AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1998
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
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)
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<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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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)
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COPIES OF COMMUNICATIONS TO:
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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]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share..... 1,437,500(2) $ 8.00 $11,500,000 $3,393
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Representative's Warrants to Purchase
Common Stock ............................. 125,000 -- -- (3)
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Common Stock underlying the
Representative's Warrants(4) ............. 125,000 $ 9.60 1,200,000 $ 354
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Total Registration Fee .................... $3,747
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act.
(2) Includes 187,500 shares of Common Stock which may be issued upon exercise
of a 45-day option granted to the Underwriters solely to cover
over-allotments, if any.
(3) No fee required pursuant to Rule 457(g) under the Securities Act.
(4) Pursuant to Rule 416 under the Securities Act, this Registration Statement
also covers such additional shares as may become issuable as a result of
the anti-dilution provisions contained in the Representative's Warrants.
--------------
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.
================================================================================
<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 SEPTEMBER 17, 1998
PROSPECTUS
1,250,000 SHARES
[COMPANY LOGO]
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 5 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.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY(2)
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Per Share ......... $ $ $
- -------------------------------------------------------------------
Total(3) .......... $ $ $
===================================================================
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(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 $ , 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
(IV) 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"). Through a
wholly-owned managing general agent, Assurance Managing General Agents, Inc.
("Assurance MGA") and a wholly-owned claims adjusting company, Superior
Adjusting, Inc. ("Superior"), the Company has underwriting and claims authority
for third-party insurance companies. 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 through its
wholly-owned subsidiary, Florida State Discount Auto Title Loans, Inc.
("Florida Auto Title") offers auto title loans and other ancillary services.
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 all aspects of its business. These systems
enable the Company's agents to 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 Company, Inc. ("A.M. Best"), a rating agency for the insurance industry,
from 1993 to 1997, the
3
<PAGE>
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 19.2% of the total personal automobile
insurance market. Also, according to A.M. Best, annual premium volume in the
nonstandard personal automobile insurance market in Florida grew from
approximately $1.5 billion in 1993 to approximately $2.6 billion in 1997 and
from 27.8% to 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, acquired those 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 "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.
4
<PAGE>
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.
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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 ........................... 2,185 2,104 3,328 2,936
Net investment income ....................... 506 453 1,047 850
Net realized gains (losses) ................. 390 (34) (19) 155
Other income ................................ 1,550 553 1,737 2,117
-------- ------ ------- --------
Total revenue ............................... 11,309 8,054 17,017 15,701
Expenses:
Losses and LAE .............................. 4,681 3,272 7,414 7,660
Operating and underwriting expenses ......... 2,106 1,484 3,306 3,513
Other expenses .............................. 2,743 2,528 4,945 3,824
-------- ------ ------- --------
Total expenses .............................. 9,530 7,284 15,665 14,997
-------- ------ ------- --------
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% 32%
-------- ------- ------- --------
SAP Combined ratio .......................... 100% 105% 99% 108%
======== ======= ======= ========
</TABLE>
6
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JUNE 30, 1998
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ACTUAL AS ADJUSTED(1)
------------ ---------------
(UNAUDITED)
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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
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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. There can be no
assurance that Federated National will be
8
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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. 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 or 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 or 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
ultimate payment of all loss and LAE incurred. The liability for unpaid losses
and LAE is based on historical data and estimates of future events, and are
imprecise. Ultimate loss and LAE may vary from the established liability.
Furthermore, factors such as future 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 future loss
experience. Accordingly, there can be no assurance that Federated National's
liability for unpaid losses and LAE will be adequate to cover its ultimate
losses. If Federated National's liability for unpaid losses and LAE should
prove to be inadequate, 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 or 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 in Florida, its state
of domicile and will be subject to the laws of any state in which it conducts
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 surplus requirements, allowable rates and forms,
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. The failure of
9
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the Company to comply with the provisions of 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. Due to
not reporting its underwriting results related to the Florida Joint
Underwriting Association ("FJUA"), an assigned risk pool for automobile
insurance drivers, Federated National fell outside the usual range with respect
to two of the IRIS tests. Federated National's participation in this pool was
not reported in its statutory financial statements in 1994 or 1995. The full
results since inception of Federated National's 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. Despite the fact that 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 is 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 or 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
is no assurance that the Company's lack of experience will not have a material
adverse effect on the Company's business, results of operations or 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 resources available than the Company, have favorable
A.M. Best ratings and/or offer more diversified insurance coverages. 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, potentially, reduced policy acquisition costs. The
Company may also face competition from new or temporary entrants into 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 or
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 ratings issued 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 a favorable one. 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 that it reports on,
that have not been assigned a letter rating due to, among other factors,
insufficient operating history. If the letter rating when obtained is poor, it
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
11
<PAGE>
rating (as to which there can be no assurance) and, if 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 assurances
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 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 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 yearly 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 any shares which may be 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 pursuant to Rule 144 under the Securities Act subject to
the volume limitations and other restrictions contained in Rule 144. 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 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
has 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 the 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
the 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 by the Company (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 ........................... 2,185 2,104 3,328 2,936
Net investment income ....................... 506 453 1,047 850
Net realized gains (losses) ................. 390 (34) (19) 155
Other income ................................ 1,550 553 1,737 2,117
-------- ------ ------- --------
Total revenue ............................... 11,309 8,054 17,017 15,701
Expenses:
Losses and LAE .............................. 4,681 3,272 7,414 7,660
Operating and underwriting expenses ......... 2,106 1,484 3,306 3,513
Other expenses .............................. 2,743 2,528 4,945 3,824
-------- ------ ------- --------
Total expenses .............................. 9,530 7,284 15,665 14,997
-------- ------ ------- --------
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% 32%
-------- ------- ------- --------
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 or financial condition. Also, if
Federated National's liabilities for unpaid losses and LAE should prove to be
inadequate, 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
resources available than the Company, have favorable A.M. Best ratings and/or
offer more diversified insurance coverages. 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,
potentially, reduced acquisition costs. The Company may also face competition
from new or temporary entrants into 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 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 since $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 increased 4.8% to $2.2 million for
the six month period ended June 30, 1998 from $2.1 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, as well as, commissions from reinsurance ceded.
Company-owned agency fees decreased 37.5% or $600,000 to $1.0 million for the
six month period ended June 30, 1998, from $1.6 million for the same period in
1997. 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. Commissions from reinsurance ceded by Federated National
increased to $1.2 million for the six month period ended June 30, 1998 from
$500,000 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.
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 to 10,129 for the six month period ended June 30, 1998 from
zero for the same period in 1997 by Federated Premium. In order to terminate a
premium finance funding 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, in accordance with GAAP, for the
six month period ended June 30, 1998 was 70.0% compared with 66.0% 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 premium 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.
21
<PAGE>
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 due
to the increase in interest expense of $412,000 for the six month period ended
June 30, 1998 from 1997. This increase is attributed 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 increased 6.0% to $1.0 million for the six
month period ended June 30, 1998 from $943,000 for the same period in 1997. The
amount deferred increased 27.3% to $1.4 million at June 30, 1998 from $1.1
million 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 1998 compared with 16.7% for 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 since $4.7
million or 26.6% of premiums written were ceded to a reinsurer in 1997 as
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 13.8% to $3.3 million in
1997 from $2.9 million in 1996. The increase in Company-owned agency fees of
40% or $600,000 to $2.1 million in 1997 from $1.5 million in 1996 was
attributable to an increase in the number of Company-owned agencies to 12 in
1997 from 11 in 1996. Offsetting this increase was 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.
22
<PAGE>
FINANCE REVENUES. Finance revenues decreased 77.6% to $220,000 in 1997
from approximately $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 funding 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 funding arrangement was established and the Company recommenced its
premium financing activities. Revenue earned in the fourth quarter of 1997
represented nearly all of the $220,000 in finance revenue earned for the year.
INVESTMENT INCOME. Investment income remained relatively constant at $1.0
million for the years ended December 31, 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 36.4% to $1.5 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, in accordance with GAAP, for
1997 was 68.0% compared with 79.0% in the previous year. 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 $412,000 in 1997 from
1996. This is attributed 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 38.5% to $1.8 million in 1997 from
$1.3 million in 1996. The amount deferred increased 35.7% to $1.9 million at
December 31, 1997 from $1.4 million at December 31, 1996. This increase is
attributed to the premiums written by independent agencies which increased by
31.8% to $11.2 million in 1997 from $8.5 million in 1996.
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.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are revenues generated from
operations, gains on investments and borrowings under credit facilities. As 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. The amount of an 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 the loan is the prime rate plus 1.50%. 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
December 31, 1997 and June 30, 1998. The 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 facility was
completed and the Company consolidated its executive offices and administrative
operations in the facility, 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 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 ("RBC"). RBC is 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 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. GAAP differs in some respects from reporting practices prescribed or
permitted by the Florida Department of Insurance. Federated National's
statutory capital and surplus was approximately
24
<PAGE>
$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 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. Through a wholly-owned managing general agent, Assurance
MGA and a wholly-owned claims adjusting company, Superior, the Company has
underwriting and claims authority for third-party insurance companies. The
Company also offers premium financing to its own and third-party insureds
through its wholly-owned subsidiary, Federated Premium, and through its
wholly-owned subsidiary, Florida Auto Title, offers auto title loans and other
ancillary services.
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 all aspects of its business. These systems
enable the Company's agents to 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 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 19.2% of the total personal automobile
insurance market. Also, according to A.M. Best, annual premium volume in the
nonstandard personal automobile insurance market in Florida grew from
approximately $1.5 billion in 1993 to approximately $2.6 billion in 1997 and
from 27.8% to 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;
identifying and reviewing opportunities to acquire additional insurers;
and
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 only licensed to conduct business in
Florida. From 1992 when Federated National commenced operations as an insurer,
to 1997, gross written premiums grew at a 34% 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, in
these business measures. 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
27
<PAGE>
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 surplus. Accordingly,
the Company believes it will be able to substantially increase the amount of
premiums Federated National may underwrite. 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. 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 risk 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 are at the
minimum limits required of the policyholder by statute and with 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 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, Federated National in August 1998 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 at limits 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 significantly in excess of the
required minimum capital surplus. 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 funding arrangement. In early 1997, the
premium finance funding arrangement was terminated and in September 1997 a
new premium finance funding 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 insurance 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 operation into 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 (the "reinsurer"). The
reinsurer assumes a portion of the exposure in return for a portion, or quota
share, of the premium. 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 is
primarily ceded with Transatlantic Re, an A++ rated reinsurance company on a
30.0% quota share basis for automobile insurance. Federated National maintains
a 40.0% quota share basis for mobile home insurance with A-rated reinsurers
including Transatlantic Re. 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.
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
33
<PAGE>
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
income in the period in which the deficiency is identified. Future loss
experience substantially in excess
34
<PAGE>
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 as shown in the Company's consolidated and combined financial
statements for unpaid losses and LAE 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 $ 4,359 $ 4,178
Prior years ........................... 1,895 2,267 2,952 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 and 1996. 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,
---------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance Sheet Liability .................... $ 4,635 $ 4,532
Cumulative paid as of:
One year later ............................ -- 2,952
Two years later ........................... -- --
Three years later ......................... -- --
Re-estimated net liability as of:
End of year ............................... $ 4,635 $ 4,532
One year later ............................ -- 4,334
Two years later ........................... --
Three years later ......................... --
Cumulative redundancy (deficiency) ......... -- $ 198
</TABLE>
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% 68% 79%
Expense Ratio .......... 23 32 22 23
-- -- -- --
Combined Ratio ......... 100% 105% 90% 102%
=== === == ===
</TABLE>
INVESTMENTS
The Company's investment policy 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 "junk bonds"), and limits total
investments in equity securities and mortgage notes receivable to 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 are currently
concentrated 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. 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 resources available than the Company, have favorable
A.M. Best ratings and/or offer more diversified insurance coverages. 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, potentially, reduced policy acquisition costs. The
Company may also face competition from new or temporary entrants into 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.
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 underwriting program. In 1998 and 1999, Federated
National is required to have capital surplus of $4.7
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<PAGE>
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 significantly in excess of the
required minimum capital surplus. 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 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 periodic information with the Florida
Department of Insurance, including information concerning its
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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 RBC requirements for insurance
companies. The Model Law became effective with respect to property and casualty
insurance companies as of year-end 1994. The requirements are
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<PAGE>
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. Due to not reporting
its underwriting results related to the FJUA, Federated National fell outside
the usual range with respect to two of the IRIS tests. Federated National's
participation in this pool was not reported in its statutory financial
statements in 1994 or 1995. The full results since inception of Federated
National's 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. Despite the fact that 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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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/casualty companies that it
reports on, but 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
which included 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 housed in four locations in
the Fort Lauderdale area. 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 and 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. Mr. Raymond has over 25 years insurance
experience, most recently as owner and president of Raymond/Patterson Agency,
Inc., a managing general agency, since May 1970, and as an owner of Gulfstream
Insurance Group, Inc., a multi-lines insurance agency, since May 1992, both 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.
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.
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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 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
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<PAGE>
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 (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.
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<PAGE>
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.
47
<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
(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 director.
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 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 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 Articles and Bylaws of the Company 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 Company's 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, 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 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 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 any such shares which may be 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 pursuant to Rule 144 under the
Securities Act, subject to the volume limitations and other restrictions
contained in Rule 144.
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 there of
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.
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
55
<PAGE>
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
(excluding interest expense) 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.
57
<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.
58
<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 Stockholders' 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 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 .................... (1,718,888) (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 ................................... 2,185,357 2,103,919 3,328,001 2,935,962
Finance revenue ..................................... 715,927 22,167 220,433 982,438
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 1,515,999 1,134,479
------------ ------------ ------------ ------------
Total revenue ................................... 11,309,346 8,053,952 17,016,665 15,701,013
------------ ------------ ------------ ------------
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 1,483,982 3,306,491 3,512,895
Salaries and wages ................................. 1,626,969 1,572,604 3,148,558 2,553,017
Amortization of deferred acquisition costs ......... 1,009,914 942,832 1,757,540 1,251,188
Amortization of goodwill ........................... 106,279 13,308 38,102 19,294
------------ ------------ ------------ ------------
Total expenses .................................. 9,530,351 7,284,400 15,664,842 14,996,692
------------ ------------ ------------ ------------
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 minority interests
in net income and income taxes ................... -- 769,552 1,351,283 704,321
Pro forma income tax expense ....................... -- 262,661 466,861 277,231
Pro forma net income ............................... -- 506,891 884,962 427,000
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
corporation's 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 $ 4,358,545 $ 4,178,043
Prior years ........................... 1,895,022 2,267,390 2,952,419 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 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 .......................
Risk Factors .............................
Use of Proceeds ..........................
Dividend Policy ..........................
Dilution .................................
Capitalization ...........................
Selected Consolidated and Combined
Financial Data ........................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations .........................
Business .................................
Management ...............................
Certain Transactions .....................
Principal Shareholders ...................
Shares Eligible for Future Sale ..........
Underwriting .............................
Legal Matters ............................
Experts ..................................
Available Information ....................
Glossary of Selected Terms ...............
</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
[COMPANY LOGO]
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 .......................................... 41,750
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.
3.1 Form of Registrant's Amended and Restated Articles of Incorporation
3.2 Form of Registrant's Amended and Restated Bylaws
4.1 Specimen of Common Stock Certificate(1)
4.2 Representative's Warrant Agreement including form of Representative's Warrant(1)
5.1 Opinion of Broad and Cassel(1)
10.1 Form of Stock Option Plan*
10.2 Employment Agreement between the Registrant and Edward J. Lawson*
10.3 Employment Agreement between the Registrant and Michele V. Lawson*
10.4 Form of Indemnification Agreement between the Registrant and its directors and executive
officers*
10.5 Revolving Credit and Term Loan Agreement between FlatIron Funding Company, LLC and
FPF, Inc.(1)
10.6 Sale and Assignment Agreement between Federated Premium and FPF, Inc.(1)
21.1 Subsidiaries of the Registrant
23.1 Consent of Broad and Cassel (included in its opinion filed as Exhibit 5.1(1)
23.2 Consent of KPMG Peat Marwick LLP
25.1 Power of Attorney (included on the signature page of the Registration Statement)
</TABLE>
- ----------------
* Management Compensation Plan or Arrangement
(1) 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 September 17, 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 September 17, 1998
- ----------------------------- President, Chief Executive
Edward J. Lawson Officer (principal executive,
financial and accounting
officer)
/s/ Michele V. Lawson Vice President-Agency September 17, 1998
- ----------------------------- Operations, Treasurer and
Michele V. Lawson Director
/s/ Ronald A. Raymond President, Federated National September 17, 1998
- ----------------------------- and Director
Ronald A. Raymond
/s/ Patrick Doyle Director September 17, 1998
- -----------------------------
Patrich Coyle
/s/ Joseph A. Epstein Director September 17, 1998
- -----------------------------
Joseph A. Epstein
/s/ Carla L. Leonard Director September 17, 1998
- -----------------------------
Carla L. Leonard
/s/ Bruce Simberg Director September 17, 1998
- -----------------------------
Bruce Simberg
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------- -------------
<S> <C> <C>
1.1 Form of Underwriting Agreement
3.1 Form of Registrant's Amended and Restated Articles of Incorporation
3.2 Form of Registrant's Amended and Restated Bylaws
10.1 Form of Stock Option Plan
10.2 Employment Agreement between the Registrant and Edward J. Lawson
10.3 Employment Agreement between the Registrant and Michele V. Lawson
10.4 Form of Indemnification Agreement between the Registrant and its directors and
executive officers
21.1 Subsidiaries of the Registrant
23.2 Consent of KPMG Peat Marwick LLP
</TABLE>
EXHIBIT 1.1
1,250,000 SHARES OF COMMON STOCK
21ST CENTURY HOLDING COMPANY
UNDERWRITING AGREEMENT
New York, New York
_____________, 1998
Gilford Securities Incorporated
As Representative of the
Several Underwriters listed
on Schedule A hereto
850 Third Avenue
New York, New York 10022
Ladies and Gentlemen:
21st Century Holding Company, a Florida corporation (the "Company")
confirms its agreement with Gilford Securities Incorporated ("Gilford") and each
of the several underwriters named in Schedule A hereto (collectively, the
"Underwriters," which term shall also include any underwriter substituted as
hereinafter provided in Section 11) for whom Gilford is acting as representative
(in such capacity, Gilford shall hereinafter be referred to as "you" or the
"Representative"), with respect to the sale by the Company and the purchase by
the Representative of 1,250,000 shares of the Company's common stock, $.01 par
value per share ("Common Stock"). Such shares of Common Stock are hereinafter
referred to as the "Firm Shares."
Upon the Representative's request, as provided in Section 2(b) of this
Agreement, the Company shall also sell to the Underwriters up to an additional
187,500 shares of Common Stock for the purpose of covering over-allotments, if
any (the "Option Shares"). The Firm Shares and the Option Shares are sometimes
hereinafter referred to as the "Shares." The Company also proposes to issue and
sell to the Representative warrants (the "Representative's Warrants") pursuant
to the Representative's Warrant Agreement (the "Representative's Warrant
Agreement") for the purchase of an additional 125,000 shares of Common Stock.
The shares of Common Stock issuable upon exercise of the Representative's
Warrants are hereinafter referred to as the "Representative's Shares." The Firm
Shares, the Option Shares, the Representative's Warrants and the
Representative's Shares (collectively, hereinafter referred to as the
"Securities") are more fully described in the Registration Statement and the
Prospectus referred to below.
<PAGE>
1. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants to, and agrees with, the
Representative as of the date hereof, and as of the Closing Date (hereinafter
defined) and the Option Closing Date (hereinafter defined), if any, as follows:
(i) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (No. 333-_____), including
any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Firm Shares and the Option Shares under the
Securities Act of 1933, as amended (the "Act"), which registration
statement and amendment or amendments have been prepared by the Company
in conformity with the requirements of the Act, and the rules and
regulations (the "Regulations") of the Commission under the Act. The
Company will promptly file a further amendment to said registration
statement in the form heretofore delivered to the Representative and
will not file any other amendment thereto to which the Representative
shall have objected in writing after having been furnished with a copy
thereof. Except as the context may otherwise require, such registration
statement, as amended, on file with the Commission at the time the
registration statement becomes effective (including the prospectus,
financial statements, schedules, exhibits and all other documents filed
as a part thereof or incorporated therein (including, but not limited to
those documents or information incorporated by reference therein) and
all information deemed to be a part thereof as of such time pursuant to
paragraph (b) of Rule 430(A) of the Regulations), is hereinafter called
the "Registration Statement," and the form of prospectus in the form
first filed with the Commission pursuant to Rule 424(b) of the
Regulations, is hereinafter called the "Prospectus." For purposes
hereof, "Rules and Regulations" mean the rules and regulations adopted
by the Commission under either the Act or the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as applicable.
(ii) Neither the Commission nor any state regulatory authority
has issued any order preventing or suspending the use of any Preliminary
Prospectus, the Registration Statement or the Prospectus or any part of
any thereof and no proceedings for a stop order suspending the
effectiveness of the Registration Statement or any of the Company's
securities have been instituted or are pending or to the Company's
knowledge, threatened. Each of the Preliminary Prospectus, Registration
Statement and Prospectus at the time of filing thereof conformed with
the requirements of the Act and the Rules and Regulations, and none of
the Preliminary Prospectus, Registration Statement or Prospectus at the
time of filing thereof contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein and
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that this
representation and warranty does not apply to statements made in
reliance upon and in conformity with written information furnished to
the Company with respect to the Underwriters by or on behalf of the
Underwriters expressly for use in such Preliminary Prospectus,
Registration Statement or Prospectus.
(iii) When the Registration Statement becomes effective and at
all times subsequent thereto up to the Closing Date and each Option
Closing Date, if any,
2
<PAGE>
and during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Underwriters or a dealer, the
Registration Statement and the Prospectus will contain all statements
which are required to be stated therein in accordance with the Act and
the Rules and Regulations, and will conform to the requirements of the
Act and the Rules and Regulations; neither the Registration Statement
nor the Prospectus, nor any amendment or supplement thereto, will
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, provided, however, that this representation and
warranty does not apply to statements made or statements omitted in
reliance upon and in conformity with information furnished to the
Company in writing by or on behalf of any Underwriters expressly for use
in the Preliminary Prospectus, Registration Statement or Prospectus or
any amendment thereof or supplement thereto.
(iv) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the state of its
incorporation. The Company does not own an interest in any corporation,
partnership, trust, joint venture or other business entity. The Company
is duly qualified and licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of
any properties or the character of its operations requires such
qualification or licensing. The Company has all requisite corporate
power and authority, and the Company has obtained any and all necessary
authorizations, approvals, orders, licenses, certificates, franchises
and permits of and from all governmental or regulatory officials and
bodies (including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; the Company is and
has been doing business in compliance with all such authorizations,
approvals, orders, licenses, certificates, franchises and permits and
all federal, state and local laws, rules and regulations; and the
Company has not received any notice of proceedings relating to the
revocation or modification of any such authorization, approval, order,
license, certificate, franchise, or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would materially and adversely affect the condition, financial or
otherwise, or the earnings, position, prospects, value, operation,
properties, business or results of operations of the Company. The
disclosures in the Registration Statement concerning the effects of
federal, state and local laws, rules and regulations on the Company's
business as currently conducted and as contemplated are correct in all
material respects and do not omit to state a material fact necessary to
make the statements contained therein not misleading in light of the
circumstances in which they were made.
(v) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, under "Capitalization"
and "Description of Capital Stock" and will have the adjusted
capitalization set forth therein on the Closing Date and the Option
Closing Date, if any, based upon the assumptions set forth therein, and
the Company is not a party to or bound by any instrument, agreement or
other arrangement providing for it to issue any capital stock, rights,
warrants, options or other securities, except for this Agreement, the
Representative's Warrant Agreement and as described in the Prospectus.
The Securities and all other securities issued or issuable by
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the Company conform or, when issued and paid for, will conform, in all
respects to all statements with respect thereto contained in the
Registration Statement and the Prospectus. All issued and outstanding
securities of the Company have been duly authorized and validly issued
and are fully paid and non-assessable and the holders thereof have no
rights of rescission with respect thereto, and are not subject to
personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any
holders of any security of the Company or similar contractual rights
granted by the Company. The Securities are not and will not be subject
to any preemptive or other similar rights of any stockholder, have been
duly authorized and, when issued, paid for and delivered in accordance
with the terms hereof, will be validly issued, fully paid and
non-assessable and will conform to the description thereof contained in
the Prospectus; the holders thereof will not be subject to any liability
solely as such holders; all corporate action required to be taken for
the authorization, issue and sale of the Securities has been duly and
validly taken; and the certificates representing the Securities will be
in due and proper form. Upon the issuance and delivery pursuant to the
terms hereof of the Securities to be sold by the Company hereunder, the
Underwriters will acquire good and marketable title to such Securities
free and clear of any lien, charge, claim, encumbrance, pledge, security
interest, defect or other restriction or equity of any kind whatsoever.
(vi) The financial statements, including the related notes and
schedules thereto, included in the Registration Statement, each
Preliminary Prospectus and the Prospectus fairly present the financial
position, income, changes in cash flow, changes in shareholders' equity,
and the results of operations of the Company at the respective dates and
for the respective periods to which they apply and the pro forma
financial information included in the Registration Statement and
Prospectus presents fairly on a basis consistent with that of the
audited financial statements included therein, what the Company's pro
forma (as adjusted) capitalization would have been for the respective
periods and as of the respective dates to which they apply after giving
effect to the adjustments described therein. Such financial statements
have been prepared in conformity with generally accepted accounting
principles and the Rules and Regulations, consistently applied
throughout the periods involved. There has been no adverse change or
development involving a material prospective change in the condition,
financial or otherwise, or in the earnings, position, prospects, value,
operation, properties, business, or results of operations of the Company
whether or not arising in the ordinary course of business, since the
date of the financial statements included in the Registration Statement
and the Prospectus and the outstanding debt, the property, both tangible
and intangible, and the business of the Company conform in all material
respects to the descriptions thereof contained in the Registration
Statement and the Prospectus. Financial information set forth in the
Prospectus under the headings "Summary Consolidated and Combined
Financial Data," "Selected Consolidated and Combined Financial Data,"
"Capitalization," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," fairly present, on the basis
stated in the Prospectus, the information set forth therein, and has
been derived from or compiled on a basis consistent with that of the
audited financial statements included in the Prospectus.
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(vii) The Company (i) has paid all federal, state, local, and
foreign taxes for which it is liable, including, but not limited to,
withholding taxes and amounts payable under Chapters 21 through 24 of
the Internal Revenue Code of 1986 (the "Code"), and has furnished all
information returns it is required to furnish pursuant to the Code, (ii)
has established adequate reserves for such taxes which are not due and
payable, and (iii) does not have any tax deficiency or claims
outstanding, proposed or assessed against it.
(viii) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Underwriters in connection with (i) the
issuance by the Company of the Securities, (ii) the purchase by the
Underwriters of the Securities from the Company, (iii) the consummation
by the Company of any of its obligations under this Agreement or the
Representative's Warrant Agreement, or (iv) resales of the Shares in
connection with the distribution contemplated hereby.
(ix) The Company maintains insurance policies, including, but not
limited to, general liability and property insurance, which insures the
Company and its employees, against such losses and risks generally
insured against by comparable businesses. The Company (A) has not failed
to give notice or present any insurance claim with respect to any
matter, including but not limited to the Company's business, property or
employees, under the insurance policy or surety bond in a due and timely
manner, (B) does not have any disputes or claims against any underwriter
of such insurance policies or surety bonds or has not failed to pay any
premiums due and payable thereunder, or (C) has not failed to comply
with all conditions contained in such insurance policies and surety
bonds. There are no facts or circumstances under any such insurance
policy or surety bond which would relieve any insurer of its obligation
to satisfy in full any valid claim of the Company.
(x) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against (or
circumstances that may give rise to the same), or involving the
properties or business of, the Company which (i) questions the validity
of the capital stock of the Company, this Agreement or the
Representative's Warrant Agreement or of any action taken or to be taken
by the Company pursuant to or in connection with this Agreement or the
Representative's Warrant Agreement, (ii) is required to be disclosed in
the Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement are
accurately summarized in all material respects), or (iii) might
materially and adversely affect the condition, financial or otherwise,
or the earnings, position, prospects, shareholders' equity, value,
operation, properties, business or results of operations of the Company.
(xi) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, enter into this
Agreement and the Representative's Warrant Agreement and to consummate
the transactions provided for in such agreements; and this Agreement and
the Representative's Warrant Agreement have each been duly and properly
authorized, executed and delivered by the Company. Each
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<PAGE>
of this Agreement and the Representative's Warrant Agreement constitutes
a legal, valid and binding agreement of the Company enforceable against
the Company in accordance with its terms, except (i) as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar laws
affecting creditors' rights generally, (ii) as enforceability of any
indemnification or contribution provisions may be limited under
applicable laws or the public policies underlying such laws and (iii)
that the remedies of specific performance and injunctive and other forms
of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceedings may be brought.
None of the Company's issue and sale of the Securities, execution or
delivery of this Agreement or the Representative's Warrant Agreement,
its performance hereunder and thereunder, its consummation of the
transactions contemplated herein and therein, the Prospectus, and any
amendments or supplements thereto, conflicts with or will conflict with
or results or will result in any breach or violation of any of the terms
or provisions of, or constitutes or will constitute a default under, or
result in the creation or imposition of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of, (i) the Articles of
Incorporation or by-laws of the Company, (ii) any license, contract,
indenture, mortgage, deed of trust, voting trust agreement, shareholders
agreement, note, loan or credit agreement or any other agreement or
instrument to which the Company is a party or by which it is or may be
bound or to which any of its properties or assets (tangible or
intangible) is or may be subject, or any indebtedness, or (iii) any
statute, judgment, decree, order, rule or regulation applicable to the
Company of any arbitrator, court, regulatory body or administrative
agency or other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, having jurisdiction over the Company or
any of its activities or properties.
(xii) Except as described in the Prospectus, no consent,
approval, authorization or order of, and no filing with, any court,
regulatory body, government agency or other body, domestic or foreign,
is required for the issuance of the Shares pursuant to the Prospectus
and the Registration Statement, the issuance of the Representative's
Warrants, the performance of this Agreement and the Representative's
Warrant Agreement and the transactions contemplated hereby and thereby,
including without limitation, any waiver of any preemptive, first
refusal or other rights that any entity or person may have for the issue
and/or sale of any of the Shares, or the Representative's Warrants,
except such as have been or may be obtained under the Act or may be
required under state securities or Blue Sky laws in connection with the
Representative's purchase and distribution of the Shares, and the
Representative's Warrants to be sold by the Company hereunder.
(xiii) All executed agreements, contracts or other documents or
copies of executed agreements, contracts or other documents filed as
exhibits to the Registration Statement to which the Company is a party
or by which it may be bound or to which any of its assets, properties or
business may be subject have been duly and validly authorized, executed
and delivered by the Company, and constitute the legal, valid and
binding agreements of the Company, enforceable against the Company, in
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<PAGE>
accordance with their respective terms. The descriptions in the
Registration Statement of agreements, contracts and other documents are
accurate in all material respects and fairly present the information
required to be shown with respect thereto by Form SB-2, and there are no
contracts or other documents which are required by the Act to be
described in the Registration Statement or filed as exhibits to the
Registration Statement which are not described or filed as required, and
the exhibits which have been filed are in all material respects complete
and correct copies of the documents of which they purport to be copies.
(xiv) Subsequent to the respective dates as of which information
is set forth in the Registration Statement and Prospectus, and except as
may otherwise be indicated or contemplated herein or therein, the
Company has not (i) issued any securities or incurred any liability or
obligation, direct or contingent, for borrowed money, (ii) entered into
any transaction other than in the ordinary course of business, or (iii)
declared or paid any dividend or made any other distribution on or in
respect of its capital stock of any class, and there has not been any
change in the capital stock, or any material change in the debt (long or
short term) or liabilities or material adverse change in or affecting
the general affairs, management, financial operations, shareholders'
equity or results of operations of the Company.
(xv) No default exists in the due performance and observance of
any term, covenant or condition of any license, contract, indenture,
mortgage, installment sale agreement, lease, deed of trust, voting trust
agreement, shareholders agreement, partnership agreement, note, loan or
credit agreement, purchase order, or any other agreement or instrument
evidencing an obligation for borrowed money, or any other material
agreement or instrument to which the Company is a party or by which the
Company may be bound or to which the property or assets (tangible or
intangible) of the Company is subject or affected.
(xvi) The Company has generally enjoyed a satisfactory
employer-employee relationship with its employees and is in compliance
with all federal, state, local, and foreign laws and regulations
respecting employment and employment practices, terms and conditions of
employment and wages and hours. There are no pending investigations
involving the Company by the U.S. Department of Labor, or any other
governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is no unfair labor
practice charge or complaint against the Company pending before the
National Labor Relations Board or any strike, picketing, boycott,
dispute, slowdown or stoppage pending or threatened against or involving
the Company or any predecessor entity, and none has ever occurred. No
representation question exists respecting the employees of the Company,
and no collective bargaining agreement or modification thereof is
currently being negotiated by the Company. No grievance or arbitration
proceeding is pending under any expired or existing collective
bargaining agreements of the Company. No labor dispute with the
employees of the Company exists, or is imminent.
(xvii) Except as described in the Prospectus, the Company does
not maintain, sponsor or contribute to any program or arrangement that
is an "employee
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pension benefit plan," an "employee welfare benefit plan," or a
"multiemployer plan" as such terms are defined in Sections 3(2), 3(1)
and 3(37), respectively, of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does not
maintain or contribute, now or at any time previously, to a defined
benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or
any trust created thereunder) has engaged in a "prohibited transaction"
within the meaning of Section 406 of ERISA or Section 4975 of the Code,
which could subject the Company to any tax penalty on prohibited
transactions and which has not adequately been corrected. Each ERISA
Plan is in compliance with all reporting, disclosure and other
requirements of the Code and ERISA as they relate to any such ERISA
Plan. Determination letters have been received from the Internal Revenue
Service with respect to each ERISA Plan which is intended to comply with
Code Section 401(a), stating that such ERISA Plan and the attendant
trust are qualified thereunder. The Company has never completely or
partially withdrawn from a "multiemployer plan."
(xviii) Neither the Company nor any of its employees, directors,
shareholders, partners, or affiliates (within the meaning of the Rules
and Regulations) of any of the foregoing has taken or will take,
directly or indirectly, any action designed to or which has constituted
or which might be expected to cause or result in, under the Exchange
Act, or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities or otherwise.
(xix) Except as otherwise disclosed in the Prospectus, none of
the patents, patent applications, trademarks, service marks, service
names, trade names and copyrights and none of the licenses and rights to
the foregoing presently owned or held by the Company are in dispute or
are in any conflict with the right of any other person or entity. The
Company (i) owns or has the right to use, free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects or
other restrictions or equities of any kind whatsoever, all patents,
patent applications, trademarks, service marks, service names, trade
names and copyrights, technology and licenses and rights with respect to
the foregoing, used in the conduct of its business as now conducted or
proposed to be conducted without infringing upon or otherwise acting
adversely to the right or claimed right of any person, corporation or
other entity under or with respect to any of the foregoing and (ii) is
not obligated or under any liability whatsoever to make any payment by
way of royalties, fees or otherwise to any owner or licensee of, or
other claimant to, any patent, patent application, trademark, service
mark, service names, trade name, copyright, know-how, technology or
other intangible asset, with respect to the use thereof or in connection
with the conduct of its business or otherwise. There is no action, suit,
proceeding, inquiry, arbitration, investigation, litigation or
governmental or other proceeding, domestic or foreign, pending or
threatened (or circumstances that may give rise to the same) against the
Company which challenges the exclusive rights of the Company with
respect to any trademarks, trade names, service marks, service names,
copyrights, patents, patent applications or licenses or rights to the
foregoing used in the conduct of its business, or which challenge the
right of the Company to use any technology presently used or
contemplated to be used in the conduct of its business.
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<PAGE>
(xx) The Company owns and has the unrestricted right to use all
trade secrets, know-how (including all other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), inventions, technology, designs, processes, works of
authorship, computer programs and technical data and information
(collectively herein "intellectual property") that are material to the
development, manufacture, operation and sale of all products and
services sold or proposed to be sold by the Company, free and clear of
and without violating any right, lien, or claim of others, including
without limitation, former employers of its employees; provided,
however, that the possibility exists that other persons or entities,
completely independently of the Company, or its employees or agents,
could have developed trade secrets or items of technical information
similar or identical to those of the Company. The Company is not aware
of any such development of similar or identical trade secrets or
technical information by others.
(xxi) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal
property stated in the Prospectus, to be owned or leased by it free and
clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects, or other restrictions or equities of any kind
whatsoever, other than those referred to in the Prospectus and liens for
taxes not yet due and payable.
(xxii) KPMG Peat Marwick LLP, whose report is filed with the
Commission as a part of the Registration Statement, are independent
certified public accountants as required by the Act and the Rules and
Regulations.
(xxiii) The Company has caused to be duly executed legally
binding and enforceable agreements pursuant to which all of the officers
and directors of the Company, all holders of the Common Stock and
holders of securities exchangeable or exercisable for or convertible
into shares of Common Stock have agreed not to, directly or indirectly,
offer to sell, sell, grant any option for the sale of, assign, transfer,
pledge, hypothecate, distribute or otherwise encumber or dispose of any
shares of Common Stock or securities convertible into, exercisable or
exchangeable for or evidencing any right to purchase or subscribe for
any shares of Common Stock (either pursuant to Rule 144 of the Rules and
Regulations or otherwise) or dispose of any beneficial interest therein
for a period of not less than thirteen (13) months following the
effective date of the Registration Statement (except for publicly held
shares of Common Stock of the Company acquired after the effective date
of the Registration Statement in the open market and sold through
Gilford) without the prior written consent of the Representative and the
Company. The Company will cause the Transfer Agent, as defined below, to
mark an appropriate legend on the face of stock certificates
representing all of such securities and to place "stop transfer" orders
on the Company's stock ledgers.
(xxiv) Except as described in the Prospectus under
"Underwriting," there are no claims, payments, issuances, arrangements
or understandings, whether oral or written, for services in the nature
of a finder's or origination fee with respect to the sale of the
Securities hereunder or any other arrangements, agreements,
understandings, payments or issuance with respect to the Company or any
of its officers, directors,
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<PAGE>
shareholders, partners, employees or affiliates that may affect the
Underwriters' compensation, as determined by the National Association of
Securities Dealers, Inc. ("NASD").
(xxv) The Common Stock has been approved for quotation on the
Nasdaq National Market ("NNM").
(xxvi) Neither the Company nor any of its officers, employees,
agents, or any other person acting on behalf of the Company, has,
directly or indirectly, given or agreed to give any money, gift or
similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or
agent of a customer or supplier, or official or employee of any
governmental agency (domestic or foreign) or instrumentality of any
government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is, or may be in a
position to help or hinder the business of the Company (or assist the
Company in connection with any actual or proposed transaction) which (a)
might subject the Company, or any other such person to any damage or
penalty in any civil, criminal or governmental litigation or proceeding
(domestic or foreign), (b) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the
Company, or (c) if not continued in the future, might adversely affect
the assets, business, operations or prospects of the Company. The
Company's internal accounting controls are sufficient to cause the
Company to comply with the Foreign Corrupt Practices Act of 1977, as
amended.
(xxvii) Except as set forth in the Prospectus, no officer,
director or stockholder of the Company, or any "affiliate" or
"associate" (as these terms are defined in Rule 405 promulgated under
the Rules and Regulations) of any of the foregoing persons or entities
has, either directly or indirectly, (i) an interest in any person or
entity which (A) furnishes or sells services or products which are
furnished or sold or are proposed to be furnished or sold by the
Company, or (B) purchases from or sells or furnishes to the Company any
goods or services, or (ii) a beneficial interest in any contract or
agreement to which the Company is a party or by which it may be bound or
affected. Except as set forth in the Prospectus under "Certain
Transactions," there are no existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company and any
officer, director, or Principal Stockholder (as such term is defined in
the Prospectus) of the Company or any partner, affiliate or associate of
any of the foregoing persons or entities.
(xxviii) Any certificate signed by any officer of the Company,
and delivered to the Representative or to Underwriters' Counsel (as
defined herein) shall be deemed a representation and warranty by the
Company to the Representative as to the matters covered thereby.
(xxix) The minute books of the Company have been made available
to the Representative and contain a complete summary of all meetings and
actions of the directors, shareholders, audit committee, compensation
committee and any other
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committee of the Board of Directors of the Company, respectively, since
the time of its incorporation, and reflects all transactions referred to
in such minutes accurately in all material respects.
(xxx) Except and to the extent described in the Prospectus, no
holders of any securities of the Company or of any options, warrants or
other convertible or exchangeable securities of the Company have the
right to include any securities issued by the Company in the
Registration Statement or any registration statement to be filed by the
Company or to require the Company to file a registration statement under
the Act and no person or entity holds any anti-dilution rights with
respect to any securities of the Company.
(xxxi) The Company has as of the effective date of the
Registration Statement (i) entered into an employment agreement with
each of Edward J. Lawson and Michele V. Lawson, in the form filed as
Exhibits to the Registration Statement and (ii) purchased term key-man
insurance on the life of each of Edward J. Lawson and Michele V. Lawson
in the amount of $1,000,000, which policy names the Company as the sole
beneficiary thereof.
2. PURCHASE, SALE AND DELIVERY OF THE SECURITIES AND REPRESENTATIVE'S
WARRANTS.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter
agrees to purchase from the Company at a price of $____ per share [90% of the
initial public offering price] of Common Stock, that number of Firm Shares set
forth in Schedule A opposite the name of such Underwriter, subject to adjustment
as the Representative in its sole discretion shall make to eliminate any sales
or purchases of fractional shares, plus any additional number of Firm Shares
which such Underwriter may become obligated to purchase pursuant to the
provisions of Section 11 hereof.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters to purchase all or any part of an additional 187,500 shares of
Common Stock at a price of $___ per share of Common Stock [90% of the initial
public offering price]. The option granted hereby will expire 45 days after (i)
the date the Registration Statement becomes effective, if the Company has
elected not to rely on Rule 430A under the Rules and Regulations, or (ii) the
date of this Agreement if the Company has elected to rely upon Rule 430A under
the Rules and Regulations, and may be exercised in whole or in part from time to
time only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Firm Shares upon notice by
the Representative to the Company setting forth the number of Option Shares as
to which Representative is then exercising the option and the time and date of
payment and delivery for any such Option Shares. Any such time and date of
delivery (an "Option Closing Date") shall be determined by the Representative,
but shall not be later than seven full business days after the exercise of said
option, nor in any event prior to the Closing Date, as hereinafter defined,
unless otherwise agreed upon by the Representative and the Company. Nothing
herein contained shall obligate the Underwriters to make any over-allotments. No
Option Shares shall be delivered
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unless the Firm Shares shall be simultaneously delivered or shall theretofore
have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Shares shall be made at the offices of Gilford Securities
Incorporated at 850 Third Avenue, New York, New York 10022, or at such other
place as shall be agreed upon by the Representative and the Company. Such
delivery and payment shall be made at 10:00 a.m. (New York City time) on
__________, 1998 or at such other time and date as shall be agreed upon by the
Representative and the Company, but not less than three (3) nor more than seven
(7) full business days after the effective date of the Registration Statement
(such time and date of payment and delivery being herein called "Closing Date").
In addition, in the event that any or all of the Option Shares are purchased by
the Underwriters, payment of the purchase price for, and delivery of
certificates for, such Option Shares shall be made at the above-mentioned office
of the Representative or at such other place as shall be agreed upon by the
Representative and the Company on each Option Closing Date as specified in the
notice from the Representative to the Company. Delivery of the certificates for
the Firm Shares and the Option Shares, if any, shall be made to the Underwriters
against payment by the Underwriters of the purchase price for the Firm Shares
and the Option Shares, if any, to the order of the Company for the Firm Shares
and the Option Shares, if any, by New York Clearing House funds. Certificates
for the Firm Shares and the Option Shares, if any, shall be in definitive, fully
registered form, shall bear no restrictive legends and shall be in such
denominations and registered in such names as the Representative may request in
writing at least two (2) business days prior to the Closing Date or the relevant
Option Closing Date, as the case may be. The certificates for the Firm Shares
and the Option Shares, if any, shall be made available to the Representative at
such office or such other place as the Representative may designate for
inspection, checking and packaging no later than 9:30 a.m. on the last business
day prior to Closing Date or the relevant Option Closing Date, as the case may
be.
(d) On the Closing Date, the Company shall issue and sell to the
Representative, Representative's Warrants at a purchase price of $[___] per
warrant, which warrants shall entitle the holders thereof to purchase an
aggregate of 125,000 shares of Common Stock. The Representative's Warrants shall
be exercisable for a period of four years commencing one year from the effective
date of the Registration Statement at a price equaling one hundred twenty
percent (120%) of the initial public offering price of the shares of Common
Stock. The Representative's Warrant Agreement and form of Warrant Certificate
shall be substantially in the form filed as Exhibit __ to the Registration
Statement. Payment for the Representative's Warrants shall be made on the
Closing Date.
3. PUBLIC OFFERING OF THE SHARES. As soon after the Registration Statement
becomes effective as the Representative deems advisable, the Underwriters shall
make a public offering of the Shares (other than to residents of or in any
jurisdiction in which qualification of the Shares is required and has not become
effective) at the price and upon the other terms set forth in the Prospectus.
The Representative may from time to time increase or decrease the public
offering price after distribution of the Shares has been completed to such
extent as the Representative, in its discretion deems advisable. The
Underwriters may enter into one of more agreements as the Underwriters, in each
of their sole discretion, deem advisable with one or more broker-dealers who
shall act as dealers in connection with such public offering.
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4. COVENANTS AND AGREEMENTS OF THE COMPANY. The Company covenants and
agrees with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the offering of the Shares by the Underwriters of
which the Representative shall not previously have been advised and furnished
with a copy, or to which the Representative shall have objected or which is not
in compliance with the Act, the Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representative and confirm the notice in writing,
(i) when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose, (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose, (iv) of the receipt of any comments from the Commission; and (v)
of any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission authority shall enter a
stop order or suspend such qualification at any time, the Company will make
every effort to obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representative, pursuant
to Rule 424(b)(4)) not later than the Commission's close of business on the
earlier of (i) the second business day following the execution and delivery of
this Agreement and (ii) the fifteenth business day after the effective date of
the Registration Statement.
(d) The Company will give the Representative notice of its intention
to file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Representative in connection with the offering of the Securities which differs
from the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Rules and Regulations),
and will furnish the Representative with copies of any such amendment or
supplement a reasonable amount of time
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prior to such proposed filing or use, as the case may be, and will not file any
such prospectus to which the Representative or Baker & McKenzie ("Underwriters'
Counsel"), shall object.
(e) The Company shall endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representative may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
however, the Company shall not be required to qualify as a foreign corporation
or file a general or limited consent to service of process in any such
jurisdiction. In each jurisdiction where such qualification shall be effected,
the Company will, unless the Representative agrees that such action is not at
the time necessary or advisable, use all reasonable efforts to file and make
such statements or reports at such times as are or may reasonably be required by
the laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus relating
to the Securities or the Representative's Shares is required to be delivered
under the Act, any event shall have occurred as a result of which, in the
opinion of counsel for the Company or Underwriters' Counsel, the Prospectus, as
then amended or supplemented, includes an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it is necessary at any time to amend the
Prospectus to comply with the Act, the Company will notify the Representative
promptly and prepare and file with the Commission an appropriate amendment or
supplement in accordance with Section 10 of the Act, each such amendment or
supplement to be satisfactory to Underwriters' Counsel, and the Company will
furnish to the Representative copies of such amendment or supplement as soon as
available and in such quantities as the Representative may request.
(g) As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period beginning on the day after the end of the
fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Rules and Regulations, and to the Representative, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations, which statement need not be audited unless required by the Act,
covering a period of at least 12 consecutive months after the effective date of
the Registration Statement.
(h) During a period of seven years after the date hereof, the Company
will furnish to its shareholders, as soon as practicable, annual reports
(including financial statements
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<PAGE>
audited by independent public accountants) and unaudited quarterly reports of
earnings, and will deliver to the Representative:
(i) concurrently with furnishing such quarterly reports to its
shareholders, statements of income of the Company for each quarter in
the form furnished to the Company's shareholders and certified by the
Company's principal financial or accounting officer;
(ii) concurrently with furnishing such annual reports to its
shareholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
shareholders' equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the certificate thereon of independent
certified public accountants;
(iii) as soon as they are available, copies of all reports
(financial or other) mailed to shareholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD
or any securities exchange;
(v) every press release and every material news item or article
of interest to the financial community in respect of the Company, or its
affairs which was released or prepared by or on behalf of the Company;
(vi) any additional information of a public nature concerning the
Company (and any future subsidiary) or its businesses which the
Representative may request; and
(vii) During such seven-year period, if the Company has an active
subsidiary, the foregoing financial statements will be on a consolidated
basis to the extent that the accounts of the Company and its subsidiary
are consolidated, and will be accompanied by similar financial
statements for any significant subsidiary which is not so consolidated.
(i) The Company will maintain a Transfer Agent and, if necessary under
the jurisdiction of incorporation of the Company, a Registrar (which may be the
same entity as the Transfer Agent) for its Common Stock.
(j) The Company will furnish to the Representative or on
Representative's order, without charge, at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representative may request.
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<PAGE>
(k) On or before the effective date of the Registration Statement, the
Company shall provide the Representative with true copies of duly executed,
legally binding and enforceable agreements pursuant to which for a period of
thirteen (13) months from the effective date of the Registration Statement, the
officers and directors of the Company, holders of all shares of Common Stock and
holders of securities exchangeable or exercisable for or convertible into shares
of Common Stock, agree that it or he or she will not directly or indirectly,
issue, offer to sell, sell, grant an option for the sale of, assign, transfer,
pledge, hypothecate, distribute or otherwise encumber or dispose of any shares
of Common Stock or securities convertible into, exercisable or exchangeable for
or evidencing any right to purchase or subscribe for any shares of Common Stock
(either pursuant to Rule 144 of the Rules and Regulations or otherwise) or
dispose of any beneficial interest therein without the prior written consent of
the Representative and the Company (collectively, the "Lock-up Agreements"). On
or before the Closing Date, the Company shall deliver instructions to the
Transfer Agent authorizing it to place appropriate legends on the certificates
representing the securities subject to the Lock-up Agreements and to place
appropriate stop transfer orders on the Company's ledgers.
(l) Neither the Company, nor any of its officers, directors,
shareholders, nor any of their respective affiliates (within the meaning of the
Rules and Regulations) will take, directly or indirectly, any action designed
to, or which might in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the Company.
(n) The Company shall timely file all such reports, forms or other
documents as may be required from time to time, under the Act, the Exchange Act,
and the Rules and Regulations, and all such reports, forms and documents filed
will comply as to form and substance with the applicable requirements under the
Act, the Exchange Act, and the Rules and Regulations.
(o) The Company shall furnish to the Representative as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date of the Registration Statement) which have been read by
the Company's independent public accountants, as stated in its letter to be
furnished pursuant to Section 6(j) hereof.
(p) The Company shall use cause the Common Stock to be quoted on NNM
and for a period of seven (7) years from the date hereof, use its best efforts
to maintain the NNM quotation of the Common Stock to the extent outstanding.
(q) For a period of five (5) years from the Closing Date, the Company
shall furnish to the Representative at the Representative's request and at the
Company's sole expense,
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<PAGE>
(i) daily consolidated transfer sheets relating to the Common Stock (ii) the
list of holders of all of the Company's securities and (iii) a Blue Sky "Trading
Survey" for secondary sales of the Company's securities prepared by counsel to
the Company.
(r) As soon as practicable, (i) but in no event more than 5 business
days before the effective date of the Registration Statement, file a Form 8-A
with the Commission providing for the registration under the Exchange Act of the
Securities and (ii) but in no event more than 30 days from the effective date of
the Registration Statement, take all necessary and appropriate actions to be
included in Standard and Poor's Corporation Descriptions and Moody's OTC Manual
and to continue such inclusion for a period of not less than seven (7) years.
(s) The Company hereby agrees that it will not for a period of
twenty-four (24) months from the effective date of the Registration Statement,
adopt, propose to adopt or otherwise permit to exist any employee, officer,
director, consultant or compensation plan or arrangement permitting the grant,
issue or sale of any shares of Common Stock or other securities of the Company
(i) in an amount greater than an aggregate of 350,000 shares, (ii) at an
exercise or sale price per share less than the greater of (a) the initial public
offering price of the Shares set forth herein and (b) the fair market value of
the Common Stock on the date of grant or sale, (iii) to any direct or indirect
beneficial holder on the date hereof of more than 10% of the issued and
outstanding shares of Common Stock, (iv) with the payment for such securities
with any form of consideration other than cash, (v) upon payment of less than
the full purchase or exercise price for such shares of Common Stock or other
securities of the Company on the date of grant or issuance, or (vi) permitting
the existence of stock appreciation rights, phantom options or similar
arrangements.
(t) Until the completion of the distribution of the Shares, the
Company shall not without the prior written consent of the Representative and
Underwriters' Counsel, issue, directly or indirectly, any press release or other
communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases issued
in the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations.
(u) For a period equal to the lesser of (i) seven (7) years from the
date hereof, and (ii) the sale to the public of the Representative's Shares, the
Company will not take any action or actions which may prevent or disqualify the
Company's use of Form SB-2 or Form S-1 (or other appropriate form) for the
registration under the Act of the Representative's Shares.
(v) For a period of five (5) years after the effective date of the
Registration Statement, the Representative shall have the right to designate for
election one (1) individual to the Company's Board of Directors (the "Board").
In the event the Representative elects not to exercise such right, then it may
designate one (1) individual to attend meetings of the Company's Board. The
Company shall notify the Representative of each meeting of the Board and the
Company shall send to such individual all notices and other correspondence and
communications sent by the Company to members of the Board. Such individual
shall be reimbursed for all out-of-pocket expenses incurred in connection with
his attendance of meetings of the Board.
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<PAGE>
(w) For a period of twenty four (24) months after the effective date
of the Registration Statement, the Company shall not restate, amend or alter any
term of any written employment, consulting or similar agreement entered into
between the Company and any officer, director or key employee as of the
effective date of the Registration Statement in a manner which is more favorable
to such officer, director or key employee, without the prior written consent of
the Representative.
5. PAYMENT OF EXPENSES.
(a) The Company hereby agrees to pay on each of the Closing Date and
the Option Closing Date (to the extent not paid at the Closing Date) all
expenses and fees (other than fees of Underwriters' Counsel, except as provided
in (iv) below) incident to the performance of the obligations of the Company
under this Agreement and the Representative's Warrant Agreement, including,
without limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing, (including mailing and handling charges)
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto and the printing, mailing (including the payment of postage
with respect thereto) and delivery of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreements, and related documents, including
the cost of all copies thereof and of the Preliminary Prospectuses and of the
Prospectus and any amendments thereof or supplements thereto supplied to the
Underwriters and such dealers as the Underwriters may request, in quantities as
hereinabove stated, (iii) the printing, engraving, issuance and delivery of the
Securities including, but not limited to, (x) the purchase by the Underwriters
of the Shares and the purchase by the Representative of the Representative's
Warrants from the Company, (y) the consummation by the Company of any of its
obligations under this Agreement and the Representative's Warrant Agreement, and
(z) resale of the Shares by the Underwriters in connection with the distribution
contemplated hereby, (iv) the qualification of the Securities under state or
foreign securities or "Blue Sky" laws and determination of the status of such
securities under legal investment laws, including the costs of printing and
mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky
Memorandum" and "Legal Investments Survey," if any, and disbursements and fees
of counsel in connection therewith, (v) advertising costs and expenses,
including but not limited to costs and expenses in connection with the "road
show," information meetings and presentations, bound volumes and prospectus
memorabilia and "tomb-stone" advertisement expenses, (vi) costs and expenses in
connection with due diligence investigations, including but not limited to the
fees of any independent counsel or consultant retained, (vii) fees and expenses
of the transfer agent and registrar, (viii) applications for assignments of a
rating of the Securities by qualified rating agencies, (ix) the fees payable to
the Commission and the NASD, and (x) the fees and expenses incurred in
connection with the quotation of the Securities on NNM and any other exchange.
(b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 6 or Section 10, (i) the Company shall reimburse
and indemnify the Representative for all of its actual out-of-pocket expenses,
including the fees and disbursements of Underwriters' Counsel, less any amounts
already paid pursuant to Section 5(c) hereof.
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<PAGE>
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
Representative on the Closing Date by certified or bank cashier's check or, at
the election of the Representative, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Firm Shares, [$50,000] of which has been paid to date. In the event the
Representative elects to exercise the over-allotment option described in Section
2(b) hereof, the Company agrees to pay to the Representative on the Option
Closing Date (by certified or bank cashier's check or, at the Representative's
election, by deduction from the proceeds of the Option Shares) a non-accountable
expense allowance equal to three percent (3%) of the gross proceeds received by
the Company from the sale of the Option Shares.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, with respect to the
Company as if it had been made on and as of the Closing Date or each Option
Closing Date, as the case may be; the accuracy on and as of the Closing Date or
Option Closing Date, if any, of the statements of the officers of the Company
made pursuant to the provisions hereof; and the performance by the Company on
and as of the Closing Date and each Option Closing Date, if any, of its
covenants and obligations hereunder and to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 12:00 Noon, New York time, on the date of this Agreement or such later date
and time as shall be consented to in writing by the Representative, and, at
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Shares and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to Closing Date the Company shall
have provided evidence satisfactory to the Representative of such timely filing,
or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.
(b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement of
fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
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<PAGE>
(c) On or prior to the Closing Date, the Representative shall have
received from Underwriters' Counsel, such opinion or opinions with respect to
the organization of the Company, the validity of the Securities, the
Representative's Warrants, the Registration Statement, the Prospectus and other
related matters as the Representative may request and Underwriters' Counsel
shall have received such papers and information as they request to enable them
to pass upon such matters.
(d) At Closing Date, the Underwriter shall have received the favorable
opinion of Broad & Cassel, counsel to the Company, dated the Closing Date,
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) the Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of its
jurisdiction, (B) is duly qualified and licensed and in good standing as
a foreign corporation in each jurisdiction in which its ownership or
leasing of any properties or the character of its operations requires
such qualification or licensing, and (C) has all requisite corporate
power and authority; and the Company has obtained any and all necessary
authorizations, approvals, orders, licenses, certificates, franchises
and permits of and from all governmental or regulatory officials and
bodies (including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; the Company is and
has been doing business in material compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises
and permits and all federal, state and local laws, rules and
regulations; the Company has not received any notice of proceedings
relating to the revocation or modification of any such authorization,
approval, order, license, certificate, franchise, or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the business,
operations, condition, financial or otherwise, or the earnings, business
affairs, position, prospects, value, operation, properties, business or
results of operations of the Company. The disclosures in the
Registration Statement concerning the effects of federal, state and
local laws, rules and regulations on the Company's business as currently
conducted and as contemplated are correct in all material respects and
do not omit to state a fact necessary to make the statements contained
therein not misleading in light of the circumstances in which they were
made;
(ii) to the best of such counsel's knowledge, the Company does
not own an interest in any other corporation, partnership, joint
venture, trust or other business entity;
(iii) the Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or
supplement thereto, under "Capitalization" and "Description of
Securities," and the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue any
capital stock, rights, warrants, options or other securities, except for
this Agreement, the Representative's Warrant Agreement and as described
in the Prospectus. The Securities, and all other securities issued or
issuable by the Company conform in all material respects to all
statements with respect thereto contained in the Registration Statement
and
20
<PAGE>
the Prospectus. All issued and outstanding securities of the Company
have been duly authorized and validly issued and are fully paid and
non-assessable; the holders thereof have no rights of rescission with
respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation
of the preemptive rights of any holders of any security of the Company.
The Shares, the Representative's Warrants and the Representative's
Shares to be sold by the Company hereunder and under the
Representative's Warrant Agreement are not and will not be subject to
any preemptive or other similar rights of any stockholder, have been
duly authorized and, when issued, paid for and delivered in accordance
with the terms hereof, will be validly issued, fully paid and
non-assessable and conform to the description thereof contained in the
Prospectus; the holders thereof will not be subject to any liability
solely as such holders; all corporate action required to be taken for
the authorization, issue and sale of the Shares, the Representative's
Warrants and the Representative's Shares has been duly and validly
taken; and the certificates representing the Shares and the
Representative's Warrants are in due and proper form. The
Representative's Warrants constitute valid and binding obligations of
the Company to issue and sell, upon exercise thereof and payment
therefor, the number and type of securities of the Company called for
thereby. Upon the issuance and delivery pursuant to this Agreement and
the Representative's Warrant Agreement of the Shares and the
Representative's Warrants, respectively, to be sold by the Company, the
Representative and the Representative, respectively, will acquire good
and marketable title to the Shares and Representative's Warrants free
and clear of any pledge, lien, charge, claim, encumbrance, pledge,
security interest, or other restriction or equity of any kind
whatsoever. No transfer tax is payable by or on behalf of the
Underwriters in connection with (A) the issuance by the Company of the
Shares, (B) the purchase by the Underwriters of the Shares and the
Representative's Warrants, respectively, from the Company, (C) the
consummation by the Company of any of its obligations under this
Agreement or the Representative's Warrant Agreement, or (D) resales of
the Shares in connection with the distribution contemplated hereby;
(iv) the Registration Statement is effective under the Act, and,
if applicable, filing of all pricing information has been timely made in
the appropriate form under Rule 430A, and no stop order suspending the
use of the Preliminary Prospectus, the Registration Statement or
Prospectus or any part of any thereof or suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or, to the best of such
counsel's knowledge, threatened or contemplated under the Act;
(v) each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments or supplements thereto
(other than the financial statements and other financial and statistical
data included therein, as to which no opinion need be rendered) comply
as to form in all material respects with the requirements of the Act and
the Rules and Regulations;
(vi) to the best of such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Act to be
described in the Registration Statement and the Prospectus and filed as
exhibits to the Registration Statement other than those described in the
Registration Statement (or required to be filed
21
<PAGE>
under the Exchange Act if upon such filing they would be incorporated,
in whole or in part, by reference therein) and the Prospectus and filed
as exhibits thereto, and the exhibits which have been filed are correct
copies of the documents of which they purport to be copies; (B) the
descriptions in the Registration Statement and the Prospectus and any
supplement or amendment thereto of contracts and other documents to
which the Company is a party or by which it is bound, including any
document to which the Company is a party or by which it is bound,
incorporated by reference into the Prospectus and any supplement or
amendment thereto, are accurate in all material respects and fairly
represent the information required to be shown by Form SB-2; (C) there
is not pending or threatened against the Company any action,
arbitration, suit, proceeding, inquiry, investigation, litigation,
governmental or other proceeding (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic or
foreign, pending or threatened against (or circumstances that may give
rise to the same), or involving the properties or business of the
Company which (x) is required to be disclosed in the Registration
Statement which is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately summarized in
all material respects), (y) questions the validity of the capital stock
of the Company or this Agreement or the Representative's Warrant
Agreement, or of any action taken or to be taken by the Company pursuant
to or in connection with any of the foregoing; (D) no statute or
regulation or legal or governmental proceeding required to be described
in the Prospectus is not described as required; and (E) there is no
action, suit or proceeding pending, or threatened, against or affecting
the Company before any court or arbitrator or governmental body, agency
or official (or any basis thereof known to such counsel) in which there
is a reasonable possibility of an adverse decision which may result in a
material adverse change in the condition, financial or otherwise, or the
earnings, position, prospects, shareholders' equity, value, operation,
properties, business or results of operations of the Company, which
could adversely affect the present or prospective ability of the Company
to perform its obligations under this Agreement or the Representative's
Warrant Agreement or which in any manner draws into question the
validity or enforceability of this Agreement or the Representative's
Warrant Agreement;
(vii) the Company has full legal right, power and authority to
enter into each of this Agreement and the Representative's Warrant
Agreement and to consummate the transactions provided for herein and
therein; and each of this Agreement and the Representative's Warrant
Agreement has been duly authorized, executed and delivered by the
Company. Each of this Agreement and the Representative's Warrant
Agreement, assuming due authorization, execution and delivery by each
other party thereto constitutes a legal, valid and binding agreement of
the Company enforceable against the Company in accordance with its terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action, legal or
equitable, and except as rights to indemnity or contribution may be
limited by applicable law), and none of the Company's execution or
delivery of this Agreement and the Representative's Warrant Agreement,
its performance hereunder or thereunder, its consummation of the
transactions contemplated herein or therein, or the conduct of its
business as described in the Registration Statement, the Prospectus, and
any amendments or supplements thereto, conflicts with or
22
<PAGE>
will conflict with or results or will result in any breach or violation
of any of the terms or provisions of, or constitutes or will constitute
a default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or
assets (tangible or intangible) of the Company pursuant to the terms of,
(A) the certificate of incorporation or by-laws of the Company, (B) any
license, contract, indenture, mortgage, deed of trust, voting trust
agreement, shareholders agreement, note, loan or credit agreement or any
other agreement or instrument to which the Company is a party or by
which it is or may be bound or to which any of its respective properties
or assets (tangible or intangible) is or may be subject, or any
indebtedness, or (C) any statute, judgment, decree, order, rule or
regulation applicable to the Company of any arbitrator, court,
regulatory body or administrative agency or other governmental agency or
body (including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties;
(viii) except as described in the Prospectus, no consent,
approval, authorization or order of, and no filing with, any court,
regulatory body, government agency or other body (other than such as may
be required under Blue Sky laws, as to which no opinion need be
rendered) is required in connection with the issuance of the Shares
pursuant to the Prospectus, the issuance of the Representative's
Warrants, and the Registration Statement, the performance of this
Agreement and the Representative's Warrant Agreement, and the
transactions contemplated hereby and thereby;
(ix) the properties and business of the Company conform in all
material respects to the description thereof contained in the
Registration Statement and the Prospectus; and the Company has good and
marketable title to, or valid and enforceable leasehold estates in, all
items of real and personal property stated in the Prospectus to be owned
or leased by it, in each case free and clear of all liens, charges,
claims, encumbrances, pledges, security interests, defects or other
restrictions or equities of any kind whatsoever, other than those
referred to in the Prospectus and liens for taxes not yet due and
payable;
(x) to the best knowledge of such counsel, the Company is not in
breach of, or in default under, any term or provision of any license,
contract, indenture, mortgage, installment sale agreement, deed of
trust, lease, voting trust agreement, shareholders' agreement,
partnership agreement, note, loan or credit agreement or any other
agreement or instrument evidencing an obligation for borrowed money, or
any other agreement or instrument to which the Company is a party or by
which the Company may be bound or to which the property or assets
(tangible or intangible) of the Company is subject or affected; and the
Company is not in violation of any term or provision of its certificate
of incorporation by-laws, or in violation of any franchise, license,
permit, judgment, decree, order, statute, rule or regulation;
(xi) the statements in the Prospectus under "BUSINESS,"
"MANAGEMENT," "PRINCIPAL SHAREHOLDERS," "CERTAIN TRANSACTIONS,"
"DESCRIPTION OF CAPITAL STOCK," and "SHARES
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ELIGIBLE FOR FUTURE SALE" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of statutes,
licenses, rules or regulations or legal conclusions, are correct in all
material respects;
(xii) the Shares have been accepted for quotation on NNM;
(xiii) the persons listed under the caption "PRINCIPAL
SHAREHOLDERS" in the Prospectus are the respective "beneficial owners"
(as such phrase is defined in regulation 13d-3 under the Exchange Act)
of the securities set forth opposite their respective names thereunder
as and to the extent set forth therein;
(xiv) except as described in the Prospectus, no person,
corporation, trust, partnership, association or other entity has the
right to include and/or register any securities of the Company in the
Registration Statement, require the Company to file any registration
statement or, if filed, to include any security in such registration
statement;
(xv) except as described in the Prospectus, there are no claims,
payments, issuances, arrangements or understandings for services in the
nature of a finder's or origination fee with respect to the sale of the
Securities hereunder or financial consulting arrangement or any other
arrangements, agreements, understandings, payments or issuances that may
affect the Underwriters' compensation, as determined by the NASD;
(xvi) assuming due execution by the parties thereto other than
the Company, the Lock-up Agreements are legal, valid and binding
obligations of parties thereto, enforceable against the party and any
subsequent holder of the securities subject thereto in accordance with
its terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors'
rights and the application of equitable principles in any action, legal
or equitable, and except as rights to indemnity or contribution may be
limited by applicable law); and
(xvii) except as described in the Prospectus, the Company does
not (A) maintain, sponsor or contribute to any ERISA Plans, (B) maintain
or contribute, now or at any time previously, to a defined benefit plan,
as defined in Section 3(35) of ERISA, and (C) has never completely or
partially withdrawn from a "multiemployer plan."
Such counsel shall also state that such counsel has participated in
conferences with officers and other representatives of the Company and
representatives of the independent public accountants for the Company at which
conferences such counsel made inquiries of such officers, representatives and
accountants and discussed the contents of the Preliminary Prospectus, the
Registration Statement, the Prospectus, and related matters were discussed and,
although such counsel is not passing upon and does not assume any responsibility
for the accuracy, completeness or fairness of the statements contained in the
Preliminary Prospectus, the Registration Statement and Prospectus, on the basis
of the foregoing, no facts have come to the attention of such counsel which lead
them to believe that either the Registration Statement or any amendment thereto,
at the time such Registration Statement or amendment became effective or
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the Preliminary Prospectus or Prospectus or amendment or supplement thereto as
of the date of such opinion contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and
schedules and other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or Prospectus).
Such opinion shall not state that it is to be governed or qualified
by, or that it is otherwise subject to, any treatise, written policy or other
document relating to legal opinions, including, without limitation, the Legal
Opinion Accord of the ABA Section of Business Law (1991), or any comparable
State bar accord.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company, and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel if requested. The opinion shall also
state that the Underwriters' Counsel is entitled to rely thereon. The opinion of
such counsel for the Company shall state that the opinion of any such other
counsel is in form satisfactory to such counsel and that the Underwriters and
they are justified in relying thereon.
(e) At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinion of Broad & Cassel, counsel to the Company, Broad
& Cassel, dated the Option Closing Date, addressed to the Underwriters and in
form and substance satisfactory to Underwriters' Counsel confirming as of Option
Closing Date the statements made by Broad & Cassel, in its opinion delivered on
the Closing Date.
(f) On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.
(g) Prior to each of the Closing Date and each Option Closing Date, if
any, (i) there shall have been no material adverse change nor development
involving a prospective change in the condition, financial or otherwise,
prospects, shareholders' equity or the business activities of the Company,
whether or not in the ordinary course of business, from the latest dates as of
which such condition is set forth in the Registration Statement and Prospectus;
(ii) there shall have been no transaction, not in the ordinary course of
business, entered into by the Company, from the latest date as of which the
financial condition of the Company is set forth in the Registration Statement
and Prospectus which is materially adverse to the Company; (iii) the
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Company shall not be in default under any provision of any instrument relating
to any outstanding indebtedness; (iv) the Company shall not have issued any
securities (other than the Securities); the Company shall not have declared or
paid any dividend or made any distribution in respect of its capital stock of
any class; and there has not been any change in the capital stock of the
Company, or any material change in the debt (long or short term) or liabilities
or obligations of the Company (contingent or otherwise); (v) no material amount
of the assets of the Company shall have been pledged or mortgaged, except as set
forth in the Registration Statement and Prospectus; (vi) no action, suit or
proceeding, at law or in equity, shall have been pending or threatened (or
circumstances giving rise to same) against the Company, or affecting any of its
properties or business before or by any court or federal, state or foreign
commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may adversely affect the business, operations,
prospects or financial condition or income of the Company, except as set forth
in the Registration Statement and Prospectus; and (vii) no stop order shall have
been issued under the Act and no proceedings therefor shall have been initiated,
threatened or contemplated by the Commission.
(h) At each of the Closing Date and each Option Closing Date, if any,
the Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully examined the
Registration Statement, the Prospectus and this Agreement, and that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date
or the Option Closing Date, as the case may be, and the Company has
complied with all agreements and covenants and satisfied all conditions
contained in this Agreement on its part to be performed or satisfied at
or prior to such Closing Date or Option Closing Date, as the case may
be;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are pending or, to
the best of each of such person's knowledge, after due inquiry are
contemplated or threatened under the Act;
(iii) The Registration Statement and the Prospectus and, if any,
each amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the
Registration Statement, the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading and neither the Preliminary
Prospectus or any supplement thereto included any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; and
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (a) the
Company has not incurred up to and including the Closing Date or the
Option Closing Date, as the case may be, other than
26
<PAGE>
in the ordinary course of its business, any material liabilities or
obligations, direct or contingent; (b) the Company has not paid or
declared any dividends or other distributions on its capital stock; (c)
the Company has not entered into any transactions not in the ordinary
course of business; (d) there has not been any change in the capital
stock of the Company or any material change in the debt (long or
short-term) of the Company; (e) the Company has not sustained any
material loss or damage to its property or assets, whether or not
insured; (g) there is no litigation which is pending or threatened (or
circumstances giving rise to same) against the Company, or any
affiliated party of any of the foregoing which is required to be set
forth in an amended or supplemented Prospectus which has not been set
forth; and (h) there has occurred no event required to be set forth in
an amended or supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this subsection
(g) are to such documents as amended and supplemented at the date of such
certificate.
(i) By the Closing Date, the Underwriters will have received clearance
from the NASD as to the amount of compensation allowable or payable to the
Underwriters, as described in the Registration Statement.
(j) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters in form
and substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from KPMG Peat Marwick LLP;
(i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act
and the applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in the
Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the Act and the Rules and
Regulations thereunder and that the Underwriters may rely upon the
opinion of KPMG Peat Marwick LLP with respect to such financial
statements and supporting schedules included in the Registration
Statement;
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company, a reading of the latest available minutes of
the shareholders and board of directors and the various committees of
the boards of directors of the Company, consultations with officers and
other employees of the Company responsible for financial and accounting
matters and other specified procedures and inquiries, nothing has come
to their attention which would lead them to believe that (A) the pro
forma financial information contained in the Registration Statement and
Prospectus does not comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and
Regulations or is not fairly presented in conformity with generally
accepted accounting principles applied on a basis consistent with that
of the audited financial statements of the Company
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<PAGE>
or the unaudited pro forma financial information included in the
Registration Statement, (B) the unaudited financial statements and
supporting schedules of the Company included in the Registration
Statement do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and
Regulations or are not fairly presented in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements of the Company
included in the Registration Statement, or (C) at a specified date not
more than five (5) days prior to the effective date of the Registration
Statement, there has been any change in the capital stock of the
Company, any change in the long-term debt of the Company, or any
decrease in the shareholders' equity of the Company or any decrease in
the net current assets or net assets of the Company as compared with
amounts shown in the June 30, 1998 balance sheets included in the
Registration Statement, other than as set forth in or contemplated by
the Registration Statement, or, if there was any change or decrease,
setting forth the amount of such change or decrease, and (D) during the
period from June 30, 1998 to a specified date not more than five (5)
days prior to the effective date of the Registration Statement, there
was any decrease in net revenues or net earnings of the Company or
increase in net earnings per common share of the Company, in each case
as compared with the corresponding period beginning June 30, 1997 other
than as set forth in or contemplated by the Registration Statement, or,
if there was any such decrease, setting forth the amount of such
decrease;
(iv) setting forth, at a date not later than five (5) days prior
to the date of the Registration Statement, the amount of liabilities of
the Company (including a break-down of commercial paper and notes
payable to banks);
(v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and
other financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, including work sheets, of the Company and excluding
any questions requiring an interpretation by legal counsel, with the
results obtained from the application of specified readings, inquiries
and other appropriate procedures (which procedures do not constitute an
examination in accordance with generally accepted auditing standards)
set forth in the letter and found them to be in agreement; and
(vi) statements as to such other matters incident to the
transaction contemplated hereby as the Underwriters may request.
(k) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from KPMG Peat Marwick LLP a letter, dated as
of the Closing Date or the Option Closing Date, as the case may be, to the
effect that they reaffirm the statements made in the letter furnished pursuant
to SUBSECTION (j) of this Section hereof except that the specified date referred
to shall be a date not more than five days prior to the Closing Date or the
Option Closing Date, as the case may be, and, if the Company has elected to rely
on Rule 430A of the Rules and Regulations, to the further effect that they have
carried out
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procedures as specified in clause (v) of SUBSECTION (j) of this Section with
respect to certain amounts, percentages and financial information as specified
by the Underwriters and deemed to be a part of the Registration Statement
pursuant to Rule 430A(b) and have found such amounts, percentages and financial
information to be in agreement with the records specified in such clause (v).
(l) The Company shall have delivered to the Representative a letter
from KPMG Peat Marwick LLP addressed to the Company stating that they have not
during the immediately preceding two year period brought to the attention of the
Company's management any "weakness" as defined in Statement of Auditing
Standards No. 60 "Communication of Internal Control Structure Related Matters
Noted in an Audit," in any of the Company's internal controls.
(m) On each of the Closing Date and Option Closing Date, if any, there
shall be duly tendered to the Underwriters the appropriate number of Securities.
(n) No order suspending the sale of the Securities in any jurisdiction
designated by the Underwriters pursuant to subsection (e) of Section 4 hereof
shall have been issued on either the Closing Date or the Option Closing Date, if
any, and no proceedings for that purpose shall have been instituted or shall be
contemplated.
(o) On or before the Closing Date, the Company shall have executed and
delivered to the Representative, (i) the Representative's Warrant Agreement
substantially in the form filed as Exhibit __ to the Registration Statement in
final form and substance satisfactory to the Representative, and (ii) the
Representative's Warrants in such denominations and to such designees as shall
have been provided to the Company.
(p) On or before the Closing Date, the Shares shall have been duly
approved for quotation on NNM, subject to official notice of issuance.
(q) On or before the Closing Date, there shall have been delivered to
the Representative all of the Lock-up Agreements, in form and substance
satisfactory to Representative's Counsel.
If any condition to the Representative's obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representative may terminate this
Agreement or, if the Representative so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
7. INDEMNIFICATION.
(a) The Company, agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7 "Underwriters" shall include the
officers, directors, partners, employees, agents and counsel of the
Underwriters, including specifically each person who may be substituted for an
Underwriter as provided in Section 11 hereof), and each person, if any, who
controls the Underwriter ("controlling person") within the meaning of Section 15
of the
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Act or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions,
proceedings, investigations, inquiries, and suits in respect thereof),
whatsoever (including but not limited to any and all costs and expenses
whatsoever reasonably incurred in investigating, preparing or defending against
such action, proceeding, investigation, inquiry or suit, commenced or
threatened, or any claim whatsoever), as such are incurred, to which the
Underwriter or such controlling person may become subject under the Act, the
Exchange Act or any other statute or at common law or otherwise or under the
laws of foreign countries, arising out of or based upon (A) any untrue statement
or alleged untrue statement of a material fact contained (i) in any Preliminary
Prospectus, the Registration Statement or the Prospectus (as from time to time
amended and supplemented); (ii) in any post-effective amendment or amendments or
any new registration statement and prospectus in which is included securities of
the Company issued or issuable upon exercise of the Securities; or (iii) in any
application or other document or written communication (in this Section 7
collectively called "application") executed by the Company or based upon written
information furnished by the Company filed, delivered or used in any
jurisdiction in order to qualify the Securities under the securities laws
thereof or filed with the Commission, any state securities commission or agency,
NNM or any other securities exchange, (B) the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to make
the statements therein not misleading (in the case of the Prospectus, in the
light of the circumstances under which they were made), or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company or any of its officers
delivered pursuant hereto unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriters expressly for use in any Preliminary Prospectus, the
Registration Statement or any Prospectus, or any amendment thereof or supplement
thereto, or in any application, as the case may be.
The indemnity agreement in this subsection (a) shall be in addition to
any liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriter but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering. The
Company acknowledges that the statements with respect to the public offering of
the Securities set forth under the heading "Underwriting" and the stabilization
legend in the Prospectus have been furnished by the Underwriter expressly for
use therein and constitute the only information furnished in writing by or on
behalf of the Underwriters for inclusion in the Prospectus.
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(c) The indemnity agreement in this subsection (b) shall be in
addition to any liability which the Underwriters may have at common law or
otherwise. Promptly after receipt by an indemnified party under this Section 7
of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 7, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 except to the extent that it
has been prejudiced in any material respect by such failure or from any
liability which it may have otherwise). In case any such action, investigation,
inquiry, suit or proceeding is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such case
but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of such action at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action, investigation, inquiry, suit or proceeding on behalf of the indemnified
party or parties), in any of which events such fees and expenses of one
additional counsel shall be borne by the indemnifying parties. In no event shall
the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one action, investigation,
inquiry, suit or proceeding or separate but similar or related actions,
investigations, inquiries, suits or proceedings in the same jurisdiction arising
out of the same general allegations or circumstances. Anything in this Section 7
to the contrary notwithstanding, an indemnifying party shall not be liable for
any settlement of any claim or action effected without its written consent;
provided, however, that such consent was not unreasonably withheld. An
indemnifying party will not, without the prior written consent of the
indemnified parties, settle compromise or consent to the entry of any judgment
with respect to any pending or threatened claim, action, investigation, inquiry,
suit or proceeding in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action), unless such settlement, compromise or consent
(i) includes an unconditional release of each indemnified party form all
liability arising out of such claim, action, suit or proceeding and (ii) doe
snot include a statement as to or an admission of fault, culpability or a
failure to act by or on behalf of any indemnified party.
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(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions, investigations, inquiries, suits or proceedings in respect thereof) (A)
in such proportion as is appropriate to reflect the relative benefits received
by each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand, from the offering of the Securities or (B) if the
allocation provided by clause (A) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of each of the
contributing parties, on the one hand, and the party to be indemnified on the
other hand in connection with the statements or omissions that resulted in such
losses, claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. In any case where the Company is the contributing
party and the Underwriters are the indemnified party, the relative benefits
received by the Company on the one hand, and the Underwriters, on the other,
shall be deemed to be in the same proportion as the total net proceeds from the
offering of the Securities (before deducting expenses) bear to the total
underwriting discounts received by the Underwriters hereunder, in each case as
set forth in the table on the Cover Page of the Prospectus. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, or by the
Underwriters, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, expenses or liabilities (or actions, investigations, inquiries,
suits or proceedings in respect thereof) referred to above in this subdivision
(d) shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action, claim, investigation, inquiry, suit or proceeding. Notwithstanding the
provisions of this subdivision (d) the Underwriters shall not be required to
contribute any amount in excess of the underwriting discount applicable to the
Securities purchased by the Underwriters hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7, each person, if
any, who controls the Company within the meaning of the Act, each officer of the
Company who has signed the Registration Statement, and each director of the
Company shall have the same rights to contribution as the Company, subject in
each case to this subparagraph (d). Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit, inquiry,
investigation or proceeding against such party in respect to which a claim for
contribution may be made against another party or parties under this
subparagraph (d), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this subparagraph (d), or to
the extent that such party or parties were not adversely affected by such
omission. The contribution agreement set
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forth above shall be in addition to any liabilities which any indemnifying party
may have at common law or otherwise.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All representations,
warranties and agreements contained in this Agreement or contained in
certificates of officers of the Company submitted pursuant hereto, shall be
deemed to be representations, warranties and agreements at the Closing Date and
the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the indemnity agreements contained
in Section 7 hereof, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter, the
Company, any controlling person of any Underwriter or the Company, and shall
survive termination of this Agreement or the issuance and delivery of the
Securities to the Underwriters.
9. EFFECTIVE DATE.
(a) This Agreement shall become effective at 10:00 a.m., New York City
time, on the next full business day following the date hereof, or at such
earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Shares for sale to the
public; provided, however, that the provisions of Sections 5, 7 and 10 of this
Agreement shall at all times be effective. For purposes of this Section 9, the
Shares to be purchased hereunder shall be deemed to have been so released upon
the earlier of dispatch by the Representative of telegrams to securities dealers
releasing such shares for offering or the release by the Representative for
publication of the first newspaper advertisement which is subsequently published
relating to the Shares.
10. TERMINATION.
(a) Subject to subsection (b) of this Section 10, the Representative
shall have the right to terminate this Agreement, after the date hereof, (i) if
any domestic or international event or act or occurrence has materially
disrupted, or in the Representative's opinion will in the immediate future
materially adversely disrupt the financial markets; or (ii) any material adverse
change in the financial markets shall have occurred; or (iii) if trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the American Stock Exchange, the
National Association of Securities Dealers, Inc., the Boston Stock Exchange, the
Chicago Board of Trade, the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange, the Commission or any other government authority having
jurisdiction; or (iv) if trading of any of the securities of the Company shall
have been suspended, or any of the securities of the Company shall have been
delisted, on any exchange or in any over-the-counter market; or (v) if the
United States shall have become involved in a war or major hostilities, or if
there shall have been an escalation in an existing war or major hostilities or a
national emergency shall have been declared in the United States; or (vi) if a
banking moratorium has been declared by a state or federal authority; or (vii)
if a moratorium in foreign exchange trading has been declared; or (viii) if the
Company shall have sustained a loss material or substantial to the Company by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity
or malicious act which, whether or not such loss shall have been insured, will,
in the Representative's opinion, make it inadvisable to proceed with the
delivery of
33
<PAGE>
the Securities; or (ix) if there shall have occurred any outbreak or
escalation of hostilities or any calamity or crisis or there shall have been
such a material adverse change in the conditions or prospects of the Company, or
such material adverse change in the general market, political or economic
conditions, in the United States or elsewhere as in the Representative's
judgment would make it inadvisable to proceed with the offering, sale and/or
delivery of the Securities.
(b) If this Agreement is terminated by the Representative in
accordance with the provisions of Section 10(a) the Company shall promptly
reimburse and indemnify the Representative for all of its actual out-of-pocket
expenses, including the fees and disbursements of counsel for the Underwriters
(less amounts previously paid pursuant to Section 5(c) above). Notwithstanding
any contrary provision contained in this Agreement, if this Agreement shall not
be carried out within the time specified herein, or any extension thereof
granted to the Representative, by reason of any failure on the part of the
Company to perform any undertaking or satisfy any condition of this Agreement by
it to be performed or satisfied (including, without limitation, pursuant to
Section 6 or Section 12) then, the Company shall promptly reimburse and
indemnify the Underwriter for all of their actual out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriter (less
amounts previously paid pursuant to Section 5(c) above). In addition, the
Company shall remain liable for all Blue Sky counsel fees and expenses and
filing fees. Notwithstanding any contrary provision contained in this Agreement,
any election hereunder or any termination of this Agreement (including, without
limitation, pursuant to Sections 6, 10 and 12 hereof), and whether or not this
Agreement is otherwise carried out, the provisions of Section 5 and Section 7
shall not be in any way affected by such election or termination or failure to
carry out the terms of this Agreement or any part hereof.
11. SUBSTITUTION OF THE UNDERWRITERS. If one or more of the Underwriters
shall fail otherwise than for a reason sufficient to justify the termination of
this Agreement (under the provisions of Section 6, Section 10 or Section 12
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representative
shall have the right, within 24 hours thereafter, to make arrangement for one or
more of the non-defaulting Underwriters, or any other Underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the
Representative shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
total number of Firm Shares to be purchased on such date, the non-defaulting
Underwriters shall be obligated to purchase the full amount thereof in the
proportions that their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total
number of Firm Shares, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriters.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
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In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
12. DEFAULT BY THE COMPANY. If the Company shall fail at the Closing Date
or at any Option Closing Date, as applicable, to sell and deliver the number of
Shares which it is obligated to sell hereunder on such date, then this Agreement
shall terminate (or, if such default shall occur with respect to any Option
Shares to be purchased on an Option Closing Date, the Underwriters may at their
option, by notice from the Underwriters or the Representative to the Company,
terminate the Underwriters' obligation to purchase Option Shares from the
Company on such date) without any liability on the part of any non-defaulting
party other than pursuant to Section 5, Section 7 and Section 10 hereof. No
action taken pursuant to this Section shall relieve the Company from liability,
if any, in respect of such default.
13. NOTICES. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Representative shall be directed to the
Representative at 805 third Avenue, New York, New York 10022, Attention: Robert
A. Maley, with a copy to Baker & McKenzie, 1200 Brickell Avenue, Miami, Florida
33131, Attention: Andrew Hulsh, Esq. Notices to the Company shall be directed to
the Company at 4161 N.W. 5th Street, Plantation, Florida 33317, Attention:
Edward J. Lawson, with a copy to Broad & Cassel, 201 South Biscayne Blvd.,
Miami, Florida 33131, Attention: Dale S. Bergman, P.A.
14. PARTIES. This Agreement shall inure solely to the benefit of and shall
be binding upon, the Underwriters, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Securities from the Underwriters shall be deemed to be a successor
by reason merely of such purchase.
15. CONSTRUCTION. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the Representative's
Warrant Agreement constitute the entire agreement of the parties hereto and
supersede all prior written or oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may not be amended
except in a writing, signed by the Representative and the Company.
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If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
21ST CENTURY HOLDING COMPANY
By: _________________________________________
Name: Edward J. Lawson
Title: President
Confirmed and accepted as of
the date first above written.
GILFORD SECURITIES INCORPORATED
By:___________________________________
Name:
Title:
36
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SCHEDULE A
UNDERWRITER NUMBER OF FIRM SHARES
- ----------- ---------------------
Gilford Securities Incorporated
TOTAL 1,250,000
37
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
21ST CENTURY HOLDING COMPANY
ARTICLE I - NAME
The name of the Company is 21st CENTURY HOLDING COMPANY (hereinafter
called the "Company").
ARTICLE II - MAILING ADDRESS
The current mailing address of the principal place of business of the
Company is 4164 N.W. 5th Street, Plantation, Florida 33317.
ARTICLE III - CAPITAL STOCK
The aggregate number of shares of all classes of capital stock which
the Company shall have the authority to issue is 26,000,000, consisting of (i)
25,000,000 shares of common stock, par value $.01 per share (the "Common
Stock"); and (ii) 1,000,000 shares of Preferred Stock, par value $.01 per share
(the "Preferred Stock").
A. PROVISIONS RELATING TO THE COMMON STOCK.
1. VOTING RIGHTS. Except as otherwise required by law or as may be
provided by the resolutions of the Board of Directors authorizing the issuance
of any class or series of the Preferred Stock, as herein provided, all rights to
vote and all voting power shall be vested exclusively in the holders of the
Common Stock with each share of Common Stock entitled to one vote.
2. DIVIDENDS. Subject to the rights of the holders of the Preferred
Stock, the holders of the Common Stock shall be entitled to receive when, as and
if declared by the Board of Directors, out of funds legally available therefor,
dividends and other distributions payable in cash, property, stock (including
shares of any class or series of the Company, whether or not shares of such
class or series are already outstanding) or otherwise.
3. LIQUIDATING DISTRIBUTIONS. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary, and after the
holders of the Preferred Stock shall have been paid in full the amounts to which
they shall be entitled, if any, or a sum sufficient for such payment in full
shall have been set aside, the remaining net assets of the Company, if any,
shall be distributed pro rata to the holders of Common Stock in accordance with
their respective rights and rests to the exclusion of the holders of Preferred
Stock.
<PAGE>
B. PROVISIONS RELATING TO PREFERRED STOCK
1. GENERAL. The Preferred Stock may be issued from time to time, in one
or more classes or series, the shares of each class or series to have such
designations powers, preferences and rights, and qualifications, limitations and
restrictions thereof as are stated and expressed herein and in the resolution or
resolutions providing for the issuance of such class or series adopted by the
Board of Directors as hereinafter prescribed.
2. PREFERENCES. Subject to the rights of the holders of the Company's
Common Stock, authority is hereby expressly granted to and vested in the Board
of Directors to authorize the issuance of the Preferred Stock from time to time,
in one or more classes or series, to determine and take necessary proceedings
fully to effect the issuance conversion and redemption of any such Preferred
Stock, and, with respect to each class or series of Preferred Stock, to fix and
state by the resolution or resolutions from time to time adopted providing for
the issuance thereof the following:
(a) whether or not the class or series is to have voting rights,
special or conditional, full or limited, or is to be without voting rights;
(b) the number of shares to constitute the class or series and the
designations thereof;
(c) the preferences and relative, participating, optional or other
special rights, if any, and the qualifications, limitations or restrictions
thereof, if any, with respect to any class or series;
(d) whether or not the shares of any class or series shall be
redeemable and if redeemable the redemption price or prices, and the time or
times at which and the terms and conditions upon which, such shares shall be
redeemable and the manner of redemption;
(e) whether or not the shares of a class or series shall be subject
to the operation of retirement or sinking funds to be applied to the purchase or
redemption of such shares for retirement, and if such retirement or sinking fund
or funds be established, the periodic amount thereof and the terms and
provisions relative to the operation thereof;
(f) the dividend rate, whether dividends are payable in cash, stock
or other property of the Company, the conditions upon which and the times when
such dividends are payable, the preference to or the relation to the payment of
the dividends payable, on any other class or classes or series of stock, whether
or not such dividend shall be cumulative or noncumulative, and if cumulative,
the date or dates from which such dividends shall accumulate;
(g) the preferences, if any, and the amounts thereof that the
holders of any class or series thereof shall be entitled to receive upon the
voluntary or involuntary dissolution of, or upon any distribution of the assets
of, the Company;
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(h) whether or not the shares of any class or series shall be
convertible into, or exchangeable for, the shares of any other class or classes
or of any other series of the same or any other class or classes of the Company
and the conversion price or prices or ratio or ratios or the rate or rates at
which such conversion or exchange may be made, with such adjustments, if any, as
shall be stated and expressed or provided for in such resolution or resolutions;
and
(i) such other special rights and protective provisions with respect
to any class or series as the Board of Directors may deem advisable.
The shares of each class or series of the Preferred Stock may vary from
the shares of any other class or series thereof in any or all of the foregoing
respects. The Board of Directors may increase the number of shares of Preferred
Stock designated for any existing class or series by a resolution adding to such
class or series authorized and unissued shares of the Preferred Stock not
designated for any other class or series. The Board of Directors may decrease
the number of shares of the Preferred Stock designated for any existing class or
series by a resolution, subtracting from such series unissued shares of the
Preferred Stock designated for such class, or series, and the shares so
subtracted shall become authorized, unissued and undesignated shares of the
Preferred Stock.
ARTICLE IV - REGISTERED AGENT
The street address of the Company's registered office is 201 South
Biscayne Boulevard, Suite 3000, Miami, Florida 33131. The name of the
Company's registered agent at that address is B&C Corporate Services, Inc.
ARTICLE V - BOARD OF DIRECTORS
A. NUMBER OF DIRECTORS. The number of directors constituting the Company's
Board of Directors shall not be less than three nor more than 15, and the exact
number of Directors shall be fixed from time to time in the manner provided in
the Company's Bylaws.
B. TERM OF OFFICE. The Board of Directors shall be divided into three
classes, designated as Class I, Class II and Class III. The number of directors
in each class shall be determined by the Board of Directors and shall consist of
as nearly equal a number of directors as practicable. The term of the Class I
directors initially shall expire at the next ensuing annual meeting of
shareholders; the term of Class II directors initially shall expire at the
annual meeting of shareholders held one year thereafter; and the term of Class
III directors initially shall expire at the annual meeting of shareholders held
one year thereafter. In the case of each class, the directors shall serve until
their respective successors are duly elected and qualified or until his or her
earlier resignation, death, incapacity or removal from office. At each annual
meeting of shareholders, directors of the respective class whose term expires
shall be elected, and the directors chosen to succeed those whose terms shall
have expired shall be elected to hold office for a term to expire at the third
ensuing annual meeting of shareholders after their election, and until their
respective successors are elected and qualified or until their earlier
resignation, death, incapacity or removal from office.
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C. VACANCIES. A director may resign at any time by giving written notice
to the Company, the Board of Directors or the Chairman of the Board of
Directors. Such resignation shall take effect when the notice is delivered
unless the notice specifies a later effective date, in which event the Board of
Directors may fill the pending vacancy before the effective date if they provide
that the successor does not take office until the effective date. Any vacancy
occurring in the Board of Directors due to death, resignation, retirement,
disqualification, removal and any directorship to be filled by reason of an
increase in the size of the Board of Directors shall be filled by the
affirmative vote of a majority of the current directors though less than a
quorum of the Board of Directors, or may be filled by an election at an annual
or special meeting of the shareholders called for that purpose, unless otherwise
provided by law. A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office, or until the next election of one
or more directors by shareholders if the vacancy is caused by an increase in the
number of directors.
D. REMOVAL. A director may be removed from office prior to the expiration
of his or her term: (i) only for cause; and (ii) only upon the affirmative vote
of at least two-thirds of outstanding shares of capital stock of the Company
entitled to vote for the election of directors.
E. AMENDMENTS. Notwithstanding anything contained in these Articles of
Incorporation to the contrary, this Article V shall not be altered, amended or
repealed except by an affirmative vote of at least two-thirds of the outstanding
shares of capital stock of the Company entitled to vote for the election of
directors.
ARTICLE VI - LIMITATION ON DIRECTOR LIABILITY
A director shall not be personally liable to the Company or the holders
of shares of capital stock for monetary damages for breach of fiduciary duty as
a director, except (i) for any breach of the duty of loyalty of such director to
the Company or such holders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 607.0831 of the Florida Business Company Act (the "FBCA"), or (iv) for
any transaction from which such director derives an improper personal benefit.
This Article VI shall be read to authorize the limitation of liability to the
fullest extent permitted under Florida law. If the FBCA is hereafter amended to
authorize the further or broader elimination or limitation of the personal
liability of directors, then the liability of a director of the Company shall be
eliminated or limited to the fullest extent permitted by the FBCA, as so
amended. No repeal or modification of this Article VI shall adversely affect any
right of or protection afforded to a director of the Company existing
immediately prior to such repeal or modification.
ARTICLE VII - SPECIAL MEETINGS OF SHAREHOLDERS
Except as otherwise required by law and subject to the rights of the
holders of the Preferred Stock, special meetings of shareholders of the Company
may be called only by (i) the Board of Directors pursuant to a resolution
approved by a majority of the entire Board of Directors, (ii) the Company's
Chief Executive Officer or (iii) the holders of at least one-third of the
outstanding shares of capital stock of the Company. Notwithstanding anything
contained in these Amended
4
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and Restated Articles of Incorporation to the contrary, this Article VII shall
not be altered, amended or repealed except by an affirmative vote of at least
two-thirds of the outstanding shares of capital stock of the Company entitled to
vote at a shareholders' meeting duly called for such purpose.
ARTICLE VIII - NO SHAREHOLDER ACTION WITHOUT A MEETING
Any action required or permitted to be taken by the shareholders of the
Company shall be taken at a duly called annual or special meeting of such
holders and may not be taken by any consent in writing by such holders.
Notwithstanding anything contained in these Amended and Restated Articles of
Incorporation to the contrary, this Article VIII shall not be altered, amended
or repealed except by an affirmative vote of at least two-thirds of the
outstanding shares of capital stock of the Company entitled to vote at a
shareholders' meeting duly called for such purpose.
ARTICLE IX - INDEMNIFICATION
The Company shall indemnify and advance expenses to, and may purchase
and maintain insurance on behalf of, its officers and directors to the fullest
extent permitted by law as now or hereafter in effect. Without limiting the
generality of the foregoing, the Company's Bylaws (the "Bylaws") may provide for
indemnification and advancement of expenses to officers, directors, employees
and agents on such terms and conditions as the Board of Directors may from time
to time deem appropriate or advisable.
ARTICLE X - BYLAWS
The Board of Directors shall have the power to adopt, amend or repeal
the Bylaws or any part hereof. Certain provisions of the Bylaws, as stated
therein, may not be altered, amended or repealed except by the affirmative vote
of at least two-thirds of the outstanding shares of capital stock of the Company
entitled to vote at a shareholders' meeting duly called for such purpose. Except
for such provisions requiring a two-thirds vote to alter, amend or repeal, the
Bylaws may be altered, amended or repealed, and new bylaws may be adopted, by
the shareholders upon the affirmative vote of at least a majority of the
outstanding shares of capital stock of the Company entitled to vote at a
shareholders' meeting duly called for such purpose.
Notwithstanding anything contained in these Amended and Restated
Articles of Incorporation to the contrary, this Article X shall not be altered,
amended or repealed except by an affirmative vote of at least two-thirds of the
outstanding shares of capital stock of the Company entitled to vote at a
shareholders' meeting duly called for such purpose.
ARTICLE XI - AMENDMENT
Except as provided herein, these Amended and Restated Articles of
Incorporation may be altered, amended or repealed by the shareholders of the
Company in accordance with Florida law.
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IN WITNESS WHEREOF, the undersigned, for the purpose of amending and
restating the Company's Article of Incorporation pursuant to laws of the State
of Florida, has executed these Amended and Restated Articles of Incorporation as
of August, 1998.
21ST CENTURY HOLDING COMPANY
By:
--------------------------------------
Edward J. Lawson, Chairman and
Chief Executive Officer
EXHIBIT 3.2
AMENDED AND RESTATED
BY-LAWS OF
21ST CENTURY HOLDING COMPANY
ARTICLE I
OFFICES
SECTION 1. NAME. The name of the company is 21st Century Holding Company, a
Florida Corporation (the "Company").
SECTION 2. OTHER OFFICES. The location of the registered office of the
Company shall be as stated in the Articles of Incorporation, which location may
be changed from time to time by the Company's Board of Directors (the "Board of
Directors"). The Company may also have offices at such other places, either
within or without the State of Florida, as the Board of Directors may from time
to time determine or as the business of the Company may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 1. ANNUAL MEETINGS. All annual meetings of the shareholders of the
Company for the election of directors and for such other business as may
properly come before the meeting shall be held (i) on the fourth Friday of May
of each calendar year at 10:00 a.m., Eastern time, or on such other date or at
such other time as may be fixed, from time to time, by the Board of Directors,
and (ii) at such place, within or without the State of Florida, as may be
designated by or on behalf of the Board of Directors and stated in the notice of
meeting or in a duly executed waiver of notice thereof.
SECTION 2. SPECIAL MEETINGS. Except as otherwise required by law and subject
to the rights of the holders of the Preferred Stock, special meetings of
shareholders of the Company may be called only by (i) the Board of Directors
pursuant to a resolution approved by a majority of the entire Board of
Directors, (ii) the Company's Chief Executive Officer or (iii) the holders of at
least one-third of the outstanding shares of capital stock of the Company.
Special meetings of shareholders may be held at such time and date, and at such
place, within or without the State of Florida, as shall be designated by the
Board of Directors and set forth in the notice of meeting required pursuant to
Section 3 of this Article. Notwithstanding anything contained in these Bylaws to
the contrary, this Article II, Section 2 shall not be altered, amended or
repealed except by an affirmative vote of at least two-thirds of the outstanding
shares of capital stock of the Company entitled to vote at a shareholders'
meeting duly called for such purpose. Only such business as is set forth in the
notice of a special meeting may be transacted at such Special Meeting.
SECTION 3. NOTICE. A written notice of each meeting of shareholders shall be
given to each shareholder entitled to vote at the meeting, at the address as it
appears on the stock transfer records of the Company, not less than ten nor more
than 60 days before the date of the meeting, by or at the direction of the
President, the Secretary or the officer or persons calling the meeting.
<PAGE>
The notice so given shall state the date, time and place of meeting and, in the
case of a special shareholders' meeting, the purpose or purposes for which the
meeting is called.
SECTION 4. WAIVER OF NOTICE. Shareholders may waive notice of any meeting
before or after the date and time specified in the written notice of meeting.
Any such waiver of notice must be in writing, be signed by the shareholder
entitled to the notice and be delivered to the Company for inclusion in the
appropriate corporate records. Neither the business to be transacted at, nor the
purpose of, any shareholders' meeting need be specified in any written waiver of
notice. Attendance of a person at a shareholders' meeting shall constitute a
waiver of notice of such meeting, unless the shareholder at the beginning of the
meeting objects to holding the meeting or transacting business at the meeting.
SECTION 5. RECORD DATE. For the purpose of determining shareholders entitled
to notice of or to vote at a shareholders' meeting, to demand a special meeting,
to act by written consent or to take any other action, the Board of Directors
may fix in advance a date as the record date for any such determination of
shareholders, such date in any case to be not more than 70 days nor, in the case
of a shareholders' meeting, less than ten days, prior to the date on which the
particular action requiring such determination of shareholders is to be taken.
If no record date is fixed for the determination of shareholders entitled to
notice or to vote at a shareholders' meeting, then the record date for such
shall be the close of business on the day before the first notice is delivered
to shareholders.
SECTION 6. QUORUM. A majority of the shares entitled to vote on a matter,
represented in person or by proxy, shall constitute a quorum for action on that
matter at a meeting of shareholders. If a quorum is not present or represented
at a meeting of shareholders, the holders of a majority of the shares
represented, and who would be entitled to vote at a meeting if a quorum were
present, may adjourn the meeting from time to time and to another place, without
notice other than announcement at the meeting, until a quorum shall be present
or represented. Once a quorum has been established at a shareholders' meeting,
the subsequent withdrawal of shareholders, so as to reduce the number of shares
entitled to vote at the meeting below the number required for a quorum, shall
not affect the validity of any action taken at the meeting or any adjournment
thereof.
SECTION 7. VOTING. If a quorum is present, action on a matter, other than
the election of directors, shall be approved if the votes cast by the
shareholders represented at the meeting and entitled to vote on the subject
matter favoring the action exceeds the votes cast opposing the action, unless a
greater number of affirmative votes or voting by classes is required by Florida
law or by the Articles of Incorporation. Directors shall be elected by plurality
vote in accordance with Article III, Section 3 of these Bylaws. Each outstanding
share shall be entitled to one vote on each matter submitted to a vote at a
meeting of shareholders, unless otherwise provided under the Articles of
Incorporation (or any resolution authorizing any class or series of Preferred
Stock) or under Florida law.
SECTION 8. PROXIES. A shareholder entitled to vote at any meeting of
shareholders or any adjournment thereof may vote in person or by proxy. A
shareholder may appoint a proxy to vote or otherwise act for him by signing an
appointment form, either personally or by his attorney-in-
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fact. An appointment of proxy is effective when received by the Secretary or
other officer or agent authorized to tabulate votes.
SECTION 9. NO SHAREHOLDER ACTION WITHOUT A MEETING. Any action required or
permitted to be taken by the shareholders of the Company shall be taken at a
duly called annual or special meeting of such holders and may not be taken by
any consent in writing by such holders. Notwithstanding anything contained in
these Bylaws to the contrary, this Article II, Section 9 shall not be altered,
amended or repealed except by an affirmative vote of at least two-thirds of the
outstanding shares of capital stock of the Company entitled to vote at a
shareholders' meeting duly called for such purpose.
SECTION 10. ADVANCE NOTICE OF SHAREHOLDER PROPOSED BUSINESS AT ANNUAL
MEETING. At an annual meeting of the shareholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be properly
brought before an annual meeting, business must be either (a) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, (b) otherwise properly brought before the meeting by or
at the direction of the Board of Directors, or (c) otherwise properly brought
before the meeting by a shareholder. In addition to any other applicable
requirements, for business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the Secretary of the Company. 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 so received not later than the
close of business on the tenth day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was made,
whichever first occurs. A shareholder's notice to the Secretary shall set forth
as to each matter the shareholder proposes to bring before the annual meeting
(i) a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and record address of the shareholder proposing such business, (iii)
the class and number of shares of the Company which are beneficially owned by
the shareholder, and (iv) any material interest of the shareholder in such
business.
Notwithstanding anything in the Bylaws to the contrary, no business shall be
conducted at the annual meeting except in accordance with the procedures set
forth in this Article II, Section 10; provided, however, that nothing in this
Article II, Section 10, shall be deemed to preclude discussion by any
shareholder of any business properly brought before the annual meeting in
accordance with said procedure.
The Chairman of an annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Article II, Section 10, and if he
should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
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Notwithstanding anything contained in the Bylaws to the contrary, this Article
II, Section 10 shall not be altered, amended or repealed except by an
affirmative vote of at least two-thirds of the outstanding shares of capital
stock of the Company entitled to vote thereon.
ARTICLE III
DIRECTORS
SECTION 1. POWERS. All corporate powers shall be exercised by or under the
authority of, and the business and affairs of the Company shall be managed under
the direction of, the Board of Directors. Directors must be natural persons who
are at least 18 years of age but need not be residents of Florida or
shareholders of the Company.
SECTION 2. COMPENSATION. Directors of the Company who also serve as officers
or members of management ("Employee Directors") shall serve as directors without
compensation. Non-employee directors of the Company shall be entitled to receive
such compensation and benefits as is from time to time determined by the Board
of Directors. The Employee Directors may be paid their expenses, if any, and the
non-employee directors may be paid a fee and expenses, if any, of attendance at
each meeting of the Board of Directors or of any committee. No such payments
shall preclude any director from serving in any other capacity and receiving
compensation therefor.
SECTION 3. NUMBER, ELECTION & TERM. The Company's Board of Directors shall
consist of not less than three nor more than 15 members, with the exact number
to be fixed from time to time in accordance with a resolution adopted by a
majority of the entire Board of Directors. No decrease in the number of
directors shall have the effect of shortening the term of any incumbent
director. The Board of Directors shall be divided into three classes, designated
as Class I, Class II and Class III. The number of directors in each class shall
be as nearly equal in number as practicable. The term of the Class I directors
shall expire at the next ensuing annual meeting of shareholders; the term of the
Class II directors shall expire at the annual meeting of shareholders held one
year thereafter; and the term of the Class III directors shall expire at the
annual meeting of shareholders held one year thereafter, in each case until his
or her successor is duly elected and qualified or until his or her earlier
resignation, death, incapacity or removal from office. Upon the expiration of
the initial terms of office for each class of directors, the successor directors
of each class shall be elected for a full term of three years, to serve until
their successors are duly elected and qualified or until their earlier
resignation, death, incapacity or removal from office. The Board of Directors
shall apportion any increase or decrease in the number of directors among the
classes as nearly equal in number as possible.
SECTION 4. VACANCIES. Whenever any vacancy on the Board of Directors shall
occur due to death, resignation, retirement, disqualification, removal, increase
in the number of directors, or otherwise, a majority of the remaining directors
in office, although less than a quorum of the Board of Directors, may fill the
vacancy for the balance of the unexpired term, at which time a successor or
successors shall be duly elected by the shareholders and qualified.
Notwithstanding the provisions of any other Article hereof, only the remaining
directors of the Company shall have the authority, in accordance with the
procedure stated herein, to fill any vacancy that arises on the Board of
Directors.
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SECTION 5. REMOVAL OF DIRECTORS. A director may be removed from office prior
to the expiration of his or her term: (i) only for cause; and (ii) only upon the
affirmative vote of at least two-thirds of the outstanding shares of capital
stock of the Company entitled to vote for the election of directors.
SECTION 6. QUORUM AND VOTING. A majority of the number of directors fixed
by or in accordance with these Bylaws shall constitute a quorum for the
transaction of business at any meeting of directors. If a quorum is present when
a vote is taken, the affirmative vote of a majority of the directors present
shall be the act of the Board of Directors.
SECTION 7. DEEMED ASSENT. A director who is present at a meeting of the
Board of Directors or a committee of the Board of Directors when corporate
action is taken is deemed to have assented to the action taken unless (i) the
director objects at the beginning of the meeting (or promptly upon his arrival)
to the holding of the meeting or transacting specified business at the meeting,
or (ii) the director votes against or abstains from the action taken.
SECTION 8. COMMITTEES. The Board of Directors, by resolution adopted by a
majority of the full Board of Directors, may designate from among its members an
executive committee, a compensation committee, an audit committee and one or
more other committees each of which must have at least two members and, to the
extend provided in the designating resolution, shall have and may exercise all
the authority of the Board of Directors, except such authority as may be
reserved to the Board of Directors under Florida law.
(a) EXECUTIVE COMMITTEE. The Board of Directors by resolution may
designate one or more directors to constitute an executive committee, which
committee, to the extent provided in such resolution, shall have and may
exercise all powers and authority of the Board of Directors in the management of
the business and affairs of the Company, except where action of the Board of
Directors is required by statute.
(b) OTHER COMMITTEES. The Board of Directors may by resolution create
other committees for such terms and with such powers and duties as the Board of
Directors shall deem appropriate.
(c) ORGANIZATION OF COMMITTEES. The chairman of all committees of the
Board of Directors shall be chosen by the members thereof. Each committee shall
elect a secretary, who shall be either a member of the committee or the
secretary of the Company. The chairman of each committee shall preside at all
meetings of such committee.
(d) MEETINGS. Regular meetings of each committee may be held without
the giving of notice if a day of the week, a time, and a place shall have been
established by the committee for such meetings. Special meetings (and, if the
requirements of the preceding sentence have not been met, regular meetings)
shall be called as provided in Section 9 with respect to notices of special
meetings of the Board of Directors.
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(e) QUORUM AND MANNER OF ACTING. A majority of the members of each
committee shall be present either in person or by telephone, radio, television,
or similar means of communication through which all persons participating may
simultaneously hear each other at all times, at each meeting of such committee
in order to constitute a quorum for the transaction of business. The act of a
majority of the members so present at a meeting at which a quorum is present
shall be the act of such committee. The members of each committee shall act only
as a committee, and shall have no power or authority, as such, by virtue of
their membership on the committee.
(f) RECORD OF COMMITTEE ACTION; REPORTS. Each committee shall maintain
a record, which need not be in the form of complete minutes, of the action taken
by it at each meeting, which record shall include the date, time and place of
the meeting, the names of the members present and absent, the action considered,
and the number of votes cast for and against the adoption of the action
considered. All action by each committee shall be reported to the Board of
Directors at its meeting next succeeding such action, such report to be in
sufficient detail as to enable the Board of Directors to be informed of the
conduct of the Company's business and affairs since the last meeting of the
board.
(g) REMOVAL. Any member of any committee may be removed from such
committee, either with or without cause, at any time by resolution adopted by a
majority of the whole Board of Directors at any meeting of the board.
(h) VACANCIES. Any vacancy in any committee shall be filled by the
Board of Directors in the manner prescribed by these Bylaws.
SECTION 9. MEETINGS. Regular and special meetings of the Board of Directors
shall be held at the principal place of business of the Company or at any other
place, within or without the State of Florida, designated by the person or
persons entitled to give notice of or otherwise call the meeting. Meetings of
the Board of Directors may be called by the President or by any two directors.
Members of the Board of Directors (and any committee of the Board of Directors)
may participate in a meeting of the Board of Directors (or any committee of the
Board of Directors) by means of a conference telephone or similar communications
equipment through which all persons participating may simultaneously hear each
other during the meeting; participation by these means constitutes presence in
person at the meeting.
SECTION 10. NOTICE OF MEETINGS. Regular meetings of the Board of Directors
may be held without notice of the date, time, place or purpose of the meeting,
so long as the date, time and place of such meetings are fixed generally by the
Board of Directors. Special meetings of the Board of Directors must be preceded
by at least two days' written notice of the date, time and place of the meeting.
The notice need not describe either the business to be transacted at or the
purpose of the special meeting.
SECTION 11. WAIVER OF NOTICE. Notice of a meeting of the Board of Directors
need not be given to a director who signs a waiver of notice either before or
after the meeting. Attendance of a director at a meeting shall constitute a
waiver of notice of that meeting and a waiver of any and all objections to the
place of the meeting, the time of the meeting and the manner in which it has
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been called or convened, except when a director states, at the beginning of the
meeting or promptly upon arrival at the meeting, any objection to the
transaction of business because the meeting is not lawfully called or convened.
The waiver of notice need not describe either the business to be transacted at
or the purpose of the special meeting.
SECTION 12. DIRECTOR ACTION WITHOUT A MEETING. Any action required or
permitted to be taken at a meeting of the Board of Directors (or a committee of
the board) may be taken without a meeting if the action is taken by the written
consent of all members of the Board of Directors (or of the committee of the
Board of Directors). The action must be evidenced by one or more written
consents describing the action to be taken and signed by each director (or
committee member), which consent(s) shall be filed in the minutes of the
proceedings of the Board of Directors. The action taken shall be deemed
effective when the last director signs the consent, unless the consent specifies
otherwise.
SECTION 13. SHAREHOLDER NOMINATIONS FOR DIRECTOR CANDIDATES. Only persons
who are nominated in accordance with the following procedures shall be eligible
for election as directors. Nominations of persons for election to the Board of
Directors of the Company may be made at a meeting of shareholders by or at the
direction of the Board of Directors by any nominating committee or person
appointed by the Board of Directors or by any shareholder of the Company
entitled to vote for the election of directors at the meeting who complies with
the notice procedures set forth in this Article III, Section 13. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Company. To be timely, a shareholder's notice shall 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 meting is given or made to shareholders, notice by the shareholder
to be timely must be so received not later than the close of business on the
tenth day following the date on which such notice of the date of the meeting was
mailed or such public disclosure was made whichever first occurs. Such
shareholder's notice to the Secretary shall set forth (a) as to each person whom
the shareholder proposes to nominate for election or re-election as a director,
(i) the name, age, business address and residence address of the person, (ii)
the principal occupation or employment of the persons, (iii) the class and
number of shares of capital stock of the Company which are beneficially owned by
the person, (iv) the consent of each nominee to serve as a director of the
Company if so elected, and (v) any other information relating to the person that
is required to be disclosed in solicitations for proxies for election of
directors pursuant to Rule 14a under the Securities Exchange Act of 1934, as
amended; and (b) as to the shareholder giving the notice, (i) the name and
record address of shareholder, and (ii) the class and number of shares of
capital stock of the Company which are beneficially owned by the shareholder.
The Company may require any proposed nominee to furnish such other information
as may reasonably be required by the Company to determine the eligibility of
such proposed nominee to serve as director of the Company. No person shall be
eligible for election as a director of the Company unless nominated in
accordance with the procedures set forth herein.
The Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he
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should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
SECTION 14. AMENDMENTS. Notwithstanding anything contained in the Bylaws to
the contrary, this Article III shall not be altered, amended or repealed except
by an affirmative vote of at least two-thirds of the outstanding shares of
capital stock of the Company entitled to vote thereon.
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. The officers of the Company shall consist of a
President, one or more Vice Presidents and Secretaries and a Treasurer and if
elected by the Board of Directors by resolution, a Chairman. Such other officers
and assistant officers and agents as may be deemed necessary or desirable may be
appointed by the Board of Directors. Any two or more offices may be held by the
same person.
SECTION 2. DUTIES. The officers of the Company shall have the following
duties:
The CHIEF EXECUTIVE OFFICER shall have general and active management of
the business and affairs of the Company subject to the direction of the Board of
Directors.
The Chief Executive Officer shall see to it that all orders and resolutions of
the Board of Directors are carried into effect. In the absence of the Chairman
of the Board of Directors or in the event the Board of Directors shall not have
designated a Chairman of the Board of Directors, the Chief Executive Officer
shall preside at all meetings of the Board of Directors and shareholders.
The PRESIDENT shall have such powers and perform such duties as the
Board of Directors shall from time to time designate. In the absence or
disability of the Chief Executive Officer, the President shall have the powers
and shall exercise the duties of the Chief Executive Officer.
Each VICE PRESIDENT, if any, shall have such powers and perform such
duties as the Board of Directors shall from time to time designate. In the
absence or disability of the President, a Vice President specifically designated
by the vote of the Board of Directors shall have the powers and shall exercise
the duties of the President.
The SECRETARY shall have custody of and shall maintain all of the
corporate records (except the financial records), shall record the minutes of
all meetings of the shareholders and the Board of Directors, shall authenticate
records of the Company, shall send all notices of meetings and shall perform
such other duties as are prescribed by the Board of Directors or the President,
under whose supervision he shall be.
The TREASURER shall have custody of all corporate funds, securities and
financial records, shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Company and shall deposit all monies and
other valuable effects in the name and to the credit of the Company in such
depositaries as may be designated by the Board of Directors. He shall
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disburse the funds of the Company as may be ordered by the Board of Directors,
taking proper vouchers for such disbursements, and shall render an account of
all his transactions as treasurer and of the financial condition of the Company
at regular meetings of the Board of Directors or when the Board of Directors so
requests. The Treasurer shall also perform such other duties as are prescribed
by the Board of Directors.
Each ASSISTANT SECRETARY and ASSISTANT TREASURER, if any, shall be
appointed by the Board of Directors and shall have such powers and shall perform
such duties as shall be assigned to them by the Board of Directors.
SECTION 3. RESIGNATION OF OFFICER. An officer may resign at any time by
delivering notice to the Company. The resignation shall be effective upon
receipt, unless the notice specifies a later effective date acceptable to the
Board of Directors. If the resignation is effective at a later date and the
Company accepts the future effective date, the Board of Directors may fill the
pending vacancy before the effective date provided the Board of Directors
provides that the successor officer does not take office until the future
effective date.
SECTION 4. REMOVAL OF OFFICER. The Board of Directors may remove any
officer at any time with or without cause.
SECTION 5. COMPENSATION. The compensation of officers shall be fixed from
time to time at the discretion of the Board of Directors. The Board of Directors
may enter into employment agreements with any officer of the Company.
ARTICLE V
STOCK CERTIFICATES
SECTION 1. ISSUANCE. Every holder of shares in this Company shall be
entitled to have a certificate representing all shares to which he is entitled.
No certificate shall be issued for any share until the consideration therefor
has been fully paid.
SECTION 2. FORM. Certificates representing shares in this Company shall be
signed by the President and the Secretary of the Company, or any other officer
so designated by the Board of Directors.
SECTION 3. LEGENDS FOR PREFERENCES AND RESTRICTIONS ON TRANSFER. If the
Company shall be authorized to issue more than one class of stock or more them
one series of any class, the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications or restrictions of such preferences and/or rights
shall be set forth in full or summarized on the face or back of the certificate
which the Company shall issue to represent such class or series of stock,
provided that, except as otherwise provided by law, in lieu of the foregoing
requirements, there be set forth on the face or back of the certificate which
the Company shall issue to represent such class or series of stock, a statement
that the Company will furnish without charge to each shareholder who so requests
the powers, designations, preferences and relative, participating, optional, or
other special rights of
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each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
A written restriction on the transfer or registration of transfer of a
security of the Company, if permitted by law and noted conspicuously on the
certificate representing the security may be enforced against the holder of the
restricted security or any successor or transferee of the holder including an
executor, administrator, trustee, guardian or other fiduciary entrusted with
like responsibility for the person or estate of the holder. Unless noted
conspicuously on the certificate representing the security, a restriction, even
though permitted by law, is ineffective except against a person with actual
knowledge of the restriction. If the Company issues any shares that are not
registered under the Securities Act of 1933, as amended, and registered or
qualified under the applicable state securities laws, the transfer of any such
shares shall be restricted substantially in accordance with the following
legend, or in such other form as the Board of Directors may provide from time to
time:
"THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
OR UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE SECURITIES ACT OF 1933
AND ANY APPLICABLE STATE LAW, OR (2) AT HOLDER'S EXPENSE, AN OPINION
(SATISFACTORY TO THE COMPANY) OF COUNSEL (SATISFACTORY TO THE COMPANY) THAT
REGISTRATION IS NOT REQUIRED."
SECTION 4. FACSIMILE SIGNATURES. Any and all signatures on the certificate
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon such certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Company with the same effect as
if he were such officer, transfer agent or registrar at the date of the issue.
SECTION 5. REGISTERED SHAREHOLDERS. The Company shall be entitled to treat
the holder of record of shares as the holder in fact and, except as otherwise
provided by the laws of Florida, shall not be bound to recognize any equitable
or other claim to or interest in the shares.
SECTION 6. TRANSFER OF SHARES. Shares of the Company shall be transferred
on its books only after the surrender to the Company or the transfer agent of
the share certificates duly endorsed by the holder of record or
attorney-in-fact. If the surrendered certificates are canceled, new certificates
shall be issued to the person entitled to them, and the transaction recorded on
the books of the Company.
SECTION 7. LOST, STOLEN OR DESTROYED CERTIFICATES. If a shareholder claims
to have lost or destroyed a certificate of shares issued by the Company, a new
certificate shall be issued upon delivery to the Company of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed, and, at the discretion of the Board of Directors, upon the deposit of
a bond or other indemnity as the Board of Directors reasonably requires.
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ARTICLE VI
DISTRIBUTIONS
The Board of Directors may, in its sole judgment and discretion, from
time to time authorize and declare, and the Company may pay, distributions on
its outstanding shares in cash, property or its own shares, unless the
distribution, after giving it effect, would result in (i) the Company being
unable to pay its debts as they become due in the usual course of business, or
(ii) a violation of applicable law.
ARTICLE VII
CORPORATE RECORDS
The Company shall keep as permanent records minutes of all meetings of
its shareholders and Board of Directors, a record of all actions taken by the
Board of Directors without a meeting, and a record of all actions taken by a
committee of the Board of Directors in place of the Board of Directors on behalf
of the Company. The Company shall also maintain accurate accounting records and
a record of its shareholders in a form that permits preparation of a list of the
names and addresses of all shareholders in alphabetical order by class of shares
showing the number and series of shares held by each.
ARTICLE VIII
INDEMNIFICATION OF OFFICERS,
DIRECTORS, EMPLOYEES AND AGENTS
SECTION 1. INDEMNIFICATION. The Company shall, and does hereby, indemnify
and hold harmless to the fullest extent permitted or authorized by current or
future legislation or current or future judicial or administrative decisions
(but, in the case of any such future legislation or decisions, only to the
extent that it permits the Company to provide broader indemnification rights
than permitted prior to such legislation or decisions), each person (including
here and hereinafter, the heirs, executors, administrators, personal
representatives or estate of such person) who was or is a party, or is
threatened to be made a party, or was or is a witness, to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "Proceeding"), from, against and in respect
of any liability (which for purposes of this Article shall include any judgment,
settlement penalty or fine) or cost, charge or expense (including attorneys'
fees and expenses) asserted against him or incurred by him by reason of the fact
that such indemnified person (1) is or was a director or officer of the Company
or (2) is or was an employee or agent of the Company as to whom the Company has
agreed in writing to grant such indemnity or (3) is or was serving, at the
request of the Company, as a director, officer, employee or trustee of another
Company, partnership, joint venture, trust or other enterprise (including
serving as a fiduciary of an employee benefit plan) or is or was serving as an
agent of such other Company, partnership, joint venture, trust or other
enterprise in each case, as to whom the Company has agreed in writing to grant
such indemnity. Each director, officer, employee or agent of the Company as to
whom indemnification rights have been granted under this Section 1 of this
Article shall be referred to as an "Indemnified Person".
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Notwithstanding the foregoing, except as specified in Section 3 of this Article,
the Company shall not be required to indemnify an Indemnified Person in
connection with a Proceeding (or any part thereof) initiated by such Indemnified
Person unless the authorization for such Proceeding (or any part thereof) was
not cleared by the Board of Directors of the Company within 60 days after
receipt of notice thereof from such Indemnified Person stating his intent to
initiate such Proceeding and only then upon such terms and conditions as the
Board of Directors may deem appropriate.
SECTION 2. ADVANCE OF COSTS, CHARGES AND EXPENSES. Costs, charges and
expenses (including attorneys' fees and expenses) incurred by an officer or
director who is an Indemnified Person in defending a Proceeding shall be paid by
the Company, to the fullest extent permitted or authorized by current or future
legislation or current of future judicial or administrative decisions (but, in
the case of any such future legislation or decisions, only to the extent that it
permits the Company to provide broader rights to advance costs, charges and
expenses than permitted prior to such legislation or decisions), in advance of
the final disposition of such Proceeding, upon receipt of an undertaking by or
on behalf of the Indemnified Person to repay all amounts so advanced in the
event that it shall ultimately be determined that such person is not entitled to
be indemnified by the Company as authorized in this Article. The Company may,
upon approval of the Indemnified Person, authorize the Company's counsel to
represent such person in any Proceeding, whether or not the Company is a party
to such Proceeding. Such authorization may be made by the Chairman of the Board,
unless he is a party to such Proceeding, or by the Board of Directors by
majority vote, including directors who are parties to such Proceeding.
SECTION 3. PROCEDURE FOR INDEMNIFICATION. Any indemnification or advance
under this Article shall be made promptly and in any event within 45 days upon
the written request of the Indemnified Person. The right to indemnification or
advances as granted by this Article shall be enforceable by the Indemnified
Person in any court of competent jurisdiction, if the Company denies such
request under this Article, in whole or in part, or if no disposition thereof is
made within 45 days. Such Indemnified Person's costs and expenses incurred in
connection with successfully establishing his right to indemnification or
advances, in whole or in part, in any such action shall also be indemnified by
the Company. It shall be a defense to any such action that the claimant has not
met the standard of conduct, if any, required by current or future legislation
or by current or future judicial or administrative decisions for Indemnification
(but, in the case of any such future legislation or decisions, only to the
extent that it does not impose a more stringent standard of conduct than
permitted prior to such legislation or decision), but the burden of proving such
defense shall be on the Company. Neither the failure of the Company (including
its Board of Directors or any committee thereof, its independent legal counsel,
and its shareholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct, if any, nor the fact that
there has been an actual determination by the Company (including its Board of
Directors or any committee thereof, its independent legal counsel, or its
shareholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
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SECTION 4. RIGHTS NOT EXCLUSIVE; CONTRACT RIGHTS; SURVIVAL. The
indemnification provided by this Article shall not be deemed exclusive of any
other rights to which those indemnified may be entitled under any agreement,
vote of shareholders or disinterested directors or otherwise, both as to actions
in such person's official capacity and as to actions in another capacity while
holding such office, and shall continue as to an Indemnified Person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors, administrators, personal representatives and
estate of such person. All rights to indemnification and advances under this
Article shall be deemed to be a contract between the Company and each
Indemnified Person who serves or served in such capacity at any time while this
Article is in effect and, as such, are enforceable against the Company. Any
repeal or modification of this Article or any repeal or modification of relevant
provisions of Florida's Company law or any other applicable laws shall not in
any way diminish these rights to indemnification of or advances to such
Indemnified Person, or the obligations of the Company arising hereunder, for
claims relating to matters occurring prior to such repeals or modification.
SECTION 5. INSURANCE. The Company may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee, trustee or agent of another Company partnership, joint
venture, trust or other enterprise (including serving as a fiduciary of an
employee benefit plan), with respect to any liability asserted against him and
incurred by him in any such capacity or arising out of his status as such,
whether or not the Company would have the power to indemnify him against such
liability under the provisions of this Article or the applicable provisions of
Florida law.
SECTION 6. SAVINGS CLAUSE. If this Article or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Company shall nevertheless indemnify and hold harmless, and make advances to,
each Indemnified Person as to costs, charges and expenses (including attorneys'
fees), liabilities, judgments, fines and amounts paid in settlement with respect
to any Proceeding, including any action by or in the right of the Company, to
the full extent permitted by any applicable portion of this Article that shall
not have been invalidated and as otherwise permitted by applicable law.
ARTICLE IX
MISCELLANEOUS
SECTION 1. CORPORATE SEAL. The corporate seal of the Company shall be
circular in form and shall include the name and jurisdiction of incorporation of
the Company.
SECTION 2. FISCAL YEAR. The fiscal year of the Company shall end on
December 31 of each calendar year, unless otherwise fixed by resolution of the
Board of Directors.
SECTION 3. CHECKS. All checks, drafts or other orders for the payment of
money, notes or other evidences of indebtedness issued in the name of the
Company shall be signed by the President, the Treasurer or such other officer(s)
or agent(s) of the Company as shall be determined from time to time by
resolution of the Board of Directors.
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ARTICLE X
AMENDMENT
The Board of Directors shall have the power to adopt, amend or repeal
the Bylaws or any part hereof. Certain provisions of the Bylaws, as stated
herein, may not be altered, amended or repealed except by the affirmative vote
of at least two-thirds of the outstanding shares of capital stock of the Company
entitled to vote at a shareholders' meeting duly called for such purpose. Except
for such provisions requiring a two-thirds vote to alter, amend or repeal, the
Bylaws may be altered, amended or repealed, and new bylaws may be adopted, by
the shareholders upon the affirmative vote of at least a majority of the
outstanding shares of capital stock of the Company entitled to vote at a
shareholders' meeting duly called for such purpose. Notwithstanding anything
contained in these Bylaws to the contrary, this Article X shall not be altered,
amended or repealed except by an affirmative vote of at least two-thirds of the
outstanding shares of capital stock of the Company entitled to vote at a
shareholders' meeting duly called for such purpose.
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EXHIBIT 10.1
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21ST CENTURY HOLDING COMPANY
1998 STOCK OPTION PLAN
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1. PURPOSE. The purpose of this Plan is to advance the interests of 21ST
CENTURY HOLDING COMPANY, a Florida corporation (the "Company"), by providing an
additional incentive to attract, retain and motivate highly qualified and
competent persons who are key to the Company, including key employees,
consultants, independent contractors, Officers and Directors, and upon whose
efforts and judgment the success of the Company and its Subsidiaries is largely
dependent, by authorizing the grant of options to purchase Common Stock of the
Company to persons who are eligible to participate hereunder, thereby
encouraging stock ownership in the Company by such persons, all upon and subject
to the terms and conditions of this Plan.
2. DEFINITIONS. As used herein, the following terms shall have the meanings
indicated:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Cause" shall mean any of the following:
(i) a determination by the Company that there has been a willful,
reckless or grossly negligent failure by the Optionee to perform his or her
duties as an employee of the Company;
(ii) a determination by the Company that there has been a willful
breach by the Optionee of any of the material terms or provisions of any
employment agreement between such Optionee and the Company;
(iii) any conduct by the Optionee that either results in his or
her conviction of a felony under the laws of the United States of America or any
state thereof, or of an equivalent crime under the laws of any other
jurisdiction;
(iv) a determination by the Company that the Optionee has
committed an act or acts involving fraud, embezzlement, misappropriation, theft,
breach of fiduciary duty or material dishonesty against the Company, its
properties or personnel;
(v) any act by the Optionee that the Company determines to be in
willful or wanton disregard of the Company's best interests, or which results,
or is intended to result, directly or indirectly, in improper gain or personal
enrichment of the Optionee at the expense of the Company;
(vi) a determination by the Company that there has been a willful,
reckless or grossly negligent failure by the Optionee to comply with any rules,
regulations, policies or procedures of the Company, or that the Optionee has
engaged in any act, behavior or
<PAGE>
conduct demonstrating a deliberate and material violation or disregard of
standards of behavior that the Company has a right to expect of its employees;
or
(vii) if the Optionee, while employed by the Company and for two
years thereafter, violates a confidentiality and/or noncompete agreement with
the Company, or fails to safeguard, divulges, communicates, uses to the
detriment of the Company or for the benefit of any person or persons, or misuses
in any way, any Confidential Information; PROVIDED, HOWEVER, that, if the
Optionee has entered into a written employment agreement with the Company which
remains effective and which expressly provides for a termination of such
Optionee's employment for "cause", the term "Cause" as used herein shall have
the meaning as set forth in the Optionee's employment agreement in lieu of the
definition of "Cause" set forth in this Section 2(b).
(c) "Change of Control" shall mean the acquisition by any person or
group (as that term is defined in the Exchange Act, and the rules promulgated
pursuant to that act) in a single transaction or a series of transactions of
thirty percent (30%) or more in voting power of the outstanding stock of the
Company and a change of the composition of the Board of Directors so that,
within two years after the acquisition took place, a majority of the members of
the Board of Directors of the Company, or of any corporation with which the
Company may be consolidated or merged, are persons who were not directors or
officers of the Company or one of its Subsidiaries immediately prior to the
acquisition, or to the first of a series of transactions which resulted in the
acquisition of thirty percent (30%) or more in voting power of the outstanding
stock of the Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Committee" shall mean the stock option committee appointed by the
Board or, if not appointed, the Board.
(f) "Common Stock" shall mean the Company's Common Stock, par value
$.01 per share.
(g) "Director" shall mean a member of the Board.
(h) "Employee" shall mean any person, including officers, directors,
consultants and independent contractors employed by the Company or any parent or
Subsidiary of the Company within the meaning of Section 3401(c) of the
regulators promulgated thereunder.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(j) "Fair Market Value" of a Share on any date of reference shall be
the Closing Price of a share of Common Stock on the business day immediately
preceding such date, unless the Committee in its sole discretion shall determine
otherwise in a fair and uniform manner. For this purpose, the "Closing Price" of
the Common Stock on any business day shall be (i) if the Common Stock is listed
or admitted for trading on any United States national
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securities exchange, or if actual transactions are otherwise reported on a
consolidated transaction reporting system, the last reported sale price of the
Common Stock on such exchange or reporting system, as reported in any newspaper
of general circulation, (ii) if the Common Stock is quoted on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), or any
similar system of automated dissemination of quotations of securities prices in
common use, the mean between the closing high bid and low asked quotations for
such day of the Common Stock on such system, or (iii) if neither clause (i) nor
(ii) is applicable, the mean between the high bid and low asked quotations for
the Common Stock as reported by the National Quotation Bureau, Incorporated if
at least two securities dealers have inserted both bid and asked quotations for
the Common Stock on at least five of the 10 preceding days. If the information
set forth in clauses (i) through (iii) above is unavailable or inapplicable to
the Company (e.g., if the Company's Common Stock is not then publicly traded or
quoted), then the "Fair Market Value" of a Share shall be the fair market value
(i.e., the price at which a willing seller would sell a Share to a willing buyer
when neither is acting under compulsion and when both have reasonable knowledge
of all relevant facts) of a share of the Common Stock on the business day
immediately preceding such date as the Committee in its sole and absolute
discretion shall determine in a fair and uniform manner.
(k) "Incentive Stock Option" shall mean an incentive stock option as
defined in Section 422 of the Code.
(l) "Non-Statutory Stock Option" or "Nonqualified Stock Option" shall
mean an Option which is not an Incentive Stock Option.
(m) "Officer" shall mean the Company's chairman, president, principal
financial officer, principal accounting officer (or, if there is no such
accounting officer, the controller), any vice-president of the Company in charge
of a principal business unit, division or function (such as sales,
administration or finance), any other officer who performs a policy-making
function, or any other person who performs similar policy-making functions for
the Company. Officers of Subsidiaries shall be deemed Officers of the Company if
they perform such policy-making functions for the Company. As used in this
paragraph, the phrase "policy-making function" does not include policy-making
functions that are not significant. Unless specified otherwise in a resolution
by the Board, an "executive officer" pursuant to Item 401(b) of Regulation S-K
(17 C.F.R. section 229.401(b)) shall be only such person designated as an
"Officer" pursuant to the foregoing provisions of this paragraph.
(n) "Option" (when capitalized) shall mean any stock option granted
under this Plan.
(o) "Optionee" shall mean a person to whom an Option is granted under
this Plan or any person who succeeds to the rights of such person under this
Plan by reason of the death of such person.
(p) "Plan" shall mean this 1998 Stock Option Plan of the Company, which
Plan shall be effective upon approval by the Board, subject to approval, within
12 months of the
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date thereof by holders of a majority of the Company's issued and outstanding
Common Stock of the Company.
(q) "Share" or "Shares" shall mean a share or shares, as the case may
be, of the Common Stock, as adjusted in accordance with Section 10 of this Plan.
(r) "Subsidiary" shall mean any corporation (other than the Company) in
any unbroken chain of corporations beginning with the Company if, at the time of
the granting of the Option, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50 percent or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chain.
3. SHARES AND OPTIONS. Subject to adjustment in accordance with Section
10 hereof, the Company may grant to Optionees from time to time Options to
purchase an aggregate of up to Three Hundred and Fifty Thousand (350,000) Shares
from Shares held in the Company's treasury or from authorized and unissued
Shares. If any Option granted under this Plan shall terminate, expire, or be
canceled, forfeited or surrendered as to any Shares, the Shares relating to such
lapsed Option shall be available for issuance pursuant to new Options
subsequently granted under this Plan. Upon the grant of any Option hereunder,
the authorized and unissued Shares to which such Option relates shall be
reserved for issuance to permit exercise under this Plan. Subject to the
provisions of Section 14 hereof, an Option granted hereunder shall be either an
Incentive Stock Option or a Non-Statutory Stock Option as determined by the
Committee at the time of grant of such Option and shall clearly state whether it
is an Incentive Stock Option or Non-Statutory Stock Option. All Incentive Stock
Options shall be granted within 10 years from the effective date of this Plan.
4. LIMITATIONS. Options otherwise qualifying as Incentive Stock Options
hereunder will not be treated as Incentive Stock Options to the extent that the
aggregate Fair Market Value (determined at the time the Option is granted) of
the Shares, with respect to which Options meeting the requirements of Code
Section 422(b) are exercisable for the first time by any individual during any
calendar year (under all stock option or similar plans of the Company and any
Subsidiary), exceeds $100,000.
5. CONDITIONS FOR GRANT OF OPTIONS.
(a) Each Option shall be evidenced by an option agreement that may
contain any term deemed necessary or desirable by the Committee, provided such
terms are not inconsistent with this Plan or any applicable law. Optionees shall
be those persons selected by the Committee from the class of all regular
Employees of the Company or its Subsidiaries, including Employee directors and
officers who are regular or former regular employees of the Company, Directors
who are not regular employees of the Company, as well as consultants to the
Company. Any person who files with the Committee, in a form satisfactory to the
Committee, a written waiver of eligibility to receive any Option under this Plan
shall not be eligible to receive any Option under this Plan for the duration of
such waiver.
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<PAGE>
(b) In granting Options, the Committee shall take into consideration
the contribution the person has made, or is expected to make, to the success of
the Company or its Subsidiaries and such other factors as the Committee shall
determine. The Committee shall also have the authority to consult with and
receive recommendations from Officers and other personnel of the Company and its
Subsidiaries with regard to these matters. The Committee may from time to time
in granting Options under this Plan prescribe such terms and conditions
concerning such Options as it deems appropriate, including, without limitation,
(i) the exercise price or prices of the Option or any installments thereof, (ii)
prescribing the date or dates on which the Option becomes and/or remains
exercisable, (iii) providing that the Option vests or becomes exercisable in
installments over a period of time, and/or upon the attainment of certain stated
standards, specifications or goals, (iv) relating an Option to the continued
employment of the Optionee for a specified period of time, or (v) conditions or
termination events with respect to the exercisability of any Option, provided
that such terms and conditions are not more favorable to an Optionee than those
expressly permitted herein; provided, however, that to the extent not cancelled
pursuant to Section 9(b) hereof, upon a Change in Control, any Options that have
not yet vested, may, in the sole discretion of the Committee, vest upon such
Change in Control.
(c) The Options granted to employees under this Plan shall be in
addition to regular salaries, pension, life insurance or other benefits related
to their employment with the Company or its Subsidiaries. Neither this Plan nor
any Option granted under this Plan shall confer upon any person any right to
employment or continuance of employment (or related salary and benefits) by the
Company or its Subsidiaries.
6. EXERCISE PRICE. The exercise price per Share of any Option shall be
any price determined by the Committee but shall not be less than the par value
per Share; provided, however, that in no event shall the exercise price per
Share of any Incentive Stock Option be less than the Fair Market Value of the
Shares underlying such Option on the date such Option is granted and, in the
case of an Incentive Stock Option granted to a 10% shareholder, the per Share
exercise price will not be less than 110% of the Fair Market Value in accordance
with Section 14 of this Plan. Re-granted Options, or Options which are canceled
and then re-granted covering such canceled Options, will, for purposes of this
Section 6, be deemed to have been granted on the date of the re-granting.
7. EXERCISE OF OPTIONS.
(a) An Option shall be deemed exercised when (i) the Company has
received written notice of such exercise in accordance with the terms of the
Option, (ii) full payment of the aggregate option price of the Shares as to
which the Option is exercised has been made, (iii) the Optionee has agreed to be
bound by the terms, provisions and conditions of any applicable shareholders'
agreement, and (iv) arrangements that are satisfactory to the Committee in its
sole discretion have been made for the Optionee's payment to the Company of the
amount that is necessary for the Company or the Subsidiary employing the
Optionee to withhold in accordance with applicable Federal or state tax
withholding requirements. Unless further limited by the Committee in any Option,
the exercise price of any Shares purchased pursuant to the exercise of such
Option shall be paid in cash, by certified or official bank check, by money
order,
5
<PAGE>
with Shares or by a combination of the above; provided, however, that the
Committee in its sole discretion may accept a personal check in full or partial
payment of any Shares. If the exercise price is paid in whole or in part with
Shares, the value of the Shares surrendered shall be their Fair Market Value on
the date the Option is exercised. The Company in its sole discretion may, on an
individual basis or pursuant to a general program established by the Committee
in connection with this Plan, lend money to an Optionee to exercise all or a
portion of the Option granted hereunder. If the exercise price is paid in whole
or part with the Optionee's promissory note, such note shall (i) provide for
full recourse to the maker, (ii) be collateralized by the pledge of the Shares
that the Optionee purchases upon exercise of such Option, (iii) bear interest at
a rate no less than the rate of interest payable by the Company to its principal
lender, and (iv) contain such other terms as the Committee in its sole
discretion shall require. No Optionee shall be deemed to be a holder of any
shares subject to an Option unless and until a stock certificate or certificates
for such shares are issued to the person(s) under the terms of this Plan. No
adjustments shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or property) or distributions or other rights for which the
record date is prior to the date such stock certificate is issued, except as
expressly provided in Section 10 hereof.
(b) No Optionee shall be deemed to be a holder of any Shares subject to
an Option unless and until a stock certificate or certificates for such Shares
are issued to such person(s) under the terms of this Plan. No adjustment shall
be made for dividends (ordinary or extraordinary, whether in cash, securities or
other property) or distributions or other rights for which the record date is
prior to the date such stock certificate is issued, except as expressly provided
in Section 10 hereof.
8. EXERCISABILITY OF OPTIONS. Any Option shall become exercisable in such
amounts, at such intervals, upon such events or occurrences and upon such other
terms and conditions as shall be provided in an individual Option agreement
evidencing such Option, except as otherwise provided in Section 5(b) or this
Section 8.
(a) The expiration date(s) of an Option shall be determined by the
Committee at the time of grant, but in no event shall an Option be exercisable
after the expiration of 10 years from the date of grant of the Option.
(b) Unless otherwise expressly provided in any Option as approved by
the Committee, notwithstanding the exercise schedule set forth in any Option,
each outstanding Option, may, in the sole discretion of the Committee, become
fully exercisable upon the date of the occurrence of any Change of Control, but,
unless otherwise expressly provided in any Option, no earlier than six months
after the date of grant, and if and only if Optionee is in the employ of the
Company on such date.
(c) The Committee may in its sole discretion accelerate the date on
which any Option may be exercised and may accelerate the vesting of any Shares
subject to any Option or previously acquired by the exercise of any Option.
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<PAGE>
9. TERMINATION OF OPTION PERIOD.
(a) Unless otherwise expressly provided in any Option, the unexercised
portion of any Option shall automatically and without notice immediately
terminate and become forfeited, null and void at the time of the earliest to
occur of the following:
(i) three months after the date on which the Optionee's employment
is terminated for any reason other than by reason of (A) Cause, (B) the
termination of the Optionee's employment with the Company by such Optionee
following less than 60 days' prior written notice to the Company of such
termination (an "Improper Termination"), (C) a mental or physical disability
(within the meaning of Section 22(e) of the Code) as determined by a medical
doctor satisfactory to the Committee, or (D) death;
(ii) immediately upon (A) the termination by the Company of the
Optionee's employment for Cause, or (B) an Improper Termination;
(iii) one year after the date on which the Optionee's employment
is terminated by reason of a mental or physical disability (within the meaning
of Code Section 22(e)) as determined by a medical doctor satisfactory to the
Committee or the later of three months after the date on which the Optionee
shall die if such death shall occur during the one-year period specified herein;
or
(iv) one year after the date of termination of the Optionee's
employment by reason of death of the employee;
(b) The Committee in its sole discretion may, by giving written notice
("cancellation notice"), cancel effective upon the date of the consummation of
any corporate transaction described in Subsection 10(d) hereof, any Option that
remains unexercised on such date. Such cancellation notice shall be given a
reasonable period of time prior to the proposed date of such cancellation and
may be given either before or after approval of such corporate transaction.
(c) Upon Optionee's termination of employment as described in this
Section 9, or otherwise, any Option (or portion thereof) not previously vested
or not yet exercisable pursuant to Section 8 of this Plan or the vesting
schedule set forth in such Option shall be immediately canceled.
10. ADJUSTMENT OF SHARES.
(a) If at any time while this Plan is in effect or unexercised Options
are outstanding, there shall be any increase or decrease in the number of issued
and outstanding Shares through the declaration of a stock dividend or through
any recapitalization resulting in a stock split, combination or exchange of
Shares (other than any such exchange or issuance of Shares through which Shares
are issued to effect an acquisition of another business or entity or the
Company's purchase of Shares to exercise a "call" purchase option), then and in
such event:
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(i) appropriate adjustment shall be made in the maximum number of
Shares available for grant under this Plan, so that the same percentage of the
Company's issued and outstanding Shares shall continue to be subject to being so
optioned;
(ii) appropriate adjustment shall be made in the number of Shares
and the exercise price per Share thereof then subject to any outstanding Option,
so that the same percentage of the Company's issued and outstanding Shares shall
remain subject to purchase at the same aggregate exercise price; and
(iii) such adjustments shall be made by the Committee, whose
determination in that respect shall be final, binding and conclusive.
(b) Subject to the specific terms of any Option, the Committee may
change the terms of Options outstanding under this Plan, with respect to the
option price or the number of Shares subject to the Options, or both, when, in
the Committee's sole discretion, such adjustments become appropriate by reason
of a corporate transaction described in Subsection 10(d) hereof, or otherwise.
(c) Except as otherwise expressly provided herein, the issuance by the
Company of shares of its capital stock of any class, or securities convertible
into or exchangeable for shares of its capital stock of any class, either in
connection with a direct or unwritten sale or upon the exercise of rights or
warrants to subscribe therefor or purchase such Shares, or upon conversion of
shares of obligations of the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall be made
with respect to the number of or exercise price of Shares then subject to
outstanding Options granted under this Plan.
(d) Without limiting the generality of the foregoing, the existence of
outstanding Options granted under this Plan shall not affect in any manner the
right or power of the Company to make, authorize or consummate (i) any or all
adjustments, reclassifications, recapitalizations, reorganizations or other
changes in the Company's capital structure or its business; (ii) any merger or
consolidation of the Company or to which the Company is a party; (iii) any
issuance by the Company of debt securities, or preferred or preference stock
that would rank senior to or above the Shares subject to outstanding Options;
(iv) any purchase or issuance by the Company of Shares or other classes of
common stock or common equity securities; (v) the dissolution or liquidation of
the Company; (vi) any sale, transfer, encumbrance, pledge or assignment of all
or any part of the assets or business of the Company; or (vii) any other
corporate act or proceeding, whether of a similar character or otherwise.
(e) The Optionee shall receive written notice within a reasonable time
prior to the consummation of such action advising the Optionee of any of the
foregoing. The Committee may, in the exercise of its sole discretion, in such
instances declare that any Option shall terminate as of a date fixed by the
Board and give each Optionee the right to exercise his or her Option.
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<PAGE>
11. TRANSFERABILITY OF OPTIONS. No Option granted hereunder shall be sold,
pledged, assigned, hypothecated, disposed or otherwise transferred by the
Optionee other than by will or the laws of descent and distribution, unless
otherwise authorized by the Board, and no Option shall be exercisable during the
Optionee's lifetime by any person other than the Optionee.
12. ISSUANCE OF SHARES. As a condition of any sale or issuance of Shares
upon exercise of any Option, the Committee may require such agreements or
undertakings, if any, as the Committee may deem necessary or advisable to assure
compliance with any such law or regulation including, but not limited to, the
following:
(i) a representation and warranty by the Optionee to the Company,
at the time any Option is exercised, that he is acquiring the Shares to be
issued to him for investment and not with a view to, or for sale in connection
with, the distribution of any such Shares; and
(ii) (A)an agreement and undertaking to comply with all of the
terms, restrictions and provisions set forth in any then applicable
shareholders' agreement relating to the Shares, including, without limitation,
any restrictions on transferability, any rights of first refusal and any option
of the Company to "call" or purchase such Shares under then applicable
agreements, and
(B) any restrictive legend or legends, to be embossed or
imprinted on Share certificates, that are, in the discretion of the Committee,
necessary or appropriate to comply with the provisions of any securities law or
other restriction applicable to the issuance of the Shares.
13. ADMINISTRATION OF THIS PLAN.
(a) This Plan shall be administered by the Committee, which shall
consist of not less than two Directors. The Committee shall have all of the
powers of the Board with respect to this Plan. Any member of the Committee may
be removed at any time, with or without cause, by resolution of the Board and
any vacancy occurring in the membership of the Committee may be filled by
appointment by the Board.
(b) Subject to the provisions of this Plan, the Committee shall have
the authority, in its sole discretion, to: (i) grant Options, (ii) determine the
exercise price per Share at which Options may be exercised, (iii) determine the
Optionees to whom, and time or times at which, Options shall be granted, (iv)
determine the number of Shares to be represented by each Option, (v) determine
the terms, conditions and provisions of each Option granted (which need not be
identical) and, with the consent of the holder thereof, modify or amend each
Option, (vi) defer (with the consent of the Optionee) or accelerate the exercise
date of any Option, and (vii) make all other determinations deemed necessary or
advisable for the administration of this Plan, including re-pricing, canceling
and regranting Options.
(c) The Committee, from time to time, may adopt rules and regulations
for carrying out the purposes of this Plan. The Committee's determinations and
its interpretation
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and construction of any provision of this Plan shall be final, conclusive and
binding upon all Optionees and any holders of any Options granted under this
Plan.
(d) Any and all decisions or determinations of the Committee shall be
made either (i) by a majority vote of the members of the Committee at a meeting
of the Committee or (ii) without a meeting by the unanimous written approval of
the members of the Committee.
(e) No member of the Committee, or any Officer or Director of the
Company or its Subsidiaries, shall be personally liable for any act or omission
made in good faith in connection with this Plan.
14. INCENTIVE OPTIONS FOR 10% SHAREHOLDERS. Notwithstanding any other
provisions of this Plan to the contrary, an Incentive Stock Option shall not be
granted to any person owning directly or indirectly (through attribution under
Section 424(d) of the Code) at the date of grant, stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company (or of
its Subsidiary) at the date of grant unless the exercise price of such Option is
at least 110% of the Fair Market Value of the Shares subject to such Option on
the date the Option is granted, and such Option by its terms is not exercisable
after the expiration of 10 years from the date such Option is granted.
15. INTERPRETATION.
(a) This Plan shall be administered and interpreted so that all
Incentive Stock Options granted under this Plan will qualify as Incentive Stock
Options under Section 422 of the Code. If any provision of this Plan should be
held invalid for the granting of Incentive Stock Options or illegal for any
reason, such determination shall not affect the remaining provisions hereof, and
this Plan shall be construed and enforced as if such provision had never been
included in this Plan.
(b) This Plan shall be governed by the laws of the State of Florida.
(c) Headings contained in this Plan are for convenience only and shall
in no manner be construed as part of this Plan or affect the meaning or
interpretation of any part of this Plan.
(d) Any reference to the masculine, feminine, or neuter gender shall be
a reference to such other gender as is appropriate.
(e) Time shall be of the essence with respect to all time periods
specified for the giving of notices to the company hereunder, as well as all
time periods for the expiration and termination of Options in accordance with
Section 9 hereof (or as otherwise set forth in an option agreement).
16. AMENDMENT AND DISCONTINUATION OF THIS PLAN. Either the Board or the
Committee may from time to time amend this Plan or any Option without the
consent or approval of the shareholders of the Company; provided, however, that,
except to the extent provided in Section
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9, no amendment or suspension of this Plan or any Option issued hereunder shall
substantially impair any Option previously granted to any Optionee without the
consent of such Optionee.
17. TERMINATION DATE. This Plan shall terminate ten years after the date
of adoption by the Board of Directors.
11
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the
1st day of September, 1998 by and between 21ST CENTURY HOLDING COMPANY, a
Florida corporation with its principal office at 4161 N.W. 5th Street,
Plantation, Florida 33317 (the "Company"), and EDWARD J. LAWSON, whose residence
address is 12731 N.W. 1st Street, Plantation, Florida 33325 (the "Executive").
RECITALS
1. The Executive is currently Chairman of the Board of Directors and Chief
Executive Officer of the Company.
2. The Executive possesses intimate knowledge of the business and affairs
of the Company, its policies, methods and personnel.
3. The Board of Directors (the "Board") of the Company recognizes that the
Executive's contribution, as Chairman of the Board and Chief Executive Officer
of the Company, to the growth and success of the Company has been and will be
substantial and desires to assure the Company of the Executive's present and
continued employment in an executive capacity and to compensate him therefor.
4. The Board has determined that this Agreement will reinforce and
encourage the Executive's continued attention and dedication to the Company.
5. The Executive is willing to make his services available to the Company
on the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the parties hereby agree as follows:
1. Employment.
1.1 EMPLOYMENT AND TERM. The Company shall continue to employ the
Executive and the Executive shall continue to serve the Company, on the terms
and conditions set forth herein, for the period (the "Term") effective as of
September 1, 1998 (the "Commencement Date") and expiring on the second
anniversary of the Commencement Date, unless sooner terminated as hereinafter
set forth; provided, however, that the Term of this Agreement shall
automatically be extended so that at all times, the balance of the Term shall
not be less than two years.
1.2 DUTIES OF EXECUTIVE. The Executive shall serve as Chairman of the
Board and Chief Executive Officer of the Company and shall perform the duties of
an executive commensurate with such position, shall diligently perform all
services as may be reasonably
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designated by the Board and shall exercise such power and authority as is
necessary and customary to the performance of such duties and services. The
Executive shall devote such time as he deems necessary to the business and
affairs of the Company.
1.3 PLACE OF PERFORMANCE. In connection with his employment by the
Company, the Executive shall be based at the Company's principal executive
offices in Boca Raton, Florida except for required travel on the Company's
business to an extent substantially consistent with his present travel
obligations.
2. COMPENSATION.
2.1 BASE SALARY. During the Term, the Executive shall receive a base
salary at the annual rate of $156,000, subject to adjustment in accordance with
this Paragraph 2.1 (the "Base Salary"). The Base Salary shall be payable in
substantially equal installments consistent with the Company's normal payroll
schedule, subject to applicable withholding and other taxes. Commencing on the
first anniversary of the Commencement Date, and each anniversary of the
Commencement Date thereafter during the Term, the Base Salary shall be
increased, but shall not be decreased, by that percentage by which the Consumer
Price Index (All Items Less Shelter), Urban Wage Earners and Clerical Workers,
for the Miami, Florida area published by the United States Government (the
"Index") for the immediately preceding calendar year exceeds such index for the
next preceding calendar year. If publication of the Index is discontinued, the
parties hereto shall accept comparable statistics on the cost of living for the
Miami, Florida area as computed and published by an agency of the United States
government or, if no such agency computes and publishes such statistics, by any
regularly published national periodical that does compute and publish such
statistics.
2.2 ADDITIONAL CASH COMPENSATION. Executive shall also be entitled to
receive such increments in base salary and performance or merit bonuses
(collectively, "Bonus") as shall be determined from time to time during the term
by the Board.
3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS.
3.1 EXPENSE REIMBURSEMENT. During the Term, the Company, upon the
submission of supporting documentation by the Executive, and in accordance with
Company policies for its executives, shall reimburse the Executive for all
expenses actually paid or incurred by the Executive in the course of and
pursuant to the business of the Company, including expenses for travel and
entertainment.
3.2 OTHER BENEFITS. The Company shall obtain or shall continue in force
comprehensive major medical and hospitalization insurance coverages, including
dental coverages, either group or individual, for the Executive and his
dependents, and shall obtain or shall continue in force disability and life
insurance for the Executive (collectively, the "Policies"), which Policies the
Company shall keep in effect at its sole expense throughout the Term. The
Policies to be provided by the Company shall be on terms as determined by the
Board. Within 30 days following any termination of this Agreement, at the
Executive's option, the Company shall assign to the executive all insurance
policies on the life of the Executive then owned by the Company in consideration
of the payment by the Executive of the cash surrender
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value, if any, and the Executive's agreement to assume the Company liability to
pay any premiums accruing thereon after the date of such termination.
3.3 WORKING FACILITIES. The Company shall furnish the Executive with an
office, a secretary and such other facilities and services suitable to his
position and adequate for the performance of his duties hereunder.
3.4 AUTOMOBILE ALLOWANCE. Throughout the Term of this Agreement, the
Company will pay Executive an automobile allowance in the amount of $300 per
month. Such automobile allowance shall be for no more than one automobile and
shall include all expenses related thereto, including, without limitation, lease
expenses, maintenance and insurance.
3.5 VACATION. Executive shall be entitled to reasonable vacations
during each year of the Term, the time and duration thereof to be determined by
mutual agreement between Executive and the Company.
4. TERMINATION.
4.1 TERMINATION FOR CAUSE. Notwithstanding anything contained in this
Agreement to the contrary, this Agreement may be terminated by the Company for
Cause. As used in this Agreement "Cause" shall only mean (i) subject to the
following sentences, any action or omission of the Executive which constitutes a
willful and material breach of this Agreement which is not cured or as to which
diligent attempts to cure have not commenced within 20 business days after
receipt by Executive of notice of same, (ii) fraud, embezzlement or
misappropriation as against the Company, or (iii) the conviction (from which no
appeal can be taken) of Executive for any criminal act which is a felony. Upon
any determination by the Company's Board of Directors that Cause exists under
clause (i) of the preceding sentence, the Company shall cause a special meeting
of the Board to be called and held at a time mutually convenient to the Board
and Executive, but in no event later than 10 business days after Executive's
receipt of the notice contemplated by clause (i). Executive shall have the right
to appear before such special meeting of the Board with legal counsel of his
choosing to refute any determination of Cause specified in such notice, and any
termination of Executive's employment by reason of such Cause determination
shall not be effective until Executive is afforded such opportunity to appear.
Any termination for Cause pursuant to clause (ii) or (iii) of this Paragraph 4.1
shall be made in writing to Executive, which notice shall set forth in detail
all acts or omissions upon which the Company is relying for such termination.
Upon any termination pursuant to this Paragraph 4.1, the Company shall pay to
the Executive any unpaid Base Salary accrued through the effective date of
termination specified in such notice. In addition, the Company shall pay any
benefits, if any, owed to Executive under any plan provided for Executive under
Paragraph 3 hereof in accordance with the terms of such plan as in effect on the
date of termination of employment under this Paragraph 4.1. Except as provided
above, the Company shall have no further liability hereunder (other than for
reimbursement for reasonable business expenses incurred prior to the date of
termination, subject, however to the provisions of Paragraph 3.1 hereof).
4.2 DISABILITY. Notwithstanding anything to the contrary contained in
this Agreement if, during the term hereof the Executive suffers a disability (as
defined below) the Company shall, subject to the provisions of Paragraph 4.3
hereof continue to pay Executive the
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compensation provided in Paragraphs 2.1 and 2.2 hereof during the period of his
disability; provided, however, that, in the event Executive is disabled for a
period of more than 180 days in any 12 month period (the "Disability Period"),
the Company may, at its election, by a vote of 75% of the members of the Board
within 90 days from the end of the Disability Period, terminate this agreement.
In the event of such termination, (a) payment of the Executive's Base Salary at
the rate prevailing on the date of termination of the Executive and fringe
benefits (to the extent permissible by applicable law) shall be continued for a
period of 24 months after such termination and (b) Executive shall receive a
bonus, payable in two annual installments, equal to twice the amount of bonus
paid to the Executive during the 12 months preceding the date of termination of
the Executive. As used in this Agreement, the term "disability" shall mean the
complete inability of Executive to perform his duties under this Agreement as
determined by an independent physician selected with the approval of the Company
and the Executive. Except as provided above, the Company shall have no further
liability hereunder (other than for reimbursement for reasonable business
expenses incurred prior to the date of termination subject, however, to the
provisions of Paragraph 3.1 hereof).
4.3 DEATH. In the event of the death of Executive during the Term of
this Agreement, the Company shall pay to Executive's legal representative, any
unpaid Base Salary accrued through the date of his death, as well as a lump sum
payment equal to (a) 24 months' Base Salary at the rate prevailing on the date
of the death of the Executive and (b) a bonus in an amount equal to twice the
amount of bonus paid in the 12 months preceding the date of death of the
Executive. Except as provided above, the Company shall have no further liability
hereunder (other than for reimbursement for reasonable business expenses
incurred prior to the date of the Executive's death, subject, however to the
provisions of Paragraph 3.1 hereof).
5. FULL SETTLEMENT. The Company's obligation to make the payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company may have against the Executive or
others. In no event shall the Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement.
6. CHANGE OF CONTROL.
(a) For the purposes of this Agreement, a "Change of Control" shall
be deemed to have taken place if: (i) any person, including a "group" as defined
in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, becomes
the owner or beneficial owner of Company securities, after the date of this
Agreement, having 20% or more of the combined voting power of the then
outstanding securities of the Company that may be cast for the election of
directors of the Company (other than as a result of an issuance of securities
initiated by the Company, or open market purchases approved by the Board, as
long as the majority of the Board approving the purchases is the majority at the
time the purchases are made), or (ii) the persons who were directors of the
Company before such transactions shall cease to constitute a majority of the
Board, or any successor to the Company, as the direct or indirect result of or
in connection with, any cash tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any combination of the
foregoing transactions.
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(b) The Company and Executive hereby agree that, if Executive is
affiliated with the Company on the date on which a Change of Control occurs (the
"Change of Control Date"), the Company (or, if Executive is affiliated with a
subsidiary, the subsidiary) will continue to retain Executive and Executive will
remain affiliated with the Company (or subsidiary), for the period commencing on
the Change of Control Date and ending on the second anniversary of such date, to
exercise such authority and perform such executive duties as are commensurate
with the authority being exercised and duties being performed by the Executive
immediately prior to the Change of Control Date. If after a Change of Control
Executive is requested and, in his sole and absolute discretion, consents to
change his principal business location, the Company will reimburse the Executive
for his reasonable relocation expenses, including without limitation, moving
expenses, temporary living and travel expenses for a reasonable time while
arranging to move his residence to the changed location, closing costs, if any,
associated with the sale of his existing residence and the purchase of a
replacement residence at the changed location, plus an additional amount
representing a gross-up of any state or federal taxes payable by Executive as a
result of any such reimbursements. If the Executive shall not consent to change
his business location, the Executive may continue to provide the services
required of him hereunder from his then residence and/or business address, and
the Company shall continue to maintain an office for Executive at that location
commensurate with the Company's office prior to the Change of Control Date.
(c) During the remaining term hereof after the Change of Control
Date, the Company (or subsidiary) will (i) continue to pay Executive a salary at
not less than the level applicable to Executive on the Change of Control Date,
(ii) pay Executive bonuses in amounts not less in amount than those paid during
the 12 month period preceding the Change of Control Date, and (iii) continue
employee benefit programs as to Executive at levels in effect on the Change of
Control Date (but subject to such reductions as may be required to maintain such
plans in compliance with applicable federal law regulating employee benefit
programs).
(d) If during the remaining term hereof after the Change of Control
Date (i) Executive's employment is terminated by the Company (or subsidiary), or
(ii) there shall have occurred a material reduction in Executive's compensation
or employment related benefits, or a material change in Executive's status,
working conditions, management responsibilities or titles, and Executive
voluntarily terminates his relationship with the Company within 60 days of any
such occurrence, or the last in a series of occurrences, then Executive shall be
entitled to receive, subject to the provisions of subparagraphs (e) and (f)
below, a lump sum payment equal to 299% of Executive's "base period income" as
determined under (e) below. Such amount will be paid to Executive within 15
business days after his termination of affiliation with the Company.
(e) The Executive's "base period income" shall be his Base Salary
and Bonuses paid or payable to him during or with respect to the 12 month period
preceding the date of his termination of affiliation. If Executive has not been
affiliated for 12 months at the time of his termination of affiliation, his
"base period income" shall be his annualized base salary at the rate then in
effect and any annual incentive Bonus paid to Executive prior to the date of his
termination of affiliation or payable to Executive with respect to his period of
affiliation.
(f) The amounts payable to Executive under any other compensation
arrangement maintained by the Company (or a subsidiary) which became payable
after payment
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of the lump sum provided for in (d), upon or as a result of the exercise by
Executive of rights which are contingent on a Change of Control (and would be
considered a "parachute payment" under Internal Revenue Code Section 280G and
regulations thereunder), shall be increased by an additional amount representing
a gross-up of any federal income tax liability arising from an excess parachute
payment or otherwise. If Executive has not been affiliated with the Company (or
a subsidiary of the Company) during one or more calendar years immediately
preceding the Change of Control Date, this paragraph (f) shall not apply.
(g) In the event of a proposed Change in Control, the Company will
allow Executive to participate in all meetings and negotiations related thereto.
7. RESTRICTIVE COVENANTS.
7.1 NON-COMPETITION. During the Term and for a period of one year
following the termination (other than without Cause, as defined in Paragraph
4.1) of the Executive's employment by the Company, Executive shall not, directly
or indirectly engage in or have any interest in, directly or indirectly, any
sole proprietorship, partnership, corporation, business or any other person or
entity (whether as an employee, officer, director, partner, agent, security
holder, creditor, consultant or otherwise) that, directly or indirectly, engages
primarily in the development, marketing, distribution, underwriting or sale of
products and services competitive with the Company's and/or any subsidiary's
products and services in any and all states in which the Company and/or any
subsidiary conducts its business during the Term or at the time Executive's
employment with the Company is terminated (the "Territory"); provided, however,
that Executive may hold Company securities and/or acquire, solely as an
investment, shares of capital stock or other equity securities of any such
company, so long as Executive does not control acquire a controlling interest in
or become a member of a group which exercises direct or indirect control of,
more than five percent of any class of capital stock of such corporation.
7.2 NONDISCLOSURE. During the Term and following termination of the
Executive's employment with the Company, Executive shall not divulge,
communicate, use to the detriment of the Company or for the benefit of any other
person or persons, or misuse in any way, any Confidential Information (as
hereinafter defined) pertaining to the business of the Company. Any Confidential
Information or data now or hereafter acquired by the Executive with respect to
the business of the Company (which shall include, but not be limited to,
information concerning the Company's financial condition, prospects, technology,
customers, methods of doing business and marketing, distribution, underwriting
or sale of the Company's products and services) shall be deemed a valuable,
special and unique asset of the Company that is received by the Executive in
confidence and as a fiduciary. For purposes of this Agreement "Confidential
Information" means information disclosed to the Executive or known by the
Executive as a consequence of or through his employment by the Company
(including information conceived, originated, discovered or developed by the
Executive) prior to or after the date hereof and not generally known or in the
public domain, about the Company or its business. Notwithstanding the foregoing,
nothing herein shall be deemed to restrict the Executive from disclosing
Confidential Information to the extent required by law.
7.3 NONSOLICITATION OF EMPLOYEES. During the Term and for a period of
one year following termination of the Executive's employment with the Company,
Executive shall
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not directly or indirectly, for himself or for any other person, firm,
corporation, partnership, association or other entity, attempt to employ or
enter into any contractual arrangement with any employee or former employee of
the Company, unless such employee or former employee has not been employed by
the Company for a period in excess of six months.
7.4 BOOKS AND RECORDS. All books, records, accounts and similar
repositories of Confidential Information of the Company, whether prepared by the
Executive or otherwise coming into the Executive's possession, shall be the
exclusive property of the Company and shall be returned immediately to the
Company on termination of this Agreement or on the Board's request at any time.
8. INJUNCTION. It is recognized and hereby acknowledged by the parties
hereto that a breach by the Executive of any of the covenants contained in
Paragraph 7 of this Agreement will cause irreparable harm and damage to the
Company, the monetary amount of which may be virtually impossible to ascertain.
As a result, the Executive recognizes and hereby acknowledges that the Company
shall be entitled to an injunction from any court of competent jurisdiction
enjoining and restraining any violation of any or all of the covenants contained
in Paragraph 7 of this Agreement by the Executive or any of his affiliates,
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other
remedies the Company may possess.
9. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this Agreement
shall preclude the Company from consolidating or merging into or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement, and all obligations of the Company hereunder, in
writing. Upon such consolidation, merger, or transfer of assets and assumption,
the term "the Company" as used herein, shall mean such other corporation and
this Agreement shall continue in full force and effect, subject to the
provisions of Paragraph 6 hereof.
10. BINDING EFFECT. Except as herein otherwise provided, this Agreement
shall inure to the benefit of and shall be binding upon the parties hereto,
their personal representatives, successors, heirs and assigns.
11. TERMINOLOGY. All personal pronouns used in this Agreement, whether
used in the masculine, feminine or neuter gender, shall include all other
genders; the singular shall include the plural and vice versa. Titles of
Paragraphs are for convenience only, and neither limit nor amplify the
provisions of the Agreement itself.
12. FURTHER ASSURANCES. At any time, and from time to time, each party
will take such action as may be reasonably requested by the other party to carry
out the intent and purposes of this Agreement.
13. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof. It
supersedes all prior negotiations, letters and understandings relating to the
subject matter hereof.
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14. AMENDMENT. This Agreement may not be amended, supplemented or modified
in whole or in part except by an instrument in writing signed by the party or
parties against whom enforcement of any such amendment, supplement or
modification is sought.
15. ASSIGNMENT. This Agreement may not be assigned by any party hereto
without the prior written consent of the other party and except as provided in
Paragraph 9 hereof.
16. CHOICE OF LAW. This Agreement will be interpreted, construed and
enforced in accordance with the laws of the State of Florida, without giving
effect to the application of the principles pertaining to conflicts of laws.
17. EFFECT OF WAIVER. The failure of any party at any time or times to
require performance of any provision of this Agreement will in no manner affect
the right to enforce the same. The waiver by any party of any breach of any
provision of this Agreement will not be construed to be a waiver by any such
party of any succeeding breach of that provision or a waiver by such party of
any breach of any other provision.
18. CONSTRUCTION. The parties hereto and their respective legal counsel
participated in the preparation of this Agreement; therefore, this Agreement
shall be construed neither against nor in favor of any of the parties hereto,
but rather in accordance with the fair meaning thereof.
19. SEVERABILITY. The invalidity, illegality or unenforceability of any
provision or provisions of this Agreement will not affect any other provision of
this Agreement, which will remain in full force and effect, nor will the
invalidity, illegality or unenforceability of a portion of any provision of this
Agreement affect the balance of such provision. In the event that any one or
more of the provisions contained in this Agreement or any portion thereof shall
for any reason be held to be invalid, illegal or unenforceable in any respect,
this Agreement shall be reformed, construed and enforced as if such invalid,
illegal or unenforceable provision had never been contained herein.
20. ENFORCEMENT. Should it become necessary for any party to institute
legal action to enforce the terms and conditions of this Agreement, the
successful party will be awarded reasonable attorneys' fees at all trial and
appellate levels, expenses and costs. Any suit, action or proceeding with
respect to this Agreement shall be brought in the courts of Broward County in
the State of Florida or in the U.S. District Court for the Southern District of
Florida. The parties hereto hereby accept the exclusive jurisdiction of those
courts for the purpose of any such suit, action or proceeding.
Venue for any such action, in addition to any other venue permitted by
statute, will be Broward County, Florida. The parties hereto hereby irrevocably
waive, to the fullest extent permitted by law, any objection that any of them
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or any judgment entered
by any court in respect thereof brought in Broward County, Florida, and hereby
further irrevocably waive any claim that any suit, action or proceeding brought
in Broward County, Florida, has been brought in an inconvenient forum.
The parties hereto acknowledge and agree that any party's remedy at law
for a breach or threatened breach of any of the provisions of this Agreement
would be inadequate and such
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breach or threatened breach shall be per se deemed as causing irreparable harm
to such party. Therefore, in the event of such breach or threatened breach, the
parties hereto agree that, in addition to any available remedy at law, including
but not limited to monetary damages, an aggrieved party, without posting any
bond, shall be entitled to obtain, and the offending party agrees not to oppose
the aggrieved party's request for, equitable relief in the form of specific
enforcement, temporary restraining order, temporary or permanent injunction, or
any other equitable remedy that may then be available to the aggrieved party.
21. BINDING NATURE. This Agreement will be binding upon and will inure to
the benefit of any successor or successors of the parties hereto.
22. NO THIRD-PARTY BENEFICIARIES. No person shall be deemed to possess any
third-party beneficiary right pursuant to this Agreement. It is the intent of
the parties hereto that no direct benefit to any third party is intended or
implied by the execution of this Agreement.
23. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original.
24. NOTICE. Any notice required or permitted to be delivered hereunder
shall be deemed to be delivered when sent by facsimile with receipt confirmed or
when deposited in the United States mail, postage prepaid, registered or
certified mail, return receipt requested, or by overnight courier, addressed to
the parties at the addresses first stated herein, or to such other address as
either party hereto shall from time to time designate to the other party by
notice in writing as provided herein.
IN WITNESS WHEREOF, this Agreement has been duly signed by the parties
hereto on the day and year first above written.
21ST CENTURY HOLDING COMPANY
By:_________________________________
Name:____________________________
Title:___________________________
____________________________________
EDWARD J. LAWSON
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EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the
1st day of September, 1998 by and between 21ST CENTURY HOLDING COMPANY, a
Florida corporation with its principal office at 4161 N.W. 5th Street,
Plantation, Florida 33317 (the "Company"), and MICHELE V. LAWSON, whose
residence address is 12731 N.W. 1st Street, Plantation, Florida 33325 (the
"Executive").
RECITALS
1. The Executive is currently a Director and Vice President-Operations-
Treasurer of the Company.
2. The Executive possesses intimate knowledge of the business and affairs
of the Company, its policies, methods and personnel.
3. The Board of Directors (the "Board") of the Company recognizes that the
Executive's contribution, as Chairman of the Board and Chief Executive Officer
of the Company, to the growth and success of the Company has been and will be
substantial and desires to assure the Company of the Executive's present and
continued employment in an executive capacity and to compensate her therefor.
4. The Board has determined that this Agreement will reinforce and
encourage the Executive's continued attention and dedication to the Company.
5. The Executive is willing to make her services available to the Company
on the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the parties hereby agree as follows:
1. Employment.
1.1 EMPLOYMENT AND TERM. The Company shall continue to employ the
Executive and the Executive shall continue to serve the Company, on the terms
and conditions set forth herein, for the period (the "Term") effective as of
September 1, 1998 (the "Commencement Date") and expiring on the second
anniversary of the Commencement Date, unless sooner terminated as hereinafter
set forth; provided, however, that the Term of this Agreement shall
automatically be extended so that at all times, the balance of the Term shall
not be less than two years.
1.2 DUTIES OF EXECUTIVE. The Executive shall serve as a Director and
Vice President-Operations-Treasurer of the Company and shall perform the duties
of an executive commensurate with such position, shall diligently perform all
services as may be reasonably
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designated by the Board and shall exercise such power and authority as is
necessary and customary to the performance of such duties and services. The
Executive shall devote such time as she deems necessary to the business and
affairs of the Company.
1.3 PLACE OF PERFORMANCE. In connection with her employment by the
Company, the Executive shall be based at the Company's principal executive
offices in Boca Raton, Florida except for required travel on the Company's
business to an extent substantially consistent with her present travel
obligations.
2. COMPENSATION.
2.1 BASE SALARY. During the Term, the Executive shall receive a base
salary at the annual rate of $78,000, subject to adjustment in accordance with
this Paragraph 2.1 (the "Base Salary"). The Base Salary shall be payable in
substantially equal installments consistent with the Company's normal payroll
schedule, subject to applicable withholding and other taxes. Commencing on the
first anniversary of the Commencement Date, and each anniversary of the
Commencement Date thereafter during the Term, the Base Salary shall be
increased, but shall not be decreased, by that percentage by which the Consumer
Price Index (All Items Less Shelter), Urban Wage Earners and Clerical Workers,
for the Miami, Florida area published by the United States Government (the
"Index") for the immediately preceding calendar year exceeds such index for the
next preceding calendar year. If publication of the Index is discontinued, the
parties hereto shall accept comparable statistics on the cost of living for the
Miami, Florida area as computed and published by an agency of the United States
government or, if no such agency computes and publishes such statistics, by any
regularly published national periodical that does compute and publish such
statistics.
2.2 ADDITIONAL CASH COMPENSATION. Executive shall also be entitled to
receive such increments in base salary and performance or merit bonuses
(collectively, "Bonus") as shall be determined from time to time during the term
by the Board.
3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS.
3.1 EXPENSE REIMBURSEMENT. During the Term, the Company, upon the
submission of supporting documentation by the Executive, and in accordance with
Company policies for its executives, shall reimburse the Executive for all
expenses actually paid or incurred by the Executive in the course of and
pursuant to the business of the Company, including expenses for travel and
entertainment.
3.2 OTHER BENEFITS. The Company shall obtain or shall continue in force
comprehensive major medical and hospitalization insurance coverages, including
dental coverages, either group or individual, for the Executive and her
dependents, and shall obtain or shall continue in force disability and life
insurance for the Executive (collectively, the "Policies"), which Policies the
Company shall keep in effect at its sole expense throughout the Term. The
Policies to be provided by the Company shall be on terms as determined by the
Board. Within 30 days following any termination of this Agreement, at the
Executive's option, the Company shall assign to the executive all insurance
policies on the life of the Executive then owned by the Company in consideration
of the payment by the Executive of the cash surrender
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value, if any, and the Executive's agreement to assume the Company liability to
pay any premiums accruing thereon after the date of such termination.
3.3 WORKING FACILITIES. The Company shall furnish the Executive with an
office, a secretary and such other facilities and services suitable to his
position and adequate for the performance of her duties hereunder.
3.4 AUTOMOBILE ALLOWANCE. Throughout the Term of this Agreement, the
Company will pay Executive an automobile allowance in the amount of $300 per
month. Such automobile allowance shall be for no more than one automobile and
shall include all expenses related thereto, including, without limitation, lease
expenses, maintenance and insurance.
3.5 VACATION. Executive shall be entitled to reasonable vacations
during each year of the Term, the time and duration thereof to be determined by
mutual agreement between Executive and the Company.
4. TERMINATION.
4.1 TERMINATION FOR CAUSE. Notwithstanding anything contained in this
Agreement to the contrary, this Agreement may be terminated by the Company for
Cause. As used in this Agreement "Cause" shall only mean (i) subject to the
following sentences, any action or omission of the Executive which constitutes a
willful and material breach of this Agreement which is not cured or as to which
diligent attempts to cure have not commenced within 20 business days after
receipt by Executive of notice of same, (ii) fraud, embezzlement or
misappropriation as against the Company, or (iii) the conviction (from which no
appeal can be taken) of Executive for any criminal act which is a felony. Upon
any determination by the Company's Board of Directors that Cause exists under
clause (i) of the preceding sentence, the Company shall cause a special meeting
of the Board to be called and held at a time mutually convenient to the Board
and Executive, but in no event later than 10 business days after Executive's
receipt of the notice contemplated by clause (i). Executive shall have the right
to appear before such special meeting of the Board with legal counsel of his
choosing to refute any determination of Cause specified in such notice, and any
termination of Executive's employment by reason of such Cause determination
shall not be effective until Executive is afforded such opportunity to appear.
Any termination for Cause pursuant to clause (ii) or (iii) of this Paragraph 4.1
shall be made in writing to Executive, which notice shall set forth in detail
all acts or omissions upon which the Company is relying for such termination.
Upon any termination pursuant to this Paragraph 4.1, the Company shall pay to
the Executive any unpaid Base Salary accrued through the effective date of
termination specified in such notice. In addition, the Company shall pay any
benefits, if any, owed to Executive under any plan provided for Executive under
Paragraph 3 hereof in accordance with the terms of such plan as in effect on the
date of termination of employment under this Paragraph 4.1. Except as provided
above, the Company shall have no further liability hereunder (other than for
reimbursement for reasonable business expenses incurred prior to the date of
termination, subject, however to the provisions of Paragraph 3.1 hereof).
4.2 DISABILITY. Notwithstanding anything to the contrary contained in
this Agreement if, during the term hereof the Executive suffers a disability (as
defined below) the Company shall, subject to the provisions of Paragraph 4.3
hereof continue to pay Executive the
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compensation provided in Paragraphs 2.1 and 2.2 hereof during the period of her
disability; provided, however, that, in the event Executive is disabled for a
period of more than 180 days in any 12 month period (the "Disability Period"),
the Company may, at its election, by a vote of 75% of the members of the Board
within 90 days from the end of the Disability Period, terminate this agreement.
In the event of such termination, (a) payment of the Executive's Base Salary at
the rate prevailing on the date of termination of the Executive and fringe
benefits (to the extent permissible by applicable law) shall be continued for a
period of 24 months after such termination and (b) Executive shall receive a
bonus, payable in two annual installments, equal to twice the amount of bonus
paid to the Executive during the 12 months preceding the date of termination of
the Executive. As used in this Agreement, the term "disability" shall mean the
complete inability of Executive to perform her duties under this Agreement as
determined by an independent physician selected with the approval of the Company
and the Executive. Except as provided above, the Company shall have no further
liability hereunder (other than for reimbursement for reasonable business
expenses incurred prior to the date of termination subject, however, to the
provisions of Paragraph 3.1 hereof).
4.3 DEATH. In the event of the death of Executive during the Term of
this Agreement, the Company shall pay to Executive's legal representative, any
unpaid Base Salary accrued through the date of her death, as well as a lump sum
payment equal to (a) 24 months' Base Salary at the rate prevailing on the date
of the death of the Executive and (b) a bonus in an amount equal to twice the
amount of bonus paid in the 12 months preceding the date of death of the
Executive. Except as provided above, the Company shall have no further liability
hereunder (other than for reimbursement for reasonable business expenses
incurred prior to the date of the Executive's death, subject, however to the
provisions of Paragraph 3.1 hereof).
5. FULL SETTLEMENT. The Company's obligation to make the payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company may have against the Executive or
others. In no event shall the Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement.
6. CHANGE OF CONTROL.
(a) For the purposes of this Agreement, a "Change of Control" shall
be deemed to have taken place if: (i) any person, including a "group" as defined
in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, becomes
the owner or beneficial owner of Company securities, after the date of this
Agreement, having 20% or more of the combined voting power of the then
outstanding securities of the Company that may be cast for the election of
directors of the Company (other than as a result of an issuance of securities
initiated by the Company, or open market purchases approved by the Board, as
long as the majority of the Board approving the purchases is the majority at the
time the purchases are made), or (ii) the persons who were directors of the
Company before such transactions shall cease to constitute a majority of the
Board, or any successor to the Company, as the direct or indirect result of or
in connection with, any cash tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any combination of the
foregoing transactions.
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(b) The Company and Executive hereby agree that, if Executive is
affiliated with the Company on the date on which a Change of Control occurs (the
"Change of Control Date"), the Company (or, if Executive is affiliated with a
subsidiary, the subsidiary) will continue to retain Executive and Executive will
remain affiliated with the Company (or subsidiary), for the period commencing on
the Change of Control Date and ending on the second anniversary of such date, to
exercise such authority and perform such executive duties as are commensurate
with the authority being exercised and duties being performed by the Executive
immediately prior to the Change of Control Date. If after a Change of Control
Executive is requested and, in her sole and absolute discretion, consents to
change her principal business location, the Company will reimburse the Executive
for his reasonable relocation expenses, including without limitation, moving
expenses, temporary living and travel expenses for a reasonable time while
arranging to move her residence to the changed location, closing costs, if any,
associated with the sale of her existing residence and the purchase of a
replacement residence at the changed location, plus an additional amount
representing a gross-up of any state or federal taxes payable by Executive as a
result of any such reimbursements. If the Executive shall not consent to change
her business location, the Executive may continue to provide the services
required of her hereunder from her then residence and/or business address, and
the Company shall continue to maintain an office for Executive at that location
commensurate with the Company's office prior to the Change of Control Date.
(c) During the remaining term hereof after the Change of Control
Date, the Company (or subsidiary) will (i) continue to pay Executive a salary at
not less than the level applicable to Executive on the Change of Control Date,
(ii) pay Executive bonuses in amounts not less in amount than those paid during
the 12 month period preceding the Change of Control Date, and (iii) continue
employee benefit programs as to Executive at levels in effect on the Change of
Control Date (but subject to such reductions as may be required to maintain such
plans in compliance with applicable federal law regulating employee benefit
programs).
(d) If during the remaining term hereof after the Change of Control
Date (i) Executive's employment is terminated by the Company (or subsidiary), or
(ii) there shall have occurred a material reduction in Executive's compensation
or employment related benefits, or a material change in Executive's status,
working conditions, management responsibilities or titles, and Executive
voluntarily terminates her relationship with the Company within 60 days of any
such occurrence, or the last in a series of occurrences, then Executive shall be
entitled to receive, subject to the provisions of subparagraphs (e) and (f)
below, a lump sum payment equal to 299% of Executive's "base period income" as
determined under (e) below. Such amount will be paid to Executive within 15
business days after her termination of affiliation with the Company.
(e) The Executive's "base period income" shall be her Base Salary
and Bonuses paid or payable to her during or with respect to the 12 month period
preceding the date of her termination of affiliation. If Executive has not been
affiliated for 12 months at the time of her termination of affiliation, her
"base period income" shall be her annualized base salary at the rate then in
effect and any annual incentive Bonus paid to Executive prior to the date of her
termination of affiliation or payable to Executive with respect to her period of
affiliation.
(f) The amounts payable to Executive under any other compensation
arrangement maintained by the Company (or a subsidiary) which became payable
after payment
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of the lump sum provided for in (d), upon or as a result of the exercise by
Executive of rights which are contingent on a Change of Control (and would be
considered a "parachute payment" under Internal Revenue Code Section 280G and
regulations thereunder), shall be increased by an additional amount representing
a gross-up of any federal income tax liability arising from an excess parachute
payment or otherwise. If Executive has not been affiliated with the Company (or
a subsidiary of the Company) during one or more calendar years immediately
preceding the Change of Control Date, this paragraph (f) shall not apply.
(g) In the event of a proposed Change in Control, the Company will
allow Executive to participate in all meetings and negotiations related thereto.
7. RESTRICTIVE COVENANTS.
7.1 NON-COMPETITION. During the Term and for a period of one year
following the termination (other than without Cause, as defined in Paragraph
4.1) of the Executive's employment by the Company, Executive shall not, directly
or indirectly engage in or have any interest in, directly or indirectly, any
sole proprietorship, partnership, corporation, business or any other person or
entity (whether as an employee, officer, director, partner, agent, security
holder, creditor, consultant or otherwise) that, directly or indirectly, engages
primarily in the development, marketing, distribution, underwriting or sale of
products and services competitive with the Company's and/or any subsidiary's
products and services in any and all states in which the Company and/or any
subsidiary conducts its business during the Term or at the time Executive's
employment with the Company is terminated (the "Territory"); provided, however,
that Executive may hold Company securities and/or acquire, solely as an
investment, shares of capital stock or other equity securities of any such
company, so long as Executive does not control acquire a controlling interest in
or become a member of a group which exercises direct or indirect control of,
more than five percent of any class of capital stock of such corporation.
7.2 NONDISCLOSURE. During the Term and following termination of the
Executive's employment with the Company, Executive shall not divulge,
communicate, use to the detriment of the Company or for the benefit of any other
person or persons, or misuse in any way, any Confidential Information (as
hereinafter defined) pertaining to the business of the Company. Any Confidential
Information or data now or hereafter acquired by the Executive with respect to
the business of the Company (which shall include, but not be limited to,
information concerning the Company's financial condition, prospects, technology,
customers, methods of doing business and marketing, distribution, underwriting
or sale of the Company's products and services) shall be deemed a valuable,
special and unique asset of the Company that is received by the Executive in
confidence and as a fiduciary. For purposes of this Agreement "Confidential
Information" means information disclosed to the Executive or known by the
Executive as a consequence of or through his employment by the Company
(including information conceived, originated, discovered or developed by the
Executive) prior to or after the date hereof and not generally known or in the
public domain, about the Company or its business. Notwithstanding the foregoing,
nothing herein shall be deemed to restrict the Executive from disclosing
Confidential Information to the extent required by law.
7.3 NONSOLICITATION OF EMPLOYEES. During the Term and for a period of
one year following termination of the Executive's employment with the Company,
Executive shall
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not directly or indirectly, for herself or for any other person, firm,
corporation, partnership, association or other entity, attempt to employ or
enter into any contractual arrangement with any employee or former employee of
the Company, unless such employee or former employee has not been employed by
the Company for a period in excess of six months.
7.4 BOOKS AND RECORDS. All books, records, accounts and similar
repositories of Confidential Information of the Company, whether prepared by the
Executive or otherwise coming into the Executive's possession, shall be the
exclusive property of the Company and shall be returned immediately to the
Company on termination of this Agreement or on the Board's request at any time.
8. INJUNCTION. It is recognized and hereby acknowledged by the parties
hereto that a breach by the Executive of any of the covenants contained in
Paragraph 7 of this Agreement will cause irreparable harm and damage to the
Company, the monetary amount of which may be virtually impossible to ascertain.
As a result, the Executive recognizes and hereby acknowledges that the Company
shall be entitled to an injunction from any court of competent jurisdiction
enjoining and restraining any violation of any or all of the covenants contained
in Paragraph 7 of this Agreement by the Executive or any of her affiliates,
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other
remedies the Company may possess.
9. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this Agreement
shall preclude the Company from consolidating or merging into or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement, and all obligations of the Company hereunder, in
writing. Upon such consolidation, merger, or transfer of assets and assumption,
the term "the Company" as used herein, shall mean such other corporation and
this Agreement shall continue in full force and effect, subject to the
provisions of Paragraph 6 hereof.
10. BINDING EFFECT. Except as herein otherwise provided, this Agreement
shall inure to the benefit of and shall be binding upon the parties hereto,
their personal representatives, successors, heirs and assigns.
11. TERMINOLOGY. All personal pronouns used in this Agreement, whether
used in the masculine, feminine or neuter gender, shall include all other
genders; the singular shall include the plural and vice versa. Titles of
Paragraphs are for convenience only, and neither limit nor amplify the
provisions of the Agreement itself.
12. FURTHER ASSURANCES. At any time, and from time to time, each party
will take such action as may be reasonably requested by the other party to carry
out the intent and purposes of this Agreement.
13. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof. It
supersedes all prior negotiations, letters and understandings relating to the
subject matter hereof.
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14. AMENDMENT. This Agreement may not be amended, supplemented or modified
in whole or in part except by an instrument in writing signed by the party or
parties against whom enforcement of any such amendment, supplement or
modification is sought.
15. ASSIGNMENT. This Agreement may not be assigned by any party hereto
without the prior written consent of the other party and except as provided in
Paragraph 9 hereof.
16. CHOICE OF LAW. This Agreement will be interpreted, construed and
enforced in accordance with the laws of the State of Florida, without giving
effect to the application of the principles pertaining to conflicts of laws.
17. EFFECT OF WAIVER. The failure of any party at any time or times to
require performance of any provision of this Agreement will in no manner affect
the right to enforce the same. The waiver by any party of any breach of any
provision of this Agreement will not be construed to be a waiver by any such
party of any succeeding breach of that provision or a waiver by such party of
any breach of any other provision.
18. CONSTRUCTION. The parties hereto and their respective legal counsel
participated in the preparation of this Agreement; therefore, this Agreement
shall be construed neither against nor in favor of any of the parties hereto,
but rather in accordance with the fair meaning thereof.
19. SEVERABILITY. The invalidity, illegality or unenforceability of any
provision or provisions of this Agreement will not affect any other provision of
this Agreement, which will remain in full force and effect, nor will the
invalidity, illegality or unenforceability of a portion of any provision of this
Agreement affect the balance of such provision. In the event that any one or
more of the provisions contained in this Agreement or any portion thereof shall
for any reason be held to be invalid, illegal or unenforceable in any respect,
this Agreement shall be reformed, construed and enforced as if such invalid,
illegal or unenforceable provision had never been contained herein.
20. ENFORCEMENT. Should it become necessary for any party to institute
legal action to enforce the terms and conditions of this Agreement, the
successful party will be awarded reasonable attorneys' fees at all trial and
appellate levels, expenses and costs. Any suit, action or proceeding with
respect to this Agreement shall be brought in the courts of Broward County in
the State of Florida or in the U.S. District Court for the Southern District of
Florida. The parties hereto hereby accept the exclusive jurisdiction of those
courts for the purpose of any such suit, action or proceeding.
Venue for any such action, in addition to any other venue permitted by
statute, will be Broward County, Florida. The parties hereto hereby irrevocably
waive, to the fullest extent permitted by law, any objection that any of them
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or any judgment entered
by any court in respect thereof brought in Broward County, Florida, and hereby
further irrevocably waive any claim that any suit, action or proceeding brought
in Broward County, Florida, has been brought in an inconvenient forum.
The parties hereto acknowledge and agree that any party's remedy at law
for a breach or threatened breach of any of the provisions of this Agreement
would be inadequate and such
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breach or threatened breach shall be per se deemed as causing irreparable harm
to such party. Therefore, in the event of such breach or threatened breach, the
parties hereto agree that, in addition to any available remedy at law, including
but not limited to monetary damages, an aggrieved party, without posting any
bond, shall be entitled to obtain, and the offending party agrees not to oppose
the aggrieved party's request for, equitable relief in the form of specific
enforcement, temporary restraining order, temporary or permanent injunction, or
any other equitable remedy that may then be available to the aggrieved party.
21. BINDING NATURE. This Agreement will be binding upon and will inure to
the benefit of any successor or successors of the parties hereto.
22. NO THIRD-PARTY BENEFICIARIES. No person shall be deemed to possess any
third-party beneficiary right pursuant to this Agreement. It is the intent of
the parties hereto that no direct benefit to any third party is intended or
implied by the execution of this Agreement.
23. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original.
24. NOTICE. Any notice required or permitted to be delivered hereunder
shall be deemed to be delivered when sent by facsimile with receipt confirmed or
when deposited in the United States mail, postage prepaid, registered or
certified mail, return receipt requested, or by overnight courier, addressed to
the parties at the addresses first stated herein, or to such other address as
either party hereto shall from time to time designate to the other party by
notice in writing as provided herein.
IN WITNESS WHEREOF, this Agreement has been duly signed by the parties
hereto on the day and year first above written.
21ST CENTURY HOLDING COMPANY
By:_____________________________
Name:________________________
Title:_______________________
________________________________
MICHELE V. LAWSON
9
EXHIBIT 10.4
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is dated as of
September __, 1998, by and between 21ST CENTURY HOLDING COMPANY, a Florida
corporation (the "Company"), with its principal office located at 4161 N.W. 5th
Street, Plantation, Florida 33317, and ____________________________, whose
residence is _____________________________ (the "Indemnitee").
RECITALS
1. The substantial increase in corporate litigation subjects directors
and officers of corporations and others to expensive litigation risks at the
same time that the availability of competent and qualified directors, officers,
employees, consultants, advisers and agents has been greatly reduced, and the
coverage offered by directors' and officers' liability insurance has been
severely limited;
2. The Company's Restated and Amended Articles of Incorporation (the
"Articles of Incorporation") and By-Laws (the "By-Laws") requires the Company to
indemnify and advance expenses to its directors and officers to the fullest
extent permitted by law and the Indemnitee has been serving and continues to
serve as a director or officer of the Company in part in reliance on such
Articles of Incorporation;
3. In recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's continued service to
the Company in an effective manner and Indemnitee's reliance on the Articles of
Incorporation and By-Laws, and in part to provide Indemnitee with specific
contractual assurance that the protection promised by the Articles of
Incorporation and By-Laws will be available to Indemnitee (regardless of, among
other things, any amendment to or revocation of such or any change in the
composition of the Company's Board of Directors (the "Board") or acquisition
transaction relating to the Company), the Company wishes to provide in this
Agreement for the indemnification of, and the advancing of expenses to,
Indemnitee to the fullest extent (whether partial or complete) permitted by law
and as set forth in this Agreement, and, to the extent insurance is maintained,
for the continued coverage of Indemnitee under the Company's directors' and
officers' liability insurance policies;
4. As a condition to the Indemnitee's agreement to continue to serve as
a director of the Company, the Indemnitee requires that he be indemnified from
liability to the fullest extent permitted by law; and
5. The Company is willing to indemnify the Indemnitee to the fullest
extent permitted by law in order to retain the services of the Indemnitee.
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereby agree as follows:
<PAGE>
1. MANDATORY INDEMNIFICATION IN PROCEEDINGS OTHER THAN THOSE BY OR IN
THE RIGHT OF THE COMPANY. Subject to Section 5 hereof, the Company shall
indemnify and hold harmless the Indemnitee from and against any and all claims,
damages, expenses (including attorneys' fees), judgments, penalties, fines
(including excise taxes assessed with respect to an employee benefit plan),
settlements, and all other liabilities incurred or paid by him in connection
with the investigation, defense, prosecution, settlement or appeal of any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) and to which the Indemnitee was or is a party or is
threatened to be made a party by reason of the fact that the Indemnitee is or
was an officer, director, shareholder, employee, consultant adviser or agent of
the Company, or is or was serving at the request of the Company as an officer,
director, partner, trustee, employee, adviser or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise, or
by reason of anything done or not done by the Indemnitee in any such capacity or
capacities, provided that the Indemnitee acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
2. MANDATORY INDEMNIFICATION IN PROCEEDINGS BY OR IN THE RIGHT OF THE
COMPANY. Subject to Section 5 hereof the Company shall indemnify and hold
harmless the Indemnitee from and against any and all expenses (including
attorneys' fees) and amounts actually and reasonably incurred or paid by him in
connection with the investigation, defense, prosecution, settlement or appeal of
any threatened, pending or completed action, suit or proceeding by or in the
right of the Company to procure a judgment in its favor, whether civil,
criminal, administrative or investigative, and to which the Indemnitee was or is
a party or is threatened to be made a party by reason of the fact that the
Indemnitee is or was an officer, director, shareholder, employee, consultant,
adviser or agent of the Company, or is or was serving at the request of the
Company as an officer, director, partner, trustee, employee, adviser or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, or by reason of anything done or not done by the Indemnitee in
any such capacity or capacities, provided that (i) the Indemnitee acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company and (ii) no indemnification shall be made under this
Section 2 in respect of any claim, issue or matter as to which the Indemnitee
shall have been adjudged to be liable to the Company for misconduct in the
performance of his duty to the Company unless, and only to the extent that, the
court in which such proceeding was brought (or any other court of competent
jurisdiction) shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, the Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
3. MANDATORY INDEMNIFICATION AGAINST EXPENSES INCURRED WHILE
TESTIFYING. Subject to Section 5 hereof, the Company shall indemnify the
Indemnitee against expenses (including attorney's fees) incurred or paid by the
Indemnitee as a result of providing testimony in any proceeding, whether civil,
criminal, administrative or investigative (including but not limited to any
action or suit by or in the right of the Company to procure judgment in its
favor), by reason of the fact that the Indemnitee is or was an officer,
director, shareholder, employee, consultant, adviser or agent of the Company, or
is or was serving at the request of the Company as an officer, director,
partner, trustee, employee, adviser or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise.
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4. REIMBURSEMENT OF EXPENSES FOLLOWING ADJUDICATION OF NEGLIGENCE. The
Company shall reimburse the Indemnitee for any expenses (including attorney's
fees) and amounts actually and reasonably incurred or paid by him in connection
with the investigation, defense, settlement or appeal of any action or suit
described in Section 2 hereof that results in an adjudication that the
Indemnitee was liable for negligence, gross negligence or recklessness (but not
willful misconduct) in the performance of his duty to the Company; provided,
however, that the Indemnitee acted in good faith and in a manner he believed to
be in or not opposed to the best interests of the Company.
5. AUTHORIZATION OF INDEMNIFICATION. Any indemnification under
Sections 1, 2 and 3 hereof (unless ordered by a court) and any reimbursement
made under Section 4 hereof shall be made by the Company only as authorized in
the specific case upon a determination (the "Determination") that
indemnification or reimbursement of the Indemnitee is proper in the
circumstances because the Indemnitee has met the applicable requirements set
forth in Sections 1, 2, 3 and 4 hereof, as the case may be. Subject to Sections
6.6, 6.7 and 9 of this Agreement, the Determination shall be made in the
following order of preference:
(a) first, by the Board by a majority vote or consent of a quorum,
in each case consisting of directors who are not, at the time of the
Determination, named parties to such action, suit or proceeding ("Disinterested
Directors"); or
(b) next, if such a quorum of Disinterested Directors cannot be
obtained, by majority vote or consent of a committee duly designated by the
Board (in which designation all directors, whether or not Disinterested
Directors, may participate) consisting solely of two or more Disinterested
Directors; or
(c) next, if such a committee cannot be designated, by any
independent legal counsel (who may be any outside counsel regularly employed by
the Company) in a written opinion; or
(d) next, if such legal counsel determination cannot be obtained,
by vote or consent of the holders of a majority of the Company's Common Stock.
5.1 NO PRESUMPTIONS. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or
its equivalent, shall not, of itself, create a presumption that the Indemnitee
did not act in good faith and in a manner that he reasonably believed to be in
or not opposed to the best interests of the Company, and with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
5.2 BENEFIT PLAN CONDUCT. The Indemnitee's conduct with respect to an
employee benefit plan for a purpose he reasonably believed to be in the
interests of the participants in and beneficiaries of the plan shall be deemed
to be conduct that the Indemnitee reasonably believed to be not opposed to the
best interests of the Company.
5.3 RELIANCE AS SAFE HARBOR. For purposes of any Determination
hereunder, the Indemnitee shall be deemed to have acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company, or, with respect to any criminal
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action or proceeding, to have had no reasonable cause to believe his conduct was
unlawful, if his action is based on (i) the records or books of account of the
Company or another enterprise, including financial statements, (ii) information
supplied to him by the officers of the Company or another enterprise in the
course of their duties, (iii) the advice of legal counsel for the Company or
another enterprise, or (iv) information or records given or reports made to the
Company or another enterprise by an independent certified public accountant or
by an appraiser or other expert selected with reasonable care by the Company or
another enterprise. The term "another enterprise" as used in this Section 5.3
shall mean any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise of which the Indemnitee is or was
serving at the request of the Company as an officer, director, partner, trustee,
employee, adviser or agent. The provisions of this Section 5.3 shall not be
deemed to be exclusive or to limit in any way the other circumstances in which
the Indemnitee may be deemed to have met the applicable standard of conduct set
forth in Sections 1, 2 or 4 hereof, as the case may be.
5.4 SUCCESS ON MERITS OR OTHERWISE. Notwithstanding any other provision
of this Agreement, to the extent that the Indemnitee has been successful on the
merits or otherwise in defense of any action, suit or proceeding described in
Sections 1 or 2 hereof, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the investigation, defense,
settlement or appeal thereof. For purposes of this Section 5.4, the term
"successful on the merits or otherwise' shall include, but not be limited to,
(i) any termination, withdrawal, or dismissal (with or without prejudice) of any
claim, action, suit or proceeding against the Indemnitee without any express
finding of liability or guilt against him, and (ii) the expiration of 120 days
after the making of any claim or threat of an action, suit or proceeding without
the institution of the same and without any promise or payment made to induce a
settlement.
5.5 PARTIAL INDEMNIFICATION OR REIMBURSEMENT. If the Indemnitee is
entitled under any provision of this Agreement to indemnification and/or
reimbursement by the Company for some or a portion of the claims, damages,
expenses (including attorneys' fees), judgments, penalties, fines or amounts
paid in settlement by the Indemnitee in connection with the investigation of,
defense of, settlement of, appeal of or testimony provided with respect to any
action specified in Sections 1, 2, 3 or 4 hereof, but not, however, for the
total amount thereof, the Company shall nevertheless indemnify and/or reimburse
the Indemnitee for the portion thereof to which the Indemnitee is entitled. The
party or parties making the Determination shall determine the portion (if less
than all) of such claims, damages, expenses (including attorneys' fees),
judgments, penalties, fines or amounts paid in settlement for which the
Indemnitee is entitled to indemnification and/or reimbursement under this
Agreement.
6. PROCEDURES FOR DETERMINATION OF WHETHER STANDARDS HAVE BEEN
SATISFIED.
6.1 COSTS. All costs of making the Determination required by Section 6
hereof shall be borne solely by the Company, including, but not limited to, the
costs of legal counsel, proxy solicitations and judicial determinations. The
Company shall also be solely responsible for paying (i) all reasonable expenses
incurred by the Indemnitee to enforce this Agreement, including, but not limited
to, the costs incurred by the Indemnitee to obtain court-ordered indemnification
pursuant to Section 9 hereof regardless of the outcome of any such application
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or proceeding, and (ii) all costs of defending any suits or proceedings
challenging payments to the Indemnitee under this Agreement.
6.2 TIMING OF THE DETERMINATION. The Company shall use its best efforts
to make the Determination contemplated by Section 5 hereof promptly. In
addition, the Company agrees:
(a) if the Determination is to be made by the Board or a committee
thereof, such Determination shall be made not later than 15 days after a written
request for a Determination (a "Request") is delivered to the Company by the
Indemnitee;
(b) if the Determination is to be made by independent legal
counsel, such Determination shall be made not later than 30 days after a Request
is delivered to the Company by the Indemnitee; and
(c) if the Determination is to be made by the shareholders of the
Company, such Determination shall be made not later than 90 days after a Request
is delivered to the Company by the Indemnitee.
The failure to make a Determination within the above-specified time period shall
constitute a Determination approving full indemnification or reimbursement of
the Indemnitee. Notwithstanding anything herein to the contrary, a Determination
may be made in advance of (i) the Indemnitee's payment (or incurring) of
expenses with respect to which indemnification or reimbursement is sought,
and/or (ii) final disposition of the action, suit or proceeding with respect to
which indemnification or reimbursement is sought.
6.3 REASONABLENESS OF EXPENSES. The evaluation and finding as to the
reasonableness of expenses incurred by the Indemnitee for purposes of this
Agreement shall be made (in the following order of preference) within 15 days of
the Indemnitee's delivery to the Company of a Request that includes a reasonable
accounting of expenses incurred:
(a) first, by the Board by a majority vote or consent of a quorum
consisting of Disinterested Directors; or
(b) next, if a quorum cannot be obtained under subdivision (a), by
majority vote or consent of a committee duly designated by the Board (in which
designation all directors, whether or not Disinterested Directors, may
participate), consisting solely of two or more Disinterested Directors; or
(c) next, if a finding cannot be obtained under either subdivision
(a) or (b), by vote or consent of the holders of a majority of the Company's
Common Stock.
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All expenses shall be considered reasonable for purposes of this Agreement if
the finding contemplated by this Section 6.3 is not made within the prescribed
time. The finding required by this Section 6.3 may be made in advance of the
payment (or incurring) of the expenses for which indemnification or
reimbursement is sought.
6.4 PAYMENT OF INDEMNIFIED AMOUNT. Immediately following a
Determination that the Indemnitee has met the applicable requirements set forth
in Sections 1, 2, 3 or 4 hereof, as the case may be, and the finding of
reasonableness of expenses contemplated by Section 6.3 hereof, or the passage of
time prescribed for making such determination(s), the Company shall pay to the
Indemnitee in cash the amount to which the Indemnitee is entitled to be
indemnified and/or reimbursed, as the case may be, without further authorization
or action by the Board; provided, however, that the expenses for which
indemnification or reimbursement is sought have actually been incurred by the
Indemnitee.
6.5 SHAREHOLDER VOTE ON DETERMINATION. Notwithstanding the provisions
of the Florida statutes, if the Indemnitee is a shareholder of the Company, the
Indemnitee and any other shareholder who is a party to the proceeding for which
indemnification or reimbursement is sought shall be entitled to vote on any
Determination to be made by the Company's shareholders, including a
Determination made pursuant to Section 6.3 hereof. In addition, in connection
with each meeting at which a shareholder Determination will be made, the Company
shall solicit proxies that expressly include a proposal to indemnify or
reimburse the Indemnitee. The Company proxy statement relating to the proposal
to indemnify or reimburse the Indemnitee shall not include a recommendation
against indemnification or reimbursement.
6.6 SELECTION OF INDEPENDENT LEGAL COUNSEL. If the Determination
required under Section 5 is to be made by independent legal counsel, such
counsel shall be selected by the Indemnitee with the approval of the Board,
which approval shall not be unreasonably withheld. The fees and expenses
incurred by counsel in making any Determination (including Determinations
pursuant to Section 6.8 hereof) shall be borne solely by the Company regardless
of the results of any Determination and, if requested by counsel, the Company
shall give such counsel an appropriate written agreement with respect to the
payment of their fees and expenses and such other matters as may be reasonably
requested by counsel.
6.7 RIGHT OF INDEMNITEE TO APPEAL AN ADVERSE DETERMINATION BY BOARD. If
a Determination is made by the Board or a committee thereof that the Indemnitee
did not meet the requirements set forth in Sections 1, 2, 3 or 4 hereof upon the
written request of the Indemnitee and the Indemnitee's delivery of $500 to the
Company, the Company shall cause a new Determination to be made by the Company's
shareholders at the next regular or special meeting of shareholders. Subject to
Section 9 hereof, such Determination by the Company's shareholders shall be
binding and conclusive for all purposes of this Agreement.
6.8 RIGHT OF INDEMNITEE TO SELECT FORUM FOR DETERMINATION. If, at any
time subsequent to the date of this Agreement, "Continuing Directors" do not
constitute a majority of
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the members of the Board, or there is otherwise a change in control of the
Company (as contemplated by Item 403(c) of Regulation S-K), then upon the
request of the Indemnitee, the Company shall cause the Determination required by
Section 5 hereof to be made by independent legal counsel selected by the
Indemnitee and approved by the Board (which approval shall not be unreasonably
withheld), which counsel shall be deemed to satisfy the requirements of clause
(3) of Section 5 hereof. If none of the legal counsel selected by the Indemnitee
are willing and/or able to make the Determination, then the Company shall cause
the Determination to be made by a majority vote or consent of a Board committee
consisting solely of Continuing Directors. For purposes of this Agreement, a
"Continuing Director" means either a member of the Board at the date of this
Agreement or a person nominated to serve as a member of the Board by a majority
of the then Continuing Directors.
6.9 ACCESS BY INDEMNITEE TO DETERMINATION. The Company shall afford to
the Indemnitee and his representatives ample opportunity to present evidence of
the facts upon which the Indemnitee relies for indemnification or reimbursement,
together with other information relating to any requested Determination. The
Company shall also afford the Indemnitee the reasonable opportunity to include
such evidence and information in any Company proxy statement relating to a
shareholder Determination.
6.10 JUDICIAL DETERMINATIONS IN DERIVATIVE SUITS. In each action or
suit described in Section 2 hereof, the Company shall cause its counsel to use
its best efforts to obtain from the Court in which such action or suit was
brought (i) an express adjudication whether the Indemnitee is liable for
negligence or misconduct in the performance of his duty to the Company, and, if
the Indemnitee is so liable, (ii) a determination whether and to what extent,
despite the adjudication of liability but in view of all the circumstances of
the case (including this Agreement), the Indemnitee is fairly and reasonably
entitled to indemnification.
7. SCOPE OF INDEMNITY. The actions, suits and proceedings described in
Sections 1 and 2 hereof shall include, for purposes of this Agreement, any
actions that involve, directly or indirectly, activities of the Indemnitee both
in his capacities as a Company director, officer, adviser or agent and actions
taken in another capacity while serving as director, officer, adviser or agent,
including, but not limited to, actions or proceedings involving (i) compensation
paid to the Indemnitee by the Company, (ii) activities by the Indemnitee on
behalf of the Company, including actions in which the Indemnitee is plaintiff,
(iii) actions alleging a misappropriation of a "corporate opportunity," (iv)
responses to a takeover attempt or threatened takeover attempt of the Company,
(v) transactions by the Indemnitee in Company securities, and (vi) the
Indemnitee's preparation for and appearance (or potential appearance) as a
witness in any proceeding relating, directly or indirectly, to the Company. In
addition, the Company agrees that, for purposes of this Agreement, all services
performed by the Indemnitee on behalf of, in connection with or related to any
subsidiary of the Company, any employee benefit plan established for the benefit
of employees of the Company or any subsidiary, any corporation or partnership or
other entity in which the Company or any subsidiary has a 5% ownership interest,
or any other affiliate shall be deemed to be at the request of the Company.
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8. ADVANCE FOR EXPENSES.
8.1 MANDATORY ADVANCE. Expenses (including attorneys' fees) incurred by
the Indemnitee in investigating, defending, settling or appealing any action,
suit or proceeding described in Sections 1 or 2 hereof shall be paid by the
Company in advance of the final disposition of such action, suit or proceeding.
The Company shall promptly pay the amount of such expenses to the Indemnitee,
but in no event later than 10 days following the Indemnitee's delivery to the
Company of a written request for an advance pursuant to this Section 8, together
with a reasonable accounting of such expenses.
8.2 UNDERTAKING TO REPAY. The Indemnitee hereby undertakes and agrees
to repay to the Company any advances made pursuant to this Section 8 if and to
the extent that it shall ultimately be found (by final judicial determination
from which there is no further right to appeal) that the Indemnitee is not
entitled to be indemnified by the Company for such amounts.
8.3 MISCELLANEOUS. The Company shall make the advances contemplated by
this Section 8 regardless of the Indemnitee's financial ability to make
repayment, and regardless whether indemnification of the Indemnitee by the
Company will ultimately be required. Any advances and undertakings to repay
pursuant to this Section 8 shall be unsecured and interest-free.
9. COURT-ORDERED INDEMNIFICATION.
9.1 Regardless of whether the Indemnitee has met the requirements set
forth in Sections 1, 2, 3 or 4 hereof, as the case may be, and notwithstanding
the presence or absence of any Determination whether such standards have been
satisfied, the Indemnitee may apply for indemnification (and/or reimbursement
pursuant to Sections 4 or 13 hereto) to the court conducting any proceeding to
which the Indemnitee is a party or to any other court of competent jurisdiction.
On receipt of an application, the court, after giving any notice the court
considers necessary, may order indemnification (and/or reimbursement) if it
determines the Indemnitee is fairly and reasonably entitled to indemnification
(and/or reimbursement) in view of all the relevant circumstances (including this
Agreement).
9.2 The right to indemnification and advances as provided by this
Agreement shall be enforceable by Indemnitee in an action in any court of
competent jurisdiction. In such an action, the burden of proving that
indemnification is not required hereunder shall be on the Company. Neither the
failure of the Company (including its Board and independent legal counsel) to
have made a Determination prior to the commencement of such an action that
indemnification is proper in the circumstances because Indemnitee has met the
applicable standard of conduct, nor an actual Determination by the Company
(including its Board and independent legal counsel) that Indemnitee has not met
such applicable standard of conduct, shall be a defense to such an action or
create a presumption that Indemnitee has not met the applicable standard of
conduct. Indemnitee's expenses reasonably incurred in connection with
establishing his right to indemnification, in whole or in part, in connection
with any proceeding shall also be indemnified by the Company.
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10. NONDISCLOSURE OF PAYMENTS. Except as expressly required by federal
securities laws, neither party shall disclose any payments under this Agreement
unless prior approval of the other party is obtained. Any payments to the
Indemnitee that must be disclosed shall, unless otherwise required by law, be
described only in the Company's proxy or information statements relating to
special and/or annual meetings of the Company's shareholders, and the Company
shall afford the Indemnitee the reasonable opportunity to review all such
disclosures and, if requested, to explain in such statement any mitigating
circumstances regarding the events reported.
11. COVENANT NOT TO SUE, LIMITATION OF ACTIONS AND RELEASE OF CLAIMS.
No legal action shall be brought and no cause of action shall be asserted by or
on behalf of the Company (or any of its subsidiaries) against the Indemnitee,
his spouse, heirs, executors, personal representatives or administrators after
the expiration of 2 years from the date the Indemnitee ceases (for any reason)
to serve as either an officer, director, adviser or agent of the Company, and
any claim or cause of action of the Company (or any of its subsidiaries) shall
be extinguished and deemed released unless asserted by filing of a legal action
within such 2-year period.
12. INDEMNIFICATION OF INDEMNITEE'S ESTATE. Notwithstanding any other
provision of this Agreement, if the Indemnitee is deceased, and indemnification
of the Indemnitee would be permitted and/or required under this Agreement, the
Company shall indemnify and hold harmless the Indemnitee's estate, spouse,
heirs, administrators, personal representatives and executors (collectively the
"Indemnitee's Estate") against, and the Company shall assume, any and all
claims, damages, expenses (including attorneys' fees), penalties, judgments,
fines and amounts paid in settlement actually incurred by the Indemnitee or the
Indemnitee's Estate in connection with the investigation, defense, settlement or
appeal of any action described in Sections 1, 2 or 4 hereof.
13. MISCELLANEOUS.
13.1 NOTICE. Any notice required or permitted to be delivered
hereunder shall be deemed to be delivered when sent by facsimile with receipt
confirmed or deposited in the United States mail, postage prepaid, registered or
certified mail, return receipt requested, or by overnight courier addressed to
the parties at the addresses first stated herein, or to such other address as
either party hereto shall from time to time designate to the other party by
notice in writing as provided herein.
13.2 ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement
between the parties hereto with respect to the subject matter hereof. It
supercedes all prior negotiations, letters and understandings relating to the
subject matter hereof.
13.3 NON-EXCLUSIVITY. The rights of indemnification and reimbursement
provided in this Agreement shall be in addition to any rights to which the
Indemnitee may otherwise be entitled under the Company's Articles of
Incorporation or By-Laws or any statute, agreement, vote of shareholders or
otherwise.
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13.4 SEVERABILITY. The invalidity, illegality or unenforceability of
any provision or provisions of this Agreement will not affect any other
provision of this Agreement, which will remain in full force and effect, nor
will the invalidity, illegality or unenforceability of a portion of any
provision of this Agreement affect the balance of such provision. In the event
that any one or more of the provisions contained in this Agreement or any
portion thereof shall for any reason be held to be invalid, illegal or
unenforceable in any respect, this Agreement shall be reformed, construed and
enforced as if such invalid, illegal or unenforceable provision had never been
contained herein.
13.5 SAVING CLAUSE. If this Agreement or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, the Company
shall nevertheless indemnify Indemnitee as to expenses, judgments, fines and
penalties with respect to any proceeding to the full extent permitted by any
applicable portion of Agreement that shall not have been invalidated or by any
applicable law.
13.6 COOPERATION AND INTENT. The Company shall cooperate in good faith
with the Indemnitee and use its best efforts to ensure that the Indemnitee is
indemnified and/or reimbursed for liabilities described herein to the fullest
extent permitted by law.
13.7 SECURITY. To the fullest extent permitted by applicable law, the
Company may from time to time, but shall not be required to, provide such
insurance, collateral, letters of credit or other security devices as its Board
may deem appropriate to support or secure the Company's obligations under this
Agreement.
13.8 CHOICE OF LAW. This Agreement will be interpreted, construed and
enforced in accordance with the laws of the State of Florida, without giving
effect to the application of the principles pertaining to conflicts of laws.
13.9 AMENDMENT. This Agreement may not be amended, supplemented or
modified in whole or in part except by an instrument in writing signed by the
party or parties against whom enforcement of any such amendment, supplement or
modification is sought.
13.10 BINDING EFFECT. The obligations of the Company to the Indemnitee
hereunder shall survive and continue as to the Indemnitee even if the Indemnitee
ceases to be a director, officer, employee, adviser and/or agent of the Company.
Each and all of the covenants, terms and provisions of this Agreement shall be
binding upon and inure to the benefit of the successors and assigns of the
Company and, upon the death of the Indemnitee, to the benefit of the estate,
heirs, executors, administrators and personal representatives of the Indemnitee.
13.11 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original.
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13.12 EFFECTIVE DATE. The provisions of this Agreement shall cover
claims, actions, suits and proceedings whether now pending or hereafter
commenced and shall be retroactive to cover acts or omissions or alleged acts or
omissions which heretofore have taken place.
13.13 EFFECT OF WAIVER. The failure of any party at any time or times
to require performance of any provision of this Agreement will in no manner
affect the right to enforce the same. The waiver by any party of any breach of
any provision of this Agreement will not be construed to be a waiver by any such
party of any succeeding breach of that provision or a waiver by such party of
any breach of any other provision.
13.14 ENFORCEMENT. Should it become necessary for any party to
institute legal action to enforce the terms and conditions of this Agreement,
the successful party will be awarded reasonable attorneys' fees at all trial and
appellate levels, expenses and costs. Any suit, action or proceeding with
respect to this Agreement shall be brought in the courts of Broward County in
the State of Florida or in the U.S. District Court for the Southern District of
Florida. The parties hereto hereby accept the exclusive jurisdiction of those
courts for the purpose of any such suit, action or proceeding.
Venue for any such action, in addition to any other venue permitted by
statute, will be Broward County, Florida. The parties hereto hereby irrevocably
waive, to the fullest extent permitted by law, any objection that any of them
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or any judgment entered
by any court in respect thereof brought in Broward County, Florida, and hereby
further irrevocably waive any claim that any suit, action or proceeding brought
in Broward County, Florida, has been brought in an inconvenient forum.
The parties hereto acknowledge and agree that any party's remedy at law
for a breach or threatened breach of any of the provisions of this Agreement
would be inadequate and such breach or threatened breach shall be per se deemed
as causing irreparable harm to such party. Therefore, in the event of such
breach or threatened breach, the parties hereto agree that, in addition to any
available remedy at law, including but not limited to monetary damages, an
aggrieved party, without posting any bond, shall be entitled to obtain, and the
offending party agrees not to oppose the aggrieved party's request for,
equitable relief in the form of specific enforcement, temporary restraining
order, temporary or permanent injunction, or any other equitable remedy that may
then be available to the aggrieved party.
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IN WITNESS WHEREOF, this Agreement has been duly signed by the parties
hereto on the day and year first above written.
21ST CENTURY HOLDING COMPANY
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
THE INDEMNITEE:
-----------------------------------------------
EDWARD J. LAWSON
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EXHIBIT 21.1
LIST OF SUBSIDIARIES
Superior Adjusting, Inc.
Assurance Managing General Agents, Inc.
Federated National Insurance Company
Federated Premium Finance, Inc.
Federated Agency Group, Inc.
LB VII, Inc.
Oakland Park Insurance and Auto Tags, Inc.
Sunrise-Nobhill Insurance and Auto Tags, Inc.
Weston-Bonaventure Insurance Auto Tags, Inc.
Florida State Discount Insurance and Auto Tags at Margate, Inc.
Florida State Discount Insurance and Auto Tags at Coral Springs, Inc.
RSPL, Inc.
Florida State Discount Auto Title Loans, Inc.
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
