; and (d) to the Lender's independent auditors and other
professional advisors (provided they shall be notified of the confidential
nature of the information).
Each of the parties hereto has caused a counterpart of this Credit
Agreement to be duly executed and delivered as of the date first above written.
BORROWER:
SUMMIT HOLDING SOUTHEAST, INC.
By:/s/ William B. Bull
------------------------------------------
William B. Bull
President
GUARANTORS:
SUMMIT HOLDING CORPORATION
By:/s/ William B. Bull
------------------------------------------
William B. Bull
President
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<PAGE> 65
SUMMIT CONSULTING, INC.
By:/s/ William B. Bull
------------------------------------------
William B. Bull
President
SUMMIT HEALTHCARE HOLDINGS,
INC.
By:/s/ William B. Bull
------------------------------------------
William B. Bull
President
SUMMIT LOSS CONTROL SERVICES, INC.
By:/s/ William B. Bull
------------------------------------------
William B. Bull
President
SUMMIT CLAIMS MANAGEMENT, INC.
By:/s/ William B. Bull
------------------------------------------
William B. Bull
President
COMMERCIAL INSURANCE OF
CENTRAL FLORIDA, INC.
By:/s/ William B. Bull
------------------------------------------
William B. Bull
President
HERITAGE/SUMMIT HEALTH CARE
OF FLORIDA, INC.
- 60 -
<PAGE> 66
By:/s/ William B. Bull
------------------------------------------
William B. Bull
President
SUMMIT CONSULTING, INC. OF
LOUISIANA
By:/s/ Henry E. Childs, Jr.
------------------------------------------
Name: Henry E. Childs, Jr.
Title: President
LENDER:
SUNTRUST BANK, TAMPA BAY
By:/s/ Jason D. Lloyd
------------------------------------------
Jason D. Lloyd
Vice President
- 61 -
<PAGE> 1
EXHIBIT 10.10
SUMMIT HOLDING SOUTHEAST, INC.
RETIREMENT PLAN
AMENDED AND RESTATED
EFFECTIVE SEPTEMBER 1, 1997
<PAGE> 2
SUMMIT HOLDING SOUTHEAST, INC.
RETIREMENT PLAN
AMENDED AND RESTATED
EFFECTIVE SEPTEMBER 1, 1997
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 -- INTRODUCTION........................................................................ 1
1.01 Establishment of Plan; Background.................................................. 1
1.02 Purpose............................................................................ 2
1.03 Plan Governs Distribution of Benefits.............................................. 2
ARTICLE 2 -- DEFINITIONS......................................................................... 3
Account................................................................................. 3
Act or ERISA............................................................................ 3
Adjustment.............................................................................. 3
Affiliate............................................................................... 3
Affiliated Sponsor...................................................................... 3
Annuity Starting Date................................................................... 3
Authorized Leave of Absence............................................................. 3
Beneficiary............................................................................. 4
Board................................................................................... 4
Break in Service........................................................................ 4
Code.................................................................................... 5
Committee............................................................................... 5
Company................................................................................. 5
Company Stock........................................................................... 5
Company Stock Fund...................................................................... 5
Compensation............................................................................ 5
Credited Service........................................................................ 6
Distribution............................................................................ 7
Earnings................................................................................ 7
Effective Date.......................................................................... 7
Eligible Employee....................................................................... 7
Employee................................................................................ 7
Employee Contributions.................................................................. 7
Employer................................................................................ 7
Employer Contributions.................................................................. 7
Employer Matching Contribution Account.................................................. 7
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
Employer Matching Contributions......................................................... 8
Employment.............................................................................. 8
Employment Commencement Date............................................................ 8
Entry Date.............................................................................. 8
Fiduciary............................................................................... 8
Forfeiture.............................................................................. 8
Former Participant...................................................................... 8
Fund.................................................................................... 8
Highly Compensated Employee............................................................. 8
Hour of Service......................................................................... 8
Investment Fund......................................................................... 9
Maternity or Paternity Leave............................................................ 9
Ninety-Day Period of Continuous Employment.............................................. 10
Non-highly Compensated Employee......................................................... 10
Normal Retirement Date.................................................................. 10
One-Year Break in Service............................................................... 10
Participant............................................................................. 10
Period of Eligibility Service........................................................... 10
Permanent Disability.................................................................... 10
Plan.................................................................................... 10
Plan Administrator or Administrator..................................................... 10
Plan Year............................................................................... 10
Pre-Tax Contribution Account............................................................ 10
Pre-Tax Contribution.................................................................... 11
Qualified............................................................................... 11
Qualified Nonelective Contribution Account.............................................. 11
Qualified Nonelective Contribution...................................................... 11
Retirement.............................................................................. 11
Spouse.................................................................................. 11
Stock Bonus Contribution Account........................................................ 11
Stock Bonus Contribution................................................................ 11
Termination Date........................................................................ 11
Treasury Regulation..................................................................... 12
Trust or Trust Agreement................................................................ 12
Trustee................................................................................. 12
Valuation Date.......................................................................... 12
Voluntary After-Tax Contribution........................................................ 12
Voluntary After-Tax Contribution Account................................................ 12
Year of Eligibility Service............................................................. 12
Other Rules............................................................................. 12
ARTICLE 3 -- PARTICIPATION....................................................................... 14
3.01 Participation...................................................................... 14
3.02 Period of Eligibility Service...................................................... 15
3.03 Participation and Rehire........................................................... 16
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C> <C>
3.04 Acquisitions....................................................................... 16
3.05 Not Contract for Employment........................................................ 16
3.06 Special Eligibility Rule for Stock Bonus Contribution.............................. 16
ARTICLE 4 -- EMPLOYEE CONTRIBUTIONS; ROLLOVERS................................................... 18
4.01 Employee Contributions............................................................. 18
4.02 Elections Regarding Employee Contributions......................................... 18
4.03 Change in Employee Contribution Percentage or Suspension of Contributions.......... 19
4.04 Deadline for Contributions and Allocation of Employee Contributions................ 20
4.05 Rollover Contribution.............................................................. 20
ARTICLE 5 - EMPLOYER CONTRIBUTIONS............................................................... 22
5.01 Employer Matching Contribution..................................................... 22
5.02 Stock Bonus Contributions.......................................................... 22
5.03 Qualified Nonelective Contributions................................................ 22
5.04 Form and Timing of Contributions................................................... 23
5.05 Forfeitures........................................................................ 23
ARTICLE 6 -ACCOUNTS AND ALLOCATIONS.............................................................. 24
6.01 Participant Accounts............................................................... 24
6.02 Allocation of Adjustments.......................................................... 25
6.03 Plan Expenses...................................................................... 26
6.04 Investment Funds and Elections..................................................... 26
6.05 Errors............................................................................. 27
6.06 Valuation For Purposes of Distributions............................................ 27
ARTICLE 7 - VESTING.............................................................................. 28
7.01 Retirement......................................................................... 28
7.02 Permanent Disability............................................................... 28
7.03 Death.............................................................................. 28
7.04 Other Termination Date............................................................. 28
7.05 Forfeitures........................................................................ 29
ARTICLE 8 -- DISTRIBUTIONS....................................................................... 31
8.01 Commencement of Distribution....................................................... 31
8.02 Method of Distribution............................................................. 32
8.03 Annuity Option for A&A Plan Benefits............................................... 32
8.04 Special Rules Applicable to Annuity Distributions.................................. 32
8.05 Death Benefits..................................................................... 33
8.06 Payment to Minors and Incapacitated Persons........................................ 33
8.07 Application for Benefits........................................................... 33
8.08 Special Distribution Rules......................................................... 34
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C> <C>
8.09 Distributions Pursuant to Qualified Domestic Relations Orders...................... 34
8.10 Direct Rollovers................................................................... 35
8.11 Participant Withdrawals After Age 59-1/2........................................... 36
ARTICLE 9 -- IN-SERVICE WITHDRAWALS; LOANS....................................................... 37
9.01 Hardship Withdrawal of Account..................................................... 37
9.02 Definition of Hardship............................................................. 37
9.03 Maximum and Minimum Hardship Distribution.......................................... 37
9.04 Procedure to Request Hardship...................................................... 39
9.05 Authority to Establish Loan Program................................................ 39
9.06 Eligibility for Loans.............................................................. 39
9.07 Loan Amount........................................................................ 39
9.08 Maximum Number of Loans............................................................ 39
9.09 Assignment of Account.............................................................. 40
9.10 Interest........................................................................... 40
9.11 Term of Loan....................................................................... 40
9.12 Level Amortization................................................................. 40
9.13 Directed Investment................................................................ 40
9.14 Other Requirements................................................................. 41
9.15 Distribution of Loan............................................................... 41
9.16 Suspension of Loan Repayments During Military Service.............................. 41
9.17 Valuation for Purposes of In-Service Withdrawals or Loans.......................... 41
9.18 Withdrawal from Voluntary After-Tax Contribution Account........................... 41
9.19 Withdrawal from Rollover Account................................................... 42
9.20 Withdrawal from Employer Matching Contribution Account............................. 42
9.21 Other Rules for In-Service Distributions........................................... 42
ARTICLE 10 -- ADMINISTRATION OF THE PLAN......................................................... 43
10.01 Named Fiduciaries................................................................. 43
10.02 Board of Directors................................................................ 43
10.03 Trustee........................................................................... 43
10.04 Committee......................................................................... 43
10.05 Standard of Fiduciary Duty........................................................ 46
10.06 Claims Procedure.................................................................. 46
10.07 Indemnification of Committee...................................................... 47
ARTICLE 11 -- AMENDMENT AND TERMINATION.......................................................... 48
11.01 Right to Amend.................................................................... 48
11.02 Termination and Discontinuation of Contributions.................................. 48
11.03 IRS Approval of Termination....................................................... 49
ARTICLE 12 -- SPECIAL DISCRIMINATION RULES....................................................... 50
12.01 Small Business Job Protection Act................................................. 50
12.02 Definitions....................................................................... 50
</TABLE>
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<PAGE> 6
<TABLE>
<S> <C> <C>
12.03 Limit on Pre-Tax Contributions.................................................... 53
12.04 Average Actual Deferral Percentage................................................ 55
12.05 Special Rules For Determining Average Actual Deferral Percentage.................. 56
12.06 Distribution of Excess ADP Deferrals.............................................. 57
12.07 Average Actual Contribution Percentage............................................ 58
12.08 Special Rules For Determining Average Actual Contribution Percentages............. 59
12.09 Distribution of Excess ACP Contributions.......................................... 59
12.10 Combined ACP and ADP Test......................................................... 61
12.11 Order of Applying Certain Sections of Article 12.................................. 62
ARTICLE 13 -- HIGHLY COMPENSATED EMPLOYEES....................................................... 63
13.01 In General........................................................................ 63
13.02 Highly Compensated Employees...................................................... 63
13.03 Former Highly Compensated Employee................................................ 63
13.04 Definitions....................................................................... 63
13.05 Other Methods Permissible......................................................... 65
ARTICLE 14 -- MAXIMUM BENEFITS................................................................... 66
14.01 General Rule...................................................................... 66
14.02 Combined Plan Limitation.......................................................... 67
14.03 Definitions....................................................................... 68
ARTICLE 15 -- TOP HEAVY RULES.................................................................... 70
15.01 General........................................................................... 70
15.02 Definitions....................................................................... 70
15.03 Minimum Benefit................................................................... 71
15.04 Combined Plan Limitation For Top Heavy Years...................................... 72
ARTICLE 16 -- MISCELLANEOUS...................................................................... 73
16.01 Headings.......................................................................... 73
16.02 Action by Employer................................................................ 73
16.03 Spendthrift Clause................................................................ 73
16.04 Distributions Upon Special Occurrences............................................ 73
16.05 Discrimination.................................................................... 74
16.06 Release........................................................................... 74
16.07 Compliance with Applicable Laws................................................... 74
16.08 Agent for Service of Process...................................................... 74
16.09 Merger............................................................................ 75
16.10 Governing Law..................................................................... 75
16.11 Adoption of the Plan by an Affiliated Sponsor..................................... 75
16.12 Protected Benefits................................................................ 77
16.13 Location of Participant or Beneficiary Unknown.................................... 77
</TABLE>
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<PAGE> 7
<TABLE>
<S> <C> <C>
16.14 Qualified Military Service.......................................................... 77
SCHEDULE A - AFFILIATED SPONSORS................................................................. 79
SCHEDULE B - PREDECESSOR EMPLOYERS............................................................... 80
SCHEDULE C - PRIOR EMPLOYER ACCOUNT.............................................................. 81
SCHEDULE D - SPECIAL RULES APPLICABLE TO ANNUITY DISTRIBUTIONS................................... 82
</TABLE>
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<PAGE> 8
SUMMIT HOLDING SOUTHEAST, INC.
RETIREMENT PLAN
AMENDED AND RESTATED SEPTEMBER 1, 1997
ARTICLE 1
INTRODUCTION
1.01 Establishment of Plan; Background.
(a) Effective May 1, 1992, Summit Consulting, Inc. adopted the
Summit Consulting, Inc. Retirement Plan (the "Prior Plan").
The Prior Plan was amended from time to time and at all
times was maintained as a plan meeting the requirements of
Sections 401(a) and 401(k) of the Internal Revenue Code of
1986, as amended, and of the Employee Retirement Income
Security Act of 1974.
(b) Summit Consulting, Inc., was a 100% subsidiary of Summit
Holding Corporation and Summit Holding Corporation was owned
by Employers Self Insurers Fund, a Florida group
self-insurance fund ("ESIF"). ESIF entered into an Amended
Plan of Conversion and Recapitalization approved by the
Florida Department of Insurance on November 15, 1996, by
ESIF's Board of Trustees on April 15, 1997 and by ESIF's
eligible members on May 9, 1997 (the "Plan of Conversion"),
pursuant to which, among other things, ESIF was converted
into a stock insurance company (the "Conversion"), and all
of ESIF's common stock was owned by Summit Holding
Southeast, Inc., a Florida corporation ("SHSI"). Following
the Plan of Conversion, Summit Consulting, Inc. remained a
100% subsidiary of Summit Holding Corporation, but Summit
Holding Corporation became a 100% subsidiary of SHSI.
Furthermore, effective as of the date of the Conversion,
Summit Consulting, Inc. transferred sponsorship of the
Prior Plan to SHSI (but Summit Consulting, Inc. continued
to participate in the Prior Plan). Therefore, the amendment
and restatement of this Plan is made by Summit Holding
Southeast, Inc.
(c) Effective September 1, 1997, the Prior Plan is continued in
an amended and restated form as set forth in its entirety
in this document (the "Plan"). Notwithstanding this general
effective date, certain provisions of this Plan (as set
forth in this document) shall have effective dates earlier
than September 1, 1997.
<PAGE> 9
1.02 Purpose.
Summit Holding Southeast, Inc. intends to operate the Summit Holding
Southeast, Inc. Retirement Plan for the purpose of enabling Eligible
Employees of the Employer and their Beneficiaries to accumulate
funds to provide for their retirement income requirements. The Plan
is intended to qualify, and the Trust established pursuant to the
related Trust Agreement is intended to be exempt from federal income
tax, under the pertinent provisions of the Internal Revenue Code of
1986, as amended, and any successor Federal Income Tax statute of
the same or similar effect.
1.03 Plan Governs Distribution of Benefits.
The distribution of benefits for all Participants (whether employed
by the Employer before or after the Effective Date) shall be
governed by the provisions of this Plan. Nevertheless, early
retirement benefits, retirement-type subsidies, or optional forms of
benefit protected under Code Section 411(d)(6) ("Protected
Benefits") shall not be reduced or eliminated with respect to
benefits accrued under such Protected Benefits unless such reduction
or elimination is permitted under the Code, Treasury Regulations,
authority issued by the Internal Revenue Service or judicial
authority.
- 2 -
<PAGE> 10
ARTICLE 2
DEFINITIONS
Certain terms of this Plan have defined meanings which are set forth in this
Article and which shall govern unless the context in which they are used
clearly indicates that some other meaning is intended.
Account shall mean the Account established and maintained by the Committee or
Trustee for each Participant or their Beneficiaries to which shall be allocated
each Participant's interest in the Fund. Each Account shall be comprised of the
sub-accounts described in Section 6.01.
Act or ERISA shall mean Public Law No. 93-406, the Employee Retirement Income
Security Act of 1974, as the same may be amended from time to time.
Adjustment shall mean, for any Valuation Date, the aggregate earnings, realized
or unrealized appreciation, losses, expenses, and realized or unrealized
depreciation of the Fund since the immediately preceding Valuation Date. The
determination of the adjustment shall be made by the Trustee and shall be final
and binding.
Affiliate shall mean the Company and any corporation which is a member of a
controlled group of corporations (as defined in Code Section 414(b)) which
includes the Company; any trade or business which is under common control (as
defined in Code Section 414(c)) with the Company; any organization which is a
member of an affiliated service group (as defined in Code Section 414(m)) which
includes the Company; and any other entity required to be aggregated with the
Company pursuant to regulations under Code Section 414(o).
Affiliated Sponsor shall mean any corporation and any other entity that wishes
to adopt this Plan; provided, however, that any such entity described in this
paragraph must be designated by the Committee as an Affiliated Sponsor under
the Plan. See Section 16.11 for provisions relating to an Affiliated Sponsor's
adoption of the Plan. All Affiliated Sponsors, groups of employees designated
as participating in the Plan by such Affiliated Sponsors (if not all
employees), and the effective date of a company's designation as an Affiliated
Sponsor shall be specified in Schedule A.
Annuity Starting Date shall mean the first day of the first period for which an
account is payable as an annuity or, in the case of a benefit not payable in
the form of an annuity, the first day on which all events have occurred which
entitle the Participant to such benefit.
Authorized Leave of Absence shall mean any temporary layoff or any absence
authorized by the Employer under the Employer's standard personnel practices
provided that all persons under similar circumstances must be treated alike in
the granting of such Authorized Leaves of Absence and provided further that the
Participant returns within the
- 3 -
<PAGE> 11
period of authorized absence. An absence due to service in the Armed Forces of
the United States shall be considered an Authorized Leave of Absence to the
extent required by federal law.
Beneficiary.
(a) Unmarried Participants. For unmarried Participants, any
individual(s), trust(s), estate(s), partnership(s),
corporation(s) or other entity or entities designated by
the Participant in accordance with procedures established
by the Committee to receive any distribution to which the
Participant is entitled under the Plan in the event of the
Participant's death. The Committee may require
certification by a Participant in any form it deems
appropriate of the Participant's marital status prior to
accepting or honoring any Beneficiary designation. Any
Beneficiary designation shall be void if the Participant
revokes the designation or marries. Any Beneficiary
designation shall be void to the extent it conflicts with
the terms of a qualified domestic relations order.
If an unmarried Participant fails to designate a
Beneficiary or if the designated Beneficiary fails to
survive the Participant and the Participant has not
designated a contingent Beneficiary, the Beneficiary shall
be the surviving descendants of the Participant (who shall
take per stirpes) and if there are no surviving
descendants, the Beneficiary shall be the Participant's
estate. For the purposes of the foregoing sentence, the
term "descendants" shall include any persons adopted by a
Participant or by any of his descendants.
(b) Married Participants. A married Participant's Beneficiary
shall be his Spouse at the time of his death unless the
Participant has designated a non-spouse Beneficiary (or
Beneficiaries) with the written consent of his Spouse
given in the presence of a notary public on a form provided
by the Committee, or unless the terms of a qualified
domestic relations order require payment to a non-spouse
Beneficiary. A married Participant's designation of a
non-spouse Beneficiary in accordance with the preceding
sentence shall remain valid until revoked by the
Participant or until the Participant marries a Spouse who
has not consented to a designation in accordance with the
preceding sentence.
For the purposes of this Section, revocation of prior Beneficiary designations
will occur when a Participant (i) files a valid designation with the Committee;
or (ii) files a signed statement with the Committee evidencing his intent to
revoke any prior designations.
Board shall mean the Board of Directors of the Company.
Break in Service shall occur under the following circumstances:
- 4 -
<PAGE> 12
(i) The Eligible Employee ceases Employment due to discharge,
quit, retirement or death and does not return to Employment
for five or more consecutive years following such Termination
Date.
(ii) The Employee ceases Employment for any reason other than for
those reasons described in subparagraph (i) above or
subparagraph (iii) below and does not return to Employment
for six or more consecutive years following such Termination
Date.
(iii) The Employee ceases Employment on account of Maternity or
Paternity Leave and does not return to Employment for seven
or more consecutive years following such Termination Date.
Code shall mean the Internal Revenue Code of l986, as amended. A reference to a
specific provision of the Code shall include such provision and any applicable
Treasury Regulation pertaining thereto.
Committee shall mean the Committee appointed by the Board under Article 10 to
administer the Plan. This term is interchangeable with "Plan Administrator."
Company shall mean Summit Holding Southeast, Inc. and its successors and
assigns which adopt this Plan.
Company Stock shall mean the voting common stock of the Company. The Company
Stock is intended to constitute "Qualifying Employer Securities" as defined in
ERISA Section 407(d)(5). It is hereby expressly provided that the Plan may
acquire and hold Qualifying Employer Securities.
Company Stock Fund shall mean the portion of a Participant's Account which is
invested in Company Stock as described in Section 6.04(e).
Compensation.
(a) Compensation shall mean the an Eligible Employee's base pay
and overtime earned after the Eligible Employee became a
Participant in the Plan. Accordingly, Compensation shall
exclude bonuses, commissions, the taxable value of any
qualified or non-qualified stock option, reimbursements or
other expense allowances, fringe benefits (cash and
non-cash), moving expenses, deferred compensation and welfare
benefits. Compensation shall include, however, Pre-Tax
Contributions under this Plan and salary reduction pre-tax
contributions to a ss.125 Plan maintained by the Employer
- 5 -
<PAGE> 13
(b) The annual Compensation of each employee taken into account
under the Plan shall not exceed the limitations of Code
Section 401(a)(17) in effect as of the beginning of the Plan
Year (e.g., $160,000 in 1997).
(c) Prior to January 1, 1997, Compensation of certain related
family members were aggregated as required by Code Section
414(q) and Code Section 401(a)(17). Effective January 1,
1997, aggregation of Compensation among certain family
members is not longer required and is not applicable under
the Plan.
Credited Service shall mean the number of years of service as an Employee of
Employer measured in accordance with the following rules:
(a) Except as provided below, an Employee shall receive
Credited Service for the elapsed time of his Employment
from the date on which the Employee first performs an Hour
of Service for the Employer to his Termination Date. If a
Participant earns Credited Service during two or more
periods of Employment (which are not otherwise
disregarded), all such periods of Credited Service shall be
aggregated on the basis that 12 months of Credited Service
equals one year of Credited Service. Any Credited Service
less than a whole year shall be disregarded.
(b) Break in Service. Credited Service shall not include any
period of Employment which precedes a Break in Service if
as of the first day of the Break in Service, the Employee
is not vested in any portion of his Account.
(c) Employment with Affiliated Sponsors; Predecessor
Businesses. Credited Service shall not include any period
of Employment with any Affiliated Sponsor prior to its
designation as an Affiliated Sponsor or any period of
Employment with a predecessor business prior to or its
acquisition by Employer except to the extent provided in
Schedule A or B and except as provided in paragraphs (a)
and (b) above.
(d) Military Service. Credited Service shall not include any
period of service in the military; except to the extent
such service is required to be credited under applicable
federal law.
(e) Employment with Affiliates. An Employee's service with an
Affiliate shall be considered Employment with the Employer.
(f) Double Counting Prohibited. Hours of Service earned under
paragraphs (a) through (e) above shall be counted only
once. Accordingly, an
- 6 -
<PAGE> 14
Employee may earn only one year of Credited Service during
any Plan Year.
Distribution shall mean payment by the Trustee to or for the benefit of a
Participant, Spouse, Beneficiary or other person entitled to benefits as
provided in this Plan.
Earnings shall have that meaning as defined in Section 4.01.
Effective Date shall mean September 1, 1997, the date of the Plan's amendment
and restatement.
Eligible Employee shall mean, except for those Employees identified in the
following sentence, all Employees employed by the Employer. The following
Employees shall not be considered Eligible Employees:
(i) any employee included in a collective bargaining unit for
which a labor organization is recognized as collective
bargaining agent unless such employee has been designated by
the Committee as an "Eligible Employee" for the purposes of
this Plan;
(ii) any "leased employee," within the meaning of Code ss.
414(n)(2), with respect to the Employer or deemed employee
under Code ss.414(o); or
(iii) any Employee who is a nonresident alien and who does not
receive earned income from the Employer which constitutes
income from sources within the United States.
Employee shall mean any person employed by or on Authorized Leave of Absence
from the Employer, and any person who is a "leased employee" within the meaning
of Code ss. 414(n)(2) with respect to the Employer. However, if such "leased
employees" constitute less than 20 percent of the Employer's combined
non-highly compensated work force, within the meaning of Code ss.
414(n)(1)(C)(ii), the term "Employee" shall not include "leased employees"
covered by a plan described in Code ss. 414(n)(5).
Employee Contributions shall mean Pre-Tax Contributions and Voluntary After-Tax
Contributions.
Employer shall mean the Company and any Affiliated Sponsor. All Affiliated
Sponsors are listed on Schedule A.
Employer Contributions shall mean Employer Matching Contributions, Stock Bonus
Contributions and/or Qualified Nonelective Contributions.
Employer Matching Contribution Account shall mean the portion of a
Participant's Account attributable to the Employer Matching Contributions, and
the total of the
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<PAGE> 15
Adjustments which have been credited to or deducted from a Participant's
Account with respect to such Employer Matching Contributions.
Employer Matching Contributions shall have that meaning as defined in Section
5.01.
Employment shall mean the active service of an Employee with the Employer.
Employment Commencement Date shall mean the date on which the Employee first
performs an Hour of Service as defined in Department of Labor Regulations.
Entry Date shall mean the first day of each calendar month.
Fiduciary shall mean any party named as a Fiduciary in Article 10 of the Plan.
Any party shall be considered a Fiduciary of the Plan only to the extent of the
powers and duties specifically allocated to such party under the Plan.
Forfeiture. See Section 5.05.
Former Participant shall have that meaning as defined in Section 3.03(a).
Fund shall mean the money and other properties held and administered by the
Trustee in accordance with the Plan and Trust Agreement. If the Committee so
directs, multiple trust funds may be established under this Plan, which
together shall comprise the Fund hereunder.
Highly Compensated Employee shall have that meaning as defined in Article 13.
Hour of Service shall mean:
(a) Each hour for which an Employee is paid, or entitled to
payment, for performance of duties for an Employer or
Employers.
(b) Each hour for which an Employee is paid, or entitled to
payment, by an Employer or Employers, on account of a
period of time during which no duties are performed
(irrespective of whether the employment relationship is
terminated) due to vacation, holiday, illness, incapacity,
layoff, jury duty, military duty, or leave of absence;
provided that in no event, shall an Employee receive credit
for more than 501 Hours of Service for any single
continuous period of non-working time.
(c) Each hour for which an Employee is absent from work by
reason of (i) the pregnancy of the Employee, (ii) the birth
of a child of the Employee, (iii) the placement of a child
with the Employee in connection with the adoption of the
child by the Employee, or (iv) the caring for a child
referred to in paragraphs (i) through (iii) immediately
following birth
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<PAGE> 16
or placement. Hours credited under this paragraph shall be
credited at the rate of eight (8) hours per day, but shall
not, in the aggregate, exceed the number of hours required
to prevent the Employee from incurring a One-Year Break in
Service (a maximum of 501 hours) during the first
computation period in which a One-Year Break in Service
would otherwise occur; provided, however, that this rule
shall apply only during the Plan Year in which the absence
from work begins and the immediately following Plan Year.
This paragraph (c) shall apply only to Participants who
begin their absence from work for a reason specified in
this paragraph (c) on or after the Effective Date.
(d) Each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by an Employer or
Employers. These hours shall be credited to the Employee
for the computation period or period to which the award or
agreement pertains, rather than the computation period in
which the award, agreement, or payment is made.
(e) In lieu of the foregoing, an Employee who is not
compensated on an hourly basis (such as salary, commission
or piecework employees) shall be credited with 45 Hours of
Service for each week (or 10 Hours of Service for each day)
in which such Employee would be credited with Hours of
Service in hourly pay. However, this method of computing
Hours of Service may not be used for any Employee whose
Hours of Service is required to be counted and recorded by
any Federal law, such as the Fair Labor Standards Act. Any
such method must yield an equivalency of at least 1,000
hours per computation period.
The following rules shall apply in determining whether an Employee completes an
"Hour of Service":
1. The same hours shall not be credited under subparagraphs
(a) or (b) above, as the case may be, and subparagraph (c)
above.
2. The rules relating to determining hours of service for
reasons other than the performance of duties and for
crediting hours of service to particular periods of
employment shall be those rules stated in Department of
Labor regulations Title 29, Chapter XXV, subchapter C, part
2530, Sections 200b2(b) and 200b2(c), respectively.
Investment Fund shall mean the separate funds under the Trust Fund which are
distinguished by their investment objectives.
Maternity or Paternity Leave shall mean the Employee's cessation of Employment
on account of (i) the pregnancy of the Employee, (ii) the birth of the
Employee's child, (iii) the child's placement with the Employee in connection
with the Employee's adoption of
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<PAGE> 17
such child, or (iv) caring for a child described in (i) through (iii) above
immediately following the child's birth or placement. This definition shall be
interpreted in accordance with Code Sections 410(a)(5)(E) and 411(a)(6)(E).
Ninety-Day Period of Continuous Employment shall have that meaning as defined
in Section 3.02.
Non-highly Compensated Employee shall mean an Employee of the Employer who is
not a Highly Compensated Employee.
Normal Retirement Date shall mean the date a Participant attains age sixty-five
(65).
One-Year Break in Service shall mean any Plan Year in which an Employee accrues
500 or fewer Hours of Service.
Participant shall mean an Employee who becomes eligible to participate in the
Plan as provided in Article 3.
Period of Eligibility Service shall mean either a Ninety-Day Period of
Eligibility Service or a Year of Eligibility Service, as the case may be.
Permanent Disability shall mean a disability of a Participant within the
meaning of Code Section 72(m)(7), to the extent that the Participant is, or
would be, entitled to disability retirement benefits under the federal Social
Security Act or to the extent that the Participant is entitled to recover
benefits under any long term disability plan or policy maintained by the
Employer. The determination of whether or not a Permanent Disability exists
shall be determined by the Committee and shall be substantiated by competent
medical evidence.
Plan shall mean the Plan as set forth in this document together with any
subsequent amendments hereto. See Section 1.01.
Plan Administrator or Administrator shall mean the Committee appointed by the
Board pursuant to Article 10 to administer the Plan. All references in the Plan
to the Administrator shall be deemed to apply to the Committee and vice versa.
The Committee so appointed is hereby designated as the "Administrator" of the
Plan within the meaning of Section 3(16) of the Act.
Plan Year shall be the calendar year.
Pre-Tax Contribution Account shall mean the portion of a Participant's Account
attributable to Pre-Tax Contributions, and the total of the Adjustments which
have been credited to or deducted from a Participant's Account with respect to
Pre-Tax Contributions.
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<PAGE> 18
Pre-Tax Contribution shall mean contributions made to the Plan during the Plan
Year by the Employer, at the election of the Participant, in lieu of cash
compensation and that are made pursuant to a salary reduction agreement. Such
contributions are nonforfeitable when made and distributable only as specified
in Article 8 or Article 9.
Qualified, as used in "qualified plan" or "qualified trust" shall mean a plan
and trust which are entitled to the tax benefits provided respectively by
Sections 401 and 501 of the Code, and related provisions of the Code.
Qualified Nonelective Contribution Account shall mean the portion of a
Participant's Account attributable to Qualified Nonelective Contributions, and
the total of the Adjustments which have been credited to or deducted from a
Participant's Account with respect to Qualified Nonelective Contributions.
Qualified Nonelective Contribution shall have that meaning as defined in
Section 5.03.
Retirement shall mean the Termination Date of a Participant on or after his
Normal Retirement Date.
Spouse shall mean the person who was married to the Participant (in a civil or
religious ceremony recognized under the laws of the state where the marriage
was contracted) immediately prior to the date on which payments to the
Participant from the Plan begin. If the Participant dies prior to the
commencement of benefits, Spouse shall mean a person who is married to a
Participant (as defined in the immediately preceding sentence) on the date of
the Participant's death. A Participant shall not be considered married to
another person as a result of any common law marriage whether or not such
common law marriage is recognized by applicable state law.
Stock Bonus Contribution Account shall mean the portion of a Participant's
Account attributable to Stock Bonus Contributions, and the total of the
Adjustments which have been credited to or deducted from a Participant's
Account with respect to such Stock Bonus Contributions.
Stock Bonus Contribution shall have that meaning as defined in Section 5.02.
Termination Date shall mean the first to occur of the following events:
(a) Voluntary resignation from service of the Employer; or
(b) Discharge from the service of the Employer by the Employer;
or
(c) Retirement; or
(d) Death; or
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<PAGE> 19
(e) The first anniversary of the date the Employee ceases
Employment for any reason not described above (e.g.,
vacation, holiday, sickness, disability, leave of absence, or
layoff).
If, however, an Employee terminates his Employment on account of an event
described in paragraphs (a) - (c) above and the Employee performs an Hour of
Service within twelve months following such termination of Employment (or such
lesser period as provided in Treasury Regulation ss. 1.410(a)-7(d)(iii)(B)),
the Employee shall be considered as having been in active Employment during
such period of absence for purposes of determining the Employee's eligibility
to participate in the Plan and for purposes of determining the Employee's
nonforfeitable interest in his Account Balance.
Treasury Regulation means regulations pertaining to certain Sections of the
Code as issued by the Secretary of the Treasury.
Trust or Trust Agreement shall refer to the Fund established pursuant to one or
more agreements of trust entered into between the Employer and one or more
trustees (sometimes referred to as sub-trusts), which governs the creation and
maintenance of the Fund, and all amendments thereto which may hereafter be
made. It is expressly intended that (if the Committee so directs) multiple
sub-trusts may be established under this Plan, which together shall comprise
the Trust Fund hereunder and that all of the sub-trusts shall be considered to
be a single trust fund for purposes of Section 1.414(1)- 1(b)(1) of the
Treasury Regulations.
Trustee shall mean any institution or individual(s) who shall accept the
appointment of the Committee to serve as Trustee pursuant to the Plan.
Valuation Date shall mean March 31, June 30, September 30 and December 31 of
each Plan Year or such other day as selected by the Committee.
Voluntary After-Tax Contribution shall have the meaning as defined in Section
4.01(b).
Voluntary After-Tax Contribution Account shall mean the portion of a
Participant's Account attributable to Voluntary After-Tax Contributions and the
total of the Adjustments which have been credited to or deducted from a
Participant's Account with respect to such Voluntary After-Tax Contributions.
Year of Eligibility Service shall have the meaning as defined in Section 3.02.
Other Rules. A defined term, such as "Retirement", will normally govern the
definitions of derivatives therefrom, such as "Retire", even though such
derivatives are not specifically defined and even if they are or are not
initially capitalized. The masculine gender, where appearing in the Plan, shall
be deemed to include the feminine gender, unless the context clearly indicates
to the contrary. Singular and plural nouns and pronouns shall be
interchangeable as the factual context may allow or require. The words
"hereof", "herein", "hereunder" and other similar compounds of the word "here"
shall mean and refer to the entire Plan and not to any particular provision or
Section.
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<PAGE> 20
ARTICLE 3
PARTICIPATION
3.01 Participation.
(a) Eligible Employees on the Effective Date. Any Eligible
Employee who participated in the Prior Plan and who is in
Employment with an Employer on the Effective Date shall
continue their participation in this Plan as of the
Effective Date.
(b) Other Employees. An Eligible Employee who does not satisfy
the requirements of paragraph (a) above and who is normally
scheduled to work more than thirty (30) hours per week
("Full-Time Employee"), shall become a Participant in the
Plan in accordance with Section 3.01(c) below. An Eligible
Employee who does not satisfy the requirements of paragraph
(a) above and who is normally scheduled to work thirty (30)
or fewer hours per week ("Part-Time Employee"), shall
become a Participant in the Plan in accordance with Section
3.01(d) below. See Section 3.04 below for special rules
that apply to new Employees following an acquisition.
(c) Full-Time Employees. An Eligible Employee who is a
Full-Time Employee shall become a Participant in the Plan
on the Entry Date immediately following the later of (i)
the date on which the Employee has completed a Ninety Day
Period of Continuous Employment or (ii) the date the
Employee becomes a member of the class of Eligible
Employees.
(d) Part-Time Employees. An Eligible Employee who is a
Part-Time Employee shall become a Participant in the Plan
for all purposes of the Plan on the Entry Date next
following the later of (i) the date on which the Eligible
Employee has both completed one Year of Eligibility Service
and attained age 21 or (ii) the date the Employee becomes a
member of the class of Eligible Employees.
(e) Break in Service. If an Eligible Employee either (i) is
not employed or (ii) is no longer an Eligible Employee on
the earliest Entry Date on or after which such Employee
satisfied the requirements described above, but returns to
work or again becomes an Eligible Employee before incurring
a Break in Service, such Eligible Employee shall commence
participation on the next Entry Date after the date such
Employee returns to work or again becomes an Eligible
Employee. If the Employee returns to work or again becomes
an Eligible Employee after a Break in Service, such
Employee must again satisfy the requirements of Section
3.01.
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<PAGE> 21
(f) Enrollment. An Eligible Employee who becomes eligible to
participate in this Plan will be asked to follow certain
procedures to enroll in the Plan, and pursuant to which he
will designate Beneficiaries and may elect to make Pre-Tax
Contributions. However, an Eligible Employee's
participation in the Plan shall not be contingent upon
completion of such enrollment process.
3.02 Period of Eligibility Service.
(a) Ninety Day Period of Eligibility Service. A Full-Time
Employee shall complete a Ninety Day Period of Continuous
Employment.
(b) Year of Eligibility Service. A Year of Eligibility Service
is determined under the 1,000 Hours of Service method.
Accordingly, a Part-Time Employee shall receive one Year
of Eligibility Service upon completing a twelve consecutive
month period of Employment during which the Part-Time
Employee earns at least 1,000 Hours of Service. The initial
twelve month period shall be the twelve consecutive month
period commencing on the Part-Time Employee's date of hire
or rehire. If the Part-Time Employee fails to complete
1,000 Hours of Service during this 12 month period, the
Part-Time Employee shall receive a Year of Eligibility
Service upon completing at least 1,000 Hours of Service
during a Plan Year (commencing with the Plan Year during
which the Part-Time Employee's first anniversary of his
date of hire occurs).
(c) Break in Service. For purposes of this Article 3, an
Employee shall not receive credit for any period of
Employment which precedes a Break in Service if, at the
time of the Break in Service, the Employee had never been a
Participant in the Plan.
(d) Authorized Leave of Absence. A period during which an
Employee is on Authorized Leave of Absence shall not count
towards the Employee's completion of the Period of
Eligibility Service nor toward the Employee's Break in
Service if such Employee resumes Employment immediately
after the end of such Authorized Leave of Absence.
(e) Transfer of Employment from an Affiliate. If an Employee
transfers employment directly from an Affiliate (that does
not participate in this Plan) to an Employer, such Employee
shall receive credit toward the Employee's Period of
Eligibility Service under this Plan for such Employee's
Hours of Service with the Affiliate.
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<PAGE> 22
3.03 Participation and Rehire.
(a) Status as a Participant. A Participant's participation in
the Plan shall continue until the Participant's Termination
Date. On or after his Termination Date, the Employee shall
be known as a "Former Participant" and his benefits shall
thereafter be governed by the provisions of Article 8. The
individual's status as a Former Participant shall cease as
of the date the individual ceases to have any balance in
his Account. If a Participant ceases to be an Eligible
Employee but does not have a Termination Date, then such
person shall continue to be known as a "Participant," but
shall not be eligible to make Pre-Tax Contributions and
shall not be eligible to receive Employer Contributions.
(b) Rehire of Person who was a Participant in this Plan. An
Eligible Employee who was a Participant in this Plan at the
time of his Termination Date and who is subsequently
rehired by an Employer, shall be eligible to participate in
this Plan on the date of his rehire or, if later, on the
date he becomes an Eligible Employee.
3.04 Acquisitions.
If a group of persons becomes employed by an Employer (or any of its
subsidiaries or divisions) as a result of an acquisition of another
employer, the Committee shall determine whether and to what extent
employment with such prior employer shall be treated as eligibility
service for purposes of Section 3.02, the applicable Entry Date (or
special entry date) for such acquired employees, and any other terms
and conditions which apply to eligibility to participate in this
Plan. Such terms and conditions shall be set forth in Schedule A or
Schedule B to this Plan by action of the Committee. Except to the
extent required by law, employees of an acquired business which is
not identified in Schedule A or Schedule B shall be treated as
having first accrued an Hour of Service as of the date of the
Employer's acquisition of such business.
3.05 Not Contract for Employment.
Participation in the Plan shall not give any Employee the right to
be retained in the Employer's employ, nor shall any Employee, upon
dismissal from or voluntary termination of his employment, have any
right or interest in the Fund, except as herein provided.
3.06 Special Eligibility Rule for Stock Bonus Contribution.
See Section 1.01 for background regarding the Conversion and Plan of
Conversion. Each Eligible Employee in Employment as of the
Conversion (expected to be May 28, 1997) ("Conversion Date") shall
become a Participant in
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<PAGE> 23
the Plan as of the Conversion Date regardless of whether the Eligible
Employee had completed a Period of Eligibility Service. The purpose of
this special eligibility rule is to allow all Eligible Employees who
are in Employment on the Conversion Date to share in the one-time
Stock Bonus Contribution (see Section 5.02). All Eligible Employees
hired after the Conversion Date shall not become a Participant until
such Eligible Employees have satisfied the requirements of Section
3.01.
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<PAGE> 24
ARTICLE 4
EMPLOYEE CONTRIBUTIONS; ROLLOVERS
4.01 Employee Contributions.
Except during periods of suspension as set forth in Section 4.03(b), a
Participant may elect to make Pre-Tax Contributions, Voluntary
After-Tax Contributions, or both by means of payroll deduction, as
provided below.
(a) Pre-Tax Contributions. A Participant may contribute as a
Pre-Tax Contribution any whole percentage from 1% to 16% of
his Earnings during any Plan Year. It is expressly intended
that, to the extent allowable by law, Pre-Tax Contributions
shall not be included in the gross income of the Participant
for income tax purposes and shall be deemed contributions
under a cash or deferred arrangement pursuant to Code
ss.401(k).
(b) Voluntary After-Tax Contributions. A Participant may elect
to make after-tax contributions to the Plan which are known
as Voluntary After-Tax Contributions. A Participant may
contribute as an After-Tax Contribution any whole percentage
of the Participant's Earnings during the Plan Year up to 16%
less the percentage of Earnings the Participant elects to
contribute to the Plan as a Pre-Tax Contribution. The
Committee may, at any time, suspend the making of further
Voluntary After-Tax Contributions or reduce the maximum
percentage of Earnings that may be contributed to the Plan as
a Voluntary After-Tax Contribution. A Participant may make a
Voluntary After-Tax Contribution without making a Pre-Tax
Contribution and vice versa. However, no Employer Matching
Contribution will be made on Voluntary After-Tax
Contributions.
(c) The Committee may establish guidelines and rules in order to
effectuate the provisions of this Section.
(d) Earnings. For this purpose, "Earnings" means Compensation, as
defined in paragraph (a) of the definition set forth in
Article 2, and by disregarding paragraph (b) of such
definition. Earnings prior to becoming a Participant are
ignored.
4.02 Elections Regarding Employee Contributions.
(a) Procedure for Making Elections. Elections by a Participant
to make Employee Contributions to the Plan shall be made in
writing on a form
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<PAGE> 25
prescribed by the Committee (or by such other means as
determined by the Committee) and by designating on such form
the percentage of Earnings that will be contributed as a
Pre-Tax Contribution and/or Voluntary After-Tax Contribution
during each pay period. The election to make Employee
Contributions shall be effective on the first payroll period
of the calendar quarter that is at least 30 days after the
Employer receives such election form (or such smaller number
of days as determined by the Committee on a nondiscriminatory
basis). However, Participants who complete an election form
within 30 days of becoming a Participant may commence to make
Pre-Tax Contributions effective on the first day of the
Participant's normal pay period (or as soon as reasonably
practicable thereafter) after the Employer receives such
election form.
(b) Additional Limitations of Employee Contributions. Pre-Tax
Contributions and Voluntary After-Tax Contributions shall be
subject to the limitations described in Section 12.02
(maximum dollar contribution limit), Section 12.03 (ADP
non-discrimination test) and Article 14 (Code ss. 415 limit).
4.03 Change in Employee Contribution Percentage or Suspension of
Contributions.
(a) Change of Contribution Percentage. A Participant may
increase or decrease the percentage of his Earnings
contributed as a Pre-Tax Contribution or Voluntary
After-Tax Contribution once each calendar quarter by
delivery of written notice to the Committee (or by such
other means as determined by the Committee). In order to be
effective, the Participant must notify the Committee at
least 30 days prior to the date that the increase or
decrease will become effective (or such lesser number of
days as determined by the Committee on a nondiscriminatory
basis).
(b) Suspension of Contributions. A Participant may suspend his
Pre-Tax Contributions and/or Voluntary After-Tax
Contributions at any time by properly completing a form
prescribed by the Committee. The suspension of Pre-Tax
Contributions and/or Voluntary After-Tax Contributions will
be effective on the first day of the Participant's normal
payroll period that begins 30 days after the Participant
delivers the completed form to the Committee. A Participant
may resume making Pre-Tax Contributions and/or Voluntary
After-Tax Contributions on or after the calendar quarter
which is after the effective date of such suspension of
contributions and only after informing the Committee in
writing at least 30 days prior to the date on which the
Pre-Tax Contributions and/or Voluntary After-Tax
Contributions are to resume. The Committee, on a
nondiscriminatory basis, may prescribe a lesser number of
days on which the suspension or resumption of Pre-Tax
Contributions and/or Voluntary After-Tax Contributions is
to be effective. A Participant's Employee Contributions
shall automatically be
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<PAGE> 26
suspended beginning on the first payroll period that
commences after the Participant is not in receipt of
Earnings, the Participant's layoff or the Participant's
Authorized Leave of Absence without pay. A Participant may
continue to make Voluntary After-Tax Contributions even
though the Participant has suspended the contribution of
Pre-Tax Contributions and vice versa.
(c) Other Rules.
(1) See Section 9.03 for circumstances under which a
Participant's Pre-Tax Contributions and Voluntary
After-Tax Contributions could be suspended for a
period of at least 12 months after such Participant
receives a hardship distribution.
(2) In order to satisfy the provisions of Article 12 and
Article 14, the Committee may from time to time
either temporarily suspend the Employee
Contributions of Participants or reduce the maximum
permissible Employee Contribution that may be made
to the Plan by Employees.
(3) Any reduction, increase, or suspension of Pre-Tax
Contributions described in this Article 4.03 shall
be made in such manner as the Committee may
prescribe from time to time consistent with the
provisions of this Article.
4.04 Deadline for Contributions and Allocation of Employee Contributions.
Employee Contributions shall be deducted by the Employer from the
Participant's Earnings and paid to the Trustee as promptly as possible
after the end of each regular pay period but in no event later than 15
business days after the end of the month in which such Employee
Contributions have been retained by the Employer.
4.05 Rollover Contribution.
(a) Without regard to any limitation on contributions set forth
in this Article, an Eligible Employee may, if the Committee
consents (based on non-discriminatory criteria), transfer
to the Trustee during any Plan Year cash, provided such
cash:
(1) was received by the Participant from a Qualified
Plan maintained by a previous employer of the
Participant and qualifies as a rollover
contribution within the meaning of Code ss.
402(c)(4);
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<PAGE> 27
(2) was received by the Participant from an individual
retirement account or individual retirement
annuity and qualifies as a rollover contribution
within the meaning of Code ss. 408(d)(3)(A)(ii)
(b) Such cash shall be held by the Trustee in the Employee's
Rollover Account. All such amounts so held shall at all
times be fully vested and nonforfeitable. Such amounts
shall be distributed to the Eligible Employee after his
Termination Date in the manner provided in Article 8.
(c) Unless the Committee determines otherwise, the Company
Stock Fund will not be available for balances in the
Rollover Account.
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<PAGE> 28
ARTICLE 5
EMPLOYER CONTRIBUTIONS
5.01 Employer Matching Contribution.
(a) Amount and Allocation of Employer Matching Contribution.
The Employer Matching Contribution shall be equal to 75% of
a Participant's Pre-Tax Contributions made during each
payroll period. However, such Employer Matching
Contribution will not exceed six percent (6%) of the
Participant's Compensation for such payroll period
(ignoring compensation earned before becoming a
Participant).
(b) Make-Up Contribution. If a Participant is unable to
continue contributing to the Plan because the Participant
has reached the maximum contribution limit of Section 12.03
(Code Section 402(g)), the Employer shall nevertheless make
the Employer Matching Contribution described in
subparagraph (a) above on behalf of such Participant, in
the manner determined by the Committee, until the
Participant's Employer Matching Contribution for the Plan
Year is equal to 75% of a Participant's Pre-Tax
Contributions made during such Plan Year. However, such
Employer Matching Contribution will not exceed six percent
(6%) of the Participant's annual Compensation (ignoring
compensation earned before becoming a Participant).
5.02 Stock Bonus Contributions.
(a) Allocation of 100 Shares of Company Stock. As soon as
practicable following the effective date of the Conversion
(as described below), each Participant shall receive an
allocation of 100 shares of Company Stock. Such stock shall
be allocated to the Participant's Stock Bonus Contribution
Account.
(b) Conversion. See Section 1.01 for background regarding the
Conversion. In general, the Conversion referred to above is
the act of the Employers Self Insurers Fund, a Florida group
self-insurance fund, converting to a stock insurance company
on or about May 28, 1997.
5.03 Qualified Nonelective Contributions.
In the sole discretion of the Board, an additional Employer
Contribution may be made to the Plan which shall be known as a
"Qualified Nonelective Contribution". Such contribution shall be made
in order to satisfy the requirements of Article 12, and shall be
allocated to the Qualified Nonelective Contribution Accounts of those
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<PAGE> 29
Non-highly Compensated Employees selected by the Committee at the time
such Qualified Nonelective Contribution is made, or as soon thereafter
as possible.
5.04 Form and Timing of Contributions.
(a) Employer Contributions shall be made in cash or in
Qualifying Employer Securities. Employer Matching
Contributions and Stock Bonus Contributions shall be
delivered to the Trustee on or before the date prescribed
by the Code for filing the Employer's federal income tax
return, including authorized extensions. Qualified
Nonelective Contributions shall be delivered to the Trustee
on or before the last day of the twelfth month following
the close of the Plan Year to which the contribution
relates.
(b) Except as provided in this Section 5.05, all Employer
Contributions shall be irrevocable, shall never inure to
the benefit of any Employer, shall be held for the
exclusive purpose of providing benefits to Participants and
their Beneficiaries (and contingently for defraying
reasonable expenses of administering the Plan), and shall
be held and distributed by the Trustees only in accordance
with this Plan.
(c) Upon an Employer's request and to the extent permitted by
the Code and other applicable laws and regulations
thereunder, a contribution (either Employee or Employer
Contribution) which was made by a mistake in fact, or
conditioned upon the initial qualification of the Plan
under Codess.401(a) or upon the deductibility of the
contribution underss.404 of the Code shall be returned to
the Employer within one year after the payment of the
contribution, the denial of the Plan's initial
qualification, or the disallowance of the deduction (to the
extent disallowed) whichever is applicable. All
contributions to this Plan are expressly conditioned on the
deductibility of such contributions under Code Section 404
and on the initial qualification of the Plan.
5.05 Forfeitures.
Forfeitures shall first be applied to restore amounts previously
forfeited pursuant to Section 7.05(c). Thereafter any remaining
Forfeitures shall be applied to reduce Plan administrative expenses
and/or reduce Employer Contributions. See Section 7.05 to determine
when a forfeiture of a Participant's Account occurs.
- 22 -
<PAGE> 30
ARTICLE 6
ACCOUNTS AND ALLOCATIONS
6.01 Participant Accounts.
(a) Individual Account Plan. This Plan is an "individual
account plan," as that term is used in ERISA. A separate
Account shall be maintained for each Participant, former
Participant or Beneficiary, so long as he has an interest
in the Trust Fund.
(b) Sub-Accounts. Each Account shall be divided (as
appropriate) into the following parts and sub-parts:
(1) The Pre-Tax Contribution Account, which shall
reflect Pre-Tax Contributions contributed to this
Plan and any Adjustments thereto.
(2) The Stock Bonus Contribution Account, which shall
reflect Stock Bonus Contributions contributed to
this Plan and any Adjustments thereto.
(3) The Employer Matching Contribution Account, which
shall reflect Employer Matching Contributions
contributed to this Plan and any Adjustments
thereto.
(4) The Rollover Account, which shall reflect the
value of all investments derived from the
Participant's Rollover Contributions under this
Plan and any Adjustments thereto.
(5) The Voluntary After-Tax Contribution Account,
which shall reflect Voluntary After-Tax
Contributions contributed to the Plan and any
Adjustments thereto.
(6) The Qualified Nonelective Contribution Account,
which shall reflect Qualified Nonelective
Contributions contributed to this Plan and any
Adjustments thereto.
The Committee may divide any Account into such additional
sub-portions as the Committee deems to be necessary or
advisable under the circumstances or to establish other
accounts or sub-accounts as needed. The Committee may
delegate the responsibility for the maintenance of any
Account or sub-account(s).
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<PAGE> 31
(c) Value of Account as of Valuation Date. As of each Valuation
Date, each Participant's Account shall equal:
(1) his total Account as determined on the immediately
preceding Valuation Date, plus
(2) his Employee Contributions added to his Account
since the immediately preceding Valuation Date,
plus
(3) his Employer Contributions added to his Account
since the immediately preceding Valuation Date,
plus
(4) his Rollover Contributions or amounts transferred
to this Plan from the trustee of another Qualified
plan and which were added to his Account since the
immediately preceding Valuation Date, minus
(5) his Distributions, if any, since the immediately
preceding Valuation Date, plus or minus
(6) his allocable share of Adjustments.
6.02 Allocation of Adjustments.
The Adjustment for each Investment Fund shall be calculated as of each
Valuation Date. The Adjustment for a given Investment Fund shall be
allocated to each Account invested in such Investment Fund in the
proportion that each such Account bears to the total of all such
Accounts. Such Valuation shall occur prior to the allocation of
Employer Contributions, by taking into account (or reducing the
Account by) 50% of the Participant's Employee Contributions, Rollover
Contributions, loan repayments and transfers to this Plan from the
trustee of another Qualified plan, by taking into account (or reducing
the Account for) all Distributions, and Forfeitures, and by taking
into account (or reducing the Account by) 50% of the Participant's new
loans which for any of the above occurred since the prior Valuation
Date.
Any cash or stock dividend received on shares of Company Stock
allocated to a Participant's Company Stock Fund shall be allocated to
such Fund. The adjustment allocable to a Participant's directed
investment of his or her loan shall be the interest payments made by
the Participant with respect to such loan since the immediately
preceding Valuation Date.
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<PAGE> 32
6.03 Plan Expenses.
The Committee may direct that expenses attributable to general Plan
administration be allocated among the Accounts of all Participants in
proportion to their Account balances. Furthermore, to the extent
permitted by ERISA, expenses attributable to a specific Participant's
Account may be charged to that Participant's Account (for example, any
brokerage commission attributable to Company Stock held in the
Participant's Account that is purchased or sold at the direction of
the Participant).
6.04 Investment Funds and Elections.
(a) Election of Investment Funds. Each Participant shall
direct, following such procedures as may be specified by
the Committee, to have his Account allocated or reallocated
among the Investment Funds.
(b) Initial Investment Direction. A Participant's initial
investment election must allocate his entire Account in 25%
increments among the Investment Funds, as of the date of
the directive, and all subsequent contributions to each
sub-account for so long as the election remains in effect.
An Employee who fails to make a proper investment election
by the deadline established by the Committee for such
purpose, shall be deemed to have elected to allocate the
non-directed portion of his Account in the Investment Fund
that, in the Committee's determination, best preserves
principal.
(c) Subsequent Elections. Investment elections will remain in
effect until changed by a new election. New elections may
be made by a Participant in 25% increments among the
Investment Funds once each calendar quarter. New elections
may change future allocations to the Participant's Account,
may reallocate between the Investment Funds any amounts
previously credited to the Participant's Account, or may
leave the allocation of such prior amounts unchanged.
(d) Investment Options. The Committee shall select such
Investment Funds as are deemed appropriate and shall notify
affected Participants of such Investment Funds. The
Committee may modify, eliminate or select new Investment
Funds from time to time and shall notify affected
Participants of such changes and solicit new investment
elections, if appropriate.
(e) Company Stock Fund. The Investments Funds selected by the
Committee shall include the Company Stock Funds described
in (i) and (ii) below:
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<PAGE> 33
(i) Employee and Employer Contributions. Effective
October 1, 1997, each Participant may elect to
invest the Participant's Employee and Employer
Contributions in the Company Stock Fund.
(ii) Stock Bonus Contribution Account. All amounts held
in the Participant's Stock Bonus Contribution
Account shall be allocated to the Company Stock
Fund.
6.05 Errors.
Where an error or omission is discovered in any Participant's Account,
the Committee shall make appropriate corrective adjustments as of the
end of the Plan Year in which the error or omission is discovered. If
it is not practical to correct the error retroactively, then the
Committee shall take such action in its sole discretion as may be
necessary to make such corrective adjustments, provided that any such
actions shall treat similarly situated Participants alike and shall
not discriminate in favor of Highly Compensated Employees.
6.06 Valuation For Purposes of Distributions.
(a) For the purposes of Article 8, each Participant's Account
shall be valued as of the Valuation Date immediately
preceding the Distribution of the Participant's Account.
(b) Notwithstanding paragraph (a) above and notwithstanding
Section 8.01, if the Committee in its discretion determines
that there has been a significant change in the market
value of the assets held in the Fund since the Valuation
Date which precedes the proposed date of distribution, the
Committee in its discretion and on a non-discriminatory
basis may postpone the Distribution until a reasonable time
following the next Valuation Date and shall use the value
of the Account computed as of the later Valuation Date in
determining the amount of the Distribution.
(c) No person entitled to a Distribution shall receive interest
or other earnings on the Account from the applicable
Valuation Date described in subsection (a) or subsection
(b) above, to the date of actual Distribution to such
person.
(d) This Section 6.06 shall not apply to the valuation of
Accounts for purposes of in-service withdrawals. Instead,
see Section 9.17.
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<PAGE> 34
ARTICLE 7
VESTING
7.01 Retirement.
A Participant who has a Termination Date on or after his Normal
Retirement Date shall be 100% vested in his Account. Such Account will
be distributed on the date and in the form specified in Article 8.
7.02 Permanent Disability.
A Participant who has a Termination Date on account of Permanent
Disability shall become 100% vested in his Account as of the date of
such Permanent Disability and shall be entitled to a Distribution of
his Account on the date and in the form specified in Article 8.
7.03 Death.
A Participant who has a Termination Date on account of death shall
become 100% vested in his Account. The Participant's Beneficiary shall
receive a Distribution of such Account on the date and in the form
specified in Article 8.
7.04 Other Termination Date.
(a) In General. Upon a Participant's Termination Date for any
reason other than Retirement, Permanent Disability or death,
the Participant shall be entitled to the vested portion of
his Account, which shall be distributed on the date and in
the form specified in Article 8.
(b) 100% Vesting in Employee Contributions and Certain
Sub-Accounts. A Participant shall always be one hundred
percent (100%) vested in his Pre-Tax Contribution Account,
Voluntary After-Tax Contribution Account, Qualified
Nonelective Contribution Account, and Rollover Account.
(c) Vesting Schedule in Employer Contributions. Any Participant
who terminates Employment for any reason other than
Retirement, Permanent Disability or death shall be vested in
his Stock Bonus Contribution Account and Employer Matching
Contribution Account pursuant to the vesting schedule set
forth below.
- 27 -
<PAGE> 35
<TABLE>
<CAPTION>
Years of Credited Service
as of Termination Date Vested Percentage
---------------------- -----------------
<S> <C>
Less than 3 Years 0%
3 Years 33-1/3%
4 Years 66-2/3%
5 Years 100%
</TABLE>
(d) Prior Employer Account. See Schedule C for the vesting
provisions applicable to a Participant's Prior Employer
Account.
(e) Forfeiture. That portion of the Participant's Account which
is not vested upon the Participant's Termination Date shall
be forfeited in accordance with Section 7.05.
7.05 Forfeitures.
(a) No Distribution of Account Prior to Break in Service. A
Participant who has a Termination Date but who does not
receive a Distribution of his vested Account prior to
incurring a Break in Service shall, upon incurring the Break
in Service, forfeit the non-vested portion of his Account. If
the terminated Participant resumes Employment with the
Employer prior to incurring a Break in Service, then the
Participant's entire Account, unreduced by any forfeiture,
shall become his beginning Account on the date he resumes
participation in the Plan.
(b) Distribution of Vested Account Prior to Break in Service. A
Participant who has a Termination Date and receives a
Distribution of his entire vested Account prior to incurring
a Break in Service, shall, upon such Distribution, forfeit
the non-vested portion of his Account. A Participant who is
not vested in any portion of his Account shall be deemed to
have received a Distribution of his entire vested account
upon his Termination Date and the Participant's non-vested
Account shall be immediately forfeited.
(c) Repayment of Account; Restoration of Non-Vested Account.
Except as provided below, a Participant who is re-hired by
the Employer shall have the right to repay to the Plan the
portion of the Participant's Account which was previously
distributed to him. In the event the Participant repays the
entire Distribution he received from the Plan, the Employer
shall restore the non-vested portion of the Participant's
Account. A Participant's Account shall first be restored, to
the extent possible, out of forfeitures under the Plan in the
Plan Year in which he was reemployed. To the extent such
forfeitures are insufficient to restore the Participant's
Account, restoration shall be made from Employer
Contributions. A Participant who
- 28 -
<PAGE> 36
was deemed to have received a Distribution of his vested
Account (see subsection (b) above) shall be deemed to have
repaid such vested Account if such Participant is rehired
before incurring a Break in Service.
(d) Restrictions of Repayment Account. Notwithstanding anything
to the contrary in this Plan, a Participant shall not have
the right to repay to the Plan the portion of his Account
which was previously distributed to him after any of the
following events: (i) the Participant incurs a Break in
Service before returning to Employment, (ii) the Participant
fails to repay the prior Distribution within five years after
the Participant is re-employed by the Employer, or (iii) the
Participant received a Distribution of his entire Account
balance at the time of such earlier Distribution.
(e) Allocation of Forfeitures. See Section 5.05 for the
allocation of forfeitures.
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<PAGE> 37
ARTICLE 8
DISTRIBUTIONS
8.01 Commencement of Distribution.
The Participant's Account shall be distributed at the earliest of the
following dates:
(a) Termination of Employment. If a Participant has a Termination
Date other than on account of death, the Participant's
Account will normally commence to be distributed no later
than 90 days following the end of the calendar quarter in
which such Participant requests a Distribution of his
Account. Such request shall be made on a form provided by the
Committee. See Section 8.01(c) for circumstances where the
Participant's consent to a Distribution is not required.
(b) Death. If a Participant has a Termination Date on account of
death, the Participant's Account shall normally be
distributed within 90 days after the Participant's death
unless the particular facts and circumstances require a
longer waiting period.
(c) Consent of Participant. A Participant's consent to a
Distribution of his Account shall not be required in the
circumstances described below, and the Committee shall direct
the Trustee to distribute the Participant's Account as
provided below:
(i) Account Less Than $3,500. If the Participant's
vested Account balance is less than or equal to
$3,500 ($5,000 on or after January 1, 1998) at the
time of the Distribution (as well as at the time of
any Prior Distribution), such Account will normally
be distributed in a lump sum no later than 90 days
after the end of the calendar quarter in which such
Termination Date occurred.
(ii) Age 70-1/2. If a distribution is required under
Section 8.08 (relating to mandatory distributions
for Participants age 70-1/2), the Participant's
Account will be distributed as provided in such
Section.
(iii) Retirement After Age 65. If a Participant has
incurred a Termination Date and is age 65 or older,
the Plan shall begin distribution of the
Participant's Account no later than 60 days
following the end of the Plan Year in which the
Participant attains age 65 or, if later, within 60
days following the end of the Plan Year in which the
Participant has a Termination Date.
- 30 -
<PAGE> 38
(d) In-Service Withdrawals. Hardship withdrawals (see Article 9)
and age 59-1/2 distribution (see Section 8.11) shall normally
commence no later than 90 days after such request is approved
by the Committee.
(e) Committee Direction to Trustee. The Committee shall issue
directions to the Trustee concerning the recipient and the
distribution date of benefits which are to be paid from the
Trust pursuant to the Plan.
(f) Committee Guidelines. The Committee may establish for
administrative purposes, uniform and nondiscriminatory
guidelines concerning the commencement of benefits.
8.02 Method of Distribution.
(a) Except as provided in Section 8.03, the sole method of
distribution of a Participant's Account (regardless of
whether such distribution is made by reason of withdrawal or
Termination Date) shall be payment in a single lump sum.
(c) Distributions shall be made in cash.
8.03 Annuity Option for A&A Plan Benefits.
Assets (and applicable earnings) held in this Plan that were
originally contributed to Thrift Plan for Employees of Alexander &
Alexander Services, Inc. and Subsidiaries and transferred to this Plan
shall be separately accounted for ("A&A Plan Benefits"). A Participant
(or Beneficiary, if applicable) may elect to receive a distribution of
his or her A&A Plan Benefits in a lump sum, in the form of a joint and
survivor annuity (with or without a period certain), or in a single
life annuity.
8.04 Special Rules Applicable to Annuity Distributions.
This Section 8.04 shall apply to a Participant only if and when the
Participant elects to receive an annuity distribution of the
Participant's A&A Plan Benefit. After a Participant elects to receive
a Distribution of his A&A Plan Benefit in the form of an annuity, the
Participant's form of distribution and Beneficiary designation shall
be governed by Schedule D to the extent inconsistent with this Article
8. In addition, the notice requirement of Schedule D shall apply.
- 31 -
<PAGE> 39
8.05 Death Benefits.
(a) Death Benefits If Section 8.04 Applies. If the provisions of
Section 8.04 apply to the Participant (i.e., the Participant
previously elected to receive a Distribution of his or her
A&A Plan Benefits in the form of an annuity) and the
Participant dies prior to his Annuity Starting Date, the
Participant's Account shall be distributed in accordance with
the Pre-Retirement Survivor Annuity rules set forth in
Schedule D.
(b) Death Benefits if Section 8.04 Does Not Apply. If the
provisions of Section 8.04 does not apply (i.e., the
Participant has never elected to receive a Distribution of
his or her A&A Plan Benefits in the form of an annuity) and
the Participant dies, the Participant's vested Account shall
be distributed to the Participant's Beneficiary in a lump
sum. The Participant's Account will not be distributed in a
joint and survivor annuity or single life annuity.
8.06 Payment to Minors and Incapacitated Persons.
In the event that any amount is payable to a minor or to any person
who, in the judgment of the Committee, is incapable of making proper
disposition thereof, such payment shall be made for the benefit of
such minor or such person in any of the following ways as the
Committee, in its sole discretion, shall determine:
(a) By payment to the legal representative of such minor or such
person;
(b) By payment directly to such minor or such person;
(c) By payment in discharge of bills incurred by or for the
benefit of such minor or such person. The Trustee shall make
such payments as directed by the Committee without the
necessary intervention of any guardian or like fiduciary, and
without any obligation to require bond or to see to the
further application of such payment. Any payment so made
shall be in complete discharge of the Plan's obligation to
the Participant and his Beneficiaries.
8.07 Application for Benefits.
The Committee may require a Participant or Beneficiary to complete and
file with the Committee certain forms as a condition precedent to the
payment of benefits. The Committee may rely upon all such information
given to it, including the Participant's current mailing address. It
is the responsibility of all persons interested in distributions from
the Trust Fund to keep the Committee informed of their current mailing
addresses.
- 32 -
<PAGE> 40
8.08 Special Distribution Rules.
(a) To the extent that the distribution rules described in this
Section provide a limitation upon distribution rules stated
elsewhere in this Plan, the distribution rules stated in this
Section shall take precedence over such conflicting rules.
However, under no circumstances shall the rules stated in
this Section be deemed to provide distribution rights to
Participants or their Beneficiaries which are more expansive
or greater than the distribution rights stated elsewhere in
this Plan. For example, if the Plan requires distributions to
commence at age 65 for Participants who have terminated
Employment, distributions must commence at age 65 and may not
be delayed to age 70-1/2.
(b) In no event may the distribution of a Participant's Account
commence later than April 1 following the later of the
calendar year in which the Participant (i) attains age 70-1/2
or (ii) terminates employment. However, a Participant who is
a 5 Percent Owner (as defined in Section 13.04) must receive
a distribution of his Account no later than April 1 following
the calendar year in which the Participant attains age 70-1/2
(collectively the "required beginning date").
(c) The entire interest of each Participant shall be distributed,
beginning not later than the required beginning date, in a
single lump sum or, if the provisions of Section 8.04 apply,
in the manner described in Schedule D.
(d) If a Participant dies before the required beginning date, the
Participant's vested Account must be distributed in a lump
sum within five years after the death of the Participant or,
if the provisions of Section 8.04 apply, in the manner
described in Schedule D.
(e) Notwithstanding anything to the contrary herein,
distributions under the Plan will comply with Treasury
Regulations issued under Code Section 401(a)(9) and any other
provisions reflecting Code Section 401(a)(9) as prescribed by
the Commissioner of the Internal Revenue Service.
8.09 Distributions Pursuant to Qualified Domestic Relations Orders.
Notwithstanding anything to the contrary in this Plan, a "qualified
domestic relations order", as defined in Code Section 414(p), may
provide that any amount to be distributed to an alternate payee may be
distributed immediately even though the Participant is not yet
entitled to a distribution under the Plan. The intent of this Section
is to provide for the distribution of benefits to an alternate payee
as permitted by Treasury Regulation 1.401(a)-13(g)(3).
- 33 -
<PAGE> 41
8.10 Direct Rollovers.
(a) In General. Notwithstanding any provision of the Plan to the
contrary that would otherwise limit a Distributee's election
under this Section, a Distributee may elect, at the time and
in the manner prescribed by the Plan Administrator, to have
any portion of an eligible rollover distribution paid
directly to an eligible retirement plan specified by the
Distributee in a direct rollover.
(b) Definitions.
Eligible Rollover Distribution. An Eligible Rollover
Distribution is any distribution of all or any portion of the
balance to the credit of the Distributee, except that an
Eligible Rollover Distribution does not include (i) any
distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made
for the life (or life expectancy) of the Distributee or the
joint lives (or joint life expectancies) of the Distributee
and the Distributee's designated Beneficiary, or for a
specified period of ten years or more; (ii) any distribution
to the extent such distribution is required under Section
401(a)(9) of the Code; and (iii) the portion of any
distribution that is not includable in gross income
(determined without regard to the exclusion for net
unrealized appreciation with respect to employer securities).
Eligible Retirement Plan. An Eligible Retirement Plan is an
individual retirement account described in Section 408(a) of
the Code, an individual retirement annuity described in
Section 408(b) of the Code, an annuity plan described in
Section 403(a) of the Code, or a qualified trust described in
Section 401(a) of the Code, that accepts the Distributee's
Eligible Rollover Distribution. However, in the case of an
Eligible Rollover Distribution to the surviving spouse, an
Eligible Retirement Plan is an individual retirement account
or individual retirement annuity.
Distributee. A Distributee includes an Employee or former
Employee. In addition, the Employee's or former Employee's
surviving spouse and the Employee's or former Employee's
spouse or former spouse who is an alternate payee under a
qualified domestic relations order, as defined in Section
414(p) of the Code, are Distributees with regard to the
interest of the spouse or former spouse.
Direct Rollover. A Direct Rollover is a payment by the Plan
to the Eligible Retirement Plan specified by the Distributee.
(c) Waiver of 30-day Notice. If a distribution is one to which
Sections 401(a)(11) and 417 of the Internal Revenue Code do
not apply, such
- 34 -
<PAGE> 42
distribution may commence less than 30 days after the notice
required under section 1.411(a)-11(c) of the Income Tax
Regulations is given, provided that:
(1) the Plan Administrator clearly informs the
Participant that the Participant has a right to a
period of at least 30 days after receiving the
notice to consider the decision of whether or not to
elect a distribution (and, if applicable, a
particular distribution option), and
(2) the Participant, after receiving the notice,
affirmatively elects a distribution.
8.11 Participant Withdrawals After Age 59-1/2.
At any time after a Participant in active Employment attains age
59-1/2, such Participant may elect to withdraw all or part of his or her vested
Account (including any earnings thereon). In no event shall a Participant be
permitted to repay the amount of his or her in-service withdrawal. If the
Participant withdraws only a portion of his or her vested Account, the
Committee shall determine (in a nondiscriminatory manner) the source of the
Accounts and Investment Funds from which the withdrawal shall be made.
Participants must be in active Employment to request an age 59-1/2 withdrawal.
A Participant may receive only one age 59-1/2 withdrawal each calendar year. A
Participant who receives an age 59-1/2 withdrawal is not suspended from
continuing or commencing to make (in accordance with the Plan) Pre-Tax
contributions to the Plan.
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<PAGE> 43
ARTICLE 9
IN-SERVICE WITHDRAWALS; LOANS
9.01 Hardship Withdrawal of Account.
(a) In General. Any Participant may request the Committee to
distribute to him part or all of his vested Account (other
than amounts held in the Participant's Qualified Nonelective
Contribution Account and certain earnings on the
Participant's Account as provided below).
(b) No Distribution of Earnings. Income or gain that is allocated
to the Participant's Pre-Tax Contribution Account may not be
distributed in a hardship withdrawal.
9.02 Definition of Hardship.
Hardship shall mean an immediate and heavy financial need experienced
by reason of:
(a) Expenses of any accident to or sickness of such Participant,
his Spouse or his dependents or expenses necessary to provide
medical care for such Participant, his Spouse or his
dependents;
(b) Purchase of a primary residence for such Participant;
(c) Payment of tuition and related educational fees for the next
twelve months of post-secondary education for the
Participant, his Spouse, children or dependents;
(d) The need to prevent the eviction of the Participant from his
principal residence or foreclosure on the Participant's
principal residence; or
(e) Other safe harbor financial hardships as commanded by
Treasury Regulations or other regulatory or judicial
authority in the firm and approved by the Committee.
9.03 Maximum and Minimum Hardship Distribution.
A hardship distribution cannot exceed the amount required to meet the
immediate financial need created by the hardship (after taking into
account applicable federal, state, or local income taxes and
penalties) and not reasonably available from other resources of the
Participant. In order to ensure compliance with this requirement, the
Committee may require the Participant to satisfy any or all of the
provisions
- 36 -
<PAGE> 44
described below in (a), (b), or (c) below as a condition precedent to
the Participant receiving a hardship distribution:
(a) No Other Sources Available. Certification by the Participant
on a form provided by the Committee for such purpose that the
financial need cannot be relieved (1) through reimbursement
or payment by insurance; (2) by reasonable liquidation of the
Participant's assets; (3) by ceasing Employee Contributions
under the Plan; (4) by other in-service distributions
(including loans and other in-service withdrawals) under the
Plan and under any other plan maintained by the Employer; or
(5) by borrowing from commercial lenders on reasonable
commercial terms.
(b) Receipt of all Distributions Available; Suspension of Future
Contributions. Receipt by the Participant of all
distributions that he is eligible to receive (including loans
and other in-service withdrawals) under this Plan and under
any other plan maintained by the Employer.
In addition, the Participant must agree to the following
limitations and restrictions:
(1) The Participant's Pre-Tax Contributions and
Voluntary After-Tax Contributions shall
automatically be suspended beginning on the first
payroll period that commences after such Participant
requests and receives a hardship distribution. Such
Participant may resume making Pre-Tax Contributions
and/or Voluntary After-Tax Contributions only on the
first day of a calendar month which is at least 12
months after the effective date of such suspension
and only after informing the Committee in writing at
least 30 days (or such lesser time as specified by
the Committee) prior to the date on which the
Pre-Tax Contributions and/or Voluntary After-Tax
Contributions are to resume.
(2) The maximum Pre-Tax Contribution the Participant may
make for the calendar year following his hardship
distribution shall be reduced by the amount of
Pre-Tax Contributions made by the Participant during
the calendar year in which he received his hardship
distribution.
(3) The Participant shall be prohibited under a legally
enforceable agreement from making an employee
contribution to this Plan and any other plan
maintained by the Employer for at least 12 months
after the receipt of the hardship distribution. For
this purpose, the phrase "any other plan" includes
all qualified and nonqualified plans of deferred
compensation, stock option plans and stock purchase
- 37 -
<PAGE> 45
plans. It does not include a health or welfare plan
including one that is part of a section 125
cafeteria plan.
(c) Other. Any other condition or method approved by the Internal
Revenue Service.
9.04 Procedure to Request Hardship.
The request to receive a hardship distribution shall be made on such
forms and following such procedures as the Committee may prescribe
from time to time. Under no circumstances shall the Committee permit a
Participant to repay to the Plan the amount of any withdrawal by a
Participant under this Section.
9.05 Authority to Establish Loan Program.
The Committee is authorized and directed to administer the loan
program.
9.06 Eligibility for Loans.
Loans shall be available to all Participants on a reasonably
equivalent basis. For the purposes of receiving a loan, the term
"Participant" shall include any Former Participant who is a "party in
interest" as defined in ss.3(14) of ERISA.
9.07 Loan Amount.
(a) Minimum Loan. No loan of less than $500 will be made.
(b) Maximum Loan. A loan to any Participant (determined
immediately after the origination of the loan) shall not
exceed the lesser of:
(1) Fifty percent (50%) of the Participant's vested
balance in his Account as of the Valuation Date with
respect to which the loan is processed; or
(2) $50,000, reduced by the excess (if any) of (A) the
highest outstanding balance of loans from the Plan
during the one-year period ending on the day before
the date on which such loan was made, over (B) the
outstanding loan balance of loans from the Plan on the
date on which the loan was made.
9.08 Maximum Number of Loans.
No more than one loan may be outstanding at any time. Furthermore, at
least ten days must elapse between the payoff of a loan and the
request for a second loan.
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9.09 Assignment of Account.
Each loan shall be supported by the Participant's promissory note for
the amount of the loan, including interest, payable to the order of
the Trustee. In addition, each loan shall be supported by an
assignment of fifty percent (50%) of the Participant's right, title
and interest in and to his Account and shall be supported by any other
reasonable security required by the Trustee.
9.10 Interest.
Interest shall be charged on any such loan at a rate equivalent to the
prime rate charged by a commercial lender at the beginning of the
calendar quarter in which the loan is made plus one percent (1%).
9.11 Term of Loan.
The maximum repayment term of any non-home loan is sixty (60) months.
The maximum repayment term of any home loan is ten years. Except for
Former Participants described in Section 9.06, the term of the loan
may not extend beyond the Participant's Termination Date. The
Committee may, in its discretion, establish a shorter repayment term
than the maximum repayment term otherwise permitted under the Plan.
9.12 Level Amortization.
Each loan shall provide for level amortization with payments to be
made at such regular intervals as the Committee determines in its
discretion, but not less frequently than once every three months over
the term of the loan. Loans to Participants in active Employment shall
be repaid through payroll deductions and the Participant shall be
required to authorize such payroll deduction as a condition to
receiving the loan.
9.13 Directed Investment.
A Participant who requests a loan shall be deemed to have directed the
Committee to invest assets held in his Account by the amount of the
loan, and until such loan is repaid, such loan shall be considered a
directed investment of the Participant's Account hereunder. The Plan
monies which are used to fund the Participant loan shall be withdrawn
first from a Participant's Voluntary After-Tax Contribution Account
and second from a Participant's Investment Funds on a pro rata basis
(other than from the Company Stock Fund) according to the value of the
Investment Funds as of the Valuation Date coincident with or
immediately preceding the date such loan is made. Amounts will be
withdrawn from the Company Stock Fund only after all other Investment
Funds have been depleted. Principal and interest payments on the loan
will be allocated to the Participant's
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Investment Funds according to the Participant's investment election at
the time of the payment. However, if the Participant does not have an
investment election in place at the time of repayment, the principal
and interest payments will be allocated to the Participant's
Investment Funds on a pro rata basis based on the Participant's most
recent investment election at the time of repayment.
9.14 Other Requirements.
The Committee may establish such additional guidelines and rules as it
deems necessary. Such guidelines and rules shall be set forth in the
loan application and the terms specified in such loan application are
hereby incorporated by reference in the Plan. The Committee may amend
or modify the loan application as it deems necessary to carry out the
provisions of this Article Nine.
9.15 Distribution of Loan.
Loan proceeds will be distributed as soon as practicable after the
loan is approved and after the Participant completes all documentation
necessary to make such loan.
9.16 Suspension of Loan Repayments During Military Service.
The Committee may in its discretion suspend a Participant's obligation
to make loan repayments as permitted under Section 414(u)(4) of the
Internal Revenue Code.
9.17 Valuation for Purposes of In-Service Withdrawals or Loans.
The Participant's Account for purposes of determining the amount of an
in-service withdrawal or loan shall be determined as of the Valuation
Date preceding the date the Committee approves the in-service
distribution or loan. However, if the Committee in its discretion
determines that there has been a significant change in the market
value of the assets held in the Fund since the Valuation Date which
precedes the proposed date of distribution, the Committee in its
discretion and on a non-discriminatory basis may postpone the
in-service distribution or loan until a reasonable time following the
next Valuation Date and shall use the value of the Account computed as
of the later Valuation Date in determining the amount of the
distribution. Alternatively, the Committee may implement such other
measures as it deems appropriate, including suspension of withdrawals
or special valuations, to insure that each Participant's Account
receives an appropriate allocation of income or loss.
9.18 Withdrawal from Voluntary After-Tax Contribution Account.
Any Participant may request the Committee to distribute to him from
25% to 100% of his or her Voluntary After-Tax Contribution Account in
25% increments.
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Upon receipt of an in-service withdrawal from the Participant's
Voluntary After-Tax Contribution Account, the Participant may not make
additional Voluntary After-Tax Contributions to the Plan for six
months from the date of such in-service withdrawal.
9.19 Withdrawal from Rollover Account.
Any Participant may request the Committee to distribute to him from
25% to 100% of his or her Rollover Account in 25% increments. Upon
receipt of an in-service withdrawal from the Participant's Rollover
Account, the Participant may not make additional Pre-Tax Contributions
or Voluntary After-Tax Contributions to the Plan for six months from
the date of such in-service withdrawal.
9.20 Withdrawal from Employer Matching Contribution Account.
Once every twenty-four month period, any Participant may request the
Committee to distribute to him from 25% to 100% of his or her vested
interest in the Participant's Employer Matching Contribution Account
in 25% increments. Upon receipt of an in-service withdrawal from the
Participant's Employer Matching Contribution Account, the Participant
may not make additional Pre-Tax Contributions or Voluntary After-Tax
Contributions to the Plan for six months from the date of such
in-service withdrawal.
9.21 Other Rules for In-Service Distributions.
(a) All in-service distributions shall me made in the form of a
single lump sum cash distribution.
(b) If the Participant withdraws only a portion of a vested
Account, the Committee shall determine (in a
nondiscriminatory manner) the source of the Accounts and
Investment Funds from which the withdrawal shall be made
(with amounts withdrawn from the Company Stock Fund last).
(c) In no event shall a Participant be permitted to repay the
amount of his or her in-service withdrawal.
(d) The request to receive an in-service distribution shall be
made on such forms and following such procedures as the
Committee may prescribe from time to time.
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ARTICLE 10
ADMINISTRATION OF THE PLAN
10.01 Named Fiduciaries.
The following parties are named as Fiduciaries of the Plan and shall
have the authority to control and manage the operation and
administration of the Plan:
(i) The Company;
(ii) The Board;
(iii) The Trustee;
(iv) The Committee.
The Fiduciaries named above shall have only the powers and duties
expressly allocated to them in the Plan and in the Trust Agreement
and shall have no other powers and duties in respect of the Plan;
provided, however, that if a power or responsibility is not
expressly allocated to a specific named fiduciary, the power or
responsibility shall be that of the Company. No Fiduciary shall have
any liability for, or responsibility to inquire into, the acts and
omissions of any other Fiduciary in the exercise of powers or the
discharge of responsibilities assigned to such other Fiduciary under
this Plan or the Trust Agreement.
10.02 Board of Directors.
The Board shall have the power to appoint and remove the members of
the Committee. The Board shall have no other responsibilities with
respect to the Plan.
10.03 Trustee.
The Trustee shall exercise all of the powers and duties assigned to
the Trustee as set forth in the Trust Agreement. The Trustee shall
have no other responsibilities with respect to the Plan.
10.04 Committee.
(a) A Committee of one or more individuals shall be appointed
by and serve at the pleasure of the Board to administer the
Plan. Any Participant, officer, or director of the Employer
shall be eligible to be appointed a member of the Committee
and all members shall serve as such without compensation.
Upon termination of his employment with the Employer,
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or upon ceasing to be an officer or director, if not an
employee, he shall cease to be a member of the Committee.
The Board shall have the right to remove any member of the
Committee at any time, with or without cause. A member may
resign at any time by written notice to the Committee and
the Board. If a vacancy in the Committee should occur, a
successor shall be appointed by the Board. The Committee
shall by written notice keep the Trustee notified of
current membership of the Committee, its officers and
agents. The Committee shall furnish the Trustee a certified
signature card for each member of the Committee and for all
purposes hereunder the Trustee shall be conclusively
entitled to rely upon such certified signatures.
(b) The Board shall appoint a Chairman and a Secretary from
among the members of the Committee. All resolutions,
determinations and other actions shall be by a majority
vote of all members of the Committee. The Committee may
appoint such agents, who need not be members of the
Committee, as it deems necessary for the effective
performance of its duties, and may delegate to such agents
such powers and duties, whether ministerial or
discretionary, as the Committee deems expedient or
appropriate. The compensation of such agents shall be fixed
by the Committee; provided, however, that in no event shall
compensation be paid if such payment violates the
provisions of Section 408 of the Act and is not exempted
from such prohibitions by Section 408 of the Act.
(c) The Committee shall have complete control of the
administration of the Plan with all powers necessary to
enable it to properly carry out the provisions of the Plan.
In addition to all implied powers and responsibilities
necessary to carry out the objectives of the Plan and to
comply with the requirements of the Act, the Committee
shall have the following specific powers and
responsibilities:
(1) To construe the Plan and Trust Agreement and to
determine all questions arising in the
administration, interpretation and operation of
the Plan;
(2) To amend any or all of the provisions of the Plan
and to terminate the Plan in whole or in part
pursuant to the procedures provided hereunder;
(3) To decide all questions relating to the
eligibility of Employees to participate in the
benefits of the Plan and Trust Agreement;
(4) To determine the benefits of the Plan to which any
Participant, Beneficiary or other person may be
entitled;
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<PAGE> 51
(5) To keep records of all acts and determinations of
the Committee, and to keep all such records, books
of accounts, data and other documents as may be
necessary for the proper administration of the
Plan;
(6) To prepare and distribute to all Plan Participants
and Beneficiaries information concerning the Plan
and their rights under the Plan, including, but
not limited to, all information which is required
to be distributed by the Act, the regulations
thereunder, or by any other applicable law;
(7) To file with the Secretary of Labor such reports
and additional documents as may be required by the
Act and regulations issued thereunder, including,
but not limited to, summary plan description,
modifications and changes, annual reports,
terminal reports and supplementary reports;
(8) To file with the Secretary of the Treasury all
reports and information required to be filed by
the Internal Revenue Code, the Act and regulations
issued under each;
(9) To do all things necessary to operate and
administer the Plan in accordance with its
provisions and in compliance with applicable
provisions of federal law; and
(10) To appoint and remove the Trustee.
(d) To enable the Committee to perform its functions, the
Employer shall supply full and timely information of all
matters relating to the compensation and length of service
of all Participants, their retirement, death or other cause
of , and such other pertinent facts as the Committee may
require. The Committee shall advise the Trustee of such
facts and issue to the Trustee such instructions as may be
required by the Trustee in the administration of the Plan.
The Committee and the Employer shall be entitled to rely
upon all certificates and reports made by a Certified
Public Accountant selected or approved by the Employer.
The Committee, the Employer and its officers and the
Trustee, shall be fully protected in respect of any action
suffered by them in good faith in reliance upon the advice
or opinion of any accountant or attorney, and all action so
taken or suffered shall be conclusive upon each of them and
upon all other persons interested in the Plan.
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<PAGE> 52
10.05 Standard of Fiduciary Duty.
Any Fiduciary, or any person designated by a Fiduciary to carry out
fiduciary responsibilities with respect to the Plan, shall discharge
his duties solely in the interests of the Participants and
Beneficiaries for the exclusive purpose of providing them with
benefits and defraying the reasonable expenses of administering the
Plan. Any Fiduciary shall discharge his duties with the care, skill,
prudence and diligence under the circumstances then prevailing that
a prudent man acting in a like capacity and familiar with such
matter would use in the conduct of an enterprise of a like character
and with like aims. Any Fiduciary shall discharge his duties in
accordance with the documents and instruments governing the Plan
insofar as such documents and instruments are consistent with the
provisions of the Act. Notwithstanding any other provisions of the
Plan, no Fiduciary shall be authorized to engage in any transaction
which is prohibited by Sections 408 and 2003(a) of the Act or
Section 4975 of the Code in the performance of its duties hereunder.
10.06 Claims Procedure.
Any Participant, Former Participant, Beneficiary, or Spouse or
authorized representative thereof (hereinafter referred to as
"Claimant"), may file a claim for benefits under the Plan by
submitting to the Committee a written statement describing the
nature of the claim and requesting a determination of its validity
under the terms of the Plan. Within sixty (60) days after the date
such claim is received by the Committee, it shall issue a ruling
with respect to the claim.
If special circumstances require an extension of time for
processing, the Committee shall send the Claimant written notice of
the extension prior to the termination of the 60-day period. In no
case, however, shall the extension of time delay the Committee's
decision on such appeal request beyond one hundred twenty (120) days
following receipt of the actual request.
If the claim is wholly or partially denied, written notice shall be
furnished to the Claimant, which notice shall set forth in a manner
calculated to be understood by the Claimant:
(1) The specific reason or reasons for denial;
(2) Specific reference to pertinent Plan provisions on which
the denial is based;
(3) A description of any additional material or information
necessary for the Claimant to perfect the claim and an
explanation of why such material or information is
necessary; and
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<PAGE> 53
(4) An explanation of the claims review procedures.
Any Claimant whose claim for benefits has been denied, may appeal
such denial by resubmitting to the Committee a written statement
requesting a further review of the decision within sixty (60) days
of the date the Claimant receives notice of such denial. Such
statement shall set forth the reasons supporting the claim, the
reasons such claim should not have been denied, and any other issues
or comments which the Claimant deems appropriate with respect to the
claim.
If the Claimant shall request in writing, the Committee shall make
copies of the Plan documents pertinent to his claim available for
examination of the Claimant.
Within sixty (60) days after the request for further review is
received, the Committee shall review its determination of benefits
and the reasons therefor and notify the Claimant in writing of its
final decision.
If special circumstances require an extension of time for
processing, the Committee shall send the Claimant written notice of
the extension prior to the termination of the 60-day period. In no
case, however, shall the extension of time delay the Committee's
decision on such appeal request beyond one hundred twenty (120) days
following receipt of the actual request.
Such written notice shall include specific reasons for the decision,
written in a manner calculated to be understood by the Claimant,
with specific references to the pertinent Plan provisions on which
the decision is based. The Committee's decision of appeal may be
reviewed by the Board, which shall have the right to overrule the
Committee.
10.07 Indemnification of Committee. To the extent permitted under the Act,
the Plan shall indemnify the Board and the Committee against any
cost or liability which they may incur in the course of
administering the Plan and executing the duties assigned pursuant to
the Plan except for costs or liabilities attributable to gross and
intentional negligence. The Employer shall indemnify the Committee
and the members of the Board against any personal liability or cost
not provided for in the preceding sentence which they may incur as a
result of any act or omission in relation to the Plan or its
Participants except for costs or liabilities attributable to gross
and intentional negligence. The Employer may purchase fiduciary
liability insurance to insure its obligation under this Section.
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<PAGE> 54
ARTICLE 11
AMENDMENT AND TERMINATION
11.01 Right to Amend.
The Company intends for the Plan to be permanent so long as the
corporation exists; however, it reserves (through action of the
Committee) the right to modify, alter, or amend this Plan or the
Trust Agreement, from time to time, to any extent that it may deem
advisable, including, but not limited to any amendment deemed
necessary to insure the continued qualification of the Plan under
Sections 40l(a) and 401(k) of the Code or to insure compliance with
the Act; provided, however, that the Company shall not have the
authority to amend this Agreement in any manner which will:
(a) Permit any part of the Fund (other than such part as is
required to pay taxes and administrative expenses) to be
used for or diverted to purposes other than for the
exclusive benefit of the Participants or their
Beneficiaries;
(b) Cause or permit any portion of the funds to revert to or
become the property of the Employer;
(c) Change the duties, liabilities, or responsibilities of the
Trustee without its prior written consent.
See Section 16.11(c) regarding the power of an Affiliated Sponsor to
amend or terminate the Plan.
11.02 Termination and Discontinuance of Contributions.
The Company shall have the right at any time and for any reason to
terminate this Plan (hereinafter referred to as "Plan Termination").
Upon Plan Termination, the Committee shall direct the Trustee with
reference to the disposition of the Fund, after payment of any
expenses properly chargeable against the Fund. The Trustee shall
distribute all amounts held in Trust to the Participants and others
entitled to Distributions based on each Participant's Account
balance in the Plan. In the event that this Plan is partially
terminated, then the provisions of this Section 11.02 shall apply,
but solely with respect to the Employees affected by the partial
termination. The termination of sponsorship of the Plan by any
Affiliated Sponsor shall not affect the sponsorship of the Plan by
the Company or any other Affiliated Sponsor.
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<PAGE> 55
11.03 IRS Approval of Termination.
Notwithstanding Section 11.02, the Trustee shall not be required to
make any Distribution from this Plan in the event of complete or
partial termination until the authorized officials of the Internal
Revenue Service shall have determined that there will be no
liability against the Trustee by reason of such Distribution.
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ARTICLE 12
SPECIAL DISCRIMINATION RULES
12.01 Small Business Job Protection Act.
Certain provisions of the Code Section 401(k) and 401(m) were modified
as part of the Small Business Job Protection Act. This Article is not
intended to serve as a formal election of the various testing
methodologies available following such modifications. Instead, such
elections will be made at the time the applicable testing is performed
or as otherwise required in subsequent IRS pronouncements.
12.02 Definitions.
Actual Contribution Percentage or ACP shall mean the ratio (expressed
as a percentage) of (i) the sum of the Employer Matching Contributions
and Voluntary After-Tax Contributions on behalf of the Participant for
the Plan Year and, to the extent permitted in Treasury Regulations and
elected by the Employer, the Participant's Qualified Elective
Deferrals and Qualified Nonelective Contributions to (ii) the
Participant's Compensation for the Plan Year. The Employer, on an
annual basis, may elect to include or not to include Qualified
Elective Deferrals and Qualified Nonelective Contributions in
computing the ACP for a Plan Year. An Employer may elect on an annual
basis to count a Participant's Employer Matching Contribution toward
satisfying the required minimum contribution under Section 15.03
(minimum contribution for Non-Key Employees in a top-heavy plan) in
lieu of including such contributions in the ACP. If a Participant (as
defined below) does not receive an allocation of Employer
Contributions for a Plan Year, such Participant's ACP for the Plan
Year shall be zero.
Actual Deferral Percentage or ADP shall mean the ratio (expressed as a
percentage) of (i) the sum of Pre-Tax Contributions on behalf of a
Participant for the Plan Year (excluding any Excess Deferrals by a
Non-highly Compensated Employee) and, to the extent permitted in
Treasury Regulations and elected by the Employer, the Participant's
Qualified Nonelective Contributions to (ii) the Participant's
Compensation for the Plan Year. The Employer, on an annual basis, may
elect to include or not to include Qualified Nonelective Contributions
in computing the ADP for a Plan Year. In the case of a Participant (as
defined below) who does not make a Pre-Tax Contribution for a Plan
Year and is not allocated a Qualified Nonelective Contribution for
such Plan Year, such Participant's ADP for the Plan Year shall be
zero.
Average Actual Contribution Percentage shall mean the average
(expressed as a percentage) of the Actual Contribution Percentages of
the Participants in a group.
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The percentage shall be rounded to the nearest one-hundredth of one
percent (four decimal places).
Average Actual Deferral Percentage shall mean the average (expressed
as a percentage) of the Actual Deferral Percentages of the
Participants in a group. The percentage shall be rounded to the
nearest one-hundredth of one percent (four decimal places).
Combined ADP and ACP Test shall have the meaning as defined in Section
12.10.
Compensation for purposes of this Article 12 shall be that definition
selected by the Committee that satisfies the requirements of Code
Sections 414(s) and 401(a)(17). Such definition may change from year
to year but must apply uniformly among all Eligible Employees being
tested under the Plan for a given Plan Year and among all Employees
being tested under any other plan that is aggregated with this Plan
during the Plan Year. If no such definition is elected by the
Committee (either formally or informally), Compensation shall have the
meaning described below.
If the Committee fails to select a different definition, Compensation
shall mean the gross annual earnings reported on the Participant's IRS
Form W-2 (box 1 or its comparable location as provided on Form W-2 in
future years) as required by Code Sections 6041(d) and 6051(a)(3). In
addition, Compensation shall include compensation which is not
includable in the Participant's IRS Form W-2 (Box 1) by reason of Code
Section 402(a)(8) (employee Salary Deferrals under a Code Section
401(k) plan) or Code Section 125 (salary deferrals under a cafeteria
plan). Compensation shall not include amounts paid or reimbursed by
the Employer for moving expenses if, at the time of the payment of
such moving expenses, it is reasonable to believe that the moving
expenses will be deductible by the Participant under Code Section 217.
Compensation shall be determined by ignoring any income exclusions
under Code Section 3401(a) based on the nature or location of
employment. In no event shall Compensation in excess of the
limitations of Code Section 401(a)(17) be taken into account for any
Employee.
Employer Matching Contributions. For purposes of this Article 12, an
Employer Matching Contribution for a particular Plan Year includes
only those contributions that are (i) allocated to the Participant's
Account under the Plan as of any date within such Plan Year, (ii)
contributed to the Trust no later than the end of the 12-month period
following the close of such Plan Year, and (iii) made on account of
such Participant's Pre-Tax Contributions for the Plan Year.
Excess Deferrals shall have that meaning as defined in Section 12.03.
Excess ACP Contributions shall have that meaning as defined in Section
12.09.
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Excess ADP Deferrals shall have that meaning as defined in Section
12.06.
Highly Compensated Employee. See Article 13.
Maximum Combined Percentage shall have the meaning as defined in
Section 12.10.
Non-highly Compensated Employee. See Article 13.
Participant. For purposes of this Article 12, a Participant shall mean
any Eligible Employee who (i) is eligible to receive an allocation of
an Employer Matching Contribution, even if no Employer Matching
Contribution is allocated due to the Eligible Employee's failure to
make a required Pre-Tax Contribution, (ii) is eligible to make an
Employee Contribution, including an Eligible Employee whose right to
make an Employee Contribution has been suspended because of an
election not to participate or a hardship distribution, and (iii) is
unable to receive an Employer Matching Contribution or make an
Employee Contribution because his Compensation is less than a stated
amount.
Pre-Tax Contributions. For purposes of this Article 12, a Pre-Tax
Contribution is taken into account only if the contribution (i) is
allocated to the Participant's Account under the terms of the Plan as
of any date within the Plan Year, and (ii) relates to Compensation
that would have been received by the Participant during the Plan Year
or within 2-1/2 months after the Plan Year but for the deferral
election. A Pre-Tax Contribution is considered to be allocated as of a
date within a Plan Year only if the allocation is not contingent on
participation in the Plan or performance of service after the Plan
Year to which the Pre-Tax Contribution relates.
Qualified Elective Deferral shall mean Pre-Tax Contributions
designated by the Committee as Qualified Elective Deferrals in order
to meet the ACP testing requirements of Section 12.07.
In addition, the following requirements must be satisfied:
(1) The aggregate of all Pre-Tax Contributions for the Plan Year
(including the Qualified Elective Deferrals) must satisfy the
ADP testing requirements set forth in Section 12.04(a).
(2) The aggregate of all Pre-Tax Contributions for the Plan Year
(excluding the Qualified Elective Deferrals) must satisfy the
ADP testing requirements set forth in Section 12.04(a).
(3) Qualified Elective Deferrals must satisfy all other
provisions of this Plan applicable to Pre-Tax Contributions
and shall remain part of the Participant's Pre-Tax
Contribution Account.
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<PAGE> 59
(4) Except as provided by this definition, Qualified Elective
Deferrals shall be excluded in determining whether any other
contribution or benefit satisfies the nondiscrimination
requirements of Code ss.ss. 401(a)(4) and 401(k)(3).
Qualified Nonelective Contribution shall mean an Employer contribution
designated by the Committee as a Qualified Nonelective Contribution in
order to meet the ADP testing requirements of Section 12.04 or the ACP
testing requirements of Section 12.07. In addition, the following
requirements must be satisfied:
(1) The Qualified Nonelective Contribution, whether or not used
to satisfy the requirements of Sections 12.04 or 12.07, must
meet the requirements of Code ss. 401(a)(4).
(2) Qualified Nonelective Contributions which are taken into
account in order to meet the requirements of Section 12.04 or
12.07 (as applicable) shall not be counted in determining
whether the testing requirements of any of such other
Sections are met.
(3) The Qualified Nonelective Contributions shall be subject to
all provisions of this Plan applicable to Pre-Tax
Contributions (except that Qualified Nonelective
Contributions cannot be distributed in a hardship
distribution).
(4) Except as provided in this paragraph, the Qualified
Nonelective Contributions shall be excluded in determining
whether any other contribution or benefit satisfies the
nondiscrimination requirements of Code ss.ss. 401(a)(4) and
401(k)(3).
12.03 Limit on Pre-Tax Contributions.
(a) Notwithstanding any other provision of the Plan to the
contrary, the aggregate of a Participant's Pre-Tax
Contributions during a calendar year may not exceed the amount
established by the Secretary of the Treasury pursuant to Code
Section 402(g) ($9,500 in 1997). Any Pre-Tax Contributions in
excess of the foregoing limit ("Excess Deferral"), plus any
income and minus any loss allocable thereto, may be
distributed to the applicable Participant no later than April
15 following the calendar year in which the Pre-Tax
Contributions were made.
(b) Any Participant who has an Excess Deferral during a calendar
year may receive a distribution of the Excess Deferral during
such calendar year plus any income or minus any loss allocable
thereto, provided (1) the Participant requests (or is deemed
to request) the distribution of the Excess Deferral, (2) the
distribution occurs after the date the Excess Deferral arose,
and
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(3) the Committee designates the distribution as a
distribution of an Excess Deferral.
(c) If a Participant makes a Pre-Tax Contribution under this Plan
and in the same calendar year makes a contribution to a Code
Section 401(k) plan containing a cash or deferred arrangement
(other than this Plan), a Code Section 408(k) plan
(simplified employee pension plan) or a Code Section 403(b)
plan (tax sheltered annuity) and, after the return of any
Excess Deferral pursuant to Section 12.03(a) and (b) the
aggregate of all such Pre-Tax Contributions and contributions
exceed the limitations contained in Code Section 402(g), then
such Participant may request that the Committee return all or
a portion of the Participant's Pre-Tax Contributions for the
calendar year plus any income and minus any loss allocable
thereto. The amount by which such Pre-Tax Contributions and
contributions exceed the Code Section 402(g) limitations will
also be known as an Excess Deferral.
(d) Any request for a return of Excess Deferrals arising out of
contributions to a plan described in Section 12.03(c) above
which is maintained by an entity other than the Employer must:
(1) be made in writing;
(2) be submitted to the Committee not later than the
March 1 following the Plan Year in which the Excess
Deferral arose (or such other date selected by the
Committee);
(3) specify the amount of the Excess Deferral; and,
(4) contain a statement that if the Excess Deferral is
not distributed, it will, when added to amounts
deferred under other plans or arrangements described
in Sections 401(k), 408(k),or 403(b) of the Code,
exceed the limit imposed on the Participant by
Section 402(g) of the Code for the year in which the
Excess Deferral occurred.
In the event an Excess Deferral arises out of contributions to
a plan (including this Plan) which is maintained by the
Employer, the Participant making the Excess Deferral shall be
deemed to have requested a return of the Excess Deferral.
(e) Pre-Tax Contributions may only be returned to the extent
necessary to eliminate a Participant's Excess Deferral. Excess
Deferrals returned to the Participant under this Section 12.03
shall not be treated as annual additions under the Plan. In no
event shall the returned Excess Deferrals for a
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particular calendar year exceed the Participant's aggregate
Pre-Tax Contributions for such calendar year.
(f) The income or loss allocable to a Pre-Tax Contribution that is
returned to a Participant pursuant to Section 12.03(a) or (c)
shall be determined by multiplying the income or loss
allocable to the Participant's Account for the calendar year
in which the Excess Deferral arose by a fraction. The
numerator of the fraction is the Excess Deferral. The
denominator of the fraction is the value of the Participant's
Account balance on the last day of the calendar year in which
the Excess Deferral arose reduced by any income allocated to
the Participant's Account for such calendar year and
increased by any loss allocated to the Participant's Account
for such calendar year.
(g) The income or loss allocable to an Excess Deferral that is
returned to a Participant pursuant to Section 12.03(b) shall
be determined using any reasonable method adopted by the Plan
to measure income earned or loss incurred during the Plan Year
or any other method authorized by the Internal Revenue Service
to compute the income earned or loss incurred for the period
commencing on January 1 of the calendar year in which the
Pre-Tax Contribution was made and ending on the date the
Excess Deferral was distributed.
(h) Any Employer Matching Contribution allocable to an Excess
Deferral that is returned to a Participant pursuant to this
Section 12.03 shall be forfeited notwithstanding the
provisions of Article 7 (vesting). For this purpose, however,
the Pre-Tax Contributions that are returned to the
Participant as an Excess Deferral shall be deemed to be first
those Pre-Tax Contributions for which no Employer Matching
Contribution was made and second those Pre-Tax Contributions
for which an Employer Matching Contribution was made.
Accordingly, if the Pre-Tax Contributions that are returned
to the Participant as Excess Deferrals were not matched, no
Employer Matching Contribution will be forfeited.
12.04 Average Actual Deferral Percentage.
(a) The Average Actual Deferral Percentage for Highly Compensated
Employees for each Plan Year and the Average Actual Deferral
Percentage for Non-highly Compensated Employees for the same
Plan Year must satisfy one of the following tests:
(1) The Average Actual Deferral Percentage for
Participants who are Highly Compensated Employees
for the Plan Year shall not exceed the Average
Actual Deferral Percentage for Participants who are
Non-highly Compensated Employees for the Plan Year
multiplied by 1.25; or
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(2) The excess of the Average Actual Deferral Percentage
for Participants who are Highly Compensated
Employees for the Plan Year over the Average Actual
Deferral Percentage for Participants who are
Non-highly Compensated Employees for the Plan Year
is not more than two percentage points, and the
Average Actual Deferral Percentage for Participants
who are Highly Compensated Employees is not more
than the Average Actual Deferral Percentage for
Participants who are Non-highly Compensated
Employees multiplied by 2.0.
(b) The permitted disparity between the Average Actual Deferral
Percentage for Highly Compensated Employees and the Average
Actual Deferral Percentage for Non-Highly Compensated
Employees may be further reduced as required by Section
12.10.
(c) If at the end of the Plan Year, the Plan does not comply with
the provisions of Section 12.04(a), the Employer may do any
or all of the following, except as otherwise provided in the
Code or Treasury Regulations:
(1) Distribute Pre-Tax Contributions to certain Highly
Compensated Employees as provided in Section 12.06;
(2) Make a Qualified Nonelective Contribution on behalf
of any or all of the Non-highly Compensated
Employees and aggregate such contributions with the
Non-highly Compensated Employees' Pre-Tax
Contributions Deferrals as provided in Section 12.02
(definition of ADP).
12.05 Special Rules For Determining Average Actual Deferral Percentage.
(a) The Actual Deferral Percentage for any Highly Compensated
Employee for the Plan Year who is eligible to have Pre-Tax
Contributions allocated to his Account under two or more
arrangements described in ss. 401(k) of the Code that are
maintained by an Employer or its Affiliates shall be
determined as if such Pre-Tax Contributions were made under a
single arrangement.
(b) If two or more plans maintained by the Employer or its
Affiliates are treated as one plan for purposes of the
nondiscrimination requirements of Code ss. 401(a)(4) or the
coverage requirements of Code ss. 410(b) (other than for
purposes of the average benefits test), all Pre-Tax
Contributions that are made pursuant to those plans shall be
treated as having been made pursuant to one plan.
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(c) The determination and treatment of the Pre-Tax Contributions
and Actual Deferral Percentage of any Participant shall be in
accordance with such other requirements as may be prescribed
from time to time in Treasury Regulations.
12.06 Distribution of Excess ADP Deferrals.
(a) Pre-Tax Contributions exceeding the limitations of Section
12.04(a) ("Excess ADP Deferrals") and any income or loss
allocable to such Excess ADP Deferral shall be designated by
the Committee as Excess ADP Deferrals and shall be
distributed to Highly Compensated Employees whose Accounts
were credited with the largest dollar amount of Pre-Tax
Contributions. In determining the amount of Excess ADP
Deferrals to be distributed to each Highly Compensated
Employee, the Committee shall reduce the amount of Pre-Tax
Contribution, for each Highly Compensated Employee as
follows:
(1) The Pre-Tax Contributions made by the Highly
Compensated Employee(s) with the highest dollar
amount of Pre-Tax Contributions will be reduced
until equal with the second highest amount of
Pre-Tax Contribution under the Plan; then
(2) The amount of Pre-Tax Contributions made by the two
(or more) Highly Compensated Employees with the
highest dollar amount of Pre-Tax Contributions will
be reduced until equal to the third highest dollar
amount of Pre-Tax Contributions under the Plan; then
(3) The steps described in (1) and (2) above shall be
repeated with respect to the third and successive
highest Pre-Tax Contributions under the Plan until
the Plan has distributed all Excess ADP Deferrals.
(b) To the extent administratively possible, the Committee shall
distribute all Excess ADP Deferrals and any income or loss
allocable thereto prior to 2-1/2 months following the end of
the Plan Year in which the Excess ADP Deferrals arose. In any
event, however, the Excess ADP Deferrals and any income or
loss allocable thereto shall be distributed prior to the end
of the Plan Year following the Plan Year in which the Excess
ADP Deferrals arose. Excess ADP Deferrals shall be treated as
annual additions under the Plan.
(c) The income or loss allocable to Excess ADP Deferrals shall be
determined by multiplying the income or loss allocable to the
Participant's Account for the Plan Year in which the Excess
ADP Deferrals arose by a fraction. The
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numerator of the fraction is the Excess ADP Deferral. The
denominator of the fraction is the value of the Participant's
Account balance on the last day of the Plan Year in which the
Excess ADP Deferrals arose reduced by any income allocated to
the Participant's Account for such Plan Year and increased by
any loss allocated to the Participant's Account for the Plan
Year.
(d) If an Excess Deferral has been distributed to the Participant
pursuant to Section 12.03(a) or (b) for any taxable year of a
Participant, then any Excess ADP Deferral allocable to such
Participant for the same Plan Year in which such taxable year
ends shall be reduced by the amount of such Excess Deferral.
(e) Any Employer Matching Contribution allocable to an Excess ADP
Deferral that is returned to the Participant pursuant to this
Section 12.06 shall be forfeited notwithstanding the
provisions of Article 7 (vesting). For this purpose, however,
Pre-Tax Contributions that are returned to the Participant
shall be deemed to be first those Pre-Tax Contributions for
which no Employer Matching Contribution was made and second
those Pre-Tax Contributions for which an Employer Matching
Contribution was made. Accordingly, unmatched Pre-Tax
Contributions shall be returned as an Excess ADP Deferral
before matched Pre-Tax Contributions.
12.07 Average Actual Contribution Percentage.
(a) The Average Actual Contribution Percentage for Highly
Compensated Employees for each Plan Year and the Average
Actual Contribution Percentage for Non-highly Compensated
Employees for the same Plan Year must satisfy one of the
following tests:
(1) The Average Actual Contribution Percentage for
Participants who are Highly Compensated Employees
for the Plan Year shall not exceed the Average
Actual Contribution Percentage for Participants who
are Non-highly Compensated Employees for the Plan
Year multiplied by 1.25; or
(2) The excess of the Average Actual Contribution
Percentage for Participants who are Highly
Compensated Employees for the Plan Year over the
Average Actual Contribution Percentage for
Participants who are Non-highly Compensated
Employees for the Plan Year is not more than two
percentage points, and the Average Actual
Contribution Percentage for Participants who are
Highly Compensated Employees is not more than the
Average Actual Contribution Percentage for
Participants who are Non-highly Compensated
Employees multiplied by 2.0.
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(b) If at the end of the Plan Year, the Plan does not comply with
the provisions of this Section 12.07(a), the Employer may do
any or all of the following in order to comply with such
provision as applicable (except as otherwise provided in the
Code or in Treasury Regulations):
(1) Aggregate Qualified Elective Deferrals with the
Employer Matching Contributions of Non-highly
Compensated Employees as provided in Section 12.02
(definition of ACP).
(2) Distribute or forfeit Employer Matching
Contributions to certain Highly Compensated
Employees as provided in Section 12.09.
(3) Make a Qualified Nonelective Contribution on behalf
of any or all of the Non-highly Compensated
Employees and aggregate such contributions with the
Non-highly Compensated Employees' Employer Matching
Contributions as provided
in Section 12.01 (definition of ACP).
12.08 Special Rules For Determining Average Actual Contribution Percentages.
(a) The Actual Contribution Percentage for any Highly Compensated
Employee for the Plan Year who is eligible to have Employer
Matching Contributions or Voluntary After-Tax Contributions
allocated to his Account under two or more arrangements
described in ss.ss. 401(a) or 401(m) of the Code that are
maintained by an Employer or its Affiliates shall be
determined as if such contributions were made under a single
arrangement.
(b) If two or more plans maintained by the Employer or its
Affiliates are treated as one plan for purposes of the
nondiscrimination requirements of Code ss. 401(a)(4) or the
coverage requirements of Code ss. 410(b) (other than for
purposes of the average benefits test), all Employer Matching
Contributions and Voluntary After-Tax Contributions that are
made pursuant to those plans shall be treated as having been
made pursuant to one plan.
(c) The determination and treatment of the Actual Contribution
Percentage of any Participant shall satisfy such other
requirements as may be prescribed by the Secretary of the
Treasury.
12.09 Distribution of Excess ACP Contributions.
(a) Employer Matching Contributions and Voluntary After-Tax
Contributions exceeding the limitations of Section 12.07(a)
("Excess ACP
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Contributions") and any income or loss allocable to such
Excess ACP Contribution may be designated by the Committee as
Excess ACP Contributions and may be distributed in the Plan
Year following the Plan Year in which the Excess ACP
Contributions arose to those Highly Compensated Employees
whose Accounts were credited with largest aggregate amount of
Employer Matching Contributions and Voluntary After-Tax
Contributions during the preceding Plan Year. The amount of
Employer Matching Contributions and Voluntary After-Tax
Contributions to be distributed to a Highly Compensated
Employee shall be determined using the procedure described in
Section 12.06(a). To the extent possible, Voluntary After-Tax
Contributions shall be distributed first, followed by vested
Employer Matching Contributions.
(b) To the extent administratively possible, the Committee shall
distribute all Excess ACP Contributions and any income or
loss allocable thereto prior to 2-1/2 months following the
end of the Plan Year in which the Excess ACP Contributions
arose. In any event, however, the Excess ACP Contributions
and any income or loss allocable thereto shall be distributed
prior to the end of the Plan Year following the Plan Year in
which the Excess ACP Contributions arose.
(c) The income or loss allocable to Excess ACP Contributions
shall be determined by multiplying the income or loss
allocable to the Participant's Account for the Plan Year in
which the Excess ACP Contribution arose by a fraction. The
numerator of the fraction is the Excess ACP Contributions.
The denominator of the fraction is the value of the
Participant's Account on the last day of the Plan Year
reduced by any income allocated to the Participant's Account
by such Plan Year and increased by any loss allocated to the
Participant's Account for the Plan Year.
(d) Amounts distributed to Highly Compensated Employees under
this Section 12.09 shall be treated as annual additions with
respect to the Employee who received such amount.
(e) Matching Contributions may be distributed to Highly
Compensated Employees only to the extent such Matching
Contributions are vested. Matching Contributions which are
not vested shall be forfeited to the extent necessary to
correct Excess ACP Contribution pursuant to this Section
12.09. For this purpose, Matching Contributions shall first
be comprised of vested Employer Matching Contributions and
second of non-vested Employer Matching Contributions.
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12.10 Combined ACP and ADP Test.
(a) The Plan must satisfy the Combined ACP and ADP Test described
in this Section 12.10 only if (1) the Average Actual Deferral
Percentage of the Highly Compensated Employees exceeds 125%
of the Average Actual Deferral Percentage of the Non-highly
Compensated Employees and (2) the Average Actual Contribution
Percentage of the Highly Compensated Employees exceeds 125%
of the Average Actual Contribution Percentage of the
Non-highly Compensated Employees.
(b) The Combined ACP and ADP Test is satisfied if the sum of the
Highly Compensated Employees' Average Actual Deferral
Percentage and Average Actual Contribution Percentage is
equal to or less than the Maximum Combined Percentage defined
in
paragraph (c) below.
(c) The Maximum Combined Percentage shall be determined by
adjusting the Non-highly Compensated Employees' Average
Actual Deferral Percentage and Average Actual Contribution
Percentage in the following manner:
(1) The greater of the two percentages shall be
multiplied by 1.25; and
(2) The lesser of the two percentages shall be increased
by two percentage points; however, in no event shall
such adjusted percentage exceed twice the original
percentage.
The sum of (1) and (2) shall be the Maximum Combined
Percentage.
Notwithstanding the foregoing, the Maximum Combined
Percentage shall be determined in the following manner if
such calculation results in a higher Maximum Combined
Percentage than the formula specified above:
(1) The lesser of the Average Actual Deferral Percentage
and Average Actual Contribution Percentage of the
Non-Highly Compensated Employees shall be multiplied
by 1.25; and
(2) The greater of such two percentages shall be
increased by two percentage points; however, in no
event shall such percentage exceed twice the
original percentage.
(d) In the event the Plan does not satisfy the Combined ADP and
ACP Test, the Highly Compensated Employees' Average Actual
Contribution Percentage shall be decreased by either
distributing Voluntary After-Tax Contributions or vested
Employer Matching Contributions to certain Highly Compensated
Employees by using the procedures described in Section 12.09
or by making a Qualified Nonelective Contribution as
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provided in Section 12.07(b)(3) until the sum of such
percentage and the Highly Compensated Employees' Average
Actual Deferral Percentage equals the Maximum Combined
Percentage.
(e) If Voluntary After-Tax Contributions or vested Employer
Matching Contributions are distributed to certain Highly
Compensated Employees in order to satisfy the Combined ADP
and ACP Test, income or loss allocable to such Employer
Matching Contributions shall also be distributed.
(f) To the extent administratively possible, the Committee shall
distribute the Voluntary After-Tax Contributions and vested
Employer Matching Contributions (if applicable) and allocable
income or loss prior to 2-1/2 months following the end of the
Plan Year for which the Combined ADP and ACP Test is
computed. In any event, however, such Voluntary After-Tax
Contributions and vested Employer Matching Contributions (if
applicable) and allocable income or loss shall be distributed
by the end of the Plan Year following the Plan Year for which
the Combined ADP and ACP Test is computed. Voluntary
After-Tax Contributions and vested Employer Matching
Contributions that are distributed pursuant to this Section
12.10 shall be treated as annual additions under the Plan.
(g) The income or loss allocable to returned Voluntary After-Tax
Contributions or vested Employer Matching Contributions shall
be determined using the same procedures as Section 12.06(c).
12.11 Order of Applying Certain Sections of Article 12.
In applying the provisions of this Article 12, the determination and
distribution of Excess Deferrals shall be made first, the
determination and elimination of Excess ACP Deferrals shall be made
second, the determination and elimination of Excess ADP Contributions
shall be made third and finally the determination and any necessary
adjustment related to the Combined ADP and ACP Test shall be made.
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ARTICLE 13
HIGHLY COMPENSATED EMPLOYEES
13.01 In General.
For the purposes of this Plan, the term "Highly Compensated Employee"
is any active Employee described in Section 13.02 below and any Former
Employee described in Section 13.03 below. Various definitions used in
this Article are contained in Section 13.04. A Non-Highly Compensated
Employee is an Employee who is not a Highly Compensated Employee.
13.02 Highly Compensated Employees.
(a) An Employee is a Highly Compensated Employee if the Employee:
(1) is a 5 Percent Owner at any time during the
Determination Year or the Look Back Year; or
(2) receives Compensation in excess of $80,000 during
the Look Back Year.
The dollar amount described above shall be increased annually
as provided in Code ss. 414(q)(1).
13.03 Former Highly Compensated Employee.
A Former Employee is a Highly Compensated Employee if (applying the
rules of Section 13.02) the Former Employee was a Highly Compensated
Employee during a Separation Year or during any Determination Year
ending on or after the Former Employee's 55th birthday.
13.04 Definitions.
The following special definitions shall apply to this Article 13:
Compensation for purposes of this Article 13 shall mean the gross
annual earnings reported on the Participant's IRS Form W-2 (Box 1 -
Wages, Tips and Compensation, or its comparable location as provided
on Form W-2 in future years) as required by Code ss.ss. 6041(d) and
6051(a)(3). In addition, Compensation shall include compensation which
is not includable in the Participant's IRS Form W-2 (Box 1) by reason
of Code ss. 402(a)(8) (employee pre-tax contributions under a Code ss.
401(k) plan) or Code ss. 125 (salary deferrals under a cafeteria
plan). Compensation shall not include amounts paid or reimbursed by
the Employer for
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moving expenses if, at the time of the payment of such moving
expenses, it is reasonable to believe that the moving expenses will be
deductible by the Participant under Code ss. 217. Compensation shall
be determined by ignoring any income exclusions under Code ss. 3401(a)
based on the nature or location of employment. In no event shall
Compensation in excess of the limitations under Code Section
401(a)(17) be taken into account for any Employee.
Determination Year shall mean the Plan Year for which the ADP is
computed.
Employer for purposes of this Article 13 shall mean the Company and
its Affiliates.
5 Percent Owner shall mean any Employee who owns or is deemed to own
(within the meaning of Code ss. 318), more than five percent of the
value of the outstanding stock of the Employer or stock possessing
more than five percent of the total combined voting power of the
Employer.
Former Employee shall mean an Employee (i) who has incurred a
Severance from Service or (ii) who remains employed by the Employer
but who has not performed services for the Employer during the
Determination Year (e.g., an Employee on Authorized Leave of Absence).
Look Back Year shall mean the Plan Year preceding the Determination
Year.
Separation Year shall mean any of the following years:
(1) An Employee who incurs a Termination Date shall have a
Separation Year in the Determination Year in which such
Termination Date occurs;
(2) An Employee who remains employed by the Employer but who
temporarily ceases to perform services for the Employer
(e.g., an Employee on Authorized Leave of Absence) shall have
a Separation Year in the calendar year in which he last
performs services for the Employer;
(3) An Employee who remains employed by the Employer but whose
Compensation for a calendar year is less than 50% of the
Employee's average annual Compensation for the immediately
preceding three calendar years (or the Employee's total years
of employment, if less) shall have a Separation Year in such
calendar year. However, such Separation Year shall be ignored
if the Employee remains employed by the Employer and the
Employee's Compensation returns to a level comparable to the
Employee's Compensation immediately prior to such Separation
Year.
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13.05 Other Methods Permissible.
To the extent permitted by the Code, judicial decisions, Treasury
Regulations and IRS pronouncements, the Committee may (without further
amendment to this Plan) take such other steps and actions or adopt
such other methods or procedures (in addition to those methods and
procedures described in this Article 13) to determine and identify
Highly Compensated Employees (including adopting alternative
definitions of Compensation which satisfy Code ss. 414(q)(7) and are
uniformly applied).
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ARTICLE 14
MAXIMUM BENEFITS
14.01 General Rule.
(a) Notwithstanding any other provision of this Plan, for any
Plan Year, the Annual Additions to a Participant's Account,
when combined with the Annual Additions to the Participant's
Account under all other Qualified individual account plans
maintained by the Employer or its Affiliates shall not exceed
the lesser of (i) $30,000 or (ii) twenty-five percent (25%)
of the Participant's Compensation for such Plan Year (the
"maximum permissible amount").
(b) The Employer hereby elects that the Limitation Year for
purposes of Code ss. 415 shall be the Plan Year.
(c) For purposes of determining the limit on Annual Additions
under paragraph (a) of this Section, the dollar limit
described therein, to wit, $30,000, shall be increased for
each Plan Year to the extent permitted by law.
(d) If the amount to be allocated to a Participant's Account
exceeds the maximum permissible amount (and for this purpose
Employer Contributions shall be deemed to be allocated after
Employee Contributions), the excess will be disposed of as
follows. First, if the Participant's Annual Additions exceed
the maximum permissible amount as a result of (i) a
reasonable error in estimating the Participant's
Compensation, (ii) a reasonable error in estimating the
amount of Employee Contributions that the Participant could
make under Code Section 415 or (iii) other facts and
circumstances that the Internal Revenue Service finds
justifiable, the Committee may direct the Trustee to return
to the Participant his Employee Contributions for such Plan
Year to the extent necessary to reduce the excess amount.
Such returned Employee Contributions shall be ignored in
performing the discrimination tests of Article 12. Second,
any excess annual additions still remaining after the return
of Employee Contributions shall be reallocated as determined
by the Committee among the Participants whose accounts have
not exceeded the limit in the same proportion that the
Compensation of each such Participant bears to the
Compensation of all such Participants. If such reallocation
would result in an addition to another Participant's Account
which exceeds the permitted limit, that excess shall likewise
be reallocated among the Participants whose Accounts do not
exceed the limit. However, if the allocation or reallocation
of the excess amounts pursuant to these provisions causes the
limitations of Section 415 of the Code to be exceeded with
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respect to each Participant for the limitation year, then any
such excess shall be held unallocated in a 415 Suspense
Account. If the 415 Suspense Account is in existence at any
time during a limitation year, other than the limitation year
described in the preceding sentence, all amounts in the 415
Suspense Account shall be allocated and reallocated to
Participants' Accounts (subject to the limitations of
Code ss.415) before any Contributions which would constitute
annual additions may be made to the Plan for that limitation
year.
(e) If the Participant is covered under another qualified defined
contribution plan maintained by an Employer during any
limitation year, the annual additions which may be credited
to a Participant's account under this Plan for any such
limitation year shall not exceed the maximum permissible
amount reduced by the annual additions credited to a
Participant's account under all such plans for the same
limitation year. If a Participant's annual additions under
this Plan and such other plans would result in an excess
amount for a limitation year, the excess amount will be
deemed to consist of the annual additions last allocated (and
for this purpose, Employer Contributions shall be deemed to
be allocated after Employee Contributions). If an excess
amount is allocated to a Participant on an allocation date of
this Plan which coincides with an allocation date of another
plan, the excess amount attributed to this Plan will be the
product of
(i) the total excess amount as of such date, times
(ii) the ratio of (A) the annual additions allocated to
the Participant for the limitation year as of such
date under this Plan to (B) the total annual
additions allocated to the Participant for the
limitation year as of such date under this and all
the other qualified defined contribution plans
maintained by the Employer.
Any excess amount attributed to this Plan will be disposed in the
manner described in this Section 14.01 above.
14.02 Combined Plan Limitation.
If the Employer or its Affiliates maintains, or at any time
maintained, a Qualified defined benefit plan covering any Participant
in this Plan, the sum of the Participant's defined benefit plan
fraction and defined contribution plan fraction shall not exceed 1.0
in any limitation year and the annual benefit otherwise payable to the
Participant under such defined benefit plan shall be frozen or reduced
to the extent necessary so that the sum of such fractions shall not
exceed 1.0. This Section 14.02 shall not apply after December 31,
1999.
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14.03 Definitions. For the purposes of this Article 14, the following
definitions shall apply:
(a) "Annual Addition" shall mean the sum of:
(1) Employee Contributions;
(2) Employer Contributions;
(3) Forfeitures; and
(4) Amounts described in Code ss.ss. 415(l)(1) and
419A(d)(2).
Annual Additions shall not include any amounts credited to the
Participant's Account resulting from Rollover Contributions.
(b) "Affiliates" shall have that meaning contained in Article 2
except that for purposes of determining who is an Affiliate
the phrase "more than 50 percent" shall be substituted for
the phrase "at least 80 percent" each place it appears in
Code ss. 1563(a)(1).
(c) "Compensation" shall have the same meaning as defined in
Article 12 except that Compensation for purposes of Article
14 shall not include Pre-Tax Contributions under this Plan
and shall not include salary deferrals under a Code ss. 125
Cafeteria Plan. Effective January 1, 1998, "Compensation"
shall have the same meaning as defined in Article 12.
(d) "Defined Benefit Fraction" means a fraction, the numerator of
which is the sum of the Participant's projected annual
benefits under all the defined benefit plans (whether or not
terminated) maintained by the Employer or its Affiliates, and
the denominator of which is the lesser of (i) 125 percent of
the dollar limitation in effect for the limitation year
under ss.415(b)(1)(A) of the Code or (ii) 140 percent of the
Highest Average Compensation. Notwithstanding the foregoing,
if the Participant was a Participant as of the first day of
the first Limitation Year beginning after December 31, 1986,
in one or more defined benefit plans maintained by the
Employer or its Affiliates which were in existence on May 6,
1986, the denominator of this fraction will not be less than
125 percent of the sum of the annual benefits under such
plans which the Participant had accrued as of the end of the
last limitation year beginning before January 1, 1987, but
determined without regard to any changes in the terms and
conditions of the Plan occurring after May 5, 1986. The
preceding sentence applies only if the defined benefit plans
individually and in the aggregate satisfied the requirements
of ss.415 for all limitation years beginning before January 1,
1987.
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<PAGE> 75
(e) "Defined Contribution Fraction" means a fraction, the
numerator of which is the sum of the Annual Additions to the
Participant's account under all the defined contribution
plans (whether or not terminated) maintained by the Employer
or its Affiliates for the current and all prior limitation
years, and the denominator of which is the sum of the Maximum
Aggregate Amounts for the current and all prior limitation
years of service with the Employer or its Affiliates
(regardless of whether a defined contribution plan was
maintained by the Employer or its Affiliates). The Maximum
Aggregate Amount in any limitation year is the lesser of (i)
125 percent of the dollar limitation in effect
under ss.415(c)(1)(A) of the Code; or (ii) 35 percent of the
Participant's compensation for such year. If the Employee was
a Participant as of the first day of the first Limitation
Year beginning after December 31, 1986, in one or more
defined contribution plans maintained by the Employer or its
Affiliates which were in existence on May 6, 1986, the
numerator of this fraction will be adjusted if the sum of
this fraction and the defined benefit fraction would
otherwise exceed 1.0 under the terms of this Plan. Under the
adjustment, an amount equal to the product of (i) the excess
of the sum of the fractions over 1.0 times and (ii) the
denominator of this fraction, will be permanently subtracted
from the numerator of this fraction.
(f) "Highest Average Compensation" means the average compensation
for the three consecutive years of service with the employer
that produces the highest average.
(g) "Projected Annual Benefit" means the annual retirement
benefit (adjusted to an actuarially equivalent straight life
annuity if such benefit is expressed in a form other than a
straight life annuity or qualified joint and survivor
annuity) to which the Participant would be entitled under the
terms of the plan assuming (i) the Participant will continue
employment until normal retirement age under the plan (or
current age, if later), and (ii) the Participant's
compensation for the current limitation year and all other
relevant factors used to determine benefits under the plan
will remain constant for all future limitation years.
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<PAGE> 76
ARTICLE 15
TOP HEAVY RULES
15.01 General.
The provisions of this Article of the Plan shall become effective in
any Plan Year in which the Plan is determined to be Top Heavy and
shall supersede any conflicting provision of this Plan.
15.02 Definitions.
(a) Top Heavy. The Plan shall be Top Heavy for the Plan Year if,
as of the Valuation Date which coincides with or immediately
precedes the Determination Date, the value of the Participant
Accounts of Key Employees exceeds 60% of the value of all
Participant Accounts. If the Employer maintains more than one
plan, all plans in which any Key Employee participates and
all plans which enable this Plan to satisfy the
anti-discrimination requirements of Code ss.ss.401(a)(4) and
410 must be combined with this Plan ( "Required Aggregation
Group") for the purposes of applying the 60% test described
in the preceding sentence. Plans maintained by the Employer
which are not in the required aggregation group may be
combined at the Employer's election with this Plan for the
purposes of determining Top Heavy status if the combined plan
satisfies the requirements of Code ss.401(a)(4) and 410 (
"Permissive Aggregation Group"). In determining the value of
Participant Accounts, all distributions made during the
five-year period ending on the Determination Date shall be
included and any unallocated Employer Contributions or
forfeitures attributable to the Plan Year in which the
Determination Date falls shall also be included. The Account
of (i) any Employee who at one time was a Key Employee but
who is not a Key Employee for any of the five Plan Years
ending on the Determination Date; and (ii) any Employee who
has not performed services for the Employer or a related
employer maintaining a plan in the aggregation group for the
five Plan Years ending on the Determination Date, shall be
disregarded in determining Top Heavy status.
If the Employer maintains a defined benefit plan during the
Plan Year which is subject to aggregation with this Plan, the
60% test shall be applied after calculating the present value
of the Participants' accrued benefits under the defined
benefit plan in accordance with the rules set forth in that
plan and combining the present value of such accrued benefits
with the Participant's account balances under this Plan.
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<PAGE> 77
Solely for the purpose of determining if the Plan, or any
other plan included in the Required Aggregation Group, is
Top-Heavy, a Non-Key Employee's accrued benefit in a defined
benefit plan shall be determined under (i) the method, if
any, that uniformly applies for accrual purposes under all
plans maintained by the Affiliates, or (ii) if there is no
such method, as if such benefit accrued not more rapidly than
the slowest accrual rate permitted under the fractional
accrual rate of Code ss. 411(b)(1)(C).
(b) Key Employee. Any employee of the Employer who, during the
Plan Year or the four preceding Plan Years was an officer
receiving Compensation in excess of 50% of the limit
described in Code ss.415(b)(1)(A), one of the ten employees of
the Employer owning the largest interests in the Employer and
receiving Compensation equal to or greater than the dollar
limit described in Code ss.415(c)(1)(A), a greater than 5%
owner of the Employer, a greater than 1% owner of the
Employer receiving Compensation in excess of $150,000, or the
Beneficiary of a Key Employee. The Code ss.415(b)(1)(A) and
415(c)(1)(A) limits referred to in the preceding sentence
shall be the specified dollar limit plus any increases
reflecting cost of living adjustments specified by the
Secretary of the Treasury.
(c) Determination Date. The last day of the Plan Year immediately
preceding the Plan Year for which Top Heavy status is
determined. For the first Plan Year, the Determination Date
shall be the last day of the first Plan Year.
(d) Non-Key Employee. Any Participant who is not a Key Employee.
(e) Employer. The term "Employer" shall include any Affiliate of
such Employer.
(f) Compensation. The term "Compensation" shall have that meaning
as defined in Article 14.
15.03 Minimum Benefit.
(a) Except as provided below, the Employer Contributions
allocated on behalf of any Non-Key Employee who is employed
by the Employer on the Determination Date shall not be less
than the lesser of (i) 3% of such Non-Key Employee's
Compensation or (ii) the largest percentage of Employer
Contributions and Pre-Tax Contributions, as a percentage of
the Key Employee's Compensation, allocated on behalf of any
Key Employee for such Plan Year. Pre-Tax Contributions
allocated to the Accounts of Non-Key Employees shall not be
considered in determining whether a Non-Key Employee has
received the minimum contribution required by this Section
15.03.
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<PAGE> 78
(b) The minimum allocation is determined without regard to any
Social Security contribution and shall be made even though,
under other Plan provisions, the Non-Key Employee would have
received a lesser allocation or no allocation for the Plan
Year because of the Non-Key Employee's failure to complete
1,000 Hours of Service, his failure to make mandatory
employee contributions, or his earning compensation less than
a stated amount.
(c) If the Employer maintains a defined benefit plan in addition
to this Plan, the minimum contribution and benefit
requirements for both plans in a Top Heavy Plan Year may be
satisfied by an allocation of Employer Contributions to the
Account of each Non-Key Employee in the amount of 5% of the
Non-Key Employee's compensation.
15.04 Combined Plan Limitation For Top Heavy Years.
In any Plan Year during which more than 90% of the Participant Account
balances are attributable to Key Employees, 100% or an equivalent
factor shall be substituted for 125% or an equivalent factor in the
combined plan fraction denominators set forth in the Section of this
Plan which limits maximum benefits pursuant to ss. 415 of the Code. In
any Plan Year during which more than 60% but not more than 90% of the
Participant Account balances are attributable to Key Employees, 100%
or an equivalent factor shall be substituted for 125% or an equivalent
factor in the combined plan fraction denominators unless the Account
of each Non-Key Employee participating in the Plan receives an
allocation which satisfies Section 15.03 above, except that for this
purpose the figure "4%" shall be substituted for "3%" where it appears
in Section 15.03(a) and the figure "7.5%" shall be substituted for
"5%" where it appears in Section 15.03(c). This Section 15.04 shall
cease to be applicable after December 31, 1999.
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<PAGE> 79
ARTICLE 16
MISCELLANEOUS
16.01 Headings.
The headings and sub-headings in this Plan have been inserted for
convenience of reference only and are to be ignored in any
construction of the provisions hereof.
16.02 Action by Employer.
Any action by an Employer under this Plan shall be by resolution of
its Board of Directors, or by any person or persons duly authorized
by resolution of said Board to take such action.
16.03 Spendthrift Clause.
Except as otherwise required by a "qualified domestic relations
order" as defined in Code Section 414(p), none of the benefits,
payments, proceeds or distributions under this Plan shall be subject
to the claim of any creditor of any Participant or Beneficiary, or
to any legal process by any creditor of such Participant or
Beneficiary, and none of them shall have any right to alienate,
commute, anticipate or assign any of the benefits, payments,
proceeds or distributions under this Plan except for the extent
expressly provided herein to the contrary. If any Participant shall
attempt to dispose of the benefits provided for him hereunder, or to
dispose of the right to receive such benefits, or in the event there
should be an effort to see such benefits or the right to receive
such benefits by attachment, execution or other legal or equitable
process, such right to benefits shall pass and be transferred, at
the discretion of the Plan Administrator, to such one or more as may
be appointed by the Plan Administrator from among the Beneficiaries,
if any theretofore designated by the Participant, or from the
spouse, children or other dependents of the Participant, in such
shares as the Committee may appoint. Any appointment so made by the
Committee may be revoked by it at any time and further appointment
made by it which may include the Participant.
16.04 Distributions Upon Special Occurrences.
(a) Subject to Section 11.03, Pre-Tax Contributions and any
income attributable thereto, shall be distributed to
Participants or their Beneficiaries in a single lump sum as
soon as administratively feasible after the termination of
the Plan, provided that neither the Employer nor its
Affiliates maintain a successor plan.
(b) Pre-Tax Contributions and any income attributable thereto
shall be distributed to Participants in a single lump sum
as soon as administratively
- 72 -
<PAGE> 80
feasible after the sale, to an entity that is not an
Affiliate, of substantially all of the assets used by the
Employer in the trade or business in which the Participant
is employed.
(c) After the sale of an incorporated Affiliate's interest in a
subsidiary to an entity that is not an Affiliate, Pre-Tax
Contributions and any income attributable thereto of a
Participant who continues to work for such subsidiary shall
be distributed in a lump sum as soon as administratively
feasible.
(d) The provisions of this Section 16.04 including the
definitions of terms such as "successor plan" and
"substantially all of the assets" shall be governed by
Treasury Regulation ss. 1.401(k)-1(d)(1)(iii) or any
successor Treasury Regulation thereto.
16.05 Discrimination.
The Employer, the Committee, the Trustee and all other persons
involved in the administration and operation of the Plan shall
administer and operate the Plan and Trust in a uniform and
consistent manner with respect to all Participants similarly
situated and shall not permit discrimination in favor of Highly
Compensated Employees.
16.06 Release.
Any payment to a Participant or Beneficiary, or to their legal
representatives, in accordance with the provisions of this Plan,
shall to the extent thereof be in full satisfaction of all claims
hereunder against the Trustee, Plan Administrator, Committee and the
Employer, any of whom may require such Participant, Beneficiary, or
legal representative, as a condition precedent to such payment, to
execute a receipt and release therefor in such form as shall be
determined by the Trustee, the Committee, or the Employer, as the
case may be.
16.07 Compliance with Applicable Laws.
The Company, through the Plan Administrator, shall interpret and
administer the Plan in such manner that the Plan and Trust shall
remain in compliance with the Code, with the Act, and all other
applicable laws, regulations, and rulings.
16.08 Agent for Service of Process.
The agent for service of process of this Plan shall be the person
listed from time to time in the current records of the Secretary of
State of Georgia as the agent for the service of process for the
Company.
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<PAGE> 81
16.09 Merger.
In the event of any merger or consolidation of the Plan with any
other Plan, or the transfer of assets or liabilities by the Plan to
another Plan, each Participant must receive (assuming that the Plan
would terminate) the benefit immediately after the merger,
consolidation, or transfer which is equal to or greater than the
benefit such Participant would have been entitled to receive
immediately before the merger, consolidation, or transfer (assuming
that the Plan had then terminated), provided such merger,
consolidation, or transfer took place after the date of enactment of
the Act.
16.10 Governing Law.
The Plan shall be governed by the laws of the State of Florida to
the extent that such laws are not preempted by Federal law.
16.11 Adoption of the Plan by an Affiliated Sponsor.
(a) The Committee shall determine which employers shall become
Affiliated Sponsors within the terms of the Plan. In order
for the Committee to designate an Employer as an Affiliated
Sponsor, the Committee must approve the addition of the
Affiliated Sponsor's identity to Schedule A (which approval
may be retroactive to an earlier effective date). The
Committee may also specify such terms and conditions
pertaining to the adoption of the Plan by the Affiliated
Sponsor as the Committee deems appropriate. With the
Committee's consent, an Affiliated Sponsor may limit
participation in the Plan to certain of its Employees.
(b) The Plan of the Affiliated Sponsor and of the Company shall
be considered a single plan for purposes of Treasury
Regulations ss.1.414(1)-1(b)(1). All assets contributed to the
Plan by the Affiliated Sponsor shall be held in a single fund
together with the assets contributed by the Company (and with
the assets of any other Affiliated Sponsors); and so long as
the Affiliated Sponsor continues to be designated as such,
all assets held in such fund shall be available to pay
benefits to all Participants and Beneficiaries covered by the
Plan irrespective of whether such Employees are employed by
the Company or by the Affiliated Sponsor. Nothing contained
herein shall be construed to prohibit the separate accounting
of assets contributed by the Company and the Affiliated
Sponsors for purposes of cost allocation if directed by the
Committee or the holding of Plan assets in more than one
Trust Fund with more than one Trustee.
(c) So long as the Affiliated Sponsor's designation as such
remains in effect, the Affiliated Sponsor shall be bound by,
and subject to all provisions of the Plan and the Trust
Agreement. The exclusive authority to amend the
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<PAGE> 82
Plan and the Trust Agreement shall be vested in the Committee
and no Affiliated Sponsor shall have any right to amend the
Plan or the Trust Agreement. Any amendment to the Plan or the
Trust Agreement adopted by the Committee shall be binding
upon every Affiliated Sponsor without further action by such
Affiliated Sponsor.
(d) Each Affiliated Sponsor shall be solely responsible for
making an Employer Contribution with respect to its Employees
and solely responsible for making any contribution required
by Article 15. Furthermore, if an Affiliated Sponsor
determines to make a Qualified Nonelective Contribution on
behalf of its Employees, such Affiliated Sponsor shall be
solely responsible for making such contribution. Neither the
Company nor any other Affiliated Sponsor is obligated to make
a Qualified Nonelective Contribution on behalf of the
Employees of a different Affiliated Sponsor.
(e) The Company and each Affiliated Sponsor which is an Affiliate
will be tested on a combined basis to determine whether the
Company and such Affiliated Sponsors satisfy the Average
Actual Deferral Percentage Test and Average Actual
Contribution Percentage Test described in Article 12. An
Affiliated Sponsor which is not an Affiliate shall be tested
separately from the Company and those Affiliated Sponsors
that are Affiliates for purposes of the ADP and ACP test
described in Article 12.
(f) No Affiliated Sponsor other than the Company shall have the
right to terminate the Plan. However, any Affiliated Sponsor
may withdraw from the Plan by action of its board of
directors provided such action is communicated in writing to
the Committee. The withdrawal of an Affiliated Sponsor shall
be effective as of the last day of the Plan Year following
receipt of the notice of withdrawal (unless the Committee
consents to a different effective date). In addition, the
Committee may terminate the designation of an Affiliated
Sponsor to be effective on such date as the Committee
specifies. Any such Affiliated Sponsor which ceases to be an
Affiliated Sponsor shall be liable for all cost accrued
through the effective date of its withdrawal or termination
and any contributions owing as a result of Employee
Contributions by its Employees or any other contribution as
provided in paragraphs (d) and (e). In the event of the
withdrawal or termination of an Affiliated Sponsor as
provided in this paragraph, such Affiliated Sponsor shall
have no right to direct that assets of the Plan be
transferred to a successor plan for its Employees unless such
a transfer is approved by the Committee in its sole
discretion.
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<PAGE> 83
16.12 Protected Benefits.
Early retirement benefits, retirement-type subsidies, or optional
forms of benefits protected under Code ss.411(d)(6) ("Protected
Benefits") shall not be reduced or eliminated with respect to benefits
accrued under such Protected Benefits unless such reduction or
elimination is permitted under the Code authority issued by the
Internal Revenue Service, or judicial authority.
16.13 Location of Participant or Beneficiary Unknown.
In the event that all or any portion of the distribution payable to a
Participant or his Beneficiary shall remain unpaid solely by reason of
the Committee's inability to ascertain the whereabouts of such
Participant or Beneficiary, the amount unpaid shall be forfeited.
However, such forfeiture shall not occur until five (5) years after
the amount first became payable. The Committee shall make a diligent
effort to locate the Participant or Beneficiary including the mailing
of a registered letter, return receipt requested, to the last known
address of such Participant or Beneficiary. In the event a Participant
or Beneficiary is located subsequent to his benefit being forfeited,
such benefit shall be restored and distributed.
16.14 Qualified Military Service.
Notwithstanding any provision of this Plan to the contrary,
contributions, benefits, and service credit with respect to qualified
military service will be provided in accordance with Section 414(u) of
the Internal Revenue Code.
IN WITNESS WHEREOF, the Company has caused this Plan to be duly
executed and its seal to be hereunto affixed on the date indicated below, but
effective as of September 1, 1997.
SUMMIT HOLDING SOUTHEAST, INC.
By:
-------------------------------
Title:
----------------------------
Date:
-----------------------------
SUMMIT CONSULTING, INC.
By:
-------------------------------
Title:
----------------------------
Date:
-----------------------------
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<PAGE> 84
SUMMIT CLAIMS MANAGEMENT, INC.
By:
---------------------------------------
Title:
------------------------------------
Date:
-------------------------------------
SUMMIT LOSS CONTROL SERVICES, INC.
By:
---------------------------------------
Title:
------------------------------------
Date:
-------------------------------------
HERITAGE/SUMMIT HEALTHCARE, INC.
By:
---------------------------------------
Title:
------------------------------------
Date:
-------------------------------------
BRIDGEFIELD CASUALTY INSURANCE COMPANY
By:
---------------------------------------
Title:
------------------------------------
Date:
-------------------------------------
BRIDGEFIELD EMPLOYERS INSURANCE COMPANY
By:
---------------------------------------
Title:
------------------------------------
Date:
-------------------------------------
- 77 -
<PAGE> 85
SCHEDULE A
AFFILIATED SPONSORS
<TABLE>
<CAPTION>
Name Effective Date of Affiliation
- ---------------------------------------------------- -----------------------------
<S> <C>
Summit Consulting, Inc. 5/1/92
Summit Claims Management, Inc. 5/1/92
Summit Loss Control Services, Inc. 5/1/92
Bridgefield Casualty Insurance Company 1/1/96
Heritage/Summit Healthcare, Inc. 1/1/97
Bridgefield Employers Insurance Company 9/1/97
</TABLE>
- 78 -
<PAGE> 86
SCHEDULE B
PREDECESSOR EMPLOYERS
PREDECESSOR EMPLOYER DATE OF ACQUISITION SPECIAL RULES
[NONE]
- 79 -
<PAGE> 87
SCHEDULE C
PRIOR EMPLOYER ACCOUNT
[NONE]
- 80 -
<PAGE> 88
SCHEDULE D
SPECIAL RULES APPLICABLE TO ANNUITY DISTRIBUTIONS
(a) Automatic Form of Payment
(i) If a Participant does not have a Spouse on his Annuity
Starting Date, the Participant's vested Account shall be
distributed in the form of a Single Life Annuity unless the
Participant elects otherwise under Paragraph (b). If a
Participant has a Spouse on his Annuity Starting Date, the
Participant's vested Account shall be distributed in the form
of a Joint and 50% Survivor Annuity unless the Participant
(with spousal consent) otherwise elects under Paragraph (b).
(ii) Single Life Annuity is an annuity which may be purchased with
the Participant's vested Account or paid directly from the
Trust that provides level monthly payments during the
Participant's lifetime, with payments ceasing upon the
Participant's death.
(iii) Joint and 50% Survivor Annuity is an annuity which may be
purchased with the Participant's vested Account or paid
directly to the Participant for his life, and upon the
Participant's death, 50% of such monthly payment shall be
payable on a monthly basis to the Participant's Spouse for
the Spouse's life. Payments under the Joint and Survivor
Annuity shall cease on the later of the death of the
Participant or the death of the Participant's Spouse.
(b) Participant Election of an Optional Form of Payment
(i) Within 90 days of the Participant's Annuity Starting Date,
the Committee shall provide an election form on which the
Participant may elect an optional form of benefit. In addition
to the election form, the Committee shall provide each
Participant a written explanation of the applicable automatic
form of payment described in Paragraph (a) and of the optional
forms of payment described in Article 8. Such explanation
shall describe the circumstances under which the Joint and 50%
Survivor Annuity will be provided and explanation of the
financial effect of electing not to have such form.
Furthermore, the written explanation shall provide a general
description of the eligibility conditions (if any) and other
material features of the optional forms of payment including
sufficient information regarding the relative values of the
optional forms of payment and the automatic form of payment.
If payment is scheduled to commence prior to the Participant's
Normal Retirement Date, the written explanation must also
inform the Participant of is rights (if any) to defer receipt
of the Distribution until his
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<PAGE> 89
Normal Retirement Date. If a Participant makes a request for
additional information that is received 90 days prior to the
Annuity Starting Date, such information must be furnished
within 30 days. The Participant will then be entitled to a 90
day period in which to make or change an election, even if
such 90-day period extends beyond the Participant's Annuity
Starting Date and, in such case, the Participant's first
payment shall be made after such election form has been
received, on a retroactive basis, if necessary.
(ii) A married Participant's election to receive an optional form
of payment shall be valid only if the Participant's Spouse
(after receipt of the written explanation described in
Paragraph (b)(i) consents in writing on a form provided by the
Committee in the presence of a notary public or Plan
representative to the Participant's election. The Spouse's
consent must be made within 90 days of the Participant's
Annuity Starting Date and must acknowledge the effect of such
consent. However, if the Participant establishes to the
satisfaction of the Committee that his Spouse's consent cannot
be obtained because he has no Spouse, because his Spouse
cannot be located, or because of other circumstances as
determined by applicable Treasury Regulations, The Committee
may treat the Participant's election as an election for which
spousal consent was obtained. A Spouse's consent pursuant to
this paragraph shall be irrevocable.
(iii) A Participant may revoke his election of an optional form of
payment or make a new election (provided any required spousal
consent is obtained) at any time prior to his Annuity Starting
Date. Furthermore, the Participant's election shall cease to
be valid upon the marriage of the Participant or upon the
remarriage of the Participant following the death or divorce
of the Spouse giving the consent to the Participant's
election. If the Participant revokes his election or if such
election otherwise ceases to be valid, the Participant's
vested Account shall be payable under the applicable automatic
form of payment described in Paragraph (a).
(iv) If a Distribution is one to which Sections 401(a)(11) and 417
of the Internal Revenue Code do apply, such Distribution may
commence less than 30 days but not less than 7 days after the
notice described above is given, provided that:
(A) the Committee clearly informs the Participant that
the Participant has a right to a period of at least
30 days after receiving the notice to consider the
decision of (i) whether or not to elect a
Distribution and (ii) whether to waive a joint and
survivor annuity and elect an optional form of
distribution;
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<PAGE> 90
(B) the Participant, after receiving the notice,
affirmatively elects a Distribution;
(C) the Participant is permitted to revoke an
affirmative Distribution election at least until the
Annuity Starting Date or, if later, at any time
prior to the expiration of the 7-day period that
begins the day after the explanation of the joint
and survivor annuity is provided to the Participant;
(D) the Participant's Annuity Starting Date is after the
date that the explanation of the joint and survivor
annuity is provided to the Participant; and
(E) the Distribution in accordance with the affirmative
election does not commence before the expiration of
the 7-day period that begins the day after the
explanation of the joint and survivor annuity is
provided to the Participant.
(c) Pre-Retirement Survivor Annuity
(i) Except as provided in subparagraph (iii) below, if a married
Participant dies prior to his Annuity Starting Date, the
Participant's vested Account shall be paid to the
Participant's Spouse in the form of a Single Life Annuity
payable for the life of the Spouse (the "Pre-Retirement
Survivor Annuity"). The Spouse may, however, elect to receive
the Participant's vested Account in a lump sum as provided in
Article 8. The election of an optional distribution form must
be made within ninety days of the Participant's death on a
form provided by the Committee for such purpose.
(ii) During the Applicable Period (defined below), the Plan shall
provide each Participant with a written explanation of the
Pre-Retirement Survivor Annuity. Such explanation shall
contain comparable information as provided in the notice
described in paragraph (b)(i). The "Applicable Period" shall
mean whichever of the following periods ends last:
(A) The period beginning with the first Plan Year in
which the Participant attains age 32 and ending with
the close of the Plan Year in which the Participant
attains age 34;
(B) A reasonable period of time ending after the
Employee becomes a Participant; or
(C) A reasonable period after Participant first becomes
subject to Code Section 417.
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<PAGE> 91
However, if a Participant terminates his Employment
prior to the attainment of age 35, the "Applicable
Period" shall mean the one-year period immediately
preceding and immediately following the
Participant's Termination Date. If the Participant
is subsequently re-hired on or after the attainment
of age 35, the Participant shall receive a new
explanation within the "Applicable Period" descried
in the preceding paragraph.
(iii) A married Participant may waive the Pre-Retirement Survivor
Annuity by properly completing and filing a form with the
Committee during the period beginning on the first day of the
Plan Year during which the Participant attains age 35 and
ending on the Participant's death. In addition, the married
Participant may name a non-spouse Beneficiary to receive the
death benefit. However, the married Participant's waiver of
the Pre-Retirement Survivor Annuity shall be void unless the
Participant's Spouse (after receipt of the explanation of the
Pre-Retirement Survivor Annuity described in subparagraph (ii)
above) consents in writing on a form provided by the Plan
Administrator in the presence of a notary public or Plan
representative to the Participant's waiver of the
Pre-Retirement Survivor Annuity. The Spouse's consent must
acknowledge the effect of such consent and must specifically
state the non-spouse beneficiary, if any, selected by the
Participant. However, if the Participant establishes to the
satisfaction of the Plan Administrator that his Spouse's
consent cannot be obtained because he has no Spouse, because
his Spouse cannot be located, or because of other
circumstances as determined by applicable Treasury
Regulations, the Committee may treat the Participant's
election as an election for which spousal consent was
obtained. A Spouse's consent pursuant to this paragraph shall
be irrevocable.
(iv) If the Participant waives the Pre-Retirement Survivor Annuity
(with spousal consent), the Participant's Account will be
distributed to the Participant's Beneficiary as provided in
Section 8.05(b). A married Participant may revoke his waiver
of the Pre-Retirement Survivor Annuity at any time prior to
his death. Furthermore, the Participant's waiver shall cease
to be valid upon the remarriage of the Participant following
the death or divorce of the spouse giving the consent to the
waiver of the Pre-Retirement Survivor Annuity. If the
Participant revokes his waiver or if such election otherwise
ceases to be valid, any death benefit payable to the
Participant's Spouse shall be determined pursuant to
subparagraph (i) above.
(v) If a unmarried Participant dies prior to his Annuity Starting
Date, the Participant's vested Account shall be distributed
to the Beneficiary as provided in Section 8.05(b).
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<PAGE> 92
(vi) If a Participant dies on or after his Annuity Starting Date,
no death benefits will be paid under this Paragraph (c) or
under Section 8.05. Instead, any death benefits will be
determined in accordance with the distribution option
selected by the Participant. The Beneficiary may elect to
accelerate any death benefit into a lump sum by notifying the
Committee within ninety days of the Participant's death on a
form provided by the Committee for such purpose.
- 85 -
<PAGE> 1
EXHIBIT 10.14
MANAGING GENERAL AGENT AGREEMENT BY AND
BETWEEN SUMMIT CONSULTING, INC. OF LOUISIANA AND
LOUISIANA EMPLOYERS MUTUAL INSURANCE COMPANY
Agreement made May 29, 1997 between Louisiana Employers Mutual
Insurance Company, hereinafter referred to as "Insurance Company", a
corporation organized under the laws of the State of Louisiana, having
its principle place of business at Baton Rouge, Louisiana, and Summit
Consulting, Inc. of Louisiana, hereinafter referred to as "Summit", a
corporation organized under the laws of the State of Louisiana, having
its principle place of business at Baton Rouge, Louisiana.
Section 1
Appointment of Managing General Agent
Insurance Company appoints Summit as its Managing General Agent, to
solicit applications for insurance policies and to collect such
premiums as directed by Insurance Company. Summit shall act as the
exclusive Managing General Agent of Insurance Company. Summit hereby
accepts such appointment and agrees to render its services to
Insurance Company in the management of claims, in the manner and to
the extent set forth herein.
Section 2
Term of Agreement
This agreement shall become effective upon approval of the Louisiana
Department of Insurance of Summit as a Managing General Agent and
authorization for Insurance Company to begin doing business in the
state of Louisiana, and such agreement shall continue in force for a
term of 5 years, subject to the provisions of this agreement; and
thereafter on a continuing basis as mutually agreed upon in accordance
with the policies adopted by the Board of Directors of Insurance
Company, provided that either party hereto shall have the right to
terminate this agreement by giving not less than 30 days notice in
writing to the other party in accordance with the provisions below.
Section 3
Relationship of Parties
The parties agree that the relationship created by this agreement is
that of an independent contractor. Summit is not an employee of
Insurance Company and the relationship created herein is not to be
construed as a joint venture between Summit and Insurance Company or
any form of partnership between Summit and Insurance Company.
<PAGE> 2
Section 4
Taxes
Each party shall remain exclusively responsible for payment and
discharge of all taxes, assessments or charges of any nature whatsoever
that may be imposed or claimed against the party.
Section 5
Duties of Summit
5.1 Summit shall set up policies, maintain records and manage
claims of Insurance Company in such a manner as provided
herein. Premium audits shall be performed by Summit, along
with all record keeping and accounting services. All policy
administration, loss control prevention services and all
underwriting functions shall be performed by Summit. Summit
shall collect all sums due Insurance Company and pay all
items of expense in accordance with the policies of the Board
of Directors of Insurance Company. Summit shall also invest
policy surplus as approved by the Board of Directors and
properly account for all funds so handled, as provided
herein. Collection activities shall also be performed by
Summit. Such collection activities shall not include legal
pursuit of Insurance Company's claim and therefore, no legal
fees, court costs or other associated costs shall be incurred
by Summit on behalf of Insurance Company. Summit shall also
market insurance products for and on behalf of Insurance
Company.
5.2 Premium audit, as defined in this section, shall mean
analysis and tests of payroll records and other procedures
necessary to examine the correctness of premiums paid by
policyholders. The audit shall include examining, on a test
basis, evidence supporting the amounts and disclosures with
respect to the payroll and premiums paid by policyholders;
therefore, the audit will involve judgment about the number
of transactions to be examined and the areas to be tested.
However, because the audit will not include a detailed
examination of all transactions, there is a risk that
material errors, irregularities or illegal acts, including
fraud, may exist and not be detected by Summit.
Section 6
Type of Insurance Authorized to Issue
The classes of business of which Summit shall have jurisdiction shall
be any and all types of business for which Insurance Company's charter
presently authorizes and is approved by the Louisiana Department of
Insurance and will continue to authorize from time to time.
<PAGE> 3
Section 7
Underwriting Guidelines of Summit
Summit shall agree to be bound by the following underwriting
guidelines. Any modification of the underwriting guidelines must be in
writing and signed by both parties.
7.1 The maximum annual premium volume written shall be
$20,000,000.00, with $500,000.00 payable for one
policyholder.
7.2 The basis of the rates to be charged shall be that of NCCI
rates, as approved and authorized by the Louisiana Department
of Insurance.
7.3 The types of risks which may be written include worker's
compensation insurance or any risks authorized by the
Louisiana Department of Insurance that Insurance Company may
write.
7.4 The maximum limits of liability for worker's compensation
insurance, are as statutorily defined by Louisiana law.
Maximum limits of employer's liability are up to a
$1,000,000.00 policy limit.
7.5 All applicable policy exclusions are as provided in the
proposed NCCI policy forms.
7.6 Policies shall only be written in the State of Louisiana.
7.7 Policy cancellation provisions are as provided in NCCI policy
forms and allowed under Louisiana statute.
7.8 The maximum policy period is one year.
Section 8
Settlement of Claims
8.1A Summit shall have installment and lump sum settlement
authority with respect to the settling of claims on behalf of
Insurance Company. Lump sum settlement authority shall be
limited to $100,000.00, without the approval of an Officer of
Insurance Company.
8.1B For purposes of section 8.1, lump sum settlement shall mean
payment of an entire amount due at one time in lieu of
monthly installments.
<PAGE> 4
8.2 Summit shall hold all settlement documents, records and files
available for purposes of inspection, review, audit and
copying by Insurance Company at all times, upon reasonable
request..
8.3A It shall be the duty of Summit to timely report all claims to
Insurance Company. The duty to respond will be discharged by
a report to any officer of Insurance Company. Insurance
Company shall retain the right to request a copy of the claim
file. Upon such request, or as soon as it becomes known that
the claim:
i) has the potential to exceed an amount determined by
the Commissioner or exceeds the limits set by
Insurance Company, whichever is less, if applicable;
ii) involves a coverage dispute;
iii) may exceed Summit's claims settlement authority;
iv) is open for more than six (6) months; or
v) is closed by payment of an amount set by the
Commissioner or an amount set by the company, which
ever is less, if applicable,
a copy of the claim file shall be sent to the insurer. With
respect to section 8.3A, "timely" shall be defined as any 24
hour period. If the expiration of such 24 hour period shall
fall on a weekend or holiday, the period shall be extended to
the first business day following said weekend or holiday.
8.3B The Louisiana Department of Insurance or any other
appropriate government agency may request such documents and
Summit shall comply with all governmental orders effecting
Insurance Company. If, however, Summit is aware that
Insurance Company is legally contesting such action, or
intends to legally contest such action, Summit shall refuse
to comply with such governmental request or order, until a
final court order is obtained in favor of the governmental
request or order.
8.4 Insurance Company shall have the right to review and/or audit
all settlement documents and settlement files, at anytime,
with proper notice.
8.5 All claim files shall be the property of Insurance Company.
Upon order of liquidation of Insurance Company, files shall
become the sole property of Insurance Company or its estate.
Summit shall have reasonable access to and the right to copy
the files on a timely basis.
<PAGE> 5
8.6 Any settlement authority granted to Summit may be terminated
for cause upon Insurance Company's written notice to Summit
or upon termination of the contract.
8.7 Insurance Company may suspend settlement authority of Summit
during the pendency of any dispute regarding the cause for
termination.
Section 9
Records
9.1 It shall be the duty and responsibility of Summit to maintain
separate records of all matters pertaining to this agreement.
Insurance Company shall have access to and the right to copy
all accounts, electronic data files and records related to
its business in a form useable by Insurance Company and the
Commissioner of Insurance for the State of Louisiana or any
regulatory authority, upon reasonable request. Access to all
books, bank accounts, and records of Summit in a form usable
to the Commissioner of Insurance or regulatory authority
shall be given. Such records shall be retained pursuant to
rules and regulations, as amended from time to time and
promulgated by the Commissioner of Insurance.
9.2 In the event of the termination of this agreement between
Insurance Company and Summit or the withdrawal of funds from
the terms of this agreement as herein provided, Summit
specifically agrees to turn over to an authorized
representative of Insurance Company on or before the date of
such termination or withdrawal, any such records or
correspondence as may be reasonably necessary for the
assistance of an authorized representative of the corporation
in carrying to completion any transaction that may be
required under the terms of this agreement.
9.3 All documents, except as herein specified, shall be and
remain the property of Insurance Company and shall be
available to Insurance Company and its representatives as
provided herein.
Section 10
Cancellation of Policy
Insurance Company shall have the right to cancel or non-renew any
policy of insurance pursuant to the laws and regulations applicable
thereto.
<PAGE> 6
Section 11
Severability
In the event any provision of this agreement shall be held to be
invalid and unenforceable by a court of competent jurisdiction or
regulatory authority, the same shall not affect whatsoever the
validity or enforceability of the remainder of this agreement.
Section 12
Notice
All notices, requests, demands or other communications hereunder shall
be in writing and shall be deemed to have been duly given if delivered
in person, or within 10 days after deposit in the United States mail,
postage prepaid, certified, with return receipt requested, or
otherwise actually delivered to the other party.
Section 13
Termination of Contract
13.1 Insurance Company may terminate the contract for cause upon
written notice to Summit. At least 60 days written notice
must be given to Summit notifying Summit of Insurance
Company's intention to terminate for cause. During this sixty
day period, Summit shall be given the opportunity to cure the
default Such notice shall be sent by registered mail, with
return receipt requested. As defined in this section, "cause"
is any breach of the terms of this agreement.
13.2 Notwithstanding any other provision in this agreement,
Insurance Company may cancel this contract for any illegal or
unlawful act committed by Summit, its officers and/or
employees in performance of this contract.
13.3 Insurance Company may suspend the underwriting authority of
Summit during the pendency of any dispute regarding the cause
for termination.
13.4 Notice of termination must be signed by officers or
representatives of the respective organizations of equal or
greater rank to those signing this agreement.
Section 14
Receipt of Insurance Company Funds; Accounts
14.1 Summit shall deposit (either directly or in a depositary bank
for transmittal) all money received on behalf of Insurance
Company in an escrow fund account for the benefit of
Insurance Company or an account
<PAGE> 7
or approved investment in the name of Insurance Company. The
trust account shall be maintained at all times in a national
or state member bank that is a member of the Federal Reserve
System. Summit shall not commingle any of the above described
money with any funds or other property of Summit. This
account shall be used for all payments on behalf of Insurance
Company. Notwithstanding any other provision in this
agreement, Summit may retain no more than three (3) months
estimated claims payments and allocated loss adjustment
expenses. Any balance remaining shall be remitted to
Insurance Company.
14.2 In the event Insurance Company so elects, it may designate
the bank which shall act as a depositor for such funds.
Insurance Company further reserves the right to direct a
change in the depositary, at any time. Notice of an election
to designate a depositary bank or of an exercise of the right
to direct a change in the depository arrangements or the
depository bank shall be given in writing by an authorized
representative of the corporation.
14.3 Anything in this agreement to the contrary notwithstanding,
Summit shall not be liable for any failure or bankruptcy of
any bank used as a depository of any funds maintained in the
escrow account or Insurance account, provided said bank was
approved or authorized by Insurance Company.
Section 15
Unauthorized Actions
15.1 Summit shall have full power and authority, to act on behalf
of Insurance Company, pursuant to the duties and obligations
of this agreement.
15.2 Summit shall not:
A. Bind reinsurance or retrocessions on behalf of Insurance
Company, except that Summit shall bind facultative
reinsurance contracts pursuant to obligatory facultative
agreements if the contract with Insurance Company contains
reinsurance underwriting guidelines including, for
reinsurance both assumed and ceded, a list of reinsurers with
which such automatic agreements are in effect, the coverages
and amounts or percentages that may be reinsured and
commission schedules.
B. Commit the insurer to participate in insurance or reinsurance
syndicates;
C. Appoint any producer without assuring that the producer is
lawfully licensed to transact the type of insurance for which
he is appointed.
<PAGE> 8
D. Notwithstanding any other provision of this agreement,
without prior approval of Insurance Company, pay or commit
Insurance Company to pay a claim over a
specified amount, net of reinsurance, which shall not exceed
one (1%) percent of Insurance Company's policyholder's
surplus as of December 31, of the last completed calendar
year.
E. Collect any payment from a reinsurer or commit Insurance
Company to any claims settlement with a reinsurer, without
prior approval of Insurance Company. If prior approval is
given, a report shall be promptly forwarded to Insurance
Company.
F. Permit its sub-producer to serve on its Board of Directors.
G. Appoint a sub-MGA.
H. Jointly employ an individual who is employed with the
Insurance Company.
Section 16
Fees
16.1 In exchange for these services, Insurance Company shall pay
to Summit as compensation for services rendered hereunder an
amount equal to 14.5% of collected earned normal premium,
payable by the 15th of the following month. Earned normal
premium shall be defined as annual premium less any approved
discounts, credits or adjustments, as approved by Insurance
Company.
16.2 The fees to be received by Summit shall not include the
following expenses: commission payments to agents,
reinsurance fees or professional fees, such as audit fees,
accounting fees and fees for outside professional services.
Section 17
Licensing of MGA
Summit shall at all times during the term of this agreement maintain
such licenses and approvals as are required for any of the various
services to be performed by Summit on behalf of Insurance Company.
<PAGE> 9
Section 18
Non-Assignability
This contract may not be assigned in whole or in part by Summit.
Section 19
Bond of Agent
On written request of Insurance Company, Summit agrees to furnish to
Insurance Company at Summit's cost and expense, a fidelity bond,
reasonable in amount, of a reputable insurance company in a sum
satisfactory to Insurance Company providing for the faithful
accounting of all monies collected by Summit under this agreement.
Section 20
Confidentiality
20.1 Summit agrees that all knowledge and information whether
printed, written or oral that Summit may receive from
Insurance Company or from its employees or consultants of
Insurance Company, or by virtue of the performance of
services under and pursuant to this agreement, relating to
costs, business affairs, policyholders' lists, procedures,
future plans, or technical data that belong to Insurance
Company or to those with whom Insurance Company has
contracted regarding such information, and all information
provided by Summit to Insurance Company, directly or
indirectly, in reports of work done, together with any other
information acquired or gained by Summit as done, together
with any other information acquired or gained by Summit as a
direct result of Summit's assignment to provide services
under and pursuant to this agreement, shall for all time and
for all purposes be regarded by Summit as strictly
confidential and held by Summit in confidence, and solely for
Insurance Company's benefit and use, and shall not be
directly or indirectly used by Summit or directly or
indirectly disclosed by Summit to any person whatsoever
excepting to Insurance Company or with Insurance Company's
prior written permission.
20.2 Insurance Company hereby acknowledges that Summit may
represent other Insurance Companies within the state of
Louisiana.
Section 21
Governing Regulations
Summit shall comply with all regulations of any federal, state or
municipal authority having jurisdiction over the activities of the
Insurance Industry.
<PAGE> 10
Section 22
Bankruptcy
If bankruptcy proceedings, whether voluntary or involuntary, are
commenced against either Insurance Company or Summit, or if either
party enters into a composition agreement with its creditors, either
party may terminate this agreement by giving 15 days written notice to
the other party.
Section 23
Choice of Law
This agreement has been made and entered into in the State of
Louisiana and the laws of Louisiana govern the validity and
interpretation of this agreement and the performance due hereunder.
Section 24
Accounting
Summit shall render an accounting to Insurance Company detailing all
transactions and remit all funds due under this contract on not less
than a monthly basis.
Section 25
Integration
The drafting, execution and delivery of this agreement by the parties
have been induced by no representations, statements, warranties or
agreements other than those expressed in this agreement. This
agreement embodies the entire understanding of the parties, and there
are no further or other agreements or understandings, written or oral,
in effect between the parties relating to the subject matter hereof
unless expressly referred to in this agreement.
Section 26
Modification
This agreement may not be modified unless such modification is in
writing and signed by both parties to this agreement.
<PAGE> 11
Section 27
Signature
This agreement shall not go into force until signed by Summit and by a
duly authorized officer of Insurance Company. The Parties signing this
document have verified their capacity to bind the parties stated
herein.
IN WITNESS WHEREOF, the parties have executed this agreement on May
29, 1997.
Summit Consulting, Inc. of Louisiana
By: /S/ HENRY E. CHILDS, JR.
-------------------------------------
Henry E. Childs, Jr., President
Louisiana Employers Mutual Insurance Co.
By: /S/ FRANK P. DISPENSIRE, SR.
-------------------------------------
Frank P. Dispensire, Sr., President
-----------------------------------------
NOTARY PUBLIC
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-36649) pertaining to the Summit Holding Southeast, Inc.
Retirement Plan and in the Registration Statement (Form S-8 No. 333-31781)
pertaining to the Summit Holding Southeast, Inc. 1996 Long Term Incentive Plan
and the Summit Consulting, Inc. Retirement Plan (as amended) of our report
dated March 6, 1998 with respect to the consolidated financial statements and
schedules of Summit Holding Southeast, Inc. included in the transition report
on Form 10-K for the nine-month period ended December 31, 1997.
ERNST & YOUNG LLP
Jacksonville, Florida
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SUMMIT HOLDING SOUTHEAST, INC. AND
SUBSIDIARIES AS OF AND FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SUMMIT HOLDING SOUTHEAST, INC.
AND SUBSIDIARIES FORM 10-K FOR THE NINE MONTHS ENDED DECEMBER 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 221,228
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 21,691
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 249,456
<CASH> 5,757
<RECOVER-REINSURE> 6,211
<DEFERRED-ACQUISITION> 973
<TOTAL-ASSETS> 534,651
<POLICY-LOSSES> 347,068
<UNEARNED-PREMIUMS> 36,633
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 14,015
<NOTES-PAYABLE> 16,540
0
16,397
<COMMON> 58
<OTHER-SE> 81,879
<TOTAL-LIABILITY-AND-EQUITY> 534,651
19,532
<INVESTMENT-INCOME> 11,117
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<UNDERWRITING-OTHER> 22,034
<INCOME-PRETAX> 12,688
<INCOME-TAX> 4,138
<INCOME-CONTINUING> 8,550
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<EPS-PRIMARY> 1.43
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<RESERVE-OPEN> 248,691
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