AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1998
REGISTRATION STATEMENT NO. 333-63623
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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21ST CENTURY HOLDING COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
FLORIDA 6331 65-0248866
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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<TABLE>
<S> <C>
EDWARD J. LAWSON
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
21ST CENTURY HOLDING COMPANY
4161 N.W. 5TH STREET
PLANTATION, FLORIDA 33317
(954) 581-9993
(NAME, ADDRESS, INCLUDING
ZIP CODE, AND TELEPHONE NUMBER
INCLUDING AREA CODE, OF AGENT
FOR SERVICE)
</TABLE>
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COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
DALE S. BERGMAN, P.A. ANDREW HULSH, ESQ.
BROAD AND CASSEL BAKER & MCKENZIE
201 SOUTH BISCAYNE BOULEVARD 1200 BRICKELL AVENUE
MIAMI CENTER, SUITE 3000 19TH FLOOR
MIAMI, FLORIDA 33131 MIAMI, FLORIDA 33131
TELEPHONE: (305) 373-9454 TELEPHONE: (305) 789-8900
TELECOPIER: (305) 373-9443 TELECOPIER: (305) 789-8953
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
--------------
If any of the Securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended (the "Securities Act"), check the following box: [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [x]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A), OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 7, 1998
PROSPECTUS
1,250,000 SHARES
21ST CENTURY HOLDING COMPANY
COMMON STOCK
----------------
21st Century Holding Company (the "Company") hereby offers 1,250,000
shares of common stock, par value $.01 per share (the "Common Stock"). Prior to
this offering (the "Offering"), there has been no public market for the Common
Stock and there can be no assurance that such a market will develop after
completion of this Offering, or if developed, that it will be sustained. It is
presently anticipated that the initial public offering price of the Common
Stock will be between $7.00 and $8.00 per share. For information regarding the
factors considered in determining the initial public offering price of the
Common Stock, see "Risk Factors" and "Underwriting." The Company has applied
for quotation of the Common Stock on the Nasdaq National Market under the
symbol "TCHC."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY(2)
<S> <C> <C> <C>
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Per Share ......... $ $ $
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Total(3) .......... $ $ $
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</TABLE>
(1) Does not include compensation payable to Gilford Securities Incorporated,
the representative of the several underwriters (the "Representative"), in
the form of a non-accountable expense allowance. In addition, see
"Underwriting" for information concerning indemnification and contribution
arrangements with and other compensation payable to the Representative.
(2) Before deducting expenses estimated to be $745,000, including the
Representative's non-accountable expense allowance.
(3) The Company has granted to the Underwriters an option (the "Over-Allotment
Option"), exercisable for a period of 45 days after the date of this
Prospectus, to purchase up to 187,500 additional shares of Common Stock
upon the same terms and conditions set forth above, solely to cover
over-allotments, if any. If the Over-Allotment Option is exercised in
full, the total Price to Public, Underwriting Discounts and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
----------------
The Common Stock is being offered by the Underwriters subject to prior
sale when, as and if delivered to and accepted by the Underwriters, and subject
to approval of certain legal matters by their counsel and to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this Offering and to reject any order in whole or in part. It is expected that
delivery of the shares of Common Stock offered hereby will be made against
payment at the offices of Gilford Securities Incorporated, New York, New York,
on or about , 1998.
----------------
GILFORD SECURITIES INCORPORATED
The date of this Prospectus is , 1998
<PAGE>
[GRAPHIC OMITTED]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT AND OTHER STABILIZING TRANSACTIONS. SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." EXCEPT AS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE
OVER-ALLOTMENT OPTION; (II) ASSUMES NO EXERCISE OF THE WARRANTS TO BE ISSUED BY
THE COMPANY TO THE REPRESENTATIVE TO PURCHASE UP TO 125,000 SHARES OF COMMON
STOCK (THE "REPRESENTATIVE'S WARRANTS"); (III) DOES NOT GIVE EFFECT TO 282,400
SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF OUTSTANDING OPTIONS
GRANTED UNDER THE COMPANY'S 1998 STOCK OPTION PLAN (THE "1998 PLAN"); (IV)
GIVES EFFECT TO THE 1.8-FOR-ONE, 1.2-FOR-ONE AND 926.33-FOR-ONE STOCK SPLITS
EFFECTED IN NOVEMBER 1996, JANUARY 1997 AND SEPTEMBER 1998, RESPECTIVELY; AND
(V) GIVES EFFECT TO THE CONSOLIDATION OF THE COMPANY'S OPERATIONS EFFECTED IN
JANUARY 1997 AND JANUARY AND FEBRUARY 1998. SEE "GLOSSARY OF SELECTED TERMS"
FOR DEFINITIONS OF CERTAIN INSURANCE-RELATED TERMS USED IN THIS PROSPECTUS.
THE COMPANY
GENERAL
The Company is a vertically integrated insurance holding company which,
through its subsidiaries, controls substantially all aspects of the insurance
underwriting, distribution and claims process. The Company underwrites
nonstandard and standard personal automobile insurance and mobile home property
and casualty insurance in the State of Florida through its subsidiary,
Federated National Insurance Company ("Federated National"). The Company has
underwriting authority for third-party insurance companies which it represents
through a wholly-owned managing general agent, Assurance Managing General
Agents, Inc. ("Assurance MGA"). The Company internally processes claims made by
Federated National's insureds through a wholly-owned claims adjusting company,
Superior Adjusting, Inc. ("Superior"). The Company also offers premium
financing to its own and third-party insureds through its wholly-owned
subsidiary, Federated Premium Finance, Inc. ("Federated Premium"), and offers
auto title loans and other ancillary services through its wholly-owned
subsidiary, Florida State Discount Auto Title Loans, Inc. ("Florida Auto
Title").
The Company markets and distributes Federated National's and third-party
insurers' products and its other services primarily in South Florida, through a
network of 15 Company-owned agencies and approximately 300 active independent
agents. The Company believes that it can be distinguished from its competitors
because it generates revenue from substantially all aspects of the insurance
underwriting, distribution and claims process. The Company provides quality
service to both its agents and insureds by utilizing an integrated computer
system which links the Company's insurance and service entities. The Company's
computer and software systems allow for rapid automated premium quotation,
policy issuance, billing and payment and claims processing and enable the
Company to continuously monitor substantially all aspects of its business.
Using these systems, the Company's agents can access a customer's driving
record, quote a premium, offer premium financing and, if requested, generate a
policy on-site. The Company believes that these systems have facilitated its
ability to market and underwrite insurance products on a cost-efficient basis,
and that they will enhance the Company's ability to expand to other regions in
Florida and to other states.
The Company's primary product is nonstandard personal automobile
insurance, which is principally provided to insureds who are unable to obtain
preferred or standard insurance coverage because of their payment history,
driving record, age, vehicle type or other factors, including market conditions
for preferred or standard risks. Underwriting standards for preferred or
standard insurance coverage have become more restrictive, thereby requiring
more drivers to seek coverage in the nonstandard automobile insurance market.
These factors have contributed to an increase in the size of the nonstandard
personal automobile insurance market. Based on information provided by A.M.
Best
3
<PAGE>
Company, Inc. ("A.M. Best"), a leading rating agency for the insurance
industry, from 1993 to 1997, the nonstandard personal automobile insurance
market in the United States grew from approximately $14.2 billion to
approximately $22.0 billion of annual premium volume and from approximately
15.1% to approximately 19.2% of the total personal automobile insurance market.
Also according to A.M. Best, from 1993 to 1997, annual premium volume in the
nonstandard personal automobile insurance market in Florida grew from
approximately $1.5 billion to approximately $2.6 billion and from approximately
27.8% to approximately 35.6% of the total personal automobile insurance market
in Florida.
BUSINESS STRATEGY
The Company's strategy is to seek continued growth of its business by
capitalizing on the efficiencies of its vertical integration and
/bullet/ selectively expanding the Company's product offerings by
underwriting additional insurance products and programs such
as standard automobile insurance, which the Company commenced
offering in August 1998, commercial vehicle insurance and
homeowners' insurance, and marketing these products and
programs through its distribution network;
/bullet/ further penetrating the Florida market by acquiring additional
insurance agencies and establishing relationships with
additional independent agents in order to expand the Company's
distribution network to and market its products and services
in other regions of Florida;
/bullet/ expanding direct marketing of insurance products to customers
through mailings, media advertising and the Internet;
/bullet/ maintaining a commitment to provide quality service to its
agents and insureds by emphasizing customer service;
/bullet/ encouraging agents to place a high volume of quality business
with the Company by providing them with attractive commission
structures tied to premium levels and loss ratios;
/bullet/ identifying and reviewing opportunities to acquire additional
insurers; and
/bullet/ using the model established in Florida to ultimately expand to
other selected states.
The Company is continually exploring various acquisition opportunities,
but does not currently have any understandings, commitments, arrangements or
agreements with respect to any acquisition.
BACKGROUND
The Company commenced operations in November 1983 when Edward J. Lawson
and Michele V. Lawson, the Company's co-founders, opened an independent
insurance agency in South Florida to sell private passenger automobile
insurance. Through internal growth and acquisitions, the number of
Company-owned agencies has expanded to 15, located principally in South
Florida. In September 1987, Mr. and Mrs. Lawson organized Federated Premium to
offer premium financing services. The Company was incorporated in the State of
Florida in March 1991 for the purpose of functioning as a holding company for
Federated National, which commenced underwriting operations in 1992.
In January 1997, the Company acquired all of the outstanding capital stock
of Assurance MGA, Federated Premium and Superior, and in January and February
1998, the Company acquired all other insurance agencies and other affiliated
companies not previously owned by the holding company (collectively, the
"Consolidation"). Unless the context requires otherwise, all references herein
to the
4
<PAGE>
"Company" refer to 21st Century Holding Company and its subsidiaries and their
respective businesses as presently conducted and as historically conducted
prior to the Consolidation.
The Company's executive offices are located at 4161 N.W. 5th Street,
Plantation, Florida 33317, and its telephone number is (954) 581-9993.
THE OFFERING
Common Stock offered
by the Company................... 1,250,000 shares
Common Stock outstanding
before the Offering.............. 2,100,000 shares
Common Stock outstanding
after the Offering............... 3,350,000 shares
Use of Proceeds................... Contribution to Federated National's
capital to increase its underwriting
capacity, repayment of a portion of the
outstanding balance under the Company's
$4.0 million revolving line of credit and
term loan agreement (the "Credit
Facility"), financing of acquisitions and
working capital and other general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National
Market symbol..................... TCHC
5
<PAGE>
SUMMARY CONSOLIDATED AND COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
The following summary consolidated and combined financial data of the
Company under the caption "Statement of Income Data" for the years ended
December 31, 1997 and 1996 are derived from the Company's consolidated and
combined financial statements, which have been audited by KPMG Peat Marwick
LLP, independent certified public accountants. The following summary
consolidated and combined financial data of the Company under the caption
"Statement of Income Data" for the six months ended June 30, 1998 and 1997 and
the "Balance Sheet Data" under the caption "Actual" as of June 30, 1998 are
derived from unaudited interim consolidated and combined financial statements
contained elsewhere herein and includes all adjustments, consisting only of
normal recurring adjustments, which the Company considers necessary for a fair
presentation of the financial position and the results of operations of the
Company as of and for these periods. Operating results for the six months ended
June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. This summary consolidated and
combined financial data should be read in conjunction with the consolidated and
combined financial statements, the unaudited interim consolidated and combined
financial statements and the notes thereto and the other financial information
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30 DECEMBER 31
------------------------- -------------------------
1998 1997 1997 1996
------------ ---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Gross premiums written ...................... $ 12,169 $8,842 $17,675 $ 14,850
Net Premiums written ........................ 8,397 6,802 13,016 9,248
Net premiums earned ......................... 6,678 4,978 10,924 9,643
Commission income ........................... 979 1,567 2,358 1,535
Net investment income ....................... 506 453 1,047 850
Net realized gains (losses) ................. 389 (34) (19) 155
Other income ................................ 1,551 553 1,439 2,117
-------- ------ ------- --------
Total revenue ............................... 10,103 7,517 15,749 14,300
Expenses:
Losses and LAE .............................. 4,681 3,272 7,414 7,660
Operating and underwriting expenses ......... 2,106 1,495 3,301 3,513
Other expenses .............................. 1,537 1,980 3,682 2,423
-------- ------ ------- --------
Total expenses .............................. 8,324 6,747 14,397 13,596
-------- ------ ------- --------
Net income .................................. 1,112 641 1,070 626
Net income per share ........................ $ 0.53 $ 0.31 $ 0.51 $ 0.30
Weighted average shares outstanding ......... 2,100 2,100 2,100 2,100
STATUTORY OPERATING RATIOS:
Loss ratio .................................. 77% 73% 75% 85%
Expense ratio ............................... 23% 32% 24% 23%
-------- ------- ------- --------
SAP Combined ratio .......................... 100% 105% 99% 108%
======== ======= ======= ========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------
ACTUAL AS ADJUSTED(1)
------------ ---------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Total investments .................... $ 17,839 $ 17,839
Finance contract receivables ......... 4,943 4,943
Total assets ......................... 33,883 40,139
Unpaid losses and LAE ................ 7,623 7,623
Unearned premiums .................... 10,100 10,100
Revolving credit outstanding ......... 3,850 2,350
Shareholders' equity ................. 6,865 14,621
Book value per share ................. 3.27 4.36
</TABLE>
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(1) Adjusted to reflect the sale of 1,250,000 shares of Common Stock by the
Company in this Offering at an assumed initial public offering price of
$7.50 per share and the application of the net proceeds therefrom. See
"Use of Proceeds."
7
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating the Company and
its business before purchasing the shares of Common Stock offered hereby. This
Prospectus contains in addition to historical information, forward-looking
statements that involve risks and uncertainties. The words "expect,"
"estimate," "anticipate," "believe," "intend," "plan" and similar expressions
and variations thereof are intended to identify forward--looking statements.
The Company's actual results could differ materially from those set forth in or
implied by any forward--looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below as well as those discussed elsewhere in this Prospectus.
NATURE OF THE COMPANY'S BUSINESS
Factors affecting the sectors of the insurance industry in which the
Company operates may subject the Company to significant fluctuations in
operating results. These factors include competition, catastrophe losses and
general economic conditions, including interest rate changes, as well as
legislative initiatives, the frequency of litigation, the size of judgments and
severe weather conditions. Specifically, the nonstandard automobile insurance
market, which comprises the bulk of the Company's current operations, is
influenced by many factors, including state and Federal insurance laws, market
conditions for automobile insurance and state assigned risk and residual market
plans. Additionally, an economic downturn in Florida could result in fewer car
sales and less demand for automobile insurance.
Historically, the financial performance of the property and casualty
insurance industry has tended to fluctuate in cyclical patterns of soft markets
followed by hard markets. Although an individual insurance company's financial
performance is dependent on its own specific business characteristics, the
profitability of most property and casualty insurance companies tends to follow
this cyclical market pattern.
The Company has grown rapidly over the last few years. The Company
believes that a substantial portion of its future growth will depend on its
ability, among other things, to successfully implement its business strategy,
including expanding the Company's product offering by underwriting and
marketing additional insurance products and programs through its distribution
network and further penetrating the Florida market by acquiring additional
insurance agencies and establishing relationships with additional independent
agents in order to expand its distribution network. Any future growth is
contingent on various factors, including the availability of adequate capital,
the Company's ability to hire and train additional personnel, regulatory
requirements and rating agency considerations. There is no assurance that the
Company will be successful in expanding its business, that the existing
infrastructure will be able to support additional expansion or that any new
business will be profitable. Moreover, as the Company expands its insurance
products and programs and the Company's mix of business changes, there can be
no assurance that the Company will be able to maintain its profit margins or
other operating results. There can also be no assurance that the Company will
be able to obtain the required regulatory approvals to offer additional
insurance products or expand into states other than Florida. Moreover, pursuant
to a Consent Order issued in conjunction with the Company's authorization to
underwrite mobile home insurance (the "Consent Order"), the Company's growth is
subject to regulatory limits on the amount of premiums it can underwrite. In
1998, Federated National may only underwrite $21.0 million in gross premiums
written and $14.0 million in total net premiums written. In 1999, these limits
increase to $24.0 million and $15.0 million, respectively. Federated National
also is required to maintain a minimum capital surplus to support its
underwriting program. In 1998 and 1999, Federated National is required to have
capital surplus of $4.7 million and $5.9 million, respectively. The premium
limits and capital surplus requirements impact Federated National's potential
growth. Federated National's ability to exceed these limitations will be
subject to the prior approval of the Florida Department of Insurance. The
Florida Department of Insurance has indicated in writing its willingness to
modify the Consent Order and increase Federated National's underwriting
authority, subject to the completion of this Offering. However, there can be no
assurance that Federated National
8
<PAGE>
will be able to obtain the required regulatory approvals, and the failure to do
so could have a material adverse effect on the Company's ability to expand its
business. See "Business--Regulation."
REINSURANCE CONSIDERATIONS
Federated National follows the customary industry practice of reinsuring a
portion of its risks and paying for that protection based upon premiums
received on all policies subject to reinsurance. The Company's business is
dependent upon Federated National's ability to transfer or "cede" significant
amounts of the risk insured by it. The amount, availability and cost of
reinsurance are subject to prevailing market conditions which are beyond
Federated National's control, and they affect Federated National's level of
business and profitability. Reinsurance makes the assuming reinsurer liable to
the extent of the risk ceded. Federated National's reinsurance is primarily
ceded with Transatlantic Reinsurance Corporation ("Transatlantic Re").
Federated National, however, is subject to credit risk with respect to its
current and future reinsurers, as the ceding of risk to its reinsurers does not
relieve Federated National of its liability to its insureds with respect to the
portion of the risk which has been reinsured, in the event of the reinsurers'
failure to pay for any reason. The insolvency of Transatlantic Re or any other
of Federated National's reinsurer's or their inability to make payments could
have a material adverse effect on the Company's business, results of operations
and financial condition. There can be no assurance that reinsurance will
continue to be available to Federated National to the same extent, and at the
same cost, as it has in the past. See "Business--Reinsurance."
DEPENDENCE ON INVESTMENT INCOME
Federated National, similar to other property and casualty insurance
companies, depends on income from its investment portfolio for a substantial
portion of its earnings. A significant decline in investment yields in
Federated National's investment portfolio could have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Business--Investments."
ADEQUACY OF UNPAID LOSS AND LAE LIABILITY
Federated National is directly liable for loss and loss adjustment
expenses ("LAE") under the terms of the insurance policies it underwrites.
Federated National establishes a liability for unpaid losses and LAE for the
expected payment of all incurred losses and LAE. The liability for unpaid
losses and LAE is an estimate based on historical data and anticipated future
events. Actual losses and LAE may vary significantly from the established
liability. Furthermore, factors such as inflation, claims settlement patterns,
legislative activity and litigation trends, all of which are difficult to
predict, may have a substantial impact on Federated National's actual loss
experience. Accordingly, there can be no assurance that Federated National's
liability for unpaid losses and LAE will be adequate to cover its actual
losses. If Federated National's liability for unpaid losses and LAE is less
than actual losses and LAE, Federated National will be required to increase the
liability for unpaid losses and LAE with a corresponding reduction in Federated
National's net income in the period in which the deficiency is identified.
Future loss experience substantially in excess of Federated National's
established liability for unpaid losses and LAE could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Liability for Unpaid Losses and LAE."
REGULATION
The Company is subject to the laws and regulations of Florida, its state
of domicile, and will be subject to the laws of any state in which it conducts
business in the future. These laws and regulations cover all aspects of its
business and are generally designed to protect the interests of insurance
policyholders. Such laws and regulations relate to authorized lines of
business, capital surplus requirements, allowable rates and forms, investment
parameters, underwriting limitations, restrictions upon transactions with
affiliates, dividend limitations, changes in control, market conduct,
limitations on premium financing service charges and interest for title loans
and a variety of other financial and
9
<PAGE>
non-financial aspects of the Company's business. The failure of the Company to
comply with applicable insurance laws and regulations or to have new insurance
programs approved could have a material adverse effect on the Company's
business, results of operations and financial condition. Prior to conducting
insurance business in any states other than Florida, the Company will need to
obtain a certificate of authority to conduct insurance business in such states.
There can be no assurance that the Company will be able to obtain a certificate
of authority in any additional states, and the failure to do so would limit the
Company's ability to expand geographically. In addition, any changes in laws
and regulations including the adoption of consumer initiatives regarding rates
charged for automobile or other insurance coverage, could materially adversely
affect the Company's business, results of operations and financial condition.
The National Association of Insurance Commissioners ("NAIC") has adopted a
system of assessing the financial condition and stability of insurance
companies, known as "IRIS ratios," and a system to test the adequacy of
statutory capital, known as "risk-based capital," each of which applies to
Federated National. The IRIS ratios consist of 11 ratios that are compiled
annually from an insurance company's statutory financial reports and then
compared against the NAIC-established "usual range" for each ratio. As of
December 31, 1997, the Florida Department of Insurance found that Federated
National was outside the usual range with respect to four IRIS tests. Federated
National fell outside the usual range with respect to two of the IRIS tests due
to not reporting its underwriting results related to the Florida Joint
Underwriting Association ("FJUA"), an assigned risk pool for automobile
insurance drivers, in its statutory financial statements prior to 1996. The
full results since Federated National's inception of its FJUA participation
were reported in the 1996 underwriting year. If the FJUA results are not
considered, Federated National still falls outside the usual range with respect
to two IRIS tests. Although the Florida Department of Insurance found that
Federated National was outside the usual range with respect to the four IRIS
tests, no regulatory action has been taken to date. The risk-based capital
rules establish statutory capital requirements based on levels of risk retained
by an insurance company. Federated National's adjusted capital at December 31,
1997 exceeded the applicable risk-based standards as established by the NAIC.
Federated National's ratio of statutory surplus to its Authorized Control Level
("ACL") was 261.3% at December 31, 1997 and 290.6% at December 31, 1996.
Regulatory action is triggered if surplus falls below 200% of the ACL amount.
There can be no assurance that Federated National will be able to maintain the
required capital levels or IRIS ratios. Failure to maintain risk-based capital
at the required levels, or IRIS ratios within the NAIC's usual range, could
adversely affect Federated National's ability to secure regulatory approvals as
necessary or appropriate and would materially adversely affect the Company's
business, results of operations and financial condition. See
"Business--Regulation."
RISKS RELATING TO INSURANCE AGENTS
The Company's insurance programs are managed by Assurance MGA, its
managing general agent, which has underwriting authority on behalf of Federated
National and third-party insurance companies which it represents. The Company
markets Federated National's and third-party insurer's products and its other
services through a network of 15 Company-owned agencies and approximately 300
active independent agents. Both Company-employed and independent agents may
under certain circumstances have the ability to bind the Company. Since many of
the agents are independent, the Company has only limited ability to exercise
control over these agents. In the event that an independent agent exceeds its
authority by binding the Company on a risk which does not comply with the
Company's underwriting guidelines, the Company is at risk for that policy until
it receives the application and effects a cancellation. Although the Company
has not experienced a material loss from improper use of binding authority of
its agents, improper use of such authority may result in losses which could
have a material adverse effect on the Company's business, results of operations
and financial condition. See "Business--Insurance Operations."
10
<PAGE>
LIMITED EXPERIENCE IN THE INSURANCE INDUSTRY
Although the Company has been operating since 1983 and certain of its
executive officers and directors have substantial experience in the insurance
industry, Federated National only commenced underwriting nonstandard automobile
insurance in 1992, mobile home property and casualty insurance in 1997 and
standard automobile insurance in August 1998. Accordingly, Federated National
has relatively limited experience in the automobile insurance and mobile home
property and casualty insurance businesses. In addition, Federated National
will have limited or no experience in the additional insurance products which
Federated National plans on introducing as part of its business strategy. There
can be no assurance that the Company's lack of experience will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
COMPETITION
The Company operates in a highly competitive market and faces competition
from both national and regional insurance companies, many of whom are larger
and have greater financial and other resources than the Company, have favorable
A.M. Best ratings and offer more diversified insurance coverage. The Company's
competitors include other companies which market their products through agents,
as well as companies which sell insurance directly to their customers. Large
national writers may have certain competitive advantages over agency writers,
including increased name recognition, increased loyalty of their customer base
and reduced policy acquisition costs. The Company may also face competition
from new or temporary entrants in its niche markets. In some cases, such
entrants may, because of inexperience, desire for new business or other
reasons, price their insurance below that of the Company. Although the
Company's pricing is inevitably influenced to some degree by that of its
competitors, management of the Company believes that it is generally not in the
Company's best interest to compete solely on price, choosing instead to compete
on the basis of underwriting criteria, its distribution network and high
quality service to its agents and insureds. The Company competes with respect
to personal automobile insurance in Florida with more than 100 companies which
underwrite personal automobile insurance. Companies of comparable or smaller
size, which compete with the Company in the nonstandard automobile insurance
business include Fortune Insurance Company, U.S. Security Insurance Company,
United Automobile Insurance Company, Direct General Insurance Company, and
Security National Insurance Company, as well as major insurers such as
Progressive Casualty Insurance Company. Competition could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business--Competition."
IMPORTANCE OF RATINGS BY INDUSTRY SERVICES
Insurers compete for business on the basis of a number of factors,
including the letter ratings assigned by A.M. Best and by other entities
including Standard and Poor's Corporation and Demotech, Inc. A.M. Best's letter
ratings for the industry currently range from "A++" (Superior) to "C-" (Fair)
and some companies are not rated. These letter ratings are continually
monitored and subject to adjustment by A.M. Best. In evaluating a company's
financial and operating performance, A.M. Best reviews the company's
profitability, leverage and liquidity as well as its book of business, the
adequacy and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its reserves and the experience and
competency of its management. Federated National has yet to receive an A.M.
Best letter rating due to its limited operating history and there is no
assurance that the letter rating will be obtained, and if obtained, that it
will be favorable. Although Federated National has not yet received a letter
rating from A.M. Best, A.M. Best has issued a Financial Performance Rating
("FPR") of "3 out of 9 (below average)" to Federated National. An FPR reflects
A.M. Best's opinion of the financial strength and operating performance of
property and casualty insurance companies on which it reports, that have not
been assigned a letter rating due to, among other factors, insufficient
operating history. A poor letter rating could adversely affect the Company. The
Company expects Federated National to receive its rating in 1999. Federated
National is rated "BBB" (Adequate and Secure) by Standard and Poor's
Corporation and is rated "A" (Strong) by Demotech, Inc. If Federated National
does receive a favorable A.M. Best letter rating (as to which there can be no
assurance) and, if
11
<PAGE>
that rating or other available ratings were subsequently downgraded, the
Company could also be adversely affected. See "Business--Regulation."
CATASTROPHE LOSSES
Property and casualty insurance companies are subject to claims arising
from catastrophes which may have a significant impact on their business,
results of operations and financial condition. Catastrophe losses can be caused
by a wide variety of events, including hurricanes, tropical storms, tornadoes,
wind, hail, fires, riots and explosions, and their incidence and severity are
inherently unpredictable. The extent of losses from a catastrophe is a function
of two factors: the total amount of the insurance company's exposure in the
area affected by the event and the severity of the event. Federated National's
policyholders are currently concentrated in South Florida, which is
periodically subject to adverse weather conditions such as hurricanes and
tropical storms. Accordingly, the occurrence of a catastrophe in South Florida
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business".
RELIANCE ON KEY PERSONNEL
The Company depends, and will continue to depend, on the services of its
co-founders and principal shareholders, Edward J. Lawson, the Company's
President and Chief Executive Officer, and Michele Lawson, its Vice
President-Agency Operations and Treasurer. The Company will also be dependent
on the services of other key personnel in the areas of administration,
underwriting, claims and marketing. The ability of the Company to underwrite,
market and distribute its insurance products is partially dependent upon its
ability to retain these key personnel. The Company has entered into an
employment agreement with each of Mr. and Mrs. Lawson; however, no assurance
can be given that the Company can retain Mr. or Mrs. Lawson or its other key
employees. The loss of Mr. or Mrs. Lawson or one or more of its other key
employees could have a material adverse effect on the Company's business. The
Company will be the sole beneficiary of key man life insurance policies in the
amount of $1.0 million which it will maintain on each of Mr. and Mrs. Lawson
effective upon consummation of this Offering. See "Management."
CONCENTRATION OF COMMON STOCK OWNERSHIP
After giving effect to the sale of the 1,250,000 shares offered hereby,
Edward J. Lawson and Michele V. Lawson will beneficially own approximately
37.8% of the issued and outstanding shares of Common Stock. As the Company's
largest shareholders, they are likely to have the power to influence
significantly the election of the Company's directors and to effectively
control the outcome of substantially all matters submitted to a vote of the
Company's shareholders. See "Principal Shareholders."
DILUTION
Purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution of $3.56 per share (assuming an initial
public offering price of $7.50 per share) in the net tangible book value of
their shares. See "Dilution."
ABSENCE OF PRIOR PUBLIC MARKET
Prior to this Offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or
continue after this Offering. The initial public offering price has been
determined by negotiations between the Company and the Representative and may
not be indicative of the market price for the Common Stock after this Offering.
The market price of the Common Stock is subject to significant fluctuations in
response to variations in quarterly and annual operating results, general
trends in the Company's industry actions taken by competitors, the overall
performance of the stock market and other factors. See "Underwriting."
12
<PAGE>
POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 3,350,000 shares
of Common Stock outstanding. The 1,250,000 shares of Common Stock sold in this
Offering will be freely tradable without restriction under the Securities Act,
except for shares which are acquired by an "affiliate" of the Company. The
holders of all 2,100,000 currently outstanding shares have agreed not to offer,
sell or otherwise dispose of their shares for 13 months after the date of this
Prospectus without the prior written consent of the Representative. After this
period, all of the shares subject to this restriction will be eligible for sale
in the public market, subject to the volume limitations and other restrictions
contained in Rule 144 under the Securities Act. Future sales of the shares of
Common Stock held by existing shareholders, or the perception that such sales
may occur, could have an adverse effect on the price of the Common Stock. See
"Shares Eligible for Future Sale."
AUTHORIZATION OF PREFERRED STOCK
The Company's Amended and Restated Articles of Incorporation (the
"Articles") authorize the issuance of preferred stock with designations, rights
and preferences determined from time to time by its Board of Directors.
Accordingly, the Company's Board of Directors is empowered, without shareholder
approval, to issue preferred stock with dividends, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other
rights of the holders of the Common Stock. In the event of issuance, the
preferred stock could be used, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
Although the Company has no present intention to issue any shares of its
preferred stock, there can be no assurance that it will not do so in the
future. See "Description of Capital Stock."
ANTITAKEOVER EFFECTS OF CERTAIN ARTICLES AND BYLAW PROVISIONS AND CERTAIN
PROVISIONS OF FLORIDA LAW
Certain provisions of the Articles and the Company's Bylaws (the "Bylaws")
may be deemed to have antitakeover effects and may delay, defer or prevent a
hostile takeover of the Company, including: a classified Board of Directors,
prohibition of shareholder action by written consent and advance notice
requirements for shareholder proposals and director nominations. In addition,
Florida has enacted legislation that may deter or frustrate takeovers of
Florida corporations. The Florida Control Share Act generally provides that
shares acquired in a "control share acquisition" will not possess any voting
rights unless such voting rights are approved by a majority of the
corporation's disinterested shareholders. A "control share acquisition" is an
acquisition, directly or indirectly, by any person of ownership of, or the
power to direct the exercise of voting power with respect to, issued and
outstanding "control shares" of a publicly held Florida corporation. "Control
shares" are shares, which, except for the Florida Control Share Act, would have
voting power that, when added to all other shares owned by a person or in
respect to which such person may exercise or direct the exercise of voting
power, would entitle such person, immediately after acquisition of such shares,
directly or indirectly, alone or as a part of a group, to exercise or direct
the exercise of voting power in the election of directors within any of the
following ranges: (a) at least 20% but less than 331/3% of all voting power,
(b) at least 331/3% but less than a majority of all voting power; or (c) a
majority or more of all voting power. The Florida Affiliated Transactions Act
generally requires supermajority approval by disinterested shareholders of
certain specified transactions between a public corporation and holders of more
than 10% of the outstanding voting shares of the corporation (or their
affiliates). See "Description of Capital Stock."
NO DIVIDENDS
The Company has not paid any dividends on its Common Stock and anticipates
that for the foreseeable future all earnings, if any, will be retained for the
operation and expansion of the Company's business. Moreover, the ability of the
Company to pay dividends, if and when its Board of Directors determines to do
so, may be restricted by regulatory limits on the amount of dividends which
Federated National is permitted to pay to the Company. See "Dividend Policy"
and "Business--Regulation."
13
<PAGE>
YEAR 2000 ISSUE
The Company has evaluated its internal systems, both hardware and
software, facilities, and interactions with business partners in relation to
year 2000 issues. In 1996, the Company began converting its computer systems to
be year 2000 compliant. As of December 31, 1997, the Company believes that it
had completed its efforts to bring the systems into compliance. The Company
will continue to contact its business partners (including agents, banks, motor
vehicle departments and rating agencies) to determine the status of their
compliance and to assess the impact of noncompliance on the Company. The
Company believes that it is taking the necessary measures to mitigate issues
that may arise relating to the year 2000. However, there can be no assurance
that significant year 2000-related computer operating problems or expenses will
not arise with the Company's computer systems and software or in the computer
systems and software of the Company's business partners and have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Matters."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,250,000 shares of
Common Stock being offered hereby at an assumed initial public offering price
of $7.50 per share are estimated to be approximately $7,756,250 ($8,979,688 if
the Over-Allotment Option is exercised in full) after deducting the
underwriting discount, the non-accountable expense allowance and other
estimated offering expenses payable by the Company.
The net proceeds are expected to be used as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
AMOUNT PERCENTAGE
------------- ------------
<S> <C> <C>
Contribution to the capital of Federated National .................. $2,500,000 32.2%
Repayment of a portion of the amount outstanding under the Company's
Credit Facility(1) ................................................ 1,500,000 19.4
Financing of Acquisitions(2) ....................................... 2,500,000 32.2
Working capital and general corporate purposes ..................... 1,256,250 16.2
---------- -----
Total .............................................................. $7,756,250 100.0%
========== =====
</TABLE>
- ----------------
(1) The Company intends to repay a portion of the amount outstanding under the
Credit Facility and to borrow under the Credit Facility in the future as
the need arises. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
(2) The Company is continually exploring various acquisition opportunities, but
does not currently have any understandings, commitments, arrangements or
agreements with respect to any acquisition.
The amounts and timing of the above expenditures may vary and will depend
on numerous factors. The net proceeds from the exercise of the Over-Allotment
Option, if any, will be used for working capital and general corporate
purposes. The Company believes that the net proceeds of this Offering, when
combined with its current capital resources, will be sufficient to support
current operations and expected growth for at least 24 months from completion
of this Offering.
Pending use of the proceeds as described above, the net proceeds will be
invested in bank deposits and short--term, investment grade securities,
including government obligations and money market instruments.
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock and anticipates
that for the foreseeable future all earnings, if any, will be retained for the
operation and expansion of the Company's business. Moreover, the ability of the
Company to pay dividends if and when its Board of Directors determines to do
so, may be restricted by regulatory limits on the amount of dividends which
Federated National is permitted to pay to the Company. See
"Business--Regulation."
15
<PAGE>
DILUTION
As of June 30, 1998, the net tangible book value of the Company was
$5,459,176 or $2.60 per share. Net tangible book value represents the amount of
total assets including deferred policy acquisition costs, less any intangible
assets and total liabilities. After giving effect to the sale of 1,250,000
shares of Common Stock offered hereby (at an assumed initial public offering
price of $7.50 per share) and after deducting the underwriting discount, the
non-accountable expense allowance and other estimated expenses of this
Offering, the pro forma net tangible book value as of June 30, 1998 would have
been $13,215,426 or $3.94 per share. This represents an immediate increase in
net tangible book value of $1.35 per share to existing shareholders and an
immediate dilution of $3.56 per share to investors in this Offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price .......................................... $ 7.50
Net tangible book value per share at June 30, 1998 ................... $ 2.60
Increase attributable to new investors ............................... 1.34
-------
Pro forma net tangible book value per share after the offering ......... 3.94
-------
Dilution to new investors .............................................. $ 3.56
=======
</TABLE>
If the Over-Allotment Option is exercised in full, the pro forma net
tangible book value per share of Common Stock after the Offering would be
$4.08, which would result in dilution to new investors in this Offering of
$3.42 per share of Common Stock.
The following table shows, at June 30, 1998, a comparison of the total
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price paid per share by existing
shareholders and to be paid by investors who purchase shares of Common Stock in
this Offering (at an assumed initial public offering price of $7.50 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT DOLLARS PERCENT PER SHARE
----------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders ......... 2,100,000 62.7% $ 4,584,445 32.8% $ 2.18
New Investors ................. 1,250,000 37.3 9,375,000 67.2 $ 7.50
--------- ----- ----------- -----
Total ....................... 3,350,000 100.0% $13,959,445 100.0%
========= ===== =========== =====
</TABLE>
16
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1998 and as adjusted to give effect to the sale of 1,250,000 shares
of Common Stock offered hereby (at an assumed initial public offering price at
of $7.50 per share) and the receipt of the net proceeds therefrom. This table
should be read in conjunction with the Company's consolidated and combined
financial statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------
ACTUAL AS ADJUSTED
---------- ------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Current maturities of debt .............................................. $4,250 $ 2,750
====== =======
Total debt excluding current maturities ................................. -- --
Shareholders' equity: ...................................................
Preferred Stock, $.01 par value, authorized 1,000,000 shares, issued and
outstanding no shares ................................................ -- --
Common Stock, $.01 par value. Authorized 25,000,000 shares, issued and
outstanding 2,100,000 shares (3,350,000 as adjusted) ................. 21 34
Additional paid-in capital ............................................. 4,564 12,307
Accumulated other comprehensive income ................................. (109) (109)
Retained earnings ...................................................... 2,389 2,389
------ -------
Total shareholders' equity ............................................ 6,865 14,621
------ -------
Total capitalization .................................................. $6,865 $14,621
====== =======
</TABLE>
17
<PAGE>
SELECTED CONSOLIDATED AND COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
The following selected consolidated and combined financial data of the
Company under the caption "Statement of Income Data" for the years ended
December 31, 1997, and 1996 and under the caption "Balance Sheet Data" as of
December 31, 1997 are derived from the Company's consolidated and combined
financial statements, which have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The following selected consolidated
and combined financial data of the Company under the caption "Statement of
Income Data" for the six months ended June 30, 1998 and 1997 and under the
caption "Balance Sheet Data" as of June 30, 1998 are derived from unaudited
interim consolidated and combined financial statements contained elsewhere
herein and includes all adjustments, consisting only of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
the financial position and the results of operations as of and for these
periods. Operating results for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. This selected consolidated and combined financial data
should be read in conjunction with the consolidated and combined financial
statements, the unaudited interim consolidated and combined financial
statements and the notes thereto and the other financial information appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30 DECEMBER 31
------------------------- -------------------------
1998 1997 1997 1996
------------ ---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Gross premiums written ...................... $ 12,169 $8,842 $17,675 $ 14,850
Net premiums written ........................ 8,397 6,802 13,016 9,248
Net premiums earned ......................... 6,678 4,978 10,924 9,643
Commission income ........................... 979 1,567 2,358 1,535
Net investment income ....................... 506 453 1,047 850
Net realized gains (losses) ................. 389 (34) (19) 155
Other income ................................ 1,551 553 1,439 2,117
-------- ------ ------- --------
Total revenue ............................... 10,103 7,517 15,749 14,300
Expenses:
Losses and LAE .............................. 4,681 3,272 7,414 7,660
Operating and underwriting expenses ......... 2,106 1,495 3,301 3,513
Other expenses .............................. 1,537 1,980 3,682 2,423
-------- ------ ------- --------
Total expenses .............................. 8,324 6,747 14,397 13,596
-------- ------ ------- --------
Net income .................................. 1,112 641 1,070 626
Net income per share ........................ $ 0.53 $ 0.31 $ 0.51 $ 0.30
Weighted average shares outstanding ......... 2,100 2,100 2,100 2,100
STATUTORY OPERATING RATIOS:
Loss ratio .................................. 77% 73% 75% 85%
Expense ratio ............................... 23% 32% 24% 23%
-------- ------- ------- --------
SAP Combined ratio .......................... 100% 105% 99% 108%
======== ======= ======= ========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
--------------- -------------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Total investments .................... $ 17,839 $ 15,760
Finance contract receivables ......... 4,943 2,344
Total assets ......................... 33,883 25,677
Unpaid losses and LAE ................ 7,623 6,726
Unearned premiums .................... 10,100 7,500
Revolving credit outstanding ......... 3,850 1,594
Shareholders' equity ................. 6,865 5,102
Book value per share ................. 3.27 2.43
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company, through its subsidiaries, is engaged in the insurance
underwriting, distribution and claims business. Federated National, the
Company's insurance subsidiary, generates revenues from the collection and
investment of premiums. The Company's agency operations generate income from
policy fees, commissions, premium financing referral fees, auto tag agency fees
and the marketing of ancillary services. Federated Premium generates revenue
from premium financing provided to Company and third party insureds. Assurance
MGA, the Company's managing general agent, generates revenue through policy fee
income and other administrative fees from the marketing of third parties'
insurance products through the Company's distribution network.
The Company's business, results of operations and financial condition are
subject to fluctuations due to a variety of factors. Abnormally high severity
or frequency of claims in any period could have a material adverse effect on
the Company's business, results of operations and financial condition. Also, if
Federated National's estimated liabilities for unpaid losses and LAE is less
than actual losses and LAE, Federated National will be required to increase
reserves with a corresponding reduction in Federated National's net income in
the period in which the deficiency is identified. The Company operates in a
highly competitive market and faces competition from both national and regional
insurance companies, many of whom are larger and have greater financial and
other resources than the Company, have favorable A.M. Best ratings and offer
more diversified insurance coverage. The Company's competitors include other
companies which market their products through agents, as well as companies
which sell insurance directly to customers. Large national writers may have
certain competitive advantages over agency writers, including increased name
recognition, increased loyalty of their customer base and reduced acquisition
costs. The Company may also face competition from new or temporary entrants in
its niche markets. In some cases, such entrants may, because of inexperience,
desire for new business or other reasons, price their insurance below that of
the Company. Although the Company's pricing is inevitably influenced to some
degree by that of its competitors, management of the Company believes that it
is generally not in the Company's best interest to compete solely on price,
choosing instead to compete on the basis of underwriting criteria, its
distribution network and superior service to its agents and insureds. The
Company competes with respect to automobile insurance in Florida with more than
100 companies which underwrite personal automobile insurance.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
GROSS PREMIUMS WRITTEN. Gross premiums written increased 38.6% to $12.2
million for the six month period ended June 30, 1998 from $8.8 million for the
same period in 1997. The increase in gross premiums written is primarily
attributable to an increase in the number of independent agents working with
the Company from 1997 to 1998. Marketing efforts also contributed to the
increase in the amount of premiums written through independent agents to
approximately 40.9% or $9.3 million for the six month period ended June 30,
1998 from $6.6 million for the same period in 1997. The increase in gross
premiums written was also attributable to an increase in premiums written by
Company-owned agencies of approximately 31.8% to $2.9 million in 1998 from $2.2
million in 1997.
NET PREMIUMS WRITTEN. Net premiums written increased 23.5% to $8.4 million
for the six month period ended June 30, 1998 from $6.8 million for the same
period in 1997. The difference in growth rates for gross and net premiums
written reflects the impact of reinsurance, because $3.8 million or 31.1% of
premiums written were ceded to a reinsurer for the six month period ended June
30, 1998 as compared to $2.0 million or 22.7% for the same period in 1997. Net
premiums written grew at a faster rate than gross premiums written as a result
of the April 1997 modification of a reinsurance agreement
20
<PAGE>
wherein the percentage of future premiums written ceded was reduced to 30.0%
from 50.0%. This modification resulted in $1.2 million of gross premiums
previously ceded being refunded to the Company from the reinsurer.
NET PREMIUMS EARNED. Net premiums earned increased 34.0% to $6.7 million
for the six month period ended June 30, 1998 from $5.0 million for the same
period in 1997.
COMMISSION INCOME. Commission income decreased 37.5% to $1.0 million for
the six month period ended June 30, 1998 from $1.6 million for the same period
in 1997. Commission income consists of fees earned by the Company-owned
agencies placing business with third party insurers and third party premium
finance companies. The decrease is partially attributable to a $300,000
decrease in commissions earned on business placed with third party insurers.
The remainder of the decrease is attributable to the fact that during 1997,
premium financing was placed almost exclusively with third party companies for
which commissions were received, as compared to 1998, where premium financing
was placed substantially with Federated Premium for which no commissions are
paid.
FINANCE REVENUES. Finance revenues increased to $716,000 for the six month
period ended June 30, 1998 from approximately $22,000 for the same period in
1997. The increase was attributable to an increase in the number of premium
contracts financed by Federated Premium to 10,129 for the six month period
ended June 30, 1998 from zero for the same period in 1997. In order to
terminate a premium finance lending arrangement which was not favorable to the
Company's overall growth strategy, Federated Premium ceased all new premium
financing with its customers in July 1996 and subsequently terminated the
premium finance lending arrangement with its lender in early 1997. In September
1997, a new premium finance lending arrangement was established and the Company
recommenced its premium financing activities.
INVESTMENT INCOME. Investment income consists of net investment income and
net realized gains (losses). Investment income increased 113.6% to $895,000 for
the six month period ended June 30, 1998 from $419,000 for the same period in
1997. The Company experienced realized gains of $390,000 for the six month
period ended June 30, 1998 compared to realized losses of ($34,000) for the same
period in 1997.
OTHER INCOME. Other income increased 57.3% to $835,000 for the six month
period ended June 30, 1998 from $531,000 for the same period in 1997. Other
income is comprised mainly of the managing general agent's policy fee income on
all new and renewal insurance policies, and revenue on auto tag products.
LOSSES AND LAE. The Company's Loss Ratio, as determined in accordance with
GAAP, for the six month period ended June 30, 1998 was 77.0% compared with
73.0% for the same period in 1997. Losses and LAE incurred increased 42.4% to
$4.7 million for the six month period ended June 30, 1998 from $3.3 million for
the same period in 1997 as compared to net premiums earned which increased by
34.0% to $6.7 million for the six month period ended June 30, 1998 from $5.0
million for the same period in 1997. Losses and LAE, the Company's most
significant expense, represent actual payments made and changes in estimated
future payments to be made to or on behalf of its policyholders, including
expenses required to settle claims and losses. Losses and LAE are influenced by
loss severity and frequency. Because the Loss Ratio is dependent on net
premiums earned and the fact that the ratio of net premiums earned over gross
premiums written decreased to 54.9% for the six month period ended June 30,
1998 from 56.8% for the same period in 1997, the Loss Ratio increased by a
nominal amount compared to the decrease in the ratio of net premiums earned to
gross premiums written. The Company believes that the severity and frequency of
claims remained stable for the periods under comparison.
OPERATING AND UNDERWRITING EXPENSES. Operating and underwriting expenses
increased 40.0% to $2.1 million for the six month period ended June 30, 1998
from $1.5 million for the same period in 1997. This increase is primarily
attributable to the increase in costs associated with supporting the growth of
the Company's operations. This increase is also due to the increase in interest
expense of $150,000 for the six month period
21
<PAGE>
ended June 30, 1998 from $0 for the same period in 1997. This increase is
attributable to the initiation of the premium finance funding arrangement
between Federated Premium and a lender in September 1997.
SALARIES AND WAGES. Salaries and wages remained relatively constant at
approximately $1.6 million for the six month periods ended June 30, 1998 and
1997.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. Amortization of deferred
policy acquisition costs decreased to $(197,000) for the six month period ended
June 30, 1998 from $395,000 for the same period in 1997. Amortization of
deferred policy acquisition costs consists of the actual amortization of
deferred policy acquisition costs less commissions earned on reinsurance ceded.
The decrease in the amortization of deferred policy acquisition costs is
attributable to the increase in commissions from reinsurance ceded by Federated
National of 140.0% to $1.2 million for the six month period ended June 30, 1998
from $550,000 for the same period in 1997. This increase is primarily the result
of the modification of the reinsurance agreement in April 1997 which resulted in
a refund to the reinsurer for $375,000 of commissions. Additional commissions
were generated from the increase in gross premiums written in 1998. The decrease
in the amortization of deferred policy acquisition costs was partially offset by
the increase of the actual amortization of deferred policy acquisition costs of
11.1% to $1.0 million at June 30, 1998 from $943,000 at June 30, 1997. This
increase is attributable to the premiums written by independent agencies which
increased by 40.9% to $9.3 million for the six month period ended June 30, 1998
from $6.6 million for the same period in 1997.
INCOME TAX EXPENSE. The Company's estimated effective income tax rate was
37.5% for the six months ended June 30, 1998 compared with an estimated
effective income tax rate of 16.7% for the same period in 1997. This increase
is primarily the result of the January and February 1998 acquisition by the
Company of certain insurance agencies and other affiliated companies which
prior to their acquisition were S Corporations for Federal income tax purposes.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
GROSS PREMIUMS WRITTEN. Gross premiums written increased 18.8% to $17.7
million in 1997 from $14.9 million in 1996. The increase in premiums written is
primarily attributable to an increase in the number of independent agents from
1996 to 1997. Marketing efforts also contributed to the increase in the amount
of gross premiums written through independent agents by $2.9 million to $12.8
million in 1997 from $9.9 million in 1996. The increase in gross premiums
written was partially offset by a nominal decrease in gross premiums written by
Company-owned agencies of $200,000. The increase in gross written premiums can
also be attributed to an increase in the average price of non-standard
automobile insurance in the South Florida area.
NET PREMIUMS WRITTEN. Net premiums written increased 41.3% to $13.0
million in 1997 from $9.2 million in 1996. The difference in growth rates for
gross and net premiums written reflects the impact of reinsurance, because $4.7
million or 26.6% of premiums written were ceded to a reinsurer in 1997 compared
to $5.6 million or 37.6% in 1996. Net premiums written grew at a slower rate
than gross premiums written as a result of the April 1997 modification of a
reinsurance agreement. On December 31, 1996, the Company modified the
reinsurance agreement to increase the percentage of future written premiums
ceded from 30.0% to 50.0%. This modification resulted in an additional $1.2
million of premiums written being ceded to the reinsurer. Effective April 1,
1997, the Company again modified the reinsurance agreement to reduce the
percentage of future premiums written ceded to the original 30.0%. This
modification resulted in $1.2 million of premiums ceded being refunded to the
Company from the reinsurer.
NET PREMIUMS EARNED. Net premiums earned increased 13.5% to $10.9 million
in 1997 from $9.6 million in 1996.
COMMISSION INCOME. Commission income increased 60.0% to $2.4 million in
1997 from $1.5 million in 1996. The increase in commission income is primarily
attributable to the increase in
22
<PAGE>
Company-owned agency fees of 40.0% to $2.1 million in 1997 from $1.5 million in
1996 which was due to an increase in the number of Company-owned agencies to 12
in 1997 from 11 in 1996. The increase in commission income was also attributable
to an increase of $300,000 in premium financing commissions due to the fact that
during 1997, premium financing was placed almost exclusively with third party
premium finance companies for which commissions were received, as compared to
1996, where premium financing was placed substantially with Federated Premium
for which no commissions are paid.
FINANCE REVENUES. Finance revenues decreased 77.6% to $220,000 in 1997
from $982,000 in 1996. The decrease was attributable to a decrease in the
number of premium contracts financed by Federated Premium of 57.7% to 4,497 in
1997 from 10,634 in 1996. In order to terminate a premium finance lending
arrangement which was not favorable to the Company's overall growth strategy,
Federated Premium ceased all new premium financing with its customers in July
1996 and subsequently terminated the premium finance lending arrangement with
its lender in early 1997. In September 1997, a new premium finance lending
arrangement was established and the Company recommenced its premium financing
activities. Nearly all of the $220,000 in finance revenue earned for the year
was earned in the fourth quarter of 1997.
INVESTMENT INCOME. Investment income remained relatively constant at $1.0
million in 1997 and 1996. This was primarily the result of a decrease in the
average investment yield as lower yielding securities were sold or matured and
reinvestments were made at lower market rates offset by an increase in total
amounts invested. The Company experienced realized losses of ($19,000) in 1997
compared to realized gains of $155,000 in 1996.
OTHER INCOME. Other income increased 9.1% to $1.2 million in 1997 from
$1.1 million in 1996. Other income is comprised mainly of the managing general
agent's policy fee income on all new and renewal insurance policies and revenue
on auto tag products.
LOSSES AND LAE. The Company's Loss Ratio, as determined in accordance with
GAAP, for 1997 was 75.0% compared with 85.0% in 1996. The loss and LAE
decreased 3.9% to $7.4 million in 1997 from $7.7 million in 1996 as compared to
net premium earned which increased by 13.5% to $10.9 million in 1997 from $9.6
million in 1996. The lower Loss Ratio in 1997 was primarily attributable to the
hiring of an experienced manager and key personnel, improvement on the claims
evaluation process implementing a strategy to minimize legal expenses and
introducing revised claims evaluation procedures. In addition, the Loss Ratio
related to the mobile home product was below that of non-standard automobile
products and the introduction of this product in 1997 reduced the Loss Ratio in
1997. Non-standard automobile insurance rates increased in the South Florida
area in 1997, further contributing to the decrease in the Loss Ratio.
OPERATING AND UNDERWRITING EXPENSES. Operating and underwriting expenses
decreased 5.7% to $3.3 million in 1997 from $3.5 million in 1996. This decrease
is primarily due to the decrease in interest expense of $410,000 to $50,000 in
1997 from $460,000 in 1996. This is attributable to the termination of the
premium finance funding arrangement between the Company's Federated Premium
subsidiary and a lender in early 1997. This decrease was offset by the costs of
expanded marketing and advertising expenses.
SALARIES AND WAGES. Salaries and wages increased 24.0% to $3.1 in 1997,
from $2.5 million in 1996. The $600,000 increase is primarily a result of the
hiring of six key management executives in 1997 and the latter half of 1996 and
the increase in personnel required to manage the increased volume in
underwriting and claims, as well as the increase in the number of affiliated
agencies to 12 in 1997 from 11 in 1996. The Company's employee count increased
approximately 21.7% to 129 at year end 1997 from 106 at year end 1996.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. Amortization of deferred
policy acquisition costs increased to $496,000 in 1997 from $(149,000) in 1996.
The increase is attributable to the increase in the actual amortization of
deferred policy acquisition costs of 38.5% to $1.8 million in
23
<PAGE>
1997 from $1.3 million in 1996. This increase is attributable to the premiums
written by independent agencies which increased by 31.8% to $11.2 million in
1997 from $8.5 million in 1996. This increase was also attributable to a
decrease in commissions earned from reinsurance ceded by Federated National to
$1.3 million in 1997 from $1.4 million in 1996. The net decrease in commissions
ceded is primarily the result of the return of $375,000 of commissions to the
reinsurer related to the refund of premiums ceded to the Company based on the
reinsurance modification in April 1997. This was offset by the increase in
additional ceding commissions related to the increase in premiums written earned
in 1997.
INCOME TAX EXPENSE. The Company's estimated effective income tax rate was
20.9% for 1997 compared with 8.9% for 1996. This increase in the effective tax
rate is primarily the result of the January 1997 acquisition by the Company of
Assurance MGA, Federated Premium and Superior which, prior to their
acquisition, were S Corporations for Federal income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are revenues generated from
operations, investment income and borrowings under credit facilities. Because
the Company is a holding company, it is largely dependent upon dividends from
its subsidiaries for cash flow.
In September 1997, Federated Premium entered into the Credit Facility, as
amended, which is used to fund its operations. Each advance is subject to
availability under a borrowing base calculation based upon a percentage of
eligible accounts receivable, with maximum advances outstanding not to exceed
the maximum credit commitment of $4.0 million. The annual interest rate on
borrowings under the Credit Facility is the prime rate plus 1.75%. The Credit
Facility contains various operating and financial covenants and is
collateralized by a first lien and assignment of all of Federated Premium's
finance contracts receivable. Federated Premium was in compliance with all
covenants under the Credit Facility as of June 30, 1998. The Credit Facility
expires on September 30, 2000.
The Company is also party to a $400,000 line of credit which expires on
December 30, 1998. The line of credit has an annual interest rate at 1.25% over
the lender's variable base rate. The line was fully utilized and outstanding at
June 30, 1998. These funds were used for a November 1997 acquisition of an
unaffiliated agency.
For the 30-month period ended June 30, 1998, operations generated
operating cash flow of $9.8 million, and operating cash flow is expected to be
positive in both the short-term and reasonably foreseeable future. In addition,
the Company's investment portfolio is highly liquid as it consists almost
entirely of readily marketable securities.
The Company believes that the net proceeds of this Offering, when combined
with its current capital resources, will be sufficient to support current
operations and expected growth for at least 24 months from the completion of
this Offering.
In October 1996, Federated National purchased land in Plantation, Florida
to construct a headquarters building. In August 1998, the building was
completed and the Company consolidated its executive offices and administrative
operations in the building, which consists of approximately 14,000 square feet.
The cost of the project is currently estimated at $1.5 million and
approximately $925,000 has been paid as of June 30, 1998.
To retain its certificate of authority, the Florida insurance laws and
regulations require that Federated National maintain capital surplus equal to
the greater of 10.0% of its liabilities or the 1997 statutory minimum capital
and surplus requirement of $2.1 million as defined in the Florida Insurance
Code. The Company is also required to adhere to prescribed premium-to-capital
surplus ratios. The Company is in compliance with these requirements.
The maximum amount of dividends which can be paid by Florida insurance
companies without prior approval of the Florida Commissioner is subject to
restrictions relating to statutory surplus. The
24
<PAGE>
maximum dividend that may be paid in 1998 by the Company without prior approval
is limited to the lesser of statutory net income from operations of the
preceding calendar year or 10.0% of statutory unassigned capital surplus as of
the preceding December 31, and amounted to $0 at December 31, 1997.
The Company is party to the Consent Order which limits the amount of
premiums it can underwrite in 1998 and 1999. See "Business--Regulation."
The Company is required to comply with the NAIC's risk-based capital
requirements. The NAIC's risk-based capital requirements are a method of
measuring the amount of capital appropriate for an insurance company to support
its overall business operations in light of its size and risk profile. NAIC's
risk-based capital standards are used by regulators to determine appropriate
regulatory actions relating to insurers who show signs of weak or deteriorating
condition. As of June 30, 1998, based on calculations using the appropriate NAIC
formula, the Company's total adjusted capital is in excess of ratios which would
require any form of regulatory action. GAAP differs in some respects from
reporting practices prescribed or permitted by the Florida Department of
Insurance. Federated National's statutory capital surplus was approximately
$4,112,265 as of December 31, 1997 and $4,708,291 as of June 30, 1998. Statutory
net income was $493,089 for the year ended December 31, 1997 and $700,783 for
the six months ended June 30, 1998.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated and combined financial statements and related data
presented herein have been prepared in accordance with GAAP which requires the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. The primary assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a more significant
impact on the Company's performance than the effects of the general levels of
inflation. Interest rates do not necessarily move in the same direction or with
the same magnitude as the cost of paying losses and LAE.
Insurance premiums are established before the Company knows the amount of
loss and LAE and the extent to which inflation may affect such expenses.
Consequently, the Company attempts to anticipate the future impact of inflation
when establishing rate levels. While the Company attempts to charge adequate
rates, the Company may be limited in raising its premium levels for competitive
and regulatory reasons. Inflation also affects the market value of the
Company's investment portfolio and the investment rate of return. Any future
economic changes which result in prolonged and increasing levels of inflation
could cause increases in the dollar amount of incurred loss and LAE and thereby
materially adversely affect future liability requirements.
YEAR 2000 MATTERS
In 1996, the Company began converting its computer systems to be year 2000
compliant. The Company has evaluated its internal systems, both hardware and
software, facilities, and interactions with business partners in relation to
year 2000 issues. As of December 31, 1997, the Company believes that it had
completed its efforts to bring the systems in compliance. The total cost
incurred during the year ended December 31, 1997 to modify these existing
systems, which include both internal and external costs of programming, coding
and testing, was not material. The Company continually evaluates computer
hardware and software upgrades and, therefore, many of the costs to replace
existing items with year 2000 compliant upgrades are not likely to be
incremental costs to the Company. During 1998, the Company will continue to
contact its business partners (including agents, banks, motor vehicle
departments and rating agencies) to determine the status of their compliance
and to assess the impact of noncompliance on the Company. The Company believes
that it is taking the necessary measures to mitigate issues that may arise
relating to the year 2000. To the extent that any additional issues arise, the
Company will evaluate the impact on its business, results of operations and
financial condition and, if material, make the necessary disclosures and take
appropriate remedial action.
25
<PAGE>
BUSINESS
GENERAL
The Company is a vertically integrated insurance holding company which,
through its subsidiaries, controls substantially all aspects of the insurance
underwriting, distribution and claims process. The Company underwrites
nonstandard and standard personal automobile insurance and mobile home property
and casualty insurance in the State of Florida through its subsidiary,
Federated National. The Company has underwriting authority for third-party
insurance companies which it represents through a wholly-owned managing general
agent, Assurance MGA. The Company internally processes claims made by Federated
National's insureds through a wholly-owned claims adjusting company, Superior.
The Company also offers premium financing to its own and third-party insureds
through its wholly-owned subsidiary, Federated Premium, and offers auto title
loans and other ancillary services through its wholly-owned subsidiary, Florida
Auto Title.
The Company markets and distributes Federated National's and third-party
insurers' products and its other services primarily in South Florida, through a
network of 15 Company-owned agencies and approximately 300 active independent
agents. The Company believes that it can be distinguished from its competitors
because it generates revenue from substantially all aspects of the insurance
underwriting, distribution and claims process. The Company provides quality
service to both its agents and insureds by utilizing an integrated computer
system which links the Company's insurance and service entities. The Company's
computer and software systems allow for rapid automated premium quotation,
policy issuance, billing and payment and claims processing and enable the
Company to continuously monitor substantially all aspects of its business.
Using these systems, the Company's agents can access a customer's driving
record, quote a premium, offer premium financing and, if requested, generate a
policy on-site. The Company believes that these systems have facilitated its
ability to market and underwrite insurance products on a cost-efficient basis,
and that they will enhance the Company's ability to expand to other regions in
Florida and to other states.
The Company's primary product is nonstandard personal automobile
insurance, which is principally provided to insureds who are unable to obtain
preferred or standard insurance coverage because of their payment history,
driving record, age, vehicle type or other factors, including market conditions
for preferred or standard risks. Underwriting standards for preferred or
standard insurance coverage have become more restrictive, thereby requiring
more drivers to seek coverage in the nonstandard automobile insurance market.
These factors have contributed to an increase in the size of the nonstandard
personal automobile insurance market. Based on information provided by A.M.
Best, a leading rating agency for the insurance industry, from 1993 to 1997,
the nonstandard personal automobile insurance market in the United States grew
from approximately $14.2 billion to approximately $22.0 billion of annual
premium volume and from approximately 15.1% to approximately 19.2% of the total
personal automobile insurance market. Also according to A.M. Best, from 1993 to
1997 annual premium volume in the nonstandard personal automobile insurance
market in Florida grew from approximately $1.5 billion to approximately $2.6
billion and from approximately 27.8% to approximately 35.6% of the total
personal automobile insurance market in Florida.
BUSINESS STRATEGY
The Company's strategy is to seek continued growth of its business by
capitalizing on the efficiencies of its vertical integration and
/bullet/ selectively expanding the Company's product offerings by
underwriting additional insurance products and programs such
as standard automobile insurance, which the Company commenced
offering in August 1998, commercial vehicle insurance and
homeowners' insurance, and marketing these products and
programs through its distribution network;
26
<PAGE>
/bullet/ further penetrating the Florida market by acquiring additional
insurance agencies and establishing relationships with
additional independent agents in order to expand the Company's
distribution network to and market its products and services
in other regions of Florida;
/bullet/ expanding direct marketing of insurance products to customers
through mailings, media advertising and the Internet;
/bullet/ maintaining a commitment to provide quality service to its
agents and insureds by emphasizing customer service;
/bullet/ encouraging agents to place a high volume of quality business
with the Company by providing them with attractive commission
structures tied to premium levels and loss ratios;
/bullet/ identifying and reviewing opportunities to acquire additional
insurers; and
/bullet/ using the model established in Florida to ultimately expand to
other selected states.
The Company is continually exploring various acquisition opportunities,
but does not currently have any understandings, commitments, arrangements or
agreements with respect to any acquisition.
BACKGROUND
The Company commenced operations in November 1983 when Edward J. Lawson
and Michele V. Lawson, the Company's co-founders, opened an independent
insurance agency in South Florida to sell private passenger automobile
insurance. Through internal growth and acquisitions, the number of
Company-owned agencies has expanded to 15, located principally in South
Florida. In September 1987, Mr. and Mrs. Lawson organized Federated Premium to
offer premium financing services.
In January 1992, Federated National was established to underwrite private
passenger automobile insurance and enhance operating margins. In October 1994,
Assurance MGA was formed to manage underwriting, policy administration,
marketing, accounting and financial services and to participate in the
negotiation of reinsurance contracts for the Company. Additional corporations
were subsequently formed or acquired to handle the Company's insurance claims
internally in order to reduce ultimate loss payments, lower LAE and improve
customer service, manage the Company's agencies and to provide customers with
short-term auto title loans. In January 1997 and January and February 1998, the
Company effected the Consolidation in which the Company became the holding
company for all of the Company's operating subsidiaries.
INSURANCE OPERATIONS
UNDERWRITING
GENERAL. The Company underwrites its nonstandard and standard personal
automobile insurance and mobile home property and casualty insurance through
Federated National. Federated National is licensed to conduct business only in
Florida. From 1992 when Federated National commenced operations as an insurer,
to 1997, gross written premiums grew at a 34.0% compound annual rate from $4.1
million to $17.7 million. Pursuant to the Consent Order, Federated National's
growth is subject to regulatory limits on the amount of premiums it can
underwrite. In 1998, Federated National may only underwrite $21.0 million in
gross premiums written and $14.0 million in total net premiums written. In
1999, this limit increases to $24.0 million and $15.0 million, respectively.
Federated National is also required to maintain a minimum capital surplus to
support its underwriting program. In 1998 and 1999, Federated National is also
required to have capital surplus of $4.7 million and $5.9 million,
respectively. The premium limits and capital surplus requirements impact
Federated National's potential growth. Federated National's ability to exceed
these limits are subject to the prior approval of the Florida
27
<PAGE>
Department of Insurance. The Florida Department of Insurance has indicated in
writing its willingness to modify the Consent Order and increase Federated
National's underwriting authority, subject to the completion of this Offering.
The Company believes that as a result of the capital generated by this
Offering, Federated National will have capital surplus significantly in excess
of the required minimum. Accordingly, the Company believes it will be able to
substantially increase the amount of premiums Federated National may
underwrite. However, there can be no assurance that the Company will obtain the
approval of the Florida Department of Insurance to exceed the underwriting
limitations or that it will not be subject to other regulatory limits on the
amount of premiums it can underwrite.
The following tables set forth the amount and percentages of Federated
National's gross premiums written and premiums ceded to reinsurers and net
premiums written by line of business for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------
1998 1997
----------------------- -------------------------
PREMIUM PERCENT PREMIUM PERCENT
----------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Written:
Nonstandard Automobile ......... $ 11,043 90.7% $ 8,842 100.0%
Mobile Home .................... 1,126 9.3 -- --
-------- ----- -------- -----
Total Written ................. 12,169 100.0% 8,842 100.0%
Ceded:
Nonstandard Automobile ......... (3,308) 87.7% (2,040) 100.0%
Mobile Home .................... (464) 12.3 -- --
-------- ----- -------- -----
Total Ceded ................... (3,772) 100.0% (2,040) 100.0%
Net:
Nonstandard Automobile ......... 7,735 92.1% 6,802 100.0%
Mobile Home .................... 662 7.9 -- --
-------- ----- -------- -----
Total Net ..................... $ 8,397 100.0% $ 6,802 100.0%
======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996
----------------------- -------------------------
PREMIUM PERCENT PREMIUM PERCENT
----------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Written:
Nonstandard Automobile ......... $ 17,332 98.1% $ 14,851 100.0%
Mobile Home .................... 343 1.9 -- --
-------- ----- -------- -----
Total Written ................. 17,675 100.0% 14,851 100.0%
Ceded:
Nonstandard Automobile ......... (4,536) 97.4% (5,603) 100.0%
Mobile Home .................... (123) 2.6 -- --
-------- ----- -------- -----
Total Ceded ................... (4,659) 100.0% (5,603) 100.0%
Net:
Nonstandard Automobile ......... 12,796 98.3% 9,248 100.0%
Mobile Home .................... 220 1.7 -- --
-------- ----- -------- -----
Total Net ..................... $ 13,016 100.0% $ 9,248 100.0%
======== ===== ======== =====
</TABLE>
Following completion of this Offering, the Company intends to expand its
business by identifying and reviewing opportunities to acquire additional
insurers, agencies, and other related businesses. The Company is continually
exploring various acquisition opportunities, but does not currently have any
understandings, commitments, arrangements or agreements with respect to any
acquisition.
28
<PAGE>
NONSTANDARD AUTOMOBILE. Nonstandard personal automobile insurance is
principally provided to insureds who are unable to obtain standard insurance
coverage because of their payment history, driving record, age, vehicle type or
other factors, including market conditions. Underwriting standards for
preferred and standard coverage have become more restrictive, thereby requiring
more insureds to seek nonstandard coverage and contributing to increase in the
size of the nonstandard automobile market. Nonstandard automobile insurance,
however, generally involves the potential for increased loss exposure and
higher claims experience. Loss exposure is limited because premiums usually are
at higher rates than those charged for standard insurance coverage and because
approximately 32.0% of the policies issued by Federated National provide the
minimum coverage required of the policyholder by statute and provide no bodily
injury coverage. Federated National currently underwrites nonstandard personal
automobile insurance in Florida, where the minimum limits are $10,000 per
individual and $20,000 per accident for bodily injury and $10,000 per accident
for property damage and comprehensive and collision up to $50,000. The average
annual premium on policies currently in force is approximately $650. Federated
National underwrites this coverage on an annual and semi-annual basis.
Due to the purchasing habits of nonstandard automobile insureds (for
example, insureds seeking the least expensive insurance required of the
policyholder by statute which satisfies the requirements of state laws to
register a vehicle), policy renewal rates tend to be low compared to standard
policies. Federated National's experience has been that a significant number of
existing policyholders allow their policies to lapse and then reapply for
insurance as new policyholders. The success of Federated National's nonstandard
automobile insurance program, therefore, depends in part on its ability to
replace non-renewing insureds with new policyholders through marketing efforts.
The Company markets Federated National's nonstandard personal automobile
coverage primarily through its network of Company-owned agencies and
independent agents. The Company also markets its insurance on a limited basis
directly to insureds through direct mail and media advertising.
The Company emphasizes customer service to both its agents and insureds by
utilizing an integrated computer system which links all of the Company's
insurance and service entities. The Company's computer and software systems
allow for rapid automated premium quotation, policy issuance, billing and
payment and claims processing and enable the Company to monitor substantially
all aspects of its business. This system enables the Company's agent's to
rapidly access the customer's driving record, quote a premium and, if
requested, generate the policy on-site.
Following the completion of this Offering, the Company intends to focus
its efforts on further penetrating the Florida nonstandard personal automobile
insurance market. Ultimately, the Company intends to expand to other selected
states. The Company will select states for expansion based on a number of
criteria, including the size of the personal automobile insurance market,
statewide loss results, competition and the regulatory climate. The Company's
ability to expand into other states will be subject to the prior regulatory
approval of each state. Certain states impose seasoning requirements upon
licensee applicants, which, due to the Company's limited operating history, may
impose burdens on the Company's ability to obtain a license to conduct
insurance business in those other states. There can be no assurance that the
Company will be able to obtain the required licenses, and the failure to do so
would limit the Company's ability to expand geographically.
STANDARD AUTOMOBILE. Standard personal automobile insurance is principally
provided to insureds that present an average risk profile in terms of payment
history, driving record, vehicle type and other factors. As part of its
expansion strategy, in August 1998 Federated National commenced underwriting
standard personal automobile insurance. Limits on standard personal automobile
insurance are generally significantly higher than those for nonstandard
coverage, but typically provide for deductibles and other restrictive terms.
Federated National is initially underwriting standard personal automobile
insurance policies providing coverage no higher than $100,000 per individual
and $300,000 per accident for bodily injury and $50,000 per accident for
property damage and comprehensive and collision up to $50,000 per accident,
with deductibles ranging from $200 to $1,000. The Company is marketing
Federated National's standard personal automobile insurance through its network
of Company-owned agencies and independent agents.
29
<PAGE>
MOBILE HOME. In 1997, Federated National commenced underwriting homeowners
insurance for mobile homes, principally in Central and Northern Florida, where
the Company believes that the risk of catastrophe loss from hurricanes is less
than in other areas of the state. Homeowners insurance generally protects an
owner of real or personal property against covered causes of loss to that
property. Homeowners insurance for mobile homes generally involves the
potential for above-average loss exposure. In the absence of major catastrophe
losses, loss exposure is limited because premiums usually are at higher rates
than those charged for non-mobile home property and casualty insurance.
Additionally, Federated National's property lines typically provide maximum
coverage in the amount of $75,000, with the average policy limit being
approximately $31,000. In addition, the Company presently intends to limit its
mobile home coverage to no more than 10.0% of its underwriting exposure. The
average annual premium on policies currently in force is approximately $379 and
the typical deductible is $500. As the Company-owned agencies are located
primarily in South Florida, the Company markets Federated National's mobile
home property and casualty insurance through independent agents in Central and
Northern Florida.
FUTURE PRODUCTS. The Company intends to expand its product offerings by
underwriting additional insurance products and programs and marketing them
through its distribution network. Within one year after completion of this
Offering, the Company intends to expand its product offerings to include
homeowners' insurance and increase its current limited offering of commercial
vehicle insurance. There can be no assurance that the Company can successfully
underwrite and profitably market and distribute any of these products. Pursuant
to the Consent Order, Federated National's growth is subject to regulatory
limits on the amount of premiums it can underwrite. In 1998, Federated National
only may underwrite $21.0 million in gross premiums written and $14.0 million
in total net premiums written. In 1999, Federated National is limited to $24.0
million and $15.0 million, respectively. Federated National also is required to
maintain a minimum capital surplus to support its underwriting program. In 1998
and 1999, Federated National is required to have capital surplus of $4.7
million and $5.9 million, respectively. The premium limits and capital surplus
requirements impact Federated National's potential growth. Federated National's
ability to exceed these limitations will be subject to the prior approval of
the Florida Department of Insurance. The Florida Department of Insurance has
indicated in writing its willingness to modify the Consent Order and increase
Federated National's underwriting authority, subject to the completion of this
Offering. The Company believes that as a result of the capital generated by
this Offering, Federated National will have capital surplus significantly in
excess of the required minimum. Accordingly, the Company believes that it will
be able to substantially increase the amount of premiums Federated National may
underwrite. There can be no assurance that Federated National will obtain the
prior approval of the Florida Department of Insurance to exceed the
underwriting limitations or that it will not be subject to other regulatory
limits on the amount of premiums it can underwrite. See "Regulation."
ASSURANCE MGA
Assurance MGA acts as Federated National's managing general agent.
Assurance MGA currently provides all underwriting policy administration,
marketing, accounting and financial services to Federated National and the
Company's agencies and participates in the negotiation of reinsurance
contracts.
Assurance MGA has established a relationship with and has underwriting
authority for Gainsco, Inc. for commercial property and casualty lines and
Lloyds of London for various other insurance products. Assurance MGA also
generates revenue through policy fee income and other administrative fees from
the marketing of these companies' products through the Company's distribution
network. Assurance MGA plans to establish relationships with additional
carriers and add additional insurance products and products.
SUPERIOR
The Company internally processes claims made by Federated National's
insureds through Superior. The Company-owned agencies and independent agents
have no authority to settle claims or otherwise
30
<PAGE>
exercise control over the claims process. Management believes that the
employment of salaried claims personnel, as opposed to independent adjusters,
results in reduced ultimate loss payments, lower LAE and improved customer
service. The Company only retains independent appraisers and adjusters on an as
needed basis.
Claims settlement authority levels are established for each adjuster or
manager based on the employee's ability and level of experience. Upon receipt,
each claim is reviewed and assigned to an adjuster based on the type and
severity of the claim. All claim-related litigation is monitored by Company
personnel. The claims policy of the Company emphasizes prompt and fair
settlement of meritorious claims and the establishment of appropriate liability
for claims. The Company believes that the internal processing of claims enables
it to provide quality customer service while controlling claims adjustment
expenses.
FEDERATED PREMIUM
Federated Premium provides premium financing to both Federated National's
insureds and to third-party insureds. Premium financing is marketed through the
Company's distribution network of Company-owned agencies and independent
agents. Lending operations are supported by Federated Premium's own capital
base and are currently leveraged through the Credit Facility.
Premiums for property and casualty insurance are typically payable at the
time a policy is placed in force or renewed. Federated Premium's services allow
the insured to pay a portion of the premium when the policy is placed in force
and the balance in monthly installments over the life of the policy. As
security, Federated Premium retains a contractual right, if a premium
installment is not paid when due, to cancel the insurance policy and to receive
the unearned premium from the insurer (or in the event of insolvency of an
insurer, from the Florida Guarantee Association, subject to a $100 per policy
deductible). In the event of cancellation, Federated Premium applies the
unearned premium towards the payment obligation of the insured. As part of its
premium financing offered to third-party insureds, Federated Premium may
advance funds for financed premiums to independent insurance agencies who
represent third-party insurers. If remittance is not made by the agency to the
third-party insurer, advances made by Federated Premium may only be recoverable
to the extent that the agency's receipt of such advances is received by the
third-party insurer. Premium financing which the Company offers to its own
insureds involves limited credit risk.
The following table sets forth the amount and percentages of premiums
financed for Federated National and other insurers for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------
1998 1997(1)
---------------------- ---------------------
PREMIUMS PERCENT PREMIUMS PERCENT
---------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Federated National ......... $ 5,460 62.1% -- --
Other insurers ............. 3,334 37.9 -- --
------- ----- ---------- --------
Total .................... $ 8,794 100.0% -- --
======= ===== ========== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996
---------------------- -----------------------
PREMIUMS PERCENT PREMIUMS PERCENT
---------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Federated National ......... $ 1,972 51.4% $ 3,973 40.2%
Other insurers ............. 1,865 48.6 5,908 59.8
------- ----- ------- -----
Total .................... $ 3,837 100.0% $ 9,881 100.0%
======= ===== ======= =====
</TABLE>
- ----------------
(1) In July 1996 the Company ceased all new premium financing because of an
unfavorable premium finance lending arrangement. In early 1997 the premium
finance lending arrangement was terminated and in September 1997 a new
premium finance lending arrangement was established and the Company
recommended premium financing activities.
31
<PAGE>
AUTO TITLE LOANS AND ANCILLARY SERVICES
In 1998, the Company began offering auto title loans, which are short-term
(30-day) loans secured by free and clear automobile titles. These loans bear
interest rates which by law may range from 5.0% to 22.0% per month and, in the
Company's case, average 7.0% per month. The criteria for a loan is that the
borrower must show proof that he or she is currently employed and has utility
(telephone and electricity) accounts. If a borrower qualifies, he or she may
obtain a loan for up to 50.0% of the wholesale book value of the automobile.
Insurance is required and a lien is taken out on the title for security. The
Company offers ancillary automobile services at most of its Company-owned
agencies such as the issuance of license tags and renewals. Auto title loan and
ancillary services are presently offered exclusively through the 15
Company-owned agencies, although the Company intends to offer these services
throughout its entire distribution network in the future.
MARKETING AND DISTRIBUTION
The Company markets and distributes Federated National's and third-party
insurers' products and its other services primarily in South Florida, through a
network of 15 Company-owned agencies and approximately 300 active independent
agents. The Company's agencies are located in Miami-Dade, Broward and Polk
Counties, Florida, and its network of independent agents are located primarily
in South Florida. The Company supports its agency network by advertising in
various media.
Company-employed and independent agents have the authority to sell and
bind insurance coverages in accordance with procedures established by Assurance
MGA. Assurance MGA reviews all coverages bound by the agents promptly and
generally accepts all coverages which fall within stated underwriting criteria.
Assurance MGA also has the right within a period of 60 days from a policy's
inception to cancel any policy upon 45 days notice, even if the risk falls
within its underwriting criteria.
The Company believes that it provides its independent agents with
attractive commission structures. The Company compensates its agents by paying
a commission based on a percentage of premiums produced. The Company also
offers its agents a contingent commission based on premium levels and loss
ratios, which is intended to encourage the agents to place an increased portion
of their profitable business with the Company.
The Company believes that its integrated computer system, which allows for
rapid automated premium quotation and policy issuance by its agents, is a key
element in providing quality service to both its agents and insureds. For
example, upon entering a customer's basic personal information, the customer's
driving record is accessed and a premium rate is quoted. If the customer
chooses to purchase the insurance, the system generates the policy on-site.
The Company believes that its distribution system will ultimately enable
it to lower its expense ratio and operate with more favorable loss experience.
A lower expense ratio will, in turn, allow the Company to more effectively
compete with larger providers of nonstandard automobile and other forms of
insurance.
32
<PAGE>
The following table sets forth the amount and percentages of insurance
premiums written through Company-owned agencies and independent agents for the
periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------
1998 1997
---------------------- -----------------------
PREMIUMS PERCENT PREMIUMS PERCENT
---------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Through Company-owned agencies ......... $ 2,908 23.9% $2,223 25.1%
Through independent agents ............. 9,262 76.1 6,619 74.9
------- ----- ------ -----
Total ................................ $12,170 100.0% $8,842 100.0%
======= ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996
---------------------- -----------------------
PREMIUMS PERCENT PREMIUMS PERCENT
---------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Through Company-owned agencies ......... $ 4,518 26.1% $ 4,950 33.3%
Through independent agents ............. 13,157 73.9 9,900 67.6
------- ----- ------- -----
Total ................................ $17,675 100.0% $14,850 100.0%
======= ===== ======= =====
</TABLE>
Following completion of this Offering, the Company will seek to expand its
distribution network and market its products and services in other regions of
Florida by acquiring additional insurance agencies and establishing
relationships with additional independent agents. Ultimately, as the Company
expands its insurance operations to other states, the Company will seek to
replicate its distribution network in those states. There can be no assurance
that the Company will be able to obtain the required regulatory approvals to
offer additional insurance products or expand into states other than Florida.
Moreover, pursuant to the Consent Order, the Company's growth in Florida is
currently subject to limits on the amount of premiums it can underwrite. See
"Regulation."
In addition to its agency network, the Company currently markets its
insurance products on a limited basis directly to customers. Such marketing
efforts are concentrated in geographic areas of Florida where the Company does
not have an extensive network of agents. Following completion of this Offering,
the Company intends to expand its direct marketing efforts through additional
media and Internet advertising, as well as direct mail promotions.
REINSURANCE
Federated National follows the customary industry practice of reinsuring a
portion of its risks and paying for that protection based upon premiums
received on all policies subject to such reinsurance. Reinsurance involves an
insurance company transferring or "ceding" all or a portion of its exposure on
insurance underwritten by it to another insurer, known as a "reinsurer." The
reinsurer assumes a portion of the exposure in return for a portion, or quota
share, of the premium, and pays the ceding company a commission based upon the
amount of insurance ceded. The ceding of insurance does not legally discharge
the insurer from its primary liability for the full amount of the policies. If
the reinsurer fails to meet its obligations under the reinsurance agreement,
the ceding company is still required to pay the loss.
Reinsurance is ceded under separate contracts or "treaties" for the
separate lines of business underwritten. Federated National's reinsurance for
automobile insurance is primarily ceded with Transatlantic Re, an A++ rated
reinsurance company. Federated National cedes 30.0% of automobile premiums
written to Transatlantic Re. Federated National maintains reinsurance contracts
for mobile home insurance with A-rated reinsurers including Transatlantic Re.
Federated National cedes 40.0% of mobile home premiums written to various
reinsurers. The reinsurance program renews annually, although the Company
continually reviews the program and may elect to change it more frequently.
Reinsurance is placed directly by the Company and through national reinsurance
intermediaries.
33
<PAGE>
The Company is selective in choosing a reinsurer and considers numerous
factors, the most important of which is the financial stability of the
reinsurer, its history of responding to claims and its overall reputation. In
an effort to minimize its exposure to the insolvency of a reinsurer, the
Company evaluates the acceptability and reviews the financial condition of the
reinsurer at least annually. The Company's current policy is to use only
reinsurers that have an A.M. Best rating of "A (Excellent)" or better.
LIABILITY FOR UNPAID LOSSES AND LAE
The Company is directly liable for loss and LAE payments under the terms
of the insurance policies that it writes. In many cases, several years may
elapse between the occurrence of an insured loss, the reporting of the loss to
the Company and the Company's payment of that loss. As required by insurance
regulations and accounting rules, the Company reflects its liability for the
ultimate payment of all incurred losses and LAE by establishing a liability for
those unpaid losses and LAE for both reported and unreported claims, which
represent estimates of future amounts needed to pay claims and related
expenses.
When a claim involving a probable loss is reported, the Company
establishes a liability for the estimated amount of the Company's ultimate loss
and LAE payments. The estimate of the amount of the ultimate loss is based upon
such factors as the type of loss, jurisdiction of the occurrence, knowledge of
the circumstances surrounding the claim, severity of injury or damage,
potential for ultimate exposure, estimate of liability on the part of the
insured, past experience with similar claims and the applicable policy
provisions.
All newly reported claims received with respect to nonstandard personal
automobile policies are set up with an initial average liability. The average
liability for these claims are determined every quarter by dividing the number
of closed claims into the total amount paid during the three month period. If a
claim is open more than 30 days, that open case liability is evaluated and the
liability is adjusted upward or downward according to the facts and damages of
that particular claim. The Company anticipates that it will adopt a similar
policy with respect to standard automobile policies.
In addition, management provides for a liability on an aggregate basis to
provide for IBNR. The Company utilizes independent actuaries to help establish
its liability for unpaid losses and LAE. The Company does not discount the
liability for unpaid losses and LAE for financial statement purposes. There are
no differences in the liability for unpaid losses and LAE established under
GAAP and those established under SAP.
The estimates of the liability for unpaid losses and LAE are subject to
the effect of trends in claims severity and frequency and are continually
reviewed. As part of this process, the Company reviews historical data and
considers various factors, including known and anticipated legal developments,
changes in social attitudes, inflation and economic conditions. As experience
develops and other data become available, these estimates are revised, as
required, resulting in increases or decreases to the existing liability for
unpaid losses and LAE. Adjustments are reflected in results of operations in
the period in which they are made and the liabilities may deviate substantially
from prior estimates.
Among the classes of insurance underwritten by the Company, the automobile
and mobile home liability claims historically tend to have longer time lapses
between the occurrence of the event, the reporting of the claim to the Company
and the final settlement than do automobile physical damage and mobile home
property claims. Liability claims often involve parties filing suit and
therefore may result in litigation. By comparison, property damage claims tend
to be reported in a relatively shorter period of time and settle in a shorter
time frame with less occurrence of litigation.
There can be no assurance that the Company's liability for unpaid losses
and LAE will be adequate to cover actual losses. If the Company's liability for
unpaid losses and LAE proves to be inadequate, the Company will be required to
increase the liability with a corresponding reduction in the Company's net
34
<PAGE>
income in the period in which the deficiency is identified. Future loss
experience substantially in excess of established liability for unpaid losses
and LAE could have a material adverse effect on the Company's business, results
of operations and financial condition.
The following table sets forth a reconciliation of beginning and ending
liability for unpaid losses and LAE as shown in the Company's consolidated and
combined financial statements for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------- ------------------------
1998 1997 1997 1996
------------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at January 1 ................... $ 6,726 $ 6,234 $ 6,234 $ 4,756
Less reinsurance recoverables ......... (2,091) (1,702) (1,702) (1,068)
-------- -------- -------- --------
Net balance at January 1 ............. $ 4,635 $ 4,532 $ 4,532 $ 3,688
======== ======== ======== ========
Incurred related to:
Current year .......................... $ 4,686 $ 3,582 $ 7,612 $ 7,598
Prior years ........................... (5) (311) (198) 62
---------- -------- -------- --------
Total incurred ....................... $ 4,681 $ 3,271 $ 7,414 $ 7,660
========= ======== ======== ========
Paid related to:
Current year .......................... $ 2,038 $ 1,564 $ 4,459 $ 4,178
Prior years ........................... 1,895 2,267 2,852 2,638
--------- -------- -------- --------
Total paid ........................... $ 3,933 $ 3,831 $ 7,311 $ 6,816
========= ======== ======== ========
Net balance at period ending ........... $ 5,383 $ 3,972 $ 4,635 $ 4,532
Plus reinsurance recoverables ......... 2,240 1,774 2,091 1,702
--------- -------- -------- --------
Balance at period ending ............. $ 7,623 $ 5,746 $ 6,726 $ 6,234
========= ======== ======== ========
</TABLE>
Based upon consultations with the Company's independent actuarial
consultants and their statement of opinion on losses and LAE, the Company
believes that the liability for unpaid losses and LAE is adequate to cover all
claims and related expenses which may arise from incidents reported and IBNR.
The following table presents total unpaid loss and LAE, net and total
reinsurance recoverables shown in the Company's consolidated and combined
financial statements for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
--------------------- ---------------------
1998 1997 1997 1996
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loss and LAE, net ........................ $ 3,325 $2,712 $3,383 $3,166
IBNR, net ................................ 2,058 1,260 1,252 1,366
------- ------ ------ ------
Total unpaid loss and LAE, net ......... $ 5,383 $3,972 $4,635 $4,532
======= ====== ====== ======
Reinsurance recoverable .................. 1,373 1,176 1,267 1,045
IBNR recoverable ......................... 867 598 824 657
------- ------ ------ ------
Total reinsurance recoverable .......... $ 2,240 $1,774 $2,091 $1,702
======= ====== ====== ======
</TABLE>
35
<PAGE>
The following table presents the liability for unpaid losses and LAE for
the Company for the years ended December 31, 1997, 1996, 1995, 1994, 1993 and
1992. The top line of the table shows the estimated net liabilities for unpaid
losses and LAE at the balance sheet date for each of the periods indicated.
These figures represent the estimated amount of unpaid losses and LAE for
claims arising in all prior years that were unpaid at the balance sheet date,
including losses that had been incurred but not yet reported. The portion of
the table labeled "Cumulative paid as of" shows the net cumulative payments for
losses and LAE made in succeeding years for losses incurred prior to the
balance sheet date. The lower portion of the table shows the re-estimated
amount of the previously recorded liability based on experience as of the end
of each succeeding year.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,(1)
-------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Liability .................... $ 4,635 $ 4,532 $3,688 $3,355 $2,507 $611
Cumulative paid as of:
One year later ............................ 2,852 2,638 2,449 1,964 499
Two years later ........................... 2,658 2,792 2,426 554
Three years later ......................... 3,018 2,449 585
Four years later .......................... 2,529 580
Five years later .......................... 583
Re-estimated net liability as of:
End of year ............................... $ 4,635 $ 4,532 $3,688 $3,355 $2,507 $611
One year later ............................ 4,334 3,750 3,570 2,566 628
Two years later ........................... 3,252 3,231 2,780 586
Three years later ......................... 3,305 2,596 593
Four years later .......................... 2,619 580
Five years later .......................... 583
Cumulative redundancy (deficiency) ......... -- $ 198 $ 436 $ 50 $ (112) $ 28
</TABLE>
- ----------------
(1) To evaluate the information in the table properly it should be noted
that, although the Company recorded its participation in the FJUA from 1992
until 1995 in its 1996 statutory financial statements, this table properly
reflects the Company's participation in the FJUA in the corresponding years.
The cumulative redundancy or deficiency represents the aggregate change in
the estimates over all prior years. A deficiency indicates that the latest
estimate of the liability for losses and LAE is higher than the liability that
was originally estimated and a redundancy indicates that such estimate is
lower. It should be emphasized that the table presents a run-off of balance
sheet liability for the periods indicated rather than accident or policy loss
development for those periods. Therefore, each amount in the table includes the
cumulative effects of changes in liability for all prior periods. Conditions
and trends that have affected liabilities in the past may not necessarily occur
in the future.
36
<PAGE>
Underwriting results of insurance companies are frequently measured by
their Combined Ratios. However, investment income, Federal income taxes and
other non-underwriting income or expense are not reflected in the Combined
Ratio. The profitability of property and casualty insurance companies depends
on income from underwriting, investment and service operations. Underwriting
results are considered profitable when the Combined Ratio is under 100% and
unprofitable when the Combined Ratio is over 100%. The following table sets
forth Loss Ratios, Expense Ratios and Combined Ratios for the periods indicated
for the nonstandard automobile insurance business of the Company. The Ratios
shown in the table below are computed based upon GAAP.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------- -------------------
1998 1997 1997 1996
------ -------- -------- --------
<S> <C> <C> <C> <C>
Loss Ratio ............. 77% 73% 75% 85%
Expense Ratio .......... 18 29 27 23
-- -- -- --
Combined Ratio ......... 95% 102% 102% 108%
== === === ===
</TABLE>
INVESTMENTS
The Company's investment objective is to maximize total rate of return
after Federal income taxes while maintaining liquidity and minimizing risk. The
Company's current investment policy limits investment in non-investment grade
fixed maturity securities (including high-yield bonds), and limits total
investments in equity securities and mortgage notes receivable to approximately
20.0% and 5.0%, respectively, of total consolidated investments. The Company
also complies with applicable laws and regulations which further restrict the
type, quality and concentration of investments. In general, these laws and
regulations permit investments, within specified limits and subject to certain
qualifications, in Federal, state and municipal obligations, corporate bonds,
preferred and common equity securities and real estate mortgages.
The Company's investment policy is established by the Board of Directors
and is reviewed on a regular basis. Pursuant to this investment policy, as of
June 30, 1998, approximately 89.8% of the Company's investments were in
investment-grade fixed income securities and short-term investments, which are
considered to be either available for sale or held to maturity, based upon the
Company's intent at the time of purchase. Fixed maturities are considered
available for sale and are marked to market. The Company may in the future also
consider fixed maturities held to maturity and carried at amortized cost. The
Company does not use any material swaps, options, futures or forward contracts
to hedge or enhance its investment portfolio.
The Company's investment portfolio is managed by the Company's Investment
Committee consisting of the Company's President, the President of Federated
National and one outside advisor, in accordance with guidelines established by
the Florida Department of Insurance.
37
<PAGE>
The table below sets forth investment results for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
---------------------- --------------------
1998 1997 1997 1996
---------- --------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest on fixed maturities ............... $439 $ 391 $ 817 $ 601
Dividends on equity securities ............. 49 31 147 105
Interest on short-term investments ......... 19 24 38 132
Other ...................................... (1) 7 64 25
---- ----- ------ -----
Total investment income .................... 506 453 1,066 863
Investment expense ......................... -- -- (19) (13)
Net investment income ...................... $506 $ 453 $1,047 $ 850
==== ===== ====== =====
Net realized gain (losses) ................. $390 $ (34) $ (19) $ 155
==== ===== ====== =====
</TABLE>
The following table summarizes, by type, the investments of the Company as
of June 30, 1998.
<TABLE>
<CAPTION>
CARRYING PERCENT OF
AMOUNT TOTAL
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Fixed maturities, at market:
U.S. government agencies and authorities ................. $ 2,013 11.3%
Obligations of states and political subdivisions ......... 11,453 64.2
Corporate securities ..................................... 2,083 11.7
Collateralized mortgage obligations ...................... 462 2.6
-------- ----
Total fixed maturities .................................. 16,011 89.8
-------- ----
Equity securities, at market ............................. 1,647 9.2
Mortgage notes receivable ................................ 181 1.0
-------- ----
Total investments ....................................... $ 17,839 100%
======== ====
</TABLE>
Fixed maturities are carried on the Company's balance sheet at market. At
June 30, 1998, fixed maturities had the following quality ratings (by Moody's
Investors Service, Inc. ("Moody's") and for securities not assigned a rating by
Moody's, by Standard and Poor's Corporation):
<TABLE>
<CAPTION>
CARRYING PERCENT OF
AMOUNT TOTAL
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
AAA .......... $ 4,959 31.0%
AA ........... 3,801 23.7
A ............ 2,222 13.9
BBB .......... 5,029 31.4
BB++ ......... -- --
-------- -----
$ 16,011 100.0%
======== =====
</TABLE>
38
<PAGE>
The following table summarizes, by maturity, the fixed maturities of the
Company as of June 30, 1998.
<TABLE>
<CAPTION>
CARRYING PERCENT OF
AMOUNT TOTAL
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Matures In:
One year or less ................. $ 309 1.9%
One year to five years ........... 676 4.2
Five years to 10 years ........... 4,499 28.1
More than 10 years ............... 10,527 65.8
-------- -----
Total fixed maturities ......... $ 16,011 100.0%
======== =====
</TABLE>
At June 30, 1998, the average maturity of the fixed maturities portfolio
was 13 years.
COMPETITION
The Company operates in a highly competitive market and faces competition
from both national regional insurance companies, many of whom are larger and
have greater financial and other resources than the Company, have favorable
A.M. Best ratings and offer more diversified insurance coverage. The Company's
competitors include other companies which market their products through agents,
as well as companies which sell insurance directly to their customers. Large
national writers may have certain competitive advantages over agency writers,
including increased name recognition, increased loyalty of their customer base
and reduced policy acquisition costs. The Company may also face competition
from new or temporary entrants in its niche markets. In some cases, such
entrants may, because of inexperience, desire for new business or other
reasons, price their insurance below that of the Company. Although the
Company's pricing is inevitably influenced to some degree by that of its
competitors, management of the Company believes that it is generally not in the
Company's best interest to compete solely on price, choosing instead to compete
on the basis of underwriting criteria, its distribution network and superior
service to its agents and insureds. The Company competes with respect to
automobile insurance in Florida with more than 100 companies which underwrite
personal automobile insurance. Companies of comparable or smaller size which
compete with the Company in the nonstandard automobile insurance industry
include Fortune Insurance Company, U.S. Security Insurance Company, United
Automobile Insurance Company, Direct General Insurance Company and Security
National, as well as major insurers such as Progressive Casualty Insurance
Company. Competition could have a material adverse effect on the Company's
business, results of operations and financial condition.
REGULATION
GENERAL
The Company is subject to the laws and regulations in Florida and will be
subject to the laws and regulations of any other states in which it seeks to
conduct business in the future. The regulations cover all aspects of its
business and are generally designed to protect the interests of insurance
policyholders, as opposed to the interests of shareholders. Such regulations
relate to authorized lines of business, capital and surplus requirements,
allowable rates and forms (particularly for the nonstandard auto segment),
investment parameters, underwriting limitations, transactions with affiliates,
dividend limitations, changes in control, market conduct, maximum amount
allowable for premium financing service charges, maximum amount of interest
allowable for title loans and a variety of other financial and non-financial
components of the Company's business. Pursuant to the Consent Order, Federated
National's growth is subject to regulatory limits on the amount of premiums it
can underwrite. In 1998, Federated National only may underwrite $21.0 million
in gross premiums written and $14.0 million in total net premiums written. In
1999, Federated National is limited to $24.0 million and $15.0 million,
respectively. Federated National also is required to maintain a minimum capital
surplus to support its
39
<PAGE>
underwriting program. In 1998 and 1999, Federated National is required to have
capital surplus of $4.7 million and $5.9 million, respectively. The premium
limits and capital surplus requirements impact Federated National's potential
growth. Federated National's ability to exceed these limitations will be
subject to the prior approval of the Florida Department of Insurance. The
Florida Department of Insurance has indicated in writing its willingness to
modify the Consent Order and increase Federated National's underwriting
authority, subject to the completion of this Offering. The Company believes
that as a result of the capital generated by this Offering, Federated National
will have capital surplus significantly in excess of the required minimum.
Accordingly, the Company believes that it will be able to substantially
increase the amount of premiums it can underwrite. There can be no assurance
that the Company will obtain the prior approval of the Florida Department of
Insurance to exceed the underwriting limitations or that it will not be subject
to other regulatory limits on the amount of premiums Federated National may
underwrite. The failure of the Company to comply with certain provisions of
applicable insurance laws and regulations could have a material adverse effect
on the Company's business, results of operations or financial condition. In
addition, any changes in such laws and regulations including the adoption of
consumer initiatives regarding rates charged for automobile or other insurance
coverage, could materially adversely affect the operations of the Company's,
ability to expand its operations.
Many states have also enacted laws which restrict an insurer's
underwriting discretion, such as the ability to terminate policies, terminate
agents or reject insurance coverage applications, and many state regulators
have the power to reduce, or to disallow increases in, premium rates. These
laws may adversely affect the ability of an insurer to earn a profit on its
underwriting operations.
Most states have insurance laws requiring that rate schedules and other
information be filed with the state's insurance regulatory authority, either
directly or through a rating organization with which the insurer is affiliated.
The regulatory authority may disapprove a rate filing if it finds that the
rates are inadequate, excessive or unfairly discriminatory. Rates, which are
not necessarily uniform for all insurers, vary by class of business, hazard
covered, and size of risk. The Company is permitted to file rates for
nonstandard policies which are usually higher than those charged for standard
risks, reflecting the higher probability of loss. Florida and several states
have recently adopted laws or their legislatures are considering proposed laws
which, among other things, limit the ability of insurance companies to effect
rate increases or to cancel, reduce or non-renew insurance coverage with
respect to existing policies, particularly private passenger automobile
insurance.
Most states require licensure or regulatory approval prior to the
marketing of new insurance products. Typically, licensure review is
comprehensive and includes a review of a company's business plan, solvency,
reinsurance, character of its officers and directors, rates, forms and other
financial and non-financial aspects of the Company. The regulatory authorities
may not allow entry into a new market by withholding approval or not granting a
license which, in turn, would have a material adverse effect on the Company's
ability to expand its operations.
All insurance companies must file quarterly and annual statements with
certain regulatory agencies and are subject to regular and special examinations
by those agencies. The last regulatory examination of Federated National
covered the three-year period ended on December 31, 1995. No material
deficiencies were found during this regulatory examination.
In some instances, various states routinely require deposits of assets for
the protection of policyholders either in those states or for all
policyholders. As of December 31, 1997, securities representing $250,000 or
1.5% of the carrying value of the Company's total investments, were on deposit
with the State of Florida.
INSURANCE HOLDING COMPANY REGULATION
The Company is subject to laws governing insurance holding companies in
Florida where Federated National is domiciled. These laws, among other things,
(i) require the Company to file
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periodic information with the Florida Department of Insurance, including
information concerning its capital structure, ownership, financial condition
and general business operations, (ii) regulate certain transactions between the
Company and its affiliates, including the amount of dividends and other
distributions and the terms of surplus notes and (iii) restrict the ability of
any one person to acquire certain levels of the Company's voting securities
without prior regulatory approval. Any purchaser of 5% or more of the
outstanding shares of Common Stock of the Company will be presumed to have
acquired control of Federated National unless the Florida Insurance
Commissioner, upon application, has determined otherwise.
Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its shareholders except out of that part
of its available and accumulated capital surplus funds which is derived from
realized net operating profits on its business and net realized capital gains.
A Florida domestic insurer may not make dividend payments or distributions to
shareholders without prior approval of the Florida Department of Insurance if
the dividend or distribution would exceed the larger of (i) the lesser of (a)
10.0% of capital surplus or (b) net income, not including realized capital
gains, plus a two-year carryforward, (ii) 10.0% of capital surplus with
dividends payable constrained to unassigned funds minus 25% of unrealized
capital gains or (iii) the lesser of (a) 10.0% of capital surplus or (b) net
investment income plus a three-year carryforward with dividends payable
constrained to unassigned funds minus 25.0% of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution
without the prior written approval of the Florida Department of Insurance (i)
if the dividend is equal to or less than the greater of (a) 10.0% of the
insurer's capital surplus as regards policyholders derived from realized net
operating profits on its business and net realized capital gains or (b) the
insurer's entire net operating profits and realized net capital gains derived
during the immediately preceding calendar year, (ii) the insurer will have
policyholder capital surplus equal to or exceeding 115.0% of the minimum
required statutory capital surplus after the dividend or distribution, (iii)
the insurer files a notice of the dividend or distribution with the department
at least ten business days prior to the dividend payment or distribution and
(iv) the notice includes a certification by an officer of the insurer attesting
that, after the payment of the dividend or distribution, the insurer will have
at least 115.0% of required statutory capital surplus as to policyholders.
Except as provided above, a Florida domiciled insurer may only pay a dividend
or make a distribution (i) subject to prior approval by the Florida Department
of Insurance or (ii) 30 days after the Florida Department of Insurance has
received notice of such dividend or distribution and has not disapproved it
within such time.
Under these laws, Federated National is not permitted to pay dividends to
the Company in 1998 without prior regulatory approval. Although the Company
believes that amounts required for it to meet its financial and operating
obligations will be available, there can be no assurance in this regard.
Further, there can be no assurance that, if requested, the Florida Department
of Insurance will allow any dividends to be paid by Federated National in the
future.
The maximum dividends permitted by state law are not necessarily
indicative of an insurer's actual ability to pay dividends or other
distributions to a parent company, which also may be constrained by business
and regulatory considerations, such as the impact of dividends on capital
surplus, which could affect an insurer's competitive position, the amount of
premiums that can be written and the ability to pay future dividends. Further,
state insurance laws and regulations require that the statutory capital surplus
of an insurance company following any dividend or distribution by it be
reasonable in relation to its outstanding liabilities and adequate for its
financial needs.
While the non-insurance company subsidiaries are not subject directly to
the dividend and other distribution limitations, insurance holding company
regulations govern the amount which a subsidiary within the holding company
system may charge any of the insurance companies for service (e.g., management
fees and commissions).
In order to enhance the regulation of insurer solvency, the NAIC enacted a
model law (the "Model Law") to implement its risk-based capital requirements
for insurance companies. The Model Law
41
<PAGE>
became effective with respect to property and casualty insurance companies as
of year-end 1994. The requirements are designed to assess capital adequacy and
to raise the level of protection that statutory surplus provides for
policyholders. The Model Law measures three major areas of risk facing property
and casualty insurers: (i) underwriting risks, which encompass the risk of
adverse loss developments and inadequate pricing; (ii) declines in asset values
arising from credit risk; and (iii) other business risks from investments.
Insurers having less statutory surplus than required by the Model Law will be
subject to varying degrees of regulatory action, depending on the level of
capital inadequacy. The Model Law establishes various levels of regulatory
action. Based upon the 1997 statutory financial statements for Federated
National, the Company's insurance subsidiary, Federated National's statutory
surplus exceeds all regulatory action levels established by the NAIC.
The extent of regulatory intervention and action increases as the ratio of
an insurer's statutory surplus to its Authorized Control Level ("ACL"), as
calculated under the Model Law, decreases. The first action level, the Company
Action Level, requires an insurer to submit a plan of corrective actions to the
insurance regulators if statutory surplus falls below 200.0% of the ACL amount.
The second action level, the Regulatory Action Level, requires an insurer to
submit a plan containing corrective actions and permits the insurance
regulators to perform an examination or other analysis and issue a corrective
order if statutory surplus falls below 150.0% of the ACL amount. The Authorized
Control Level, the third action level, allows the regulators to rehabilitate or
liquidate an insurer in addition to the aforementioned actions if statutory
surplus falls below the ACL amount. The fourth action level is the Mandatory
Control Level which requires the regulators to rehabilitate or liquidate the
insurer if statutory surplus falls below 70.0% of the ACL amount. Federated
National's ratio of statutory surplus to its ACL, as calculated under the Model
Law, was 261.3% at December 31, 1997 and 290.6% at December 31, 1996.
Regulatory action is triggered if surplus falls below 200.0% of the ACL amount.
The NAIC has also developed IRIS to assist state insurance departments in
identifying companies which may be developing performance or solvency problems,
as signaled by significant changes in the companies' operations. Such changes
may not necessarily result from any problems with an insurance company, but may
merely indicate changes in certain ratios outside the ranges defined as normal
by the NAIC. When an insurance company has four or more ratios falling outside
"normal ranges", state regulators may investigate to determine the reasons for
the variance and whether corrective action is warranted. As of December 31,
1997, the Florida Department of Insurance found that Federated National was
outside the usual range with respect to four IRIS tests. Federated National
fell outside the usual range with respect to two of the IRIS tests due to not
reporting its underwriting results related to the FJUA in its statutory
financial statements prior to 1996. The full results since Federated
National's inception of its FJUA participation were reported in the 1996
underwriting year. If the FJUA results are not considered, Federated National
still falls outside the usual range with respect to two IRIS tests. Although
the Florida Department of Insurance found that Federated National was outside
the usual range with respect to the four IRIS tests, no regulatory action has
been taken to date.
The Company's premium financing program is also subject to certain laws
governing the operation of premium finance companies. These laws pertain to
such matters as books and records that must be kept, forms, licensing, fees and
charges. For example, in Florida, the maximum late payment fee Federated
Premium may charge is the greater of $10 per month or 5% of the amount of the
overdue payment.
UNDERWRITING AND MARKETING RESTRICTIONS
During the past several years, various regulatory and legislative bodies
have adopted or proposed new laws or regulations to deal with the cyclical
nature of the insurance industry, catastrophic events and insurance capacity
and pricing. These regulations include (i) the creation of "market assistance
plans" under which insurers are induced to provide certain coverages, (ii)
restrictions on the ability of insurers to rescind or otherwise cancel certain
policies in mid-term, (iii) advance notice requirements or limitations imposed
for certain policy non-renewals and (iv) limitations upon or decreases in rates
permitted to be charged.
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<PAGE>
LEGISLATION
From time to time, new regulations and legislation are proposed to limit
damage awards, to control plaintiffs' counsel fees, to bring the industry under
regulation by the Federal government, to control premiums, policy terminations
and other policy terms and to impose new taxes and assessments. It is not
possible to predict whether, in what form or in what jurisdictions, any of
these proposals might be adopted, or the effect, if any, on the Company.
INDUSTRY RATINGS SERVICES
Federated National does not qualify for a letter rating by A.M. Best
because of insufficient operating history. Typically, A.M. Best requires a
company to have a five-year operating history before issuing ratings. Such
period may be extended by management or operational changes such as the
Consolidation. Federated National expects to receive an A.M. Best letter rating
in 1999. Although Federated National has not yet received a letter rating from
A.M. Best, A.M. Best has issued a FPR of "3 out of 9 (below average)" to
Federated National. An FPR reflects A.M. Best's opinion of the financial
strength and operating performance of property and casualty insurance companies
on which it reports, that have not been assigned a letter rating due to, among
other factors, insufficient operating history. A.M. Best's ratings are based
upon factors of concern to agents, reinsurers and policyholders are not
primarily directed toward the protection of investors. Federated National is
rated "BBB" (Adequate and Secure) by Standard and Poor's Corporation and is
rated "A" (Strong) by Demotech, Inc.
EMPLOYEES
As of June 30, 1998, the Company and its subsidiaries had 128 employees,
including three executive officers. The Company is not a party to any
collective bargaining agreement and has not experienced work stoppages or
strikes as a result of labor disputes. The Company considers relations with its
employees to be satisfactory.
FACILITIES
In August 1998, the Company consolidated its executive offices and
administrative operations into a 14,000 square foot facility built to its
specifications in Plantation, Florida. The facility is owned by the Company.
Prior to such consolidation, these operations were based in four locations in
Fort Lauderdale, Florida. See "Certain Transactions."
The Company's agencies are located in leased locations pursuant to leases
expiring at various times through February 2004. The aggregate annual rental
for the facilities is approximately $422,000. See "Certain Transactions."
LEGAL PROCEEDINGS
The Company is subject to routine legal proceedings in the ordinary course
of business. The Company believes that the ultimate resolution of these
lawsuits will not have a material adverse effect on its business, financial
condition or results of operations. The Company provides for a liability for
both the amount of estimated damages attributable to these lawsuits and the
estimated costs of litigation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Edward J. Lawson(1) .............. 48 President, Chief Executive Officer and Director
Michele V. Lawson ................ 40 Vice President--Agency Operations, Treasurer and
Director
Ronald A. Raymond ................ 53 President, Federated National and Director
Patrick D. Doyle(1)(2) ........... 38 Secretary and Director
Joseph A. Epstein(1)(2) .......... 43 Director
Carla L. Leonard ................. 36 Director
Bruce Simberg(2) ................. 50 Director
</TABLE>
- ----------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
EDWARD J. LAWSON co-founded the Company and has served as its President
and Chief Executive Officer since inception. Mr. Lawson has over 15 years
experience in the insurance industry commencing with the founding of the
Company's initial insurance agency in 1983.
MICHELE V. LAWSON, co-founded the Company and has served as a director and
executive officer since inception. Mrs. Lawson is currently the Company's Vice
President--Agency Operations, and Treasurer. Mrs. Lawson has 15 years
experience in the insurance industry commencing with the founding of the
Company's initial insurance agency in 1983 and also holds a property and
casualty license in Florida.
RONALD A. RAYMOND has served as a director of the Company and as Federated
National's President since June 1995. From May 1970 to the present date, Mr.
Raymond has been a shareholder and president of Raymond/Patterson Agency, Inc.,
a managing general agency, in Ft. Lauderdale, Florida. From May 1992 to the
present date, Mr. Raymond has been a shareholder of Gulfstream Insurance Group,
Inc., a multi-lines insurance agency, in Fort Lauderdale, Florida. Mr. Raymond
holds general lines, surplus lines, and life insurance licenses in Florida and
is a past President of the Independent Insurance Agents of Broward County.
PATRICK D. DOYLE has served as Secretary and a director of the Company
since April 1998. Since April 1990, Mr. Doyle has been Chief Financial Officer
of Efjohn North America Limited, a lessor and manager of cruise ships. From May
1982 to April 1990, Mr. Doyle was employed by KPMG Peat Marwick LLP, most
recently as a Senior Manager focusing on the emerging growth business sector.
Mr. Doyle is a certified public accountant. Mr. Doyle is also currently a
director of a subsidiary of Silja OY AB, a Finish company.
JOSEPH A. EPSTEIN has served as a director of the Company since April
1998. Since January 1998, Mr. Epstein has been the Chief Financial Officer at
the Center for English Studies, Inc., a provider of language services. From
November 1996 to January 1998, Mr. Epstein was a partner at the accounting firm
of Mallah, Furman & Company, P.A. From May 1989 to October 1996, Mr. Epstein
was a shareholder of the accounting firm of Rachlin, Cohen & Holtz.
CARLA L. LEONARD has served as a director of the Company since its
inception. Since September 1983, Ms. Leonard has also owned and operated
Statewide Insurance and Auto Tag Agency, Inc., an independent insurance agency.
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<PAGE>
BRUCE SIMBERG has served as a director of the Company since January 28,
1998. Mr. Simberg has been a practicing attorney for the last 22 years, most
recently as managing partner of Conroy, Simberg & Ganon, a law firm in Fort
Lauderdale, Florida since October 1979.
Edward J. Lawson and Michele V. Lawson are husband and wife. There are no
other family relationships among the Company's directors and executive
officers.
The Company's Articles provide that the Board of Directors is divided into
three classes and directors serve staggered three-year terms. Joseph A. Epstein
and Carla L. Leonard will hold office until the annual meeting of shareholders
scheduled to be held in 1999, Bruce Simberg and Patrick Doyle will hold office
until the 2000 annual meeting, and Edward J. Lawson, Michele V. Lawson and
Ronald A. Raymond will hold office until the 2001 annual meeting.
The Company has also agreed, for a three-year period following the
effective date of the Registration Statement, to elect one designee of the
Representative to the Company's Board of Directors. In the event the
Representative does not designate a person for election to the Company's Board
of Directors, the Representative is entitled to information and observer rights
with respect to meetings of the Company's Board of Directors and executive
committees, if any. No designee has been chosen as of the date of this
Prospectus. See "Underwriting."
Officers of the Company serve at the pleasure of the Board of Directors
and until the first meeting of the Board of Directors following the next annual
meeting of the Company's shareholders and until their successors have been
chosen and qualified. The Company is actively seeking to secure the services of
a Chief Financial Officer.
DIRECTOR COMPENSATION
The Company has historically paid fees to all of its directors. Such fees
were paid at the rate of $6,000 per annum during 1996 and 1997 and at rates
ranging from $12,000 to $25,000 per annum since January 1, 1998. In addition,
directors of Federated National are paid directors fees at the rate of $2,000
per annum.
Effective September 1, 1998, the Company will no longer compensate
employee directors for their services as directors of either the Company or
Federated National. Non-employee directors will receive a fee of $500 per
meeting of the Board of Directors or committee thereof attended, and will
receive annual grants of stock options under the 1998 Plan to purchase 3,000
shares of Common Stock. All directors will, however, also be reimbursed for
travel and lodging expenses in connection with their attendance at meetings.
In September 1998, each of Ms. Leonard and Messrs. Doyle, Epstein and
Simberg were granted ten-year options under the 1998 Plan to purchase 3,000
shares of Common Stock at an exercise price of $10.00 per share. Such options
will vest over a four-year period commencing September 1999. Mr. Doyle has also
been granted additional options under the 1998 Plan. See "1998 Stock Option
Plan."
INDEMNIFICATION AGREEMENTS
The Company has entered into an indemnification agreement with each of its
directors and executive officers. Each indemnification agreement provides that
the Company will indemnify such person against certain liabilities (including
settlements) and expenses actually and reasonably incurred by him or her in
connection with any threatened or pending legal action, proceeding or
investigation (other than actions brought by or in the right of the Company) to
which he or she is, or is threatened to be, made a party by reason of his or
her status as a director, officer or agent of the Company, provided that such
director or executive officer acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interest of the Company
and, with respect to any criminal proceedings, had no reasonable cause to
believe his or her conduct was unlawful. With respect to any
45
<PAGE>
action brought by or in the right of the Company, a director or executive
officer will also be indemnified, to the extent not prohibited by applicable
law, against expenses and amounts paid in settlement, and certain liabilities
if so determined by a court of competent jurisdiction, actually and reasonably
incurred by him or her in connection with such action if he or she acted in
good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interest of the Company. The Company also intends to secure
$3.0 million in directors' and officers' liability insurance, effective upon
consummation of this Offering.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation for
1997 received by the Chief Executive Officer (the "CEO") and for the other
executive officers whose annual salary and bonus exceeded $100,000 for 1997
(collectively, with the CEO, the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- -------------
SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION FISCAL YEAR ($) ($) OPTION(#) ($)(1)
- ------------------------------- ------------ --------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Edward J. Lawson 1997 290,936 -- -- 3,000
President and CEO
Michele V. Lawson 1997 192,991 -- -- 2,000
Vice President-Agency
Operations and Treasurer
Ronald A. Raymond 1997 106,000 -- -- 5,000
President, Federated National
</TABLE>
- ----------------
(1) Represents $3,000 in contributions for Mr. Lawson and Mr. Raymond to the
Company's 401(k) Plan and $2,000 in directors fees for Ms. Lawson and Mr.
Raymond.
EMPLOYMENT AGREEMENTS
Effective September 1, 1998, the Company entered into employment
agreements with each of Edward J. Lawson, the Company's President and Chief
Executive Officer and Michele V. Lawson, the Company's Vice President--Agency
Operations and Treasurer. Each employment agreement has a "rolling" two-year
term, so that at all times the remaining term of the agreement is two years.
The employment agreements provide for annual salaries initially set at $156,000
for Mr. Lawson, and $78,000 for Mrs. Lawson, and such bonuses and increases as
may be awarded by the Board of Directors.
Each employment agreement provides that the executive officer will
continue to receive his salary for a period of two years after termination of
employment, if his or her employment is terminated by the Company for any
reason other than death, disability or Cause (as defined in the employment
agreement), or for a period of 24 months after termination of the agreement as
a result of his or her disability and a bonus equal to twice the amount paid to
the executive officer during the 12 months preceding the termination, and the
executive officer's estate will receive a lump sum payment equal to two year's
salary plus a bonus equal to twice the amount paid to the executive officer
during the 12 months preceding the termination by reason of his death. Each
employment agreement also prohibits the executive officer from directly or
indirectly competing with the Company for one year after termination for any
reason except a termination without Cause. If a Change of Control (as defined
in the employment agreement) occurs, the employment agreement provides for the
continued employment of the executive officer for a period of two years
following the Change of Control. In addition, following the Change of Control,
if the executive officer's employment is terminated by the Company other than
for Cause or by reason of his death or disability, or by the executive officer
for certain specified reasons
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<PAGE>
(such as a reduction of compensation or a diminution of duties), he or she will
receive a lump sum cash payment equal to 299% of the cash compensation received
by him or her during the 12 calendar months prior to such termination.
OPTION GRANTS IN LAST FISCAL YEAR
The Company did not grant any options during 1997.
1998 STOCK OPTION PLAN
Under the 1998 Plan, as amended, an aggregate of 350,000 shares of Common
Stock are reserved for issuance upon exercise of options ("1998 Plan Options").
1998 Plan Options are designed to serve as incentives for retaining qualified
and competent directors, employees, consultants and independent contractors of
the Company.
The Company's Board of Directors, or a committee thereof, administers and
interprets the 1998 Plan and is authorized to grant 1998 Plan Options
thereunder to all eligible employees of the Company, including directors
(whether or not employees) and executive officers of the Company, as well as
consultants and independent contractors hired by the Company. The 1998 Plan
provides for the granting of both "incentive stock options" (as defined in
Section 422 of the Internal Revenue Code of 1986, as amended) and nonstatutory
stock options. Incentive stock options may only be granted, however, to
employees. 1998 Plan Options can be granted on such terms and at such prices as
determined by the Board, or a committee thereof, except that the per share
exercise price of incentive 1998 Plan Options will not be less than the fair
market value of the Common Stock on the date of grant and, in the case of an
incentive 1998 Plan Option granted to a 10% shareholder, the per share exercise
price will not be less than 110% of such fair market value as defined in the
1998 Plan.
In accordance with the Internal Revenue Service Code, options granted
under the 1998 Plan that would otherwise qualify as incentive stock options
will not be treated as incentive stock options to the extent that the aggregate
fair market value of the shares covered by the incentive stock options which
are exercisable for the first time by any individual during any calendar year
exceeds $100,000.
1998 Plan Options will be exercisable after the period or periods
specified in the option agreement, provided, however, that incentive 1998 Plan
Options vest in three annual installments commencing one year from the date of
grant. 1998 Plan Options granted are not exercisable after the expiration of
ten years from the date of grant and are not transferable other than by will or
by the laws of descent and distribution. Adjustments in the number of shares
subject to 1998 Plan Options can be made by the Board of Directors or the
appropriate committee in the event of a stock dividend or recapitalization
resulting in a stock split-up, combination or exchange of shares. Under the
1998 Plan, options may become immediately exercisable in the event of a change
in control or approval by stockholders of the Company of a merger,
consolidation, liquidation, dissolution or disposition of all or substantially
all of the assets of the Company. The 1998 Plan also authorizes the Company to
make loans to optionees to enable them to exercise their options.
As of the date of this Prospectus, the Company has 1998 Plan Options
outstanding to purchase an aggregate of 282,400 shares of Common Stock at an
exercise price of $10.00 per share, including options to purchase 16,000,
10,000, 10,000 and 10,000 shares outstanding to Mr. Lawson, Mrs. Lawson, Mr.
Raymond and Mr. Doyle, respectively. All such options vest over a four-year
period commencing one year from the date of grant and expire ten years from the
date of grant. Of these options, 169,400 are incentive stock options and
113,000 are non-statutory stock options.
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<PAGE>
CERTAIN TRANSACTIONS
SALES AND REDEMPTION OF COMMON STOCK
In June 1997, the Company redeemed 33,348 shares of Common Stock held by
Carla Leonard for cash consideration of $120,000.
In December 1997, the Company sold 33,348 shares of Common Stock to Bruce
Simberg in a private transaction for cash consideration of $120,000.
THE CONSOLIDATION
In January 1997, the Company acquired all of the issued and outstanding
capital stock of each of Assurance MGA, Federated Premium and Superior for cash
consideration of $65,000, $42,500 and $2,500, respectively. Edward J. Lawson,
Michele V. Lawson and Ronald A. Raymond were principal shareholders of
Assurance MGA, Federated Premium and Superior.
In January 1998, the Company acquired all of the issued and outstanding
capital stock of eight affiliated corporations, principally the Company's
insurance agencies, in exchange for the issuance of 954,124 shares of Common
Stock to eight persons. Included in such shares were 377,481 shares of Common
Stock issued to each of Edward J. Lawson and Michele V. Lawson, who were
principal shareholders of seven of such corporations and 18,526 shares of
Common Stock issued to Ronald A. Raymond, who was the principal shareholder of
the eighth corporation.
In February 1998, the Company acquired all of the issued and outstanding
capital stock of one additional insurance agency in exchange for the issuance
of 27,792 shares of Common Stock to five persons, including 6,948 shares of
Common Stock issued to each of Edward J. Lawson and Michele V. Lawson, who were
principal shareholders of the agency.
REAL ESTATE TRANSACTIONS
In October 1997, the Company sold an office property housing one of its
agencies to Edward J. Lawson and Michele V. Lawson for $255,000. In connection
with the sale, the Company lent the Lawsons the sum of $200,000. Such loan is
evidenced by a promissory note which matures in October 2002, bearing interest
at the rate of 8.0% per annum and providing for monthly payments of principal
and interest. The outstanding balance of the promissory note at December 31,
1997 was $197,278. The promissory note is secured by a first mortgage lien on
the property. The Company leases the property from the Lawsons at a rental of
$3,000 per month, pursuant to a lease expiring in May 2001.
The Company also leases a second insurance agency location from Edward J.
Lawson and Michele V. Lawson at a rental of $3,500 per month pursuant to a
lease expiring in May 2001.
Prior to the Company's consolidation of its executive offices and
administrative operations, the Company leased a location from Ronald A. Raymond
at a rental of $2,650 per month and two other locations from Edward J. Lawson
and Michele V. Lawson at a rental of $6,500 per month.
The Company believes that its arrangements with Edward J. Lawson, Michele
V. Lawson and Ronald A. Raymond are on terms at least as favorable as those the
Company could secure from a non-affiliated third party.
OTHER TRANSACTIONS
Bruce F. Simberg, a director of the Company, is a partner of the Fort
Lauderdale, Florida law firm of Conroy, Simberg & Ganon, which renders legal
services to the Company. The Company has paid legal fees to Conroy, Simberg &
Ganon for services rendered.
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<PAGE>
From November 1996 to January 1998, Joseph A. Epstein, a director of the
Company, was a partner of the accounting firm of Mallah, Furman & Company,
P.A., which rendered accounting services to the Company. The Company has paid
accounting fees to Mallah, Furman & Company, P.A. for services rendered.
APPROVAL OF AFFILIATED TRANSACTIONS
No further transactions between the Company and its executive officers,
directors, principal shareholders or their affiliates are currently
contemplated. The Company has adopted a policy that any transactions between
the Company and its executive officers, directors, principal shareholders or
their affiliates take place on an arms-length basis and require the approval of
a majority of the independent directors of the Company.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock, as of the date of this Prospectus and
as adjusted to reflect the sale of 1,250,000 shares offered hereby the Company,
of (i) each of the shareholders of the Company owning more than 5% of the
outstanding shares of Common Stock; (ii) each director of the Company; (iii)
each of the Named Executive Officers; and (iv) all directors and executive
officers of the Company as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF CLASS
NUMBER OF SHARES -----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) BEFORE OFFERING AFTER OFFERING
- ----------------------------------------------- ---------------------- ----------------- ---------------
<S> <C> <C> <C>
Edward J. Lawson(3) ........................... 1,269,078 60.4% 37.9%
Michele V. Lawson(4) .......................... 1,269,078 60.4 37.9
Ronald A. Raymond ............................. 318,659 15.2 9.5
Patrick D. Doyle .............................. -- -- --
Joseph A. Epstein ............................. -- -- --
Carla L. Leonard .............................. 166,740 7.9 5.0
Bruce Simberg ................................. 33,348 1.6 1.0
All directors and executive officers as a group
(seven persons) ............................. 1,787,825 85.1% 53.4%
</TABLE>
- ----------------
* Less than 1%
(1) Except as indicated, the address of each person named in the table is c/o
21st Century Holding Company, 4161 N.W. 5th Street, Plantation, Florida
33317.
(2) Except as otherwise indicated, the persons named in this table have sole
voting and investment power with respect to all shares of Common Stock
listed, which include shares of Common Stock that such persons have the
right to acquire a beneficial interest within 60 days from the date of
this Prospectus.
(3) Includes 634,539 shares of Common Stock held of record by Mrs. Lawson.
(4) Includes 634,539 shares of Common Stock held of record by Mr. Lawson.
DESCRIPTION OF CAPITAL STOCK
After this Offering, the authorized capital stock of the Company will
consist of (i) 25,000,000 shares of Common Stock, par value $.01 per share,
3,350,000 shares of which will be outstanding and (ii) 1,000,000 shares of
Preferred Stock, par value $.01 per share (the "Preferred Stock"), none of
which are outstanding.
COMMON STOCK
Subject to the rights of the holders of any Preferred Stock that may be
outstanding, each holder of Common Stock on the applicable record date is
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefor, and, in the event of liquidation, to
share pro rata in any distribution of the Company's assets after payment of
providing for the payment of liabilities and the liquidation preference of any
outstanding Preferred Stock. Each holder of Common Stock is entitled to one
vote for each share held of record on the applicable record date on all matters
presented to a vote of shareholders, including the election of directors.
Holders of Common Stock have no cumulative voting rights or preemptive rights
to purchase or subscribe for any stock or other securities, and there are no
conversion rights or redemption or sinking fund provisions with respect to such
stock. All outstanding shares of Common Stock are, and the shares of Common
Stock offered hereby will be, when issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors has the authority to issue 1,000,000
shares of Preferred Stock in one or more series and to fix, by resolution,
conditional, full, limited or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights, if
any, and the
50
<PAGE>
qualifications, limitations or restrictions thereof, if any, including the
number of shares in such series (which the Board of Directors may increase or
decrease as permitted by Florida law), liquidation preferences, dividend rates,
conversion or exchange rights, redemption provisions of the shares constituting
any series and such other special rights and protective provisions with respect
to any class or series as the Board of Directors may deem advisable without any
further vote or action by the shareholders. Any shares of Preferred Stock so
issued would have priority over the Common Stock with respect to dividend or
liquidation rights or both and could have voting and other rights of
shareholders. The Company has no present plans to issue shares of Preferred
Stock.
CERTAIN FLORIDA LEGISLATION
Florida has enacted legislation that may deter or frustrate takeovers of
Florida corporations. The Florida Control Share Act generally provides that
shares acquired in a "control share acquisition" will not possess any voting
rights unless such voting rights are approved by a majority of the
corporation's disinterested shareholders. A "control share acquisition" is an
acquisition, directly or indirectly, by any person of ownership of, or the
power to direct the exercise of voting power with respect to, issued and
outstanding "control shares" of a publicly held Florida corporation. "Control
shares" are shares, which, except for the Florida Control Share Act, would have
voting power that, when added to all other shares owned by a person or in
respect to which such person may exercise or direct the exercise of voting
power, would entitle such person, immediately after acquisition of such shares,
directly or indirectly, alone or as a part of a group, to exercise or direct
the exercise of voting power in the election of directors within any of the
following ranges: (i) at least 20% but less than 331/3% of all voting power;
(ii) at least 331/3% but less than a majority of all voting power; or (iii) a
majority or more of all voting power. The Florida Affiliated Transactions Act
generally requires supermajority approval by disinterested shareholders of
certain specified transactions between a public corporation and holders of more
than 10% of the outstanding voting shares of the corporation (or their
affiliates). Florida law and the Company's Articles and Bylaws also authorize
the Company to indemnify the Company's directors, officers, employees and
agents. In addition, the Company's Articles and Florida law presently limit the
personal liability of corporate directors for monetary damages, except where
the directors (i) breach their fiduciary duties, and (ii) such breach
constitutes or includes certain violations of criminal law, a transaction from
which the directors derived an improper personal benefit, certain unlawful
distributions or certain other reckless, wanton or willful acts or misconduct.
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE ARTICLES AND BYLAWS
Certain provision of the Articles and Bylaws may be deemed to have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt, including attempts that might result in a premium being paid over the
market price for the shares held by shareholders. The following provisions may
not be amended in the Articles or Bylaws without the affirmative vote of the
holders of two-thirds of the outstanding shares of Common Stock.
CLASSIFIED BOARD OF DIRECTORS. The Articles and Bylaws provide for the
Board of Directors to be divided into three classes serving staggered terms. As
a result, approximately one-third of the Board of Directors will be elected
each year. The Articles and Bylaws also provide that directors may only be
removed for cause and only upon the affirmative vote of the holders of at least
two-thirds of the outstanding shares of capital stock entitled to vote. These
provisions, when coupled with the provision of the Articles and Bylaws
authorizing only the Board of Directors to fill vacant directorships or
increase the size of the Board of Directors, may deter a shareholder from
removing incumbent directors and simultaneously gaining control of the Board of
Directors by filling the vacancies created by such removal with its own
nominees.
SPECIAL MEETINGS OF SHAREHOLDERS; PROHIBITION OF ACTION BY WRITTEN
CONSENT. The Articles and Bylaws prohibit the taking of shareholder action by
written consent without a meeting and provide that special meetings of
shareholders of the Company may be called only by a majority of the Board of
Directors, the Company's Chief Executive Officer or holders of not less than
one-third of the Company's outstanding voting stock.
51
<PAGE>
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Bylaws provide that shareholders seeking to bring business
before an annual meeting of shareholders, or to nominate candidates for
election as directors at an annual or special meeting of shareholders, must
provide timely notice thereof in writing. To be timely, a shareholder's notice
must be delivered to or mailed and received at the principal executive offices
of the Company not less than 60 days nor more than 90 days prior to the
meeting; provided, however, that in the event that less than 70 days' notice or
prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder, to be timely, must be received no
later than the close of business on the 10th day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made, whichever is first. The Bylaws also specify certain requirements as to
the content and form of a shareholder's notice. These provisions may preclude
shareholders from bringing matters before the shareholders at an annual or
special meeting or from making nomination for directors at an annual or special
meeting.
AMENDMENT OF BYLAWS. Except for the provisions identified above requiring
a two-thirds vote of the outstanding shares to alter, amend or repeal, the
Bylaws may only be altered, amended or repealed by the Board of Directors or
the affirmative vote of the holders of at least a majority of the outstanding
shares of capital stock of the Company.
TRANSFER AGENT
The transfer agent for the Common Stock is Continental Stock Transfer &
Trust Company, New York, New York.
REPORTS TO SHAREHOLDERS
The Company intends to furnish registered holders with annual reports
containing financial statements audited by its independent accounting firm and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 3,350,000 shares
of Common Stock outstanding. Of these shares, 1,250,000 shares of Common Stock
sold in this Offering will be freely tradeable without restriction under the
Securities Act, except for such shares which are acquired by an "affiliate" of
the Company as that term is defined in Rule 144 under the Securities Act (an
"Affiliate"), which shares generally may be sold publicly without registration
under the Securities Act only in compliance with Rule 144.
In general, under Rule 144 as currently in effect, if a period of at least
one year has elapsed since the later of the date the "restricted shares" (as
that phrase is defined in Rule 144) were acquired from the Company and the date
they were acquired from an Affiliate, then the holder of such restricted shares
(including an Affiliate) is entitled to sell a number of shares within any
three-month period that does not exceed the greater of 1% of the then
outstanding shares of the Common Stock or the average weekly reported volume of
trading of the Common Stock on The Nasdaq National Market during the four
calendar weeks preceding such sale. The holder may only sell such shares
through unsolicited brokers' transactions or directly to market makers. Sales
under Rule 144 are also subject to certain requirements pertaining to the
manner of such sales, notices of such sales and the availability of current
public information concerning the Company. Affiliates may sell shares not
constituting restricted shares in accordance with the foregoing volume
limitations and other requirements but without regard to the one-year holding
period.
Under Rule 144(k), if a period of at least two years has elapsed between
the later of the date restricted shares were acquired from the Company and the
date they were acquired from an Affiliate, as applicable, a holder of such
restricted shares who is not an Affiliate at the time of the sale and has not
been an Affiliate for at least three months prior to the sale would be entitled
to sell the shares immediately without regard to the volume limitations and
other conditions described above.
Shareholders who collectively own all 2,100,000 currently outstanding
shares of Common Stock have agreed that they will not directly or indirectly,
sell, offer, contract to sell, make a short sale, pledge or otherwise dispose
of any shares of Common Stock (or any securities convertible into or
exchangeable or exercisable for any other rights to purchase or acquire Common
Stock other than shares of Common Stock issuable upon exercise of outstanding
options) owned by them, for a period of 13 months after the effective date of
this Prospectus, without the prior written consent of the Representative. After
the one year period, all of such shares subject to the sale restriction will be
eligible for sale in the public market under the Securities Act, subject to the
volume limitations and other restrictions contained in Rule 144 under the
Securities Act.
Prior to this Offering, there has been no market for the Common Stock of
the Company. The Company can make no predictions as to the effect, if any, that
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of significant amounts
of the Common Stock in the public market, or the perception that such sales may
occur, could adversely affect prevailing market prices.
53
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Company and the Representative (the "Underwriting
Agreement"), the Underwriters below have severally agreed to purchase from the
Company, and the Company has agreed to sell to the several Underwriters, the
number shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER
NAME OF UNDERWRITER OF SHARES
- -------------------------------------------- ----------
<S> <C>
Gilford Securities Incorporated .........
Total ................................. 1,250,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligation is such that they are committed to purchase and pay for all of the
above shares offered hereby if any are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the offering price set forth on the cover page of this
Prospectus, and at such price less a concession not in excess of $ per
share to certain securities dealers, of which a concession not in excess of
$ per share may be reallowed to certain other securities dealers. After
this Offering, the public offering price and other selling terms may be changed
by the Underwriters.
The Underwriters have been granted a 45-day over-allotment option to
purchase from the Company up to an aggregate of 187,500 additional shares of
Common Stock exercisable at the public offering price less the underwriting
discount. If the Underwriters exercise such over-allotment option, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof as the number of shares to
be purchased by it bears to the total number of shares of Common Stock offered
hereby. The Underwriters may exercise such option only to cover over-allotments
made in connection with the sale of Common Stock offered hereby.
Upon consummation of this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, the Representative's Warrants to
purchase from the Company 125,000 shares of Common Stock. The Representative's
Warrants are initially exercisable at a price per share equal to 120.0% of the
initial public offering price for a period of four years commencing one year
after the date of this Prospectus and are restricted from sale, transfer,
assignment or hypothecation for a period of 12 months form the date hereof,
except to officers of the Representative. The Representative's Warrants also
provide for adjustment in the number of shares of Common Stock issuable upon
the exercise thereof as a result of certain subdivisions and combinations of
the Common Stock. The Representative's Warrants grant to the holders thereof
certain rights of registration for the securities issuable upon exercise of the
Representative's Warrants.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to certain payments that the Underwriters may be required to make in respect
thereof. The Company has also agreed to pay the Representative an expense
allowance on a non-accountable basis equal to three percent of the gross
proceeds of this Offering, of which $50,000 has been paid to date.
The Company has also agreed, for a three-year period following the
effective date of the Registration Statement of which this Prospectus forms a
part, to elect one designee of the Underwriter to the Company's Board of
Directors. In the event the Underwriter does not designate a person for
54
<PAGE>
election to the Company's Board of Directors, the Underwriter is entitled to
information and observer rights with respect to meetings of the Company's Board
of Directors and executive committees, if any. No designee has been chosen as
of the date of this Prospectus.
The holders of all 2,100,000 currently outstanding shares have agreed that
for a period of 13 months from the date of this Prospectus they will not offer
for sale, sell, or otherwise dispose of the shares of Common Stock beneficially
owned by them, without the prior written consent of the Representative.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock has
been determined by negotiations between the Company and the Underwriters and is
not necessarily related to the Company's asset value, net worth or other
established criteria of value. The factors considered in such negotiations, in
addition to prevailing market conditions, included the history of and prospects
for the industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure and certain
other factors as were deemed relevant.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company and in such a case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 187,500 shares of Common Stock, by
exercising the over-allotment option. In addition, the Representative may
impose "penalty bids" under contractual arrangements with the Underwriters,
whereby it may reclaim from an Underwriter (or dealer participating in the
offering) for the account of other Underwriters, the selling concession with
respect to Common Stock that is distributed in any offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
In connection with this Offering, the Underwriters and selling group
members (if any) or their respective affiliates intend to engage in passive
market making transactions in the Common Stock of the Company on the Nasdaq
National Market in accordance with Regulation M under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), during the two business day
period before commencement of offers or sales of the shares of Common Stock
offered hereby. The passive market making transactions must be identified as
such and comply with applicable volume and price limits. In general, a passive
market maker may display its bid at a price not in excess of the highest
independent bid for such security; if all independent bids are lowered below
the passive market maker's bid, however, such bid must then be lowered when
certain purchase limits are exceeded.
LEGAL MATTERS
The validity of the Common Stock offered hereby is being passed upon for
the Company by Broad and Cassel, a partnership including professional
associations, Miami, Florida. Certain legal matters relating to the Offering
will be passed upon for the Underwriters by Baker & McKenzie, Miami, Florida.
55
<PAGE>
EXPERTS
The consolidated and combined financial statements of the Company as of
December 31, 1997 and for the years ended December 31, 1997 and 1996 are
included herein and in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission (the "Commission") at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates and may also be obtained from the website that the Commission
maintains at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement (of
which this Prospectus is a part and which term shall encompass any amendments
thereto) on Form SB-2 pursuant to the Securities Act with respect to the Common
Stock being offered in this Offering. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits thereto,
certain portions of which are omitted as permitted by the rules and regulations
of the Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete;
with respect to any such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the mater involved, and each such statement shall
be deemed qualified in its entirety by reference to the Registration Statement
and to the financial statements, schedules and exhibits filed as a part
thereof.
56
<PAGE>
GLOSSARY OF SELECTED TERMS
CEDE.............................. To transfer to an insurer or reinsurer
all or a part of the insurance written by
an insurance entity.
CEDING COMMISSION................. A payment by a reinsurer to the ceding
company, generally on a proportional basis,
to compensate the ceding company for its
policy acquisition costs.
EXPENSE RATIO..................... Under SAP, the ratio of underwriting
expenses to net written premiums. On a GAAP
basis, the ratio of underwriting expenses
to net premiums earned.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP").............. Accounting practices and principles, as
defined principally by the American
Institute of Certified Public Accountants,
the Financial Accounting Standards Board,
and the Commission. GAAP is the method of
accounting typically used by the Company
for reporting to persons or entities other
than insurance regulatory authorities.
GROSS PREMIUMS WRITTEN............ The total of premiums received or to be
received for insurance written by an
insurer during a specific period of time
without any reduction for reinsurance
ceded.
HARD MARKET....................... The portion of the market cycle of the
property and casualty insurance industry
characterized by constricted industry
capital and underwriting capacity,
increasing premium rates and, typically,
enhanced underwriting performance.
INCURRED BUT NOT REPORTED
LOSSES ("INBR").................. The estimated liability of an insurer, at
a given point in time, with respect to
losses that have been incurred but not yet
reported to the insurer, and for potential
future developments on reported claims.
INSURANCE REGULATORY
INFORMATION SYSTEM ("IRIS")...... A system of ratio analysis developed by
the NAIC primarily intended to assist state
insurance departments in executing their
statutory mandates to oversee the financial
condition of insurance companies.
LOSS ADJUSTMENT EXPENSE ("LAE")... The expenses of investigating and
settling claims, including legal fees,
outside adjustment expenses and other
general expenses of administering the
claims adjustment process.
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<PAGE>
LOSS RATIO........................ For SAP and GAAP, net losses and LAE
incurred, divided by net premiums earned,
expressed as a percentage.
LOSS RESERVES..................... The estimated liability of an insurer, at
a given point in time, with respect to
unpaid incurred losses, including losses
which are INBR and related LAE.
LOSSES INCURRED................... The total of all policy losses sustained
by an insurance company during a period,
whether paid or unpaid. Incurred losses
include a provision for claims that have
occurred but have not yet been reported to
the insurer.
MODEL LAW......................... A Model Law to implement RBC requirements
for insurance companies. The Model Law
became effective with respect to property
and casualty insurance companies as of
year-end 1994.
NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS ("NAIC")........... A voluntary organization of state
insurance officials that promulgates model
laws regulating the insurance industry,
values securities owned by insurers,
develops and modifies insurer financial
reporting statements and insurer
performance criteria and performs other
services with respect to the insurance
industry.
NET PREMIUMS EARNED............... The amount of net premiums written
allocable to the expired period of an
insurance policy or policies.
NET PREMIUMS WRITTEN.............. The gross premiums written during a
specific period of time, less the portion
of such premiums ceded to (reinsured by)
other insurers.
NONSTANDARD....................... Risks that generally have been found
unacceptable by standard lines insurers for
various underwriting reasons.
REINSURANCE....................... A procedure whereby a primary insurer
transfers (or "cedes") a portion of its
risk to a reinsurer in consideration of a
payment of premiums by the primary insurer
to the reinsurer for their assumption of
such portion of the risk. Reinsurance can
be effected by a treaty or individual risk
basis. Reinsurance does not legally
discharge the primary insurer from its
liabilities with respect to its obligations
to the insured.
REINSURERS........................ Insurers (known as the reinsurer or
assuming company) who agree to indemnify
another insurer (known as the reinsured or
ceding company) against all or part of a
loss which the latter may incur under a
policy or policies it has issued.
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<PAGE>
RISK-BASED CAPITAL
REQUIREMENTS ("RBC")............. Capital requirements for property and
casualty insurance companies adopted by the
NAIC to assess minimum capital requirements
and to raise the level of protection that
statutory surplus provides for policyholder
obligations.
SOFT MARKET....................... The portion of the market cycle of the
property and casualty insurance industry
characterized by heightened premium rate
competition among insurers, increased
underwriting capacity and, typically,
depressed underwriting performance.
STANDARD AUTOMOBILE INSURANCE..... Personal automobile insurance written for
those individuals presenting an average
risk profile in terms of loss history,
driving record, type of vehicle driven and
other factors.
STATUTORY ACCOUNTING
PRACTICES ("SAP")................ Those accounting principles and practices
which provide the framework for the
preparation of financial statements, and
the recording of transactions, in
accordance with the rules and procedures
adopted by regulatory authorities,
generally emphasizing solvency
considerations rather than a going concern
concept of accounting. The principal
differences between SAP and GAAP are as
follows: (a) under SAP, certain assets
(non-admitted assets) are eliminated from
the balance sheet; (b) under SAP, policy
acquisition costs are expensed upon policy
inception, while under GAAP they are
deferred and amortized over the term of the
policies; (c) under SAP, no provision is
made for deferred income taxes; and (d)
under SAP, certain reserves are recognized
which are not recognized under GAAP.
UNDERWRITING...................... The process whereby an underwriter
reviews applications submitted for
insurance coverage and determines whether
it will provide all or part of the coverage
being requested, and the price of such
premiums. Underwriting also includes an
ongoing review of existing policies and
their pricing.
UNDERWRITING EXPENSE.............. The aggregate of policy acquisition
costs, including that portion of general
and administrative expenses attributable to
underwriting operations.
UNEARNED PREMIUMS................. The portion of premiums written
representing unexpired policy terms as of a
certain date.
59
<PAGE>
21ST CENTURY HOLDING COMPANY
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Certified Public Accountants .................... F-2
Consolidated and Combined Balance Sheets
as of June 30, 1998 and December 31, 1997 ............................ F-3
Consolidated and Combined Statements of Income
For the six months ended June 30, 1998 and 1997 (unaudited)
and for the years ended December 31, 1997 and 1996 ................... F-4
Consolidated and Combined Statements of Changes in Shareholders' Equity
For the six months ended June 30, 1998 and 1997 (unaudited)
and for the years ended December 31, 1997 and 1996 ................... F-5
Consolidated and Combined Statements of Cash Flows
For the six months ended June 30, 1998 and 1997 (unaudited)
and for the years ended December 31, 1997 and 1996 ................... F-6
Notes to Consolidated and Combined Financial Statements ............... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
21st Century Holding Company:
We have audited the accompanying consolidated and combined balance sheet
of 21st Century Holding Company (the "Company") as of December 31, 1997, and
the related consolidated and combined statements of income, changes in
shareholders' equity, and cash flows for the years ended December 31, 1997 and
1996. These consolidated and combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated and combined financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated and combined financial statements
referred to above present fairly, in all material respects, the financial
position of 21st Century Holding Company as of December 31, 1997 , and the
results of their operations and their cash flows for the years ended December
31, 1997 and 1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
August 31, 1998
F-2
<PAGE>
21ST CENTURY HOLDING COMPANY
CONSOLIDATED AND COMBINED BALANCE SHEETS
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Available for sale at fair value:
Investments
Fixed maturities .............................................. $16,010,879 13,267,284
Equity securities ............................................. 1,647,128 2,208,594
Mortgage loan .................................................. 180,562 283,712
----------- ----------
Total investments .......................................... 17,838,569 15,759,590
----------- ----------
Cash and cash equivalents ...................................... 1,416,768 1,684,450
Finance contracts receivable, net of allowance for credit losses
of $34,390 and $36,980, respectively .......................... 4,942,987 2,343,851
Prepaid reinsurance premiums ................................... 3,099,169 2,217,664
Due from reinsurers ............................................ 1,002,360 1,024,512
Deferred acquisition costs ..................................... 1,110,827 761,472
Deferred income taxes .......................................... 1,016,645 518,322
Other assets ................................................... 2,049,854 890,929
Goodwill ....................................................... 1,405,441 476,006
----------- ----------
Total assets ............................................... $33,882,620 $25,676,796
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses ..................... $ 7,623,147 6,726,462
Unearned premiums .............................................. 10,100,136 7,499,742
Premium deposit ................................................ 642,724 1,844,556
Revolving credit outstanding ................................... 3,850,465 1,593,752
Bank overdraft ................................................. 1,519,032 730,289
Unearned commissions ........................................... 604,113 645,594
Accounts payable and accrued expenses .......................... 1,947,519 654,883
Notes payable .................................................. 400,000 552,625
Drafts payable to insurance companies .......................... 304,617 269,160
Due to shareholders ............................................ 26,250 57,250
----------- -----------
Total liabilities .......................................... 27,018,003 20,574,313
----------- -----------
Shareholders' equity:
Common stock of $0.01 par value. Authorized 25,000,000 shares,
issued and outstanding 2,100,000 and 1,042,121 shares,
respectively ................................................ 21,000 10,421
Common stock of $1 par value. Authorized, issued and
outstanding 840 shares ...................................... -- 840
Additional paid-in capital .................................... 4,563,445 4,304,758
Accumulated other comprehensive income ........................ (108,655) 124,677
Retained earnings ............................................. 2,388,827 661,787
----------- -----------
Total shareholders' equity ................................. 6,864,617 5,102,483
Commitments and contingencies ..................................
----------- -----------
Total liabilities and shareholders' equity ................. $33,882,620 25,676,796
=========== ===========
</TABLE>
See accompanying notes to consolidated and combined financial
statements.
F-3
<PAGE>
21ST CENTURY HOLDING COMPANY
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, DECEMBER 31,
-------------------------------- -------------------------------
1998 1997 1997 1996
-------------- --------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Gross premiums written ............................. $ 12,169,337 $ 8,842,004 $ 17,675,375 $ 14,850,484
Gross premiums ceded ............................... (3,772,747) (2,039,621) (4,659,378) (5,602,538)
------------ ------------ ------------ ------------
Net premiums written ............................ 8,396,590 6,802,383 13,015,997 9,247,946
Increase (decrease) in unearned premiums, net
of prepaid reinsurance premiums .................... (1,718,889) (1,824,071) (2,091,718) 395,310
------------ ------------ ------------ ------------
Net premiums earned ............................. 6,677,701 4,978,312 10,924,279 9,643,256
Commission income ................................... 978,575 1,566,707 2,357,579 1,535,329
Finance revenue ..................................... 715,927 22,167 220,434 982,438
Net investment income ............................... 505,647 452,517 1,047,348 850,262
Net realized (losses) gains ......................... 389,541 (33,661) (19,395) 154,616
Other income ........................................ 835,173 530,698 1,218,895 1,134,479
------------ ------------ ------------ ------------
Total revenue ................................... 10,102,564 7,516,740 15,749,140 14,300,380
------------ ------------ ------------ ------------
Expenses:
Losses and loss adjustment expenses ................ 4,681,226 3,271,674 7,414,151 7,660,298
Operating and underwriting expenses ................ 2,105,963 1,494,798 3,300,713 3,512,895
Salaries and wages ................................. 1,626,969 1,572,604 3,148,558 2,553,017
Amortization of deferred acquisition costs ......... (196,868) 394,804 495,793 (149,445)
Amortization of goodwill ........................... 106,279 13,308 38,102 19,294
------------ ------------ ------------ ------------
Total expenses .................................. 8,323,569 6,747,188 14,397,317 13,596,059
------------ ------------ ------------ ------------
Income before provision for income
tax expense .................................. 1,778,995 769,552 1,351,823 704,321
Provision for income tax expense .................... 667,257 128,558 282,187 78,662
------------ ------------ ------------ ------------
Net income ...................................... $ 1,111,738 $ 640,994 $ 1,069,636 $ 625,659
============ ============ ============ ============
Net income per share ............................ $ 0.53 $ 0.31 $ 0.51 $ 0.30
============ ============ ============ ============
Net income per share--
assuming dilution ............................ $ 0.53 $ 0.31 $ 0.51 $ 0.30
============ ============ ============ ============
Pro forma information:
Historical income before provisions for
income tax expense ............................... -- 769,552 1,351,823 704,321
Pro forma income tax expense ....................... -- 262,661 466,861 277,231
Pro forma net income ............................... -- 506,891 884,962 427,090
Pro forma net income per share (basic) ............. -- 0.24 0.42 0.20
Pro forma net income per share (diluted) ........... -- 0.24 0.42 0.20
Weighted average shares outstanding
(basic) .......................................... -- 2,100,000 2,100,000 2,100,000
Weighted average shares outstanding
(diluted) ........................................ -- 2,100,000 2,100,000 2,100,000
</TABLE>
See accompanying notes to the consolidated and combined financial
statements.
F-4
<PAGE>
21ST CENTURY HOLDING COMPANY
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
DESCRIPTION STOCK CAPITAL INCOME EARNINGS EQUITY
- ------------------------------------------- ------------ -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 ........... $ 24,528 $3,961,100 $ (35,242) $ (270,503) $3,679,883
Issuance of stock ........................ 2,402 637,495 -- -- 639,897
Distributions to affiliated
corporations' shareholders ............. -- -- -- (680,520) (680,520)
Net appreciation on investments,
net of tax ............................. -- -- 14,521 -- 14,521
Net income ............................... -- -- -- 625,659 625,659
--------- ---------- ---------- ---------- ----------
Balance as of December 31, 1996 ........... 26,930 4,598,595 (20,721) (325,364) 4,279,440
Capital contributions .................... -- 222,500 -- -- 222,500
Acquisition and consolidation of
affiliates previously combined ......... (15,669) (359,399) -- 375,068 --
Distributions to affiliated
corporations' shareholders ............. -- -- -- (457,553) (457,553)
Distributions to shareholders ............ -- (156,938) -- -- (156,938)
Net appreciation on investments,
net of tax ............................. -- -- 145,398 -- 145,398
Net income ............................... -- -- -- 1,069,636 1,069,636
--------- ---------- ---------- ---------- ----------
Balance as of December 31, 1997 ........... 11,261 4,304,758 124,677 661,787 5,102,483
Acquisition and consolidation of
affiliates previously combined ......... 9,739 358,687 -- 615,302 983,728
Distributions to shareholders ............ -- (100,000) -- -- (100,000)
Net appreciation on investments,
net of tax ............................. -- -- (233,332) -- (233,332)
Net income ............................... -- -- -- 1,111,738 1,111,738
--------- ---------- ---------- ---------- ----------
Balance as of June 30, 1998
(unaudited) .............................. $ 21,000 $4,563,445 $ (108,655) $2,388,827 $6,864,617
========= ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated and combined financial
statements.
F-5
<PAGE>
21ST CENTURY HOLDING COMPANY
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------
1998 1997
---------------- ---------------
(UNAUDITED)
<S> <C> <C>
Cash flow from operating activities:
Net income ......................................................... $ 1,111,738 $ 640,994
Adjustments to reconcile net income to net cash flow used in
operating activities:
Amortization of investment premiums .............................. 6,300 --
Depreciation and amortization .................................... 9,926 13,281
Amortization of goodwill ......................................... 106,279 13,308
Deferred income tax expense ...................................... (393,565) (270,434)
Loss (gain) on sale of investment securities ..................... (389,541) 33,661
Gain on sale of property and equipment ........................... -- (7,903)
Provision for credit losses ...................................... 2,590 (74,346)
Changes in operating assets and liabilities:
Finance contracts receivables ................................... (2,601,726) 547,022
Prepaid reinsurance premiums .................................... (881,505) 891,964
Due from reinsurers ............................................. 22,152 (750,872)
Deferred acquisition costs ...................................... (349,355) (121,437)
Other assets .................................................... (453,350) 38,554
Unpaid losses and loss adjustment expenses ...................... 896,685 (487,026)
Unearned premiums ............................................... 2,600,394 846,952
Premium deposit ................................................. (1,201,832) 344,030
Revolving credit outstanding .................................... 2,256,713 52,711
Unearned commissions ............................................ (41,481) 9,016
Accounts payable and accrued expenses ........................... 1,292,636 315,037
Drafts payable to insurance companies ........................... 35,457 --
-------------- -------------
Net cash flow provided by operating activities ................. 2,028,515 2,034,512
-------------- -------------
Cash flow from investing activities:
Proceeds from sale of investment securities available for sale ..... 28,673,773 5,989,473
Purchases of investment securities available for sale .............. (30,764,738) (7,449,288)
Cost of mortgage loan .............................................. -- (155,000)
Sale of mortgage loan .............................................. 103,150 147,546
Acquisition of affiliates previously combined ...................... (198,000) (191,357)
Purchases of property and equipment ................................ (715,501) (111,894)
Proceeds from sale of property and equipment ....................... -- 267,504
-------------- -------------
Net cash flow used in investing activities ..................... (2,901,316) (1,503,016)
-------------- -------------
Cash flow from financing activities:
Bank overdraft ..................................................... 788,743 517,967
Capital contribution ............................................... -- --
Distributions to shareholders ...................................... -- (456,489)
Borrowings from bank ............................................... -- 177,500
Repayment of indebtedness .......................................... (183,625) (616,969)
-------------- -------------
Net cash flow (used in) provided by financing activities ....... 605,118 (377,991)
-------------- -------------
Net increase in cash and cash equivalents ...................... (267,683) 153,505
Cash and cash equivalents at beginning of year ...................... 1,684,451 1,231,636
-------------- -------------
Cash and cash equivalents at end of year ............................ $ 1,416,768 $ 1,385,141
============== =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest .......................................................... $ 143,224 $ --
============== =============
Income taxes ...................................................... $ -- $ --
============== =============
Cash received during the year from:
Income taxes ...................................................... $ -- $ --
============== =============
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
Cash flow from operating activities:
Net income ......................................................... $ 1,069,636 $ 625,659
Adjustments to reconcile net income to net cash flow used in
operating activities:
Amortization of investment premiums .............................. 1,175 4,750
Depreciation and amortization .................................... 50,935 51,776
Amortization of goodwill ......................................... 38,102 19,294
Deferred income tax expense ...................................... 48,110 78,662
Loss (gain) on sale of investment securities ..................... 19,395 (154,616)
Gain on sale of property and equipment ........................... (11,433) (18,747)
Provision for credit losses ...................................... 38,362 239,408
Changes in operating assets and liabilities:
Finance contracts receivables ................................... (1,792,048) 4,337,341
Prepaid reinsurance premiums .................................... 707,320 (746,739)
Due from reinsurers ............................................. (484,134) (542,443)
Deferred acquisition costs ...................................... (186,246) (149,802)
Other assets .................................................... (319,626) (217,746)
Unpaid losses and loss adjustment expenses ...................... 492,502 1,478,249
Unearned premiums ............................................... 1,255,201 1,122,154
Premium deposit ................................................. 901,826 2,576,586
Revolving credit outstanding .................................... 1,593,752 (3,550,594)
Unearned commissions ............................................ 37,700 160,396
Accounts payable and accrued expenses ........................... 384,954 (201,090)
Drafts payable to insurance companies ........................... 269,160 (1,434,275)
-------------- --------------
Net cash flow provided by operating activities ................. 4,114,643 3,678,223
-------------- --------------
Cash flow from investing activities:
Proceeds from sale of investment securities available for sale ..... 21,088,211 6,440,189
Purchases of investment securities available for sale .............. (24,469,367) (10,455,079)
Cost of mortgage loan .............................................. (200,000) 9,606
Sale of mortgage loan .............................................. 89,421 --
Acquisition of affiliates previously combined ...................... (80,175) (120,000)
Purchases of property and equipment ................................ (102,073) (192,151)
Proceeds from sale of property and equipment ....................... 314,874 77,603
-------------- --------------
Net cash flow used in investing activities ..................... (3,359,109) (4,239,832)
-------------- --------------
Cash flow from financing activities:
Bank overdraft ..................................................... 211,477 513,600
Capital contribution ............................................... 222,500 500,000
Distributions to shareholders ...................................... (457,153) (680,520)
Borrowings from bank ............................................... 431,000 495,560
Repayment of indebtedness .......................................... (710,146) --
-------------- --------------
Net cash flow (used in) provided by financing activities ....... (302,322) 828,640
-------------- --------------
Net increase in cash and cash equivalents ...................... 453,212 267,031
Cash and cash equivalents at beginning of year ...................... 1,231,638 964,607
-------------- --------------
Cash and cash equivalents at end of year ............................ $ 1,684,850 $ 1,231,638
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest .......................................................... $ 21,758 $ 465,970
============== ==============
Income taxes ...................................................... $ 26,211 $ 66,237
============== ==============
Cash received during the year from:
Income taxes ...................................................... $ 61,000 $ --
============== ==============
</TABLE>
See note 2(a) regarding non-cash financing and investing activities.
See accompanying notes to consolidated financial statements
F-6
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(1) ORGANIZATION AND BUSINESS
The accompanying consolidated and combined financial statements include
the accounts of 21st Century Holding Company and its wholly owned subsidiaries
and those entities which are under common control through common ownership
(collectively referred to as the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
The Company is a vertically integrated insurance holding company
performing all aspects of the insurance underwriting, distribution and claims
process. The Company's Federated National Insurance Company ("Federated
National") subsidiary underwrites nonstandard and standard personal automobile
insurance and mobile home property and casualty insurance in the State of
Florida. Through a wholly-owned managing general agent, Assurance Managing
General Agents, Inc. ("Assurance MGA"), the Company has underwriting and claims
authority for third-party insurance companies. The Company also offers premium
financing, auto title loans and other ancillary services to its customers.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) BASIS OF ACCOUNTING
In January 1997, the Company acquired all of the issued and outstanding
capital stock of Assurance MGA, Federated Premium Finance, Inc. and Superior
Adjusting, Inc., the Company's claims processing subsidiary, for cash
consideration. Principal shareholders of the Company were also principal
shareholders of Assurance MGA, Federated Premium Finance, Inc. and Superior
Adjusting, Inc. The Company has accounted for the acquisitions at historical
cost in a manner similar to that in pooling of interests accounting due to the
entities being under the common control of the owners of 21st Century Holding
Company. The cash paid to individuals of the control group for their shares in
these entities was recorded as a distribution in the statement of changes in
shareholders' equity. In addition, the Company purchased the assets of two
independent agencies for cash consideration of $540,000. These transactions
were accounted for by the purchase method of accounting, generating goodwill
amounting to approximately $533,000.
In January 1998, the Company acquired all of the issued and outstanding
capital stock of eight affiliated corporations, principally the Company's
insurance agencies, in exchange for the issuance of shares of common stocks.
The financial statements of these entities have been presented in the combined
statements of the Company based on the common control of ownership interest.
The minority interest relative to the ownership of the affiliated corporations,
whose results are combined prior to their acquisition on January 1, 1998, was
accounted for as a component of equity of the Company. This treatment was
applied because the minority interest was in a deficit position due to
distributions to shareholders in excess of basis and deemed uncollectible from
the unaffiliated shareholders. The acquisition of the minority interest in the
affiliated corporations was accounted for by the purchase method. The
acquisition had an excess of fair value over book basis creating goodwill of
approximately $1,035,000 and eliminated the minority interest deficit of
approximately $113,000. The acquisition of the net retained deficit of the
affiliated corporations which are presented on a combined basis and the
elimination of their common stock resulted in the net credit to the equity of
the Company of approximately $984,000. The issuance of $100,000 to individuals
of the control group for their shares in these entities was recorded as a
distribution in the statement of changes in shareholders' equity.
F-7
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
(B) CASH AND CASH EQUIVALENTS
The Company considers all short-term highly liquid investments with
original maturities of three months or less to be cash equivalents.
(C) INVESTMENTS AVAILABLE FOR SALE
All of the Company's investment securities have been classified as
available-for-sale in as much as, all of the Company's securities are available
to be sold in response to the Company's liquidity needs, changes in market
interest rates and asset-liability management strategies, among other reasons.
Investments available-for-sale on the balance sheet are stated at fair value.
Unrealized gains and losses are excluded from earnings and reported as a
separate component of shareholders' equity, net of related deferred income
taxes.
A decline in the fair value of an available-for-sale security below cost
that is deemed other than temporary results in a charge to income, resulting in
the establishment of a new cost basis for the security. All declines in fair
values of the Company's investment securities in 1997 and 1996 were deemed to
be temporary.
Premiums and discounts are amortized or accreted, respectively, over the
life of the related fixed maturity security as an adjustment to yield using a
method that approximates yield to maturity. Dividends and interest income are
recognized when earned. Realized gains and losses are included in earnings and
are derived using the specific-identification method for determining the cost
of securities sold.
(D) PREMIUM REVENUE
Premium revenue on property and casualty insurance is earned on a pro rata
basis over the life of the policies. Unearned premiums represent the portion of
the premium related to the unexpired policy terms.
(E) DEFERRED ACQUISITION COSTS
Deferred acquisition costs represent commissions paid to the Company's
agents at the time of policy issuance (to the extent they are recoverable from
future premium income) and are amortized over the life of the related policy in
relation to the amount of premiums earned.
F-8
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
An analysis of deferred acquisition costs follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------------- ---------------------------------
1998 1997 1997 1996
--------------- ------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, beginning of period ......... $ 761,472 $ 575,226 $ 575,226 $ 425,734
Acquisition costs deferred ........... 1,359,269 1,064,569 1,943,786 1,400,680
Amortized to expense during
the period .......................... (1,009,914) (942,832) (1,757,540) (1,251,188)
------------ ---------- ------------ ------------
Balance, end of period ............... $ 1,110,827 $ 696,963 $ 761,472 $ 575,226
============ ========== ============ ============
</TABLE>
(F) PREMIUM DEPOSITS
Premium deposits represent premium received on policies not yet written.
The Company takes approximately 35 working days to write the policy from the
date the cash and policy application are received.
(G) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Unpaid losses and loss adjustment expenses are provided for through the
establishment of liabilities in amounts estimated to cover incurred losses and
loss adjustment expenses. Such liabilities are determined based upon the
Company's assessment of claims pending and the development of prior years' loss
liability. These amounts include liabilities based upon individual case
estimates for reported losses and loss adjustment expenses and estimates of
such amounts that are incurred but not reported ("IBNR"). Changes in the
estimated liability are charged or credited to operations as the estimates are
revised. Unpaid losses and loss adjustment expenses are reported net of
estimates for salvage and subrogation recoveries which totaled $338,320, net of
reinsurance, at June 30, 1998 and $341,118, net of reinsurance, at December 31,
1997.
(H) FINANCE REVENUE
Interest and service income, resulting from the financing of insurance
premiums, is recognized using a method which approximates the interest method.
Late charges are recognized as income when chargeable.
(I) CREDIT LOSSES
Provisions for credit losses are charged to operations in amounts
sufficient to maintain the allowance at a level considered adequate to cover
anticipated losses in the existing finance contracts receivables.
(J) POLICY FEES
Policy fees are non-refundable and are recognized as income when charged
and are included in other income.
F-9
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
(K) REINSURANCE
The Company recognizes the income and expense on reinsurance contracts
principally on a pro-rata basis over the life of the policies covered under the
reinsurance agreements. The Company is reinsured under separate reinsurance
agreements for the different lines of business underwritten. Reinsurance
contracts do not relieve the Company from its obligations to policyholders. The
Company continually monitors its reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. The Company only cedes risks to
reinsurers whom the Company believes to be financially sound. The Company's
reinsurance is primarily ceded to Transatlantic Re, an A++ rated reinsurance
company on a quota share basis. At June 30, 1998, all reinsurance recoverables
are considered collectible.
(L) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax-credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Most of the combining affiliates of the Company have elected S corporation
status. Accordingly, all income tax liabilities, as long as the S corporation
status is effective, are the responsibility of the individual shareholders.
Pro forma income taxes represent the total of historical income taxes that
would have been reported had the respective entities filed income tax returns
as taxable C corporation for each of the years presented.
(M) CONTINGENT REINSURANCE COMMISSION
The Company's reinsurance contracts provide ceding commissions for
premiums written which are subject to adjustment. The amount of ceding
commissions is determined by the loss experience for the reinsurance agreement
term. The reinsurer provides commissions on a sliding scale with maximum and
minimum achievable levels. The reinsurer provides the Company with the
provisional commissions. The Company has recognized the commissions based on
the current loss experience for the policy year premiums. This results in
establishing a contingent liability, included in due from reinsurers, for the
excess of provisional commissions retained compared to amounts recognized which
is subject to variation until the ultimate loss experience is determinable.
(N) CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of premiums receivable and
amounts due from reinsurers on unpaid losses. The Company has
F-10
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
not experienced significant losses related to premiums receivable from
individual policyholders or groups of policyholders in a particular industry or
geographic area. Management believes no credit risk beyond the amounts provided
for collection losses is inherent in the Company's premiums receivable. In
order to reduce credit risk for amounts due from reinsurers, the Company seeks
to do business with financially sound reinsurance companies and regularly
reviews the financial strength of all reinsurers used.
(O) DUE FROM FLORIDA JOINT UNDERWRITING ASSOCIATION (THE "ASSOCIATION")
PARTICIPATION
The amount recorded as a component of other assets represents the
Company's proportionate share of the net assets of the Association. The
Company's proportionate share of premiums, losses, loss expenses, and other
related items is recorded and presented in their respective accounts in the
accompanying consolidated and combined financial statements.
(P) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted FAS No. 130, "Reporting
Comprehensive Income." Comprehensive income presents a measure of all changes
in shareholders' equity except for changes resulting from transactions with
shareholders in their capacity as shareholders. The Company's total
comprehensive income presently consists of net unrealized holding gains
(losses) on investments available for sale. Total comprehensive income was
$(233,332) and $31,758 for the six months ended June 30, 1998 and 1997,
respectively; and $219,648 and $22,002 for the years ended December 31, 1997
and 1996, respectively. The Statement also requires the separate presentation
of the accumulated balance of comprehensive income other than net earnings in
the consolidated and combined balance sheets.
(Q) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, ("SFAS 131"), DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. SFAS 131 is effective for periods beginning after December 15,
1997. SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments, based on how the
enterprise defines such segments. The Company will report operating segment
information, to the extent such segments are defined, beginning with the year
ended December 31, 1998.
(R) USE OF ESTIMATES
The preparation of the consolidated and combined financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported financial statement balances as well as the disclosure of
contingent assets and liabilities. Actual results could differ materially from
those estimates used.
Similar to other property and casualty insurers, the Company's liability
for unpaid losses and loss adjustment expenses, although supported by actuarial
projections and other data is ultimately based on management's reasoned
expectations of future events. Although considerable variability is inherent in
these estimates, management believes that this liability is adequate. Estimates
are reviewed regularly
F-11
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
and adjusted as necessary. Such adjustments are reflected in current
operations. In addition, the realization of the Company's deferred income tax
assets is dependent on generating sufficient future taxable income. It is
reasonably possible that the expectations associated with these accounts could
change in the near term and that the effect of such changes could be material
to the consolidated and combined financial statements.
(S) NATURE OF OPERATION
The following is a description of the most significant risks facing the
Company and how it mitigates those risks:
(I) LEGAL/REGULATORY RISKS--the risk that changes in the regulatory
environment in which insurer operates will create additional expenses not
anticipated by the insurer in pricing its products. That is, regulatory
initiatives designed to reduce insurer profits, restrict underwriting
practices and risk classifications, mandate rate reductions and refunds,
and new legal theories or insurance company insolvencies through guaranty
fund assessments may create costs for the insurer beyond those recorded in
the financial statements. The Company attempts to mitigate this risk by
monitoring proposed regulatory legislation and by assessing the impact of
new laws. As the Company writes business only in the state of Florida, it
is more exposed to this risk than some of its more geographically balanced
competitors.
(II) CREDIT RISK--the risk that issuers of securities owned by the
Company will default or that other parties, including reinsurers to whom
business is ceded, which owe the Company money, will not pay. The Company
attempts to minimize this risk by adhering to a conservative investment
strategy and by maintaining sound reinsurance agreements with a number of
reinsurers, and by providing for any amounts deemed uncollectible.
(III) INTEREST RATE RISK--the risk that interest rates will change and
cause a decrease in the value of an insurer's investments. To the extent
that liabilities come due more quickly than assets mature, an insurer might
have to sell assets prior to maturity and potentially recognize a gain or a
loss. The Company attempts to mitigate this risk by attempting to match the
maturity schedule of its assets with the expected payouts of its
liabilities.
(T) FAIR VALUE
The fair value of the Company's investments are estimated based on bid
prices published by financial services or quotations received from securities
dealers and is reflective of the interest rate environment that existed as of
the close of business on December 31, 1997. Changes in interest rates
subsequent to June 30, 1998 may affect the fair value of the Company's
investments.
The carrying amounts for the following financial instrument categories
approximate their fair values at June 30, 1998 and December 31, 1997 because of
their short-term nature: cash and cash equivalents, finance contracts
receivable, due from reinsurers, prepaid reinsurance premiums, unearned
premiums, finance contracts payable and notes payable.
F-12
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
The fair value of mortgage loans is estimated using the present value of
future cash flows based on the market rate for similar types of loans. Carrying
value approximates market value as rates used are commensurate with market
rate.
(U) GOODWILL
Goodwill, representing the excess of cost over the fair value of assets
acquired and the cost of a purchased book of business, is amortized on a
straight-line basis over seven years. The carrying value of goodwill is
periodically reviewed by the Company based on the expected future undiscounted
operating cash flows of the related item. Based upon its most recent analysis,
the Company believes that no material impairment of goodwill exists at June 30,
1998.
(V) NET INCOME PER SHARE
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during each year.
A reconciliation of the numerators and denominators of the "income per
share" and "income per share-assuming dilution" computations for income before
cumulative effect of change in accounting method' are presented below:
<TABLE>
<CAPTION>
INCOME SHARE PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- ----------
<S> <C> <C> <C>
For the six months ended June 30, 1998 (unaudited):
Income per share ................................. $1,111,738 $2,100,000 $ 0.53
---------- ---------- ------
Income per share assuming dilution ............... $1,111,738 $2,100,000 $ 0.53
========== ========== ======
For the six months ended June 30, 1997 (unaudited):
Income per share ................................. $ 640,994 $2,100,000 $ 0.31
---------- ---------- ------
Income per share assuming dilution ............... $ 640,994 $2,100,000 $ 0.31
========== ========== ======
For the year ended December 31, 1997:
Income per share ................................. $1,069,636 $2,100,000 $ 0.51
---------- ---------- ------
Income per share assuming dilution ............... $1,069,636 $2,100,000 $ 0.51
========== ========== ======
For the year ended December 31, 1996: .............
Income per share ................................. $ 625,659 $2,100,000 $ 0.30
---------- ---------- ------
Income per share assuming dilution ............... $ 625,659 $2,100,000 $ 0.30
========== ========== ======
</TABLE>
The weighted average shares outstanding gives effect to a 1.8-for-one,
1.2-for-one and 926.33-for-one stock splits effected in November 1996, January
1997 and September 1998, respectively; and gives effect to the consolidation of
the Company effected in January 1997 and January 1998 and February 1998. The
Company's par value of $.01 per share remained unchanged. All historical share
and per share amounts have been restated to retroactively reflect the stock
splits.
F-13
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
(W) PRO FORMA NET INCOME
Pro forma net income represents the results of operations for the six
months ended June 30, 1997 (unaudited) and for the years ended December 31,
1997 and 1996, adjusted to reflect a provision for income tax on historical
income before income taxes which gives effect to the change in the affiliated
corporations' income tax status to C corporations.
(3) INVESTMENTS
(A) FIXED MATURITIES AND EQUITY SECURITIES
A summary of the amortized cost, estimated fair value, gross unrealized
gains and gross unrealized losses of fixed maturities and equity securities at
June 30, 1998 (unaudited) and December 31, 1997 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
JUNE 30, 1998 (UNAUDITED)
Fixed Maturities:
U.S. treasury securities and obligations
of U.S. government corporations
and agencies ......................... $ 2,004,867 $ 9,854 $ 1,523 $ 2,013,198
Mortgage-backed securities ............. 466,774 -- 5,053 461,721
Obligations of states and political
subdivisions ......................... 11,548,834 35,984 132,301 11,452,517
Corporate securities ................... 2,070,464 34,842 21,863 2,083,443
----------- -------- -------- -----------
$16,090,939 $ 80,680 $160,740 $16,010,879
=========== ======== ======== ===========
Equity Securities:
Preferred stocks ....................... $ 76,750 $ -- $ 1,250 $ 75,500
Common stocks .......................... 1,649,305 -- 77,677 1,571,628
----------- -------- -------- -----------
$ 1,726,055 $ -- $ 78,927 $ 1,647,128
=========== ======== ======== ===========
DECEMBER 31, 1997
Fixed Maturities:
U.S. treasury securities and obligations
of U.S. government corporations
and agencies ......................... $ 7,291,936 $105,335 $ 3,135 $ 7,394,136
Mortgage-backed securities ............. 519,439 -- 3,473 515,966
Obligations of states and political
subdivisions ......................... 4,422,736 109,601 -- 4,532,337
Corporate securities ................... 804,420 21,029 604 824,845
----------- -------- -------- -----------
$13,038,531 $235,965 $ 7,212 $13,267,284
=========== ======== ======== ===========
Equity Securities:
Preferred stocks ....................... $ 1,089,268 $ 10,613 $ 2,749 $ 1,097,132
Common stocks .......................... 1,159,826 3,706 52,070 1,111,462
----------- -------- -------- -----------
$ 2,249,094 $ 14,319 $ 54,819 $ 2,208,594
=========== ======== ======== ===========
</TABLE>
F-14
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(3) INVESTMENTS--(CONTINUED)
A summary of fixed maturities available for sale at June 30, 1998
(unaudited) and December 31, 1997 are shown below by contractual or expected
maturity periods. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------------------------ -------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Due in one year or less ......... $ 311,744 $ 308,879 $ 275,850 $ 275,358
Due after one year through
five years ..................... 650,489 676,128 2,200,570 2,229,280
Due after five years through ten
years .......................... 4,505,258 4,498,879 5,491,936 5,592,622
Due after ten years ............. 10,623,448 10,526,993 5,070,175 5,170,024
----------- ----------- ----------- -----------
$16,090,939 $16,010,879 $13,038,531 $13,267,284
=========== =========== =========== ===========
</TABLE>
A summary of the sources of net investment income follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------
1998 1997 1997 1996
----------- ----------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Fixed maturities .................. $439,460 $390,652 $ 816,904 $ 601,143
Equity securities ................. 48,661 30,598 146,942 105,348
Cash and cash equivalents ......... 19,376 23,588 38,463 132,309
Other ............................. (1,850) 7,679 63,726 24,387
-------- -------- ---------- ---------
Total investment income ......... 505,647 452,517 1,066,035 863,187
Less investment expenses .......... -- -- (18,687) (12,925)
-------- -------- ---------- ---------
Net investment income ........... $505,647 $452,517 $1,047,348 $ 850,262
======== ======== ========== =========
</TABLE>
Proceeds on sales of fixed maturities and equity securities for the six
months ending June 30, 1998 and 1997 (unaudited) are $28,673,773 and
$5,984,473, respectively, and for the years ending December 31, 1997 and 1996
are $21,088,211 and $6,440,189, respectively.
F-15
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(3) INVESTMENTS--(CONTINUED)
Realized gains and increases (decreases) in net unrealized gains (losses)
follow:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------------ ---------------------------
1998 1997 1997 1996
-------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net realized gains (losses):
Fixed maturities ...................... $ 224,563 $ (49,188) $ 18,891 $ 26,831
Equity securities ..................... 164,978 2,793 (33,798) 127,785
Other ................................. -- 12,734 -- --
Cash and cash equivalents ............. -- -- (4,488) --
---------- --------- --------- --------
Total ............................... $ 389,541 $ (33,661) $ (19,395) $154,616
========== ========= ========= ========
Change in net unrealized gains (losses):
Fixed maturities ...................... $ (194,903) $ 12,884 $ 203,504 $ 29,296
Equity securities ..................... (38,429) 18,874 16,144 (7,294)
---------- --------- --------- --------
Total ............................... $ (233,332) $ 31,758 $ 219,648 $ 22,002
========== ========= ========= ========
</TABLE>
(B) MORTGAGE LOANS
The amount represents outstanding balances from related party
transactions. Refer to note 11 for details.
(4) REINSURANCE
The Company reinsures (cedes) a portion of its written premiums on a
quota-share basis to nonaffiliated insurance companies in order to limit its
loss exposure. The Company also maintains coverages to limit losses from large
exposures, which the Company believes are adequate for its current volume. To
the extent that reinsuring companies are unable to meet their obligations
assumed under the reinsurance agreements, the Company remains primarily liable
to its policyholders.
F-16
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(4) REINSURANCE--(CONTINUED)
The impact of reinsurance on the financial statements is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------------- --------------------------------
1998 1997 1997 1996
-------------- --------------- --------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Premiums written:
Direct .................... $ 12,169,337 $ 8,842,004 $ 17,675,375 $ 14,850,484
Ceded ..................... (3,772,747) (2,039,621) (4,659,378) (5,602,538)
------------ ------------ ------------ ------------
$ 8,396,590 $ 6,802,383 $ 13,015,997 $ 9,247,946
============ ============ ============ ============
Premiums earned:
Direct .................... $ 9,568,942 $ 7,995,051 $ 16,420,172 $ 13,728,328
Ceded ..................... (2,891,241) (3,016,739) (5,495,893) (4,085,072)
------------ ------------ ------------ ------------
$ 6,677,701 $ 4,978,312 $ 10,924,279 $ 9,643,256
============ ============ ============ ============
Losses and loss adjustment
expenses incurred: .........
Direct .................... $ 6,528,741 $ 5,277,437 $ 11,241,218 $ 10,832,411
Ceded ..................... (1,847,515) (2,005,763) (3,827,067) (3,172,113)
------------ ------------ ------------ ------------
$ 4,681,226 $ 3,271,674 $ 7,414,151 $ 7,660,298
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER 31,
1998 1997
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Unpaid losses and loss adjustment expenses:
Direct .................................. $ 7,623,147 $ 6,726,462
Ceded ................................... (2,239,775) (2,090,998)
------------ ------------
$ 5,383,372 $ 4,635,464
============ ============
Unearned premiums:
Direct .................................. $ 10,100,136 $ 7,499,742
Ceded ................................... (3,099,169) (2,217,664)
------------ ------------
$ 7,000,967 $ 5,282,078
============ ============
</TABLE>
The Company received approximately $1.2 million and $548,000 in
commissions on premiums ceded during the six months ended June 30, 1998 and
1997 (unaudited) and approximately $1.4 million and $1.3 million in commissions
on premiums ceded during the years ended December 31, 1997 and 1996,
respectively. Had all of the Company's reinsurance agreements been canceled at
June 30, 1998, the Company would have returned a total of approximately
$595,000 in contingent reinsurance commissions to its reinsurers; in turn, its
reinsurers would have returned approximately $3.1 million in unearned premiums
to the Company.
F-17
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(4) REINSURANCE--(CONTINUED)
At June 30, 1998 (unaudited) and December 31, 1997, the Company had an
unsecured aggregate recoverable for losses paid, unpaid losses and loss
adjustment expenses including IBNR and unearned premiums with the following
companies:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Transatlantic Reinsurance Company (A++A.M. Best Rated):
Unearned premiums ........................................ $ 2,722,823 $ 2,119,819
Reinsurance recoverable on loss payments ................. 1,177,448 717,569
Unpaid losses and loss adjustment liability .............. 2,239,775 2,090,998
------------ ------------
6,140,046 4,928,386
Other:
Unearned premium ......................................... 376,346 97,845
------------ ------------
$ 6,516,392 $ 5,026,231
============ ============
Amounts due from reinsurers consisted of amounts related to:
Unpaid losses and loss adjustment expense ................ $ 2,239,775 $ 2,090,998
Paid losses and loss adjustment expense .................. 1,177,448 717,569
Reinsurance payable ...................................... (1,820,291) (1,114,520)
Contingent ceded payable ................................. (594,572) (669,535)
------------ ------------
$ 1,002,360 $ 1,024,512
============ ============
</TABLE>
(5) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for unpaid losses and loss adjustment expenses is determined
on an individual-case basis for all incidents reported. The liability also
includes amounts for unallocated expenses, anticipated future claim development
and IBNR.
F-18
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(5) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES--(CONTINUED)
Activity in the liability for unpaid losses and loss adjustment expenses
is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------------------------------- ---------------------------------
1998 1997 1997 1996
--------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at January 1 ................... $ 6,726,462 $ 6,233,962 $ 6,233,962 $ 4,756,273
Less reinsurance recoverables ......... (2,090,998) (1,701,685) (1,701,685) (1,068,560)
------------ ------------ ------------ ------------
Net balance at January 1 ............ $ 4,635,464 $ 4,532,277 $ 4,532,277 $ 3,687,713
============ ============ ============ ============
Incurred related to:
Current year .......................... $ 4,685,733 $ 3,582,493 $ 7,612,167 $ 7,597,874
Prior years ........................... (4,507) (310,819) (198,016) 62,424
------------ ------------ ------------ ------------
Total incurred ...................... $ 4,681,226 $ 3,271,674 $ 7,414,151 $ 7,660,298
============ ============ ============ ============
Paid related to:
Current year .......................... $ 2,038,296 $ 1,563,920 $ 4,458,527 $ 4,178,043
Prior years ........................... 1,895,022 2,267,390 2,852,437 2,637,691
------------ ------------ ------------ ------------
Total paid .......................... $ 3,933,318 $ 3,831,310 $ 7,310,964 $ 6,815,734
============ ============ ============ ============
Net balance at period ending ........... $ 5,383,372 $ 3,972,641 $ 4,635,464 $ 4,532,277
Plus reinsurance recoverables ......... 2,239,775 1,774,295 2,090,998 1,701,685
------------ ------------ ------------ ------------
Balance at period ending ............ $ 7,623,147 $ 5,746,936 $ 6,726,462 $ 6,233,962
============ ============ ============ ============
</TABLE>
Based upon consultations with the Company's independent actuarial
consultants and their statement of opinion on losses and loss adjustment
expenses, the Company believes that the liability for unpaid losses and loss
adjustment expenses is adequate to cover all claims and related expenses which
may arise from incidents reported.
(6) NOTES PAYABLE
The following is a summary of outstanding debt at June 30, 1998
(unaudited) and for the year ended December 31, 1997:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Notes payable:
Line of credit, expiration date December 30, 1998, interest only at
1.25% over bank's variable base rate is due monthly (bank's
base rate at December 31, 1997 was 10%). Line is collateralized
by all assets of 21st Century Holding Company .................... $400,000 $400,000
Bank loan, principal and interest due February 1998, interest at
18.00%. Note is collateralized by finance contracts receivables of
Federated Premium Finance, Inc. .................................. -- 152,625
-------- --------
$400,000 $552,625
======== ========
</TABLE>
F-19
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(7) REVOLVING CREDIT OUTSTANDING
On September 24, 1997, the Company, through Federated Premium Finance,
Inc. entered into a revolving loan agreement ("Revolving Agreement") with
Flaitron Funding Company LLC. Under the Revolving Agreement, the Company can
borrow up to the maximum credit commitment of $4 million. The amount of an
advance is subject to availability under a borrowing base calculation, with
maximum advances outstanding not to exceed the maximum credit commitment. The
annual interest rate on the loan is the prime rate plus 1.75 percent which
amounted to 10.25 percent at June 30, 1998 (unaudited) and December 31, 1997.
The Revolving Agreement contains various operating and financial covenants and
is collateralized by a first lien and assignment of all of the Company's
assigned finance contracts receivables. The Revolving Agreement expires on
September 30, 2000. The balance of this account as of June 30, 1998 (unaudited)
and December 31, 1997 amounted to $3,850,465 and $1,593,752, respectively, and
interest expense for the six months ended June 30, 1998 (unaudited) and for the
year ended December 31, 1997 totaled $126,113 and $12,702, respectively. At
June 30, 1998 (unaudited) and December 31, 1997, the Company is in compliance
with all revolving loan agreement covenants.
(8) INCOME TAXES
A summary of the provision (benefit) for income tax expense for the six
months ended June 30, 1998 and 1997 (unaudited) and for the years ended
December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------------- -----------------------
1998 1997 1997 1996
------------- ------------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal:
Current .......... $ 900,975 $ 340,675 $195,623 $ --
Deferred ......... (355,600) (230,907) 42,422 70,945
---------- ---------- -------- -------
545,375 109,768 238,045 70,945
---------- ---------- -------- -------
State:
Current .......... 159,847 58,317 38,454 --
Deferred ......... (37,965) (39,527) 5,688 7,717
---------- ---------- -------- -------
121,882 18,790 44,142 7,717
---------- ---------- -------- -------
$ 667,257 $ 128,558 $282,187 $78,662
========== ========== ======== =======
</TABLE>
F-20
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(8) INCOME TAXES--(CONTINUED)
The actual income tax expense differs from the "expected" income tax
expense for the six months ended June 30, 1998 and 1997 (unaudited) and years
ended December 31, 1997 and 1996 (computed by applying U.S. federal tax rate of
34 percent to income before provision for income tax expense) as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------------------------- ----------------------------
1998 1997 1997 1996
----------- ------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computed "expected" tax expense,
at federal rate ........................ $ 580,744 $ 238,574 $ 454,929 $ 236,884
Effect of S corporation income .......... -- (134,103) (184,674) (198,569)
State tax expense ....................... 62,003 25,471 32,260 7,796
Tax-free interest ....................... (44,951) -- (40,000) --
Goodwill ................................ 66,681 -- 10,035 --
Other, net .............................. 2,780 (1,384) 9,637 32,551
--------- ---------- ---------- ----------
Income tax expense, as reported ......... $ 667,257 $ 128,558 $ 282,187 $ 78,662
========= ========== ========== ==========
</TABLE>
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 net deferred tax assets and liabilities as of June 30, 1998
(unaudited) and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Unpaid losses and loss adjustment expenses ................ $ 222,834 $191,876
Unearned premiums ......................................... 760,136 397,529
Unrealized loss on investments available for sale ......... 33,675 --
---------- --------
Total gross deferred tax assets ......................... 1,016,645 589,405
Less valuation allowance ................................ -- --
---------- --------
Net deferred tax assets ................................. 1,016,645 589,405
---------- --------
Deferred tax liabilities:
Unrealized gain on investments available for sale ......... -- 71,083
---------- --------
Total gross deferred tax liabilities .................... -- 71,083
---------- --------
Net deferred tax asset .................................. $1,016,645 $518,322
========== ========
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. At June
30, 1998 (unaudited) and December 31, 1997, based upon the level of historical
F-21
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(8) INCOME TAXES--(CONTINUED)
taxable income and projections for future taxable income over the periods in
which the deferred tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of these deductible
differences.
(9) REGULATORY REQUIREMENTS AND RESTRICTIONS
To retain its certificate of authority, the Florida Insurance Code (the
"Code") requires that Federated National maintain capital and surplus equal to
the greater of 10 percent of its liabilities or the 1997 statutory minimum
capital and surplus requirement of $2,100,000 as defined in the Code or
$2,100,000. The Company is also required to adhere to prescribed
premium-to-surplus ratios. The Company is in compliance with these requirements
as of December 31, 1997. As of December 31, 1997, to meet regulatory
requirements, the Company had fixed maturities with a par value of $250,000
pledged to the Insurance Commissioner of the State of Florida (the
"Commissioner").
Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its shareholders except out of that part
of its available and accumulated capital surplus funds which is derived from
realized net operating profits on its business and net realized capital gains.
A Florida domestic insurer may not make dividend payments or distributions to
shareholders without prior approval of the Florida Department of Insurance if
the dividend or distribution would exceed the larger of (i) the lesser of (a)
10 percent of capital surplus (b) net income, not including realized capital
gains, plus a two-year carryforward, (ii) 10 percent of capital surplus with
dividends payable constrained to unassigned funds minus 25 percent of
unrealized capital gains of (iii) the lesser of (a) 10 percent of capital
surplus or (b) net investment income plus a three-year carryfoward with
dividends payable constrained to unassigned funds minus 25 percent of
unrealized capital gains. Alternatively, a Florida domestic insurer may pay a
dividend or distribution without the prior written approval of the Florida
Department of Insurance (i) if the dividend is equal to or less than the
greater of (a) 10 percent of the insurer's capital surplus as regards
policyholders derived from realized net operating profits on its business and
net realized capital gains or (b) the insurer's entire net operating profits
and realized net capital gains derived during the immediately preceding
calendar year, (ii) the insurer will have policyholder capital surplus equal to
or exceeding 115 percent of the minimum required statutory capital surplus
after the dividend or distribution, (iii) the insurer files a notice of the
dividend or distribution with the department at least ten business days prior
to the dividend payment or distribution and (iv) the notice includes a
certification by an officer of the insurer attesting that, after the payment of
the dividend or distribution, the insurer will have at least 115 percent of
required statutory capital surplus as to policyholders. Except as provided
above, a Florida domiciled insurer may only pay a dividend or make a
distribution (i) subject to prior approval by the Florida Department of
Insurance of (ii) 30 days after the Florida Department of Insurance has
received notice of such dividend or distribution and has not disapproved it
within such time. No dividends were declared or paid in 1997.
Under these laws, Federated National is not permitted to pay dividends to
the Company in 1998 without prior regulatory approval. Although the Company
believes that amounts required for it to meet its financial and operating
obligations will be available, there can be no assurance in this regard.
Further, there can be no assurance that, if requested, that the Florida
Department of Insurance will allow any dividends to be paid by Federated
National.
The Company is required to comply with NAIC risk-based capital ("RBC")
requirements. RBC is a method of measuring the amount of capital appropriate
for an insurance company to support its
F-22
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(9) REGULATORY REQUIREMENTS AND RESTRICTIONS--(CONTINUED)
overall business operations in light of its size and risk profile. NAIC's RBC
standards are used by regulators to determine appropriate regulatory actions
relating to insurers who show signs of weak or deteriorating condition. As of
June 30, 1998, based on calculations using the appropriate NAIC formula, The
Company's total adjusted capital is in excess of ratios which would require any
form of regulatory action.
Pursuant to a consent order issued in conjunction with the Company's
authorization to underwrite mobile home insurance (the "Consent Order"), the
Company's growth is subject to regulatory limits on the amount of premiums it
can underwrite. In 1998, Federated National may only underwrite $21 million in
direct written premiums and $14 million in total net written premiums. In 1999,
Federated National is limited to $24 million and $15 million, respectively.
Federated National also is required to maintain a minimum capital surplus to
support its underwriting program. In 1998 and 1999, Federated National is
required to have capital surplus of $4.7 million and $5.9 million,
respectively. The premium limits and capital surplus requirements impact
Federated National's potential growth. Federated National's ability to exceed
these limitations will be subject to the prior approval of the Florida
Department of Insurance. Although correspondence from the Department of
Insurance has indicated it is agreeable to modifications of the current Consent
Order due to the improved financial condition of the Company, there can be no
assurance that Federated National will be able to obtain the required
regulatory approvals, and the failure to do so could have a material adverse
effect on the Company's business, results of operations or financial condition.
Generally accepted accounting principles differ in some respects from
reporting practices prescribed or permitted by the Department of Insurance of
the State of Florida. Federated National's statutory capital and surplus was
$4,708,291 and $4,112,265 as of June 30, 1998 and December 31, 1997,
respectively. The Company's statutory net income was $700,783 and $493,089 for
the six months ended June 30, 1998 and for the year ended December 31, 1997,
respectively.
(10) COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
In October 1996, the Company purchased land in Plantation, Florida to
construct facilities to accommodate executive offices and administration. In
August 1998, the facility was completed and the Company consolidated its
executive offices and administrative operations in the facility, which consists
of approximately 14,000 square feet of space. The cost of the project is
estimated at $1.5 million and approximately $223,000 has been paid as of
December 31, 1997 and approximately $925,000 has been paid as of June 30, 1998.
(11) RELATED PARTY TRANSACTIONS
In October 1997, the Company sold an office property to a group of
officers and shareholders. The sale price of the property was $255,000 which
generated a profit of approximately $13,000. In
F-23
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996
(11) RELATED PARTY TRANSACTIONS--(CONTINUED)
connection with the sale, the Company provided seller-financing in an amount of
$200,000. The note bears interest at 8.00 percent per annum with monthly
payments of principal and interest. The note matures on October 31, 2002. The
outstanding principal balance of the note at June 30, 1998 and December 31,
1997 was $180,561 and $197,278, respectively.
The Company also leases a second insurance agency location from principal
shareholders at a rental of $3,500 per month pursuant to a lease expiring in
May 2001.
Prior to the Company's consolidation of its executive offices and
administrative operations, the Company leased two locations at a rental of
$9,150 per month from principle shareholders.
The Company believes these arrangements are on terms at least as favorable
as those the Company could secure from a nonaffiliated third party.
(12) SUBSEQUENT EVENTS (UNAUDITED)
In January and February 1998, the Company acquired certain insurance
agencies and other affiliated companies as mentioned in 2(a).
The Company intends to conduct an initial public offering by filing a
registration statement on Form SB-2 for 1,250,000 shares of common stock, par
value $.01 per share. Concurrently, the Company intends to adopt a stock option
plan reserving 350,000 shares of common stock.
The Company's Board of Directors now has the authority to issue 1,000,000
shares of preferred stock with any terms as the Board may deem advisable.
F-24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR SINCE THE DATES AS OF WHICH INFORMATION IS SET FORTH
HEREIN. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
-----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary ....................... 3
Risk Factors ............................. 8
Use of Proceeds .......................... 15
Dividend Policy .......................... 15
Dilution ................................. 16
Capitalization ........................... 17
Selected Consolidated and Combined
Financial Data ........................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ......................... 20
Business ................................. 26
Management ............................... 44
Certain Transactions ..................... 48
Principal Shareholders ................... 50
Description of Capital Stock ............. 50
Shares Eligible for Future Sale .......... 53
Underwriting ............................. 54
Legal Matters ............................ 55
Experts .................................. 56
Available Information .................... 56
Glossary of Selected Terms ............... 57
</TABLE>
-----------------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
1,250,000 SHARES
21ST CENTURY
HOLDING COMPANY
COMMON STOCK
-----------------------------------
PROSPECTUS
-----------------------------------
GILFORD SECURITIES
INCORPORATED
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has authority under Section 607.0850 of the Florida
Business Corporations Act to indemnify its directors and officers to the extent
provided for in such statute. The Registrant's Amended and Restated Articles of
Incorporation and Bylaws provide that the Registrant may insure, shall
indemnify and shall advance expenses on behalf of its officers and directors to
the fullest extent not prohibited by law. The Company is also a party to
indemnification agreements with each of its directors and officers.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses payable by the Registrant in
connection with the offering described in this registration statement (other
than underwriting discounts and commissions) will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration fee ......... $ 3,747
NASD filing fee ............................................. 1,770
Nasdaq listing fee .......................................... 53,750
Printing and engraving expenses ............................. *
Accounting fees and expenses ................................ *
Legal fees and expenses ..................................... *
Blue Sky fees and expenses .................................. 7,500
Transfer Agent's fees and expenses .......................... *
Miscellaneous ............................................... *
-------
Total ....................................................... $ *
</TABLE>
- ----------------
* To be filed by amendment
All amounts except the Securities and Exchange Commission registration
fee, the NASD filing fee, and the Nasdaq listing fee are estimated.
ITEM 26. RECENT SALE OF UNREGISTERED SECURITIES.
The following sets forth the Registrant's sale of its securities within
the last three years, which securities were not registered under the Securities
Act of 1933, as amended:
1. In November 1996, the Company sold 111,160 shares of Common Stock to
four individuals in a private transaction for cash consideration of
$500,000.
2. In December 1997, the Company sold 33,348 shares of Common Stock to
Bruce Simberg in a private transaction for cash consideration of
$120,000.
3. In January 1998, the Company acquired all of the issued and outstanding
capital stock of eight affiliated corporations, principally the Company's
insurance agencies, in exchange for the issuance of 954,124 shares of
Common Stock to eight persons. Included in such shares were 377,481
shares of Common Stock issued to each of Edward J. Lawson and Michele V.
Lawson, who were principal shareholders of seven of such corporations and
18,526 shares of Common Stock issued to Ronald A. Raymond, who was the
principal shareholder of the eighth corporation.
4. In February 1998, the Company acquired all of the issued and
outstanding capital stock of an affiliated insurance agency in exchange
for the issuance of 27,792 shares of Common Stock,
II-1
<PAGE>
including 6,948 shares of Common Stock issued to each of Edward J. Lawson
and Michele V. Lawson, who were principal shareholders of the agency.
5. In April 1998, the Company acquired all of the issued and outstanding
capital stock of a non-affiliated insurance agency in exchange for the
issuance of 6,484 shares of Common Stock to one person.
6. In February 1998, the Company sold 38,906 shares of Common Stock to one
person in a private transaction.
The above securities were also issued without registration under the
Securities Act, by reason of the exemption from registration afforded by the
provisions of section 4(2) thereof, as transactions by an issuer not involving
a public offering.
All information in this Item with respect to shares of Common Stock has
been adjusted to give effect to the 1.8-for-one, 1.2-for-one, and
926.33-for-one stock splits implemented in November 1996, January 1997 and
September 1998, respectively.
ITEM 27. EXHIBITS.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
1.1 Form of Underwriting Agreement(1)
3.1 Form of Registrant's Amended and Restated Articles of Incorporation(1)
3.2 Form of Registrant's Amended and Restated Bylaws(1)
4.1 Specimen of Common Stock Certificate(3)
4.2 Representative's Warrant Agreement including form of Representative's Warrant(2)
5.1 Opinion of Broad and Cassel(3)
10.1 Form of Stock Option Plan(1)*
10.2 Employment Agreement between the Registrant and Edward J. Lawson(1)*
10.3 Employment Agreement between the Registrant and Michele V. Lawson(1)*
10.4 Form of Indemnification Agreement between the Registrant and its directors and executive
officers(1)*
10.5 Revolving Credit and Term Loan Agreement between FlatIron Funding Company, LLC and
FPF, Inc., as amended(2)
10.6 Sale and Assignment Agreement between Federated Premium and FPF, Inc., as amended(2)
21.1 Subsidiaries of the Registrant(1)
23.1 Consent of Broad and Cassel (included in its opinion filed as Exhibit 5.1)(3)
23.2 Consent of KPMG Peat Marwick LLP(2)
25.1 Power of Attorney (included on the signature page of the Registration Statement)(1)
</TABLE>
- ----------------
* Management Compensation Plan or Arrangement
(1) Previously filed.
(2) Filed herewith.
(3) To be filed by amendment.
ITEM 28. UNDERTAKINGS.
B. The Registrant hereby undertakes:
(1) To file during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i)
include any prospectus required by Section 10(a)(3) of the Securities
Act; (ii) reflect in the prospectus any facts or events which,
individually or
II-2
<PAGE>
together, represent a fundamental change in the information set forth
in the registration statement; and (iii) include any additional or
changed material information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time
will be the initial bona fide offer.
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit
prompt delivery to each purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other that the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
(6) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon rule 430A and contained
in a form of prospectus filed by the registrant pursuant to rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(7) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registrant Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Plantation,
State of Florida, on October 7, 1998.
21ST CENTURY HOLDING COMPANY
By: /s/ Edward J. Lawson
--------------------------------------
Edward J. Lawson, Chairman of the
Board,
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Edward
J. Lawson and Michele V. Lawson, or any one of them, as his or her true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution for him or her and in his or her name, place and stead in any
and all capacities to execute in the name of each such person who is then an
officer or director of the Registrant any and all amendments (including
post-effective amendments) to this Registration Statement, and any registration
statement relating to the offering hereunder pursuant to Rule 462 under the
Securities Act of 1933, as amended, and to file the same with all exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents and each
of them full power and authority to do and perform each and every act and thing
required or necessary to be done in and about the premises as fully as he or
she might or could do in person, hereby ratifying and confirming all that said
attorneys-in fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Edward J. Lawson Chairman of the Board October 7, 1998
- --------------------------- President, Chief Executive
Edward J. Lawson Officer (principal executive,
financial and accounting officer)
/s/ Michele V. Lawson Vice President-Agency Operations, October 7, 1998
- --------------------------- Treasurer and Director
Michele V. Lawson
/s/ Ronald A. Raymond President, Federated National October 7, 1998
- --------------------------- and Director
Ronald A. Raymond
/s/ Patrick D. Doyle Director October 7, 1998
- ---------------------------
Patrick D. Doyle
/s/ Joseph A. Epstein Director October 7, 1998
- ---------------------------
Joseph A. Epstein
/s/ Carla L. Leonard Director October 7, 1998
- ---------------------------
Carla L. Leonard
/s/ Bruce Simberg Director October 7, 1998
- ---------------------------
Bruce Simberg
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.2 Representative's Warrant Agreement including form of Representative's Warrant
10.5 Revolving Credit and Term Loan Agreement between FlatIron Funding Company, LLC and
FPF, Inc., as amended
10.6 Sale and Assignment Agreement between Federated Premium and FPF, Inc., as amended
23.2 Consent of KPMG Peat Marwick LLP
</TABLE>
EXHIBIT 4.2
WARRANT AGREEMENT dated as of ________ __, 1998 between 21st Century
Holding Company, a Florida corporation (the "Company"), and Gilford Securities
Incorporated (hereinafter referred to as "Gilford").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to Gilford warrants ("Warrants")
to purchase up to 125,000 shares (the "Shares") of common stock of the Company,
par value $.01 per share (the "Common Stock"); and
WHEREAS, Gilford (the "Underwriter") has entered into an underwriting
agreement (the "Underwriting Agreement") dated _____________ __, 1998 between
the Underwriter as representative of the several underwriters named in Schedule
1 to the Underwriting Agreement, and the Company in connection with the
Company's proposed public offering (the "Public Offering") of 1,250,000 shares
of Common Stock, at a price of $____ per share; and
WHEREAS, the Warrants issued pursuant to this Agreement are being
issued by the Company to Gilford or officers and partners of Gilford and members
of the selling group and/or their officers or partners, in consideration for,
and as part of Gilford's compensation in connection with, the Underwriter acting
as representative of several underwriters named in Schedule 1 to the
Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Underwriter or its designees to the Company of TWELVE DOLLARS AND FIFTY CENTS
($12.50), the agreements herein set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
<PAGE>
1. GRANT.
Gilford, and/or its designees are hereby granted the right to purchase,
at any time from _________________, 1999 until 5:00 P.M., New York time, on
_______________, 2003 (the "Warrant Exercise Term"), up to 125,000 fully-paid
and non assessable Shares at an initial exercise price (subject to adjustment as
provided in Article 8 hereof) of $_____ per share, representing 120% of the
initial offering price of the Common Stock in the Public Offering.
2. WARRANT CERTIFICATES.
The warrant certificates (the "Warrant Certificates") delivered and to
be delivered pursuant to this Agreement shall be in the form set forth in
Exhibit A attached hereto and made a part hereof, with such appropriate
insertions, omissions, substitutions and other variations as required or
permitted by this Agreement.
3. EXERCISE OF WARRANT.
The Warrants initially are exercisable at a price of $______ per share
of Common Stock purchased, payable in cash or by check to the order of the
Company, or any combination of cash or check, subject to adjustment as provided
in Article 8 hereof. Upon surrender of the Warrant Certificate with the annexed
Form of Election to Purchase duly executed, together with payment of the
Exercise Price (as hereinafter defined) for the Shares purchased, at the
Company's principal offices in Florida (currently located at 4161 N.W. 5th
Street, Plantation, Florida 33317) the registered holder of a Warrant
Certificate ("Holder" or "Holders") shall be entitled to receive a certificate
or certificates for the Shares so purchased. The purchase rights represented by
each Warrant Certificate are exercisable at the option of the Holder hereof, in
whole or in part (but not as to fractional Shares). In the case of the purchase
of less than all the Shares purchasable under
2
<PAGE>
any Warrant Certificate, the Company shall cancel said Warrant Certificate upon
the surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Shares purchasable thereunder.
4. ISSUANCE OF CERTIFICATES.
Upon the exercise of the Warrants, the issuance of certificates for the
Shares shall be made forthwith (and in any event within three business days
thereafter) without charge to the Holder thereof including, without limitation,
any transfer tax which may be payable in respect of the issuance thereof, and
such certificates shall (subject to the provisions of Article 5 hereof) be
issued in the name of, or in such names as may be directed by, the Holder
thereof; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificates in a name other than that of the Holder and
the Company shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid. The Warrant
Certificates and the certificates representing the Shares shall be executed on
behalf of the Company by the manual or facsimile signature of the present or any
future Chairman or Vice Chairman of the Board of Directors or President or Vice
President of the Company under its corporate seal reproduced thereon, attested
to by the manual or facsimile signature of the present or any future Secretary
or Assistant Secretary of the Company. Warrant Certificates shall be dated the
date of execution by the Company upon initial issuance, division, exchange,
substitution or transfer.
3
<PAGE>
Upon exercise, in part or in whole, of the Warrants, certificates
representing the Shares (the "Warrant Securities"), shall bear a legend
substantially similar to the following:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"), nor any state securities laws and may not be offered
or sold except (i) pursuant to an effective registration
statement under the Act and applicable state securities laws,
(ii) to the extent applicable, pursuant to Rule 144 under the
Act (or any similar rule under such Act relating to the
disposition of securities), or (iii) upon the delivery by the
holder to the Company of an opinion of counsel, reasonably
satisfactory to counsel to the issuer, stating that an
exemption from registration under such Act or applicable state
securities laws is available."
5. RESTRICTION ON TRANSFER OF WARRANTS.
The Holder of a Warrant Certificate, by its acceptance thereof,
covenants and agrees that the Warrants are being acquired as an investment and
not with a view to the distribution thereof, and that the Warrants may not be
sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or
in part, for a period of one (1) year from the effective date of the
registration statement filed in connection with the Public Offering, except to
officers and partners of Gilford or to any member of the selling group
participating in the distribution to the public of the shares of Common Stock
and/or their respective officers or partners.
6. PRICE.
6.1 INITIAL AND ADJUSTED EXERCISE PRICES. The initial exercise
price of each Warrant shall be $______ per share. The adjusted exercise price
shall be the price which shall result from time to time from any and all
adjustments of the initial exercise price in accordance with the provisions of
Article 8 hereof.
4
<PAGE>
6.2 EXERCISE PRICE. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price, depending upon
the context.
7. REGISTRATION RIGHTS.
7.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933. Neither the
Warrants nor the Shares have been registered for purposes of public distribution
under the Securities Act of 1933, as amended (the "Securities Act").
7.2 REGISTRABLE SECURITIES. As used herein the term
"Registrable Security" means the Shares and any shares of Common Stock issued
upon any stock split or stock dividend in respect of such Shares; PROVIDED,
HOWEVER, that with respect to any particular Registrable Security, such security
shall cease to be a Registrable Security when, as of the date of determination,
(i) it has been effectively registered under the Securities Act and disposed of
pursuant thereto, (ii) registration under the Securities Act is no longer
required for subsequent public distribution of such security pursuant to Rule
144 under the Securities Act (or any successor provision), or (iii) it has
ceased to be outstanding. The term "Registrable Securities" means any and/or all
of the securities falling within the foregoing definition of a "Registrable
Security." In the event of any merger, reorganization, consolidation,
recapitalization or other change in corporate structure affecting the Common
Stock, such adjustment shall be made in the definition of "Registrable Security"
as is appropriate in order to prevent any dilution or enlargement of the rights
granted pursuant to this Article 7.
7.3 PIGGYBACK REGISTRATION. If, at any time during the seven
years following the closing of the Public Offering, the Company proposes to
prepare and file any new registration statement or post-effective amendments
thereto covering equity or debt securities of the
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Company, or any such securities of the Company held by its shareholders (in any
such case, other than pursuant to Form S-4 or Form S-8 or successor form) (for
purposes of this Article 7, collectively, the "Registration Statement"), it will
give written notice of its intention to do so by registered mail ("Notice"), at
least twenty (20) business days prior to the filing of each such Registration
Statement, to all Holders of the Warrants and the Registrable Securities. Upon
the written request of such a Holder (a "Requesting Holder"), made within ten
(10) business days after receipt of the Notice, that the Company include any of
the Requesting Holder's Registrable Securities in the proposed Registration
Statement, the Company shall, as to each such Requesting Holder, effect the
registration under the Securities Act of the Registrable Securities which it has
been so requested to register ("Piggyback Registration"), at the Company's sole
cost and expense and at no cost or expense to the Requesting Holders other than
underwriting discounts and commissions, and fees and expenses of the Holder's
counsel; provided, however, that if, in the written opinion of the Company's
managing underwriter, if any, for such offering, the inclusion of all or a
portion of the Registrable Securities requested to be registered, when added to
the securities being registered by the Company or the selling shareholder(s),
will exceed the maximum amount of the Company's securities which can be marketed
(i) at a price reasonably related to their then current market value, or (ii)
without otherwise materially adversely affecting the entire offering, then the
Company may exclude from such offering all or a portion of the Registrable
Securities which it has been requested to register.
If securities are proposed to be offered for sale pursuant to such
Registration Statement by other security holders of the Company and the total
number of securities to be offered by the Requesting Holders and such other
selling security holders is required to be reduced pursuant to a
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request from the managing underwriter (which request shall be made only for the
reasons and in the manner set forth above) the aggregate number of Registrable
Securities to be offered by Requesting Holders pursuant to such Registration
Statement shall equal the number which bears the same ratio to the maximum
number of securities that the underwriter believes may be included for all the
selling security holders (including the Requesting Holders) as the original
number of Registrable Securities proposed to be sold by the Requesting Holders
bears to the total original number of securities proposed to be offered by the
Requesting Holders and the other selling security holders.
7.4 DEMAND REGISTRATION. (a) For a period of five (5) years
from the closing of the Public Offering, any "Majority Holder" (as such term is
defined in Section 7.4(d) below) of the Registrable Securities shall have the
right (which right is in addition to the piggyback registration rights provided
for under Section 7.3 hereof), exercisable by written notice to the Company (the
"Demand Registration Request"), to have the Company prepare and file with the
Securities and Exchange Commission (the "Commission") on one occasion, at the
sole expense of the Company (excluding fees and expenses of the Majority
Holder's counsel and any underwriting or selling commissions), a Registration
Statement and such other documents, including a prospectus, as may be necessary
(in the opinion of both counsel for the Company and counsel for such Majority
Holder) in order to comply with the provisions of the Securities Act, so as to
permit a public offering and sale of the Registrable Securities by the Holders
thereof for nine (9) consecutive months.
(b) The Company covenants and agrees to give written
notice of any Demand Registration Request to all Holders of the Registrable
Securities within ten (10) days
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from the date of the Company's receipt of any such Demand Registration Request.
After receiving notice from the Company as provided in this Section 7.4(b),
Holders of Registrable Securities may request the Company to include their
Registrable Securities in the Registration Statement to be filed pursuant to
Section 7.4(a) hereof by notifying the Company of their decision to have such
securities included within ten (10) days of their receipt of the Company's
notice.
(c) In addition to the registration rights provided
for under Section 7.3 hereof and subsection (a) of this Section 7.4, for a
period of five (5) years from the closing of the Public Offering, any Holder of
Registrable Securities shall have the right, exercisable by written request to
the Company, to have the Company prepare and file with the Commission, on one
occasion in respect of such Holders of Registrable Securities, a Registration
Statement so as to permit a public offering and sale of such Registrable
Securities for nine (9) consecutive months, provided, however, that all costs
incident thereto shall be at the expense of the Holders of the Registrable
Securities included in such Registration Statement. If a Holder of Registrable
Securities shall give notice to the Company at any time of its or their desire
to exercise the registration right granted pursuant to this Section 7.4(c), then
within ten (10) days after the Company's receipt of such notice, the Company
shall give notice to the other Holders of Registrable Securities advising them
that the Company is proceeding with such registration and offering to include
therein the Registrable Securities of such Holders, provided they furnish the
Company with such appropriate information in connection therewith as the Company
shall reasonably request in writing. The Registration Statement filed pursuant
to this Section 7.4(c) may include other securities of the Company which are
held by officers or directors of the
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Company, or which are held by persons who, by virtue of agreements with the
Company, are entitled to include their securities in such Registration
Statement.
(d) The term "Majority Holder" as used in Section 7.4
hereof shall mean any Holder or any combination of Holders of Registrable
Securities, if included in such Holders' Registrable Securities are that
aggregate number of shares of Common Stock (including Shares already issued and
Shares issuable pursuant to the exercise of outstanding Warrants) as would
constitute a majority of the aggregate number of shares of Common Stock
(including Shares already issued and Shares issuable pursuant to the exercise of
outstanding Warrants) included in all the Registrable Securities.
(e) Notwithstanding the foregoing, if the Company
shall inform the Holders requesting the filing of a registration statement
pursuant to this Section 7.4 that, in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company and
its shareholders for such Registration Statement to be filed and it is therefore
essential to defer the filing of such Registration Statement, then the Company
shall have the right to defer such filing for a period of not more than 120 days
after receipt of the request of the initiating Holders; PROVIDED, HOWEVER, that
the Company may not utilize this right more than once in any twelve (12) month
period.
7.5 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. The
Company covenants and agrees as follows:
(a) In connection with any registration under Section
7.4 hereof, the Company shall file the Registration Statement as expeditiously
as possible, but in any event no later than twenty (20) business days following
receipt of any demand therefor, shall use its best
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efforts to have any such Registration Statement declared effective at the
earliest possible time, and shall furnish each Holder of Registrable Securities
such number of prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs, fees and
expenses in connection with all Registration Statements filed pursuant to
Sections 7.3 and 7.4(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, and blue sky fees and expenses;
provided, however, that the Holders of Registerable Securities shall pay any
underwriting discounts or expenses applicable to the sale of the Registerable
Securities sold by such Holders pursuant to the Registration Statement and the
fees and expenses of any counsel retained by them. The Holders of Registrable
Securities included in any Registration Statement filed pursuant to Section
7.4(c) hereof will pay all costs, fees and expenses in connection with such
Registration Statement.
(c) The Company will take all necessary action which
may be required in qualifying or registering the Registrable Securities included
in a Registration Statement, for offering and sale under the securities or blue
sky laws of such states as are requested by the Holders of such securities,
provided that the Company shall not be obligated to execute or file any general
consent to service of process or to qualify as a foreign corporation to do
business under the laws of any such jurisdiction.
(d) The Company shall indemnify any Holder of the
Registrable Securities to be sold pursuant to any Registration Statement and any
underwriter or person deemed to be an underwriter under the Securities Act and
each person, if any, who controls such Holder or underwriter or person deemed to
be an underwriter within the meaning of Section 15 of
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the Securities Act or Section 20(a) of the Securities Exchange Act of 1934, as
amended ("Exchange Act"), against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Securities Act, the Exchange Act or otherwise, arising from such
registration statement to the same extent and with the same effect as the
provisions pursuant to which the Company has agreed to indemnify the Underwriter
and to provide for just and equitable contribution as set forth in Section 7 of
the Underwriting Agreement.
(e) INFORMATION BY THE HOLDERS. Each of the Holders
holding securities included in any registration, shall furnish to the Company
such information regarding such Holder and the distribution proposed by such
Holder as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification or
compliance referred to in this Section 7.4.
(f) Any Holder of Registrable Securities to be sold
pursuant to a registration statement, and its successors and assigns, shall
severally, and not jointly, indemnify, the Company, its officers and directors
and each person, if any, who controls the Company within the meaning of Section
15 of the Securities Act or Section 20(a) of the Exchange Act, against all loss,
claim, damage or expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any claim whatsoever)
to which they may become subject under the Securities Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf of such Holder, or
its successors or assigns, for specific inclusion in such
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Registration Statement to the same extent and with the same effect as the
provisions pursuant to which the Underwriter has agreed to indemnify the Company
and to provide for just and equitable contribution as set forth in Section 7 of
the Underwriting Agreement.
(g) Nothing contained in this Agreement shall be
construed as requiring any Holder to exercise his Warrants prior to the initial
filing of any registration statement or the effectiveness thereof.
8. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF SECURITIES.
The following adjustments apply to the Exercise Price of the Warrants
with respect to the Shares and the number of Shares purchasable upon exercise of
the Warrants.
8.1 COMPUTATION OF ADJUSTED PRICE. Except as hereinafter
provided, in case the Company shall at any time after the date hereof issue or
sell any shares of Common Stock (other than the issuances or sales referred to
in Section 8.6 hereof), including shares held in the Company's treasury and
shares of Common Stock issued upon the exercise of any options, rights or
warrants to subscribe for shares of Common Stock (other than the issuance or
sales of Common Stock pursuant to rights to subscribe for such Common Stock
distributed to all the shareholders of the Company and Holders of Warrants
pursuant to section 8.8 hereof) and shares of Common Stock issued upon the
direct or indirect conversion or exchange shares of Common Stock, for a
consideration per share less than the Current Market Price (as defined below),
the Exercise Price shall (until another such issuance or sale) be adjusted to
equal the product of the Exercise Price and the quotient obtained by dividing:
(A) an amount equal to the sum of (X) the product of
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(a) the total number of shares of Common Stock
outstanding immediately prior to such issuance or
sale, multiplied by
(b) the Current Market Price,
plus, (Y) the aggregate amount of all consideration, if any, received
by the Company upon such issuance or sale, by
(B) the product of (i) total number of shares of Common Stock
outstanding immediately after such issuance or sale and (ii)
the Current Market Price.
For purposes of this Section 8.1, the "Current Market Price" at the
time of any issuance or sale of Common Stock shall mean the Exercise Price, as
adjusted pursuant to this Section 8.
For the purposes of any computation to be made in accordance with this
Section 8.1, the following provisions shall be applicable:
(i) In case of the issuance or sale of
shares of Common Stock for a consideration part or all of which shall
be cash, the amount of the cash consideration therefor shall be deemed
to be the amount of cash received by the Company for such shares (or,
if shares of Common Stock are offered by the Company for subscription,
the subscription price, or, if such securities shall be sold to
underwriters or dealers for public offering without a subscription
offering, the initial public offering price) before deducting therefrom
any compensation paid or discount allowed in the sale, underwriting or
purchase thereof by underwriters or dealers or others performing
similar services, or any expenses incurred in connection therewith.
(ii) In case of the issuance or sale
(otherwise than as a dividend or other distribution on any stock of the Company)
of shares of Common Stock for a consideration, part or all of which shall be
other than cash, the amount of the consideration
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therefor other than cash shall be deemed to be the value of such consideration
as determined in good faith by the Board of Directors of the Company.
(iii) Shares of Common Stock issuable by way
of dividend or other distribution on any stock of the Company shall be deemed to
have been issued immediately after the opening of business on the day following
the record date for the determination of shareholders entitled to receive such
dividend or other distribution and shall be deemed to have been issued without
consideration.
(iv) The reclassification of securities of
the Company other than shares of Common Stock into securities including shares
of Common Stock shall be deemed to involve the issuance of such shares of Common
Stock for a consideration other than cash immediately prior to the close of
business on the date fixed for the determination of security holders entitled to
receive such shares, and the value of the consideration allocable to such shares
of Common Stock shall be determined as provided in subsection (ii) of this
Section 8.1.
(v) The number of shares of Common Stock at
any one time outstanding shall include the aggregate number of shares issued or
issuable upon the exercise of options, rights, warrants and upon the conversion
or exchange of convertible or exchangeable securities.
8.2 OPTIONS, RIGHTS, WARRANTS AND CONVERTIBLE AND EXCHANGEABLE
SECURITIES. Except in the case of the Company issuing rights to subscribe for
shares of Common Stock distributed to all the shareholders of the Company and
Holders of Warrants pursuant to Section 8.8 hereof and in the case of the
Company issuing employee stock options pursuant to a stock option plan at an
option price no less than 80% of the fair market value of the underlying
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Common Stock on the date of grant, if the Company shall at any time after the
date hereof issue options, rights or warrants to subscribe for shares of Common
Stock, or issue any securities convertible into or exchangeable for shares of
Common Stock, (i) for a consideration per share less than the Exercise Price in
effect immediately prior to the issuance of such options, rights or warrants, or
such convertible or exchangeable securities or (ii) without consideration, the
Exercise Price in effect immediately prior to the issuance of such options,
rights or warrants, or such convertible or exchangeable securities, as the case
may be, shall be reduced to a price determined by making a computation in
accordance with the provisions of Section 8.1 hereof, provided that:
(a) The aggregate maximum number of shares
of Common Stock, as the case may be, issuable under all the outstanding options,
rights or warrants shall be deemed to be issued and outstanding at the time all
the outstanding options, rights or warrants were issued, and for a consideration
equal to the minimum purchase price per share provided for in the options,
rights or warrants at the time of issuance, plus the consideration (determined
in the same manner as consideration received on the issuance or sale of shares
in accordance with the terms of the Warrants), if any, received by the Company
for the options, rights or warrants, and if no minimum price is provided in the
options, rights or warrants, then the consideration shall be equal to zero;
provided, however, that upon the expiration or other termination of the options,
rights or warrants, if any thereof shall not have been exercised, the number of
shares of Common Stock deemed to be issued and outstanding pursuant to this
subsection (a) (and for the purposes of subsection (v) of Section 8.1 hereof)
shall be reduced by such number of shares as to which options, warrants and/or
rights shall have expired or terminated unexercised, and such number of shares
shall no longer be deemed to be issued and outstanding, and the Exercise Price
then in
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effect shall forthwith be readjusted and thereafter be the price which it would
have been had adjustment been made on the basis of the issuance only of shares
actually issued or issuable upon the exercise of those options, rights or
warrants as to which the exercise rights shall not have expired or terminated
unexercised.
(b) The aggregate maximum number of shares
of Common Stock issuable upon conversion or exchange of any convertible or
exchangeable securities shall be deemed to be issued and outstanding at the time
of issuance of such securities, and for a consideration equal to the
consideration (determined in the same manner as consideration received on the
issue or sale of shares of Common Stock in accordance with the terms of the
Warrants) received by the Company for such securities, plus the minimum
consideration, if any, receivable by the Company upon the conversion or exchange
thereof; provided, however, that upon the termination of the right to convert or
exchange such convertible or exchangeable securities (whether by reason of
redemption or otherwise), the number of shares deemed to be issued and
outstanding pursuant to this subsection (b) (and for the purpose of subsection
(v) of Section 8.1 hereof) shall be reduced by such number of shares as to which
the conversion or exchange rights shall have expired or terminated unexercised,
and such number of shares shall no longer be deemed to be issued and outstanding
and the Exercise Price then in effect shall forthwith be readjusted and
thereafter be the price which it would have been had adjustment been made on the
basis of the issuance only of the shares actually issued or issuable upon the
conversion or exchange of those convertible or exchangeable securities as to
which the conversion or exchange rights shall not have expired or terminated
unexercised.
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(c) If any change shall occur in the price
per share provided for in any of the options, rights or warrants referred to in
subsection (a) of this Section 8.2, or in the price per share at which the
securities referred to in subsection (b) of this Section 8.2 are convertible or
exchangeable, the options, rights or warrants or conversion or exchange rights,
as the case may be, shall be deemed to have expired or terminated on the date
when such price change became effective in respect of shares not theretofore
issued pursuant to the exercise or conversion or exchange thereof, and the
Company shall be deemed to have issued upon such date new options, rights or
warrants or convertible or exchangeable securities at the new price in respect
of the number of shares issuable upon the exercise of such options, rights or
warrants or the conversion or exchange of such convertible or exchangeable
securities.
8.3 SUBDIVISION AND COMBINATION. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
8.4 ADJUSTMENT IN NUMBER OF SECURITIES. Upon each adjustment
of the Exercise Price pursuant to the provisions of this Article 8, the number
of securities issuable upon the exercise of each Warrant shall be adjusted to
the nearest full number by multiplying the Exercise Price in effect immediately
prior to such adjustment by the number of securities issuable upon exercise of
the Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
8.5 RECLASSIFICATION, CONSOLIDATION, MERGER, ETC. In case of
any reclassification or change of the outstanding shares of Common Stock (other
than a change in par value to no par value, or from no par value to par value,
or as a result of a subdivision or combination), or in the
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case of any consolidation of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger in which the Company
is the surviving corporation and which does not result in any reclassification
or change of the outstanding shares of Common Stock, except a change as a result
of a subdivision or combination of such shares or a change in par value, as
aforesaid), or in the case of a sale or conveyance to another corporation of the
property of the Company as an entirety, the Holders shall thereafter have the
right to purchase the kind and number of shares of stock and other securities
and property receivable upon such reclassification, change, consolidation,
merger, sale or conveyance as if the Holders were the owners of the Shares
underlying the Warrants immediately prior to any such events, at a price equal
to the product of (x) the number of shares of Common Stock issuable upon
exercise of the Warrants and (y) the Exercise Price in effect immediately prior
to the record date for such reclassification, change, consolidation, merger,
sale or conveyance as if such Holders had exercised the Warrants.
8.6 NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES.
Notwithstanding anything herein to the contrary, no adjustment of the Exercise
Price shall be made:
(a) Upon the issuance or sale of the
Warrants or the shares of Common Stock issuable upon the
exercise of the Warrants; or
(b) Upon the issuance or sale of the shares
of Common Stock issued pursuant to the Public Offering;
(c) Upon the issuance of options pursuant to
the Company's employee stock option plan in effect on the date
hereof or the issuance or sale by
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the Company of any shares of Common Stock pursuant to the
exercise of any such options; or
(d) If the amount of said adjustment shall
be less than one cents (1(cent)) per security, provided,
however, that in such case any adjustment that would otherwise
be required then to be made shall be carried forward and shall
be made at the time of and together with the next subsequent
adjustment which, together with any adjustment so carried
forward, shall amount to at least one cents (1(cent)) per
security.
8.7 DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO
OUTSTANDING SECURITIES. In the event that the Company shall at any time prior to
the exercise of all Warrants declare a dividend (other than a dividend
consisting solely of shares of Common Stock or a cash dividend or distribution
payable out of current or retained earnings) or otherwise distribute to its
shareholders any monies, assets, property, rights, evidences of indebtedness,
securities (other than shares of Common Stock), whether issued by the Company or
by another person or entity, or any other thing of value, the Holders of the
unexercised Warrants shall thereafter be entitled, in addition to the shares of
Common Stock or other securities receivable upon the exercise thereof, to
receive, upon the exercise of such Warrants, the same monies, property, assets,
rights, evidences of indebtedness, securities or any other thing of value that
they would have been entitled to receive at the time of such dividend or
distribution. At the time of any such dividend or distribution, the Company
shall make appropriate reserves to ensure the timely performance of the
provisions of this Subsection 8.7.
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8.8 SUBSCRIPTION RIGHTS FOR SHARES OF COMMON STOCK OR OTHER
SECURITIES. In the case that the Company or an affiliate of the Company shall at
any time after the date hereof and prior to the exercise of all the Warrants
issue any rights to subscribe for shares of Common Stock or any other securities
of the Company or of such affiliate to all the shareholders of the Company, the
Holders of the unexercised Warrants shall be entitled, in addition to the shares
of Common Stock or other securities receivable upon the exercise of the
Warrants, to receive such rights at the time such rights are distributed to the
other shareholders of the Company.
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES.
Each Warrant Certificate is exchangeable without expense, upon the
surrender hereof by the registered Holder at the principal executive office of
the Company, for a new Warrant certificate of like tenor and date representing
in the aggregate the right to purchase the same number of securities in such
denominations as shall be designated by the Holder thereof at the time of such
surrender.
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Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. ELIMINATION OF FRACTIONAL INTERESTS.
The Company shall not be required to issue certificates representing
fractions of Shares upon the exercise of the Warrants, nor shall it be required
to issue scrip or pay cash in lieu of fractional interests, it being the intent
of the parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of Shares.
11. RESERVATION AND LISTING OF SECURITIES.
The Company shall at all times reserve and keep available out of its
authorized shares of Common Stock, solely for the purpose of issuance upon the
exercise of the Warrants, such number of shares of Common Stock as shall be
issuable upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Warrants and payment of the Exercise Price therefor, all Shares
issuable upon such exercise shall be duly and validly issued, fully paid,
nonassessable and not subject to the preemptive rights of any shareholder. As
long as the Warrants shall be outstanding, the Company shall use its best
efforts to cause all shares of Common Stock issuable upon the exercise of the
Warrants to be listed on the Nasdaq National Market.
12. NOTICES TO WARRANT HOLDERS.
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Nothing contained in this Agreement shall be construed as conferring
upon the Holder or Holders the right to vote or to consent or to receive notice
as a shareholder in respect of any meetings of shareholders for the election of
directors or any other matter, or as having any rights whatsoever as a
shareholder of the Company. If, however, at any time prior to the expiration of
the Warrants and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of
its shares of Common Stock for the purpose of entitling them
to receive a dividend or distribution payable otherwise than
in cash, or a cash dividend or distribution payable otherwise
than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the
books of the Company; or
(b) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the
Company or securities convertible into or exchangeable for
shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or
merger) or a sale of all or substantially all of its property,
assets and business as an entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
to the Holder or Holders of such event at least fifteen (15) days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the shareholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, options or
warrants, or
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entitled to vote on such proposed dissolution, liquidation, winding up or sale.
Such notice shall specify such record date or the date of closing the transfer
books, as the case may be. Failure to give such notice or any defect therein
shall not affect the validity of any action taken in connection with the
declaration or payment of any such dividend or distribution, or the issuance of
any convertible or exchangeable securities or subscription rights, options or
warrants, or any proposed dissolution, liquidation, winding up or sale.
13. NOTICES.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made when delivered,
or mailed by registered or certified mail, return receipt requested:
(a) If to a registered Holder of the Warrants, to the
address of such Holder as shown on the books of the Company;
or
(b) If to the Company, to the address set forth in
Section 3 of this Agreement or to such other address as the
Company may designate by notice to the Holders.
14. SUPPLEMENTS AND AMENDMENTS.
The Company and Gilford may from time to time supplement or amend this
Agreement without the approval of any Holders of the Warrants and/or Warrant
Securities in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and Gilford may deem necessary or
desirable and
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which the Company and Gilford deem not to adversely affect the interests of the
Holders of Warrant Certificates.
15. SUCCESSORS.
All the covenants and provisions of this Agreement by or for the
benefit of the Company and the Holders inure to the benefit of their respective
successors and assigns hereunder.
16. GOVERNING LAW.
This Agreement and each Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of New York and for all
purposes shall be construed in accordance with the laws of said State.
17. BENEFITS OF THIS AGREEMENT.
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and Gilford and any other registered Holder
or Holders of the Warrant Certificates or Warrant Securities any legal or
equitable right, remedy or claim under this Agreement; and this Agreement shall
be for the sole and exclusive benefit of the Company and Gilford and any other
Holder or Holders of the Warrant Certificates or Warrant Securities.
18. COUNTERPARTS.
This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and such counterparts shall together constitute but one and the same
instrument.
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the date first above written.
21st CENTURY HOLDING COMPANY
By:________________________________________
Name:
Title:
Attest:
________________________________ GILFORD SECURITIES INCORPORATED
By:________________________________________
Name:
Title:
25
<PAGE>
EXHIBIT A
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT") NOR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR
SOLD EXCEPT (I) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT
AND ANY APPLICABLE STATE SECURITIES LAWS, (II) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (III) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
ISSUER, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR APPLICALBE
STATE SECURITIES LAWS IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE COMMENCING ________________ ___, 1999, THROUGH
5:00 P.M., NEW YORK TIME, ____________ ___, 2003
NO. W-1 125,000 WARRANTS
WARRANT CERTIFICATE
This Warrant Certificate certifies that Gilford Securities Incorporated
or its registered assigns, is the registered holder of Warrants to purchase, at
any time from ___________ __, 1999 until 5:00 P.M. New York City time on
__________ __, 2003 ("Expiration Date"), up to 125,000 fully-paid and
non-assessable shares of common stock, $.01 par value ("Common Stock"), of 21st
Century Holding Company, a Florida corporation (the "Company"), at the initial
exercise price, subject to adjustment in certain events (the "Exercise Price"),
of $_____ per share of Common Stock upon surrender of this Warrant Certificate
and payment of the Exercise Price at an office or agency of the Company, but
subject to the conditions set forth herein and in the Warrant Agreement dated as
of ___________ ___, 1998 between the Company and Gilford Securities Incorporated
(the "Warrant Agreement"). Payment of the Exercise Price may be made in cash, or
by certified or official bank check in New York Clearing House funds payable to
the order of the Company, or any combination of cash or check.
26
<PAGE>
No Warrant may be exercised after 5:00 P.M, New York City time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to in a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain
events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax, or other governmental charge
imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
27
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated: __________ __, 1998 21st CENTURY HOLIDNG COMPANY
By:_______________________________________
Name:
Title:
Attest:
____________________________________
28
<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______ shares of Common
Stock and herewith tenders in payment for such securities cash or a certified or
official bank check payable in New York Clearing House Funds to the order of
21st Century Holding Company in the amount of $____________, all in accordance
with the terms hereof. The undersigned requests that a certificate for such
securities be registered in the name of ___________________________, whose
address is ____________________________________________, and that such
Certificate be delivered to _______________________________________, whose
address is _________________________________________________.
Dated: Signature:__________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
_______________________________________
_______________________________________
(Insert Social Security or Other
Identifying Number of Holder)
29
<PAGE>
FORM OF ASSIGNMENT
(TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH HOLDER
DESIRES TO TRANSFER THE WARRANT CERTIFICATE.)
FOR VALUE RECEIVED hereby sells, assigns and transfers
unto__________________________ (Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint , Attorney, to transfer the
within Warrant Certificate on the books of the within-named Company, with full
power of substitution.
Signature:__________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
_________________________________
_________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
30
EXHIBIT 10.5
REVOLVING CREDIT AND TERM LOAN AGREEMENT
BETWEEN
FLATIRON FUNDING COMPANY, LLC
AND
FPF, INC.
DATED AS OF SEPTEMBER ___, 1997
FEDERATED PREMIUM FINANCE, INC.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C> <C>
ARTICLE I
AMOUNTS AND TERMS OF THE ADVANCES
Section 1.01. Advances................................................................................... 1
Section 1.02. Making the Advances........................................................................ 1
Section 1.03. Fees....................................................................................... 1
Section 1.04. Reduction of the Maximum Credit Commitment................................................. 2
Section 1.05. Interest and Repayment..................................................................... 2
Section 1.06. Optional Prepayments....................................................................... 2
Section 1.07. Mandatory Prepayments...................................................................... 2
Section 1.08. Payments and Computations.................................................................. 3
Section 1.09. Due Dates for Obligations.................................................................. 3
Section 1.10. Access..................................................................................... 3
ARTICLE II
CONDITIONS OF LENDING
Section 2.01. Condition Precedent to Initial Advance..................................................... 4
Section 2.02. Conditions Precedent to All Advances....................................................... 4
Section 2.03. Reserves................................................................................... 5
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.01. Representations and Warranties of FPF...................................................... 5
ARTICLE IV
COVENANTS AND OTHER AGREEMENTS OF THE PARTIES
Section 4.01. Affirmative Covenants...................................................................... 6
Section 4.02. Loan Deposit Account and Collection Account................................................ 8
Section 4.03. Certain Powers of Lender................................................................... 9
Section 4.04. Lender Appointed Authorized Agent and Attorney-in-Fact..................................... 10
1
<PAGE>
Section 4.05. Information Regarding Collateral........................................................... 11
Section 4.06. FPF Covenants.............................................................................. 11
Section 4.07. Agreement Not to Institute Bankruptcy Proceedings.......................................... 14
Section 4.08. Further Assurances......................................................................... 14
ARTICLE V
AMORTIZATION EVENTS
Section 5.01. Amortization Events........................................................................ 14
ARTICLE VI
MISCELLANEOUS
Section 6.01. Amendments................................................................................. 16
Section 6.02. Notices.................................................................................... 16
Section 6.03. Waivers.................................................................................... 16
Section 6.04. Costs, Expenses and Taxes.................................................................. 16
Section 6.05. Limited Right of Set-off................................................................... 17
Section 6.06. Binding Effect............................................................................. 17
Section 6.07. Representations............................................................................ 18
Section 6.08. Governing Law.............................................................................. 18
Section 6.09. JURISDICTION............................................................................... 18
Section 6.10. WAIVER OF JURY TRIAL....................................................................... 18
Section 6.11. Severability of Provisions................................................................. 18
Section 6.12. Counterparts............................................................................... 19
Section 6.13. Captions................................................................................... 19
Section 6.14. Legal Holidays............................................................................. 19
Section 6.15. Advice from Independent Counsel............................................................ 19
Section 6.16. Judicial Interpretation.................................................................... 19
Exhibit A--Promissory Note A-1
Exhibit B--Security Agreement B-1
Exhibit C--Concentration Test C-1
Exhibit D--Request for Advance D-1
Exhibit E--Representations and Warranties E-1
Exhibit F--Closing Documents F-1
Exhibit G--Power of Attorney G-1
</TABLE>
2
<PAGE>
REVOLVING CREDIT AND TERM LOAN AGREEMENT
This REVOLVING CREDIT AND TERM LOAN AGREEMENT (the "Agreement") is made
as of September __, 1997 by and between FPF, INC., a Colorado corporation
("FPF"), and FLATIRON FUNDING COMPANY, LLC, a Delaware limited liability company
(the "Lender"). As used in this Agreement, capitalized terms not otherwise
defined herein are used with the respective meanings set forth in that certain
Agreement of Definitions, dated as of the date of this Agreement, among the
Lender, FPF, the Originator, the Residual Interest Holder and Flatiron.
ARTICLE I
AMOUNTS AND TERMS OF THE ADVANCES
Section 1.01. ADVANCES. The Lender agrees to make advances of funds
(the "Advances") to FPF under the terms and conditions of this Agreement. The
amount of an Advance is subject to Availability under a Borrowing Base
calculation, with maximum Advances outstanding not to exceed the Maximum Credit
Commitment. So long as Availability exists and subject to compliance with the
provisions hereof, FPF may receive Advances pursuant to this Agreement. The
Lender agrees, subject to the provisions hereof, to continuously provide
Advances during a period beginning on the date hereof and ending the earlier of
September 30, 2000 or upon the occurrence of an Amortization Event (such period
the "Revolving Period" and such termination date the "Revolving Period
Termination Date"); provided, that the Lender may, in its sole discretion,
extend the Revolving Period for an additional period of up to 24 months upon
written notice by the Lender to FPF made not later than 120 days prior to the
Revolving Period Termination Date setting forth the terms of such extension;
provided, further, that upon delivery of written acceptance of such terms by FPF
not later than 90 days prior to the Revolving Period Termination Date, and upon
FPF's acceptance of such extension, the terms "Revolving Period Termination
Date" and "Revolving Period" shall be deemed automatically amended to reflect
such extension. Following the Revolving Period Termination Date, Availability
under this Agreement shall be zero. FPF shall consult with Originator and shall
only agree to such extension with the prior written consent of Originator.
Section 1.02. MAKING THE ADVANCES. Each Advance shall require written
notice in the form included as Exhibit D hereto, given not later than 12:00 noon
(Denver, Colorado time) on a Business Day which is not less than one Business
Day prior to the date of the proposed Advance, by FPF to the Lender. Not later
than 2:00 p.m. (Denver, Colorado time) on the date of such Advance, subject to
fulfillment of the applicable conditions precedent set forth in Article II, the
Lender shall make such Advance available to FPF or, if so directed by FPF, the
Originator, by initiating a same day funds transfer pursuant to written
instructions provided to the Lender by FPF.
Section 1.03. FEES.
1
<PAGE>
(a) In consideration for the loan commitment pursuant to the
provisions hereof, FPF agrees to pay to the Lender the unpaid balance
of the Closing Fee, payable immediately upon the execution of this
Agreement by FPF. FPF's obligation to pay the Closing Fee shall be
subject to and payable solely from funds to be disbursed pursuant to
Section 2.06 of the Sale and Assignment Agreement. The Closing Fee is
fully earned and non-refundable as of the date hereof.
(b) FPF agrees to pay to the Lender the Commitment Fee,
monthly in arrears on the second Business Day of each calendar month
occurring during the Revolving Period. FPF's obligation to pay such
Commitment Fee shall be subject to and payable solely from funds
received pursuant to Section 2.02(a)(ii) of the Residual Agreement,
which funds shall be pledged and assigned to the Lender pursuant to the
Security Agreement.
Section 1.04. REDUCTION OF THE MAXIMUM CREDIT COMMITMENT. If at any
time FPF receives notice from the Residual Interest Holder that it intends to
reduce its funding commitment under the Residual Agreement, FPF shall have the
right, upon at least 60 days' notice to the Lender (and, except as provided in
Section 2.04(a) of the Residual Agreement, payment to the Lender of the
applicable Purchase Reduction Fee), to terminate in whole, or reduce in part,
the Maximum Credit Commitment; provided, that each partial reduction shall be in
the minimum amount of $250,000 provided, further, that if the Maximum Credit
Commitment shall be less than $250,000, the reduction must be in whole only.
FPF's obligation to pay such Yield Maintenance Payment shall be subject to and
payable solely from funds received pursuant to Section 2.04 of the Residual
Agreement, which funds shall be pledged and assigned to the Lender pursuant to
the Security Agreement.
Section 1.05. INTEREST AND REPAYMENT. FPF shall pay interest on the
aggregate unpaid principal amount of all Advances in accordance with a
non-recourse promissory note of FPF, in substantially the form of Exhibit A
hereto (the "Note"), evidencing the indebtedness resulting from such Advances
and delivered to the Lender pursuant to Section 2.01. The Note shall be payable
solely from the Collateral pledged with respect thereto.
Section 1.06. OPTIONAL PREPAYMENTS. FPF may, upon at least 60 days'
notice to the Lender stating the proposed date and principal amount of the
prepayment, and if such notice is given FPF shall, prepay the outstanding
principal amounts of the Advances from amounts other than collections from
Pledged Premium Receivables in whole only, together with (a) accrued interest to
the date of such prepayment on the amount prepaid and (b) the applicable Yield
Maintenance Payment, if any.
Section 1.07. MANDATORY PREPAYMENTS. If, at any time, the then
outstanding aggregate amount of all Advances shall exceed the lesser of the then
existing Maximum Credit Commitment or the Borrowing Base, FPF shall cause to be
prepaid on demand, solely from amounts received with respect thereto under the
Residual Agreement, the outstanding principal amount of the Advances in an
aggregate amount equal to such excess.
2
<PAGE>
Section 1.08. PAYMENTS AND COMPUTATIONS. FPF shall make each payment
hereunder and under the Note not later than 2:00 p.m. (Denver, Colorado time) on
the day when due in same day funds of U.S. dollars to the Lender at its address
referred to in Section 6.02, or pursuant to such other instructions as the
Lender may from time to time provide to FPF. FPF hereby authorizes the Lender,
if and to the extent payment is not made when due hereunder or under the Note,
to make Advances directly to itself for any such amount so due; provided,
however, that any such Advances made by the Lender shall not be deemed a waiver
of any payment default by FPF. All computations of interest, commitment fees and
other fees due hereunder shall be made by the Lender on the basis of a year of
360 days for the actual number of days (including the first day but excluding
the last day) occurring in the period for which such interest, commitment fees
or other fees are payable. Each determination by the Lender of an interest rate
hereunder shall be conclusive and binding for all purposes, absent manifest
error.
Section 1.09. DUE DATES FOR OBLIGATIONS. Subject to the provisions
hereof, the Obligations shall be payable as follows: (a) principal (applied
daily) and interest payments on the Advances and other Obligations shall be due
and payable monthly in arrears on the fourth Business Day of each month,
commencing on the fourth Business Day of the month immediately succeeding the
date hereof, (b) except as otherwise provided in Section 1.03, payment of all
fees and reimbursable expenses owing by FPF to the Lender hereunder or under any
other Borrowing Document shall be due no later than the fourth Business day of
the month immediately following the date on which such fees or reimbursable
expenses are incurred, (c) all other Obligations (including, without limitation,
the mandatory prepayment obligation set forth in Section 1.07) shall be either
payable as provided in the Borrowing Documents evidencing or describing such
Obligations or, if not so provided therein, shall be due upon demand and payable
on or before the tenth day after such demand, (d) to the extent not sooner paid,
all Obligations shall be due and payable in full on the Scheduled Maturity Date,
and (e) if any payment becomes due and payable on a day other than a Business
Day, then such payment shall be due and payable on the next succeeding Business
Day. Notwithstanding the above, the parties hereto agree that the Obligations
shall be non-recourse to FPF except to the extent expressly provided herein and
in the Security Agreement.
Section 1.10. ACCESS. Upon written request in writing by the Lender to
FPF, FPF shall provide the Lender or any representative or designee of Lender
(including, without limitation, the Lender's Funding Source) with full and
complete access to all books, records, financial statements and documents
requested by Lender to inspect the Collateral and to inspect, audit and make
extracts from all of FPF's records, financial statements, files and books of
account in support of the above. The Lender or any representative or designee of
the Lender shall have such access right, exercisable as frequently as the Lender
or any representative or designee of the Lender determines to be appropriate,
during normal business hours. Upon written request of the Lender or any
representative or designee of the Lender to FPF, FPF shall instruct its bank and
other financial institutions to make available to the Lender or any
representative or designee of the Lender such information and materials as the
Lender or any representative or designee of the Lender may request.
3
<PAGE>
ARTICLE II
CONDITIONS OF LENDING
Section 2.01. CONDITION PRECEDENT TO INITIAL ADVANCE. The obligation of
the Lender to make its initial Advance is subject to the condition precedent
that the Lender shall have received on or before the day of such Advance the
Closing Documents listed on Exhibit F, each dated prior to or as of the date of
the initial Advance, in form and substance satisfactory to the Lender.
Section 2.02. CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of
the Lender to make each Advance (including the initial Advance) shall be subject
to the further conditions precedent that on the date of such Advance the
following statements shall be true (and each of the giving of the applicable
notice requesting such Advance and the acceptance by FPF of the proceeds of such
Advance shall constitute a representation and warranty by FPF that on the date
of such Advance such statements are true):
(a) The representations and warranties of FPF contained in the
Borrowing Documents are correct on and as of the date of such Advance,
before and after giving effect to such Advance and to the application
of the proceeds therefrom, as though made on and as of such date.
(b) No event has occurred and is continuing, or would result
from such Advance or from the application of the proceeds therefrom,
which constitutes an Amortization Event or would constitute an
Amortization Event but for the requirement that notice be given or time
elapse or both.
(c) The Lender shall be satisfied, in its sole discretion,
with the examinations, including sampling and testing procedures of the
Premium Receivables Portfolio, performed pursuant to Section 1.10
hereof.
(d) FPF shall have taken any and all steps and made any and
all filings that are deemed reasonable, convenient, necessary, or
advisable by the Lender to protect and perfect the security interest of
the Lender or the Trustee on behalf of the Lender under the Security
Agreement with respect to all of the Collateral.
(e) The Lender shall have received payment of all amounts then
due and payable to the Lender under the Borrowing Documents.
(f) The Lender shall have received such other approvals,
opinions or documents as the Lender may reasonably request.
(g) The Lender shall have determined, in its sole discretion,
that the aggregate amount of Advances outstanding, after giving effect
to such Advance, does not exceed the lesser of the then existing
Maximum Credit Commitment or the Borrowing Base calculated as of the
date of such Advance.
(h) The Lender shall have determined, in its sole discretion,
that funds are available from Lender's Funding Source sufficient for
the Lender to fund such Advance.
4
<PAGE>
(i) FPF shall have received the Residual Advance with respect
to such Advance from the Residual Interest Holder in accordance with
the Residual Agreement.
(j) The Lender shall have received evidence that all
transactions contemplated by (i) the Sale and Assignment Agreement with
respect to Sales of the related Premium Receivables thereunder and (ii)
the Residual Agreement with respect to Residual Advances thereunder,
have been consummated on the date of such Advance, and all conditions
precedent to each such transaction have been satisfied.
Section 2.03. RESERVES. The Lender shall have a continuing right to
deduct reserves ("Reserves") in determining the Borrowing Base, and to increase
and decrease such Reserves from time to time, if and to the extent that, in the
Lender's sole judgment, such Reserves are necessary to protect the Lender
against any state of facts which does, or could, with notice or passage of time
or both, constitute an Amortization Event or have an adverse effect on any
Collateral. The Lender may, at its option, implement Reserves by designating as
ineligible a sufficient amount of Premium Receivables which Premium Receivables
would otherwise be Eligible Premium Receivables so as to reduce the Borrowing
Base by the amount of the intended Reserve. Without in any way limiting the
generality of the foregoing, the Lender may implement Reserves in such amounts
as the Lender deems appropriate in the event any Premium Receivables shall not
be in Return Premium Parity and amounts by which any Premium Receivables exceed
maximum amounts specified in the Concentration Test. If the Lender implements
any Reserve, the Lender shall provide FPF with timely written notice thereof and
the amount and basis for such Reserve.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.01. REPRESENTATIONS AND WARRANTIES OF FPF. FPF represents and
warrants to Lender that each of the representations and warranties of FPF set
forth in Sections 1 and 2 of Exhibit E hereto is true and complete as of the
date of this Agreement and as of the date of each Advance hereunder, except as
FPF has otherwise notified the Lender and its assignees (including, without
limitation, the Lender's Funding Source) in writing and the Lender and such
assignee(s), if applicable, have each, in its absolute discretion, consented in
writing to such exception(s).
ARTICLE IV
COVENANTS AND OTHER AGREEMENTS OF THE PARTIES
Section 4.01. AFFIRMATIVE COVENANTS. So long as the Note shall remain
unpaid or until the Revolving Period Termination Date, unless the Lender or its
assignee(s), as applicable, shall otherwise consent in writing:
(a) COMPLIANCE WITH LAWS, ETC. FPF shall comply in all
material respects with all applicable laws, rules, regulations and
orders, such compliance to include,
5
<PAGE>
without limitation, paying before the same become delinquent all
taxes, assessments and governmental charges imposed upon it or upon
its property except to the extent contested in good faith.
(b) REPRESENTATIONS AND WARRANTIES CORRECT. The
Representations and Warranties of FPF in Sections 1 and 2 of Exhibit C
hereto shall remain true and correct.
(c) INDEMNIFICATION AND RELEASE BY FPF. FPF shall indemnify,
defend and save and hold harmless Lender, its Affiliates, each of the
Lender's Funding Sources or other assignee of the Lender and the
respective directors, officers, agents, attorneys and employees of each
(collectively, the "Indemnitees") from and against, and shall promptly
pay any and all losses, liabilities, damages, costs, expenses and
charges (including the reasonable fees, charges and disbursements of
legal counsel) incurred by any Indemnitee as a result of (i) any
failure of FPF to perform any of its obligations under any Borrowing
Document, (ii) any failure of any representation by FPF to be correct
in all respects when made, and (iii) any claim, demand or cause of
action, or any individual proceeding, whether meritorious or not,
brought or asserted against any Indemnitee which relates to or arises
out of the Borrowing Documents, the Maximum Credit Commitment, the
Collateral or any transaction contemplated by, or the relationship
between FPF and the Lender, or any action or actions by the Lender
under, the Borrowing Documents; provided, that no Indemnitee shall be
entitled to indemnification under this Section for matters caused
solely by Indemnitee's gross negligence or willful misconduct.
FPF hereby releases and exculpates each of the Indemnitees
from any liability arising from any acts under this Agreement or in
furtherance thereof, whether as agent, attorney-in-fact or otherwise,
whether of omission or commission, and whether based upon any error of
judgment or mistake of law or fact, except for willful misconduct. In
no event will any Indemnitee have any liability to FPF for lost profits
or other special or consequential damages.
(d) NOTICE OF DEFAULT. Immediately upon becoming aware of the
existence of any condition or event which constitutes a default by any
Loan Party under the Borrowing Documents or a breach by FPF of any
representation or warranty under Section 3.02 of the Sale and
Assignment Agreement, a written notice from FPF to the Lender and each
other Loan Party shall be furnished describing its nature and the
period of existence and what action FPF or such defaulting Loan Party,
as applicable, is taking or proposes to take with respect thereto.
(e) REPORTING REQUIREMENTS. FPF shall furnish to the Lender
or its designee:
(i) within 45 days after the end of each fiscal
quarter of FPF (commencing with the quarter ending September
30, 1997, an unaudited balance sheet and income statement
(prepared in accordance with GAAP) for FPF covering the
preceding quarter, in each case certified by a Responsible
Officer of FPF to be true, accurate and complete copies of
such financial statements;
6
<PAGE>
(ii) on the earlier of (A) fifteen days after
delivery by an Independent Public Accountant, if any, to FPF
or (B) March 15 of each year beginning March 15, 1998 a
balance sheet and income statement (prepared in accordance
with GAAP) for FPF covering such preceding fiscal year
prepared by FPF or its accountants, in each case certified by
a Responsible Officer of FPF to be true, accurate and complete
copies of such financial statements;
(iii) promptly after the filing or receiving thereof,
copies of all reports and notices, if any, which FPF files
under ERISA with the Internal Revenue Service or PBGC or the
U.S. Department of Labor or which FPF receives from any such
Person;
(iv) promptly after filing thereof, copies of all
federal and state tax returns filed by, or on behalf of, FPF;
and
(v) such other information respecting the condition
or operations, financial or otherwise, of FPF as the Lender
may from time to time reasonably request.
(f) REPORT ON PROCEEDINGS. Promptly upon (but in no event more
than three Business Days following) FPF becoming aware of:
(i) any pending investigation of it, the
Originator, the Residual Interest Holder or any of their
respective employees by any governmental authority or agency;
(ii) any court or administrative proceeding which
may involve the possibility of materially and adversely
affecting the properties, business, prospects, profits,
management, financial position, results of operation or
general condition of it, the Originator or the Residual
Interest Holder; or
(iii) an event or development (including, without
limitation, a change in any relevant law or regulation) which
in the reasonable judgment of FPF could have a material
adverse impact on the properties, business, prospects,
profits, management, financial position, results of operations
or general condition of it, the Originator or the Residual
Interest Holder;
such information shall be provided by FPF to the Lender or its
designee.
Section 4.02. LOAN DEPOSIT ACCOUNT AND COLLECTION ACCOUNT.
(a) FPF shall maintain or cause to be maintained with the
Lender or Lender's designee a deposit account subject to a first
priority perfected security interest in favor of the Lender and its
assignees (the "Loan Deposit Account") into which FPF or the Servicer
on its behalf shall deposit or cause to be deposited all payments
received from Obligors with respect to the Premium Receivables serviced
by the Servicer. On a daily
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basis, FPF shall deposit or shall cause the Servicer to deposit, or any
of its Affiliates, officers, employees, agents or other Persons acting
for or in concert with FPF shall deposit or cause to be deposited into
the Loan Deposit Account, on or before the first Business Day following
receipt thereof, all payments and receipts as provided in the Premium
Receivable Servicing Agreement. Until deposited, all such payments and
receipts held by the Servicer, FPF or any such Affiliates, employees,
officers, agents or other Persons shall be held in trust for the
Lender, separate or apart from any other funds or assets of FPF,
Servicer or any such Affiliate, officer, employee, agent or other
Person. The Lender shall periodically transfer or cause to be
transferred all amounts on deposit in the Loan Deposit Account into one
or more collateral or collection accounts maintained by or for the
benefit of the Lender and its assignees (collectively, the "Collection
Account").
(b) Not later than the first Business Day following
verification by the Lender of amounts deposited into the Collection
Account, the Lender shall take the following actions:
(i) credit against the principal balance of
outstanding Advances all deposits representing Principal
Collections; and
(ii) calculate the amount of any deposits
representing downpayments by Obligors or other amounts not
required to be applied against amounts due under this
Agreement, and such amounts shall be returned timely to FPF or
its designee.
(c) On the fourth Business Day of each calendar month, amounts
on deposit in the Collection Account equal to total Collections from
the prior month less amounts described in (b) above ("Total Available
Collections") shall be applied in the following manner:
(i) (A) first, to the payment of all accrued and
unpaid fees payable by FPF to the Lender under any Borrowing
Document (including, without limitation, the Closing Fee, the
Commitment Fee, and the Yield Maintenance Payment and any
indemnification payments), (B) second, to the payment of any
indemnification obligation (C) third, to accrued and unpaid
interest owing under the Note.
(ii) upon the occurrence of an Amortization Event,
all remaining amounts to pay down the principal balance of
outstanding Advances;
(iii) to the Servicer, all accrued and unpaid Premium
Receivable Servicing Fees as of the end of the immediately
preceding Reporting Period; and
(iv) in the event that the Lender has implemented
Reserves pursuant to Section 2.03 hereof and such Reserves
have not been fully satisfied through the
<PAGE>
designating as ineligible otherwise Eligible Premium
Receivables, to the Lender, the amount necessary, if any, to
satisfy such Reserves; and
(v) all other Obligations and reimbursable expenses
due and payable by FPF to Lender under any Borrowing Document
and any indemnification payment due and payable not provided
for in 4.02(c)(i) above, which obligations, expenses and
indemnity payments shall not exceed $3,000 in the aggregate
for any calendar year; and
(vi) so long as no Amortization Event has occurred
and is continuing, the amount by which Total Available
Collections exceed payments made pursuant to 4.02(c)(i)
through (v) shall be paid to the Residual Interest Holder
pursuant to the Residual Agreement not later than the sixth
Business Day of each calendar month; and
(d) Monies in the Collection Account may be invested as
determined by the Lender in accordance with the Premium Receivable
Servicing Agreement, and the earnings of which shall inure to the
benefit of the Lender.
(e) If an Amortization Event has occurred and is continuing,
FPF irrevocably waives the right to direct the application of any and
all payments at any time or times hereafter received by the Lender from
or on behalf of FPF and FPF irrevocably agrees that the Lender shall
continue to have the exclusive right to apply any and all such payments
as provided in this Section 4.02; provided, that upon payment of all
such Obligations, all such remaining payments shall be applied pursuant
to the Residual Agreement.
Section 4.03. CERTAIN POWERS OF LENDER. The Lender may, at any time,
whether or not an Amortization Event has occurred:
(a) notify any Obligor, insurance company, Agent or other
account debtor that the Premium Receivables have been conveyed by the
Originator to FPF and that the Collateral which includes a monetary
obligation has been assigned to the Lender by FPF and following an
Event of Servicer Default that payment thereof is to be made to the
order of and directly to the Lender;
(b) send, or cause to be sent by its designee, requests (which
may identify the sender by a pseudonym) for verification of Premium
Receivables and other Collateral directly to any debtor, insurance
company, Agent or any other obligor or any bailee with respect thereto;
and
(c) demand, collect or enforce payment to any Premium
Receivables or such other Collateral, upon the failure of the Servicer
to do so as described in the Premium Finance Servicing Agreement but
without any duty to do so, and the Lender shall not be liable for any
failure to collect or enforce payment thereof. At the Lender's request,
all invoices and statements sent to any Obligor, other obligor, the
Lender or its designee,
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Issuing Insurance Company, Agent or other bailee, shall state that the
Premium Receivables and other Collateral have been conveyed by the
Originator to FPF, that the Premium Receivables and other Collateral
have been assigned by FPF to the Lender or the Trustee on behalf of the
Lender and are payable directly and only to the Lender, subject to the
terms of this Agreement.
Section 4.04. LENDER APPOINTED AUTHORIZED AGENT AND ATTORNEY-IN-FACT.
FPF hereby appoints the Lender and any designee of the Lender as FPF's
authorized agent and attorney-in-fact and authorizes the Lender or such
designee, at FPF's sole expense, to exercise at any times in the Lender's or
such designee's discretion all or any of the following powers, which powers of
attorney, being coupled with an interest, shall be irrevocable until all
Obligations have been paid in full:
(a) receive, take, endorse, assign, deliver, accept and
deposit, in the name of the Lender or FPF, any and all cash, checks,
commercial paper, drafts, remittances and other instruments and
documents relating to the Collateral;
(b) transmit to Obligors, Issuing Insurance Companies, Agents,
other obligors or any bailees (including the Lender or its designee)
notice of the interest of the Lender in the Collateral or request from
account Obligors, Issuing Insurance Companies, Agents or such other
obligors or bailees at any time, in the name of FPF or the Lender or
any designee of the Lender, information concerning the Collateral and
any amounts owing with respect thereto;
(c) notify Obligors, Issuing Insurance Companies, Agents or
other obligors to make payment directly to the Lender, or notify bailee
(including the Lender or its designee) as to the disposition of
Collateral;
(d) take or bring, in the name of the Lender or FPF, all
steps, actions, suits or proceedings deemed by the Lender or its
designee necessary or desirable to direct collection of or other
realization upon the accounts and other Collateral or to otherwise
enforce the rights of the Lender or its designee with respect to any of
the Collateral;
(e) after an Amortization Event, change the address for
delivery of mail to FPF and to receive and open mail addressed to FPF;
(f) after an Amortization Event, extend the time of payment
of, compromise or settle for cash, credit, return of merchandise, and
upon any terms or conditions, any and all accounts or other Collateral
which includes a monetary obligation and discharge or release the
Obligors or other obligor, without affecting any of the Obligations;
and
(g) execute in the name of FPF and file against FPF in favor
of the Lender and its assignees financing statements or amendments with
respect to the Collateral.
In furtherance of the foregoing and prior to the initial Advance
hereunder, FPF shall execute and deliver to the Lender a power of attorney in
the form of Exhibit G attached hereto.
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Section 4.05. INFORMATION REGARDING COLLATERAL. On each Business Day,
FPF shall electronically transmit to the Lender, in the manner specified by the
Lender, information regarding the origination and payment status of the Premium
Receivables which it has received from the Servicer. All such information shall
be, to the knowledge of FPF, true and correct as of the time of transmittal and
such electronic transmission shall constitute certification to such effect. At
the Lender's request, FPF shall deliver written material and reports relating to
the Premium Receivables to the Lender.
Section 4.06. FPF COVENANTS. So long as the Note shall remain unpaid or
prior to the Revolving Period Termination Date, without the written consent of
the Lender or its assignee, as applicable:
(a) FPF shall not engage in any business or activity other
than in connection with the acquisition of Premium Receivables and the
activities contemplated hereby and in the other Borrowing Documents,
and in connection with the issuance of additional notes and loan
agreements substantially similar to this Agreement and the other
Borrowing Documents.
(b) FPF shall not consolidate or merge with or into any other
Person (other than Flatiron) or convey or transfer its properties and
assets substantially as an entirety to any Person.
(c) The funds and other assets of FPF shall not be commingled
with those of any other Person.
(d) FPF shall not be, become or hold itself out as being
liable for the debts of any other Person.
(e) FPF shall not form, or cause to be formed, any
subsidiaries.
(f) FPF shall act solely in its own name and through its duly
authorized officers or agents in the conduct of its business, and shall
conduct its business so as not to mislead others as to the identity of
the Person with which they are concerned.
(g) FPF shall maintain its records and books of account and
shall not commingle its records and books of account with the records
and books of account of any other Person. The books of FPF may be kept
(subject to any provision of applicable law) inside or outside the
State of Colorado at such place or places as may be designated from
time to time by the board of directors or in the bylaws of FPF.
(h) All actions of FPF shall be taken by a duly authorized
officer of FPF.
(i) FPF shall not amend, alter, change or repeal any provision
contained in this Section 4.06.
(j) FPF shall not amend its articles of incorporation.
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(k) FPF shall not amend, modify, extend or waive any term of,
or any requirement, in any material respect, under any Loan Document or
Borrowing Document except with respect to any Premium Receivable which
may be amended, modified, extended or waived in accordance with the
Premium Receivable Servicing Agreement.
(l) All audited financial statements of FPF that are
consolidated with those of Flatiron or any Affiliate thereof will
contain detailed notes clearly stating that (i) all of FPF's assets are
owned by FPF and not available to satisfy the claims of creditors of
any other Person, and (ii) FPF is a separate Person with creditors who
have received ownership and/or security interests in FPF's assets.
(m) FPF shall strictly observe legal formalities in its
dealings with Flatiron, any Affiliate thereof or any other Person, and
funds or other assets of FPF shall not be commingled with those of
Flatiron, any Affiliate thereof or any other Person. FPF shall not
maintain joint bank accounts or other depository accounts to which
Flatiron, any Affiliate thereof or any other Person has independent
access except as otherwise provided or contemplated herein. FPF's funds
shall not at any time be pooled with any funds of Flatiron, any
Affiliate thereof or any other Person.
(n) FPF shall pay to Flatiron (or any Affiliate thereof) the
marginal increase (or, in the absence of such increase, the market
amount of its portion) of the premium payable with respect to any
insurance policy that covers FPF and Flatiron (or any Affiliate
thereof), but FPF shall not, directly or indirectly, be named or enter
into an agreement to be named, as a direct or contingent beneficiary or
loss payee, under any such insurance policy, with respect to any
amounts payable due to occurrences or events related to Flatiron (or
any Affiliate thereof); provided, however, that FPF shall maintain, at
its own expense, a blanket fidelity bond and an errors and omissions
insurance policy, each in form and content acceptable to the Lender and
its assignee(s), in the amount of (i) with respect to such fidelity
bond, $500,000 and (ii) with respect to errors and omissions insurance,
which may be combined with a directors and officers errors and
omissions insurance policy, $1,000,000, and pursuant to which the
Lender has been named as an additional loss payee or beneficiary of
each such fidelity bond and errors and omissions insurance policy;
provided, further, that FPF shall be deemed to have complied with this
provision if one of its Affiliates has such fidelity bond and errors
and omissions policy coverage and, by the terms of such fidelity bond
and errors and omission policy, the coverage afforded thereunder
extends to FPF; and provided, further, that any such fidelity bond and
errors and omissions insurance policy shall not be cancelled or
modified without the prior written consent of the Lender and its
assignee(s), if applicable.
(o) FPF shall maintain arm's length relationships with
Flatiron (and any Affiliate thereof). Any Person that renders or
otherwise furnishes services to FPF shall be compensated by FPF at
market rates for such services it renders or otherwise furnishes to
FPF. FPF shall not hold itself out to be responsible for the debts of
Flatiron or the decisions or actions respecting the daily business and
affairs of Flatiron.
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<PAGE>
(p) At all times, except in the event of a temporary vacancy,
at least one of the directors of FPF shall not be a director, officer,
employee or greater than 5% shareholder of any direct or ultimate
parent, or Affiliate of the parent, of FPF; provided, however, that
such independent director may serve in similar capacities for other
"special purpose entities" formed by FPF's Affiliates, and there shall
not be allowed a fundamental change to the articles of incorporation of
FPF without the unanimous consent of all directors thereof and written
consent of the Lender or its assignee(s), as applicable. In the event
of the resignation of the director of FPF whose service satisfies the
foregoing requirement, the directors of FPF, as may be appropriate,
shall accept as a director an individual to fill such vacancy who meets
the criteria set out in the foregoing sentence.
(q) FPF shall (i) observe all statutory formalities, (ii)
conduct its operations so as not to be substantively consolidated with
any other Person or to have its separate existence disregarded in any
state or federal proceeding, (iii) keep in full effect its existence,
rights and franchises as a corporation under the laws of Colorado and
obtain and preserve its qualification to do business in each
jurisdiction in which such qualification is or shall be necessary to
protect the validity and enforceability of its activities in all
respects and to protect the validity and enforceability of this
Agreement, and (iv) incur no debt except as otherwise provided herein
and in its articles of incorporation.
(r) FPF shall engage in only (i) the acquisition, ownership,
servicing, selling and pledging of the property Sold to FPF pursuant to
this Agreement, the other Borrowing Documents and similar agreements
with other originators of Premium Receivables, (ii) the exercise of any
powers permitted of corporations under the corporate law of the State
of Colorado which are incidental to the foregoing or necessary,
suitable or convenient to accomplish the foregoing, and (iii) the
exercise of any other powers permitted under its articles of
incorporation. FPF shall not (A) dissolve or liquidate in whole or in
part, (B) own any subsidiary corporation or, except as provided in the
Borrowing Documents, lend or advance any moneys to, or make an
investment in, any Person, (C) (1) commence any case, proceeding or
other action under any existing or future bankruptcy, insolvency or
similar law seeking to have an order for relief entered with respect to
it, or seeking reorganization, arrangement, adjustment, wind-up,
liquidation, dissolution, composition or other relief with respect to
it or its debts, (2) seek appointment of a receiver, trustee, custodian
or other similar official for it or any part of its assets, (3) make a
general assignment for the benefit of creditors, or (4) take any action
in furtherance of, or consenting to, or acquiescing in, any of the
foregoing, or (D) guarantee (directly or indirectly), endorse or
otherwise become contingently liable (directly or indirectly) for the
obligations of, or own or purchase any stock, obligations or securities
of or any other interest in, or make any capital contribution to, any
other Person.
(s) FPF shall be licensed as a premium insurance finance
company under the laws of any state where such licensing is required so
as not to adversely affect (i) its
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ability to conduct operations in each such state as contemplated under
this Agreement and the other Borrowing Documents and (ii) the
Collateral.
Section 4.07. AGREEMENT NOT TO INSTITUTE BANKRUPTCY PROCEEDINGS. For a
period of one year and one day following the later to occur of (a) the date on
which the Note is paid in full or (b) the Revolving Period Termination Date, FPF
shall not voluntarily institute any proceedings to adjudicate FPF or the Lender
bankrupt or insolvent, consent to the institution of bankruptcy or insolvency
proceedings against FPF or the Lender, file a petition seeking or consenting to
reorganization or relief under any applicable federal or state law relating to
bankruptcy, consent to the appointment of a receiver, liquidator, assignee,
trustee, sequestrator (or other similar official) of FPF or the Lender or a
substantial part of its or their property or admit its or their inability to pay
its or their debts generally as they become due or authorize any of the
foregoing to be done or taken on behalf of FPF or the Lender. This Section 4.07
shall survive the termination of this Agreement.
Section 4.08. FURTHER ASSURANCES. In addition to all other Obligations,
FPF agrees to execute such other documents (including additional promissory
notes evidencing the Advances (provided, that FPF's aggregate liability for the
Obligations is not increased thereby)) and to otherwise provide its reasonable
cooperation as requested from time to time by the Lender in order (a) to
evidence, secure and perfect the Obligations and the security interests securing
payment and performance of the same and (b) to assist the Lender in a
securitization of the Obligations and the Borrowing Documents, or any portion
thereof.
ARTICLE V
AMORTIZATION EVENTS
Section 5.01. AMORTIZATION EVENTS. If any of the following events
(each, an "Amortization Event") shall occur and be continuing:
(a) FPF shall fail to pay any principal of, or interest on,
the Note when the same becomes due and payable; or
(b) Any representation, warranty or statement made by FPF in
any of the Borrowing Documents shall prove to be incorrect in any
material respect as of the date made; or
(c) Failure on the part of FPF duly to observe or perform any
covenant or agreement of FPF set forth in any of the Borrowing
Documents; or
(d) Any petition or application for any relief under the
bankruptcy laws of the United States now or hereafter in effect or
under any insolvency, reorganization, receivership, readjustment of
debt, dissolution or liquidation law or statute of any jurisdiction now
or hereafter in effect (whether at law or in equity) is filed by or
against FPF or any guarantor; or
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(e) The assignment or attempted assignment by FPF of any of
the Borrowing Documents, except as expressly permitted thereunder, or
the Granting by FPF of any Lien on any Collateral to other than the
Lender or its assignee(s); or
(f) A judgment of any competent court or tribunal in the
United States of America for the payment of money in an amount of
$100,000 or more shall be rendered against FPF and shall remain
unsatisfied and undischarged for a period of 30 days without the
issuance of a stay of execution with respect thereto; or
(g) Any provision under the Security Agreement after delivery
thereof pursuant to Section 2.01 shall for any reasons cease to be
valid and binding on FPF or FPF shall so state in writing; or
(h) The Security Agreement or the Borrowing Documents after
delivery thereof pursuant to Section 2.01 shall for any reason (other
than pursuant to the terms thereof) cease to create a valid and
perfected first priority security interest in any of the Collateral
purported to be covered thereby; or
(i) FPF is dissolved or fails to maintain its corporate
existence in good standing, or the usual business of FPF ceases or is
suspended; or
(j) An event or development (including, without limitation, a
change in any relevant law or regulation) shall occur which could
reasonably be expected by the Lender to have a material adverse impact
on (i) the value or collectibility of the Collateral or (ii) FPF's
ability to perform its obligations under the Borrowing Documents; or
(k) The Loss Amount Trigger shall be exceeded; or
(l) The Fixed Charge Coverage Test shall fail to be met; or
(m) An Event of Servicing Default shall have occurred; or
(n) An Originator Trigger Event shall have occurred; or
(o) A Residual Agreement Default shall have occurred;
then, the Lender may, by notice to FPF, (A) declare its obligation to make
Advances to be terminated, whereupon the same shall forthwith terminate, (B)
declare the Revolving Period to be terminated pursuant to Section 1.01 hereof
whereupon the Note, all such interest and all such amounts shall become payable
in accordance with Section 4.02(e) hereof, and (C) exercise any and all other
rights, powers and remedies available to the Lender under the Borrowing
Documents or at law or in equity; provided, however, that in the event of any
petition, application or filing for relief with respect to FPF under the
Bankruptcy Code, (x) the obligation of the Lender to make Advances shall
automatically be terminated and (y) the Advances, the Note, all such interest
and all such amounts evidenced by the Note shall automatically become and be
immediately due and payable, without presentment, demand, protest or any notice
of any
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kind, all of which are hereby expressly waived by FPF. Notwithstanding
anything herein to the contrary, Originator is irrevocably appointed
attorney-in-fact for FPF to perform any and all obligations necessary to cure
the Amortization Event as specified in Section
5.01(a)(b)(c)(e)(g)(h)(j)(l)(m)(n) and (o) and the amounts expended by
Originator to cure such Amortization Event shall be immediately paid by FPF to
Originator upon demand. Originator shall have a reasonable time not to exceed
the cure periods specified therein or, if not specified, 30 days following
receipt of written notice to cure any such Amortization Event.
ARTICLE VI
MISCELLANEOUS
Section 6.01. AMENDMENTS. This Agreement and the Note may be amended
from time to time by a written amendment duly executed and delivered by FPF and
the Lender with the prior written consent of the Lender assignee(s), if any, as
the case may be, and no waiver of any of the terms hereof or thereof shall be
effective unless it is in writing and signed by the party or parties whose
rights are being waived and the Lender's assignee, if any.
Section 6.02. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be delivered personally
or mailed by first-class registered or certified mail, postage prepaid, or by
telephonic facsimile transmission, electronic mail and overnight delivery
service, postage prepaid, to the parties to this Agreement; provided, that
notices shall be effective upon receipt, and in any case addressed as follows:
if to FPF, at 1801 California Street, Suite 3920, Denver, Colorado 80202,
Attention: Mr. Robert A. Pinkerton; and if to the Lender, at 1801 California
Street, Suite 3920, Denver, Colorado 80202, Attention: Kathleen McCarty; or, as
to each party, at such other address as shall be designated by such party in a
written notice to the other party.
Section 6.03. WAIVERS. No failure or delay on the part of the Lender or
any assignee of the Lender in exercising any power, right or remedy under this
Agreement, the Note or any other Borrowing Document shall operate as a waiver
thereof, nor shall any single or partial exercise of any such power, right or
remedy preclude any other or further exercise thereof or the exercise of any
other power, right or remedy. No such waiver shall extend to any subsequent or
other default or impair any rights consequent thereon, except to the extent
expressly so waived. Each of the rights, powers and remedies described in this
Agreement and the other Borrowing Documents is cumulative and not exclusive of,
and shall not prejudice, any other right, power or remedy provided in this
Agreement, the other Borrowing Documents or by law. Each such right, power and
remedy may be exercised from time to time as deemed necessary by the Lender or
the Lender's assignee(s), as applicable, and in such order and manner as the
Lender or the Lender's assignee(s), as applicable, may determine. FPF hereby
acknowledges and agrees that, with respect to a violation or breach by FPF or an
Affiliate of FPF, of any representation, warranty, covenant or other term or
provision of this Agreement or any of the other Borrowing Documents, it shall be
FPF's obligation to prepare and obtain a written waiver for such breaches or
violations from the Lender or the Lender's assignee(s), as applicable. The
Lender or the Lender's assignee(s), as applicable, may grant or deny any such
requested waiver in its sole and absolute
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discretion. At no time may FPF infer a course of dealing among the parties that
would negate the requirement to obtain a written waiver from the Lender or the
Lender's assignee(s), as applicable.
Section 6.04. COSTS, EXPENSES AND TAXES. FPF agrees to pay on demand
all costs and expenses in connection with the preparation, execution, delivery,
filing, recording, administration, modification and amendment of this Agreement,
the Note and the other Borrowing Documents, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for the Lender with
respect thereto and with respect to advising the Lender as to its rights and
responsibilities under this Agreement. FPF further agrees to pay on demand all
costs and expenses, if any (including reasonable counsel fees and expenses), in
connection with the enforcement (whether through negotiations, legal proceedings
or otherwise) of this Agreement, the Note and the other Borrowing Documents,
including, without limitation, reasonable counsel fees and expenses in
connection with the enforcement of rights under this Section 6.04. In addition,
FPF agrees to pay any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of this Agreement, the
Note and the other Borrowing Documents, and agrees to hold the Lender harmless
from and against any and all liabilities with respect to or resulting from any
delay in paying or omission to pay such taxes.
Section 6.05. LIMITED RIGHT OF SET-OFF. Upon the occurrence and during
the continuance of any Amortization Event, the Lender is hereby authorized at
any time and from time to time, to the fullest extent permitted by law, to set
off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by the Lender to or for the credit or the account of FPF against any and all of
the Obligations now or hereafter existing under this Agreement, the Note or the
other Borrowing Documents, whether or not the Lender shall have made any demand
under this Agreement or the Note or the other Borrowing Documents and although
such obligations may be unmatured. The Lender agrees promptly to notify FPF
after any such set-off and application; provided, that the failure to give such
notice shall not affect the validity of such set-off and application. The rights
of the Lender under this Section are in addition to other rights and remedies
(including, without limitation, other rights of set-off) which the Lender may
have. Notwithstanding the foregoing, the Lender shall have no right to set off
and apply any other funds or deposits held by the Lender with respect to any
other loan to or indebtedness of FPF.
Section 6.06. BINDING EFFECT; ASSIGNMENTS.
(a) This Agreement shall be binding upon and inure to the
benefit of FPF and the Lender and their respective successors and
assigns, except that FPF shall not have the right to assign its rights
hereunder or any interest herein without the prior written consent of
the Lender or its assignee(s), as applicable.
(b) Notwithstanding any other provision set forth in this
Agreement, the Lender may at any time create a security interest in or
assign all or any portion of its rights under this Agreement and the
other Borrowing Documents (including, without
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limitation, the Advances owing to it and the Note held by it) in favor
of any other Person. Without limiting the generality of the foregoing,
all representations, covenants and agreements in this Agreement which
expressly confer rights upon the Lender shall be for the benefit of and
run directly to each of the Lender's assignees or designees and each
such assignee or designee shall be entitled to rely on and enforce such
representations, covenants and agreements to the same extent as if it
were a party hereto.
Section 6.07. REPRESENTATIONS. The respective agreements,
representations, warranties and other statements by FPF and the Lender set forth
in or made pursuant to this Agreement shall remain in full force and effect and
will survive each Advance.
Section 6.08. GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE
OF COLORADO WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS.
Section 6.09. JURISDICTION. THE PARTIES HERETO HEREBY IRREVOCABLY
SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF COLORADO AND
THE UNITED STATES DISTRICT COURT OF COLORADO IN ANY ACTION OR PROCEEDING ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTE AND THE PARTIES HEREBY
IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE
HEARD AND DETERMINED IN SUCH COURTS. THE PARTIES HEREBY IRREVOCABLY WAIVE, TO
THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT
FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING AND IRREVOCABLY CONSENT TO
THE SERVICE OF ANY SUMMONS AND COMPLAINT AND ANY OTHER PROCESS BY THE MAILING OF
COPIES OF SUCH PROCESS TO THEM AT THEIR RESPECTIVE ADDRESSES AS SPECIFIED IN
SECTION 6.02. THE PARTIES HEREBY AGREE THAT A FINAL JUDGMENT IN ANY SUCH 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. NOTHING IN THIS
SECTION 6.09 SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE LEGAL PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW OR PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OR
ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT OR
THE NOTE TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION.
Section 6.10. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTE.
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Section 6.11. SEVERABILITY OF PROVISIONS. Any part, provision,
agreement, representation, warranty or covenant of this Agreement or the Note
which is prohibited or unenforceable or is held to be void or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. To the extent permitted by applicable law, the parties waive
any provision of law which prohibits or renders void or unenforceable any
provision hereof. If the invalidity of any part, provision, agreement,
representation, warranty or covenant of this Agreement or the Note shall deprive
any party of the economic benefit intended to be conferred by this Agreement or
the Note, the parties shall negotiate in good faith to develop a structure the
economic effect of which is as nearly as possible the same as the economic
effect of the transactions contemplated hereunder without regard to such
invalidity.
Section 6.12. COUNTERPARTS. For the purpose of facilitating the
execution of this Agreement and for other purposes, this Agreement may be
executed simultaneously in any number of counterparts, each of which shall be
deemed to be an original, and together shall constitute and be one and the same
instrument.
Section 6.13. CAPTIONS. The article, paragraph and other headings
contained in this Agreement and the Note are inserted for convenience only and
shall not in any way affect the meaning or construction of any provision of this
Agreement or the Note.
Section 6.14. LEGAL HOLIDAYS. In the case where the date on which any
action required to be taken, document required to be delivered or payment
required to be made is not a Business Day in New York, New York or Denver,
Colorado, such action, delivery or payment need not be made on that date, but
may be made on the next succeeding Business Day.
Section 6.15. ADVICE FROM INDEPENDENT COUNSEL. The parties understand
that this Agreement and the other Borrowing Documents are legally binding
agreements that may affect such party's rights. Each party represents to the
other that it has received legal advice from counsel of its choice regarding the
meaning and legal significance of this Agreement and the other Borrowing
Documents and that it is satisfied with its legal counsel and the advice
received from it.
Section 6.16. JUDICIAL INTERPRETATION. Should any provision of this
Agreement or the other Borrowing Documents require judicial interpretation, it
is agreed that a court interpreting or construing the same shall not apply a
presumption that the terms hereof or thereof shall be more strictly construed
against any Person by reason of the rule of construction that a document is to
be construed more strictly against the Person who itself or through its agent
prepared the same, it being agreed that each party has participated in the
preparation of this Agreement and the other Borrowing Documents.
(SIGNATURE PAGE FOLLOWS)
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IN WITNESS WHEREOF, the parties hereto have caused this Revolving
Credit and Term Loan Agreement to be executed by their respective officers
thereunto duly authorized, as of the date first above written.
FPF, INC.
Bruce I. Lundy
Executive Vice President
FLATIRON FUNDING COMPANY, LLC
Name:
-------------------------------------
Title:
------------------------------------
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EXHIBIT A
PROMISSORY NOTE
$3,000,000 Dated: September ___, 1997
FOR VALUE RECEIVED, the undersigned, FPF, INC., a Colorado corporation
("FPF"), HEREBY PROMISES TO PAY to the order of FLATIRON FUNDING COMPANY, LLC, a
Delaware limited liability company, or order, (the "Lender") the principal
amount of Three Million Dollars or, if less, the aggregate principal amount of
all Advances made by the Lender to FPF pursuant to the Revolving Loan Agreement
(as hereinafter defined, capitalized terms used herein and not otherwise defined
herein being used with the meanings set forth in the Revolving Loan Agreement,
as hereafter defined) outstanding hereunder, in monthly installments of
principal on the third Business Day of each calendar month commencing with
October 4, 2000, each in an amount equal to the amount determined pursuant to
Section 4.02 of the Revolving Loan Agreement.
If not sooner paid, the principal of this Note and all accrued and
unpaid interest thereon is scheduled to be due and payable in full on July 31,
2001 (the "Scheduled Maturity Date").
FPF shall pay interest on the principal amount hereof from time to time
outstanding from the date hereof until such principal amount is paid in full,
payable monthly on the second Business Day of each calendar month, commencing
with October 2, 1997, during the term hereof and on the final day when such
principal amount becomes due at a fluctuating interest rate per annum in effect
from time to time equal to the Prime Rate (as defined below) plus one and
three-quarter percent (1.75%), with each change in such rate taking effect
simultaneously with the corresponding change in the Prime Rate.
Any principal of or accrued interest on this Note not paid when due
shall, from and after the date when due until the date such principal or
interest is paid, bear interest at the Default Rate (as defined below).
Both principal and interest are payable in lawful money of the United
States of America to the Lender at 1801 California Street, Suite 3920, Denver,
CO 80202, in same day funds.
As used herein, the following terms have the following meanings:
"Prime Rate" means the base commercial prime rate on corporate loans at
large U.S. money centers for any given Business Day as published in the "Money
Rates" column of THE WALL STREET JOURNAL. If more than one rate is shown, then
the highest rate shown shall be the applicable rate.
"Default Rate" means a fluctuating rate of interest per annum in effect
from time to time equal to the Prime Rate plus eight percent (8%).
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This Promissory Note is the Note referred to in, and is entitled to the
benefits of, the Revolving Credit and Term Loan Agreement dated as of September
__, 1997 (the "Revolving Loan Agreement") between FPF and the Lender and is
secured by the Security Agreement and other Borrowing Documents. The Revolving
Loan Agreement, among other things, (a) provides for the making of Advances by
the Lender to FPF from time to time in an aggregate amount not to exceed at any
time outstanding the U.S. dollar amount first above mentioned, the indebtedness
of FPF resulting from each such Advance being evidenced by this Promissory Note,
and (b) contains provisions for acceleration of the Revolving Period upon the
happening of certain stated events and also for prepayments on account of
principal hereof prior to the maturity hereof upon the terms and conditions
therein specified.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
SUBSTANTIVE LAWS OF THE STATE OF COLORADO WITHOUT REGARD TO CONFLICT OF LAW
PROVISIONS. FPF HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE
COURTS OF THE STATE OF COLORADO AND THE UNITED STATES DISTRICT COURT OF COLORADO
IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE AND FPF
HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH COURTS. FPF HEREBY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN
INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING AND
IRREVOCABLY CONSENT TO THE SERVICE OF ANY SUMMONS AND COMPLAINT AND ANY OTHER
PROCESS BY THE MAILING OF COPIES OF SUCH PROCESS TO IT AT ITS ADDRESS SPECIFIED
IN SECTION 6.02 OF THE REVOLVING LOAN AGREEMENT. FPF HEREBY AGREES THAT A FINAL
JUDGMENT IN ANY SUCH 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. NOTHING IN THIS PROVISION SHALL AFFECT THE RIGHT OF THE LENDER
TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR PRECLUDE THE
ENFORCEMENT OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY
ACTION UNDER THIS NOTE TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR
JURISDICTION. FPF HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS NOTE.
(SIGNATURE PAGE FOLLOWS)
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Bruce I. Lundy
Executive Vice President
3
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EXHIBIT B
SECURITY AGREEMENT
SECURITY AGREEMENT, dated as of September __, 1997 (this "Agreement"),
by and among FPF, INC., a Colorado corporation ("FPF"), FLATIRON FUNDING
COMPANY, LLC, a Delaware limited liability company (the "Lender") and NORWEST
BANK COLORADO, N.A., a national banking association, as trustee on behalf of the
Lender (the "Trustee").
PRELIMINARY STATEMENTS
WHEREAS, the Lender and FPF have entered into that certain Revolving
Credit and Term Loan Agreement, dated as of September__, 1997 (said Agreement,
as it may hereafter be amended or otherwise modified from time to time, being
the "Revolving Loan Agreement," the terms defined therein and not otherwise
defined herein being used herein as therein defined); and
WHEREAS, it is a condition precedent to the making of Advances by the
Lender under the Revolving Loan Agreement that FPF shall have granted the
security interest contemplated by this Agreement;
NOW, THEREFORE, in consideration of the premises and in order to induce
the Lender to make Advances under the Revolving Loan Agreement, FPF hereby
agrees as follows:
Section 1. GRANT OF SECURITY.
(a) FPF hereby assigns and pledges to the Trustee on behalf on
the Lender, and hereby grants to such Trustee a security interest in
all of FPF's right, title and interest in, to and under the following,
whether now owned or hereafter acquired (the "Trustee Collateral"):
(i) all Premium Receivables and the related Premium
Finance Agreements acquired by FPF from the Originator
pursuant to the Sale and Assignment Agreement;
(ii) all rights, interests and benefits (but not any
obligations) of FPF to such Premium Receivables and the
related Premium Finance Agreements; and
(iii) all payments and proceeds of any and all of the
foregoing.
(b) FPF hereby assigns and pledges to the Lender, and hereby
grants to the Lender a security interest in, all of FPF's right, title
and interest in, to and under the following, whether now owned or
hereafter acquired (the "Lender Collateral" and together with the
Trustee Collateral, the "Collateral"):
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(i) all other Conveyed Property other than the
Trustee Collateral acquired by FPF from the Originator
pursuant to the Sale and Assignment Agreement including,
without limitation, all accounts, contract rights, chattel
paper, instruments, documents, deposit accounts, general
intangibles and other rights to payment of money of any kind
evidencing or relating to any Conveyed Property, now or
hereafter existing, and all rights now or hereafter existing
in and to all security agreements, insurance policies (and
rights to payment, refund or rebate thereunder), leases and
other contracts securing or otherwise relating to any such
accounts, contract rights, chattel paper, documents,
instruments, deposit accounts, general intangibles or other
rights to payment of money (any and all such accounts,
contract rights, chattel paper, instruments, documents,
deposit accounts, general intangibles and other rights to
payment of money being the "Receivables") and any and all such
leases, security agreements, insurance policies (and rights to
payment, refund or rebate thereunder);
(ii) the Purchase Commitment Fee, the Purchase Fee,
the Purchase Reduction Fee and the Capital Availability
Payment payable to FPF by the Residual Interest Holder
pursuant to the Residual Agreement;
(iii) all rights, interests and benefits (but not any
obligations) of FPF under the Borrowing Documents, including,
without limitation, all rights, interests and benefits of FPF
to the Pledged Collateral under the Residual Agreement; and
(iv) all proceeds and products of any and all of the
foregoing Collateral (including, without limitation, proceeds
which constitute property of the types described in clauses
(i) through (iii) of this Section 1(b)) and, to the extent not
otherwise included, all (A) payments under insurance (whether
or not the Lender is the loss payee thereof), or any
indemnity, warranty or guaranty, payable by reason of loss or
damage to or otherwise with respect to any of the foregoing
Collateral and (B) cash.
Section 2. SECURITY FOR OBLIGATIONS. This Agreement secures the payment
of all loans, Advances, debts, liabilities and obligations for monetary amounts
(whether or not such amounts are liquidated or determinable) owing by FPF to the
Lender, and all covenants and duties regarding such amounts, of any kind or
nature, present or future, whether or not evidenced by a binding note, agreement
or other instrument, arising under the Revolving Loan Agreement and the other
Borrowing Documents and includes, without limitation, all principal, interest,
commitment fees, administrative fees, expenses, attorneys' fees and expenses,
consultants' and advisors' fees and expenses or otherwise, which expenses and
fees shall not exceed $3,000 in the aggregate for any calendar year of
calculation as provided in the Revolving Loan Agreement (all such obligations of
FPF being the "Obligations"). Without limiting the generality of the foregoing,
this Agreement secures the payment of all amounts which constitute part of the
Obligations and would be owed by FPF to the Lender under the Revolving Loan
Agreement and the other Borrowing Documents but for the fact that they are
unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving FPF.
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Notwithstanding anything herein to the contrary, the Collateral shall only
secure those obligations of FPF to Lender and in the amounts set forth in
Section 4.02(c) of the Revolving Loan Agreement and, upon the sale of any
Collateral following an Amortization Event, the proceeds of the Collateral shall
be applied in accordance with the provisions of Section 4.02(c) of the Revolving
Loan Agreement.
Section 3. FPF REMAINS LIABLE; USE OF COLLATERAL. Anything herein to
the contrary notwithstanding, (a) FPF shall remain liable under the contracts
and agreements included in the Collateral to the extent set forth therein to
perform all of its duties and obligations thereunder to the same extent as if
this Agreement had not been executed, (b) the exercise by the Lender or the
Trustee, as applicable, of any of the rights hereunder shall not release FPF
from any of its duties or obligations under the contracts and agreements
included in the Collateral, and (c) neither the Lender nor the Trustee shall
have any obligation or liability under the contracts and agreements included in
the Collateral by reason of this Agreement, nor shall the Lender or the Trustee
be obligated to perform any of the obligations or duties of FPF thereunder or to
take any action to collect or enforce any claim for payment assigned hereunder.
So long as no Amortization Event has occurred and is continuing and subject to
the rights and interests of the Lender and the Trustee, as applicable, in the
Collateral granted hereby, FPF shall have the right to use the Collateral in
connection with the normal conduct of its business.
Section 4. REPRESENTATIONS AND WARRANTIES. FPF represents and warrants
as follows:
(a) The chief place of business and chief executive office of
FPF and the office where FPF keeps its records concerning the
Receivables, and the originals of all instruments, documents and
chattel paper that evidence the Receivables, are located at its address
at 1801 California Street, Suite 3920, Denver, Colorado 80202. The
originals of all Loan Documents have been delivered to the Lender or
its designee.
(b) FPF is the legal and beneficial owner of the Collateral
free and clear of any Lien except for the security interest created by
this Agreement. No effective financing statement or other document
similar in effect covering all or any part of the Collateral is on file
in any recording office, except such as may have been filed in favor of
the Lender, the Trustee or the Lender's assignee(s) relating to this
Agreement.
(c) This Agreement creates a valid first priority security
interest in the Collateral, securing the payment of the Obligations,
and all filings and other actions necessary or desirable to perfect and
protect such security interest have been duly taken.
(d) No consent of any other Person and no authorization,
approval or other action by, and no notice to or filing with, any
governmental authority or regulatory body is required (i) for the grant
by FPF of the security interest granted hereby or for the execution,
delivery or performance of this Agreement by FPF, (ii) for the
perfection or maintenance of the security interest created hereby
(including the first priority nature of such security interest) or
(iii) for the exercise by the Lender and the Trustee of their
respective rights and remedies hereunder.
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Section 5. FURTHER ASSURANCES.
(a) FPF agrees that from time to time, at the expense of FPF,
FPF shall promptly execute and deliver all further instruments and
documents, and take all further action, that may be necessary or
desirable, or that the Lender or the Trustee may reasonably request, in
order to perfect and protect any security interest granted or purported
to be granted hereby or to enable the Lender and the Trustee to
exercise and enforce their respective rights and remedies hereunder
with respect to any Collateral. Without limiting the generality of the
foregoing, FPF shall: (i) mark conspicuously each Premium Finance
Agreement and each of its records pertaining to the Collateral with the
Assignment Stamp; and (ii) execute and file such financing or
continuation statements, or amendments thereto, and such other
instruments or notices, as may be necessary or desirable, or as the
Lender may request, in order to perfect and preserve the security
interest granted or purported to be granted hereby.
(b) FPF hereby authorizes the Lender and the Trustee to file
one or more financing or continuation statements, and amendments
thereto, relating to all or any part of the Collateral without the
signature of FPF where permitted by law. A photocopy or other
reproduction of this Agreement or any financing statement covering the
Collateral or any part thereof shall be sufficient as a financing
statement where permitted by law.
(c) FPF shall furnish to the Lender and the Trustee from time
to time statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral as
the Lender or the Trustee may reasonably request, all in reasonable
detail.
Section 6. AS TO RECEIVABLES.
(a) FPF shall keep its chief place of business and chief
executive office and the office where it keeps its records concerning
the Receivables at the location therefor specified in Section 4(a) or,
upon 30 days' prior written notice to the Lender and the Trustee, at
any other locations in a jurisdiction where all action required by
Section 5 shall have been taken with respect to the Receivables. FPF
and the Trustee, hold and preserve such records and shall permit
representatives of the Lender and the Trustee, at any time during
normal business hours to inspect and make abstracts from such records.
(b) Except as otherwise provided in this subsection (b), FPF
shall continue to collect, or shall cause the collection of, all
amounts due or to become due to FPF under the Receivables. In
connection with such collections, FPF may take (and, at the Lender's
direction, shall take) such action as FPF or the Lender may deem
necessary or advisable to enforce collection of the Receivables;
provided, however, that upon the occurrence of an Amortization Event,
the Lender and the Trustee shall have the right at any time, upon
written notice to FPF of its intention to do so, to notify the account
debtors or obligors under the Receivables of the assignment of such
Receivables to the Lender or the Trustee, as the case may be, and to
direct such account debtors or obligors to make payment of all
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amounts due or to become due to FPF thereunder directly to the Lender
or the Trustee, as the case may be, and, upon such notification and at
the expense of FPF, to enforce collection of any such Receivables, and
to adjust, settle or compromise the amount or payment thereof, in the
same manner and to the same extent as FPF might have done. After
receipt by FPF of the notice from the Lender referred to in the proviso
to the preceding sentence, (i) all amounts and proceeds (including
instruments) received by FPF in respect of the Receivables shall be
received in trust for the benefit of the Lender hereunder, shall be
segregated from other funds of FPF and shall be forthwith paid over to
the Lender or the Trustee on behalf of the Lender in the same form as
so received (with any necessary endorsement) to be held as cash
collateral and either (A) released to FPF so long as no Amortization
Event shall have occurred and be continuing or (B) if any Amortization
Event shall have occurred and be continuing, applied as provided by
Section 11(b), and (ii) FPF shall not adjust, settle or compromise the
amount or payment of any Receivable, release wholly or partly any
account debtor or obligor thereof, or allow any credit or discount
thereon.
Section 7. TRANSFERS AND OTHER LIENS. FPF shall not (a) sell, assign
(by operation of law or otherwise) or otherwise dispose of, or grant any option
with respect to, any of the Collateral, or (b) create or permit to exist any
Lien upon or with respect to any of the Collateral, except for the security
interest under this Agreement.
Section 8. LENDER AND TRUSTEE APPOINTED AUTHORIZED AGENT AND
ATTORNEY-IN-FACT. FPF hereby irrevocably appoints each of the Lender and the
Trustee as FPF's authorized agent and attorney-in-fact, with full authority in
the place and stead of FPF, at the option of the Lender or the Trustee at any
time after the occurrence and during the continuance of any Amortization Event,
and in the name of FPF, the Lender or the Trustee, as applicable, or otherwise,
from time to time in the Lender's and the Trustee's respective discretion, to
take any action and to execute any instrument which the Lender may deem
necessary or advisable to accomplish the purposes of this Agreement (subject to
the rights of FPF under Section 6), including, without limitation:
(a) to ask, demand, collect, sue for, recover, compromise,
receive and give acquittance and receipts for moneys due and to become
due under or in connection with the Collateral;
(b) to receive, endorse and collect any drafts or other
instruments, documents and chattel paper, in connection therewith; and
(c) to file any claims or take any action or institute any
proceedings which the Lender may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights
of the Lender and the Trustee with respect to any of the Collateral.
Section 9. LENDER AND TRUSTEE MAY PERFORM. If FPF fails to perform any
agreement contained herein, the Lender and the Trustee may perform, or cause
performance of, such
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agreement, and the expenses of the Lender and the Trustee incurred in connection
therewith shall be payable by FPF under Section 12(b).
Section 10. THE LENDER'S AND THE TRUSTEE'S DUTIES. The powers conferred
on the Lender and the Trustee hereunder are solely to protect the Lender's
interest in the Collateral and shall not impose any duty upon either the Trustee
or the Lender to exercise any such powers. Except for the safe custody of any
Collateral in its possession and the accounting for moneys actually received by
it hereunder, neither the Lender nor the Trustee shall have a duty as to any
Collateral or as to the taking of any necessary steps to preserve rights against
prior parties or any other rights pertaining to any Collateral. The Lender and
the Trustee shall each be deemed to have exercised reasonable care in the
custody and preservation of any Collateral in its possession if such Collateral
is accorded treatment substantially equal to that which the Lender or the
Trustee, as applicable, accords its own property.
Section 11. REMEDIES. If any Amortization Event occurs as a result of
the bankruptcy or insolvency of FPF:
(a) The Lender and the Trustee may exercise in respect of the
Collateral, in addition to other rights and remedies provided for
herein or otherwise available to it, all the rights and remedies of a
secured party on default under the UCC in the applicable jurisdictions
at that time (whether or not the UCC applies to the affected
Collateral), and also may (i) require FPF to, and FPF hereby agrees
that it shall at its expense and upon request of the Lender or the
Trustee forthwith, assemble all or part of the Collateral as directed
by the Lender or the Trustee and make it available to the Lender or the
Trustee at a place to be designated by the Lender or the Trustee which
is reasonably convenient to such parties and (ii) without notice except
as specified below, sell the Collateral or any part thereof in one or
more parcels at public or private sale, at any of the Lender's or the
Trustee's offices, as applicable, or elsewhere, for cash, on credit or
for future delivery, and upon such other terms as the Lender or the
Trustee, as applicable, may deem commercially reasonable. FPF agrees
that, to the extent notice of sale shall be required by law, at least
ten days' notice to FPF of the time and place of any public sale or the
time after which any private sale is to be made shall constitute
reasonable notification. Neither the Lender nor the Trustee shall be
obligated to make any sale of Collateral regardless of notice of sale
having been given. The Lender and the Trustee may adjourn any public or
private sale from time to time by announcement at the time and place
fixed therefor, and such sale may, without further notice, be made at
the time and place to which it was so adjourned.
(b) Any cash held by the Lender or the Trustee as Collateral
and all cash proceeds received by the Lender or the Trustee in respect
of any sale of, collection from, or other realization upon all or any
part of the Collateral may, in the discretion of the Lender or the
Trustee, be held by the Lender as collateral for, and/or then or at any
time thereafter be applied (after payment of any amounts payable to the
Lender and the Trustee pursuant to Section 11(a)) in whole or in part
by the Lender or the Trustee against, all or any part of the
Obligations in the order provided in Section 4.02(c) of the
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Revolving Loan Agreement. Any surplus of such cash or cash proceeds
held by the Lender and the Trustee and remaining after payment in full
of all the Obligations shall be paid over to FPF for use in payment of
the obligations under the Residual Agreement, or to whomsoever may be
lawfully entitled to receive such surplus by order of a court of
competent jurisdiction.
Section 12. INDEMNITY AND EXPENSES.
(a) FPF agrees to indemnify the Lender, its assignee(s), the
Trustee and their respective directors, officers, agents, attorneys and
employees from and against any and all claims, losses and liabilities
(including reasonable attorneys' fees actually incurred) growing out of
or resulting from this Agreement (including, without limitation,
enforcement of this Agreement), except claims, losses or liabilities
resulting from such Person's gross negligence or willful misconduct.
(b) FPF shall upon demand pay to the Lender and the Trustee
the amount of any and all reasonable expenses, including the reasonable
fees and expenses of their respective counsel and of any experts and
agents, which the Lender or the Trustee may incur in connection with
(i) the preservation, use or operation of, or the sale of, collection
from, or other realization upon, any of the Collateral, (ii) the
exercise or enforcement of any of the rights of the Lender or the
Trustee hereunder or (iii) the failure by FPF to perform or observe any
of the provisions hereof.
Section 13. CONTINUING SECURITY INTEREST; ASSIGNMENTS UNDER REVOLVING
LOAN AGREEMENT. This Agreement shall create a continuing assignment of and
security interest in the Collateral and shall (a) remain in full force and
effect until the payment in full of the Obligations and all other amounts
payable under this Agreement, (b) be binding upon FPF, its successors and
assigns and (c) inure to the benefit of, and be enforceable by, the Lender, the
Trustee and their respective successors, transferees and assigns. Without
limiting the generality of the foregoing clause (c), the Lender may assign or
otherwise transfer all or any portion of its rights and obligations under the
Revolving Loan Agreement (including, without limitation, all or any portion of
the Note) to any other Person and such other Person or entity shall thereupon
become vested with all the benefits in respect thereof granted to the Lender
herein or otherwise. Upon the payment in full of the Obligations and all other
amounts payable under this Agreement, the security interest granted hereby shall
terminate and all rights to the Collateral shall revert to FPF. Upon any such
termination, the Lender and the Trustee, as applicable, shall, at FPF's expense,
execute and deliver to FPF such documents as FPF shall reasonably request to
evidence such termination.
Section 14. ESTOPPEL CERTIFICATES AND NOTICES. Upon Lender's request,
FPF shall use its best efforts to obtain from obligors under any Collateral such
estoppel certificates as the Lender may reasonably request from time to time.
FPF shall further give prompt written notice to the Lender and the Trustee of
any payment default or any other material breach or default under any
Collateral, and shall provide the Lender and the Trustee with such other
information relating to the Collateral as the Lender or the Trustee may
reasonably request from time to time. The
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Lender and the Trustee are authorized at any time and from time to time to
directly contact any such obligor to verify any information provided by FPF or
for any other purpose relating to the Collateral.
Section 15. TERMS. Unless otherwise defined herein or in the Revolving
Loan Agreement, terms used in Article 9 of the UCC are used herein as therein
defined.
Section 16. AMENDMENTS. This Agreement may be amended from time to time
by a written amendment duly executed and delivered by FPF, the Lender and the
Trustee with the prior written consent of the Lender assignee(s), if any, as the
case may be, and the Originator and no waiver of any of the terms hereof or
thereof shall be effective unless it is in writing and signed by the party or
parties whose rights are being waived and the Lender's assignee, if any, and
Originator.
Section 17. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be delivered personally
or mailed by first-class registered or certified mail, postage prepaid, or by
telephonic facsimile transmission, electronic mail and overnight delivery
service, postage prepaid, to the parties to this Agreement; provided, that
notices shall be effective upon receipt, and in any case addressed as follows:
if to FPF, at 1801 California Street, Suite 3920, Denver, Colorado 80202,
Attention: Mr. Robert A. Pinkerton; if to the Lender, at 1801 California Street,
Suite 3920, Denver, Colorado 80202, Attention: Kathleen McCarty; and if to the
Trustee, at 1740 Broadway, Denver, Colorado 82074-8693, Attention: Corporate
Trust Department; or, as to each party, at such other address as shall be
designated by such party in a written notice to the other party.
Section 18. WAIVERS. No failure or delay on the part of the Lender, the
Trustee or any assignee of the Lender in exercising any power, right or remedy
under this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or remedy preclude any other or
further exercise thereof or the exercise of any other power, right or remedy. No
such waiver shall extend to any subsequent or other default or impair any rights
consequent thereon, except to the extent expressly so waived. Each of the
rights, powers and remedies described in this Agreement is cumulative and not
exclusive of, and shall not prejudice, any other right, power or remedy provided
in this Agreement or by law. Each such right, power and remedy may be exercised
from time to time as deemed necessary by the Lender, the Trustee or the Lender's
assignee(s), as applicable and in such order and manner as the Lender, the
Trustee or the Lender's assignee(s), as applicable, may determine. FPF hereby
acknowledges and agrees that, with respect to a violation or breach by FPF of
any representation, warranty, covenant or other term or provision of this
Agreement, it shall by FPF's obligation to prepare and obtain a written waiver
for such breaches or violations from the Lender, the Trustee or the Lender's
assignee(s), as applicable may grant or deny any such requested waiver in its
sole and absolute discretion. At no time may FPF infer a course of dealing among
the parties that would negate the requirement to obtain a written waiver from
the Lender, the Trustee or the Lender's assignee(s), as applicable.
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Section 19. THIRD PARTY BENEFICIARIES. Notwithstanding any other
provision set forth in this Agreement, the Lender may at any time create a
security interest in or assign all or any portion of its rights under this
Agreement (including, without limitation, the Collateral) in favor of any other
Person. Without limiting the generality of the foregoing, all representations,
covenants and agreements in this Agreement which expressly confer rights upon
the Lender shall be for the benefit of and run directly to each of the Lender's
assignees or designees and each such assignee or designee shall be entitled to
rely on and enforce such representations, covenants and agreements to the same
extent as if it were a party hereto.
Section 20. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF COLORADO
WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS.
Section 21. JURISDICTION. THE PARTIES HERETO HEREBY IRREVOCABLY SUBMIT
TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF COLORADO AND THE
UNITED STATES DISTRICT COURT OF COLORADO IN ANY ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO THIS AGREEMENT AND THE PARTIES HEREBY IRREVOCABLY AGREE THAT
ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED
IN SUCH COURTS. THE PARTIES HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT IT
MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE
OF SUCH ACTION OR PROCEEDING AND IRREVOCABLY CONSENT TO THE SERVICE OF ANY
SUMMONS AND COMPLAINT AND ANY OTHER PROCESS BY THE MAILING OF COPIES OF SUCH
PROCESS TO THEM AT THEIR RESPECTIVE ADDRESSES AS SPECIFIED IN SECTION 17. THE
PARTIES HEREBY AGREE THAT A FINAL JUDGMENT IN ANY SUCH 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. NOTHING IN THIS SECTION 21
SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OR ORDER OBTAINED
IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME
IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION.
Section 22. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT.
Section 23. SEVERABILITY OF PROVISIONS. Any part, provision, agreement,
representation, warranty or covenant of this Agreement which is prohibited or
unenforceable or is held to be void or unenforceable in any jurisdiction shall,
as to such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render
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unenforceable such provision in any other jurisdiction. To the extent
permitted by applicable law, the parties waive any provision of law which
prohibits or renders void or unenforceable any provision hereof.
Section 24. COUNTERPARTS. For the purpose of facilitating the execution
of this Agreement and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which shall be deemed to
be an original, and together shall constitute and be one and the same
instrument.
Section 25. CAPTIONS. The article, paragraph and other headings
contained in this Agreement are inserted for convenience only and shall not in
any way affect the meaning or construction of any provision of this Agreement.
Section 26. LEGAL HOLIDAYS. In the case where the date on which any
action required to be taken, document required to be delivered or payment
required to be made is not a Business Day in New York, New York or Denver,
Colorado, such action, delivery or payment need not be made on that date, but
may be made on the next succeeding Business Day.
Section 27. ADVICE FROM INDEPENDENT COUNSEL. The parties understand
that this Agreement is a legally binding agreement that may affect such party's
rights. Each party represents to the others that it has received legal advice
from counsel of its choice regarding the meaning and legal significance of this
Agreement and that it is satisfied with its legal counsel and the advice
received from it.
Section 28. JUDICIAL INTERPRETATION. Should any provision of this
Agreement require judicial interpretation, it is agreed that a court
interpreting or construing the same shall not apply a presumption that the terms
hereof shall be more strictly construed against any Person by reason of the rule
of construction that a document is to be construed more strictly against the
Person who itself or through its agent prepared the same, it being agreed that
each party has participated in the preparation of this Agreement.
(SIGNATURE PAGE FOLLOWS)
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IN WITNESS WHEREOF, the parties hereto have caused this Security
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first above written.
FPF, INC.
Bruce I. Lundy
Executive Vice President
FLATIRON FUNDING COMPANY, LLC
Name:
-------------------------------------
Title:
------------------------------------
Acknowledged and accepted:
NORWEST BANK COLORADO, N.A., as Trustee
By
-----------------------
Name:
---------------------
Title:
--------------------
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EXHIBIT C
CONCENTRATION TEST
No more than a specified percentage of the Premium Receivables on the
basis of the principal amount thereof shall, as of any date of determination,
relate to any insurance company, as follows:
The Reserves calculated under the Borrowing Base as contemplated by
Section 2.03 of the Revolving Loan Agreement shall include amounts by which
Eligible Premium Loans exceed the following limits.
A. Insurance Company Diversification Requirements
1. For Eligible Insurance Companies covered by the Florida
Insurance Guaranty Association ("FIGA") the following
allocations shall apply:
Insurance Company's Maximum % of Eligible
A.M. Contracts
Best Rating per Carrier
"A" or better No Limit
"B++" or "B+" 12.5%
"B" or "B-" 10.0%
ALL OTHERS* 3.50%
*NOTE: "All others" above, "C," "D," "E," "F,"
"NR-4," "N/F" and "S" are not eligible.
PER CARRIER EXCEPTIONS:
a. Up to 75% of Originator's portfolio of
eligible contracts purchased by FPF may
relate to policies issued by Federated
National Insurance Company.
b. Up to 15% of Originator's eligible contracts
purchased by FPF may relate to a single
insurance company, selected from time to
time by Originator and approved by Flatiron
which carries a B-, NR-1, NR-2 or NR-3
rating by A.M. Best.
ALL PER CARRIER EXCEPTIONS ARE SUBJECT TO ADJUSTMENT BY FPF IN
ITS SOLE DISCRETION.
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2. For companies not covered by the FIGA, the following
allocations shall apply:
No more than 15% of the pool may represent
"non-admitted insurance carriers" (including U.S. syndicates
of Lloyds of London) with per carrier and maximum pool limits
as set forth below:
Insurance Company's Maximum % of
A.M. Eligible Contracts
Best Rating per Carrier
"A" or better 7.5%
B++, B+ or B 1.0%
US Syndicates of 1.0%
Lloyd's of London
B. Insurance Agent Diversification Requirements.
Except for insurance agencies which are Affiliates of
Originator the outstanding balance of Eligible Premium
Receivables sourced from one agency may not exceed 17.5% of
the pool and the next largest agent concentration may not
exceed 15%.
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EXHIBIT D
REQUEST FOR ADVANCE
FPF, Inc.
Request For Advance Dated _____________________
The undersigned hereby requests of Flatiron Funding Company, LLC ("Flatiron") an
advance under the Revolving Credit and Term Loan Agreement (the "Revolving Loan
Agreement") as shown below, and in requesting such advance, certifies as
follows:
A. All conditions precedent described in Section 2.01 and 2.02 of the
Revolving Loan Agreement have been satisfied.
B. All representations and warranties set forth by FPF in the Revolving
Loan Agreement are true and correct as of the date hereof.
C. All representations and warranties set forth by the Originator in
the Sale and Assignment Agreement are true and correct as of the date
hereof.
D. All information set forth herein and on all supporting schedules
attached hereto is true, correct and complete in all respects as of the
date hereof.
Therefore, pursuant to the Revolving Loan Agreement and based on the
Borrowing Base and Availability Calculation attached hereto as Annex 1:
1. Total Advance requested $
2. Date Advance to be funded (at least
___ business days from today) -----
Capitalized terms used and not otherwise defined herein shall have the
respective meanings ascribed to such terms in the Revolving Loam Agreement.
RESPONSIBLE OFFICER:
NAME:
-------------------
SIGNATURE:
--------------
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ANNEX I
TO EXHIBIT D
FORM OF BORROWING BASE AND AVAILABILITY CALCULATION
Account Number: Date of Funding
------------
Portfolio Principal Amount: [DATE] $_________
Less Adjustments to Eligible Premium Loans:
Below minimum APR Below minimum down payment
Above maximum number of payments more than
120 Days Amounts Cancelled - Due from
Insureds Parity Adjustment
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Eligibles Out of Parity $___________ _________% ____________
Greater of Total Negative Parity or
Adjusted Eligible Out of Parity
Loans not meeting Reps and Warranties
Policy fee adjustment
Ineligible Amounts before Diversification
test
</TABLE>
Less Amounts exceeding Concentration Limits:
Amounts in excess of per carrier
limits
Amounts in excess of per agent
limits
Total Amounts in excess of limits
Total Ineligible Amounts
Portfolio Adjusted Balance [DATE]
Advance Percent Rate
Borrowing Base
Outstanding Principal Balance [DATE]
Subsequent Gross Advance
Adjusted Principal Balance
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Commitment Amount
Availability for Advance Request
Amount approved/requested to be advanced
Borrower authorized by amount
Amount of Advance Fee (____%)
Actual amount wired to Funding Account [Date]
New Outstanding Balance $
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EXHIBIT E
REPRESENTATIONS AND WARRANTIES
Section 1. REPRESENTATIONS AND WARRANTIES OF FPF WITH RESPECT TO
SECTIONS 3.01 AND 4.01 OF THE REVOLVING LOAN AGREEMENT.
(a) POWER AND AUTHORITY. FPF has the power and authority to
execute and deliver the Borrowing Documents, to which it is a party,
and to carry out their respective terms; there are no injunctions,
writs, restraining orders or any other order of any nature which
adversely affects FPF's performance of the Borrowing Documents, to
which it is a party, any other related agreement to which FPF is a
party or any transactions contemplated thereby; and no consent,
approval or authorization which has not been obtained is required for
the consummation by FPF of the transactions contemplated by the
Borrowing Documents.
(b) NO VIOLATION. The consummation of the transactions
contemplated by the Borrowing Documents, to which FPF is a party, and
the fulfillment of the terms thereof do not conflict with, result in
any breach of any of the terms and provisions of, nor constitute (with
or without notice or lapse of time) a default under, the certificate of
incorporation or bylaws of FPF, or any indenture, agreement or other
instrument to which FPF is a party or by which it or its properties is
bound; nor result in the creation or imposition of any Lien upon any of
its properties pursuant to the terms of any such indenture, agreement
or other instrument (other than pursuant to the Borrowing Documents);
nor violate any applicable laws, rules, regulations or orders regarding
the conduct of FPF's business or the ownership of its properties; nor
violate any law or any order, rule or regulation applicable to FPF of
any court or of any federal or state regulatory body, administrative
agency, or other governmental instrumentality having jurisdiction over
FPF or its properties except, in each case, for such violations,
conflicts, breaches, Liens and defaults which could not, in the
reasonable judgment of FPF, have an adverse effect on the condition
(financial or otherwise) of FPF, any Collateral or FPF's obligations
under the Borrowing Documents, to which it is a party.
(c) ABILITY TO PERFORM. There has been no impairment in the
ability of FPF to perform its obligations under the Borrowing
Documents, to which it is a party.
(d) FINANCIAL STATEMENTS. FPF's financial statements
delivered, or to be delivered, pursuant to Section 4.01 of the
Revolving Loan Agreement, present or will present fairly, in all
material respects, the information presented therein, and no material
adverse change has occurred in FPF's financial status since the date
thereof.
(e) NO MATERIAL LIABILITIES. FPF does not have material
liabilities or obligations other than those disclosed in the financial
statements referred to in subparagraph (d) above or for which adequate
reserves are reflected in such financials.
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(f) NO MATERIAL MISSTATEMENTS OR OMISSIONS. No information,
certificate of an officer, statement furnished in writing or report
delivered to the Lender by FPF contains any untrue statement of a
material fact or omits a material fact necessary to make such
information, certificate, statement or report not misleading.
(g) NO UNPAID TAXES. All tax returns required to be filed by
FPF in any jurisdiction have in fact been filed, and all taxes,
assessments, fees, claims and other governmental charges upon it or any
subsidiary or upon any of their respective properties, income or
franchises (including, without limitation, any taxes required to be
paid by FPF relating to all payroll, FICA, unemployment and other
taxes, assessments, fees, claims and other charges relating to the
employees of FPF), shown to be due and payable on such returns have
been paid; provided, that FPF shall not be required to pay or discharge
any such tax, assessment, fee, claim or other charge which is being
contested in good faith and by proper proceedings and as to which
appropriate reserves are being maintained in accordance with GAAP. To
the best of FPF's knowledge, all such tax returns were true and correct
and it does not know of any contemplated or proposed additional tax
assessment against it in any material amount or of any basis therefor.
(h) ADEQUATE PROVISIONS FOR TAXES. The provisions for taxes on
FPF's books are in accordance with GAAP.
(i) ERISA. No contribution failure by FPF has occurred with
respect to any Pension Plan (as defined in the Sale and Assignment
Agreement) sufficient to give rise to a lien under Section 302(f) of
ERISA and no notice of intent to terminate a Pension Plan has been
filed, nor has any Pension Plan been terminated under Section 4041(e)
of ERISA, nor has the PBGC instituted proceedings to terminate, or
appoint a trustee to administer, a Pension Plan, and no event has
occurred or condition exists which might constitute grounds under
Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Pension Plan.
(j) FPF INFORMATION. The information with respect to FPF and
the Premium Receivables provided to the Lender does not, as of its
date, contain any untrue statement of a material fact with respect to
the Premium Receivables, FPF, its business or the transactions
contemplated hereby or by the other Borrowing Documents or omit a
material fact necessary to make the statements contained herein or
therein not misleading. There is no fact peculiar to FPF or any
Affiliate of FPF or, to its knowledge, any Premium Receivable or
Obligor, which it has not disclosed to the Lender in writing which
could adversely affect or, so far as FPF can now reasonably foresee,
could adversely affect FPF's ability to perform the transactions
contemplated by the Borrowing Documents.
(k) SOLVENCY. The fair salable value of the assets on a going
concern basis of FPF, as of the time of each Grant of the Collateral
under the Revolving Loan Agreement is in excess of the total amount of
its liabilities. With respect to the date of each
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Advance, at the close of the immediately preceding fiscal quarter of
FPF, FPF had a positive net worth.
(l) PRINCIPAL EXECUTIVE OFFICE. The principal executive office
of FPF is, and for a period of not less than four months preceding the
date of the initial Advance has been, the notice address set forth in
Section 6.02 of the Revolving Loan Agreement.
(m) LEGAL NAMES. FPF, Inc. is the only legal name under which
FPF currently is operating its business. FPF has not changed its name
in the last six (6) years (or such shorter period of time during which
FPF was in existence) and does not have any other tradenames,
fictitious names, assumed names or "doing business as" names other than
"FPF Finance, Inc."
(n) VALID BUSINESS REASONS; NO FRAUDULENT TRANSFERS. The
transactions contemplated by the Sale and Assignment Agreement are in
the ordinary course of FPF's business and FPF has valid business
reasons for acquiring the related Conveyed Property rather than
participating in a secured loan with the related Conveyed Property as
collateral. At the time of each Sale: (i) FPF acquired the related
Conveyed Property from the Originator, without any intent to hinder,
delay or defraud any current or future creditor of the Originator; (ii)
FPF was not insolvent or did not become insolvent as a result of any
transfer; (iii) FPF was not engaged and was not about to engage in any
business or transaction for which any property remaining with FPF was
an unreasonably small capital or for which the remaining assets of FPF
are unreasonably small in relation to the business of FPF or the
transaction; (iv) FPF did not intend to incur, and did not believe or
reasonably should not have believed, that it would incur, debts beyond
its ability to pay as they become due; and (v) the consideration paid
by FPF to the Originator for the related Conveyed Property was
equivalent to the fair market value of such related Conveyed Property.
(o) FINANCIAL STATEMENT DISCLOSURE. FPF has been advised that
from and after the date of each Sale under the Sale and Assignment
Agreement, the financial statements of the Originator will disclose
that, under generally accepted accounting principles, on each
respective Sale, FPF acquired ownership of the Premium Receivables.
(p) OTHER AGREEMENTS. FPF is not a party to any indenture,
loan or credit agreement, lease or other instrument or agreement which
is likely to have an adverse effect on the business, properties,
assets, operations or operation, financial or otherwise, of FPF or the
ability of FPF to perform its obligations under this Agreement or any
other Borrowing Document to which it is a party.
(q) NO MATERIAL ADVERSE CHANGE. No material adverse change has
occurred in the business, properties, operating results, prospects,
assets, Premium Receivables Portfolio, operations or condition,
financial or otherwise, of FPF from the Closing Date or the date of the
immediately preceding Advance, as the case may be.
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Section 2. GENERAL REPRESENTATIONS AND WARRANTIES OF FPF WITH RESPECT
TO SECTIONS 3.01 AND 4.01 OF THE REVOLVING LOAN AGREEMENT.
(a) ORGANIZATION, ETC. FPF is duly organized and is validly
existing as a corporation in good standing under the laws of the State
of Colorado, with full power and authority to execute and deliver, to
the extent that FPF is a party thereto, the Borrowing Documents and to
perform the terms and provisions thereof.
(b) DUE QUALIFICATION. FPF is duly qualified to do business as
a foreign corporation in good standing, and has obtained all required
licenses and approvals, if any, in all jurisdictions in which the
ownership or lease of property or the conduct of its business requires
such qualifications except those jurisdictions in which failure to be
so qualified would not have an adverse effect on the business or
operations of FPF or the Collateral.
(c) DUE AUTHORIZATION. The execution, delivery and performance
by FPF of the Borrowing Documents, to which it is a party, have been
duly authorized by all necessary action of FPF, do not require any
approval or consent of any governmental agency or authority, do not and
will not conflict with any provision of its articles of incorporation
or bylaws, and do not and will not conflict with or result in a breach
which would constitute (with or without notice or lapse of time) a
default under any agreement binding upon or applicable to it or its
property, or any law or governmental regulation or court decree
applicable to it or its property.
(d) NO LITIGATION. No litigation or administrative proceeding
of or before any court, tribunal or governmental body is presently
pending, or threatened, against FPF or its properties or, to the extent
that FPF is a party thereto, with respect to the Borrowing Documents,
which, if adversely determined could, in the reasonable opinion of FPF,
have an adverse effect on the transactions contemplated by the
Borrowing Documents.
(e) ENFORCEABILITY. The Borrowing Documents to which FPF is a
party constitute valid, legal and binding obligations of FPF,
enforceable against FPF in accordance with the terms hereof, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and other
laws affecting the enforcement of creditor's rights generally and to
general principles of equity, regardless of whether such enforcement is
considered in a proceeding in equity or at law.
Section 3. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties set forth in this Exhibit E shall survive the
date of the respective Borrowing Document. Upon discovery by the Lender or FPF
of a breach of any of the foregoing representations and warranties, the party
discovering such breach shall give prompt written notice to the other parties to
the Borrowing Documents; provided, however, that failure to give such notice
shall not affect the rights of such other parties with respect to such breach.
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EXHIBIT F
CLOSING DOCUMENTS
The following Closing Documents, each in form and substance
satisfactory to the Lender, are to be delivered by FPF to the Lender in
satisfaction of the requirements in Section 2.01 of the Revolving Loan
Agreement:
(a) The Note;
(b) Payment of the Closing Fee, the Commitment Fee and any
Advance Fee payable under Section 1.03 of the Revolving Loan Agreement;
(c) A Security Agreement, duly executed by FPF, in the form of
Exhibit B to the Revolving Loan Agreement, together with:
(i) acknowledgment copies or stamped receipt copies
of proper financing statements, duly filed under the UCC of
all jurisdictions that the Lender may deem necessary or
desirable in order to perfect the security interests created
by the Security Agreement;
(ii) completed requests for information, listing the
financing statements referred to in paragraph (i) above and
all other effective financing statements filed in the
jurisdictions referred to in paragraph (i) above that name FPF
as debtor, together with copies of such other financing
statements (none of which cover the collateral purported to be
covered by the Security Agreement, unless consented to in
writing by the Lender);
(iii) evidence of the completion of all recordings
and filings of or with respect to the Security Agreement that
the Lender may deem necessary or desirable in order to perfect
the security interests created by the Security Agreement;
(iv) evidence of the delivery of notices to the
Obligors under the Premium Receivables and the Issuing
Insurance Companies relating to such Premium Receivables
advising such Obligors and Issuing Insurance Companies of the
Sale to FPF of the Premium Receivables pursuant to the Sale
and Assignment Agreement, and the Grant to the Lender of the
Premium Receivables pursuant to the Security Agreement; and
(v) evidence that all other actions necessary or,
in the opinion of the Lender, desirable to perfect and protect
the security interests created by the Security Agreement have
been taken;
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(d) Evidence that all documents required to be delivered to
the Lender or its designee pursuant to the Borrowing Documents have
been so executed and delivered;
(e) Opinions of counsel to FPF addressing such matters as the
Lender shall reasonably request;
(f) A certificate executed by the Secretary or Assistant
Secretary of FPF, certifying as to the following, which shall be
attached to such certificate (i) a copy of the articles of
incorporation of FPF, (ii) a copy of the bylaws of FPF, (iii) a copy of
the resolutions of the Board of Directors of FPF authorizing the
execution, delivery and performance by FPF of the Borrowing Documents
and the transactions contemplated thereunder, and (iv) the names and
true signatures of the officers authorized on its behalf to sign the
Borrowing Documents;
(g) A good standing certificate (or its equivalent) for FPF
issued by (i) the Secretary of State of its state of incorporation, and
(ii) the Secretary of State of each state in which it does business or
is purchasing or servicing Premium Receivables, to the extent that such
activities require qualification to do business in such states;
(h) The income statements and balance sheets of FPF as
described in, and together with the certificate of a Responsible
Officer of FPF required under, Section 4.01 of the Revolving Loan
Agreement; and
(i) The power of attorney attached as Exhibit G to the
Revolving Loan Agreement.
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EXHIBIT G
POWER OF ATTORNEY
FPF, INC., a corporation organized and existing under the laws of the
State of Colorado ("FPF"), hereby grants to FLATIRON FUNDING COMPANY, LLC (the
"Lender") or the Lender's designee pursuant to that certain Revolving Credit and
Term Loan Agreement, dated as of September__, 1997 between FPF and the Lender,
as the same may be amended or otherwise modified from time to time (the "Loan
Agreement"), and to Norwest Bank Colorado, N.A. (the "Trustee") pursuant to that
certain Security Agreement, dated as of September __, 1997 among FPF, the Lender
and the Trustee, an irrevocable power of attorney until all Obligations are paid
in full, with full power of substitution, coupled with an interest, to take any
and all of the following actions, which the Lender, its designee or the Trustee,
as applicable, determines are necessary: (a) receive, take, endorse, assign,
deliver, accept and deposit, in the name of the Lender, the Trustee or FPF, any
and all cash, checks, commercial paper, drafts, remittances and other
instruments and documents relating to the Collateral; (b) transmit to Obligors,
Issuing Insurance Companies, Agents, other obligors or any bailees (including
the Lender, its designee or the Trustee) notice of the interest of the Lender
and the Trustee in the Collateral or request from account Obligors, Issuing
Insurance Companies, Agents or such other obligors or bailees at any time, in
the name of FPF, the Trustee or the Lender or any designee of the Lender,
information concerning the Collateral and any amounts owing with respect
thereto; (c) notify Obligors, Issuing Insurance Companies, Agents or other
obligors to make payment directly to the Lender or the Trustee on behalf of the
Lender, or notify bailee (including the Lender, its designee or the Trustee) as
to the disposition of Collateral; (d) take or bring, in the name of the Lender,
the Trustee or FPF, all steps, actions, suits or proceedings deemed by the
Lender or its designee necessary or desirable to direct collection of or other
realization upon the accounts and other Collateral or to otherwise enforce the
rights of the Lender, its designee or the Trustee with respect to any of the
Collateral; (e) after an Amortization Event, change the address for delivery of
mail to FPF and to receive and open mail addressed to FPF; (f) after an
Amortization Event, extend the time of payment of, compromise or settle for
cash, credit, return of merchandise, and upon any terms or conditions, any and
all accounts or other Collateral which includes a monetary obligation and
discharge or release the Obligors or other obligor, without affecting any of the
Obligations; and (g) execute in the name of FPF and file against FPF in favor of
the Trustee, the Lender and its assignees financing statements or amendments
with respect to the Collateral.
Capitalized terms used and not otherwise defined herein shall have the
meaning ascribed to such terms in the Loan Agreement.
1
<PAGE>
IN WITNESS WHEREOF, the undersigned a duly authorized officer of FPF,
Inc. hereunto sets his hand this _______ day of September, 1997.
FPF, INC.
Bruce I. Lundy
Executive Vice President
STATE OF COLORADO )
) ss.:
COUNTY OF DENVER )
BE IT REMEMBERED, that on this ___ day of September, 1997, before me
the undersigned, a Notary Public in and for the County and State aforesaid, came
Bruce I. Lundy, Executive Vice President of FPF, Inc., a corporation duly
organized, incorporated and existing under and by virtue of the laws of
Colorado, who is personally known to me to be such officer, and who is
personally known to me to be the same person who executed, as such officer, the
within instrument on behalf of said corporation, and such person duly
acknowledged the execution of the same to be the act and deed of said
corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year last above written.
Notary Public
My commission expires:
- ---------------------------
2
<PAGE>
MODIFICATION AGREEMENT
This MODIFICATION AGREEMENT ("Modification") is entered into as of May
1, 1998 by and among FPF, INC., a Colorado corporation ("FPF"), FEDERATED
PREMIUM FINANCE, INC., a Florida corporation, as originator (the "Originator"),
FLATIRON FUNDING COMPANY, LLC, a Delaware limited liability company (the
"Lender"), FEDERATED FUNDING CORPORATION, a Florida corporation (the "Residual
Interest Holder") and FLATIRON CREDIT COMPANY, INC. ("Flatiron").
WITNESSETH;
WHEREAS, pursuant to that certain Revolving Credit and Term Loan
Agreement dated as of September 24, 1997 by and among the Lender and FPF (the
"Loan Agreement"), the Lender has loaned and will loan to FPF, subject to the
conditions thereof, funds for the acquisition by FPF of certain Premium Loans
originated by the Originator pursuant to that certain Sale and Assignment
Agreement dated as of September 24, 1997 by and between FPF, as purchaser, and
the Originator, as seller (the "Sale and Assignment Agreement") and contingent
upon certain advances by the Residual Interest Holder under the Residual
Purchase and Funding Agreement dated September 24, 1997 (the "Residual
Agreement"); and
WHEREAS, the Agreement has definitions contained therein to which
reference is made to that certain Agreement of Definitions by and among the
parties to this Modification dated as of September 24, 1997 (the "Agreement of
Definitions"); and
WHEREAS, the Loan Agreement, Sale and Assignment Agreement, the
Residual Agreement and the Agreement of Definitions and all exhibits to said
documents are collectively referred to herein as the "Documents"; and
WHEREAS, all capitalized terms used herein and not otherwise defined in
the Documents shall have the meaning set forth herein; and
WHEREAS, the parties desire to modify and amend the Documents as
hereinafter set forth.
NOW THEREFORE, in consideration of the covenants, conditions and
agreements contained in the Documents, and for good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby amend the Agreement of Definitions and all other Documents as follows:
1. AMENDED AND RESTATED PROMISSORY NOTE. All recitations and references
to the Note in the Agreement of Definitions and in Section 1.05 of the
Loan Agreement shall refer to that certain Amended and Restated
Promissory Note in the face principal amount of $4,000,000 dated as of
the date hereof, executed by FPF in favor of Lender (the "Amended
Note"). The Amended Note constitutes an amendment and restatement of
the Promissory Note dated September 24, 1997 in the face principal
amount of $3,000,000
<PAGE>
executed by the FPF in favor of the Lender pursuant to the Loan
Agreement (the "Original Note") and supersedes and replaces the
Original Note. The Amended Note provides for a reduction in the
interest rate as compared to the Original Note.
2. The PURCHASE COMMITMENT FEE as described in Section 2.02 (c) (ii) of
the Residual Agreement shall be waived through June 30, 1998.
3. MAXIMUM CREDIT COMMITMENT as described in the Agreement of Definitions
shall mean $4,000,000.
4. DOCUMENT RATIFICATION. All terms, conditions and covenants of the
Documents, not otherwise modified hereby, are hereby ratified and
confirmed and this Agreement, when executed by the parties hereto,
shall become a part of the Documents and shall have the same force and
effect as if the terms and conditions hereof were originally
incorporated in the Documents prior to the execution thereof.
[SIGNATURE PAGE FOLLOWS]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Modification
Agreement to be executed by their respective officers thereunder duly authorized
as of the date and year first above written.
FLATIRON FUNDING COMPANY, LLC
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
FPF, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
FEDERATED PREMIUM FINANCE, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
FEDERATED FUNDING CORPORATION
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
FLATIRON CREDIT COMPANY, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
3
EXHIBIT 10.6
SALE AND ASSIGNMENT AGREEMENT
BETWEEN
FEDERATED PREMIUM FINANCE, INC.,
AS ORIGINATOR,
AND
FPF, INC.
DATED AS OF SEPTEMBER __, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I
CERTAIN DEFINITIONS.......................................... 2
ARTICLE II
PURCHASE, SALE AND CONTRIBUTION OF PREMIUM RECEIVABLES
Section 2.01. Purchase and Sale of Eligible Premium Receivables........... 2
Section 2.02. Additional Sales of Premium Receivables..................... 3
Section 2.03. The Acquisition Date Closings............................... 5
Section 2.04. Characterization of Assignment; Financing Statements........ 5
Section 2.05. Ownership of Servicer Documents............................. 6
Section 2.06. Fees........................................................ 6
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.01. Representations and Warranties of the Originator............ 6
ARTICLE IV
CONDITIONS
Section 4.01. Conditions to Obligation of FPF............................. 7
Section 4.02. Conditions to Obligation of the Originator.................. 9
ARTICLE V
COVENANTS OF THE ORIGINATOR
Section 5.01. Protection of Right, Title and Interest..................... 9
Section 5.02. Other Liens or Interests.................................... 10
Section 5.03. Principal Executive Office.................................. 10
Section 5.04. Costs and Expenses.......................................... 10
Section 5.05. Notice to Obligors; Notice to Insurance Companies........... 10
Section 5.06. Additional Sales of Premium Receivables..................... 11
1
<PAGE>
Section 5.07. No Impairment of Premium Receivables; Payments to Obligors.. 11
Section 5.08. INTENTIONALLY LEFT BLANK.................................... 11
Section 5.09. Activities of Originator.................................... 12
Section 5.10. Agreement Not to Institute Bankruptcy Proceedings........... 12
Section 5.11. Additional Affirmative Covenants............................ 12
ARTICLE VI
PROVIDING OF NOTICE.......................................... 14
ARTICLE VII
INDEMNIFICATION.............................................. 14
ARTICLE VIII
MISCELLANEOUS PROVISIONS
Section 8.01. Obligations of Originator................................... 15
Section 8.02. Reacquisition Events........................................ 15
Section 8.03. FPF's Assignment of Reacquired Premium Receivables.......... 16
Section 8.04. Assignment to Trustee; Further Cooperation.................. 16
Section 8.05. Amendment................................................... 17
Section 8.06. Waivers..................................................... 17
Section 8.07. Notices..................................................... 17
Section 8.08. Costs and Expenses.......................................... 17
Section 8.09. Representations............................................. 18
Section 8.10. Third Party Beneficiaries................................... 18
Section 8.11. Lender to Receive Reports................................... 18
Section 8.12. Governing Law............................................... 18
Section 8.13. Jurisdiction................................................ 18
Section 8.14. Waiver of Jury Trial........................................ 19
Section 8.15. Severability of Provisions.................................. 19
Section 8.16. Counterparts................................................ 19
Section 8.17. Captions.................................................... 19
Section 8.18. Legal Holidays.............................................. 19
Section 8.19. Advice from Independent Counsel............................. 19
Section 8.20. Judicial Interpretation..................................... 20
Section 8.21. Confidentiality............................................. 20
EXHIBIT A--Assignment..................................................... A-1
EXHIBIT B--Schedule of Premium Receivables................................ B-1
EXHIBIT C--Form of Notice to Insurers..................................... C-1
EXHIBIT D--Sample Premium Finance Agreement............................... D-1
2
<PAGE>
EXHIBIT E--Form of Notice to Obligor...................................... E-1
EXHIBIT F--Representations and Warranties................................. F-1
3
<PAGE>
SALE AND ASSIGNMENT AGREEMENT
This SALE AND ASSIGNMENT AGREEMENT is made as of September __, 1997, by
and between FEDERATED PREMIUM FINANCE, INC., a Florida corporation having its
principal place of business at 735 E. Oakland Park Blvd., Oakland Park, Florida
33334 (the "Originator"), and FPF, INC., a Colorado corporation, having its
principal place of business at 1801 California Street, Suite 3920, Denver,
Colorado 80202 ("FPF").
WHEREAS, the Originator has (a) originated Premium Receivables to
finance payments by Obligors of premiums for the purchase of personal lines
insurance policies, and (b) entered into the Premium Finance Agreements which
evidence such Premium Receivables; and
WHEREAS, in connection with origination of the Premium Receivables, the
Originator, in the ordinary course of its business, obtains a security interest
arising under statutory authority or otherwise in the unearned premiums,
dividends and loss payments with respect to the insurance policies, and also
obtains a security interest arising under statutory authority or otherwise in
state or industry guaranty funds for the reimbursement of unearned premiums from
failed insurance carriers; and
WHEREAS, pursuant to the terms of this Agreement, the Originator
desires to Sell all of its right, title and interest in, to and under such
Premium Receivables to FPF; and
WHEREAS, pursuant to the terms of a Revolving Loan Agreement, Flatiron
Funding Company, LLC (the "Lender") has set forth the terms pursuant to which it
will loan funds to FPF, which loan or loans will be secured by the Premium
Receivables acquired by FPF pursuant to this Agreement and pledged and assigned
by FPF to the Lender pursuant to such Revolving Loan Agreement; and
WHEREAS, pursuant to the terms of this Agreement, FPF and the
Originator have set forth the terms pursuant to which (a) the Originator will
Sell all of its right, title and interest in, to and under the Premium
Receivables identified as described herein to FPF, and (b) during the term of
the Revolving Loan Agreement, additional Premium Receivables shall from time to
time be Sold by the Originator to FPF; and
WHEREAS, pursuant to the Premium Receivable Servicing Agreement, the
Originator has agreed to service the Conveyed Property on behalf of FPF,
Flatiron, the Lender and the Lender's Funding Source; and
WHEREAS, the Lender may from time to time pledge and assign its
interests in the Premium Receivables and the other Conveyed Property to the
Lender's Funding Source, a trust, trustee or other financing entity.
NOW, THEREFORE, in consideration of the foregoing, other good and
valuable consideration, and the mutual terms and covenants contained herein, the
parties hereto agree as follows:
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<PAGE>
ARTICLE I
CERTAIN DEFINITIONS
Capitalized terms used but not otherwise defined in this Agreement
shall have the meaning set forth in the Agreement of Definitions, dated as of
the date hereof, by and among the Originator, FPF, Flatiron, the Residual
Interest Holder and the Lender.
"AGREEMENT" means this Sale and Assignment Agreement and all amendments
hereof and supplements hereto.
"STATE" means the State of Florida.
ARTICLE II
PURCHASE, SALE AND CONTRIBUTION OF PREMIUM RECEIVABLES
Section 2.01. PURCHASE AND SALE OF ELIGIBLE PREMIUM RECEIVABLES. On or
prior to the Closing Date and on any subsequent Acquisition Date, subject to the
terms and conditions of this Agreement, the Originator agrees to Sell to FPF,
and FPF agrees to purchase from the Originator, all Eligible Premium Receivables
originated and then owned by the Originator; provided, however, there shall be a
$5,000 minimum purchase on each Closing Date or subsequent Acquisition Date, as
the case may be. The Eligible Premium Receivables to be Sold and purchased
hereunder on the Closing Date shall be identified on a Schedule of Premium
Receivables attached to an Assignment. For purposes of this Agreement,
Endorsement Additions purchased hereunder shall constitute Acquisition Date
Premium Receivables on the Acquisition Date immediately following the date of
the Endorsement Addition.
(a) INITIAL SALE OF ELIGIBLE PREMIUM RECEIVABLES. On or prior
to the Closing Date and simultaneously with the transactions
contemplated pursuant to the Revolving Loan Agreement, the Residual
Agreement and this Agreement, the Originator shall Sell to FPF, without
recourse, except as specifically provided herein, a 100% interest in
all right, title and interest of the Originator in, to and under the
Closing Date Premium Receivables identified on the Schedule of Premium
Receivables delivered in connection with such Sale (the "Closing Date
Conveyed Property"). The consideration for the Closing Date Premium
Receivables shall be the Acquisition Price.
(b) CLOSING DATE PREMIUM RECEIVABLES' ACQUISITION PRICE. In
consideration for the Closing Date Conveyed Property, FPF shall, on the
Closing Date, pay from its own funds or cause the Lender to pay to the
Originator the Acquisition Price in such manner as may be agreed to
between the Originator and FPF; provided, however, that the Acquisition
Price to be paid on the Closing Date by, or on behalf of, FPF to the
Originator shall be net of the Residual Advance, which FPF hereby
agrees to direct the Residual Interest Holder to pay directly to the
Originator pursuant to Section 2.02 of the Residual Agreement unless,
at the direction of FPF pursuant to Section 2.02 of the Residual
Agreement, such Residual Advance has been paid to FPF for payment to be
2
<PAGE>
made to the Originator pursuant to this Section 2.01(b). The Originator
acknowledges and agrees that if any funds to be used by FPF to purchase
such Closing Date Premium Receivables (i) are to be funded by the
Lender, such funds shall be disbursed by the Lender pursuant to Section
1.02 of the Revolving Loan Agreement and/or (ii) are to be funded by
the Residual Interest Holder, such funds shall be disbursed by the
Residual Interest Holder pursuant to Section 2.02 of the Residual
Agreement. The Originator further acknowledges that, notwithstanding
the source of funds for the Acquisition Price, all such Sales shall be
deemed Sales by the Originator to FPF.
(c) SALES OF ELIGIBLE PREMIUM RECEIVABLES DURING LOAN TERM. On
each Acquisition Date during the term of the Revolving Loan Agreement,
the Originator shall Sell to FPF, without recourse, except as
specifically provided herein, and FPF shall purchase from the
Originator, a 100% interest in all right, title and interest of the
Originator in, to and under the Acquisition Date Premium Receivables
identified on a Schedule of Premium Receivables delivered in connection
with such Sale (collectively, the "Acquisition Date Conveyed
Property").
(d) ACQUISITION DATE PREMIUM RECEIVABLES' ACQUISITION PRICE.
In consideration for the Acquisition Date Conveyed Property, upon two
Business Days' prior notice given by the Originator to FPF, FPF shall,
on each Acquisition Date, pay from its own funds or cause the Lender to
pay to the Originator the Acquisition Price in such manner as may be
agreed to between the Originator and FPF; provided, however, that the
Acquisition Price to be paid on each such Acquisition Date by, or on
behalf of, FPF to the Originator shall be net of the Residual Advance,
which FPF hereby agrees to direct the Residual Interest Holder to pay
directly to the Originator pursuant to Section 2.02 of the Residual
Agreement unless, at the direction of FPF pursuant to Section 2.02 of
the Residual Agreement, such Residual Advance has been paid to FPF for
payment to be made to the Originator pursuant to this Section 2.01(d).
The Originator acknowledges and agrees that if any funds to be used by
FPF to purchase such Acquisition Date Premium Receivables (i) are to be
funded by the Lender, such funds shall be disbursed by the Lender
pursuant to Section 1.02 of the Revolving Loan Agreement and/or (ii)
are to be funded by the Residual Interest Holder, such funds shall be
disbursed by the Residual Interest Holder pursuant to Section 2.02 of
the Residual Agreement. The Originator further acknowledges that,
notwithstanding the source of funds for the Acquisition Price, all such
Sales shall be deemed Sales by the Originator to FPF.
Section 2.02. ADDITIONAL SALES OF PREMIUM RECEIVABLES. On or prior to
the Closing Date, subject to the terms and conditions of this Agreement, the
Originator agrees to Sell to FPF, and FPF agrees to purchase from the
Originator, all remaining Premium Receivables originated or acquired and then
owned by the Originator or its Affiliates (except (i) those Eligible Premium
Receivables to be sold pursuant to Section 2.01 and (ii) any Premium Receivable
which, as of the Closing Date, was not originated or acquired in accordance, or
does not comply, with all requirements of applicable federal, state and local
laws and all regulations thereunder) (the "Additional Premium Receivables"). It
is intended that the Additional Premium Receivables to be Sold pursuant to this
Section 2.02 will not be Eligible Premium Receivables. Such Additional
3
<PAGE>
Premium Receivables to be Sold and purchased hereunder on the Closing Date shall
be identified on a Schedule of Premium Receivables attached to an Assignment.
For purposes of this Agreement, Endorsement Additions Sold hereunder shall
constitute Acquisition Date Premium Receivables on the Acquisition Date
immediately following the date of the Endorsement Addition.
(a) INITIAL SALE OF ADDITIONAL PREMIUM RECEIVABLES. On or
prior to the Closing Date and simultaneously with the transactions
contemplated pursuant to the Revolving Loan Agreement and hereunder,
the Originator shall Sell to FPF, without recourse, except as
specifically provided herein, a 100% interest in all right, title and
interest of the Originator in, to and under the Additional Premium
Receivables identified on the Schedule of Premium Receivables delivered
in connection with such Sale (the "Closing Date Additional Conveyed
Property").
(b) CLOSING DATE ADDITIONAL PREMIUM RECEIVABLES' ACQUISITION
PRICE. In consideration for the Closing Date Additional Conveyed
Property, FPF shall, on the Closing Date, pay from its own funds to the
Originator the Acquisition Price in such manner as may be agreed to
between the Originator and FPF; provided, however, that the Acquisition
Price to be paid on the Closing Date by FPF to the Originator shall be
net of the Residual Advance, which FPF hereby agrees to direct the
Residual Interest Holder to pay directly to the Originator pursuant to
Section 2.02 of the Residual Agreement. The Originator hereby
acknowledges and agrees that if any funds to be used by FPF to purchase
such Additional Premium Receivables on the Closing Date are to be
funded by the Residual Interest Holder, such funds shall be disbursed
by the Residual Interest Holder pursuant to Section 2.02 of the
Residual Agreement. The Originator further acknowledges that,
notwithstanding the source of funds for the Acquisition Price, all such
Sales shall be deemed Sales by the Originator to FPF.
(c) SALES OF ADDITIONAL PREMIUM RECEIVABLES DURING LOAN TERM.
On each Acquisition Date during the term of the Revolving Loan
Agreement, the Originator shall Sell to FPF, without recourse, except
as specifically provided herein, and FPF shall purchase from the
Originator, a 100% interest in all right, title and interest of the
Originator in, to and under the Acquisition Date Additional Premium
Receivables identified on a Schedule of Premium Receivables delivered
in connection with such Sale (collectively, the "Acquisition Date
Additional Conveyed Property").
(d) ACQUISITION DATE ADDITIONAL PREMIUM RECEIVABLES'
ACQUISITION PRICE. In consideration for the Acquisition Date Additional
Conveyed Property, upon two Business Days' prior notice given by the
Originator to FPF, FPF shall, on each Acquisition Date, pay from its
own funds to the Originator the Acquisition Price in such manner as may
be agreed to between the Originator and FPF; provided, however, that
the Acquisition Price to be paid on each Acquisition Date by FPF to the
Originator shall be net of the Residual Advance, which FPF hereby
agrees to direct the Residual Interest Holder to pay directly to the
Originator pursuant to Section 2.02 of the Residual Agreement. The
Originator hereby acknowledges and agrees that if any funds to be used
by FPF to purchase such
4
<PAGE>
Additional Premium Receivables on any Acquisition Date are to be funded
by the Residual Interest Holder, such funds shall be disbursed by the
Residual Interest Holder pursuant to Section 2.02 of the Residual
Agreement. The Originator further acknowledges that, notwithstanding
the source of funds for the Acquisition Price, all such Sales shall be
deemed Sales by the Originator to FPF.
Section 2.03. THE ACQUISITION DATE CLOSINGS. The Sale and purchase of
the Acquisition Date Premium Receivables on each Acquisition Date during the
term of the Revolving Loan Agreement shall take place at the offices of the
Originator specified on page 1 hereof or such other location as FPF and the
Originator may reasonably agree.
Section 2.04. CHARACTERIZATION OF ASSIGNMENT; FINANCING STATEMENTS.
(a) The Originator and FPF intend that each purchase and Sale
under Section 2.01 and Section 2.02 be treated as a true and absolute
Sale of all of the Originator's right, title and interest in, to and
under the Premium Receivables identified on the Schedule of Premium
Receivables delivered in connection with each such Sale, together with
all of the Loan Documents and Servicer Documents, all proceeds of the
foregoing and all of the Originator's rights to any payment from the
Obligors and any and all rights against any Obligor with respect to
such Premium Receivables and other related property and all collateral
and guaranties with respect to such Premium Receivables and other
related property (collectively, the "Conveyed Property"), and not a
transfer intended as a security interest. However, if, notwithstanding
such intention, a determination is made by a court with appropriate
jurisdiction over the matter that such transfer shall not be treated as
a true and absolute Sale, this Agreement shall be deemed to constitute
a security agreement and the transactions effected hereby shall be
deemed to constitute a secured financing, and the Originator hereby
pledges and grants to FPF a first priority Lien on, and security
interest in, to and under, all of Originator's right, title and
interest in, to and under the Premium Receivables and any other related
Conveyed Property as collateral for and as security for all amounts
paid and to be paid by FPF to the Originator and any obligations
created by or owing to the Originator pursuant to this Agreement.
(b) On the Closing Date with respect to the Closing Date
Premium Receivables and, only with respect to clause (i) below, on each
Acquisition Date with respect to the related Acquisition Date Premium
Receivables, (i) the Originator shall record and file, at FPF's sole
expense, appropriate UCC-3 termination statements with respect to any
previous Liens on the Conveyed Property being Sold hereunder (but not
with respect to any UCC-1s filed to perfect the Sale of any Conveyed
Property to the Originator or any prior transferor) and (ii) the
Originator shall record and file, at FPF's sole expense, a UCC-1
financing statement in each jurisdiction in which required by
applicable law, executed by the Originator, as seller or debtor, and
naming FPF, as purchaser or secured party, identifying the Conveyed
Property as collateral, meeting the requirements of the laws of each
such jurisdiction and in such manner as is necessary to perfect the
Sale of the Conveyed Property to FPF as of such date. The Originator
shall
5
<PAGE>
deliver file-stamped copies, or other evidence satisfactory to FPF of
such filings, to FPF on the Closing Date or Acquisition Date, as the
case may be.
Section 2.05. OWNERSHIP OF SERVICER DOCUMENTS. The Originator agrees
that if it retains possession of Servicer Documents with respect to its
activities as Servicer under the Premium Receivable Servicing Agreement, that
such Servicer Documents will remain the property of FPF and will be held in
trust by the Originator, as Servicer, for the benefit of FPF hereunder, for the
benefit of the Lender pursuant to the Revolving Loan Agreement and for the
benefit of the Lender's Funding Source or any other financing Person.
Section 2.06. FEES. In consideration of the purchase commitment
pursuant to the provisions hereof, the Originator agrees to pay, on behalf of
FPF, to the Lender the unpaid balance of the Closing Fee, in satisfaction of
Section 1.03(a) of the Revolving Loan Agreement, payable immediately upon the
execution of this Agreement by the Originator. The Closing Fee is fully earned
and non-refundable as of the date hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.01. REPRESENTATIONS AND WARRANTIES OF THE ORIGINATOR.
(a) The Originator hereby represents and warrants to FPF as of
the Closing Date and each subsequent Acquisition Date, each of the
representations and warranties contained in Sections 1 and 2 of Exhibit
F hereto.
(b) The Originator hereby represents and warrants to FPF as of
the Closing Date and each subsequent Acquisition Date and, with respect
to Eligible Premium Receivables as of any date of determination, each
of the representations and warranties contained in (i) Section 3 of
Exhibit F hereto as to each of the Eligible Premium Receivable and (ii)
Section 4 of Exhibit F hereto as to each of the Additional Premium
Receivables, and which is Sold to FPF hereunder on such date, on which
FPF relies in accepting such Premium Receivable.
(c) The representations and warranties made by the Originator
in Section 3.01(a) and (b), subject to Section 8.02 hereof, shall
survive the Sale of each such Premium Receivable to FPF, the Grant of
each such Premium Receivable to the Lender and the subsequent Grant or
pledge to the Lender's Funding Source or other financing Person
pursuant to the provisions of the Revolving Loan Agreement.
6
<PAGE>
ARTICLE IV
CONDITIONS
Section 4.01. CONDITIONS TO OBLIGATION OF FPF. The obligation of FPF to
purchase the Conveyed Property on the Closing Date or any Acquisition Date is
subject to the satisfaction of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE. The representations
and warranties of the Originator hereunder shall be true, correct and
complete on the Closing Date or Acquisition Date, as the case may be,
with the same effect as if then made, and the Originator shall have
performed all obligations to be performed by it hereunder on or prior
to the Closing Date or Acquisition Date, as the case may be.
(b) NO BREACH OF COVENANTS. As of the Closing Date or
Acquisition Date, as the case may be, the Originator shall be in
compliance with all covenants made by the Originator hereunder.
(c) NO DEFAULTS. As of the Closing Date or Acquisition Date,
as the case may be, no Amortization Event has occurred and is
continuing.
(d) FILES MARKED; FILES AND RECORDS OWNED BY FPF. The
Originator shall, at its own expense, on or prior to the Closing Date
or Acquisition Date, as the case may be, indicate in its files and its
Servicer Documents that the Conveyed Property Sold on such date has
been Sold to FPF pursuant to this Agreement, and Granted by FPF to the
Lender, and the Originator shall deliver to FPF, and the Lender or its
designee on the Closing Date or such Acquisition Date, as the case may
be, a Schedule of Premium Receivables certified by the Chairman, the
President, the Vice President or the Treasurer of the Originator to be
true, correct and complete. Further, the Originator hereby agrees that
the Servicer Documents, computer files and other physical records of
the Premium Receivables maintained by the Originator as Servicer or
subservicer will bear an indication reflecting that the Premium
Receivables have been Sold to FPF pursuant to this Agreement, and
Granted by FPF to the Lender and its assignees (including, without
limitation, the Lender's Funding Source), and that all documents
relating thereto held by the Originator as Servicer pursuant to the
Servicing Agreement or otherwise are owned by FPF and have been Granted
to the Lender.
(e) DOCUMENTS TO BE DELIVERED BY THE ORIGINATOR TO FPF ON THE
CLOSING DATE AND EACH ACQUISITION DATE.
(i) THE ASSIGNMENT. On the Closing Date with
respect to the Closing Date Premium Receivables and on each
Acquisition Date with respect to the related Acquisition Date
Premium Receivables, the Originator shall execute and deliver
an Assignment and a Schedule of Premium Receivables with
respect to the Conveyed Property being Sold hereunder on such
date.
(ii) EVIDENCE OF UCC FILINGS. On the Closing Date
with respect to the Closing Date Premium Receivables and on
each Acquisition Date with respect to the related Acquisition
Date Premium Receivables, the Originator shall (A)
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provide evidence satisfactory to FPF that any previous Liens
on the Conveyed Property have been released and (B) deliver to
FPF file-stamped copies, or other evidence, satisfactory to
FPF of the UCC filings required pursuant to Section 2.04(b)
hereof.
(iii) LOAN DOCUMENTS. The Lender or its designee, as
custodian for FPF, shall retain possession of the Loan
Documents, including, without limitation, the original Premium
Finance Agreements, evidencing the Premium Receivables being
Sold on such date; provided, that all such original Premium
Finance Agreements shall be stamped with the Assignment Stamp.
(f) SPECIAL CONDITIONS FOR CLOSING DATE. With respect to FPF's
obligations to purchase or acquire Premium Receivables on the Closing
Date:
(i) UCC AND TAX LIEN SEARCH. The delivery to FPF of
a UCC and tax lien search of the Originator satisfactory to
FPF.
(ii) OPINIONS. Receipt by counsel to FPF of such
opinions of counsel to the Originator as FPF shall reasonably
request, in form and substance satisfactory to FPF.
(iii) SECRETARY'S CERTIFICATE. A certificate executed
by the Secretary or Assistant Secretary of the Originator,
certifying as to the following, which shall be attached to
such certificate (A) a copy of the certificate of
incorporation or other charter document of the Originator, (B)
a copy of the bylaws of the Originator, (C) a copy of the
resolutions of the Board of Directors of the Originator
authorizing the execution, delivery and performance by the
Originator of this Agreement, the Premium Receivable Servicing
Agreement and the Agreement of Definitions (collectively, the
"Originator Documents") and the transactions contemplated
hereunder and thereunder, (D) a copy of each insurance premium
finance license held by the Originator together with a
certification by the Originator that no other licenses are
required to conduct its business in accordance with all
applicable laws, rules and regulations, and (E) the names and
true signatures of the officers authorized on its behalf to
sign the Originator Documents, all in form and substance
satisfactory to FPF.
(iv) GOOD STANDING CERTIFICATES. A good standing
certificate (or its equivalent) for the Originator issued by
(A) the Secretary of State of its state of formation, and (B)
the Secretary of State of each state in which it does business
or is purchasing or servicing Premium Receivables, to the
extent that such activities require qualification to do
business in such states.
(v) PAYMENT OF CLOSING FEE. The Originator shall
have paid, on behalf of FPF, to the Lender or its designee,
the Closing Fee then due pursuant to Section 2.06.
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(g) OTHER TRANSACTIONS. The transactions contemplated by (i)
the Revolving Loan Agreement with respect to Advances thereunder and
(ii) the Residual Agreement with respect to Residual Advances
thereunder, shall each have been consummated on the Closing Date or
Acquisition Date, as the case may be.
(h) Originator shall provide to FPF evidence of Originator's
error and omissions insurance coverage in an amount not less than
$500,000 with a deductible of not more than $10,000 per occurrence,
written by an insurance company and under policy language as may be
directed by or approved by FPF, naming both FPF and Lender as a named
insured and loss payee.
Section 4.02. CONDITIONS TO OBLIGATION OF THE ORIGINATOR. The
obligation of the Originator to Sell the Conveyed Property to FPF on the Closing
Date and on each Acquisition Date is subject to the satisfaction of all
obligations to be performed by FPF hereunder on or prior to the Closing Date or
such Acquisition Date, as the case may be.
ARTICLE V
COVENANTS OF THE ORIGINATOR
Section 5.01. PROTECTION OF RIGHT, TITLE AND INTEREST.
(a) FILINGS. The Originator shall cause all termination
statements, or partial releases, as the case may be, with respect to
prior Liens, financing statements and continuation statements and any
other necessary documents covering the right, title and interest of
FPF, the Lender and the Lender's assignee(s), if any, in, to and under
the Conveyed Property to be promptly executed and filed, and at all
times to be kept recorded, registered and filed, all in such manner and
in such places as may be required by law fully to preserve and protect
the right, title and interest of FPF hereunder and the Lender or its
assignee(s) under the Revolving Credit and Term Loan Agreement to the
Conveyed Property. The Originator shall deliver to FPF or its designee
file-stamped, complete copies of, or filing receipts for, any document
recorded, registered or filed as provided above, as soon as available
but in any event within 30 days following such recordation,
registration or filing. FPF shall cooperate with the Originator in
connection with the obligations set forth above and shall execute any
and all documents reasonably required to fulfill the intent of this
Section 5.01(a).
(b) CORPORATE CHANGE. At least 30 days prior to the Originator
making any change in its name, identity or organizational structure
which would make any termination statement, financing statement or
continuation statement filed in accordance with Section 5.01(a)
seriously misleading within the applicable provisions of the UCC or any
title statute, the Originator shall give FPF and the Lender notice of
any such change and shall execute and file such termination statements,
financing statements or amendments as may be necessary or reasonably
required by FPF, the Lender or the
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Lender's assignee(s) to continue the perfection of the respective
interests of FPF, the Lender and the Lender's assignee(s), if any, in
the Conveyed Property.
Section 5.02. OTHER LIENS OR INTERESTS. Except for the Sale hereunder
or as specified herein, the Originator shall not Sell to any other Person, or
Grant, incur, assume or suffer to exist any Lien on the Conveyed Property Sold
hereunder or on any interest therein, and the Originator shall defend the right,
title and interest of FPF and the Lender in, to and under such Conveyed Property
against all claims of third parties claiming through or under the Originator.
Section 5.03. PRINCIPAL EXECUTIVE OFFICE. The Originator shall
maintain, from the date of this Agreement, its principal executive office in the
State. The Originator shall not change the location of its sole place of
business or principal executive office, or change its name, identity or
corporate or other structure, unless (A) it has first given to FPF, the Servicer
and the Lender at least 30 days prior written notice of such change and (B)
before such change becomes effective, it takes all action required by Section
5.01(b) as a result of such change.
Section 5.04. COSTS AND EXPENSES. The Originator agrees to pay all
reasonable costs and disbursements in connection with the perfection, as against
all third parties, of the Sale to FPF of the Originator's right, title and
interest in, to and under the Conveyed Property.
Section 5.05. NOTICE TO OBLIGORS; NOTICE TO INSURANCE COMPANIES.
(a) The Originator shall at FPF's expense, either (i) send or
cause to be sent, within 15 days after the Closing Date or the related
Acquisition Date, as the case may be, by first class mail, postage
prepaid, written notice to each Obligor, or (ii) provide written notice
in the related Premium Finance Agreement, each substantially similar in
form and substance to Exhibit E attached hereto, to the effect that the
Premium Receivable has been Sold by the Originator to FPF pursuant to
this Sale and Assignment Agreement and Granted by FPF to the Lender
pursuant to the Revolving Loan Agreement and that all payments with
respect to such Premium Receivable are required to be made payable as
specified in such notice. Evidence satisfactory to Flatiron shall be
delivered to Flatiron, on or before the thirtieth day following the
Closing Date or Acquisition Date, as the case may be, indicating that
the written notice described in the immediately preceding sentence was
timely mailed or delivered to each Obligor.
(b) With respect to all Premium Receivables, the Originator
shall deliver at FPF's expense or cause to be delivered within 15 days
after the Closing Date or Acquisition Date, as the case may be, by
first class mail, postage prepaid, written notice substantially in the
form of Exhibit C attached hereto to each insurer, that the Originator
has provided financing to the Obligor, that the Obligor's Premium
Receivable has been Sold by the Originator to FPF, and Granted by FPF
to the Lender, and that all payments with respect to such Premium
Receivable are required to be paid, on and after the date of receipt of
such notice, to the Servicer as specified in such notice. Evidence
satisfactory to Flatiron shall be delivered to Flatiron, on or before
the thirtieth day following the Closing
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Date or Acquisition Date, as the case may be, indicating that the
written notice described in the immediately preceding sentence was
timely mailed to each insurer.
(c) The Originator shall promptly respond to reasonable
inquiries from FPF or third parties confirming the Sale of the Conveyed
Property hereunder and the Grant of the Conveyed Property to the
Lender.
Section 5.06. ADDITIONAL SALES OF PREMIUM RECEIVABLES. Subject to
Availability and the terms of the Revolving Loan Agreement, the Originator shall
Sell to FPF and FPF shall purchase subject to the terms and conditions hereof on
each Acquisition Date during the term of the Revolving Loan Agreement, all
Premium Receivables originated or acquired and then owned by the Originator or
its Affiliates except for those Premium Receivables that were not originated or
acquired in accordance, or do not comply, with all requirements of applicable
federal, state and local laws and all regulations thereunder. Such Sale shall
occur within 45 days of origination or acquisition by the Originator or at such
later date as may be mutually agreed to, from time to time, by FPF and
Originator. This covenant and agreement shall be for the benefit of FPF, the
Lender, the Lender's Funding Source and the trustee for the benefit of any
investors in any pool of loans containing the loan contemplated by the Revolving
Loan Agreement, and any such Person may enforce its legal or equitable rights,
remedies or claims hereunder.
Section 5.07. NO IMPAIRMENT OF PREMIUM RECEIVABLES; PAYMENTS TO
OBLIGORS.
(a) The Originator shall not do anything to impair FPF's or
the Lender's rights in and to any of the Conveyed Property Sold and
purchased hereunder or Granted under the Revolving Loan Agreement.
(b) The Originator shall make all payments to any Obligor
necessary to prevent such Obligor from offsetting any earlier
overpayment to the Originator, as the case may be, against any amounts
any such Obligor owes on the Conveyed Property.
Section 5.08. INTENTIONALLY LEFT BLANK.
Section 5.09. ACTIVITIES OF ORIGINATOR. The Originator and any
Affiliate, other than the Residual Interest Holder, thereof shall (i) maintain
its books and records and assets separate from the books and records of those of
the Residual Interest Holder, (ii) maintain separate bank accounts such that no
funds of the Originator or any Affiliate thereof shall be commingled with funds
of the Residual Interest Holder, (iii) conduct its businesses in separately
defined office space from that of the Residual Interest Holder with separate
stationery from that of the Residual Interest Holder, (iv) pay all of its own
expenses, (v) observe all statutory formalities, (vi) conduct its operations so
as not to be substantively consolidated with any other Person or to have its
separate existence disregarded in any state or federal proceeding, and (vii)
keep in full effect its existence, rights and franchises as a corporation under
the laws of its state of organization and obtain and preserve its qualification
to do business in each jurisdiction in which such qualification is or shall be
necessary to protect the validity and enforceability of its activities in all
material respects. Neither the Originator nor any Affiliate thereof shall
guarantee the
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indebtedness of, or make loans to, the Residual Interest Holder. All audited
financial statements of the Originator or any Affiliate thereof that are
consolidated with those of the Residual Interest Holder will contain detailed
notes clearly stating that (i) all of the Residual Interest Holder's assets are
owned by the Residual Interest Holder and not available to satisfy the claims of
creditors of any other Person, and (ii) the Residual Interest Holder is a
separate Person with creditors who have received ownership and/or security
interests in the Residual Interest Holder's assets. The Originator and any
Affiliate thereof shall maintain arm's length relationships with the Residual
Interest Holder. Neither the Originator nor any Affiliate thereof shall hold
itself out to be responsible for the debts of the Residual Interest Holder or
the decisions or actions respecting the daily business and affairs of the
Residual Interest Holder.
Section 5.10. AGREEMENT NOT TO INSTITUTE BANKRUPTCY PROCEEDINGS. The
Originator shall not voluntarily institute any proceedings to adjudicate FPF,
the Lender or the Residual Interest Holder bankrupt or insolvent, consent to the
institution of bankruptcy or insolvency proceedings against FPF, the Lender or
the Residual Interest Holder, file a petition seeking or consenting to
reorganization or relief under any applicable federal or state law relating to
bankruptcy, consent to the appointment of a receiver, liquidator, assignee,
trustee, sequestrator (or other similar official) of FPF, the Lender, the
Residual Interest Holder or a substantial part of its or their property or admit
its or their inability to pay its or their debts generally as they become due or
authorize any of the foregoing to be done or taken on behalf of FPF, the Lender
or the Residual Interest Holder.
Section 5.11. ADDITIONAL AFFIRMATIVE COVENANTS.
(a) COMPLIANCE WITH LAWS, ETC. The Originator shall comply in
all material respects with all applicable laws, rules, regulations and
orders, such compliance to include, without limitation, paying before
the same become delinquent all taxes, assessments and governmental
charges imposed upon it or upon its property except to the extent
contested in good faith.
(b) TANGIBLE NET WORTH AND CAPITAL ADEQUACY/NO OTHER
INDEBTEDNESS. The Originator shall maintain in common or preferred
equity or a combination equity and unsecured subordinated debt (the
"Subordinated Debt"), not less than that amount which is equal to the
greater of (i) 7.5% of the principal balance of all Premium Receivables
purchased by FPF hereunder, or (ii) the total of 100% of the
outstanding balance of all Premium Receivables purchased by FPF
hereunder that are not Eligible Premium Receivables. The terms and
conditions of any Subordinated Debt shall be satisfactory to FPF and
Lender in their sole discretion and any Subordinated Debt lender shall
have entered into a subordination and standby agreement with FPF
containing terms and conditions satisfactory to FPF. For purposes of
this Section 5.11(b), tangible equity means stockholders equity less
intercompany or Affiliate receivables.
(c) REPORTING REQUIREMENTS. The Originator shall furnish to
FPF and to the Lender or its designee:
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(i) within 45 days after the end of each fiscal
quarter of the Originator (commencing with the quarter ending
June 30, 1997), an unaudited balance sheet and income
statement (prepared in accordance with GAAP without
accompanying notes) for the Originator and its subsidiaries
covering the preceding quarter, in each case certified by a
principal financial officer of the Originator to be true,
accurate and complete copies of such financial statements;
(ii) on the earlier of (A) fifteen days after
delivery by an Independent Public Accountant, if any, to the
Originator or (B) March 15 of each year beginning March 15,
1998 a balance sheet and income statement (prepared in
accordance with GAAP) for the Originator and its subsidiaries
covering such preceding fiscal year prepared by the Originator
or its accountants, in each case certified by a principal
financial officer of the Originator to be true, accurate and
complete copies of such financial statements;
(iii) promptly after the filing or receiving thereof,
copies of all reports and notices, if any, which the
Originator or any subsidiary files under ERISA with the
Internal Revenue Service or PBGC or the U.S. Department of
Labor or which the Originator or any subsidiary receives from
any such Person;
(iv) promptly after filing thereof, copies of all
federal and state tax returns filed by, or on behalf of, the
Originator; and
(v) such other information respecting the condition
or operations, financial or otherwise, of the Originator or
any of its subsidiaries as FPF may from time to time
reasonably request.
(d) REPORT ON PROCEEDINGS. Promptly upon (but in no event more
than five Business Days following) the Originator becoming aware of:
(i) any pending investigation of the Originator,
any of its Affiliates or their respective employees,
including, without limitation, the Residual Interest Holder,
by any governmental authority or agency;
(ii) any court or administrative proceeding which
involves the possibility of materially and adversely affecting
the properties, business, prospects, profits, management,
financial position, results of operation or general condition
of the Originator or any of its Affiliates; or
(iii) an event or development (including, without
limitation, a change in any relevant law or regulation) which
could have a material adverse impact on the properties,
business, prospects, profits, management, financial position,
results of operations or general condition of the Originator
or any of its Affiliates, including, without limitation, the
Residual Interest Holder;
such information shall be provided by the Originator to FPF.
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(e) CHANGE IN CONTROL. The Originator shall provide prompt
written notice to FPF if (i) more than ten percent (10%) of the
ownership interest in the Originator is changed after the Closing Date,
(ii) any Person which is a corporation, partnership, trust or other
entity owning more than ten percent (10%) interest in the Originator is
dissolved or liquidated or merged with or into any other Person or for
any period of more than 10 days ceases to exist in its present form and
(where applicable) in good standing and duly qualified under the laws
of the jurisdiction of its incorporation or formation and any
jurisdiction in which such standing or qualification is necessary or
advisable in connection with the conduct of business or (iii) the
Originator commences a sale of all or substantially all of its assets,
except for the Sale of the Conveyed Property by the Originator to FPF
under this Agreement.
(f) CAPITAL EXPENDITURES/OTHER INDEBTEDNESS. The Originator
agrees not to incur any other indebtedness after the Closing
Date without the prior written consent of FPF; provided,
however, this prohibition shall not apply to the 21st Century
Company or its Affiliates. Notwithstanding the above
prohibition, if (i) Originator is in compliance with its
obligations under the Borrowing Documents and (ii) Flatiron
denies a written request by Originator to increase the Maximum
Credit Commitment to $5,000,000, then FPF shall not
unreasonably withhold their consent to Originator incurring
additional indebtedness so long as FPF's and Lender's
interests under any of the Borrowing Documents are not
impaired thereby and so long as FPF continues to enjoy a first
priority interest in all of Originator's Premium Receivables.
(g) MAINTENANCE OF EXISTENCE. The Originator shall not
dissolve or liquidate in whole or in part.
ARTICLE VI
PROVIDING OF NOTICE
The Originator, upon learning of any failure on the part of the
Originator or FPF to observe or perform in any material respect any covenant,
representation or warranty of the Originator or FPF set forth in this Agreement,
the Revolving Loan Agreement, the Residual Agreement or the Premium Receivable
Servicing Agreement, as applicable, shall promptly notify FPF and the Lender of
such failure.
ARTICLE VII
INDEMNIFICATION
(a) The Originator shall indemnify FPF, the Lender, its
assignees (including, without limitation, the Lender's Funding Source)
and all of their respective officers, directors, employees, agents and
any trustee having an interest in the Conveyed Property
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(collectively, the "Originator Indemnified Parties") for any loss,
cost, liability or expense as a result of any material breach of any of
its representations and warranties contained herein or arising from the
fraudulent acts of Originator. These indemnity obligations shall be in
addition to any obligation that the Originator may otherwise have.
(b) The Originator hereby agrees to indemnify each of the
Originator Indemnified Parties for, and to hold each of them harmless
against, any loss, cost, liability or expense incurred without
negligence or bad faith on such Originator Indemnified Party's part,
arising out of, or in connection with, the Originator's failure to
carry out its duties under this Agreement or as a result of its
fraudulent acts and for breach of any representation or warranty made
by the Originator hereunder or arising from the fraudulent acts of
Originator, including, without limitation, the costs and expenses of
defending itself against any claim in connection therewith.
(c) The parties agree that the Originator Indemnified Parties,
as a group, shall be entitled to counsel separate from the Originator
to the extent the Originator's interests are adverse in any manner to
the interests of the Originator Indemnified Parties or to the extent
that the Originator Indemnified Parties have defenses available to it
that are not available to the Originator.
(d) Such payment obligations and indemnification shall survive
the termination of this Agreement and the Revolving Loan Agreement and
payment of all obligations thereunder.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
Section 8.01. OBLIGATIONS OF ORIGINATOR. The obligations of the
Originator under this Agreement shall not be affected by reason of any
invalidity, illegality or irregularity of any Premium Receivable or Conveyed
Property.
Section 8.02. REACQUISITION EVENTS.
(a) The Originator hereby covenants and agrees to deliver to
FPF, the Residual Interest Holder and the Lender prompt written notice
of the occurrence of a breach of any of the Originator's
representations and warranties contained in Section 3 of Exhibit F
hereof with respect to any Eligible Premium Receivable Sold hereunder
which materially adversely affects the interests of FPF, the Lender or
the holder of any interest in any such Premium Receivable and which is
not cured within five Business Days of discovery or receipt of notice
thereof (any such breach, which has not been cured within such five-day
cure period, in accordance with this Section 8.02 shall constitute a
"Reacquisition Event"). Immediately upon the occurrence of any
Reacquisition Event, FPF shall, upon notice by FPF to the Originator
and the Residual Interest Holder, deem the related Premium Receivable
as not being an Eligible Premium Receivable and shall require the
Originator to repurchase such Premium Receivable and the other Conveyed
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Property related thereto at the Reacquisition Amount, unless, so long
as the related Premium Receivable at the time of such Reacquisition
Event was originated or acquired in accordance, and complied, with all
requirements of applicable federal, state and local laws and all
regulations thereunder, the Residual Interest Holder elects to make a
Supplemental Residual Advance pursuant to the Residual Agreement. In
the event that a Supplemental Residual Advance is made hereunder, the
related Premium Receivable shall thereafter be deemed an Additional
Premium Receivable for purposes of this Agreement. In connection with
the foregoing, FPF shall require (i) the Originator to remit any such
Reacquisition Amount or (ii) the Residual Interest Holder to remit any
such Supplemental Residual Advance, as the case may be, to the Servicer
not later than five Business Days after the occurrence of such
Reacquisition Event; provided, however, that, in the event that the
Originator is to repurchase such Residual Advance, FPF may instead
deduct the Reacquisition Amount from the Acquisition Price payable to
the Originator on any Acquisition Date occurring within five Business
Days after the occurrence of a Reacquisition Event. The reacquisition
obligation of the Originator pursuant to this Section 8.02 shall be a
full recourse obligation of the Originator.
(b) 21st Century Holding Corp. as an Affiliate of Originator,
hereby agrees to repurchase (i) the Premium Receivables referred to in
Section 8.02(a) upon the failure of (A) the Originator to do so or (B)
the Residual Interest Holder to elect to make a Supplemental Residual
Advance, each as provided therein, and (ii) any Premium Receivables
originated by the Originator in a fraudulent manner. Edward J. Lawson,
Michele V. Lawson and Ronald A. Raymond hereby jointly and severally
agree that, only if 21st Century Holding Corp. at any time ceases to
own 100% of the ownership interest in Originator or otherwise has
become insolvent, commenced any bankruptcy proceedings, had a receiver
appointed over any of its properties or is generally not paying its
debts as the same become due and payable, then they shall be obligated
to repurchase (i) the Premium Receivables referred to in Section
8.02(a) upon the failure of (A) the Originator to do so or (B) the
Residual Interest Holder to elect to make a Supplemental Residual
Advance, each as provided therein, and (ii) any Premium Receivables
originated by the Originator in a fraudulent manner.
Section 8.03. FPF'S ASSIGNMENT OF REACQUIRED PREMIUM RECEIVABLES. With
respect to all Reacquired Premium Receivables, FPF shall assign and shall cause
the Lender to assign, without recourse, except as specified herein,
representation or warranty, to the Originator all of FPF's and the Lender's
right, title and interest in, to and under such Reacquired Premium Receivables,
and all security and documents relating thereto.
Section 8.04. ASSIGNMENT TO TRUSTEE; FURTHER COOPERATION. The
Originator and FPF acknowledge that all or a portion of FPF's right, title and
interest in the Conveyed Property and this Agreement may be Granted or assigned
by FPF to the Lender and by the Lender to any designee of the Lender, including,
without limitation, the Lender's Funding Source, or to a financing Person or a
trustee, for the benefit of investors acquiring an interest in the Conveyed
Property. The Originator and FPF consent to such Grant by the Lender or any
designee of the Lender to the Lender's Funding Source or any such Person or
trustee and agree that the Lender's
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Funding Source or any such Person or trustee, for the benefit of such investors,
or such investors shall be entitled to enforce the terms of this Agreement and
the rights, benefits and responsibilities of FPF and the Lender hereunder
directly against the Originator, whether or not a Residual Agreement Default or
an Amortization Event or an Event of Servicing Default shall have occurred, and
that each of the representations, warranties and agreements contained in this
Agreement and the rights of FPF created hereunder are intended for the benefit
of such designee, Person, trustee and investors.
Upon notice having been given to the Originator or FPF by the Lender of
its intention to pledge, assign, grant or sell its interest in any advance under
the Revolving Loan Agreement, the Originator agrees, at its expense, to
cooperate and provide such documentation and certificates as the Lender may
reasonably request with respect to such pledge, assignment, grant or sale
consistent with the indemnification, covenants, representations and warranties
contained herein.
Section 8.05. AMENDMENT. This Agreement may be amended from time to
time by a written amendment duly executed and delivered by the Originator and
FPF with the prior written consent of the Lender or the Lender's designees, as
the case may be, and no waiver of any of the terms hereof shall be effective
unless it is in writing and signed by the party or parties whose rights are
being waived and the Lender or the Lender's designee, as the case may be.
Section 8.06. WAIVERS. No failure or delay on the part of FPF, the
Lender or any designee of the Lender in exercising any power, right or remedy
under this Agreement or any other Borrowing Document shall operate as a waiver
thereof, nor shall any single or partial exercise of any such power, right or
remedy preclude any other or further exercise thereof or the exercise of any
other power, right or remedy; provided, however, if FPF, Lender or its designee
has knowingly and consistently waived any right or remedy under this Agreement
as to any act of omission made by Originator for a period of twelve months or
more, then such entity may not claim that such act or omission constitutes a
default under this Agreement entitling FPF, Lender or such designee to exercise
the right or remedy that would otherwise have been available under this
Agreement. No such waiver shall extend to any subsequent or other default or
impair any rights consequent thereon, except to the extent expressly so waived.
Each of the rights, powers and remedies described in this Agreement and the
other Borrowing Documents is cumulative and not exclusive of, and shall not
prejudice, any other right, power or remedy provided in this Agreement, the
other Borrowing Documents or by law. Each such right, power and remedy may be
exercised from time to time as deemed necessary by FPF, the Lender or the
Lender's assignee(s), as applicable, and in such order and manner as such
applicable party may determine. The Originator hereby acknowledges and agrees
that, with respect to a violation or breach by the Originator of any
representation, warranty, covenant or other term or provision of this Agreement
or any of the other Borrowing Documents to which it is a party, it shall be the
Originator's obligation to prepare and obtain a written waiver for such breaches
or violations from FPF. FPF may grant or deny any such requested waiver in its
sole and absolute discretion. At no time may the Originator infer a course of
dealing among the parties that would negate the requirement to obtain a written
waiver from FPF.
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Section 8.07. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be delivered personally
or mailed by first-class registered or certified mail, postage prepaid, or by
telephonic facsimile transmission, electronic mail and overnight delivery
service, postage prepaid, to the parties to this Agreement; provided, that
notices shall be effective upon receipt, and in any case addressed as provided
in the first paragraph of this Agreement or in the Revolving Loan Agreement.
Section 8.08. COSTS AND EXPENSES. The Originator shall pay all expenses
incident to the performance of its obligations under this Agreement and the
Originator agrees to pay all reasonable out-of-pocket costs and expenses of FPF
and the Lender, including fees and expenses of counsel, in connection with the
perfection as against third parties of the Sale to FPF of the Originator's
right, title and interest in, to and under the Conveyed Property, and the
enforcement of any obligation of the Originator hereunder and of the Grant of
the Conveyed Property to the Lender.
Section 8.09. REPRESENTATIONS. The respective agreements,
representations, warranties and other statements by the Originator and FPF set
forth in or made pursuant to this Agreement shall remain in full force and
effect and will survive the Closing Date or Acquisition Date, as the case may
be.
Section 8.10. THIRD PARTY BENEFICIARIES. This Agreement shall inure to
the benefit of the Lender and, after the Lender's assignment thereof, each
assignee (including, without limitation, the Lender's Funding Source), designee,
trustee and each investor acquiring an interest in any advance made under the
Revolving Loan Agreement and any trustee with respect thereto and their
respective successors and assigns. Without limiting the generality of the
foregoing, all representations, covenants and agreements in this Agreement which
expressly confer rights upon the Lender or FPF shall be for the benefit of and
run directly to each assignee, designee, investor and trustee, and the Lender,
each such investor, trustee, assignee or designee shall be entitled to rely on
and enforce such representations, covenants and agreements to the same extent as
if it were a party hereto.
Section 8.11. LENDER TO RECEIVE REPORTS. Copies of all reports and
notices to be provided hereunder shall be simultaneously sent to the Lender and
its designee(s) at such address(es) as the Lender may designate.
Section 8.12. GOVERNING LAW. THIS AGREEMENT AND THE ASSIGNMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE
OF COLORADO WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS.
Section 8.13. JURISDICTION. THE PARTIES HERETO HEREBY IRREVOCABLY
SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF COLORADO AND
THE UNITED STATES DISTRICT COURT OF COLORADO IN ANY ACTION OR PROCEEDING ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR ANY ASSIGNMENT AND THE PARTIES HEREBY
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IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE
HEARD AND DETERMINED IN SUCH COURTS. THE PARTIES HEREBY IRREVOCABLY WAIVE, TO
THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT
FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING AND IRREVOCABLY CONSENT TO
THE SERVICE OF ANY SUMMONS AND COMPLAINT AND ANY OTHER PROCESS BY THE MAILING OF
COPIES OF SUCH PROCESS TO THEM AT THEIR RESPECTIVE ADDRESSES AS SPECIFIED IN
SECTION 8.07. THE PARTIES HEREBY AGREE THAT A FINAL JUDGMENT IN ANY SUCH 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. NOTHING IN THIS
SECTION 8.13 SHALL AFFECT THE RIGHT OF FPF TO SERVE LEGAL PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW OR PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OR ORDER
OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT OR ANY
ASSIGNMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION.
Section 8.14. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY ASSIGNMENT.
Section 8.15. SEVERABILITY OF PROVISIONS. Any part, provision,
agreement, representation, warranty or covenant of this Agreement which is
prohibited or unenforceable or is held to be void or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. To the extent permitted by applicable law, the parties waive
any provision of law which prohibits or renders void or unenforceable any
provision hereof. If the invalidity of any part, provision, agreement,
representation, warranty or covenant of this Agreement shall deprive any party
of the economic benefit intended to be conferred by this Agreement, the parties
shall negotiate in good faith to develop a structure the economic effect of
which is as nearly as possible the same as the economic effect of the
transactions contemplated hereunder without regard to such invalidity.
Section 8.16. COUNTERPARTS. For the purpose of facilitating the
execution of this Agreement and for other purposes, this Agreement may be
executed simultaneously in any number of counterparts, each of which shall be
deemed to be an original, and together shall constitute and be one and the same
instrument.
Section 8.17. CAPTIONS. The article, paragraph and other headings
contained in this Agreement are inserted for convenience only and shall not in
any way affect the meaning or construction of any provision of this Agreement.
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Section 8.18. LEGAL HOLIDAYS. In the case where the date on which any
action required to be taken, document required to be delivered or payment
required to be made is not a Business Day in New York, New York or Denver,
Colorado, such action, delivery or payment need not be made on that date, but
may be made on the next succeeding Business Day.
Section 8.19. ADVICE FROM INDEPENDENT COUNSEL. The parties understand
that this Agreement is a legally binding agreement that may affect such party's
rights. Each party represents to the other that it has received legal advice
from counsel of its choice regarding the meaning and legal significance of this
Agreement and that it is satisfied with its legal counsel and the advice
received from it.
Section 8.20. JUDICIAL INTERPRETATION. Should any provision of this
Agreement require judicial interpretation, it is agreed that a court
interpreting or construing the same shall not apply a presumption that the terms
hereof shall be more strictly construed against any Person by reason of the rule
of construction that a document is to be construed more strictly against the
Person who itself or through its agent prepared the same, it being agreed that
each party has participated in the preparation of this Agreement.
Section 8.21. CONFIDENTIALITY. FPF and Flatiron have provided and may
from time to time in the future provide the Originator with certain Flatiron
Information. In consideration for being furnished with the Flatiron Information,
the Originator agrees that the Flatiron Information shall be kept confidential
by the Originator and shall not, without Flatiron's or FPF's prior written
consent, be disclosed or used by the Originator, in any manner whatsoever, in
whole or in part, and shall not be used or disclosed by the Originator other
than in connection with the transactions contemplated under the Borrowing
Documents. Notwithstanding the foregoing, nothing herein shall prohibit the
Originator from disclosing the Flatiron Information if required by law or
regulation or to any of its agents, Affiliates, employees, officers, directors,
attorneys, accountants or advisors; provided, that the Originator shall use its
best efforts to cause each such recipient to keep such Flatiron Information
confidential.
(SIGNATURE PAGE FOLLOWS)
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IN WITNESS WHEREOF, the parties hereto have caused this Sale and
Assignment Agreement to be executed by their respective officers thereunto duly
authorized as of the date and year first above written.
FEDERATED PREMIUM FINANCE, INC.
FPF, INC.
Bruce I. Lundy, Executive Vice President
Agreed to with respect to Section 8.02(b):
By _______________________
Edward J. Lawson
By _______________________
Michele V. Lawson
By _______________________
Ronald A. Raymond
21st CENTURY HOLDING CORP.
By _______________________
Name: ____________________
Title: ___________________
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EXHIBIT A
ASSIGNMENT
For value received, in accordance with the Sale and Assignment
Agreement dated as of September __, 1997 (the "Agreement") by and between the
undersigned (the "Originator") and FPF, Inc. ("FPF"), the undersigned does
hereby Sell unto FPF, without recourse, except as may otherwise expressly be
provided in the Agreement, all right, title and interest of the undersigned in,
to and under the Premium Receivables identified on the Schedule of Premium
Receivables attached hereto as Exhibit B.
This Assignment is made pursuant to and upon the representations,
warranties and agreements on the part of the undersigned contained in the
Agreement, each of which the undersigned hereby restates and reaffirms, and is
to be governed by the Agreement.
The undersigned hereby certifies that to his actual knowledge after
reasonable inquiry (a) the Schedule of Premium Receivables attached hereto as
Exhibit B is true, correct and complete as of the date hereof and (b) all
conditions precedent in accordance with Section 4.01 of the Agreement have been
satisfied as of the date hereof.
Capitalized terms used herein and not otherwise defined shall have the
meaning assigned to them in the Agreement.
IN WITNESS WHEREOF, the undersigned has caused this Assignment to be
duly executed as of September __, 1997.
FEDERATED PREMIUM FINANCE, INC.
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<TABLE>
<CAPTION>
EXHIBIT B
SCHEDULE OF PREMIUM RECEIVABLES
[CLOSING DATE] [ACQUISITION DATE] , 199
INSURANCE CUT-OFF
NAME AND POLICY ENDORSEMENT DATE ORIGINAL CURRENT
LOAN ADDRESS OF INSURANCE INSURANCE MATURITY ADDITIONS PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER OBLIGOR COMPANY POLICY NUMBER DATE Y/N BALANCE BALANCE BALANCE
------ ------- ------- ------------- ---- --- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Page 1 of 2
</TABLE>
1
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<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF PREMIUM AMOUNT OF DRAFT
LOAN RETURN PREMIUM LENDER'S CURRENT SCHEDULED NEXT PAYMENT RECEIVABLE TO INSURANCE DRAFT DATE OF
NUMBER PARITY ADVANCE APR PAYMENT DUE DATE MATURITY DATE COMPANY NUMBER DRAFT
- ------ ------ ------- --- ------- -------- ------------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Page 2 of 2
<CAPTION>
NOTICE SENT TO
INSURANCE NOTICE SENT TO
COMPANY Y/N OBLIGOR Y/N
----------- -----------
<S> <C>
Page 2 of 2
</TABLE>
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EXHIBIT C
FORM OF NOTICE TO INSURERS
[Co Name]
[Co Address]
[Co City], [Co State] [Co Zip]
[Date of Sale]
To whom it may concern:
WE ARE PROVIDING THE FOLLOWING NOTICE TO YOU FOR INFORMATIONAL PURPOSES ONLY. IT
IS IMPORTANT FOR YOU TO REALIZE THAT THIS NOTICE DOES NOT AFFECT THE INSURANCE
COVERAGE YOUR COMPANY PROVIDES IN ANY WAY. IT IS SOLELY TO NOTIFY YOU THAT
FEDERATED PREMIUM FINANCE, INC. ("FEDERATED") THE PREMIUM FINANCE COMPANY WHICH
FINANCES A PORTION OF YOUR INSUREDS' PREMIUMS, HAS SOLD CERTAIN PREMIUM FINANCE
LOANS TO A THIRD PARTY WHO HAS OBTAINED A CORPORATE LOAN FROM FLATIRON FUNDING
COMPANY, LLC ("FFC"), AND THE RELATED LOAN DOCUMENTS REQUIRE THAT WE NOTIFY YOU
OF THAT FACT.
You are hereby notified that Federated has provided premium financing
to each insured named on the attached list of insureds with corresponding policy
number (each a "Policy") and contract pursuant to a premium finance agreement
(the "Premium Finance Agreement") between Federated and such insured. As of the
date set forth above, Federated will have absolutely sold, assigned, transferred
and conveyed all of its right, title and interest in, to and under each Premium
Finance Agreement and its rights thereunder and all of its rights and interests
under the corresponding Policy and payments of any kind made under the Policy to
FPF, Inc. ("FPF"), which will pledge the Premium Finance Agreement and its
rights thereunder and all of its rights and interests under the corresponding
Policy and payments of any kind made under the Policy to Norwest Bank Colorado,
N.A., as trustee on behalf of FFC, and FFC will pledge the Premium Finance
Agreement and its rights thereunder and all of its rights and interests under
the corresponding Policy and payments of any kind made under the Policy to
Norwest Bank Colorado, N.A, as trustee or custodian under the applicable trust
or custodial agreement (the "Trustee"). Federated will continue to service the
Premium Finance Agreement on behalf of FPF, FFC and the Trustee, as their
interests may appear, until further notice. All inquiries regarding this notice
may be made in writing to: Flatiron Credit Company, Inc., P.O. Box 46166,
Denver, Colorado 80202.
[Name]
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EXHIBIT D
SAMPLE PREMIUM FINANCE AGREEMENT
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EXHIBIT E
FORM OF NOTICE TO OBLIGOR
(EITHER BY LETTER OR BY INCLUSION
OF PARAGRAPH NOTICE IN
PREMIUM FINANCE AGREEMENT)
- --------------------------------------------------------------------------------
THIS IS A NOTICE, FOR INFORMATIONAL PURPOSES
ONLY. DO NOT MAKE ANY CHANGES TO YOUR
PAYMENT PROCESS OR PAYMENT AMOUNTS.
ESTO ES SOLAMENTE UN AVISO, PARA INFORMACION
UNICAMENTE, POR FAVOR, NO COMBIEN EL MODO DE
PROCESO O PAGO DE CANTIDAD DE DINERO.
- --------------------------------------------------------------------------------
[Date]
[Name]
[Address]
[City], [State] [Zip]
Re: Insurance Policy Number: [CONTRACT]
Dear Insured:
FEDERATED PREMIUM FINANCE, INC. ("FEDERATED") IS THE COMPANY WHICH
FINANCED YOUR INSURANCE PREMIUM(S). FEDERATED IS PROVIDING THE FOLLOWING NOTICE
TO YOU FOR INFORMATIONAL PURPOSES ONLY. THE NOTICE IS SIMPLY TO LET YOU KNOW
THAT FEDERATED PREMIUM FINANCE, INC. HAS SOLD THE INTEREST IN YOUR PREMIUM LOAN
TO A THIRD PARTY WHO HAS OBTAINED A CORPORATE LOAN. WE ARE REQUIRED TO NOTIFY
YOU OF THAT FACT. IT IS VERY IMPORTANT FOR YOU TO REALIZE THAT:
1. FEDERATED PREMIUM FINANCE, INC. WILL CONTINUE TO SERVICE YOUR
PREMIUM LOAN ON BEHALF ON THE FINANCE COMPANY (AS DEFINED BELOW) AND THE TRUSTEE
(AS DEFINED BELOW).
2. THIS NOTICE DOES NOT AFFECT YOUR INSURANCE COVERAGE IN ANY WAY.
3. YOU SHOULD CONTINUE MAKING YOUR MONTHLY PAYMENTS IN THE SAME
AMOUNTS, USING YOUR CURRENT COUPONS, AND MAILING THEM TO THE SAME ADDRESS YOU
HAVE USED IN THE PAST.
4. THE TERMS OF YOUR PREMIUM FINANCE AGREEMENT DO NOT CHANGE IN ANY WAY
AS A RESULT OF THIS NOTICE.
You are hereby notified that Federated Premium Finance, Inc.
("Federated") has sold the entire interest in the above-referenced premium
finance agreement (the "Loan") and all of its rights and interests under the
corresponding insurance policy (the "Policy") and payments of any kind made
under the Policy to FPF, Inc. (the "Finance Company"), and that concurrently
with such sale, the Finance Company has pledged the Loan and such rights and
interests of Federated in the Policy and payments of any kind made under the
Policy to Norwest Bank Colorado, N.A., as trustee (the "Trustee"), as security
for a loan. Please continue to direct all payments to: Federated Premium
Finance, Inc. 735 E. Oakland Park Blvd., Oakland Park, Florida 33334. Any
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inquiries regarding this notice may be made in writing to: Flatiron Credit
Company, Inc., P.O. Box 46166, Denver, Colorado 80202.
Federated Premium Finance, Inc.
Mr. Ted Lawson, President
- --------------------------------------------------------------------------------
THIS IS A NOTICE ONLY, FOR INFORMATIONAL
PURPOSES ONLY. DO NOT MAKE ANY CHANGES TO YOUR PAYMENT
PROCESS OR PAYMENT AMOUNTS.
- --------------------------------------------------------------------------------
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EXHIBIT F
REPRESENTATIONS AND WARRANTIES
Section 1. GENERAL REPRESENTATIONS AND WARRANTIES OF THE ORIGINATOR
WITH RESPECT TO SECTION 3.01(A) OF THE SALE AND ASSIGNMENT AGREEMENT.
(a) ORGANIZATION, ETC. The Originator is duly organized and is
validly existing as a corporation in good standing under the laws of
the state of its organization with full power and authority to execute
and deliver, to the extent that the Originator is a party thereto, the
Borrowing Documents and to perform the terms and provisions thereof.
(b) DUE QUALIFICATION. The Originator is duly qualified to do
business as a foreign business entity in good standing, and has
obtained all required licenses and approvals, if any, in all
jurisdictions in which the ownership or lease of property or the
conduct of its business requires such qualifications (except those
jurisdictions in which failure to be so qualified would not have an
adverse effect on the business or operations of the Originator or any
Conveyed Property), and has complied with all federal, state and local
laws and regulations in connection with the origination of the Premium
Receivables and the Sale thereof under the Sale and Assignment
Agreement.
(c) DUE AUTHORIZATION. The execution, delivery and performance
by the Originator of the Borrowing Documents to which it is a party
have been duly authorized by all necessary action of the Originator, do
not and will not conflict with any provision of its constituent
documents, and do not and will not conflict with or result in a breach
which would constitute (with or without notice or lapse of time) a
default under any agreement binding upon or applicable to it or its
property, and to its actual knowledge with reasonable inquiry do not
require any approval or consent of any governmental agency or authority
and do not conflict with any law or governmental regulation or court
decree applicable to it or its property.
(d) NO LITIGATION. No litigation or administrative proceeding
of or before any court, tribunal or governmental body is presently
pending, or threatened, against the Originator or its properties or, to
the extent that the Originator is a party thereto, with respect to the
Borrowing Documents, which, if adversely determined could, in the
reasonable opinion of the Originator, have an adverse effect on the
transactions contemplated by the Borrowing Documents or on the
Originator's ability to perform any of its obligations thereunder.
(e) ENFORCEABILITY. The Borrowing Documents to which the
Originator is a party constitute valid, legal and binding obligations
of the Originator, enforceable against the Originator in accordance
with the terms thereof, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and other laws affecting the enforcement of
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creditor's rights generally and to general principles of equity,
regardless of whether such enforcement is considered in a proceeding in
equity or at law.
Section 2. REPRESENTATIONS AND WARRANTIES OF THE ORIGINATOR WITH
RESPECT TO SECTION 3.01(A) OF THE SALE AND ASSIGNMENT AGREEMENT.
(a) POWER AND AUTHORITY. The Originator, without further
consent, approval or authorization, has the power and authority to
execute and deliver the Borrowing Documents to which it is a party and
to carry out their respective terms; the Originator has full power and
authority to Sell the Conveyed Property and other property from time to
time Sold to FPF under the Sale and Assignment Agreement; and there are
no injunctions, writs, restraining orders or any other order of any
nature which adversely affects the Originator's performance of the
Borrowing Documents, any other related agreement to which the
Originator is a party or any transactions contemplated thereby.
(b) NO VIOLATION. The consummation of the transactions
contemplated by the Borrowing Documents to which the Originator is a
party and the fulfillment of the terms thereof do not conflict with,
result in any breach of any of the terms and provisions of, nor
constitute (with or without notice or lapse of time) a default under,
the certificate of incorporation or bylaws of the Originator, or any
indenture, agreement or other instrument to which the Originator is a
party or by which it or its properties is bound; nor result in the
creation or imposition of any Lien upon any of its properties pursuant
to the terms of any such indenture, agreement or other instrument
(other than the Sale and Assignment Agreement); nor to the actual
knowledge of Originator with reasonable inquiry, violate any applicable
laws, rules, regulations or orders regarding the conduct of the
Originator's business or the ownership of its properties; nor to the
actual knowledge of Originator with reasonable inquiry, violate any law
or any order, rule or regulation applicable to the Originator of any
court or of any federal or state regulatory body, administrative
agency, or other governmental instrumentality having jurisdiction over
the Originator or its properties except, in each case, for such
violations, conflicts, breaches, Liens and defaults which could not, in
the reasonable judgment of the Originator, have an adverse effect on
the condition (financial or otherwise) of the Originator, any Conveyed
Property or the Originator's obligations under the Borrowing Documents
to which it is a party.
(c) ABILITY TO PERFORM. There has been no impairment in the
ability of Originator to perform its obligations under the Borrowing
Documents to which it is a party.
(d) NO MATERIAL LIABILITIES. The Originator does not have
material liabilities or obligations other than those previously
disclosed in writing to FPF.
(e) NO MATERIAL MISSTATEMENTS OR OMISSIONS. No information,
certificate of an officer or statement furnished in writing or report
delivered to FPF or the Lender by
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the Originator contains any untrue statement of a material fact or
omits a material fact necessary to make such information, certificate,
statement or report not misleading. There is no fact peculiar to the
Originator or any Affiliate of the Originator or, to its actual
knowledge after reasonable inquiry, any Premium Receivable or Obligor,
which it has not disclosed to FPF in writing which could materially
adversely affect the Originator's ability to perform the transactions
contemplated by the Borrowing Documents to which the Originator is a
party.
(f) NO UNPAID TAXES. All tax returns required to be filed by
the Originator in any jurisdiction have in fact been filed, and all
taxes, assessments, fees, claims and other governmental charges upon it
or any subsidiary or upon any of their respective properties, income or
franchises (including, without limitation, any taxes required to be
paid by the Originator relating to all payroll, FICA, unemployment and
other taxes, assessments, fees, claims and other charges relating to
the employees of the Originator), shown to be due and payable on such
returns have been paid; provided, that the Originator shall not be
required to pay or discharge any such tax, assessment, fee, claim or
other charge which is being contested in good faith and by proper
proceedings and as to which appropriate reserves are being maintained
in accordance with GAAP. To the best of the Originator's knowledge, all
such tax returns were true and correct and neither it nor any
subsidiary knows of any contemplated or proposed additional tax
assessment against it in any material amount or of any basis therefor.
(g) ADEQUATE PROVISIONS FOR TAXES. The provisions for taxes on
the Originator's books are in accordance with GAAP.
(h) ERISA. No contribution failure has occurred with respect
to any Pension Plan sufficient to give rise to a lien under Section
302(f) of ERISA and no notice of intent to terminate a Pension Plan has
been filed, nor has any Pension Plan been terminated under Section
4041(e) of ERISA, nor has the PBGC instituted proceedings to terminate,
or appoint a trustee to administer, a Pension Plan, and no event has
occurred or condition exists which might constitute grounds under
Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Pension Plan.
(i) SOLVENCY. The fair salable value of the assets on a going
concern basis of the Originator and its subsidiaries, on an undivided
and a consolidated basis, as of the time of, and after giving effect
to, each Sale of the Premium Receivables under the Sale and Assignment
Agreement, is in excess of the total amount of their respective
liabilities. With respect to the Closing Date and any Acquisition Date,
as the case may be, at the close of the immediately preceding fiscal
quarter of the Originator, the Originator had a positive net worth.
(j) PRINCIPAL EXECUTIVE OFFICE. The principal executive office
of the Originator is, and for a period of not less than four months
preceding the Closing Date
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has been, the notice address in the opening paragraph of the Sale and
Assignment Agreement.
(k) LEGAL NAMES. "Federated Premium Finance, Inc." is the only
legal name under which the Originator currently is operating its
business. The Originator has not changed its name in the last six (6)
years (or such shorter period of time during which the Originator was
in existence) and does not have any other trade names, fictitious
names, assumed names or "doing business as" names.
(l) VALID BUSINESS REASONS; NO FRAUDULENT TRANSFERS. The
transactions contemplated by the Sale and Assignment Agreement are in
the ordinary course of the Originator's business and the Originator has
valid business reasons for selling the related Conveyed Property rather
than obtaining a secured loan with the Conveyed Property as collateral.
At the time of each Sale: (i) the Originator Sold the related Conveyed
Property to FPF without any intent to hinder, delay, or defraud any
current or future creditor of the Originator; (ii) the Originator was
not insolvent or did not become insolvent as a result of any Sale;
(iii) the Originator was not engaged and was not about to engage in any
business or transaction for which any property remaining with the
Originator would constitute unreasonably small capital or for which the
remaining assets of the Originator are unreasonably small in relation
to the business of the Originator or the transaction; (iv) the
Originator did not intend to incur, and did not believe or reasonably
should not have believed, that it would incur, debts beyond its ability
to pay as they become due; and (v) the consideration paid by FPF to the
Originator for the related Conveyed Property was equivalent to the fair
market value of such related Conveyed Property.
(m) FINANCIAL STATEMENT DISCLOSURE. The Originator has been
advised that from and after the date of each Sale, the financial
statements of the Originator will disclose that, under GAAP, on each
respective Sale the Originator Sold ownership of the Premium
Receivables.
(n) OTHER AGREEMENTS. The Originator is not a party to any
indenture, loan or credit agreement, lease or other instrument or
agreement which is likely to have a material adverse effect on the
business, properties, assets, operations or operation, financial or
otherwise, of the Originator or the ability of the Originator to
perform its obligations under any Borrowing Document to which it is a
party.
(o) NO MATERIAL ADVERSE CHANGE. No material adverse change has
occurred in the business, properties, operating results, prospects,
assets, Premium Receivables Portfolio, operations or condition,
financial or otherwise, of the Originator from the Closing Date or the
immediately preceding Acquisition Date, as the case may be.
(p) INTENT. The Sale and Assignment Agreement and all related
documents describe each transfer of the Premium Receivables by the
Originator to FPF as a Sale and
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evidence the clear intention by the Originator to effectuate a Sale of
such Premium Receivables.
(q) CONSIDERATION. The consideration received by the
Originator for the Premium Receivables is or will be paid in full to
the Originator immediately upon each Sale of the Premium Receivables to
FPF, and no provision exists whereby the consideration will be modified
after the date of such Sale.
(r) CONTROL. After each Sale, the Originator will have
relinquished all powers and rights with respect to the Premium
Receivables, other than the Servicer's powers and rights as Servicer
under the Premium Receivables Servicing Agreement.
(s) RECOURSE. Neither FPF nor any other Person has any
recourse or right of chargeback to the Originator with respect to the
Premium Receivables, other than the repurchase obligation described in
paragraph (v) below.
(t) REPURCHASES. The Originator has no obligation to
repurchase any Premium Receivables except to repurchase a Premium
Receivable in the event of a breach of its representations and
warranties with respect thereto in the Sale and Assignment Agreement.
The representations and warranties of the Originator in the Sale and
Assignment Agreement describe the authority of the Originator to sell
the Premium Receivables and the characteristics of the Premium
Receivables, including those pertaining to the origination and
performance of the Premium Receivables before the Sale. They do not
include any representation or warranty of collectibility or future
performance of the Premium Receivables.
(u) SERVICING FEE. The Originator, as Servicer, will act as a
servicer of the Premium Receivables under the Premium Receivable
Servicing Agreement. Any servicing fee payable to the Servicer will not
exceed the normal and customary servicing fee that an unaffiliated
third Person would normally expect to receive in connection with
servicing premium finance receivables having characteristics similar to
the Premium Receivables.
(v) SERVICING ARRANGEMENTS. The servicing arrangements among
FPF, Flatiron, the Lender and the Servicer are of the type of
arrangements standard in the premium finance receivables industry
between unaffiliated Persons and do not give the Servicer greater
rights, or impose greater obligations or liabilities, with respect to,
or any greater interest in, Premium Receivables than those enjoyed by
servicers of similar receivables under servicing arrangements
negotiated at arm's length between unaffiliated Persons.
Section 3. REPRESENTATIONS AND WARRANTIES WITH RESPECT TO SECTION
3.01(B)(I) OF THE SALE AND ASSIGNMENT AGREEMENT.
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(a) PREMIUM RECEIVABLES. Each Premium Receivable Sold and
purchased under the Sale and Assignment Agreement, and on any other
date of determination, in order to be an Eligible Premium Receivable
shall have all of the following characteristics as of the Closing Date
or any Acquisition Date on which such Premium Receivables are Sold and
purchased under the Sale and Assignment Agreement, or on any other date
of determination as the case may be:
(i) Each Premium Receivable represents the genuine,
legal, valid and binding payment obligation in writing of the
Obligor thereon, enforceable by the holder thereof in
accordance with its terms.
(ii) Each Premium Receivable has been fully and
effectively Sold by the Originator to FPF pursuant to the Sale
and Assignment Agreement and (A) vests in FPF a valid,
perfected, subsisting and enforceable ownership interest in
favor of FPF in such Premium Receivable and (B) in the event
that, notwithstanding the Originator's and FPF's contrary
intention, a court with appropriate jurisdiction over the
matter determines that such transfer is not a Sale, vests in
FPF a valid, perfected, subsisting and enforceable first
priority security interest in favor of FPF in such Premium
Receivable.
(iii) Each Premium Finance Agreement contains
customary and enforceable provisions such that the rights and
remedies of the holder thereof are adequate to enforce the
Realization Provisions (and the Lender shall be entitled to
enforce all such rights under the Premium Finance Agreement)
and no Premium Receivable is subject to any proceedings or
investigations pending, or threatened, before any court,
regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the Originator or its
properties: (A) asserting the invalidity of such Premium
Receivable; (B) seeking to prevent the enforcement of such
Premium Receivable; or (C) seeking any determination or ruling
that may adversely affect the payment on or enforceability of
such Premium Receivable.
(iv) Each Premium Receivable was originated in a
state where the Originator is licensed (if required to be
licensed) to do business as an insurance premium finance
company, and the Originator is acting in accordance with, and
each Premium Receivable does not (and did not at the time of
origination) contravene, any federal, state or local laws,
rules or regulations applicable thereto or contract between
the Originator and FPF applicable thereto, and no party to any
such contract is in contravention of any such law, rule or
regulation.
(v) Each Premium Receivable was originated in the
United States of America by the Originator or purchased by the
Originator from another premium finance company in the
ordinary course of the Originator's business of financing
insurance premiums written through independent insurance
agents and brokers or
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insurance companies directly, in either case, through the
application of and consistent with the Originator's standard
procedures in a fashion not less stringent taken as a whole
than those other Premium Receivables owned by the Originator,
and are in conformity with the Originator's underwriting
standards.
(vi) Each Premium Receivable is payable in U.S.
Dollars.
(vii) Each Premium Receivable is evidenced by only
one written contract, in the form of a Premium Finance
Agreement, properly completed and executed without variations,
which Premium Finance Agreement has been or will be delivered
to the Lender or its agent, with notation of the Sale and
subsequent Grant thereof, on or before the Closing Date or
Acquisition Date, as the case may be.
(viii) Each Premium Receivable provides, according to
its original or modified terms, that the amount payable
thereunder will be paid in level payments that fully amortize
such Premium Receivable by its stated term and which amount
will be due in a maximum of ten consecutive equal monthly
payments (if financing an annual policy), and a maximum of
four consecutive equal monthly payments (if financing a
six-month policy) with the first payment due not later than 34
days following the inception date of the related insurance
policy.
(ix) No Premium Receivable is payable by an Obligor
which is the United States or any agency or state thereof or
which Obligor is located (within the meaning of the UCC as
enacted in the state of origination) in any jurisdiction
outside of the United States of America.
(x) No Premium Receivable has terms which have been
extended or modified other than through Endorsement Additions,
the originals of which have been included in the Loan
Documents delivered to the Lender or its agent.
(xi) No Premium Receivable or related Premium Finance
Agreement has been satisfied, cancelled, is more than 45 days
past due or is subject to a right of rescission, setoff,
counterclaim, subordination, recoupment or defense which has
been asserted or threatened with respect to such Premium
Receivable, nor have the Realization Provisions securing such
Premium Receivable been released from the Lien granted by the
Obligor.
(xii) No Premium Receivable has any Liens or claims
which have been filed or claimed that would be Liens prior to,
or equal or subordinate with, the Realization Provisions
granted by the Obligor pursuant to such Premium Receivable.
(xiii) No Premium Receivable is a Defaulted Premium
Receivable.
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(xiv) Except with respect to assignments or pledges
of security interests to lenders with respect to financing
obtained by the Originator, which interests has been released
prior to the Sale of the Premium Receivables to FPF, no
Premium Receivable has been Sold or pledged by the Originator
to any Person other than FPF; immediately prior to the Sale
contemplated by the Sale and Assignment Agreement, the
Originator had good title to such Premium Receivable free and
clear of all Liens and, immediately upon the Sale of the
Premium Receivables contemplated by the Sale and Assignment
Agreement, FPF will have good title to the Premium
Receivables, free and clear of all Liens.
(xv) As of the Closing Date or the Acquisition Date,
as the case may be, the Obligor with respect to each Premium
Receivable is not subject to any bankruptcy or insolvency
proceeding.
(xvi) Each Premium Receivable relates to an insurance
policy issued by an Eligible Insurance Company and as
evidenced by a policy number, or in the absence of a policy,
number, a binder number.
(xvii) No Premium Receivable relates to an insurance
policy which is deemed fully earned in the case of a claim.
(xviii) Each Premium Receivable is evidenced by proof
of payment to the insurance agent or the Issuing Insurance
Company equal to an amount not less than the original
principal amount of such Premium Receivable and any amount
remaining due on the related insurance policy to the
applicable insurance agent or Issuing Insurance Company has
been paid in full by, or on behalf of, the related Obligor.
(xix) No Premium Receivable has been originated in,
nor is subject to the laws of, any jurisdiction under which
the Sale of such Premium Receivable would be unlawful, void or
voidable.
(b) SCHEDULE OF PREMIUM RECEIVABLES. The information set forth
in each Schedule of Premium Receivables is true and correct in all
material respects as of the opening of business on the Closing Date or
Acquisition Date, as the case may be, and no selection procedures
believed to be adverse to FPF or the Lender have been utilized in
selecting the Premium Receivables for inclusion therein.
(c) TITLE. It is the intention of the Originator that the Sale
from the Originator to FPF contemplated by the Sale and Assignment
Agreement constitutes a true Sale of the Conveyed Property to FPF and
that the Conveyed Property not be part of the Originator's property for
any purpose under state or federal law. The Sale and Assignment
Agreement constitutes a valid Sale to FPF of all of the Originator's
right, title and interest in and to the Conveyed Property.
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(d) ALL FILINGS MADE. Without in any way limiting the
intention of the Originator and FPF to treat all transfers hereunder as
Sales, all filings (including, without limitation, UCC filings)
necessary in any jurisdiction to give FPF a first priority perfected
ownership interest in the Conveyed Property have been made not later
than the Closing Date and the respective Acquisition Date, as the case
may be, and copies of the filed stamped financing statements shall be
delivered to FPF within five Business Days of receipt by the Originator
or its agent from the appropriate secretary of state but not later than
30 days after the Closing Date or the Acquisition Date, as the case may
be.
(e) SALES NOT SUBJECT TO BULK TRANSFER ACT. Each Sale of
Conveyed Property by the Originator pursuant to the Sale and Assignment
Agreement is not subject to the bulk transfer or any similar statutory
provisions in effect in any applicable jurisdiction.
(f) INTENTIONALLY LEFT BLANK
(g) FAIR CONSIDERATION. The consideration to be received by
the Originator in exchange for each Sale of Conveyed Property
(including the right to receive all payments due or to become due
thereunder) is fair consideration having value equivalent to or in
excess of the value of the assets being Sold by it.
Section 4. REPRESENTATIONS AND WARRANTIES OF THE ORIGINATOR WITH
RESPECT TO SECTION 3.01(B)(II) OF THE SALE AND ASSIGNMENT AGREEMENT. The
Originator makes each of the representations and warranties with respect to the
Premium Receivables specified in Sections 3(b), 3(c), 3(d), 3(e), 3(f) and 3(g)
of this Exhibit F.
Section 5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Without
limitation of Section 3.01(c) of the Sale and Assignment Agreement, the
representations and warranties set forth in this Exhibit F shall survive the
date of the respective Borrowing Documents. Upon discovery by the Originator or
FPF of a breach of any of the foregoing representations and warranties, the
party discovering such breach shall give prompt written notice to the other
parties to the Borrowing Documents; provided, however, that failure to give such
notice shall not affect the rights of such other parties with respect to such
breach.
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EXHIBIT 23.2
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
21st Century Holding Company
We consent to the use of our report dated August 31, 1998 on the
consolidated and combined balance sheet of 21st Century Holding Company as of
December 31, 1997 and the related consolidated and combined statements of
income, shareholders' equity, and cash flows for the years ended December 31,
1997 and 1996 included herein and to the reference to our firm under the
heading "Experts", "Summary Consolidated and Combined Financial Data" and
"Selected Consolidated and Combined Financial Data" in the prospectus.
KPMG PEAT MARWICK LLP
