<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
---------- -----------
COMMISSION FILE NUMBER 0-9633
AMERICAN BANKERS INSURANCE GROUP, INC.
(Exact Name Of Registrant As Specified In Its Charter)
FLORIDA 59-1985922
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation Or Organization) Identification No.)
11222 QUAIL ROOST DRIVE, MIAMI, FL 33157
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 253-2244
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF CLASS
--------------------------
COMMON STOCK, $1 PAR VALUE
$3.125 SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK,
$50 LIQUIDATION PREFERENCE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIODS THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.[ ]
THE AGGREGATE MARKET VALUE ON MARCH 20, 1998, OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $ 2,500,000,000. SHARES OF
COMMON STOCK HELD BY EXECUTIVE OFFICERS AND DIRECTORS WHO INDIVIDUALLY OWN 5% OR
MORE OF THE OUTSTANDING COMMON STOCK HAVE BEEN EXCLUDED IN THAT SUCH PERSONS MAY
BE DEEMED TO BE AFFILIATES; HOWEVER, THIS DETERMINATION OF AFFILIATE STATUS IS
NOT NECESSARILY DETERMINATIVE FOR OTHER PURPOSES.
THERE WERE APPROXIMATELY 42,600,000 SHARES OUTSTANDING OF THE REGISTRANT'S
COMMON STOCK, $1 PAR VALUE, AS OF MARCH 20, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
(1) PORTIONS OF REGISTRANT'S SCHEDULE 14D-9 AND AMENDMENT NO. 3, AMENDMENT NO.
6, AMENDMENT NO. 10 AND AMENDMENT NO. 11 THERETO; THE FORM S-3 REGISTRATION
STATEMENT NUMBER 2-94359; THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE
YEARS ENDED 1988, 1990, 1991, 1993, 1994, AND 1995; THE REGISTRANT'S CURRENT
REPORT ON FORM 10-Q DATED MARCH 31, 1994; MARCH 31, 1995; MARCH 31, 1996, AND
SEPTEMBER 30, 1997; THE 1987 ANNUAL MEETING PROXY STATEMENT; THE REGISTRANT'S
CURRENT REPORT ON FORM 8-K DATED JANUARY 13, 1998; THE REGISTRANT'S CURRENT
REPORT ON FORM 8-K DATED NOVEMBER 14, 1990, ARE INCORPORATED BY REFERENCE, IN
PART IV OF THIS FORM 10-K.
================================================================================
<PAGE> 2
AMERICAN BANKERS INSURANCE GROUP, INC.
AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
PART I
PAGE
NUMBER
------
<S> <C> <C>
Item 1 Business......................................................................................2
Item 2 Properties...................................................................................24
Item 3 Legal Proceedings............................................................................24
Item 4 Submission of Matters to a Vote of Security Holders..........................................28
PART II
Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters.....................29
Item 6 Selected Financial Data......................................................................30
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................34
Item 8 Financial Statements and Supplementary Data..................................................44
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.......................................................89
PART III
Item 10 Directors and Executive Officers of the Registrant...........................................90
Item 11 Executive Compensation.......................................................................96
Item 12 Security Ownership of Certain Beneficial Owners and Management..............................104
Item 13 Certain Relationships and Related Transactions..............................................109
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................109
</TABLE>
1
<PAGE> 3
PART I
- ------
ITEM 1
- ------
BUSINESS
--------
a. DEVELOPMENT OF BUSINESS
American Bankers Insurance Group, Inc. ("ABIG," "American Bankers" or
the "Company") was incorporated in Florida on July 24, 1978. ABIG
became the holding company of American Bankers Insurance Company of
Florida ("ABIC") and American Bankers Life Assurance Company of Florida
("ABLAC") as a result of their merger with wholly-owned subsidiaries of
ABIG after approval by their respective stockholders on October 31,
1980. In addition to ABIC and ABLAC, the Company's subsidiaries include
American Bankers Seguros de Vida, S.A. ("ABSV"), Seguros la
Hemisferica, S.A., Federal Warranty Service Corp. ("FWSC"), Sureway,
Inc., Caribbean American Life Assurance Company ("CALAC"), Caribbean
American Property Insurance Company ("CAPIC"), American Reliable
Insurance Company ("ARIC"), Bankers American Life Assurance Company
("BALAC"), Bankers Insurance Group ("BIG"), Bankers Atlantic
Reinsurance Company ("BARC"), IBIC Forsikringsmaeglere, La Suizo
Compania Argentina de Seguros, S.A. (La Suizo), and five insurance
companies referred to collectively as the Voyager Insurance Companies.
ABIC was incorporated in the state of Florida on October 29, 1947 and
ABLAC, a legal reserve life insurance company, was incorporated in the
state of Florida on February 6, 1952. ABSV, a wholly owned subsidiary
in Argentina, began operations in 1996. Seguros la Hemisferica, S.A., a
wholly owned subsidiary in the Dominican Republic, began operations in
1996. FWSC, a wholly owned subsidiary in California, was acquired in
1993. Sureway, Inc., a wholly owned subsidiary in Florida, began
operations in 1973. CALAC and CAPIC, wholly owned subsidiaries in
Puerto Rico, began operations in 1988 and 1992 respectively. ARIC, a
wholly owned subsidiary in Arizona, was acquired by the Company in
1984. BALAC, a wholly owned subsidiary in New York, began operations in
1991. BIG, a wholly owned subsidiary in the United Kingdom, began
operations in 1997. BIG acquired Bankers Insurance Company Limited
(BICL), previously American Bankers' wholly owned subsidiary in the
United Kingdom. BARC, a wholly owned subsidiary in the Turks & Caicos
islands, began operations in 1995. IBIC, a wholly owned subsidiary in
Denmark, was acquired by the Company in 1997. La Suizo, a wholly owned
subsidiary in Argentina, was acquired by the Company in 1997. The
Voyager Insurance Companies were acquired by the Company in 1993 and
consist of five companies incorporated in Florida, Georgia and South
Carolina.
The Company entered into an Agreement and Plan of Merger, dated as of
March 23, 1998, by and among Cendant Corporation ("Cendant"), Season
Acquisition Corporation ("Season") and the Company (the "Cendant Merger
Agreement") pursuant to which (i) the previously announced tender offer
by Season is being conducted (the "Offer") and (ii) upon consummation
of the Offer, the merger of the Company with and into Season will be
consummated (the "Merger"). The execution of the Cendant Merger
Agreement followed the public announcement by Cendant on January 27,
1998 of its proposal to acquire the Company for $58 per share of Common
Stock, to be paid in cash and common stock of Cendant and the
subsequent announcement by Cendant on March 16, 1998, increasing the
per share price for its proposal from $58 to $67.
2
<PAGE> 4
Under the terms of the Cendant Merger Agreement, Season is offering to
purchase 23,501,260 outstanding shares of Common Stock at a price of
$67 per Common Share, net to the seller in cash, without interest
thereon. Following the consummation of the Offer, the Company will be
merged with and into Season with Season continuing as the surviving
corporation. Season will succeed to the business of the Company and
will assume the name American Bankers Insurance Group, Inc. As a result
of the Merger, each Common Share then outstanding (other than Common
Shares owned by Cendant, Season or any direct or indirect subsidiary of
the company and in each case not held on behalf of third parties) will
be converted into, and become exchangeable for, that number of shares
of Cendant Common Stock having a value equal to the amount derived by
dividing $67 by the average closing prices of the Cendant Common Stock
as reported on the NYSE composite transactions reporting system (as
reported by the New York City edition of the Wall Street Journal) for
the ten trading days ending on the third trading day prior to the date
the Merger is consummated. In addition, pursuant to the Merger, each of
the then outstanding $3.125 Series B Cumulative Convertible Preferred
Shares ("Preferred Shares") will be converted into one share of Cendant
Preferred Stock having substantially similar terms to the Preferred
Shares, except that such shares shall be convertible into shares of
Cendant Common Stock in accordance with the terms of the Preferred
Shares.
The consummation of the Merger is conditioned upon several
requirements, including shareholder and regulatory approval.
Cendant's proposal to acquire the Company followed an announcement by
the Company that it had entered into an agreement with American
International Group, Inc. ("AIG") for the acquisition by AIG of 100
percent of the outstanding stock of the Company pursuant to the merger
(the "AIG Merger") of the Company with and into AIGF, Inc., a Florida
corporation and a newly formed wholly owned subsidiary of AIG, in
accordance with the terms of the Agreement and Plan of Merger, dated as
of December 21, 1997 among the Company, AIG and AIGF as amended and
restated as of January 7, 1998, amended by Amendment No. 1 thereto
dated as of January 28, 1998, and as further amended and restated as of
February 28, 1998 (the "AIG Merger Agreement"). In connection with the
AIG Merger Agreement, the Company had granted AIG an option to purchase
a number of newly issued shares of Common Stock equal to approximately
19.9% of the outstanding number of shares of Common Stock pursuant to
the Stock Option Agreement dated as of December 21, 1997, as amended
and restated as of February 28, 1998 (the "Stock Option Agreement"). In
addition, Messrs. Landon and Gaston who hold approximately 8.3% of the
outstanding Common Stock had entered into a voting agreement (the
"Voting Agreement") with AIG pursuant to which these stockholders
agreed to vote their shares of Common Stock in favor of adoption of the
AIG Merger Agreement and approval of the AIG Merger and to grant to AIG
an irrevocable proxy with respect to such shares of Common Stock,
subject to certain conditions.
The AIG Merger Agreement, Stock Option Agreement and Voting Agreement
have been terminated. On March 18, 1998, the Company, AIG and Cendant
entered into a settlement agreement (the "Settlement Agreement")
pursuant to which AIG agreed to temporarily waive certain provisions of
the AIG Merger Agreement, which waiver permitted the Company to
terminate the AIG Merger Agreement and enter into the Cendant Merger
Agreement. On March 23, 1998, in accordance with the terms of the
Settlement Agreement, the Company paid to AIG a termination fee of $100
million and Cendant paid $5 million to AIG in respect of AIG's
expenses, and the Company and AIG entered into a termination agreement
which resulted in the
3
<PAGE> 5
termination of the AIG Merger Agreement, the Stock Option Agreement and
the Voting Agreement.
The Company's credit-related insurance products consist primarily of
credit unemployment, accidental death and dismemberment ("AD&D"),
disability, property, and life insurance issued in connection with the
financing of consumer purchases. American Bankers also writes non
credit-related insurance in markets where it believes it has less
competition from other insurers. For example, the Company also sells
extended service contracts in connection with consumer purchases.
For information on the growth of the Company's business for the years
ended December 31, 1997, 1996, 1995, 1994 and 1993, see the Gross
Collected Premium table set forth below in "Narrative Description of
Business."
b. BUSINESS SEGMENT DATA
See Note 12 to the Consolidated Financial Statements on page 77 in Part
II Item 8 of this report.
c. NARRATIVE DESCRIPTION OF BUSINESS
General
The Company is a specialty insurer providing primarily credit-related
insurance products in the U.S. and Canada as well as in Latin America,
the Caribbean and the United Kingdom. The majority of the Company's
gross collected premiums are derived from credit-related insurance
products sold through financial institutions and other entities which
provide consumer financing as a regular part of their businesses.
The Company's credit-related insurance products consist primarily of
credit unemployment, accidental death and dismemberment ("AD&D"),
disability, property, and life insurance issued in connection with the
financing of consumer purchases. Credit-related insurance products
generally offer a consumer a convenient option to insure a credit card
or loan balance so that the amount of coverage purchased equals the
amount of outstanding debt. Coverage is generally available to all
consumers with few of the underwriting conditions that apply to
ordinary term insurance, such as medical examinations and medical
history reports. The Company's life and AD&D insurance products
generally provide payment in full of the outstanding debt balance in
the event of the insured's death. The unemployment and disability
products satisfy the minimum monthly loan payment for a specified
duration in the event of unemployment or disability. The Company's
property insurance products pay the loan balance or the cost of
repairing or replacing the insured's merchandise in the event of a loss
due to a covered event. The Company avoids lines of insurance
characterized by long loss payout periods, such as workers'
compensation and most general liability coverages.
4
<PAGE> 6
The Company markets its products on a wholesale basis through a network
of clients that consist primarily of major financial institutions,
retailers and other entities which provide consumer financing as a
regular part of their businesses. American Bankers enters into
contracts, typically with terms of three to five years, with its
corporate clients pursuant to which such clients market the Company's
insurance products to their customers. In return, these clients receive
expense reimbursements or commissions and are thus able to recover
costs associated with the marketing of the insurance and generate
incremental revenues. The Company's clients typically share in the
profitability of business written through them.
American Bankers also writes non credit-related insurance in markets
where it believes it has less competition from other insurers. For
example, the Company's extended service contracts products pay the cost
of repairing or replacing the insured's merchandise in the event of
damages due to a covered event. In addition, the Company acts as an
administrator for the National Flood Insurance Program, for which it
earns a fee for collecting premiums and processing claims. The Company
does not assume any underwriting risk with respect to this program.
The Company's business strategy is to continue developing distribution
channels which provide access to large numbers of potential insureds in
markets not traditionally served by other insurance companies. In
addition, the Company emphasizes long-term relationships and the
development of insurance programs designed to meet individual client
needs. An essential part of the Company's strategy is to invest in
technology which enables American Bankers to accommodate a large group
of clients and their customers while simultaneously offering customized
insurance programs.
American Bankers has been able to develop a diverse client base. In
1997, no single client accounted for more than 10% of the Company's
gross collected premiums. The Company distributes its products through
various markets or distribution channels involving over one thousand
clients. Its business is generally not concentrated and the ten largest
unrelated clients represent approximately 39% of the Company's gross
collected premiums.
ABIC and ABLAC jointly market products and programs within each
distribution channel, and the Company believes that such
cross-marketing achieves economies of scale thus lowering
administrative costs. By combining its service and marketing
activities, the Company centralizes the processing of its products and
avoids duplication of administrative functions.
The Company also provides management services and marketing support to
its clients. Management services include administration of captive
insurance companies and other participating programs for clients.
American Bankers provides comprehensive administrative support in
claims, accounting, tax, data processing and actuarial matters. The
Company also packages credit-related insurance programs to meet a
client's particular needs and provides the marketing assistance to
implement these programs. Marketing support includes a full range of
marketing materials, direct mail and telemarketing services and
personnel training programs.
5
<PAGE> 7
The majority of the Company's business utilizes contracts which afford
the Company's clients the opportunity to participate in the
underwriting results of policies they market to their customers. The
"Retro Plan" contract links a client's overall commission to the claims
experience on policies marketed to its customers, so that low loss
ratios result in higher commissions for the client and high loss ratios
result in lower commissions. Another form of participation is a profit
sharing contract under which the client participates in up to 50% of
the profits generated from its insurance business. The Company also
cedes premiums generated by certain clients to the clients' own captive
insurance companies or to reinsurance subsidiaries in which clients
have an equity interest. For the Company's remaining business, the
client's commission is not linked to its claims experience.
6
<PAGE> 8
Business Segments
LIFE INSURANCE
(in thousands)
NET
TOTAL PREMIUMS TOTAL OPERATING
ASSETS EARNED REVENUES INCOME*
1997 $1,653,800 $405,800 $466,900 $67,200
1996 1,446,600 384,000 439,700 65,300
1995 1,339,200 377,100 419,000 45,900
*Operating income consists of earnings before interest expense and
taxes.
Highlights
o Gross collected premiums increased 17% to $894.5 million in
1997 from $763.2 million in 1996.
o Five products listed below contributed 88% of the segment's
1997 gross collected premiums.
Major Subsidiaries
o American Bankers Life Assurance Company of Florida (ABLAC)
o American Bankers Seguros de Vida, S.A. (ABSV)
o Bankers American Life Assurance Company (BALAC)
o Bankers Atlantic Reinsurance Company (BARC)
o Caribbean American Life Assurance Company (CALAC)
o Voyager Life and Health Insurance Company (VLHIC)
o Voyager Life Insurance Company (VLIC)
Major Products
o Credit Life
o Credit Accident & Health
o Mortgage Accident & Health
o Group Life
o Group Accident & Health
7
<PAGE> 9
Distribution Channels
o Retailers
o Financial Institutions
Commercial Banks
Consumer Finance Companies
Mortgage Bankers
Savings Institutions
o Manufactured Housing, Travel Trailer and
Equipment Manufacturers, Dealers and Lenders
o Utilities
o Independent Agents
PROPERTY AND CASUALTY INSURANCE
(in thousands)
Net
Total Premiums Total Operating
Assets Earned Revenues Income*
1997 $2,071,600 $1,048,000 $1,149,700 $113,300
1996 1,969,300 994,500 1,080,700 91,900
1995 1,602,500 863,600 934,200 87,400
*Operating income consists of earnings before interest expense and
taxes.
HIGHLIGHTS
o Gross collected premiums increased 7% to $1.8 billion in 1997
from $1.7 billion in 1996.
o Five products listed below contributed 73% of the segment's
1997 gross collected premiums.
o Operating income increased 23% to $113.3 million in 1997 from
$91.9 million in 1996.
MAJOR SUBSIDIARIES
o American Bankers Insurance Company of Florida (ABIC)
o American Reliable Insurance Company (ARIC)
o Bankers Atlantic Reinsurance Company (BARC)
o Bankers Insurance Group (BIG)
o Caribbean American Property Insurance Company (CAPIC)
o Seguros La Hemisferica, S.A.
o Voyager Indemnity Insurance Company (VIIC)
o Voyager Property and Casualty Insurance Company (VPCIC)
8
<PAGE> 10
MAJOR WARRANTY COMPANIES
o Federal Warranty Service Corporation (FWSC)
o Sureway, Inc.
o Voyager Service Warranties, Inc. (VSW)
o Voyager Service Programs, Inc. (VSP)
MAJOR PRODUCTS
o Credit Unemployment
o Credit Property
o Extended Service Contracts
o Mobilehome Physical Damage
o Credit Accident & Health
DISTRIBUTION CHANNELS
o Retailers
o Financial Institutions
Commercial Banks
Consumer Finance Companies
Mortgage Bankers
Savings Institutions
o Manufactured Housing, Travel Trailer and
Equipment Manufacturers, Dealers and Lenders
o Utilities
o Independent Agents
For additional Business Segment Information see page 32 in Part II
Item 6 of this report.
9
<PAGE> 11
Products
--------
The following table sets forth the gross collected premiums of the
Company's major insurance products:
Gross Collected Premiums
Major Insurance Products
Years Ended December 31
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C> <C>
Credit Unemployment $ 530.6 $ 489.4 $ 410.8 $ 269.8 $ 172.9
Credit A&H 432.7 377.6 349.0 244.5 182.8
Credit Life 365.3 309.5 287.2 211.7 165.5
Credit Property 342.2 336.9 367.7 354.2 268.6
Extended Service Contracts 209.9 203.9 129.5 19.3 12.0
Mobilehome Physical Damage 138.4 132.2 137.3 121.4 100.1
Homeowners 83.5 93.7 101.1 87.0 85.6
Flood 77.1 56.0 44.5 35.8 37.6
Mortgage A&H 75.6 66.6 53.3 49.1 44.3
Ordinary 37.2 29.0 23.2 21.0 59.0
All Other (1) 447.9 398.0 383.0 347.3 298.8
---------------------------------------------------------------------------------------
Total $ 2,740.4 $ 2,492.8 $ 2,286.6 $ 1,761.1 $ 1,427.2
=======================================================================================
</TABLE>
(1) "All Other" represents a large number of products, approximately 50 to 60
each year. The most significant in 1997 and 1996 are the Livestock Mortality,
Group Life and Group A&H.
The Company's business can be divided into two principal types of
products: (1) Financial Market Products, consisting primarily of
credit-related insurance, and (2) Personal Insurance lines, consisting
of non credit-related products and services.
Financial Market Products
Property Insurance. The Company's property insurance is written
primarily by ABIC, ARIC, CAPIC and certain of the Voyager Companies.
Through these subsidiaries, the Company writes a variety of property
insurance which includes homeowners' and coverages for comprehensive
physical damage of mobilehomes, autos, furniture, fixtures and other
consumer goods. In the event of a loss due to a covered event, the
Company will either pay off the loan balance or replace or repair the
merchandise.
10
<PAGE> 12
The terms of the Company's property policies range from 30 days to
multiple years. Multiple year policies generally coincide with the term
of the financing for the insured property. For example, a consumer
purchasing an automobile and financing the purchase over a three-year
period can purchase a three-year physical damage policy at the
inception of the loan for a single premium. An increasing proportion of
gross collected premiums are monthly premiums received in connection
with credit card purchases. Such premiums are based on the average
outstanding credit card balance.
Life and Disability Insurance. Through ABLAC, BALAC, CALAC and certain
of the Voyager Companies, the Company writes life, AD&D and disability
insurance primarily on consumer loans, mortgages and credit card
balances. This life insurance is a form of decreasing term life
insurance written generally without medical examination of the
borrower. Premiums are received either in a single payment at the time
the policy is written or monthly along with the borrower's regular
payment. It is normally written for the term of the installment debt
and retires all or a portion of the indebtedness in the event of the
insured's death. Disability insurance covers a borrower for payments
coming due on an installment loan, mortgage loan or revolving charge
account while the borrower is disabled.
Credit Unemployment Insurance. Through ABIC and CAPIC, the Company
writes unemployment insurance on credit card balances in conjunction
with life, disability and property coverages. This unemployment
insurance provides for the payment of the minimum monthly loan payment
for a specified duration while the insured is involuntarily out of
work. Premiums for this coverage are based on the average outstanding
credit card balance.
Extended Service Contracts. The Company's extended service contract
(ESC) business, sold mainly through FWSC and Sureway, involves various
arrangements including the administration for and the insuring of
obligations for ESC's sold in conjunction with the sale of consumer
products by retailers. The ESC's typically provide service guarantees
through the retailers which go beyond any manufacturers' warranties
underlying the products.
Of the Company's "Major Insurance Products", eight are associated with
the Financial Market Products.
Personal Insurance Lines
The Company also derives revenues from non credit-related insurance
products and services. These products and services principally consist
of: (i) group life and group disability (ii) individual life and
disability products sold through employer-sponsored payroll deduction
programs, (iii) administration fees earned in connection with the
National Flood Insurance Program, (iv) livestock mortality insurance,
(v) individual life insurance and annuity products sold principally in
Latin America and the Caribbean, and (vi) surety coverages.
Underwriting
The Company has over 40 years of experience in providing credit life
and credit property insurance and therefore maintains an extensive
actuarial database for its major lines of business. This database
enables the Company to better identify and quantify the expected loss
experience and is employed in the design of coverage and the
establishment of premium rates. American Bankers uses this information
in monitoring the loss experience of individual clients.
11
<PAGE> 13
A distinct characteristic of the Company's credit-related insurance
products is that the majority of these products represent relatively
low policy values since policy size is equal to the size of the
installment purchase or credit card balance. Thus, loss severity for
most of the Company's business is low relative to other insurance
companies writing more traditional lines of business. For those product
lines where exposure to catastrophe loss is higher (Homeowners and
Mobilehome Physical Damage) the Company closely monitors and manages
its aggregate risk by geographic area and has entered into reinsurance
treaties to control its exposure to catastrophe losses.
With respect to the Company's non credit-related insurance products,
the Company utilizes traditional underwriting techniques. The Company
seeks to ensure the quality of its business by maintaining strict
underwriting standards. In underwriting individual life policies, the
Company employs medical questionnaires, medical examinations, and
current reports from the Medical Information Bureau. Group underwriting
takes into account demographic factors such as age, gender and
occupation of members of the groups. The Company also seeks to reduce
its risk exposure by avoiding lines of insurance characterized by long
loss payout periods, such as workers' compensation and most general
liability coverages.
Marketing
American Bankers markets its credit-related insurance programs as a
wholesale distributor through several defined distribution channels:
Consumer Finance Companies, Mortgage Bankers, Electric, Gas, and
Telephone Utilities, Savings Institutions, Commercial Banks,
Manufactured Housing, Travel Trailer and Equipment Manufacturers,
Dealers, Lenders, and Retailers. These distribution channels constitute
the Company's Financial Market distribution channel. The distribution
channel for the Company's Personal Insurance Lines is primarily
Independent Agents.
At December 31, 1997, the Company had 93 salaried sales representatives
and 16 sales managers located in 16 regional sales offices throughout
the U.S., Canada, Puerto Rico, the United Kingdom, and Latin America.
Employees in the regional sales offices solicit potential new clients
and service existing clients. These sales personnel typically have work
experience in the client's industry and have received extensive sales
and product training from the Company. The Company's sales personnel
provide ongoing service and advice to clients to assist them in
marketing the Company's insurance products and attempt to gain new
clients by illustrating how the client can provide a value-added
service to its customers and at the same time enhance their
profitability by marketing the Company's products. Specifically, the
Company's sales personnel approach each potential client with a
structured four-call process: (i) initial contact, (ii) gathering
information and analyzing the prospect's needs, (iii) presenting a
program tailored to those needs, and (iv) agreeing to and implementing
a program that is satisfactory to both the client and the Company.
Products are individual programs underwritten by ABIC, ABLAC, or any of
the insurance subsidiaries or "packages" which are a combination of
products from various subsidiaries. These products can also be sold
through more than one distribution channel. Product cross-over is
commonplace within the Company's system, which facilitates streamlined
administration and processing, as well as product development. For
example, the Company's "Chargeguard" product is a combination of life,
accident and disability, unemployment and property insurance coverage
and is marketed through the Consumer Finance Companies, Mortgage
Bankers and Savings Institutions, Commercial Banks and Retailers
distribution channels.
12
<PAGE> 14
Distribution Channels
The following is a discussion of the distribution channels for the
Financial Market Products:
Consumer Finance Companies
The client base consists of consumer and commercial finance companies,
leasing and second mortgage institutions, and mortgage brokers. Because
many major consumer finance companies have their own captive insurance
companies, approximately 65% of the premiums written historically have
been ceded to these captive insurance companies. Therefore, a
substantial portion of the income in this area is derived from the
management fees paid by clients' captive companies for processing and
servicing this insurance.
Mortgage Bankers and Savings Institutions
The client base consists of mortgage bankers, savings institutions and
home builders. Through these clients, the Company markets life, AD&D,
disability and property insurance products to residential and consumer
borrowers as well as to depositors.
Commercial Banks
The Company markets its installment loan and credit card related
insurance products through commercial banks, bank holding companies and
their non-bank subsidiaries and other issuers of general purpose credit
cards. Increases in gross collected premiums have resulted primarily
from the marketing of insurance programs in connection with credit
cards. American Bankers tries to expand the business written by its
clients in this area by assisting them in implementing direct mail and
telemarketing programs.
Manufactured Housing and Travel Trailer Manufacturers and Lenders
The Company provides property insurance and credit related products to
purchasers of mobilehomes and travel trailers. Products are distributed
primarily through manufactured housing, motor home and travel trailer
manufacturers, dealers and lenders.
Retailers
The Company is a major provider of credit-related insurance and is a
provider of extended service contract products to the retail industry.
This client base includes department and specialty stores, home
furnishings and home improvement stores, appliance and electronic
stores, general merchandise and automotive chains, jewelry stores,
catalogs and rental companies. To further enhance its market position
in this area, the Company develops customized direct mail and
telemarketing programs for these clients. Premiums are generated from
mailings included in monthly credit card statements or are generated at
the point of sale.
Equipment Manufacturers and Dealers
Dealers and Manufacturers revenues are derived from credit life,
disability, physical damage and warranty insurance products sold
through agricultural and other equipment manufacturers.
13
<PAGE> 15
The following is a discussion of the distribution channels for the
Personal Insurance Lines:
Independent Agents
The Company markets individual life insurance and annuity policies to
the public through a network of independent agents. In the agency
market, the Company competes with many large nationwide companies. As a
result, the Company has made the decision to control the growth of this
segment by de-emphasizing the U.S. market and focusing on the Caribbean
and Latin American markets where loss experience has been favorable and
the competition is less vigorous.
Other products sold through agents are livestock insurance, which
primarily covers animal mortality, and surety coverages.
Agents also produce the flood premium that the Company administers on
behalf of the National Flood Insurance Program. The Company acts as
administrator and does not assume any underwriting risk with respect to
this program.
Investments
The functions of the investment department are an integral part of any
insurance company's operations. The Company's investment department is
guided by strategic objectives established by the Finance Committee of
the Board of Directors. The major investment objectives are:
o To ensure adequate safety of investments and to protect and
enhance capital.
o To maximize risk-adjusted, after-tax return on investments.
o To make prudent investment decisions based on the current market
environment.
o To provide sufficient liquidity to meet cash requirements with
minimum sacrifice of investment returns.
In seeking to achieve these objectives, the Company invests
predominantly in fixed income securities of the U.S. Government or its
agencies, collateralized mortgage obligations ("CMOs") and investment
grade corporate bonds. Protection against default risk is a primary
consideration. The CMOs are tested for volatility prior to purchase.
Interest rate risk is controlled by matching the average duration of
invested assets with the average duration of the policy liabilities.
Investment department personnel work closely with the Company's
actuaries to ensure that this balance is maintained.
Private investments are made selectively to support the insurance
business. These investments comprise about 2% of the fixed maturities
portfolio. While these Company underwritten investments are non-rated,
a careful evaluation of creditworthiness is performed before an
investment is made. This analysis helps to ensure that prudent
investment standards are maintained, even in the non-rated portfolio
holdings.
14
<PAGE> 16
The Company's equity portfolio is managed by outside investment
advisors who are monitored on a regular basis against established
performance benchmarks.
Quality of Fixed Maturities Maturity of Fixed Maturities
--------------------------- -------------------------------
AAA 55% 0-1 Years 10%
AA 7% 1-5 Years 67%
A 18% 5-10 Years 19%
BBB 17% 10-20 Years 3%
BB/NR 1% Over 20 Years 1%
Private Placement 2% --------
----------- 100%
100%
At December 31 (in thousands):
<TABLE>
<CAPTION>
At carrying value: 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Maturities
----------------
Corporate - Fixed Rate $815,100 $679,800 $346,000 $229,900 $169,200
Corporate - Adjustable Rate 65,200 19,900 15,000 14,400 4,900
Corporate - Convertible 7,000 5,400 6,000 1,400
State and Municipal 129,200 137,500 123,500 109,800 79,800
U.S. Government 738,800 741,600 817,900 631,400 567,800
Govt & Foreign Jurisdiction 45,100 67,100 61,900 36,200 30,100
Installment Loans 10,000 14,000 17,300 22,200 22,200
- ---------------------------------------------------------------------------------------------------------------------
1,810,400 1,665,300 1,387,600 1,043,900 875,400
- ---------------------------------------------------------------------------------------------------------------------
Equity Securities
-----------------
Preferred - Fixed Rate 37,300 27,800 38,400 16,600 15,000
Preferred - Convertible 500 5,800 700 600 5,900
Common 103,500 79,300 73,900 48,200 52,600
- ---------------------------------------------------------------------------------------------------------------------
141,300 112,900 113,000 65,400 73,500
- ---------------------------------------------------------------------------------------------------------------------
Mortgage Loans 9,300 10,200 11,800 13,800 15,500
Policy Loans 9,300 8,300 7,800 6,800 6,700
Real Estate 10,000 5,600 3,100 3,800 4,200
Short-Term & Other
Investments (principally
invested cash) 182,800 166,100 165,100 131,200 135,600
- ---------------------------------------------------------------------------------------------------------------------
211,400 190,200 187,800 155,600 162,000
- ---------------------------------------------------------------------------------------------------------------------
Total Investments $2,163,100 $1,968,400 $1,688,400 $1,264,900 $1,110,900
=====================================================================================================================
</TABLE>
The amounts for 1994 and forward are reported in accordance with FASB Statement
115.
15
<PAGE> 17
Net Investment Income
(in millions of dollars)
1997 $134
1996 121
1995 99
1994 74
1993 70
Other information with respect to investments is included in Note 3 to the
Consolidated Financial Statements on page 55 in Part II Item 8 of this report.
Reinsurance
-----------
The Company's insurance subsidiaries reinsure that portion of risk
in excess of $250,000 under a domestic ordinary life policy,
$400,000 under an international life policy, and $300,000 under a
property policy. In addition, coverage is obtained for the Company's
property business as protection against catastrophic losses. This
coverage is mainly related to the Company's homeowner, mobilehome
physical damage and credit property products. The Company has excess
of loss catastrophe reinsurance providing coverage per catastrophe
on property losses of $30 million excess of a $15 million retention
exclusive of any recoveries from the proportional reinsurance
described above. Additional coverage is provided through aggregate
stop loss coverage if the net loss ratio (after deducting all other
reinsurance) exceeds 37.3%. The Company believes that its
catastrophe reinsurance coverage continues to be adequate.
The Company's reinsurance receivable and prepaid reinsurance
premiums at December 31, 1997 totaled $835.9 million. The Company's
reinsurance was placed with numerous reinsurers including the
following significant reinsurers: (i) Triton Insurance Company, (ii)
Lincoln National Life Insurance Company, and (iii) Caterpillar
Insurance Company, Limited. The Company historically has not
experienced any material losses in collection of reinsurance
receivables.
Certain Factors Common to the Operations of Insurance Companies
---------------------------------------------------------------
Government Regulation
The Company and its insurance subsidiaries are subject to regulation
and supervision by the states in which the Company's insurance
subsidiaries transact business. This regulation is designed
primarily to ensure the financial stability of insurance companies
and to protect policyholders, rather than stockholders or creditors.
State insurance regulatory agencies have broad administrative powers
to grant and revoke licenses to transact business, regulate trade
practices, establish guaranty associations, license agents, require
approval of policy forms and premium rates on certain business prior
to use, establish reserve requirements, determine the form and
content of required financial statements, determine reasonableness
and adequacy of capital and surplus and prescribe the types of
permitted investments and the maximum concentrations of certain
classes of investments. These agencies also conduct periodic
detailed examinations of the books, records, accounts and trade
practices of insurance companies domiciled or admitted in their
states. Applicable state insurance laws, rather than federal
bankruptcy laws apply to the liquidation or the reorganization of
insurance companies.
16
<PAGE> 18
A substantial portion of the business written by the Company's
insurance subsidiaries is credit-related insurance. Most states have
enacted laws which regulate credit-related insurance to a greater
extent than they regulate other forms of insurance including maximum
premiums which may be charged and commissions which may be paid. In
addition, certain states have enacted or are considering regulations
which similarly attempt to limit profitability based upon
underwriting experience. As in the case of other types of insurance,
state regulators, directly and through the NAIC, have begun a
greater focus on the regulatory, licensing and disclosure issues
related to market conduct of credit insurers, including the Company.
The National Association of Insurance Commissioners (NAIC) develops
and modifies model laws and regulations which may be modified and
adopted by the various states to meet their perceived needs and
concerns regarding business written in the state. While these model
laws and regulations have no effect on the Company until adopted by
the states, the activities of the NAIC provide useful insight into
laws or regulations that might be adopted by the various states. In
the area of credit insurance, the Creditor-Placed Insurance Model
Act adopted in 1996 by the NAIC allows state regulators to take into
account factors other than losses in determining the reasonableness
of credit insurance rates. The NAIC also took action in 1995 on
credit life insurance by adopting an alternative approach to strict
loss ratio based rate making which allows state regulators to take
into account factors other than losses in determining the
reasonableness of credit insurance rates. Neither of these actions
is expected to significantly affect the Company's operations. With
respect to investment practices, in 1996 the NAIC adopted the
Investments of Insurer's Model Act which provides a well-capitalized
insurer more discretion and flexibility in its investing practices.
The Board of Directors also reviews the investment policies of the
Company's insurance subsidiaries.
Financial Regulation
Insurance companies are required to file detailed annual and
quarterly statements with state insurance regulators in each of the
states in which they do business. In addition, the Company's
insurance subsidiaries are required to comply with a minimum
risk-based capital (RBC Standards) developed by the NAIC. Under the
RBC standards - risk specific for each company - areas such as asset
risk, insurance risk, interest risk, and business risk are evaluated
and compared to the Company's capital and surplus to determine
relative solvency margins. Standards for the RBC formula were
approved by regulators and effective for 1993 statutory financial
statements for life companies and in 1994 for property and casualty
companies. All of the Company's insurance subsidiaries meet the
minimum risk-based capital requirements and require no action based
on the criteria described above.
Dividend Regulation
The Company is a legal entity separate and distinct from its
subsidiaries. As a holding company with no other business
operations, its primary sources of cash needed to meet its
obligations are dividends and other payments from its insurance
subsidiaries.
The Company's insurance subsidiaries are subject to various
regulatory restrictions on the maximum amount of payments, including
dividends, loans or cash advances that they may make to the Company
without obtaining prior regulatory approval. As Florida domiciled
insurance companies, ABIC and ABLAC are subject to Florida
requirements that insurance
17
<PAGE> 19
company dividends must receive prior regulatory approval unless,
either (i) such dividends do not exceed the larger of: (a) the
lesser of 10% of surplus or net gain from operations (ABLAC) or net
income (ABIC), not including realized capital gains, plus a 2-year
carryforward for ABIC, (b) 10% of surplus, with dividends payable
constrained to unassigned funds minus 25% of unrealized capital
gains; or (c) the lesser of 10% of surplus or net investment income
(net gain before capital gains for ABLAC) plus a 3-year carryforward
(2-year carryforward for ABLAC) with dividends payable constrained
to unassigned funds minus 25% of unrealized capital gains; or (ii)
the dividend is equal to or less than the greater of: (a) 10% of the
insurer's surplus as to policyholders derived from realized net
operating profits on its business and net realized capital gains; or
the insurer's entire net operating profits and realized net capital
gains derived during the immediately preceding calendar year; and
(b) the insurer will have surplus as to policyholders equal to or
exceeding 115% of the minimum required statutory surplus as to
policyholders after the dividend is made. As an Arizona domiciled
insurance company, ARIC must receive prior regulatory approval
unless such dividends do not exceed the lesser of either 10% of
surplus as regards policyholders or the net investment income. As
Puerto Rico domiciled companies, CALAC and CAPIC may not pay any
cash dividend to stockholders except out of that part of its
unassigned surplus funds which is derived from any realized net
profits on its business. As a New York domiciled company, BALAC must
file notice of its intention to declare a dividend and the amount
thereof with the superintendent of insurance who may disapprove such
distribution if he finds that it is not warranted by the company's
financial condition. The Voyager Insurance Companies are domiciled
in Georgia and South Carolina. Georgia and South Carolina require
prior regulatory approval for dividends in excess of the greater of
(i) 10% of a company's surplus as regards policyholders or (ii) net
gain from operations for life companies, or net income, not
including realized (net realized for South Carolina) capital gains
for non-life companies, as of the preceding year end.
If insurance regulators determine that payment of a dividend or any
other payment to an affiliate (such as a payment under a tax
allocation agreement or for employee or other services or pursuant
to a surplus debenture) would, because of the financial condition of
the paying insurance company or otherwise, be hazardous to such
insurance company's policyholders or creditors, the regulators may
prevent payment of such dividends or such other payment to the
affiliates that would otherwise be permitted without prior approval.
See other information with respect to dividend regulation in Note 8
to the Consolidated Financial Statements on page 66 in Part II Item
8 of this report.
Change of Control Regulation
The states in which the Company's insurance subsidiaries are
domiciled have enacted legislation or adopted administrative
regulations affecting the acquisition of control of insurance
companies as well as transactions between insurance companies and
persons controlling them. Most states require administrative
approval of the acquisition of control of an insurance company
incorporated in the state or the acquisition of control of an
insurance holding company whose insurance subsidiary is incorporated
in the state. In Florida, the acquisition of 5% of such shares is
generally deemed to be the acquisition of control for the purpose of
the holding company statutes and requires not only the filing of
detailed information concerning the acquiring parties and the plan
of acquisition, but also administrative approval prior to the
acquisition. In the other states in which the Company's insurance
subsidiaries are domiciled, however, an acquisition of 10% of such
shares is
18
<PAGE> 20
generally deemed to be the acquisition of control. In many states,
the insurance authority may find that control in fact does or does
not exist in circumstances in which a person owns or controls either
a lesser or a greater amount of securities.
Competition
The historical competitors of the Company consist of both stock and
mutual insurance companies. Some competing companies, both stock and
mutual, have been in business for a longer time, are more widely
known by reason of such factors as age and size, and have greater
financial resources than the Company. However, due to the
specialized nature of the markets served and products offered, the
Company's competitors differ among the different geographic
locations and market segments in which the Company conducts
business.
Banks have begun to market and underwrite insurance products which
may lead to increased competition. However, because the Company's
products do not include traditional life insurance products, the
Company does not expect to be significantly impacted. In addition,
lending institutions have begun to issue debt cancellation
agreements, which are similar to the Company's credit life and
disability products. The Company is unable to predict the market
effect that this development may have.
The Company's strategy is to establish profitable insurance
underwriting and to service business in distribution channels that
are relatively free of competition. In keeping with this strategy,
the Company markets non-traditional insurance products through
non-traditional distribution channels.
Reserves
--------
Life Companies
Life insurance companies are required to establish and maintain
policy liabilities and claim liabilities to meet their future
obligations under in-force policies. For ordinary life and
guaranteed renewable health insurance the policy liabilities are
amounts which will be sufficient to meet policy obligations at
death, disability or maturity taking into consideration future
premiums less expenses, interest, expected lapses and expected
mortality. For the interest sensitive life policies, such as
universal life, and for deferred annuities this amount is the
account value of the policyholder. The claim reserves on these
policies are the amounts of future unpaid benefits on all incurred
claims, whether reported to the company or not.
For credit life, credit health insurance and non-guaranteed
renewable health insurance, the policy liability is the unearned
premium reserve. This is the amount of premiums received that have
not been exposed to loss. It is equal to the premium the company
would charge for the remaining benefits and the remaining period of
coverage purchased. The claim reserves for these products are the
amounts of future unpaid benefits on all incurred claims, whether
reported to the company or not. For disability claims on which
continuing payments are being made, the company records special
claim reserves equal to the monthly benefits times the number of
payments expected to be made in the future, discounted for interest.
19
<PAGE> 21
Information on the Company's reserves appears in Note 4 to the
Consolidated Financial Statements on page 58 in Part II Item 8 of
this report.
Property and Casualty
The unearned premium reserve is the portion of the premium
applicable to the unexpired period of the policy. The purpose of the
unearned premium reserve is to determine the proper recognition of
revenue, to refund the unearned premium to the policyholder if the
policy is canceled, to provide a fund for the payment of future
losses, and to maintain an amount available for the purchase of
reinsurance.
The consolidated financial statements include estimated provisions
for unpaid losses and loss adjustment expenses (LAE) applicable to
the Company's property and casualty insurance subsidiaries.
Currently, these subsidiaries write principally credit unemployment,
credit property, extended service contracts, mobilehome physical
damage, homeowners, and livestock lines of business throughout the
United States, Canada, the Caribbean, and the United Kingdom. Such
liabilities are established using a combination of case basis
estimates and actuarial projections and include provisions for
claims incurred but not yet reported as of the balance sheet date.
Overall claims experience is principally dependent on the frequency
and severity of claims. With the exception of discontinued lines,
the Company writes primarily property coverages which are
characterized by relatively short settlement periods and quick
development of ultimate losses. The discontinued reinsurance assumed
pools involve liability coverages where development of the ultimate
loss is more difficult to predict because of the settlement duration
and the relative absence of homogeneity of claims as compared to the
Company's property coverages. The Company's estimating and reserving
practices are reviewed continuously. Subsequent adjustments to the
original estimates are made when determinable and are reflected in
current year operations.
20
<PAGE> 22
The following table shows the development of the estimated liability for the ten
years prior to 1997.
AMERICAN BANKERS INSURANCE GROUP, INC.
DOMESTIC PROPERTY AND CASUALTY SUBSIDIARIES
ANALYSIS OF REPORTED BALANCE SHEET LOSS AND LAE DEVELOPMENT
GAAP BASIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability
for Unpaid
Losses & LAE $79,915 $83,873 $83,328 $87,262 $89,626 $94,531 $117,080 $137,936 $163,918 $187,212 $191,881
Liability Re-estimated as of:
- -----------------------------
1 year later 89,495 79,857* 88,054* 79,291* 83,107* 106,007* 119,810* 144,123* 168,188* 184,204*
2 years later 87,088* 84,156* 84,112* 83,882* 85,203* 110,226* 136,905* 150,478* 174,532*
3 years later 92,783* 83,415* 88,843* 86,954* 89,697* 122,481* 148,475* 157,289*
4 years later 93,414* 87,017* 90,476* 91,670* 104,249* 136,894* 156,268*
5 years later 96,420* 89,180* 96,419* 106,458* 119,228* 143,703*
6 years later 99,029* 94,541* 111,122* 118,389* 125,233*
7 years later 104,150* 109,473* 119,976* 124,357*
8 years later 119,273* 117,301* 125,961*
9 years later 127,056* 123,248*
10 years later 132,955*
CUMULATIVE
(DEFICIENCY)
REDUNDANCY (53,040) (39,375) (42,633) (37,095) (35,607) (49,172) (39,188) (19,353) (10,614) 3,008
CUMULATIVE AMOUNT OF LIABILITY PAID THROUGH:
- --------------------------------------------
1 years later $53,374 $45,460* $52,144* $49,983* $48,399* $63,922* $65,901* $71,654* $93,449* $104,001*
2 years later 63,779* 59,865* 64,778* 61,736* 60,540* 85,500* 92,249* 96,417* 120,580*
3 years later 72,704* 67,232* 71,287* 68,174* 68,190* 101,603* 107,401* 108,188*
4 years later 78,370* 71,444* 74,210* 73,273* 80,932* 112,557* 113,745*
5 years later 81,840* 73,394* 78,292* 84,642* 90,090* 115,797*
6 years later 83,604* 76,938* 89,410* 90,447* 92,212*
7 years later 86,856* 87,886* 91,789* 92,377*
8 years later 97,766* 89,234* 93,620*
9 years later 99,050* 90,995*
10 years later 100,756*
Gross Liability - end of year** $158,359 $187,999 $239,357 $267,944 $283,724
Reinsurance Recoverable 41,279 50,063 75,439 80,732 93,869
-------- -------- -------- -------- --------
Net Liability - end of year $117,080 $137,936 $163,918 $187,212 $189,855
Gross Re-estimated Liability $202,385 $206,672 $250,718 $258,185
Re-estimated Reinsurance Recoverable 46,117 49,383 76,186 73,981
-------- -------- -------- --------
Net Re-estimated Liability $156,268 $157,289 $174,532 $184,204
Gross Cumulative (Deficiency) Redundancy (44,026) (18,673) (11,361) 9,759
</TABLE>
*Indicates amounts are net of collected salvage and subrogation to conform with
the presentation of Schedule P in the 1997 Statutory Reports filed with the
state regulatory authorities.
**Amounts do not include issued but unpresented claim drafts as of December 31;
$1,546 (1992), $2,411 (1993), $1,322 (1994), $1,576 (1995), and $1,374 (1996).
21
<PAGE> 23
The table in the preceding page presents the development of balance
sheet liabilities for 1987 through 1997. The top line of the table
shows the estimated liability for unpaid losses and LAE recorded at the
balance sheet date for each of the indicated years. This liability
represents the estimated amount of losses and LAE for claims arising in
all prior years that are unpaid at the balance sheet date, including
losses that had been incurred but not yet reported to the Company. The
upper portion of the table shows the re-estimated amount of the
previously recorded liability based on the experience as of the end of
each succeeding year. The estimate is increased or decreased as more
information becomes known about the frequency and severity of claims.
The lower section of the table shows the cumulative amount paid with
respect to the previously recorded liability as of the end of each
succeeding year.
Note that each amount includes the effects of all changes in amounts
for prior periods. Conditions and trends that have affected development
of the liabilities in the past may not necessarily occur in the future.
Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on this table.
In the most recent years, actual loss development of the estimated
liabilities for unpaid claims and LAE amounts demonstrated that the
original estimates have generally been adequate except for those
relating to the line "financial guarantees" (1985-1986), reinsurance
pools, and for 1992 due to Hurricane Andrew.
The "cumulative (deficiency) redundancy" represents the aggregate
change in the estimates over all prior years. Such amounts have been
reflected in income over the years indicated.
The effect on income for the past three years of changes in estimates
of the liabilities for losses and LAE is shown in Note 4 to the
Consolidated Financial Statements on page 59 in Part II Item 8 of this
report.
For the Company, the financial guarantee line is represented by its
credit bond insurance where litigation and certain related legal issues
have historically served to complicate the reserving process. Effective
with 1995 settlements, credit bond insurance is not expected to produce
any future impact.
The Company's loss reserve development reflects losses assumed from
excess casualty reinsurance pools in which the Company discontinued
participation effective on or prior to 1981. The business is long-tail
in nature and losses continue to exceed both Company and industry
expectations. Most of these losses result from asbestos-related and
environmental pollution claims. The Company's exposure is primarily
through participation in excess casualty pools. These pools typically
involve high-layer coverages that are applicable only after primary
insurance coverage and, in many cases, reinsurance coverages have been
exhausted. The Company's experience can differ significantly from that
of other insurers which wrote the primary coverages directly. The
Company establishes loss reserves on known claims as recommended by the
various pool managers, plus additional reserves to compensate for those
claims that have not yet been reported.
At the current time, it is not possible to determine the future
development of asbestos and environmental claims due to a general
absence of reliable predictive data and of a generally accepted
actuarial methodology for these exposures, significant unresolved legal
issues including
22
<PAGE> 24
coverage issues, policy definitions and evolving theories and
arguments. Additionally, the determination of ultimate damages and the
final allocation of such damages to financially responsible parties is
complex and uncertain. Our historical experience suggest, however, that
although reinsurance pool losses will continue, they should not have a
materially adverse effect on the Company's financial condition or cash
flows. Losses from the Company's discontinued reinsurance pools were
$6.6 and $8.3 million in 1997 and 1996, respectively. At December 31,
1997, the Company holds $34.8 million (gross) of reserves related to
the reinsurance pools.
No specific formula adjustment is made to the reserves in connection
with anticipated inflation; however, most coverages relate to property
settlements which occur relatively quickly. The Company establishes
full reserves on all lines (net of anticipated salvage and subrogation)
and does not employ discounting in its reserving process.
The differences between the December 31, 1997 liability for losses and
LAE reported in the accompanying consolidated financial statements in
accordance with generally accepted accounting principles (GAAP) and
that reported in the annual statement filed with state insurance
departments in accordance with statutory accounting practices (SAP) are
as follows:
<TABLE>
<CAPTION>
<S> <C>
Liability reported on a SAP basis, net of intercompany
elimination for reinsured claim liabilities with affiliated
life and health companies $197,209,000
Deduct estimated salvage and subrogation recoveries
recorded on a cash basis for SAP purposes and on an
accrual basis for GAAP purposes (2,538,000)
------------
Liability reported on a GAAP basis for the domestic Property and
Casualty subsidiaries before unpresented claim drafts and
translation of foreign branch operations 194,671,000
Deduct unpresented claim drafts reported as other liabilities for SAP
purposes, but reported as claim liabilities for GAAP purposes, and
translation of foreign branch operations (2,790,000)
------------
Liability reported on a GAAP basis - domestic Property
and Casualty subsidiaries only 191,881,000
Add reserves of foreign subsidiaries not included in
consolidated statutory liability 13,306,000
------------
Liability reported on a GAAP basis (net) 205,187,000
Add Reinsurance Recoverable for ceded unpaid losses
(domestic of $91,103,000 and foreign of $45,208,000) 136,311,000
------------
Liability reported on a GAAP basis (gross) $341,498,000
============
</TABLE>
Employees
---------
As of December 31, 1997, the Company employed 2,943 people.
23
<PAGE> 25
d. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
For financial information about foreign and domestic operations see
Note 12 to the Consolidated Financial Statements on page 77 in Part
II Item 8 of this report.
ITEM 2
- ------
PROPERTIES
----------
The headquarters building is located at 11222 Quail Roost Drive, Miami,
Florida 33157, and is approximately 480,000 square feet in size. The
building is used exclusively for general office use, except for a portion
which functions as the Company's warehouse. Certain other properties are
infrequently acquired through foreclosures of mortgage loans in which ABLAC
has invested. ABLAC holds and operates such properties until sale can be
effected.
ITEM 3
- ------
LEGAL PROCEEDINGS
-----------------
Except as discussed in the following paragraphs, there are no material
legal proceedings, other than ordinary routine litigation incidental to
the business, to which the Registrant or any of its subsidiaries is a
party or of which any of their property is the subject.
LITIGATION
----------
Following is a description of material legal proceedings:
Alabama and other litigation
----------------------------
Certain of ABIG's subsidiaries, including the Company, are presently
parties to a number of individual consumer and class action lawsuits
pending in Alabama involving premium, rate, sales practices, marketing,
disclosure and policy coverage issues. While a number of similar suits
have been filed in other jurisdictions, the insurance and finance
industries have been targeted in Alabama by plaintiffs' lawyers who
enjoy a favorable judicial climate. The Company typically has been
named as a co-defendant with one or several retailer or finance
companies who have sold the Company's product to a consumer. Other
insurers are also joined as co-defendants in some of the suits.
Although the Alabama lawsuits and similar suits pending in Mississippi
and other jurisdictions generally involve relatively small amounts of
actual or compensatory damages, they typically assert claims requesting
substantial punitive awards or purport to represent a large class of
policyholders. The Company denies any wrongdoing in any of these suits
and believes that it has not engaged in any conduct that would warrant
an award of punitive damages or that the class allegations have merit.
The Company has been advised by legal counsel that it has meritorious
defenses to all claims being asserted against it.
24
<PAGE> 26
While no one case is necessarily significant in terms of financial risk
to the Company, the judicial climate in Alabama is such that the
outcome of these cases is extremely unpredictable. Moreover, class
action lawsuits to which the Company is a party do not lend themselves
to potential damage calculation. Without admitting any wrongdoing, the
Company has settled a number of these suits, but there are still a
significant number of cases pending, and it is expected that more suits
alleging essentially the same causes of action are likely to continue
to be filed during 1998. The Company intends to continue to defend
itself vigorously against all such suits and believes, based on
information currently available, that any liabilities that could result
are not expected to have a material effect on the Company's financial
position.
Merger-Related Litigation
-------------------------
As described more fully in "Development of Business" on page 2 of this
report, on December 22, 1997, the Company announced that it had entered
into a merger agreement with AIG and on January 27, 1998, Cendant and
Season commenced an unsolicited tender offer for 51% of the Company's
shares. Six legal actions, have been brought against the Company and
members of its board of directors growing out of the proposed merger
with AIG and Cendant's tender offer.
The Company and members of its board of directors deny all allegations
unlawful conduct asserted in any of these actions and have been advised
by counsel that they have meritorious defenses to each of them. The
Company intends to continue to defend itself vigorously against these
actions and believes, based on currently available information, that
any liabilities that could result are not expected to have a material
effect on the Company's financial position.
CENDANT, ET AL. V. AMERICAN BANKERS, ET AL.
On January 27, 1998, Cendant and Season filed a complaint against the
Company, members of the Company's Board, AIG and AIGF in the United
States District Court for the Southern District of Florida. The
complaint alleged that the directors of the Company breached their
fiduciary duties by agreeing to the merger contemplated by the Original
Merger Agreement, the Original Stock Option Agreement, the 120 day
so-called "No-Shop" provision, the 180-day non-termination provision,
the $66 million termination fee, the Voting Agreement, and by exempting
the merger contemplated by the Original Merger Agreement from the
provisions of the Rights Agreement. The complaint further alleges that
AIG and AIGF conspired with the members of the Company's Board in the
breach of their fiduciary duties, and that AIG violated Section 13(d)
of the Exchange Act, by failing to disclose in the Schedule 13D that it
filed with the Commission on January 16, 1998 that AIG's Chairman and
Chief Executive Officer was a "controlling person" of AIG. The
complaint sought, among other things, preliminary and permanent
injunctive relief enjoining implementation or effectuation of the
Original Merger Agreement unless and until the conduct alleged to
constitute the breaches of fiduciary duties is remedied.
On March 23, 1998, Cendant and Season in connection with the Cendant
Merger Agreement have agreed to dismiss with prejudice this action.
GOODMAN V. AMERICAN BANKERS INSURANCE GROUP, INC., ET AL.
On or about January 27, 1998, a putative class action complaint, on
behalf of the Company' shareholders, was filed in the Circuit Court of
the Eleventh Judicial District in and for Dade County Florida against
the Company, the members of the Company's Board, and AIG (the
25
<PAGE> 27
"Goodman State Court Action"). The complaint in the Goodman State Court
Action alleges that the directors of the Company breached their
fiduciary duties by agreeing to the merger contemplated by the Original
Merger Agreement, the Original Stock Option Agreement, the 120 day
so-called "No-Shop" provision, the $66 million termination fee, the
Voting Agreement, and by failing to maximize shareholder value. The
complaint further alleges that the Company and AIG aided and abetted
the directors of the Company in the breach of their fiduciary duties.
The complaint seeks declaratory and injunction relief, as well as
unspecified damages and attorneys' fees.
On or about January 28, 1998, a putative class action complaint, on
behalf of the Company shareholders, was filed in the United States
District Court for the Southern District of Florida against the
Company, the members of the Company's Board, and AIG (the "Goodman
Federal Court Action"). The complaint in the Goodman Federal Court
Action alleged that the directors of the Company breached their
fiduciary duties by agreeing to the merger contemplated by the Original
Merger Agreement, the Original Stock Option Agreement, the 120 day
so-called "No-Shop" provision, the 180-day non-termination provision,
the $66 million termination fee, and by exempting the merger
contemplated by the Original Merger Agreement from the provisions of
the Rights Agreement. The complaint further alleged that AIG aided and
abetted the directors of the Company in the breach of their fiduciary
duties, and that AIG violated Section 13(d) of the Exchange Act, by
failing to disclose in the Schedule 13D that it filed with the
Commission on January 16, 1998 that AIG's Chairman and Chief Executive
Officer was a "controlling person" of AIG. The complaint sought
declaratory and injunctive relief including an order requiring
defendants to make corrective disclosure and enjoining the consummation
of the merger, as well as unspecified damages and attorneys' fees.
On February 17, 1998, the plaintiff in the Goodman Federal Court Action
filed an amended complaint asserting all of the claims in the original
complaint and new claims that the Company and AIG violated Sections
14(a) and 14(e) of the Exchange Act by making materially false and
misleading statements in the Original Proxy Statement/Prospectus. The
amended complaint seeks substantially the same relief as the original
complaint.
LOPATE V. LANDON, ET AL.
On or about January 28, 1998, a putative class action complaint, on
behalf of the Company shareholders, was filed in the United States
District Court for the Southern District of Florida against the
Company, the members of the board of directors of the Company (except
Jack Kemp), AIG and AIGF. The complaint alleged that the Company's
Board (except Jack Kemp) breached their fiduciary duties by agreeing to
the merger contemplated by the Original Merger Agreement, the Original
Stock Option Agreement, the 120 day so-called "No-Shop" provision, the
$66 million termination fee, the Voting Agreement, and by failing to
maximize shareholder value. The complaint further alleged that AIG,
AIGF and the Company aided and abetted the directors of the Company in
the breach of their fiduciary duties, and that AIG violated Section
13(d) of the Exchange Act, by failing to disclose in the Schedule 13D
that it filed with the Commission on January 16, 1998 that AIG's
Chairman and Chief Executive Officer was a "controlling person" of AIG.
The complaint sought declaratory and injunctive relief including an
order requiring defendants to make corrective disclosure, enjoining the
consummation of the merger contemplated by the Original Merger
Agreement, and voiding the Original Merger Agreement, as well as
unspecified damages and attorneys' fees.
26
<PAGE> 28
On February 9, 1998, the plaintiffs filed an amended complaint
asserting all of the claims in the original complaint and new claims
that the Company and AIG violated Sections 14(a) and 14(e) of the
Exchange Act by making materially false and misleading statements in
the Original Proxy Statement/Prospectus. The amended complaint dropped
the claim that AIG violated Section 13(d) of the Exchange Act. The
amended complaint seeks substantially the same relief as the original
complaint.
BILDSTEIN V. AMERICAN BANKERS INSURANCE GROUP, INC., ET AL.
On or about February 2, 1998, a putative class action complaint, on
behalf of the Company shareholders, was filed in the United States
District Court for the Southern District of Florida against the
Company, the members of the Company's Board and AIG. The complaint
alleged that the directors of the Company breached their fiduciary
duties by agreeing to the merger contemplated by the Original Merger
Agreement, the Original Stock Option Agreement, the 120 day so-called
"No-Shop" provision, the 180-day non-termination provision, the $66
million termination fee, the Voting Agreement, and by exempting the
merger contemplated by the original Merger Agreement from the
provisions of the Rights Agreement. The complaint further alleges that
AIG aided and abetted the directors of the Company in the breach of
their fiduciary duties, and that AIG violated Section 13(d) of the
Exchange Act, by failing to disclose in the Schedule 13D that it filed
with the Commission on January 16, 1998 that AIG's Chairman and Chief
Executive Officer was a "controlling person" of AIG. The complaint
seeks declaratory and injunctive relief including an order requiring
defendants to make corrective disclosure and enjoining the consummation
of the merger contemplated by the Original Merger Agreement, as well as
unspecified damages and attorneys' fees.
COFFEE V. AMERICAN BANKERS INSURANCE GROUP, INC., ET AL.
On or about February 9, 1998, a putative class action complaint, on
behalf of the Company shareholders, was filed in the United States
District Court for the Southern District of Florida against the
Company, the members of the Company's Board and AIG. The complaint
alleged that the directors of the Company breached their fiduciary
duties by agreeing to the merger contemplated by the Original Merger
Agreement, the Original Stock Option Agreement, the 120 day so-called
"No-Shop" provision, the 180-day non-termination provision, the $66
million termination fee, the Voting Agreement, by exempting the merger
contemplated by the Original Merger Agreement from the Rights
Agreement, and by failing to maximize shareholder value. The complaint
further alleges that AIG aided and abetted the directors of the Company
in the breach of their fiduciary duties, and that AIG violated Section
13(d) of the Exchange Act, by failing to disclose in the Schedule 13D
that it filed with the Commission on January 16, 1998 that AIG's
Chairman and Chief Executive Officer was a "controlling person" of AIG.
The complaint seeks declaratory and injunctive relief including an
order requiring defendants to make corrective disclosure and enjoining
the consummation of the merger contemplated by the Original Merger
Agreement, as well as unspecified damages and attorneys' fees.
SPECTOR V. LANDON, ET AL.
On or about February 11, 1998, plaintiffs filed a complaint in the
United States District Court for the Southern District of Florida
against the Company, R. Kirk Landon, Gerald N. Gaston, AIG and AIGF.
The complaint alleged that Mr. Landon and Mr. Gaston, aided and abetted
by the Company, AIG and AIGF, breached their fiduciary duties by
agreeing to the merger
27
<PAGE> 29
contemplated by the Original Merger Agreement, the Original Stock
Option Agreement, the 120 day so-called "No-Shop" provision, the $66
million termination fee, the Voting Agreement, by exempting the merger
contemplated by the Original Merger Agreement from the Rights
Agreement, and by failing to maximize shareholder value. The complaint
further alleges that the Company and AIG violated Sections 14(a) and
14(e) of the Exchange Act by making materially false and misleading
statements in the Original Proxy Statement/Prospectus. The complaint
seeks declaratory and injunctive relief including an order requiring
defendants to make corrective disclosure, enjoining the consummation of
the merger contemplated by the Original Merger Agreement and voiding
the Original Merger Agreement, as well as unspecified damages and
attorneys' fees.
The Company is involved with a number of cases in the ordinary course
of business relating to insurance matters or, more infrequently,
certain corporate matters. Generally, the Company's liability is
limited to specific amounts relating to insurance or policy coverage
for which provision has been made in the financial statements. Other
cases involve general corporate matters which generally do not
represent significant contingencies for the Company.
ITEM 4
- ------
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1997.
28
<PAGE> 30
PART II
- -------
ITEM 5
- ------
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------
a. MARKET FOR COMMON STOCK
-----------------------
Common Share Prices and Dividend Data
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1997
- ----
High $29.63 $34.03 $38.31 $45.94
Low 24.38 25.19 32.19 36.69
Dividend 0.10 0.11 0.11 0.11
1996
- ----
High $19.94 $22.13 $25.19 $26.19
Low 16.63 16.25 19.75 22.88
Dividend 0.10 0.10 0.10 0.10
Common share and dividend amounts for 1996 and the first and second
quarters of 1997 have been restated to reflect the 2 for 1 stock
split effective September 12, 1997.
The last sale price per share of the Company's common stock on the
last trading day of 1997, as reported by the New York Stock Exchange,
was $45.94.
Common Shares
American Bankers Insurance Group, Inc. is traded under the New York
Stock Exchange symbol ABI. The stock appears in the NYSE stock table.
The above table presents the high and low prices for the stock under
the abbreviation AmBkrsIns.
The ending market price as of March 20, 1998 was $64.56.
b. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
---------------------------------------------
At December 31, 1997, there were 1,865 registered shareholders.
c. DIVIDENDS PER SHARE OF COMMON STOCK
-----------------------------------
For information of the dividends paid per common share see the Table
of data in Item 5 a. above.
Prior to the closing of the pending merger with Cendant Corporation,
the Company expects to continue its policy of paying regular cash
dividends; however, future dividends are dependent on future
earnings, capital requirements and financial condition. For more
information regarding liquidity and capital resources see page 38 in
Part II Item 7 of this report.
29
<PAGE> 31
ITEM 6
SELECTED FINANCIAL DATA
-----------------------
At December 31 (in thousands except book value per common share):
<TABLE>
<CAPTION>
Major Balance Sheet Items 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Assets
- ------
Investments $2,163,100 $1,968,400 $1,688,400 $1,264,900 $1,110,900
Cash 23,300 30,400 23,300 89,500 39,800
Reinsurance receivable 270,700 202,600 168,100 130,900 174,200
Deferred policy acquisition costs 458,300 388,000 310,900 229,600 198,800
Prepaid reinsurance premiums 565,200 507,100 502,300 396,800 310,600
Other assets 301,900 373,000 294,700 320,800 326,200
- --------------------------------------------------------------------------------------------------------------------------
Total assets 3,782,500 3,469,500 2,987,700 2,432,500 2,160,500
- --------------------------------------------------------------------------------------------------------------------------
Liabilities
- -----------
Policy and claim liabilities 2,303,000 2,070,500 1,858,900 1,502,600 1,395,900
Notes payable 242,600 222,500 236,000 197,800 158,900
Deferred income taxes 51,700 40,800 29,500 5,000
Accrued expenses 150,100 156,900 136,200 98,800 87,000
Other liabilities 221,200 268,600 214,100 227,400 114,400
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,968,600 2,759,300 2,474,700 2,026,600 1,761,200
- --------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
- --------------------
Preferred stock 115,000 115,000
Common stock 41,800 20,500 20,400 20,200 20,100
Additional paid-in capital 212,000 217,900 215,100 212,100 210,900
Net unrealized investment and
foreign exchange gains (losses) 12,100 7,400 7,300 (38,500) 400
Retained earnings 449,400 359,400 282,700 225,400 183,000
Treasury stock at cost (8,100) (1,400) (2,500) (1,600) (400)
Unamortized restricted stock (6,200) (4,400) (3,600) (3,200) (4,100)
Collateralization of loan to
Leveraged Employee Stock
Ownership Plan (2,100) (4,200) (6,400) (8,500) (10,600)
- --------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 813,900 710,200 513,000 405,900 399,300
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $3,782,500 $3,469,500 $2,987,700 $2,432,500 $2,160,500
- --------------------------------------------------------------------------------------------------------------------------
Book value per common share $16.83 $14.56 $12.67 $10.08 $ 9.93
==========================================================================================================================
</TABLE>
The book value per common share for years prior to 1997 has been restated to
reflect the 2 for 1 stock split effective September 12, 1997.
30
<PAGE> 32
For the Years ended December 31 (in thousands except per common share data):
<TABLE>
<CAPTION>
Consolidated Statements of Income 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues
Net premiums earned $1,453,800 $1,378,500 $1,240,700 $1,094,300 $882,000
Net investment income 134,100 121,200 99,400 74,400 70,400
Realized investment gains 10,400 7,800 700 2,700 5,400
Gain on insurance settlement 5,400
Other income 23,100 21,500 20,100 15,400 10,100
- ---------------------------------------------------------------------------------------------------------------------
Total revenues 1,621,400 1,529,000 1,360,900 1,186,800 973,300
- ---------------------------------------------------------------------------------------------------------------------
Benefits and expenses
Benefits, claims, losses, and 532,600 523,000 463,100 437,900 349,800
settlement expenses
Commissions 614,200 571,800 526,500 437,700 358,000
Operating expenses 298,800 280,800 251,500 220,200 181,700
Interest expense 16,200 17,500 15,600 11,200 8,100
- ---------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 1,461,800 1,393,100 1,256,700 1,107,000 897,600
- ---------------------------------------------------------------------------------------------------------------------
Pre-tax income from operations 159,600 135,900 104,200 79,800 75,700
- ---------------------------------------------------------------------------------------------------------------------
Income tax (expense) benefit
Current (37,300) (28,900) (25,200) (14,800) (24,400)
Deferred (7,400) (12,500) (6,700) (8,500) 2,000
- ---------------------------------------------------------------------------------------------------------------------
Total tax expense (44,700) (41,400) (31,900) (23,300) (22,400)
- ---------------------------------------------------------------------------------------------------------------------
Net income before cumulative
effect of change in accounting 114,900 94,500 72,300 56,500 53,300
Cumulative effect of change
in accounting for income taxes (1,000)
- --------------------------------------------------------------------------------------------------------------------
Net income 114,900 $94,500 $72,300 $56,500 $52,300
- --------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Basic
Net income before cumulative
effect of change in accounting 2.60 2.24 1.78 1.40 1.46
Cumulative effect of change in
accounting for income taxes (0.03)
- --------------------------------------------------------------------------------------------------------------------
Net income $2.60 $2.24 $1.78 $1.40 $1.43
- --------------------------------------------------------------------------------------------------------------------
Weighted average number of
shares outstanding 41,433 40,697 40,556 40,344 36,524
Diluted
Net income before cumulative
effect of changein accouting $2.45 2.16 1.74 1.37 1.40
Cumulative effect of change in
accounting for income taxes (0.03)
- --------------------------------------------------------------------------------------------------------------------
Net income $2.45 $2.16 $1.74 $1.37 $1.37
- --------------------------------------------------------------------------------------------------------------------
Weighted average number of
shares outstanding 46,999 43,890 41,858 41,308 38,656
- --------------------------------------------------------------------------------------------------------------------
Dividends per common share $0.43 $0.40 $0.38 $0.36 $0.34
====================================================================================================================
</TABLE>
The per common share data for years prior to 1997 has been restated to reflect
the 2 for 1 stock split effective September 12, 1997.
31
<PAGE> 33
For the Years ended December 31 (in thousands):
<TABLE>
<CAPTION>
Gross Gross Premiums Ceded Premiums Net Premiums
Collected Premiums Earned Earned Earned
1997 1996 1997 1996 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unemployment $530,600 $489,400 $520,700 $460,100 $294,700 $195,000 $226,000 $265,100
Credit A&H 432,700 377,600 402,300 381,900 193,800 194,400 208,500 187,500
Credit Life 365,300 309,500 324,700 291,300 151,500 158,200 173,200 133,100
Credit Property 342,200 336,900 360,900 335,900 161,800 152,400 199,100 183,500
Extended Service
Contracts 209,900 203,900 156,900 110,800 6,700 8,400 150,200 102,400
Mobilehome
Physical Damage 138,400 132,200 136,900 136,700 41,300 40,700 95,600 96,000
Homeowners 83,500 93,700 93,800 100,900 1,500 39,000 92,300 61,900
Flood 77,100 56,000 72,600 54,400 72,600 54,400 0 0
Mortgage A&H 75,600 66,600 74,200 63,700 14,000 6,600 60,200 57,100
Ordinary 37,200 29,000 35,200 28,900 7,900 6,000 27,300 22,900
- ---------------------------------------------------------------------------------------------------------------------
Subtotal 2,292,500 2,094,800 2,178,200 1,964,600 945,800 855,100 1,232,400 1,109,500
- ---------------------------------------------------------------------------------------------------------------------
All Other 447,900 398,000 432,000 412,100 210,600 143,100 221,400 269,000
- ---------------------------------------------------------------------------------------------------------------------
Total $2,740,400 $2,492,800 $2,610,200 $2,376,700 $1,156,400 $998,200 $1,453,800 $1,378,500
=====================================================================================================================
</TABLE>
FIVE-YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
At December 31:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
LIFE INSURANCE SUBSIDIARIES
Statutory capital and surplus (in
thousands)* $250,900 $234,700 $188,900 $174,100 $175,900
Ratio of statutory capital and surplus to
liabilities 32.2% 33.2% 28.6% 32.2% 35.5%
PROPERTY AND CASUALTY SUBSIDIARIES
Statutory capital and surplus (in
thousands)* $416,300 $374,500 $271,500 $224,900 $215,900
Ratio of net premiums written to statutory
capital and surplus 2.1% 2.4% 3.1% 2.6% 2.3%
Ratio of loss and loss expense reserves to
statutory capital and surplus 45.5% 50.8% 65.5% 58.2% 55.6%
Combined loss and expense ratio
statutory basis) 95.7% 96.8% 93.8% 96.0% 94.1%
</TABLE>
*See Note 8 to Consolidated Financial Statements.
32
<PAGE> 34
<TABLE>
<CAPTION>
For the Years ended December 31:
Operating Ratios 1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
As a percent of net premiums earned:
Benefits, claims, losses, and
settlement expenses 36.6% 37.9% 37.3% 40.0% 39.7%
Commissions 42.2 41.5 42.4 40.0 40.6
Operating expenses as a percent of
gross premiums earned 11.4 11.8 12.5 13.1 13.6
------------------------------------------------------------------------------------------------------------------------------
Net operating income* as a percent of
gross premiums earned 4.1 3.8 3.6 3.3 3.7
Net operating income* as a percent of
total revenues 6.7 5.9 5.3 4.6 5.0
Net income as a percent of average
assets (return on assets) 3.2 2.9 2.7 2.5 3.4
Net income as a percent of average
common stockholders' equity
(return on equity) 16.6 16.5 15.7 14.1 15.7
------------------------------------------------------------------------------------------------------------------------------
At December 31:
Debt as a percent of total
capitalization 23.0 23.9 31.5 32.8 28.5
Price/Earnings Ratio (diluted) 18.8 11.9 11.2 8.8 9.4
Price/Book Value Ratio 2.7 1.8 1.5 1.2 1.3
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Excludes net realized investment gains and losses.
Gross Life Insurance in Force Gross Collected Premiums
(in millions of dollars) (in millions of dollars)
1997 $ 53,694 $ 2,740
1996 48,704 2,493
1995 42,708 2,287
1994 32,129 1,761
1993 30,848 1,427
33
<PAGE> 35
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Industry
--------
Property and casualty insurers experienced higher earnings in 1997 due to
the relative absence of major catastrophes. Standard & Poor has reported
that increased capacity and increased competition are forcing property and
casualty insurers to cut prices, particularly in the commercial sector.
The reinsurance market continued to experience significant consolidation in
1997. Despite the reduction in the number of large reinsurance companies,
the cost of reinsurance coverage has been decreasing. This may be
attributable in part to the relatively improved underwriting experience
over the last two years, the expanded Bermuda market and the resurgence of
Lloyd's of London.
Litigation continues to be a major industry concern. In Alabama, and
increasingly in other states, the insurance and finance industries have
been targeted in litigation. The legal environment in Alabama has received
national news coverage and the Alabama legislature is considering tort
reform. Future changes in the current environment, if any, cannot be
predicted.
Recent Supreme Court and other regulatory rulings are expected to lead to
increased marketing of insurance products by banks and other financial
services firms. This may lead to increased competition; however, the
Company does not expect to be significantly impacted since its major
products do not include traditional life and property and casualty
insurance products which banks may begin to market. Accordingly, this may
result in additional products and services being sold through the Company's
bank distribution channel. Congress has indicated that it may examine the
issue of banking reform including state regulation of the insurance
industry.
The Company has become aware that some financial institutions have, in
connection with a loan, begun to issue debt cancellation agreements, which
are similar to the Company's credit life and credit disability products.
Various state insurance and financial institution regulators are examining
these agreements to determine whether they should be regulated as
insurance. It is premature to project the ultimate legal resolution and
resulting market effects this development might have.
The federal government, commercial companies and the insurance industry
continue to work together toward Superfund reform and dealing with the
cleanup of pollution sites. Among issues pending are the determination of
retroactive liability and a proposed insurer-specific tax. The most recent
bill introduced in Congress reflects a scaled down Superfund reform plan
that largely retains the retroactive liability system.
American Bankers
----------------
In 1997, net income increased 22% to $114.9 million from $94.5 million in
1996. Operating results benefited from continued strong growth in net
investment income and in the Company's credit-related products. 1997 was
impacted by the favorable results in the Company's property lines and a
reduction of the operating losses in the United Kingdom insurance
subsidiary. After-tax operating
34
<PAGE> 36
income before realized gains generated by the property and casualty segment
was adversely impacted in 1996 by losses from Hurricanes Bertha, Fran and
Hortense of approximately $6.0 million, net of tax. The Company's United
Kingdom insurance subsidiary incurred additional operating losses in 1996
principally due to canceled product lines. The 1995 results included, on an
after-tax basis, $.5 million in net investment gains and a $3.8 million
charge on the settlement of the final portion of the credit bond
litigation.
Pre-tax operating income before realized gains by industry segment was as
follows:
(IN THOUSANDS)
Life
----
1997 $ 63,410
1996 $ 58,838
1995 $ 43,469
Property and Casualty
---------------------
1997 $ 101,772
1996 $ 86,028
1995 $ 83,971
These segment results exclude interest and other corporate activity.
REVENUES
Total revenues increased 6.0% in 1997 over the prior year, primarily due to
increases in net premiums earned of $75.3 million and investment income of
$12.9 million. Gross collected premiums increased more than $248 million or
approximately 10%, from $2.5 billion in 1996 to $2.7 billion in 1997. In
1997, property and casualty segment revenues increased by $69.0 million
while the life segment revenues increased $27.2 million. A significant
portion of the revenue growth resulted from the increase in net earned
premiums in extended service contract and homeowners products for the
property and casualty segment and Credit Life and Credit A&H for the life
segment.
The growth in gross collected premiums was primarily related to the
following products:
<TABLE>
<CAPTION>
(IN THOUSANDS)
Product 1997 1996 Increase
------- ------------- ------------- -----------
<S> <C> <C> <C>
Credit Unemployment $ 530,600 $ 489,400 $ 41,200
Credit A&H 432,700 377,600 55,100
Credit Life 365,300 309,500 55,800
Credit Property 342,200 336,900 5,300
------------- ------------- -----------
Total $ 1,670,800 $ 1,513,400 $ 157,400
============= ============= ===========
</TABLE>
The Company expects long-term premium growth to continue. Actual growth in
any one year may vary depending on the acquisition or loss of significant
clients, business acquisitions and international expansion or other factors
as described in the Safe Harbor Cautionary Statement.
Gross collected premiums increased 9% in 1996 and 30% in 1995 (26% in 1995
excluding the $66 million block of business acquired). Net earned premiums
increased 11% in 1996 and 13% in 1995.
35
<PAGE> 37
Total net premiums earned by industry segment were as follows:
<TABLE>
<CAPTION>
(in millions)
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Life $ 405.8 $ 384.0 $ 377.1
Property and Casualty 1,048.0 994.5 863.6
----------- ----------- -----------
Total $ 1,453.8 $ 1,378.5 $ 1,240.7
=========== =========== ===========
</TABLE>
The cost of reinsurance to cover catastrophe losses decreased by $1.8
million to $7.5 million in 1997, from $9.3 million in 1996. The cost in
1995 was $9.5 million. The Company continually reviews its exposure to
catastrophe losses.
Investment income increased by 11% to $134.1 million in 1997 from $121.2
million in 1996. The increase is mainly due to the overall increase in
invested assets of $194.7 million. The investment income increase in 1996
from 1995 was 22%. The Company's average fixed income investment yield was
6.9% in 1997, 6.8% in 1996 and 7.0% in 1995.
CLAIMS AND COMMISSIONS
Through our extensive use of adjustable commission arrangements based on
claims experience, we have been able to generate business with stable
underwriting results. The overall loss ratio for the Company was 36.6% in
1997 compared with 37.9% and 37.3% in 1996 and 1995, respectively. The
commission expense ratios for the same periods were 42.2% in 1997, 41.5% in
1996 and 42.4% in 1995.
The Company's experience in the property and casualty segment has been
better than industry experience, as demonstrated by the following statutory
combined ratios:
1997 1996 1995
------ ------ ------
Property & Casualty Segment 96 97 94
Industry 102* 107 106.5
*Insurance Information Institute
In 1997, the Company did not experience significant catastrophic losses. In
1996, the Company incurred approximately $9.2 million in pre-tax losses
related to Hurricanes Bertha, Fran and Hortense.
Credit bond pre-tax losses and expenses amounted to $11.5 million in 1995,
including reserves and partial litigation settlements of $5.8 million. In
1997 and 1996, the Company did not incur any significant expenses or losses
associated with the remaining credit bond policies in force.
36
<PAGE> 38
The Company's 1997 reserve development, both foreign and domestic, was not
significantly different from previously established reserves. The Company's
loss reserve development includes losses assumed from excess casualty
reinsurance pools in which the Company discontinued participation effective
on or prior to 1981. The business is long-tail in nature and losses
continue to exceed both Company and industry expectations. Most of these
losses result from asbestos-related and environmental pollution claims. The
Company's exposure is primarily through participation in excess casualty
pools. These pools typically involve high-layer coverages that are
applicable only after primary insurance coverage and, in many cases,
reinsurance coverages have been exhausted. The Company's experience can
differ significantly from that of other insurers which wrote the primary
coverages directly. The Company establishes loss reserves on known claims
as recommended by the various pool managers, plus additional reserves to
compensate for those claims that have not yet been reported.
At the current time, it is not possible to determine the future development
of asbestos and environmental claims due to a general absence of reliable
predictive data and of a generally accepted actuarial methodology for these
exposures, significant unresolved legal issues including coverage issues,
policy definitions and evolving theories and arguments. Additionally, the
determination of ultimate damages and the final allocation of such damages
to financially responsible parties is complex and uncertain. Our historical
experience suggests, however, that although reinsurance pool losses will
continue, they should not have a materially adverse effect on the Company's
financial condition or cash flows. Losses from the Company's discontinued
reinsurance pools were $6.6, $8.3 and $7.3 million in 1997, 1996 and 1995,
respectively. Reserve additions in 1997 have increased the survival ratio
to 22 years from 14 in 1996.
A few of the Company's products such as Mobilehome Physical Damage and
Homeowners are affected by seasonal changes during the year, causing the
profitability in those lines and for the Company to fluctuate throughout
the year.
OPERATING AND INTEREST EXPENSES
Operating expenses (excluding interest expense) were $298.8 million in
1997, $280.8 million in 1996 and $251.5 million in 1995. The ratio of
operating expenses to gross premiums earned in 1997 was 11.4%, showing
continued improvement from 1996 of 11.8% and 1995 of 12.5%. The Company is
in the process of replacing many of its legacy systems and is upgrading its
systems to accommodate business for the year 2000. Costs relate to the new
processing system being implemented for the property and casualty segment
totaled $4.2 million in 1997, $6.3 million in 1996 and $4.9 million in
1995. Similar expense levels are expected to continue through 1998.
Interest expense was $16.2 million, $17.5 million and $15.6 million in
1997, 1996 and 1995, respectively. The decrease in interest expense in 1997
is primarily due to lower debt levels during the year. The increase in
interest expense from 1995 to 1996 was due primarily to elevated debt
levels.
TAXES
The effective tax rate decreased to 28% in 1997 from 30.5% in 1996. This
decrease is due in part to the increase in low income housing investments
and a reduction of losses in the United Kingdom subsidiary. The Company
continues its strategy to increase its investments of tax-exempt and
tax-credit investments to minimize its income tax expense.
37
<PAGE> 39
FINANCIAL CONDITION
Total assets increased 9% to $3.8 billion at December 31, 1997, from $3.5
billion at December 31, 1996. The increase is attributable to strong cash
flows. Total assets increased 16% at December 31, 1996, from $3.0 billion
at December 31, 1995. This increase resulted from strong cash flows and the
investment of proceeds from the issuance of Series B Convertible Preferred
Stock. Invested assets at December 31, 1997, 1996 and 1995, were $2.2
billion, $2.0 billion and $1.7 billion respectively. At December 31, 1997,
investments in fixed maturities represented 84% of the total investment
portfolio while short-term and other investments (principally invested cash
and short-term bonds) represented another 9%. The Company does not hold
significant investments in equity securities, mortgage loans or real
estate.
Liabilities were $3.0, $2.8 and $2.5 billion at December 31, 1997, 1996 and
1995, respectively. Liabilities associated with policies represent a major
portion of total liabilities including $2.3 billion or 77.6% in 1997, $2.1
billion or 75.0% in 1996, and $1.9 billion or 75.1% in 1995.
Notes payable were $242.6 million at December 31, 1997, $222.5 million at
December 31, 1996, and $236.0 million at December 31, 1995. The Company's
debt to capitalization ratio of 23.0% at December 31, 1997 is down from
23.9% and 31.5% at December 31, 1996 and 1995 respectively.
During 1995 and 1994, the Company issued $50.0 million and $75.0 million of
medium term notes respectively. The debt issuance proceeds were used to
refinance outstanding debt and to support the Company's continued growth
and expansion into new markets. In 1995, the Company replaced its
short-term financing facility and borrowed $87 million, mainly used to pay
off its former facility.
Stockholders' equity increased by $408.0 million to $813.9 million at
December 31, 1997, from $405.9 million at January 1, 1995. In August 1997,
the Company declared a two-for-one split, effected in the form of a stock
dividend, on the Company's common stock. The result of the stock split was
that all common shareholders received one additional share for each share
they held. In July 1996, the Company issued 2.3 million shares of preferred
stock with a stated value of $50 per share that contributed net proceeds of
$111.8 million to equity. The other primary sources of growth in
stockholders' equity from January 1, 1995, to December 31, 1997, are
accumulated earnings of $281.6 million reduced by $57.4 million in
dividends paid on the Company's common and preferred shares. Under FASB
Statement 115 - Accounting for Certain Investments in Debt and Equity
Securities - certain investments in debt and equity securities are carried
in the balance sheet at fair value. The difference between amortized cost
and fair value of securities available-for-sale (unrealized gain or loss,
net of tax) is included as a component of equity. Unrealized gains, net of
taxes on the Company's fixed maturity portfolio were $15.2 million at
December 31, 1997.
In February 1996, the Board of Directors revoked the 1990 authority to
repurchase Company stock and authorized a repurchase of up to one million
shares of the Company's stock in the open market from time to time subject
to certain conditions. At December 31, 1997, the Company held approximately
271,000 shares as treasury stock.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, $2.2 billion or 57% of the Company's total assets
were comprised of securities, short-term investments and cash. Securities
are principally readily marketable and none are part of highly leveraged
transactions. In the bond portfolio, 77% of bonds have maturities of
38
<PAGE> 40
under five years and 80% have a rating of "A" or better (80% and 83%
respectively at December 31, 1996 and 1995). Unrealized gains on fixed
maturity investments increased to $42.6 million at December 31, 1997, from
$25.1 million at December 31, 1996.
The Company's investment portfolio has been structured to match cash
requirements. Liabilities representing current cash requirements including
claim liabilities, accrued commissions and other liabilities totaled
$922.3, $906.3 and $748.0 million, at December 31, 1997, 1996 and 1995
respectively. Other significant cash commitments in 1998 include
shareholder dividends of approximately $26.6 million under the current
capital structure.
In connection with the execution of the Cendant Merger Agreement, the
Company paid AIG a fee of $100 million for the termination of the AIG
Merger Agreement and certain other related agreements. See Note 15 to the
Consolidated Financial Statement on page 79 in Part II Item 8 of this
report. The Company paid the fee using principally funds provided by its
credit facility and internal funds. The Cendant Merger Agreement also
requires the Company, under certain circumstances, to pay Cendant a fee of
$94.9 million plus expenses, if the Merger is not consummated. If such
payments were required, the Company expects to obtain such funds from
available credit facilities and/or operating cash flows.
Cash flows from operations of $194.4 million in 1997, $202.7 million in
1996, and $266.0 million in 1995 contributed to meet operating
requirements, as well as anticipated debt service. Cash provided by
operating activities in excess of these needs is used in investing
activities.
During 1996, the Company raised $115 million in a public offering of
preferred stock. The net proceeds of $111.8 million were used primarily to
support future growth and reduce debt. Excluding any significant business
acquisitions, the Company expects to provide all its capital needs
internally in 1998.
Capital expenditures planned for 1998 are not expected to be significant
compared to the Company's overall liquidity and cash flow. The Company
completed the expansion of its headquarters in 1997. The Company incurred
costs of approximately $6.3 million in 1997 and $2.9 million in 1996. The
one million share stock buyback program is not expected to significantly
impact the Company's liquidity or cash flow in any one financial reporting
period. During 1997, the Company acquired 178,300 of its shares with a cost
of $6.7 million.
While the impact, if any, from the resolution of pending litigation cannot
presently be identified, the Company does not expect any unfavorable
outcome to have a material effect on liquidity or financial condition.
39
<PAGE> 41
In 1995, the Company executed a $250 million financing program with a group
of banks, which features a bid loan and revolving line of credit facility
to replace the $130 million financing program. In 1994, the Company
registered $200 million of medium-term notes with maturities ranging from
nine months to thirty years, with the Securities and Exchange Commission.
In 1994 and 1995, the Company issued a $75 million fixed rate note and a
$50 million floating rate note respectively. The interest rate on the
floating rate note is determined quarterly, and interest under the
short-term facility is determined at the time amounts are borrowed.
Accordingly, interest rate changes may impact the Company's interest
expense. Under these arrangements, approximately $213 million is available
for short-term liquidity needs as of year end. Consummation of the merger
as contemplated by the Cendant Merger Agreement will, unless consents or
waivers are obtained from the group of banks under the credit facility,
constitute an event of default and result in the termination of the credit
facility. This event may impact the Company's liquidity if it is required
to repay all outstanding loans and advances pursuant to the credit facility
and the unavailability of further loans and advances under the credit
facility.
The Company does not commit a significant portion of its investment
portfolio to equity securities, which were 6.5% of total invested assets at
December 31, 1997; consequently, liquidity is not significantly affected by
changes in the equity securities markets. The Company's preferred stock
portfolio is exposed to market value fluctuations which result primarily,
but not exclusively, from the sensitivity of the preferred stocks to
interest rate changes. To mitigate the interest rate sensitivity of this
portfolio, the Company has established a limited cross-hedging program
utilizing U.S. Treasury futures and option contracts. Open positions at
December 31, 1997 were not significant.
The Company does not concentrate in policy coverages under which
policyholders may control, on a discretionary basis, access to cash
benefits through policy surrender and withdrawals.
The Company expects to continue its policy of paying regular cash
dividends; however, future dividends are dependent on the Company's future
earnings, capital requirements and financial condition. Additionally, based
on the current dividend paying abilities of the insurance subsidiaries, the
Company does not foresee any difficulty in servicing its outstanding
indebtedness or its dividend-paying abilities.
Payment of dividends to ABIG by its insurance subsidiaries is dependent on
regulations dictated by statutory authorities in each state in which they
are domiciled. The National Association of Insurance Commissioners has
introduced standards which would treat dividends in excess of the lesser of
10% of surplus or net income as extraordinary dividends requiring insurance
department approval. While some states have adopted the standards, others
have not. The payment of dividends by the subsidiaries is subject to
restrictions discussed further in Notes 7 and 8 to the Consolidated
Financial Statements.
40
<PAGE> 42
YEAR 2000
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of information by the Company's insurance
systems. The year 2000 problem is the result of computer programs being
written using two digits (rather than four) to define the applicable year.
Any of the Company's systems that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than year 2000, which
could result in miscalculations or system failures. The Company is
strategically positioned to complete the system upgrades and compliance
testing by December 31, 1998. Among the items included in our Year 2000
strategy are centralized planning, adoption of Internal Audits' guidelines
for testing, coordination of detailed test plans and test lab for mainframe
and distributed systems.
Based on preliminary information, costs of addressing potential problems
are not currently expected to have a material adverse impact on the
Company's financial position, results of operations or cash flows in future
periods. However, if the Company, its customers or vendors are unable to
resolve such processing issues in a timely manner, it could result in a
material financial risk. Accordingly, the Company plans to devote the
necessary resources to resolve all significant year 2000 issues in a timely
manner.
The cost of achieving Year 2000 compliance is estimated to be $10 to $12
million over the cost of normal software upgrades and replacements and will
be incurred through calendar year 1999.
REGULATIONS
ABIG's insurance subsidiaries, like other insurance companies, are subject
to regulation and supervision in the jurisdictions in which they are
authorized to engage in business. Such regulations vary from state to
state, but generally relate to standards of solvency, pricing, licensing,
investment restrictions, insurance policy forms approval, computation of
reserves, assessments and financial reporting. The NAIC gave final approval
to the Codification of Statutory Accounting Principles (SAP) at its March
1998 National meeting. The main goal of the codification is to standardize
prescribed statutory accounting practices. The states will not be required
to adopt the Codification as the basis of statutory accounting. Instead,
the SAP will be the basis of practices permitted by the state of domicile
and insurance departments. Accordingly, the effective date of the
codification, if adapted, will be the date specified by the insurance
department of each company's state of domicile, which can be as early as
January 1, 1999.
A substantial portion of the business written by the insurance subsidiaries
is credit insurance. Most states have enacted laws which regulate credit
insurance to a greater extent than they regulate other forms of insurance,
including maximum premiums which may be charged and commissions which can
be paid. As in the case of other types of insurance, state regulators,
directly and through the NAIC, have begun a greater focus on the
regulatory, licensing and disclosure issues related to market conduct of
credit insurers, including the Company. A component rating approach which
allows state regulators to take into account factors other than losses in
determining the reasonableness of credit insurance rates was made part of
the National Association of Insurance Commissioners (NAIC) Creditor-Placed
Insurance Model Act that was adopted in 1996. Individual states which adopt
the regulation are generally expected to adapt the model regulation to
their perceived needs and to apply the regulation to business written in
that state. Adoption of this Regulation is not expected to significantly
affect the Company's operations.
41
<PAGE> 43
The investments of the insurance subsidiaries are limited as to type and
amount by the insurance laws of the state of domicile. During 1996, the
NAIC adopted the Investments of Insurers Model Act which provides a
well-capitalized insurer more discretion and flexibility in its investing
practices. Additionally, investment policies are reviewed by the Board of
Directors.
The NAIC has promulgated Risk-Based Capital (RBC) requirements. Under the
RBC requirements, areas such as asset risk, insurance risk, interest risk
and business risk are evaluated and compared to the Company's capital and
surplus to determine relative solvency margins. The Company's insurance
subsidiaries all exceed their respective RBC requirements.
The Catastrophe Reserve Subgroup of the NAIC is currently working on the
development and implementation of a mandatory, tax-deductible, pre-event
catastrophe reserve based on geographic exposure zones and premiums by line
of business. Agreement is yet to be reached on certain factors included in
the design of the reserve, such as a trigger point and a cap on the
reserve.
COMPETITION
The competitors of the Company consist of both stock and mutual insurance
companies. Because the profits, if any, of mutual companies accrue to the
policyholders, such companies may have certain competitive advantages. Some
competing companies, both stock and mutual, have been in business a longer
time, are more widely known by reason of such factors as age and size, and
have greater financial resources than ABIG. However, due to the specialized
nature of the markets served and products offered, most businesses of the
Company compete directly with a relatively small number of other insurance
companies, which share the Company's specialty nationwide and in regional
and state markets.
Profits of insurance companies are affected not only by volume of insurance
sold and renewed, but by such factors as mortality and loss experience,
investment income and underwriting expenses.
RESERVES
Life insurance companies are required to establish and maintain policy
liabilities and claim liabilities to meet their future obligations on life
policies. The policy liabilities are amounts which will be sufficient to
meet policy obligations at death, disability or maturity taking into
account future premiums less expenses, interest, expected lapses and
expected mortality. The claim liabilities are amounts of future unpaid
benefits on all incurred claims, whether reported to the Company or not.
Liabilities for losses and loss adjustment expenses for property and
casualty insurance represent estimates of unpaid claims related to known
losses and of claims which have been incurred but not reported. These
liabilities are based upon past experience of ultimate claim settlements
and of unreported losses and loss adjustment expenses. The length of time
for which such costs must be estimated varies depending upon the coverage
involved. Since actual claim costs are dependent upon such complex factors
as inflation, changes in doctrines of legal liability and damage awards,
the process used in computing reserves cannot be exact, particularly for
liability coverages.
The majority of the Company's property and casualty insurance business is
represented by property coverage in which the ultimate loss experience
develops relatively quicker than that for insurers concentrated more
heavily in liability coverages.
42
<PAGE> 44
In the ordinary course of business, the Company reinsures risks with other
insurance companies; nonetheless, the Company is contingently liable with
respect to risks reinsured, should the reinsuring companies fail to meet
the obligations assumed in the reinsurance agreements. (See Note 5 to the
Consolidated Financial Statements.)
SAFE HARBOR CAUTIONARY STATEMENT
Except for historical information provided in this Annual Report,
statements made throughout this document, including Management's Discussion
and Analysis, are forward-looking and, as such, actual results could differ
materially from those expected by the Company. The actual results of the
Company may be affected by (i) adverse catastrophe experience in certain of
the Company's property and casualty products, (ii) significant changes in
interest rates, (iii) increased competition causing reduction in product
margin or loss of a significant client, (iv) adverse loss development on
property and casualty prior years' claims or the excess casualty
reinsurance pools, (v) premium growth expectation not met because of the
loss of any significant client, (vi) outcome of litigation and other state
and federal regulatory issues, (vii) unresolved processing issues related
to the Year 2000 compliance, and (viii) general economic conditions. In
addition, the actual results of forward-looking statements are also subject
to the specific factors which may be included with a particular
forward-looking statement.
43
<PAGE> 45
ITEM 8
- ------
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
AMERICAN BANKERS INSURANCE GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Report of Independent Certified Public Accountants 45
Consolidated Balance Sheets at
December 31, 1997 and 1996 46
Consolidated Statements of Income for the
years ended December 31, 1997, 1996, and 1995 47
Consolidated Statements of Common Stock and
Other Stockholders' Equity for the years ended
December 31, 1997, 1996, and 1995 48
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996, and 1995 49
Notes to Consolidated Financial Statements for the
year ended December 31, 1997 50
SCHEDULES: *
I Summary of Investments - Other Than Investments in Related
Parties 81
II Condensed Financial Information of Registrant 82-85
III Supplementary Insurance Information 86
IV Reinsurance 87
VI Supplemental Information Concerning Property - Casualty
Insurance Operations 88
* Note: All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
44
<PAGE> 46
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Director and Stockholders of
American Bankers Insurance Group, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
American Bankers Insurance Group, Inc. and its subsidiaries at December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Miami, Florida
March 25, 1998
45
<PAGE> 47
CONSOLIDATED BALANCE SHEETS
- ---------------------------
<TABLE>
<CAPTION>
AT DECEMBER 31 (IN THOUSANDS EXCEPT PAR VALUE OF STOCK):
- -------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments
Held-to-maturity securities, at amortized cost
(fair value: $855,838 in 1997 and $864,307 in 1996) $ 836,608 $ 851,146
Available-for-sale securities, at fair value
(amortized cost: $950,416 in 1997 and $793,217 in 1996) 973,790 805,124
Trading securities at fair value (amortized cost: $8,867 in 1996) 9,038
Equity securities, at approximate market value
(cost: $125,345 in 1997 and $98,662 in 1996) 141,274 112,895
Mortgage loans on real estate 9,322 10,236
Policy loans 9,315 8,290
Short-term and other investments 192,802 171,674
- -------------------------------------------------------------------------------------------------------------------
Total investments 2,163,111 1,968,403
- -------------------------------------------------------------------------------------------------------------------
Cash 23,265 30,434
Accounts receivable, net of allowance for doubtful accounts of
$4,290 in 1997 and $4,526 in 1996 144,330 128,963
Reinsurance receivable 270,692 202,626
Accrued investment income 25,228 24,296
Deferred policy acquisition costs 458,289 387,993
Prepaid reinsurance premiums 565,162 507,077
Other assets 132,374 219,711
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 3,782,451 $ 3,469,503
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities $ 311,181 $ 291,756
Unearned premiums 1,436,034 1,291,142
Claim liabilities 555,797 487,596
- -------------------------------------------------------------------------------------------------------------------
2,303,012 2,070,494
- -------------------------------------------------------------------------------------------------------------------
Other policyholders' funds 4,786 6,795
Notes payable 242,592 222,490
Deferred income taxes 51,666 40,795
Accrued commissions and other expenses 150,147 156,896
Other liabilities 216,379 261,826
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 2,968,582 2,759,296
- -------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 11)
- -------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock: authorized 10,000 shares
$3.125 Series B Cumulative Convertible Preferred Stock
(stated at liquidation preference of $50 per share),
issued and outstanding 2,300 shares 115,000 115,000
Common stock of $1 par value. Authorized 100,000 shares;
issued and outstanding 41,806 shares in 1997 and 20,530 shares in 1996 41,806 20,530
Additional paid-in capital 212,010 217,939
Net unrealized investment and foreign exchange gains 12,096 7,437
Retained earnings 449,444 359,359
Treasury stock at cost - 271 shares in 1997 and 93 shares in 1996 (8,110) (1,426)
Unamortized restricted stock (6,252) (4,382)
Collateralization of loan to Leveraged Employee Stock Ownership Plan (2,125) (4,250)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 813,869 710,207
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 3,782,451 $ 3,469,503
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE> 48
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS EXCEPT PER COMMON SHARE DATA):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GROSS COLLECTED PREMIUMS $ 2,740,363 $ 2,492,828 $ 2,286,573
- -------------------------------------------------------------------------------------------------------------------
PREMIUMS AND OTHER REVENUES
Net premiums earned $ 1,453,783 $ 1,378,485 $ 1,240,713
Net investment income 134,115 121,200 99,400
Realized investment gains 10,394 7,812 721
Other income 23,090 21,538 20,014
- -------------------------------------------------------------------------------------------------------------------
Total revenues 1,621,382 1,529,035 1,360,848
- -------------------------------------------------------------------------------------------------------------------
Benefits and expenses
Benefits, claims, losses, and settlement expenses 532,607 523,024 463,130
Commissions 614,117 571,768 526,425
Operating expenses 298,819 280,768 251,519
Interest expense 16,244 17,530 15,579
- -------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 1,461,787 1,393,090 1,256,653
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 159,595 135,945 104,195
- -------------------------------------------------------------------------------------------------------------------
Income tax expense
Current (37,367) (28,921) (25,205)
Deferred (7,365) (12,521) (6,730)
- -------------------------------------------------------------------------------------------------------------------
Total income tax expense (44,732) (41,442) (31,935)
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 114,863 $ 94,503 $ 72,260
- -------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Basic:
NET INCOME $ 2.60 $ 2.24 $ 1.78
- -------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 41,433 40,697 40,556
- -------------------------------------------------------------------------------------------------------------------
Diluted:
NET INCOME $ 2.45 $ 2.16 $ 1.74
- -------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 46,999 43,890 41,858
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Per share data has been restated due to stock split. See accompanying notes to
consolidated financial statements.
47
<PAGE> 49
CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
----------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS EXCEPT PER COMMON SHARE DATA):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of year $ 115,000
Proceeds from sale of stock $ 115,000
Balance at end of year $ 115,000 115,000
- -------------------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of year $ 20,530 $ 20,384 $ 20,244
Exercise/forfeitures of options 495 146 140
Stock split 20,781
Balance at end of year $ 41,806 $ 20,530 $ 20,384
- -------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year $ 217,939 $ 215,121 $ 212,139
Exercise/forfeitures of options and related tax expense 14,852 5,479 2,982
Issuance of treasury stock 658
Expenses related to issuance of stock (3,319)
Stock split (20,781)
Balance at end of year $ 212,010 $ 217,939 $ 215,121
- -------------------------------------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT AND FOREIGN EXCHANGE GAINS (LOSSES):
Balance at beginning of year $ 7,437 $ 7,255 $ (38,554)
Change in net unrealized investment gains (losses) 13,161 (4,013) 71,310
Taxes on net unrealized investments gains (losses) (4,052) 1,215 (23,628)
Equity adjustment from foreign currency translation (4,450) 2,980 (1,873)
Balance at end of year $ 12,096 $ 7,437 $ 7,255
- -------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year $ 359,359 $ 282,748 $ 225,374
Net income 114,863 94,503 72,260
Cash dividends ($.43, $.40 and $.38 per share), net
of tax benefit on unallocated LESOP shares (24,778) (17,892) (14,886)
Balance at end of year $ 449,444 $ 359,359 $ 282,748
- -------------------------------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year $ (1,426) $ (2,516) $ (1,623)
Purchase of treasury stock (6,684) (175) (893)
Issuance of treasury stock 1,265
Balance at end of year $ (8,110) $ (1,426) $ (2,516)
- -------------------------------------------------------------------------------------------------------------------
UNAMORTIZED RESTRICTED STOCK:
Balance at beginning of year $ (4,382) $ (3,620) $ (3,205)
Exercise/forfeitures of options (4,150) (2,306) (1,822)
Amortization expense 2,280 1,544 1,407
Balance at end of year $ (6,252) $ (4,382) $ (3,620)
- -------------------------------------------------------------------------------------------------------------------
COLLATERALIZATION OF LOAN TO LESOP:
Balance at beginning of year $ (4,250) $ (6,375) $ (8,500)
Reduction of LESOP loan 2,125 2,125 2,125
Balance at end of year $ (2,125) $ (4,250) $ (6,375)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Per share data has been restated due to stock split. See accompanying notes to
consolidated financial statements.
48
<PAGE> 50
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Years ended December 31 (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 114,863 $ 94,503 $ 72,260
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in policy liabilities, unearned premiums and
claim liabilities (net of reinsurance) 132,285 172,195 213,544
Change in other assets and other liabilities 15,260 (15,174) 43,818
(Increase) decrease in accounts receivable (15,367) 2,007 (25,414)
Increase in accrued investment income (932) (3,353) (4,881)
(Decrease) increase in accrued commission and expenses (6,749) 20,722 37,355
Decrease in other policyholders' funds (2,009) (318) (6,108)
Increase in policy loans (1,025) (471) (978)
Amortization of deferred policy acquisition costs 590,117 497,855 449,749
Amortization of cost of insurance acquired 1,509 1,899 2,447
Policy acquisition costs deferred (660,414) (574,969) (531,048)
Provision for amortization and depreciation 12,783 9,150 11,873
Deferred income taxes 7,365 12,521 6,730
Net gain on sale of investments (10,394) (7,812) (721)
Compensation and tax effect on stock option shares 8,479 2,837 1,407
Net cash flow from purchases and sales of trading securities 8,660 (8,852) (4,019)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 194,431 202,740 266,014
- -------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of investments
Held-to-maturity securities (92,703) (351,992) (159,185)
Available-for-sale securities (1,287,688) (844,994) (346,237)
Mortgage loans (263)
Real estate (563)
Proceeds from sale of investments
Available-for-sale securities 1,038,856 223,292 94,267
Mortgage loans 870 1,200 2,654
Real estate 297 1,473 87
Proceeds from maturities of investments
Held-to-maturity securities 106,247 95,100 71,395
Available-for-sale securities 79,494 608,029 27,244
Increase in short-term investments (26,791) (1,447) (38,345)
Transactions related to capital assets
Capital expenditures (14,902) (10,946) (9,770)
Sales of capital assets 290 509 302
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (196,030) (279,776) (358,414)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 31,427 138,147 131,000
Repayment of notes payable (9,200) (149,513) (90,683)
Dividends paid to shareholders (24,761) (17,951) (14,824)
Proceeds from sale of stock 4,004 113,679 1,248
Purchase of treasury stock (6,684) (175) (893)
- -------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (5,214) 84,187 25,848
- -------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (356) 26 273
- -------------------------------------------------------------------------------------------------------------------
Net change in cash (7,169) 7,177 (66,279)
Cash at beginning of year 30,434 23,257 89,536
- -------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 23,265 $ 30,434 $ 23,257
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(1) DESCRIPTION OF BUSINESS
American Bankers Insurance Group, Inc. provides credit-related insurance
programs in the United States, Canada and the Caribbean. The Company also
conducts business in Latin America and the United Kingdom. ABIG, as an
international wholesaler and marketer of insurance products, services and
programs, concentrates on marketing through financial institutions,
retailers and other entities which provide consumer financing as a regular
part of their business.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles which vary in certain respects
from reporting practices prescribed or permitted by state insurance
departments and include the following significant accounting policies:
(a) Consolidation Policy
The accompanying consolidated financial statements include the accounts
of American Bankers Insurance Group, Inc. (ABIG) and its subsidiaries
(the Company):
* American Bankers Insurance Company of Florida (ABIC)
* American Bankers Life Assurance Company of Florida (ABLAC)
* American Reliable Insurance Company (ARIC)
* Bankers American Life Assurance Company (BALAC)
* Bankers Insurance Group (BIG)
* Caribbean American Life Assurance Company (CALAC)
* Caribbean American Property Insurance Company (CAPIC)
* Federal Warranty Service Corporation (FWSC)
* Voyager Insurance Companies
All significant intercompany transactions and accounts have been
eliminated in consolidation.
(b) Investments
Under FASB Statement 115, investments in debt and equity securities are
classified as either held-to-maturity, available-for-sale or trading.
Investments in debt securities are classified as held-to-maturity and
measured at amortized cost if the Company has the positive intent and
ability to hold these securities to maturity. Investments in debt
securities not classified as held-to-maturity and equity securities
with readily determinable fair values are classified as either
available-for-sale or trading securities and measured at fair value.
Securities that are purchased and held principally for the purpose of
selling them in the near term are classified as trading securities and
reported at fair value with subsequent changes in value reflected as
unrealized investment gains and losses in the Consolidated Statements
of Income. Investments not classified as either trading securities or
held-to-maturity securities are classified as available-for-sale
securities and reported at fair value with subsequent changes in value
reflected as unrealized investment gains and losses in the Consolidated
Statements of Common Stock and Other Stockholders' Equity.
50
<PAGE> 52
Equity securities are carried at market value. Mortgage loans and
policy loans are stated at the unpaid principal balance of such loans
net of unamortized discount. Investments with impairment in value,
which is other than temporary, are written down to estimated realizable
value. The writedowns are included in realized investment gains in the
Consolidated Statements of Income. Premiums and discounts on
mortgage-backed securities are amortized using the simple interest
method over the expected life of each security - generally 2 to 7
years. In addition, a pro rata portion of premiums and discounts is
recognized when principal payments are received and is included in net
investment income in the Consolidated Statements of Income. Unrealized
gains and losses on equity securities are reflected in Stockholders'
Equity. The cost of securities sold is based on the specific
identification method.
(c) Premium Revenues
Life insurance and annuity premiums, including single premiums for
accidental death and dismemberment policies, are reported as earned
when due. Credit life insurance premiums and accident and health
premiums are earned over the terms of the contracts in relation to
anticipated benefits to the policyholders. Property insurance premiums
are recognized as income principally on a pro rata basis over the life
of the policies.
(d) Policy Acquisition Costs
For life business, the costs of acquiring new business (principally
commissions and certain variable underwriting, agency and policy issue
expenses) are deferred and amortized over the term of the contracts as
follows:
* Acquisition costs relating to ordinary life contracts are amortized
over the estimated term of the contracts in proportion to the ratio
of the annual premium revenue to total premium revenue expected.
Acquisition costs for universal life and annuities are amortized
over the lives of the policies in relation to the present value of
estimated gross profits from surrender charges and investment,
mortality, and expense margins. The assumptions used for the
estimates are consistent with those used in computing the policy
liabilities.
* Acquisition costs relating to credit life and accident and health
insurance are amortized over the term of the contracts in relation
to premiums earned.
The method of computing the deferred policy acquisition costs for
property business (commissions and other acquisition expenses) limits
the amount deferred to the lower of (1) unearned premiums which remain
after deducting the expected amount of losses, loss adjustment
expenses, and servicing costs estimated to be incurred as the premiums
are earned; or (2) the costs applicable to the unearned premiums.
Deferred acquisition costs are reviewed quarterly to assure their
recoverability. The recoverability of the deferral is calculated
without considering investment income.
51
<PAGE> 53
(e) Policy Liabilities And Unearned Premiums
Policy liabilities on life and annuity business are computed
principally by the net level premium method based upon assumptions as
to future investment yield, mortality, morbidity, and withdrawals
consistent with those used to develop the gross premiums on the
policies in force. Universal life and annuity policyholders'
liabilities are based on full account values. Unearned premiums for
credit insurance and property business represent the unexpired portion
of the premiums.
(f) Claim Liabilities
Claim liabilities net of salvage and subrogation are based primarily
upon past experience and may be more or less than the amounts
ultimately paid or recovered when the claims are settled. Changes in
the estimated liability are charged or credited to operations as the
estimates are revised.
(g) Income Taxes
Deferred taxes are provided for temporary differences in the bases of
assets and liabilities for financial reporting and tax purposes.
(h) Property And Equipment
Depreciation of property and equipment is provided primarily on the
accelerated method. Buildings are depreciated on the straight line
method.
Depreciation expense for the years ended December 31, 1997, 1996 and
1995 was $10,091,000 $9,278,000 and $8,607,000, respectively and is a
component of operating expenses. Estimated useful lives range from 10
to 40 years for buildings and 3 to 10 years for furniture and
equipment.
(i) Earnings Per Common Share
In February 1997, the Financial Accounting Standards Board issued FASB
Statement 128 Earnings per Share, which specifies the computation,
presentation and disclosure requirements for earnings per share (EPS).
It replaces the presentation of primary and fully diluted EPS with
basic and diluted EPS. Basic EPS excludes all dilution. It is based on
income available to common shareholders and the weighted average number
of common shares outstanding during the period. Diluted EPS reflects
the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. The Company adopted FASB Statement 128 as of the fourth quarter
of 1997 and has restated all previously reported per share amounts to
conform to the new presentation.
(j) Pension Plan
Pension costs are comprised of service costs applicable to benefits
earned during the year, net interest cost or credit applicable to
interest on plan liabilities and plan assets, and amortization of
certain charges and credits including prior service costs.
52
<PAGE> 54
(k) Translation Of Foreign Currencies
For those foreign affiliates where the foreign currency is the
functional currency, unrealized foreign exchange gains (losses) net of
taxes have been reflected in Common Stock and Other Stockholders'
Equity under the caption "Net unrealized investment and foreign
exchange gains (losses)."
(l) Fair Values Of Financial Instruments
The Company has used the following methods and assumptions in
estimating its fair value disclosures:
* Investment securities: Fair values for fixed maturity securities
are based on quoted market prices when available. If quoted market
prices are not available, fair values are based on quoted market
prices of comparable instruments or values obtained from
independent pricing services. The fair values for equity securities
are based on quoted market prices.
* Mortgage loans and policy loans: The fair values for mortgage loans
are estimated using discounted cash-flow analysis, using interest
rates currently being offered for loans with similar terms. The
carrying amounts for policy loans approximate their fair values at
the reporting date.
* Cash and short-term investments: The carrying amounts reported in
the balance sheet for these instruments approximate their fair
values.
* Trade receivables and payables: The carrying amounts reported in
the balance sheet for these instruments approximate their fair
values.
* Notes payable: The carrying amount of the Company's short-term
financing program approximates its fair value. Fair values for the
Company's medium-term notes are based on a discounted cash-flow
calculation using the Company's current borrowing rate for similar
debts.
(m) Reinsurance
The Company recognizes the income (ceding fees) on reinsurance
contracts principally on a pro rata basis over the life of the policies
covered under the reinsurance agreements.
(n) Segment Information
Operating results and other financial data for each segment are
presented in Note 12. Industry segments are primarily composed of the
Company's business in the life and property and casualty insurance
industries. The geographic segments include the companies or branches
located in the United States and its possessions as domestic and all
other as foreign. Included in the domestic segments is one foreign
insurance subsidiary which writes no direct business, reinsures only
affiliated U.S. risks transacted in U.S. dollars and has elected to be
taxed as a U.S. corporation.
53
<PAGE> 55
(o) Reclassifications
Certain items in the 1996 and prior financial statements have been
reclassified to conform with the 1997 presentation.
(p) Estimates
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts. Certain
significant estimates, including those used in determining property and
casualty loss reserves, life insurance policy liabilities, deferred
acquisition costs, valuation allowances for investment assets and
unrecoverable reinsurance are discussed throughout the notes to
consolidated financial statements.
54
<PAGE> 56
(3) INVESTMENTS AND FAIR VALUES
INVESTMENTS
Previously, the Company would periodically purchase securities for trading
purposes generally not to exceed $20,000,000. The Company no longer engages
in this activity, and there were no securities in the trading portfolio at
December 31, 1997. At December 31, 1996, the Company held trading
securities with a fair value of $9,038,000 (amortized cost $8,867,000)
resulting in an unrealized gain of $171,000 which was included in operating
results.
At December 31, 1997 and 1996, the fair value, amortized cost, and gross
unrealized gains and losses of investments in held-to-maturity and
available-for-sale securities consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 (IN THOUSANDS) FAIR AMORTIZED GROSS UNREALIZED
HELD-TO-MATURITY VALUE COST GAINS LOSSES
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 141,447 $ 139,181 $ 2,593 $ (327)
Obligations of states and political subdivisions 100,748 98,636 2,204 (92)
Debt securities issued by foreign governments 26,326 25,794 696 (164)
Corporate securities 564,444 550,124 15,347 (1,027)
Other debt securities 22,873 22,873
- -------------------------------------------------------------------------------------------------------------------
TOTAL $ 855,838 $ 836,608 $ 20,840 $ (1,610)
- -------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 26,143 $ 25,927 $ 246 $ (30)
Obligations of states and political subdivisions 30,610 29,463 1,194 (47)
Debt securities issued by foreign governments 19,292 17,176 2,197 (81)
Corporate securities 232,307 226,757 6,545 (995)
Other debt securities 886 882 4
- -------------------------------------------------------------------------------------------------------------------
Subtotal 309,238 300,205 10,186 (1,153)
Collateralized mortgage obligations 664,552 650,211 14,545 (204)
- -------------------------------------------------------------------------------------------------------------------
TOTAL $ 973,790 $ 950,416 $ 24,731 $ (1,357)
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 (IN THOUSANDS) FAIR AMORTIZED GROSS UNREALIZED
HELD-TO-MATURITY VALUE COST GAINS LOSSES
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 180,212 $ 178,900 $ 2,157 $ (845)
Obligations of states and political subdivisions 119,427 117,953 1,736 (262)
Debt securities issued by foreign governments 31,416 29,502 1,969 (55)
Corporate securities 506,196 497,735 9,946 (1,485)
Other debt securities 27,056 27,056
- -------------------------------------------------------------------------------------------------------------------
TOTAL $ 864,307 $ 851,146 $ 15,808 $ (2,647)
- -------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 43,456 $ 44,256 $ (800)
Obligations of states and political subdivisions 19,597 19,326 $ 497 (226)
Debt securities issued by foreign governments 37,638 34,537 3,182 (81)
Corporate securities 136,629 133,807 3,743 (921)
Other debt securities 5,855 5,976 64 (185)
- -------------------------------------------------------------------------------------------------------------------
Subtotal 243,175 237,902 7,486 (2,213)
Collateralized mortgage obligations 561,949 555,315 8,476 (1,842)
- -------------------------------------------------------------------------------------------------------------------
TOTAL $ 805,124 $ 793,217 $ 15,962 $ (4,055)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE> 57
At December 31, 1997 and 1996, fixed maturities with an amortized cost of
$187,493,000 and $140,090,000 respectively were on deposit with insurance
regulatory authorities to meet statutory requirements. In addition, fixed
maturities with an amortized cost of $24,098,000 and $37,467,000 were being
held in trust under reinsurance agreements at December 31, 1997 and 1996,
respectively. The approximate market value and amortized cost of fixed
maturity investments at 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>
- -------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE-FOR-SALE
----------------------- -----------------------
FAIR AMORTIZED FAIR AMORTIZED
(IN THOUSANDS): VALUE COST VALUE COST
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 130,606 $ 130,479 $ 17,861 $ 18,181
Due after one year through five years 589,901 574,879 137,545 135,228
Due after five years through ten years 101,049 98,203 124,211 120,243
Due after ten years 34,282 33,047 29,621 26,553
- -------------------------------------------------------------------------------------------------------------------
Subtotal 855,838 836,608 309,238 300,205
Collateralized mortgage obligations 664,552 650,211
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 855,838 $ 836,608 $ 973,790 $ 950,416
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Foreign exchange gains and losses due to the translation of foreign currency are
combined with net unrealized investment gains and losses in the Stockholders'
Equity section of the Balance Sheet. Following is a reconciliation of the "Net
unrealized investment and foreign exchange gains (losses)" account:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
CHANGE CHANGE
DECEMBER 31 (IN THOUSANDS): 1997 FOR 1997 1996 FOR 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Maturities Available-for-Sale:
Gross unrealized gains $ 24,731 $ 8,769 $ 15,962 $ (4,223) $ 20,185
Gross unrealized losses (1,357) 2,698 (4,055) 393 (4,448)
Equity Securities:
Gross unrealized gains 21,507 3,323 18,184 420 17,764
Gross unrealized losses (5,578) (1,627) (3,951) (603) (3,348)
- -------------------------------------------------------------------------------------------------------------------
Subtotal 39,303 13,163 26,140 (4,013) 30,153
Taxes (13,066) (4,051) (9,015) 1,215 (10,230)
Foreign Exchange Translation (14,141) (4,453) (9,688) 2,980 (12,668)
- -------------------------------------------------------------------------------------------------------------------
TOTAL $ 12,096 $ 4,659 $ 7,437 $ 182 $ 7,255
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Investments by the Company in investment grade corporate debt securities
may be affected by a rating decline subsequent to acquisition. However, the
percentage of the portfolio affected by such developments is generally not
significant due to the diversification of the aggregate portfolio.
The Company has no significant investment concentration of credit risk by
issuer, industry or geographic region.
56
<PAGE> 58
An analysis of net realized gains and losses applicable to investments is as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS): 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed Maturities Held-to-Maturity:
Gross realized gains $ 2
Gross realized losses $ (118) (168)
Fixed Maturities Available-for-Sale:
Gross realized gains $ 6,776 2,240 712
Gross realized losses (3,708) (1,652) (266)
Fixed Maturities Trading:
Gross realized gains 241 218
Gross realized losses (622) (282)
Equity Securities:
Gross realized gains 16,922 14,353 6,734
Gross realized losses (8,016) (6,028) (1,653)
Other Invested Assets:
Gross realized gains 1,122 1,160 1,285
Gross realized losses (2,321) (2,143) (5,861)
- -------------------------------------------------------------------------------------------------------------------
TOTAL $ 10,394 $ 7,812 $ 721
- -------------------------------------------------------------------------------------------------------------------
The components of investment income are as follows:
- -------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS): 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Interest on fixed maturities $ 119,127 $ 103,539 $ 83,724
Dividends on preferred stocks 2,774 3,100 3,169
Dividends on common stocks 2,475 5,720 1,509
Interest on mortgage loans 1,131 1,072 1,228
Interest on policy loans 571 499 475
Short-term and other investment income 13,270 12,180 14,777
- -------------------------------------------------------------------------------------------------------------------
Total 139,348 126,110 104,882
Less: Investment expenses (5,233) (4,910) (5,482)
- -------------------------------------------------------------------------------------------------------------------
Net investment income $ 134,115 $ 121,200 $ 99,400
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
FAIR VALUES The fair value of the Company's financial instruments other than
investments and those where fair values approximate carrying value (See Note
2(l)) are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996
AT DECEMBER 31 FAIR CARRYING FAIR CARRYING
(IN THOUSANDS): VALUE AMOUNT VALUE AMOUNT
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Loans $ 9,700 $ 9,300 $ 10,600 $ 10,200
Notes Payable $ 244,800 $ 242,600 $ 221,300 $ 222,500
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE> 59
(4) POLICY LIABILITIES, UNEARNED PREMIUMS AND LIABILITIES FOR LOSSES AND LOSS
ADJUSTMENT EXPENSES
The composition of the liability at December 31, 1997 and 1996, and related
significant assumptions used are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
LIFE AMOUNT OF BASES OF ASSUMPTIONS (B)
INSURANCE FUTURE POLICY
IN FORCE (A) BENEFITS (A) INTEREST RATES
LINE OF BUSINESS (IN MILLIONS) (IN THOUSANDS) AND METHODS MORTALITY
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
LIFE:
<S> <C> <C> <C> <C> <C> <C>
Ordinary $ 381 $ 288 $ 30,109 $ 30,309 Rates range from 110% 55-60
8% graded to 4% Select and
for most recent Ultimate
issues and 4%
graded to 3% for
earliest issues.
Annuity
Fixed Premium 9,759 10,967 Same as above. Same as above.
Flexible Premium 31,544 34,766 Full Account Value
Single and Other
Paid Up 17,132 18,475 Full Account Value
Credit 23,540 15,819 152,021 113,638 Unearned premiums
based principally
on the "Rule of 78's"
method.
Group 5,190 10,335 1,172 1,304 7 1/2% Net Level
130% 60 CSG
Universal Life 3,709 3,094 133,648 105,210 Full Account Value
All Other 600 898 6,366 6,696 2.5%-6% Various
Net Level
ACCIDENT AND HEALTH:
Group 14,292 10,397 Unearned premiums
based on the
pro rata method.
Credit 115,336 104,604 Unearned premiums
based on the
average of the
pro rata and "Rule
of 78's" methods.
Individual 47,392 49,252 3% 105%
1959 ADB
Table
PROPERTY: 585,636 552,141 Unearned premiums
based principally on the
pro rata method.
- -------------------------------------------------------------------------------------------------------------------
Totals - Net 33,420 30,434 1,144,407 1,037,759
Reinsurance Ceded 20,274 18,270 602,808 545,139
Totals - Gross $ 53,694 $ 48,704 $ 1,747,215 $ 1,582,898
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Life insurance in force and future policy benefits are stated individually
net of reinsurance ceded to other companies. Reinsurance ceded to other
companies has been added back to policy liabilities and unearned premiums
for balance sheet presentation.
(B) All withdrawal assumptions are based on the Company's experience.
58
<PAGE> 60
PROPERTY AND CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES
The consolidated financial statements include estimated provisions for unpaid
losses and loss adjustment expenses (LAE) applicable to the Company's property
and casualty insurance subsidiaries. These subsidiaries write principally credit
property, unemployment, homeowners, mobilehome physical damage and livestock
lines of business throughout the United States, Canada, the Caribbean and the
United Kingdom. Such liabilities are established using a combination of case
basis estimates and actuarial projections and include provisions for claims
incurred but not yet reported as of the balance sheet date.
The Company's loss reserve development includes losses assumed from excess
casualty reinsurance pools in which the Company discontinued participation
effective on or prior to 1981. The business is long-tail in nature and losses
continue to exceed both Company and industry expectations. Most of these losses
result from asbestos-related and environmental pollution claims. The Company's
exposure is primarily through participation in excess casualty pools. These
pools typically involve high-layer coverages that are applicable only after
primary insurance coverage and, in many cases, reinsurance coverages have been
exhausted. The Company's experience can differ significantly from that of other
insurers which wrote the primary coverages directly. The Company establishes
loss reserves on known claims as recommended by the various pool managers, plus
additional reserves to compensate for those claims that have not yet been
reported.
At the current time, it is not possible to determine the future development of
asbestos and environmental claims due to a general absence of reliable
predictive data and of a generally accepted actuarial methodology for these
exposures, significant unresolved legal issues including coverage issues, policy
definitions and evolving theories and arguments. Additionally, the determination
of ultimate damages and the final allocation of such damages to financially
responsible parties is complex and uncertain. Our historical experience
suggests, however, that although reinsurance pool losses will continue, they
should not have a materially adverse effect on the Company's financial condition
or cash flows. Losses from the Company's discontinued reinsurance pools were
$6.6, $8.3 and $7.3 million in 1997, 1996 and 1995 respectively.
Overall claims experience is principally dependent on the frequency and severity
of claims as well as trends in litigation and loss cost inflation. With the
exception of discontinued lines, the Company writes primarily property coverages
which are characterized by relatively short settlement periods and quick
development of ultimate losses. Reinsurance pool reserves represent
approximately 10.2% of the gross liability for property and casualty losses and
LAE at December 31, 1997. The Company's estimating and reserving practices are
reviewed continually. Subsequent adjustments to the original estimates are made
when determinable and are reflected in current year operations.
59
<PAGE> 61
The accompanying tables present an analysis of losses and LAE for the Company's
domestic property and casualty subsidiaries. The following table provides a
reconciliation of beginning and ending liability balances for 1997, 1996 and
1995.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Reconciliation of Liability for Losses and Loss Adjustment Expenses for Domestic Property and Casualty Subsidiaries
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS): 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liability for losses and LAE at beginning of year (net) $ 185,838 $ 162,342 $ 137,978
- -------------------------------------------------------------------------------------------------------------------
Losses and LAE incurred related to:
Current year 329,151 313,469 263,768
Prior years (3,008) 4,270 6,187
- -------------------------------------------------------------------------------------------------------------------
Total incurred 326,143 317,739 269,955
- -------------------------------------------------------------------------------------------------------------------
Losses and LAE paid related to:
Current year (216,099) (200,794) (173,937)
Prior years (104,001) (93,449) (71,654)
- -------------------------------------------------------------------------------------------------------------------
Total paid (320,100) (294,243) (245,591)
- -------------------------------------------------------------------------------------------------------------------
Liability for losses and LAE at end of year (net) 191,881 185,838 162,342
Reinsurance receivable for unpaid losses 91,843 80,732 75,439
Liability for losses and LAE at end of year (gross) $ 283,724 $ 266,570 $ 237,781
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Accident and health net claim liabilities reported in the Company's life
subsidiaries were $80,564,000, $80,026,000 and $57,049,000 at December 31, 1997,
1996 and 1995, respectively. There was no significant adverse development during
the past three years.
60
<PAGE> 62
(5) REINSURANCE
The Company's insurance subsidiaries follow the policy of reinsuring risk
in excess of $250,000 under a domestic ordinary life policy, $400,000 under
an international ordinary life policy and $300,000 under a property policy.
In addition, aggregate excess of loss coverage is obtained for the
Company's property and casualty business as protection against catastrophic
losses. Ceded claim and policy liabilities are recorded as assets on the
balance sheet under the caption "Reinsurance Receivable." The Company's
insurance subsidiaries are liable for these amounts in the event reinsurers
are unable to pay their portion of the claims. The Company evaluates the
financial condition of its reinsurers and monitors concentration of credit
risk arising from similar geographic regions, activities or economic
attributes of the reinsurers to lessen its exposure to significant losses
from reinsurer insolvencies. Reinsurance ceded incurred losses for 1997 and
1996 were $416,333,000 and $315,096,000 respectively. Liabilities for ceded
claim reserves and recoverables on paid losses at December 31, 1997 and
1996 are shown below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31 (IN THOUSANDS): 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Ceded Claim Liabilities:
Life and health business $ 96,815 $ 63,554
Property and casualty business $ 136,228 $ 101,010
- -------------------------------------------------------------------------------------------------------------------
Reinsurance Recoverable on Paid Losses:
Life and health business $ 23,307 $ 19,492
Property and casualty business $ 35,907 $ 20,682
- -------------------------------------------------------------------------------------------------------------------
The effect of reinsurance on premiums written and earned for the years ended December 31 is as follows:
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
(IN THOUSANDS): WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
- -------------------------------------------------------------------------------------------------------------------
Life and Health:
Direct premiums $ 805,220 $ 718,748 $ 714,651 $ 677,758 $ 653,256 $ 562,360
Assumed premiums $ 89,031 $ 98,987 $ 48,563 $ 62,878 $ 49,209 $ 57,058
Ceded premiums $ 365,316 $ 411,995 $ 362,458 $ 356,671 $ 277,893 $ 242,311
- -------------------------------------------------------------------------------------------------------------------
Property and Casualty:
Direct premiums $ 1,791,426 $ 1,726,658 $ 1,690,883 $ 1,561,533 $1,474,399 $ 1,309,557
Assumed premiums $ 54,687 $ 65,807 $ 38,731 $ 74,524 $ 109,709 $ 79,158
Ceded premiums $ 761,037 $ 744,424 $ 637,448 $ 641,537 $ 601,123 $ 525,109
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE> 63
(6) INCOME TAXES
Prior to 1984, ABLAC was taxed at regular corporate rates in accordance
with the Life Insurance Company Income Tax Act of 1959, whereby a portion
of its statutory income was not subject to current income taxation, but was
accumulated in an account designated "policyholders' surplus." The
aggregate balance in this account ($17,000,000 at December 31, 1997) would
be taxed at applicable current rates only if distributed to stockholders or
if the account exceeded a prescribed maximum. The Deficit Reduction Act of
1984 eliminated additions to the account for 1984 and thereafter. ABLAC
does not anticipate any transactions that would cause any part of this
amount to become taxable. Deferred taxes in the amount of $5,950,000 have
not been provided since the Company does not anticipate any transactions
that would cause any part of the account balance to become taxable. As of
December 31, 1997, ABLAC has a shareholders' surplus account balance (on a
tax basis) of approximately $158,100,000 from which it could pay dividends
to stockholders without incurring any federal income tax liability, subject
to regulatory requirements and the availability of funds. The other life
insurance subsidiaries do not have policyholders' surplus account balances.
Under current Internal Revenue Code provisions, the life insurance
subsidiaries are taxed under a single-phase structure incorporating tax
rules comparable to other corporate taxpayers. The life insurance
subsidiaries are included in the Company's consolidated tax return.
ABIG and all other subsidiaries are taxed at regular corporate rates
applied to taxable income as determined in accordance with the Internal
Revenue Code.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Pre-tax income is derived from the following sources:
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS): 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic (including U.S. possessions) $ 160,040 $ 144,381 $ 107,772
Foreign (445) (8,436) (3,577)
- -------------------------------------------------------------------------------------------------------------------
Total $ 159,595 $ 135,945 $ 104,195
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Pre-tax income from foreign sources excludes the results of Canadian branches of
domestic companies.
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 liabilities and assets are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, (IN THOUSANDS): 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs $ 123,914 104,687
Net unrealized investment gains 13,066 9,015
Depreciation and amortization 5,602 5,218
Others - net 18,530 10,918
- -------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 161,112 129,838
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Insurance policy liabilities (74,604) (61,385)
Difference between book and tax bases of investments (3,343) (9,403)
Accrued expenses and other amounts not currently deductible for tax purposes (19,496) (16,179)
Tax loss carryforward of U.K. subsidiary (4,173) (4,496)
Others - net (12,003) (2,076)
- -------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets (113,619) (93,539)
Less valuation allowance 4,173 4,496
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax assets (109,446) (89,043)
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax liability (asset) $ 51,666 $ 40,795
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
62
<PAGE> 64
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS): 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 31,862 $ 24,169 $ 19,608
Foreign 5,505 4,752 5,597
- -------------------------------------------------------------------------------------------------------------------
Total current 37,367 28,921 25,205
- -------------------------------------------------------------------------------------------------------------------
Deferred:
Federal 9,025 11,032 6,773
Foreign (1,660) 1,489 (43)
- -------------------------------------------------------------------------------------------------------------------
Total deferred 7,365 12,521 6,730
- -------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $ 44,732 $ 41,442 $ 31,935
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for foreign taxes includes amounts attributable to income from
U.S. possessions which are considered foreign under U.S. tax laws.
Total income tax expense (benefit) varies from amounts computed by applying
current federal income tax rates to income before income taxes. The reasons for
these differences and the approximate tax effects thereon for each year ended
December 31 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Foreign operating loss carryforward 2.5 1.6
Rate differential - U.S. possessions (3.3) (2.5) (3.4)
Tax exempt investment income and dividends (1.2) (1.7) (2.4)
Tax settlement, refunds and other taxes .5 1.0 ( .4)
Tax credits, others - net (3.0) (3.8) .3
- -------------------------------------------------------------------------------------------------------------------
Effective tax rate 28.0% 30.5% 30.7%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes of $13,066,000, $9,015,000, and $10,230,000 in 1997, 1996
and 1995 respectively have been provided on net unrealized investment gains.
The Company intends to indefinitely reinvest the undistributed earnings of its
wholly owned foreign subsidiaries. The cumulative amount of undistributed
earnings for which the Company has not provided deferred income taxes is
approximately $77,300,000 as of December 31, 1997. Upon distribution of such
earnings in a taxable transaction, the Company would incur additional U.S.
income taxes in the amount of approximately $19,500,000 net of anticipated
foreign tax credits.
Current tax benefits of approximately $4,339,000 related to the vesting of
restricted stock were credited directly to additional paid-in capital in 1997.
At December 31, 1997, the Company's U.K. subsidiary had approximately
$12,645,000 in net operating loss (NOL) carryforwards. A valuation allowance for
the full amount of the related tax benefit has been established due to
uncertainties associated with utilization of the NOL carryforwards.
The Company made federal income tax payments (net of refunds) of $24,075,000,
$21,875,000, and $13,448,000 for the years 1997, 1996 and 1995 respectively.
63
<PAGE> 65
(7) NOTES PAYABLE
Following is a summary of outstanding debt at December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS): 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-term credit facility $ 111,744 $ 80,317
- -------------------------------------------------------------------------------------------------------------------
$200,000,000 medium-term note program 125,000 125,000
10.2% promissory notes due September 12, 1998, annual prepayments of $4.6 million
commenced September 12, 1995. Interest is payable quarterly. 9,200
Note payable guaranteed by the Company for LESOP. (See Note 9.) 2,125 4,250
Convertible debenture bonds due to officers on May 24, 1999 (convertible into 300,000
shares of the Company's Common Stock). Interest is payable quarterly at 1% above
prime. 3,723 3,723
- -------------------------------------------------------------------------------------------------------------------
Total $ 242,592 $ 222,490
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
On December 1, 1995, the Company replaced its short-term credit agreement with a
$250,000,000 five-year competitive advance and revolving credit agreement with a
group of banks. The credit facility features a revolving line of credit,
commercial paper and/or bid loan facilities. Interest rates vary according to
the credit instrument exercised and the market rates then prevailing. Quarterly
fees payable under this credit facility are: (a) fees payable to each lender,
based upon the Company's Moody's and Standard & Poor's ratings at every quarter
end; (b) utilization fees; and (c) administrative fee. The fees incurred in 1997
and 1996 were $237,000 and $316,000, respectively for these facilities. Fees for
1995 were $1,482,000 for the old credit agreement and credit facility. The
credit agreement contains various covenants pertaining to minimum stockholders'
equity, maximum funded debt ratio and insurance statutory surplus and other
ratios. No dividend payments are permitted if there is a default under the
credit facility. Consummation of the merger as contemplated by the Cendant
Merger Agreement will, unless consents or waivers are obtained from the group of
banks under the credit facility, constitute an event of default and result in
the termination of the credit facility. This event may impact the Company's
liquidity if it is required to repay all outstanding loans and advances pursuant
to the credit facility and the unavailability of further loans and advances
under the credit facility.
In 1994, the Company filed with the Securities and Exchange Commission a shelf
registration statement for $200,000,000 medium-term notes which provides for
maturities ranging from nine months to thirty years. Under this shelf
registration, the Company issued a $75,000,000 fixed rate note in May 1994 at
7.6% that is due May 1999 and interest is payable semi-annually. In addition,
the Company issued a five-year $50,000,000 floating rate note in April 1995.
Interest is payable and the rate is established on a quarterly basis. At
December 31, 1997, the interest rate was 6.4%.
Interest paid was $16,485,000 in 1997, $17,924,000 in 1996, and $14,328,000 in
1995.
The 10.2% promissory notes program was paid and terminated by the Company during
1997. The convertible debenture bonds were converted to shares of the Company's
common stock during January 1998.
64
<PAGE> 66
The following information is furnished with respect to the Company's short-term
borrowings (commercial paper and revolving line of credit):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31 (in thousands): 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Amount outstanding $ 111,744 $ 80,317
Weighted average interest rate on outstanding debt 6.14% 5.62%
- -------------------------------------------------------------------------------------------------------------------
For the year ended December 31 (in thousands): 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Average amount outstanding $ 97,078 $ 114,058
Maximum amount outstanding $ 132,744 $ 188,147
Average interest rate 5.83% 5.63%
</TABLE>
65
<PAGE> 67
(8) STOCKHOLDERS' EQUITY
The Company has authorized 10,000,000 shares of no par preferred stock. On
February 24, 1988, the Board of Directors adopted a "Rights Plan" (amended
November 14, 1990, December 19, 1997, February 5, 1998, and February 19,
1998) creating certain rights which attach to and trade with each share of
common stock outstanding on or after March 11, 1988. Upon the acquisition
of, or the announcement of a tender offer for, specified amounts of the
Company's common stock, the rights will separate from the common stock, at
which time holders of the rights will be entitled to purchase units of the
Company's Series A Participating Preferred Stock. Thereafter, under certain
circumstances (including acquisitions of specified amounts of the Company's
common stock, mergers involving the Company, and certain self-dealing
transactions by an acquisitor), holders of the rights will be entitled to
purchase common stock (or other property) of the Company (or of the
acquiring entity) at prescribed levels. At December 31, 1997, there were
350,000 shares of Series A Preferred Stock reserved for issuance. The
rights are redeemable at the Company's option and expire on March 10, 1998.
The Board of Directors adopted a new "Rights Plan" on February 19, 1998 and
designated and reserved for issuance 1,000,000 shares of Series C
Participating Preferred Stock, which terms are substantially similar to the
Series A Preferred Stock. Neither Rights Plans were or will be triggered by
the proposed acquisition by Cendant Corporation.
In August 1997, the Company declared a two-for-one split, effected in the
form of a stock dividend, on the Company's common stock.
At December 31, 1997, the Company had 2,300,000 shares of $3.125 Series B
Cumulative Convertible Preferred Stock issued and outstanding. Holders of
the Convertible Preferred Stock are entitled to a cumulative dividend,
payable quarterly, at the annual rate of $3.125 per share. If six quarterly
dividends are in arrears, the holders of the convertible preferred stock
will be entitled to vote as a separate class to elect two directors of the
Company. The Convertible Preferred Stock will not be redeemable prior to
August 7, 2000. On and after such date, the Convertible Preferred Stock
will be redeemable, in whole or in part, at the option of the Company, at
$51.88 per share of Convertible Preferred Stock during the period from
August 7, 2000 to August 6, 2001 and declining ratably annually to $50 per
share of Convertible Preferred Stock on or after August 7, 2006, plus in
each case accrued and unpaid dividends to the redemption date.
Each share of Preferred Stock has a liquidating preference of $50, plus
accrued and unpaid dividends, and is convertible at any time at the option
of the holders thereof into 1.9974 shares of Common Stock of the Company
(equivalent to a conversion price of $25.0325 per Common Share), subject to
adjustment under certain conditions.
Stock insurance companies are subject to various states' insurance laws and
regulations whereby amounts available for dividends are restricted. Net
consolidated assets restricted as to distribution to the Company are
$672,500,000. The maximum statutory allowed dividends in 1998 are
$141,300,000.
66
<PAGE> 68
A summary of statutory financial information for the domestic insurance
companies is presented below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory Net Income (including net realized capital gains/losses)
Life insurance subsidiaries $ 38,800 $ 54,100 $ 21,000
Property and casualty insurance subsidiaries $ 61,600 $ 52,200 $ 29,400
- -------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31 (IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Statutory Capital and Surplus
Life insurance subsidiaries $ 250,900 $ 234,700
Property and casualty insurance subsidiaries $ 416,300 $ 374,500
</TABLE>
Statutory Permitted Practices
The Company's insurance subsidiaries prepare their statutory financial
statements in accordance with accounting principles and practices prescribed or
permitted by the insurance department of their state of domicile. Prescribed
statutory accounting practices include state laws, regulations and general
administrative rules as well as a variety of publications of the National
Association of Insurance Commissioners (NAIC). Permitted statutory accounting
practices encompass all accounting practices that are not prescribed; such
practices differ from state to state and may change in the future. The NAIC has
a project to codify statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices.
(9) COMPENSATION AND OTHER PLANS
Stock Option Plans
EQUITY INCENTIVE PLAN
At their Annual Meeting in 1997, the stockholders approved the Equity Incentive
Plan (EIP). Under the EIP, selected officers and employees may be granted
Options, Stock Appreciation Rights, Restricted Stock, Merit Awards, Performance
Share Awards and Cash Awards. An aggregate of 4,000,000 (post-split) shares of
common stock are reserved for issuance under the EIP. Awards were granted as
follows:
Under the Incentive Stock Option award, 187,200 (post-split) options on shares
of common stock were granted of which 122,800 (post-split) shares were issued
upon exercise with an option price of $14.22. Certain key employees were granted
options at fifty percent of the fair market value of the common stock on the
grant date. Shares obtained by exercise are subject to restrictions. Non-vested
shares are subject to forfeiture if employment is terminated except by death,
disability or retirement. Vesting occurs ratably over a five-year period from
the date exercised. The weighted-average fair value of options granted during
the year was $14.31.
67
<PAGE> 69
Under the Non-Qualified Stock Option award, 175,200 (post-split) options on
shares of common stock were granted of which 162,600 (post-split) shares can be
exercised starting May 1998 at a price of $28.44. Certain key employees were
granted options at prices equivalent to the fair market value of the common
stock on the grant date. Each option further entitles the employee to be
awarded, for no additional consideration, two additional shares of restricted
common stock. Restricted shares vest three years from date of exercise. Options
are not exercisable before the first year anniversary nor after the third annual
anniversary from the date of the grant. The weighted-average fair value of
options granted during the year was $5.64.
Under the Non-Employee Directors Stock Option award, 26,000 (post-split) options
on shares of common stock were granted all of which can be exercised starting
May 1998 at a price of $28.44. Each non-employee director received 2,000
(post-split) options at prices equivalent to the fair market value of the common
stock on the grant date. The weighted-average fair value of options granted
during the year was $8.08.
SENIOR MANAGEMENT STOCK OPTION PLAN
Under the Senior Management Stock Option Plan (SMSOP), key management employees
were granted a total of 460,200 (post-split) options on shares of the common
stock during the years 1994 through 1996. Option prices were equivalent to the
fair market value of common stock on the grant date with prices ranging from
$11.07 to $23.75. The grantee received for no additional consideration two
shares of common stock subject to certain transfer restrictions for every one
primary share purchased upon the exercise of the option. During 1997, 144,400
(post-split) shares of common stock were issued upon exercise of options subject
to the plan, with option prices ranging from $11.07 to $23.75. As the result of
the adoption of the EIP, no new grants will be made under the SMSOP.
STOCK OPTION/RESTRICTED STOCK AWARD PLAN
Under the Stock Option/Restricted Stock Award Plan (SORSAP), key management
employees were granted a total of 1,167,600 (post-split) options on shares of
common stock during the years 1990 through 1994. Option prices were equivalent
to the fair market value of common stock on the grant date with prices ranging
from $4.13 to $13.25. The grantee received for no additional consideration three
shares of common stock subject to certain transfer restrictions for every one
primary share purchased upon the exercise of the option. As the result of the
adoption in 1994 of the SMSOP, no new grants were made under the SORSAP.
STOCK INCENTIVE COMPENSATION PLAN
Under the Stock Incentive Compensation Plan (SICP), key management employees
were granted a total of 672,100 (post-split) options on shares of common stock
during the years 1991 through 1996. Option prices were equivalent to fifty
percent of the fair market value of common stock on the grant date with prices
ranging from $3.66 to $11.88. As the result of the adoption of the EIP, no new
grants will be made under the SICP.
68
<PAGE> 70
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
Under the Non-Employee Directors' Stock Option Plan (Directors' Plan),
directors' received 2,000 (post-split) options annually at prices equivalent to
the fair market value of common stock on the grant date. The stock options were
granted during the years 1994 through 1996. As of December 31, 1997, 78,000
(post-split) shares of common stock were subject to options granted under the
Directors' Plan with option prices ranging from $11.28 to $20.19. During 1997,
8,000 (post-split) shares of common stock were issued upon exercise of options
subject to the stock option plan, with option prices ranging from $11.28 to
$20.19. As the result of the adoption of the EIP, no new grants will be made
under the Directors' Plan.
69
<PAGE> 71
A summary of the status and activity for options and shares granted and
exercised under the Plans at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
SORSAP/SMSOP SICP/Non Employee Directors EIP
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Granted Exercised Price Granted Exercised Price Granted Exercised Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1994 149,200 926,956 26,000 214,410
1995
Grants 148,800 157,000
Exercises (133,000) 133,000 (86,400) 86,400
Prices
(SORSAP $9.07 - $13.25)
(SMSOP $11.57 - $15.13)
(SICP $7.57 - $8.50)
(Non-Employee $11.28)
Forfeitures/Reacquisitions (15,000) (10,780)
Lapses (39,000) (48,600)
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at End of Year 126,000 1,044,956 48,000 290,030
(all exercisable)
1996
Grants 188,400 174,600
Exercises (121,200) 121,200 (102,000) 102,000
Prices
(SORSAP $13.25)
(SMSOP $11.07 - $23.75)
(SICP $10.25 - $11.88)
(Non-Employee $11.28 -
$14.94)
Forfeitures/Reacquisitions (29,076) (13,140)
Lapses (18,600) (56,600)
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at End of Year 174,600 1,137,080 $18.89 64,000 378,890 $16.04
(all exercisable)
1997
Grants 388,400 $21.58
Exercises (144,400) 144,400 $19.14 (8,000) 8,000 $16.65 (122,800) 122,800 $14.22
Prices
(SMSOP $11.07 - $23.75)
(Non-Employee $11.28 -
$20.19)
(EIP $14.22)
Forfeitures/Reacquisitions (19,404) $13.63 (8,666) $8.83 (1,000) ($14.22)
Lapses (9,800) $16.46 (77,000) $16.55
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at End of Year 20,400 $18.29 56,000 $15.96 188,600 $28.44
- ------------------------------------------------------------------------------------------------------------------------------------
Exercised - Net 1,262,076 378,224 121,800
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$11.28 - $28.44 265,000 2.66 $25.02 76,400 $16.58
</TABLE>
70
<PAGE> 72
Shares issued under the plans are recorded at fair market value at the effective
date of the grant. The unamortized difference ($6,252,000 as of December 31,
1997, and $4,382,000 as of December 31, 1996) between the fair market value and
option price on shares which are restricted is reported as part of stockholders'
equity. Amortization of the restricted stock is recorded as compensation expense
ratably over the vesting period ($2,280,000 in 1997, $1,544,000 in 1996, and
$1,407,000 in 1995). Furthermore, any difference between the fair market value
at the grant date and the option price on the unrestricted shares in the SORSAP
Plan and SMSOP Plan is recorded as compensation expense. Forfeitures are
included as credits in the income statement during the period in which the
forfeiting event occurs.
Fair Values of Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options as allowed pursuant to FASB
Statement No. 123, "Accounting for Stock Based Compensation" (FASB Statement
123). FASB Statement 123 requires use of option valuation models that require
the input of highly subjective assumptions, including expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant date for awards under those plans, consistent
with FASB Statement No. 123, the reduction in the Company's 1997, 1996, and 1995
net income and net income per share would have been insignificant. The effect of
applying the fair value method of accounting for stock options on reported net
income and net income per share for 1997, 1996 and 1995 may not be
representative of the effects for future years because outstanding options vest
over a period of several years and additional awards are generally made each
year.
The fair value of options granted was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Risk-free interest rate 5.78% 5.63% 5.97%
Expected life 1.25 1.33 1.34
Expected volatility 29.00% 26.00% 32.00%
Expected dividend yield 1.22% 1.99% 2.56%
</TABLE>
EXECUTIVE STOCK OPTION/DIVIDEND ACCRUAL PLAN
At their Annual Meeting in 1987, the stockholders approved the 1987 Executive
Stock Option/Dividend Accrual Plan (ESODAP). As of December 31, 1997, options
representing 1,420,828 shares (post-split) had been granted under the plan, of
which 1,109,404 (post-split) had been exercised and 131,876 (post-split) had
been terminated. A key feature of the plan is the Dividend Accrual Account which
allows for the crediting of dividends in order to assist the executive in the
exercise of the options. As the result of the adoption of the SORSAP and SICP,
no new grants were made under the ESODAP.
71
<PAGE> 73
Other Plans
KEDP
Under the 1994 Key Executive Debenture Plan (KEDP), the Board may select certain
Company officers to be eligible to purchase convertible debentures. As of
December 31, 1997, two debentures in the aggregate amount of $3.7 million had
been issued which are convertible into all the 300,000 shares as currently
reserved under the plan. All debentures were converted by the holders in January
1998.
LESOP
The Leveraged Employee Stock Ownership Plan (LESOP) through its trust was funded
by a loan from a bank which was collateralized with newly issued shares of the
Company's stock purchased by the LESOP at market price.
Although the debt is not a direct obligation of the Company, it is nevertheless
reported as part of the Company's debt with an offsetting balance reflected as a
reduction of stockholders' equity. As contributions to the LESOP are made by the
Company, the debt is repaid to the bank by the LESOP and the balances on the
Company's balance sheet are reduced accordingly. The Company has guaranteed the
Trust's loan obligation. It intends to make contributions to the LESOP in
amounts sufficient to enable the Trust to repay the loan on a quarterly basis
over ten years, including interest equal to 6%. The shares held by the bank as
collateral are released proportionately as loan repayments are made. Upon such
release, the shares are available for allocation to employees based upon years
of service. Employees are entitled to direct the vote of the shares allocated to
them on voting instruction forms furnished to the trustee. Unallocated shares
are voted by the LESOP's Trustee. At December 31, 1997 and 1996, the loan
balance was $2.1 million and $4.3 million respectively. The interest portion of
the LESOP pension expense was $.3 million in 1997 and $.4 million in 1996.
As a result of the promulgation of Statement of Position (SOP) 93-6 -
"Employers' Accounting for Employee Stock Ownership Plans" - by the American
Institute of Certified Public Accountants in late 1993, new reporting rules
became effective in 1994. These changes are mandated for shares acquired in 1993
and later, and are optional for previously acquired shares. The Company has no
shares subject to the mandated provisions and, as permitted by the SOP, is not
electing to change its accounting for previously acquired shares. The following
disclosures are made to supplement previously disclosed plan information:
* Dividends paid on all shares held by the LESOP are used to service the
existing debt of the LESOP.
* Compensation expense for the years ended December 31, 1997, 1996 and 1995
was $976,000, $1,186,000 and $1,430,000 respectively. The compensation
expense represents the Company's contributions to the LESOP necessary to
meet its periodic debt service, after applying dividend payments received
on the shares held by the LESOP. All dividends paid on such shares retain
their character as distributions made from the Company's retained earnings.
* All shares held by the LESOP are treated as issued and outstanding and,
accordingly, are included in the Company's earnings per share calculations.
72
<PAGE> 74
* Shares held by the LESOP as of December 31, 1997 include the following:
Prior allocated 3,503,986
Allocated in 1997 343,432
Suspense shares 343,440
Distribution (684)
---------
Total 4,190,174
=========
DIRECTORS' DEFERRED COMPENSATION PLAN
The 1994 Amended and Restated Directors' Deferred Compensation Plan (Deferred
Plan) allows the directors to defer their fees in cash or in common stock
equivalents. The fees that are deferred in common stock equivalents will
accumulate and earn interest from the time the fees are deferred until the last
day of each quarter when they are converted to common stock equivalents. Upon
termination from the board, the director will receive, as elected, either cash
or actual shares of the Company's common stock. The Deferred Plan provides for
the issuance of up to 400,000 shares of the Company's common stock. At December
31, 1997 there were 123,273 shares allocated under this plan.
(10) PENSION PLAN
The Company has a non-contributory pension plan covering substantially all of
its domestic employees. Benefits under the Plan are based on years of service
and compensation levels near retirement. The Company's funding policy is to
contribute amounts that meet minimum funding requirements but which do not
exceed the maximum funding limits as currently determined under applicable tax
regulations. The Plan previously reached the full funding limitation and,
accordingly, no contributions were made in 1997, 1996 and 1995.
73
<PAGE> 75
The pension plan expense included the following components for the years ended
December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2,398 $ 2,146 $ 1,903
Interest cost 2,562 2,230 1,988
Actual return on plan assets (15,701) (7,656) (9,228)
Net amortization and deferral 11,541 4,499 6,862
Pension plan expense $ 800 $ 1,219 $ 1,525
- -------------------------------------------------------------------------------------------------------------------
The following sets forth the funded status of the Plan and the amount of prepaid
pension cost included in the Company's balance sheet at December 31:
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
A. Vested benefit obligation $ (25,374) $ (21,892)
- -------------------------------------------------------------------------------------------------------------------
B. Accumulated benefit obligation $ (29,573) $ (25,228)
- -------------------------------------------------------------------------------------------------------------------
C. Projected benefit obligation $ (38,846) $ (33,868)
Plan assets at fair value, primarily
listed stocks and bonds 59,984 44,897
- -------------------------------------------------------------------------------------------------------------------
Excess of Plan assets over projected benefit obligation 21,138 11,029
Unrecognized net (gain) from past
experience different from that assumed (19,387) (8,435)
Prior service cost not yet recognized in net periodic
pension costs (166) (208)
- -------------------------------------------------------------------------------------------------------------------
Prepaid pension cost included in other assets $ 1,585 $ 2,386
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Assumptions used were as follows: 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Plan discount rate for benefit obligation 7.5% 7.5%
Rate of increase in compensation 5% 5%
Expected long-term rate of return on assets 9% 9%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Board of Directors previously approved a non-qualified supplemental benefit
plan. This unfunded deferred compensation plan is intended to provide pension
benefits which would otherwise be provided under the benefit accrual formula
applicable to all employees in the Company's qualified Plan, but which are in
excess of an annual amount permitted under current tax regulations. Expense ($.5
million in 1997, $.1 million in 1996 and $.1 million in 1995) is being
recognized over the remaining service period for the officers presently covered.
74
<PAGE> 76
(11) COMMITMENTS AND CONTINGENCIES
A summary of the approximate future minimum rental payments required under
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
For the Years ending December 31 (in thousands): Real Property Equipment Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 3,005 3,397 6,402
1999 3,096 3,104 6,200
2000 2,597 1,015 3,611
2001 1,247 583 1,831
2002 543 13 556
- -------------------------------------------------------------------------------------------------------------------
$ 10,488 $ 8,112 $ 18,600
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Total rental expense for the years ended December 31, 1997, 1996 and 1995 was
$10,962,000, $9,258,000 and $7,661,000 respectively.
Contingencies
During 1995, the Company completed a settlement with the Federal Deposit
Insurance Corporation (FDIC) of the only remaining lawsuit against the Company
relating to its relationship with a former credit bond client. This settlement
included the entry of orders by the Court dismissing all claims between the
Company and the FDIC with prejudice. The settlement, net of previously
established reserves, resulted in a charge of $5.8 million. Effective with this
settlement, the Company concluded all litigation ever initiated against it in
connection with its discontinued credit bond insurance business.
Certain of ABIG's subsidiaries, including the Company, are presently parties to
a number of individual consumer and class action lawsuits pending in Alabama
involving premium, rate, sales practices, marketing, disclosure and policy
coverage issues. While a number of similar suits have been filed in other
jurisdictions, the insurance and finance industries have been targeted in
Alabama by plaintiffs' lawyers who enjoy a favorable judicial climate. The
Company typically has been named as a co-defendant with one or several retailer
or finance companies who have sold the Company's product to a consumer. Other
insurers are also joined as co-defendants in some of the suits.
Although the Alabama lawsuits and similar suits pending in Mississippi and other
jurisdictions generally involve relatively small amounts of actual or
compensatory damages, they typically assert claims requesting substantial
punitive awards or purport to represent a large class of policyholders. The
Company denies any wrongdoing in any of these suits and believes that it has not
engaged in any conduct that would warrant an award of punitive damages or that
the class allegations have merit. The Company has been advised by legal counsel
that it has meritorious defenses to all claims being asserted against it.
While no one case is necessarily significant in terms of financial risk to the
Company, the judicial climate in Alabama is such that the outcome of these cases
is extremely unpredictable. Moreover, class action lawsuits to which the Company
is a party do not lend themselves to potential damage calculation. Without
admitting any wrongdoing, the Company has settled a number of these suits, but
there are still a significant number of cases pending, and it is expected that
more suits alleging essentially the same causes of action are likely to continue
to be filed during 1998. The Company intends to continue to defend itself
vigorously against all such suits and believes, based on information currently
available, that
75
<PAGE> 77
any liabilities that could result are not expected to have a material adverse
effect on the Company's financial position.
As described more fully in Note 15 - "Change of Control of the Company" on page
79 of this report, on December 22, 1997, the Company announced that it had
entered into a merger agreement with AIG and on January 27, 1998, Cendant
Corporation ("Cendant") and Season Acquisition Corp. ("Season") commenced an
unsolicited tender offer for 51% of the Company's shares. Six legal actions have
been brought against the Company and members of its board of directors growing
out of the proposed merger with AIG and Cendant's tender offer.
The Company and members of its board of directors deny all allegations of
unlawful conduct asserted in any of these actions and have been advised by
counsel that they have meritorious defenses to each of them. The Company intends
to continue to defend itself vigorously against these actions and believes,
based on currently available information, that any liabilities that could result
are not expected to have a material effect on the Company's financial position.
The Company is involved with a number of cases in the ordinary course of
business relating to insurance matters or, more infrequently, certain corporate
matters. Generally, the Company's liability is limited to specific amounts
relating to insurance or policy coverage for which provision has been made in
the financial statements. Other cases involve general corporate matters which
generally do not represent significant contingencies for the Company.
76
<PAGE> 78
(12) SEGMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
INDUSTRY SEGMENTS (IN THOUSANDS): 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net premiums earned:
Life $ 405,741 $ 383,968 $ 377,108
Property and Casualty 1,048,042 994,517 863,605
- -------------------------------------------------------------------------------------------------------------------
Total $1,453,783 $1,378,485 $1,240,713
- -------------------------------------------------------------------------------------------------------------------
Income before interest and income taxes:
Life $ 67,219 $ 65,346 $ 45,868
Property and Casualty 113,301 91,837 87,372
Other (4,681) (3,708) (13,466)
- -------------------------------------------------------------------------------------------------------------------
Subtotal 175,839 153,475 119,774
Interest expense (16,244) (17,530) (15,579)
- -------------------------------------------------------------------------------------------------------------------
Total $ 159,595 $ 135,945 $ 104,195
- -------------------------------------------------------------------------------------------------------------------
Identifiable assets:
Life $1,653,825 $1,446,570 $1,339,220
Property and Casualty 2,071,566 1,969,282 1,602,480
Other 57,060 53,651 46,034
- -------------------------------------------------------------------------------------------------------------------
Total $3,782,451 $3,469,503 $2,987,734
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Summarized data for the Company's foreign operations (principally in Canada and
the United Kingdom) and domestic operations are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC SEGMENTS (IN THOUSANDS): 1997 1996 1995
<S> <C> <C> <C>
Net premiums earned:
Domestic (including U.S. possessions) $1,393,576 $1,315,822 $1,190,084
Foreign 60,207 62,663 50,629
- -------------------------------------------------------------------------------------------------------------------
Total $1,453,783 $1,378,485 $1,240,713
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes:
Domestic (including U.S. possessions) $ 153,803 $ 129,652 $ 100,616
Foreign 5,792 6,293 3,579
- -------------------------------------------------------------------------------------------------------------------
Total $ 159,595 $ 135,945 $ 104,195
- -------------------------------------------------------------------------------------------------------------------
Identifiable assets:
Domestic (including U.S. possessions) $3,518,463 $3,294,847 $2,871,773
Foreign 263,988 174,656 115,961
- -------------------------------------------------------------------------------------------------------------------
Total $3,782,451 $3,469,503 $2,987,734
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company distributes its products through eight markets or distribution
channels involving over one thousand clients. Its business is generally not
concentrated, and no single customer accounted for 10% or more of the Company's
consolidated gross collected premiums in 1997.
77
<PAGE> 79
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1997 and 1996,
is presented below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER COMMON SHARE DATA): First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 404,881 $ 406,040 $ 408,162 $ 402,299
Total benefits and expenses $ 367,567 $ 365,869 $ 366,527 $ 361,824
Net income $ 26,419 $ 28,618 $ 29,839 $ 29,987
Net income per common share - basic $ .60 $ .65 $ .67 $ .68
- -------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
Total revenues $ 375,697 $ 385,988 $ 399,619 $ 367,731
Total benefits and expenses $ 344,810 $ 350,733 $ 367,922 $ 329,625
Net income $ 20,636 $ 25,060 $ 22,637 $ 26,170
Net income per common share - basic $ .51 $ .61 $ .52 $ .59
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The sum of the quarterly earnings per share amounts may not equal the comparable
amounts for the full year because the computations are done independently.
(14) EARNINGS PER SHARE
The Company adopted FASB Statement 128 "Earnings per Share" for the period
ending December 31, 1997. This Statement replaces the presentation of primary
and fully diluted EPS with a presentation of basic and diluted EPS. All prior
year data has been restated to conform with the provisions of this Statement and
to reflect the two-for-one stock split effective September 1997. The following
is the required reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 1997 FOR THE YEAR ENDED DECEMBER 1996
---------------------------------------- ----------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
NUMERATOR DENOMINATOR AMOUNT NUMERATOR DENOMINATOR AMOUNT
---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income 114,862,558 94,502,963
less: Preferred stock dividends (7,187,500) (3,114,580)
----------- ----------
BASIC EPS:
Income available to common
stockholders 107,675,058 41,433,123 2.60 91,388,383 40,696,882 2.24
==== ====
EFFECT OF DILUTIVE SECURITIES:
Common stock options 671,670 930,104
Convertible preferred stock 7,187,500 4,594,020 3,114,580 1,963,472
Convertible Debentures 231,665 300,000 228,086 300,000
---------- ---------- ---------- ----------
DILUTED EPS:
Income available to common
stockholders plus assumed
conversions 115,094,223 46,998,813 2.45 94,731,049 43,890,458 2.16
=========== ========== ==== ========== ========== ====
</TABLE>
78
<PAGE> 80
(15) CHANGE OF CONTROL OF THE COMPANY
The Company entered into an Agreement and Plan of Merger, dated as of March 23,
1998, by and among Cendant Corporation ("Cendant"), Season Acquisition
Corporation ("Season") and the Company (the "Cendant Merger Agreement") pursuant
to which (i) the previously announced tender offer by Season is being conducted
(the "Offer") and (ii) upon consummation of the Offer, the merger of the Company
with and into Season will be consummated (the "Merger"). The execution of the
Cendant Merger Agreement followed the public announcement by Cendant on January
27, 1998 of its proposal to acquire the Company for $58 per share of Common
Stock, to be paid in cash and common stock of Cendant and the subsequent
announcement by Cendant on March 16, 1998, increasing the per share price for
its proposal from $58 to $67.
Under the terms of the Cendant Merger Agreement, Season is offering to purchase
23,501,260 outstanding shares of Common Stock at a price of $67.00 per Common
Share, net to the seller in cash, without interest thereon. Following the
consummation of the Offer, the Company will be merged with and into Season with
Season continuing as the surviving corporation. Season will succeed to the
business of the Company and will assume the name American Bankers Insurance
Group, Inc. As a result of the Merger, each Common Share then outstanding (other
than Common Shares owned by Cendant, Season or any direct or indirect subsidiary
of the company and in each case not held on behalf of third parties) will be
converted into, and become exchangeable for, that number of shares of Cendant
Common Stock having a value equal to the amount derived by dividing $67.00 by
the average closing prices of the Cendant Common Stock as reported on the NYSE
composite transactions reporting system (as reported by the New York City
edition of the Wall Street Journal) for the ten trading days ending on the third
trading day prior to the date the Merger is consummated). In addition, pursuant
to the Merger, each of the then outstanding $3.125 Series B Cumulative
Convertible Preferred Shares ("Preferred Shares") will be converted into one
share of Cendant Preferred Stock having substantially similar terms to the
Preferred Shares, except that such shares shall be convertible into shares of
Cendant Common Stock in accordance with the terms of the Preferred Shares.
The consummation of the Merger is conditioned upon several requirements,
including shareholder and regulatory approval. If the Company fails to
consummate the Merger, under certain circumstances, the Company will be
obligated to pay a termination fee to Cendant of $94.9 million plus expenses.
Cendant's proposal to acquire the Company followed an announcement by the
Company that it had entered into an agreement with American International Group,
Inc. ("AIG") for the acquisition by AIG of 100 percent of the outstanding stock
of the Company pursuant to the merger (the "AIG Merger") of the Company with and
into AIGF, Inc., a Florida corporation and a newly formed wholly-owned
subsidiary of AIG, in accordance with the terms of the Agreement and Plan of
Merger, dated as of December 21, 1997 among the Company, AIG and AIGF as amended
and restated as of January 7, 1998, amended by Amendment No. 1 thereto dated as
of January 28, 1998, and as further amended and restated as of February 28, 1998
(the "AIG Merger Agreement"). In connection with the AIG Merger Agreement, the
Company had granted AIG an option to purchase a number of newly issued shares of
Common Stock equal to approximately 19.9% of the outstanding number of shares of
Common Stock pursuant to the Stock Option Agreement dated as of December 21,
1997, as amended and restated as of February 28, 1998 (the "Stock Option
Agreement"). In addition, Messrs. Landon and Gaston who hold approximately 8.3%
of the outstanding Common Stock had entered into a voting agreement (the "Voting
Agreement") with AIG pursuant to which these stockholders agreed to vote their
shares of Common Stock in favor of
79
<PAGE> 81
adoption of the AIG Merger Agreement and approval of the AIG Merger and to grant
to AIG an irrevocable proxy with respect to such shares of Common Stock, subject
to certain conditions.
The AIG Merger Agreement, Stock Option Agreement and Voting Agreement have been
terminated. On March 18, the Company, AIG and Cendant entered into a settlement
agreement (the "Settlement Agreement") pursuant to which AIG agreed to
temporarily waive certain provisions of the AIG Merger Agreement, which waiver
permitted the Company to terminate the AIG Merger Agreement and enter into the
Cendant Merger Agreement. On March 23, 1998, in accordance with the terms of the
Settlement Agreement, the Company paid to AIG a termination fee of $100 million
principally from funds provided by its short-term credit facility and Cendant
paid $5 million, and agreed to pay an additional $5 million to AIG in respect of
AIG's expenses, and the Company and AIG entered into a termination agreement
which resulted in the termination of the AIG Merger Agreement, the Stock Option
Agreement and the Voting Agreement.
The Merger is subject to approval by regulatory authorities and the Company's
shareholders which are expected to be obtained by the end of the second quarter
of 1998. In connection with the Merger, the Company will recognize certain
expenses associated with the accelerated vesting of benefits under several
compensation plans, including employee stock options and restricted stock. The
Company estimates that the after-tax charge related to the acceleration of such
benefits will be approximately $6 million.
Certain officers of the Company have severance agreements which entitle them to
receive specified payments under certain circumstances following a change in
control. The maximum amount that the Company could incur pursuant to such
severance agreements is approximately $12.7 million, net of tax.
80
<PAGE> 82
Schedule I
AMERICAN BANKERS INSURANCE GROUP, INC.
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
(IN THOUSANDS)
Information of Summary of Investments - Other Than Investments in Related
Parties is included on page 11 in Part I Item 1 c. of this report, and in
Note 3 on page 55 in Part II Item 8 of this report, with the exception of
the Information on Equity Securities which is included below.
<TABLE>
<CAPTION>
AMOUNT
AT WHICH SHOWN IN
COST MARKET VALUE THE BALANCE SHEET
---- ------------ -----------------
<S> <C> <C> <C>
Equity Securities:
Common Stocks:
Public Utilities $ 799 $ 693 $ 693
Banks, Trust and Insurance
Companies 6,905 8,415 8,415
Industrial, Miscellaneous and
All Other 80,467 94,384 94,384
Non-Redeemable Preferred
Stock 37,174 37,782 37,782
-------- -------- --------
Total Equity Securities $125,345 $141,274 $141,274
======== ======== ========
</TABLE>
81
<PAGE> 83
Schedule II
AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
AT DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Assets
- ------
Investments in subsidiaries* $1,029,476 $934,610
Investment in common stock 2,478
Amounts due from subsidiaries* 14,631
Other investments 859 1,109
Accounts Receivable 8,417 2,676
Cash 286 366
Other 13,182 12,093
---------- --------
Total Assets $1,069,329 $950,854
========== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Short-term debt $113,869 $80,317
Long-term debt 128,723 142,173
Amounts due to subsidiaries* 2,853
Accrued expenses and other liabilities 12,868 15,304
---------- --------
Total liabilities 255,460 240,647
---------- --------
Stockholders' Equity
- --------------------
Preferred stock 115,000 115,000
Common stock 41,806 20,530
Additional paid-in capital 212,010 217,939
Net unrealized investment and foreign
exchange gains 12,096 7,437
Retained earnings 449,444 359,359
Treasury stock, at cost (8,110) (1,426)
Unamortized restricted stock (6,252) (4,382)
Collateralization of loan to Leveraged Employee
Stock Ownership Plan (2,125) (4,250)
---------- --------
Total stockholders' equity 813,869 710,207
---------- --------
Total liabilities and stockholders' equity $1,069,329 $950,854
========== ========
</TABLE>
*Eliminated in consolidated financial statements.
See accompanying notes to condensed financial statements.
82
<PAGE> 84
Schedule II
AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Revenues:
---------
<S> <C> <C> <C>
Net investment income $4,102 $5,934 $2,744
Net realized investment (losses) (4,835) (4,379) (194)
Dividends from subsidiaries* 48,959 21,270 8,775
------------ ------------ -----------
Total revenues 48,226 22,825 11,325
------------ ------------ -----------
Expenses
--------
Operating expenses 423 3,943 13,214
Interest 16,188 17,530 15,565
------------ ------------ -----------
Total expenses 16,611 21,473 28,779
------------ ------------ -----------
Income (loss) before income taxes and
equity in undistributed income of subsidiaries 31,615 1,352 (17,454)
Income Tax (Benefit) Expense:
-----------------------------
Current (3,774) (5,356) (8,853)
Deferred 235 (1,313) 27
------------ ------------ -----------
(3,539) (6,669) (8,826)
------------ ------------ -----------
Income (loss) before equity in
undistributed income of subsidiaries 35,154 8,021 (8,628)
Equity in undistributed income of
subsidiaries* 79,709 86,482 80,888
------------ ------------ -----------
Net income $114,863 $94,503 $72,260
============ ============ ===========
</TABLE>
*Eliminated in consolidated financial statements.
See accompanying notes to condensed financial statements.
83
<PAGE> 85
Schedule II
AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net income $114,863 $94,503 $72,260
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries (79,708) (73,427) (79,523)
(Increase) decrease in amounts due from subsidiaries (23,641) 28,960 (8,654)
(Increase) decrease in accounts receivable (5,742) (2,284) 1,500
Decrease (increase) in other assets 1,790 (7,373) 5,346
Increase in accrued liabilities 2,031 399 3,402
Other 11,681 5,050 1,370
Deferred income taxes 232 (2,213) 27
------ ------ ------
Net cash provided (used in) by operating activities 21,506 43,615 (4,272)
------ ------ ------
Investing activities:
Increase in investment in subsidiaries (10,851) (82,789) (4,587)
Purchase of available for sale securities (2,478)
Decrease (increase) in other investments 236 1,636 (193)
Payment for purchase of subsidiaries, net of cash acquired (3,279) (46,742) (17,034)
------ ------- -------
Net cash used in investing activities (16,372) (127,895) (21,814)
------- -------- -------
Financing activities:
Purchase of treasury stock (6,684) (175) (893)
Proceeds from issuance of common stock 4,004 1,898 1,248
Proceeds from issuance of preferred stock 111,781
Proceeds from issuance of short-term debt - other 31,427 138,147 50,000
Proceeds from issuance of long-term debt - other 81,000
Repayment of long-term debt - other (9,200) (4,683) (4,683)
Repayment of short-term debt - other (144,830) (86,000)
Cash dividends paid to stockholders (24,761) (17,951) (14,824)
------- ------- -------
Net cash provided by financing activities (5,214) 84,187 25,848
------- ------- -------
Net decrease in cash (80) (93) (238)
Cash at beginning of year 366 459 697
------- ------- -------
Cash at end of year $286 $366 $459
======= ======= =======
</TABLE>
See accompanying notes to condensed financial statements
84
<PAGE> 86
Schedule II
AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DECEMBER 31, 1997
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction
with the Consolidated Financial Statements and notes thereto of American Bankers
Insurance Group, Inc. and subsidiaries.
The Company is scheduled to repay the LESOP note at a yearly amount of
$2,125,000 plus interest. For a description of short-term and long-term debt
payable to others and related information see Note 7 to the Consolidated
Financial Statements on page 64 in Part II Item 8 of this report. For a
description of the Company's commitments and contingencies, see Note 11 to the
Consolidated Financial Statements on page 75 in Part II Item 8 of this report.
Certain items in the 1996 financial statements have been reclassified to conform
with the 1997 presentation.
85
<PAGE> 87
Schedule III
AMERICAN BANKERS INSURANCE GROUP, INC.
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Future Other Policy Net
Deferred Policy Policy Unearned Claim Premium Investment
Acquisition Benefits Premiums Benefits Revenue Income*
----------- -------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
1997
- ----
Life & Health $212,749 $311,181 $544,940 $214,299 $405,741 $57,268
Property & Casualty 245,540 891,094 341,498 1,048,042 76,806
Other 41
-------- -------- -------- -------- -------- -------
Total $458,289 $311,181 $1,436,034 $555,797 $1,453,783 $134,115
======== ======== ========== ======== ========== ========
1996
- ----
Life & Health $167,686 $291,756 $419,573 $189,700 $383,965 $47,604
Property & Casualty 220,307 871,569 297,896 994,520 69,960
Other 3,636
-------- -------- -------- -------- -------- -------
Total $387,993 $291,756 $1,291,142 $487,596 $1,378,485 $121,200
======== ======== ========== ======== ========== ========
1995
- ----
Life & Health $146,548 $275,250 $399,500 $161,926 $377,108 $40,249
Property & Casualty 164,331 779,367 242,819 863,605 58,415
Other 736
-------- -------- -------- -------- -------- -------
Total $310,879 $275,250 $1,178,867 $404,745 $1,240,713 $99,400
======== ======== ========== ======== ========== =======
<CAPTION>
Benefits
Claims and Other Net
Loss Amortization Operating Premiums
Expenses of DAC Expenses Written**
-------- ------ -------- ---------
<C> <C> <C> <C>
1997
- ----
Life & Health $184,003 $162,218 $ 34,263 $211,816
Property & Casualty 348,604 427,899 275,014 1,085,076
Other 13,542
-------- -------- -------- --------
Total $532,607 $590,117 $322,819 1,296,892
======== -------- -------- ---------
1996
- ----
Life & Health $176,935 $93,843 $91,700 $152,681
Property & Casualty 346,089 404,012 250,532 1,092,166
Other 12,449
-------- -------- -------- --------
Total $523,024 $497,855 $354,681 $1,244,847
======== ======== ======== ==========
1995
- ----
Life & Health $168,899 $91,953 $96,105 $196,596
Property & Casualty 294,231 357,796 206,190 982,985
Other 25,900
======== -------- -------- --------
Total $463,130 $449,749 $328,195 $1,179,581
======== ======== ======== ==========
</TABLE>
* Excluding net realized investment gains of $10,394, $7,812, and $721 for 1997,
1996 and 1995, respectively.
**Excluding Life and Annuity premiums.
86
<PAGE> 88
Schedule IV
AMERICAN BANKERS INSURANCE GROUP, INC.
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Assumed Percentage of
Gross Ceded to other from other amount assumed
amount companies companies Net amount to net
------ --------- --------- ---------- ------
1997
- ----
<S> <C> <C> <C> <C> <C>
Life insurance in force $43,128,980 $20,274,140 $10,564,799 $33,419,639 31.61%
=========== =========== =========== =========== ======
Premiums:
Life insurance 388,527 228,231 79,402 239,698 33.13%
Accident & Health insurance* 496,862 218,945 17,473 295,391 5.92%
Property & Liability insurance 1,560,018 709,243 67,920 918,695 7.39%
--------- ------- ------ ------- -----
Total premiums $2,445,407 $1,156,419 $164,795 $1,453,784 11.34%
========== ========== ======== ========== ======
1996
- ----
Life insurance in force $37,851,887 $18,270,339 $10,852,864 $30,434,412 35.7%
=========== =========== =========== =========== =====
Premiums:
Life insurance $357,795 $190,201 $47,825 $215,419 22.2%
Accident & Health insurance* 469,532 213,834 26,688 282,386 9.5%
Property & Liability insurance 1,411,964 594,173 62,889 880,680 7.1%
---------- -------- -------- ---------- ----
Total premiums $2,239,291 $998,208 $137,402 $1,378,485 10.0%
========== ======== ======== ========== =====
1995
- ----
Life insurance in force $41,916,797 $10,522,839 $791,405 $32,185,363 2.4%
=========== =========== ======== =========== ----
Premiums:
Life insurance $285,100 $123,004 $40,329 $202,425 19.9%
Accident & Health insurance* 376,010 151,155 35,870 260,725 13.8%
Property & Liability insurance 1,169,333 493,268 101,498 777,563 13.1%
---------- -------- -------- ---------- -----
Total premiums $1,830,443 $767,427 $177,697 $1,240,713 14.3%
========== ======== ======== ========== =====
</TABLE>
*Includes premiums from both the life and property and casualty segments.
87
<PAGE> 89
Schedule VI
AMERICAN BANKERS INSURANCE GROUP, INC.
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY
INSURANCE OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Claims and Claim Adjustment Expenses
Incurred Related To
Paid Claims and
Claim
Adjustment
Current Year Prior Years * Expenses
----------------------- -------------------- -------------------------
<S> <C> <C> <C>
1997
- ----
Consolidated Property and Casualty Entities $350,650 ($2,046) $340,306
1996
- ----
Consolidated Property and Casualty Entities $345,857 $232 $313,299
1995
- ----
Consolidated Property and Casualty Entities $285,119 $9,112 $261,463
</TABLE>
Information otherwise required in the Schedule is provided in Schedule III.
*1995 amount has been restated to reflect the reclassification of credit bond
losses in Schedule III, approximately $8,000.
88
<PAGE> 90
ITEM 9
- ------
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
89
<PAGE> 91
PART III
- --------
ITEM 10
- -------
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------
a. Identification Of Directors And Executive Officers
--------------------------------------------------
NAME AGE BUSINESS EXPERIENCE AND DIRECTORSHIPS
- ---- --- -------------------------------------
R. Kirk Landon 68 Director (since 1980); Chairman of
the Board (since 1980), Chief
International Officer (since 1996)
and Chief Executive Officer of the
Company (1980-1995); Chief
International Officer of ABIC and
ABLAC (since 1996); Director (since
1982), President (1977-1988) and
Chief Executive Officer (1979-1995)
of ABIC; Director (since 1980),
President (1979-1988) and Chief
Executive Officer (1979-1995) of
ABLAC; Director, CALAC (since 1988);
Director, CAPIC (since 1992);
Director, BICL (since 1990); Vice
Chairman, Board of Trustees, Barry
University (university), Miami
Shores, FL (since 1983); Chairman
and Director, Federal Reserve Bank
of Atlanta (Miami Branch) Miami, FL
(since 1991); Director, Mayor's
Jewelers (jewelry retailers), Coral
Gables, FL (since 1987).
Gerald N. Gaston 65 Director (since 1980); President and
Chief Executive Officer (since
1996), President and Vice Chairman
of the Board (since 1980), President
and Chief Operating Officer of the
Company (1980-1995); Chief Executive
Officer (since 1996), Chief
Operating Officer (1980-1995),
Chairman of the Board (since 1993)
and Vice Chairman of the Board
(1979-1992) of ABIC and ABLAC (since
1993); Chairman of the Board, ARIC,
VGI, VLIC, and VLHIC (since 1993);
Director, BALAC (since 1991).
William H. Allen, Jr. 62 Director (since 1992); Vice
Chairman, NationsBank, N.A. (South)
(banking), Miami, FL (since 1996);
Chairman of the Board and Chief
Executive Officer, Intercontinental
Bank, (commercial banking), Miami,
FL (1987-1995); Director Winsloew
Furniture Group (furniture
manufacturer and distributor),
Pompano Beach, FL (since 1993);
Director, Decorator Industries
(manufacturer of accessories for
hospitality, recreation vehicle and
manufactured housing industries),
Ft. Lauderdale, FL (since 1995).
90
<PAGE> 92
Nicholas A. Buoniconti 57 Director (since 1993); Vice
Chairman, Chief Operating Officer
and Director, Columbia Laboratories,
Inc. (pharmaceutical distribution),
Hollywood, FL (since 1992); Partner,
Nicholas A. Buoniconti, P.A.,
(attorneys-at-law), Miami, FL
(1990-1992); President and Chief
Operating Officer, UST,
(conglomerate), Greenwich, CT
(1983-1989); Director, BALAC (since
1993); Director, Innkeepers USA (own
and manage hotels), Palm Beach, FL
(since 1995); Director, The Sports
Authority (sporting goods), Ft.
Lauderdale, FL (since 1996).
Armando M. Codina 51 Director (since 1987); Chairman of
the Board of Codina Group Inc. (real
estate development), Coral Gables,
FL (since 1989); Director,
Winn-Dixie Stores, Inc. (food
stores), Jacksonville, FL (since
1987); Director, BellSouth
Corporation (communications),
Atlanta, GA (since 1992); Director,
FPL Group, Inc. (electric utility),
Juno Beach, FL (since 1995);
Director, AMR, Inc. (airline),
Dallas, TX (since 1995).
Peter J. Dolara 60 Director (since 1995);
Officer/Senior Vice President,
American Airlines (airline), Coral
Gables, FL (since 1971); Director,
SunTrust, Miami, FL (since 1997).
Daryl L. Jones 42 Director (since 1994); State of
Florida Senator District 40 (since
1992); Major/Lt. Col. F16 Pilot,
U.S. Air Force Reserves (since
1989); Of Counsel/Attorney, Adorno &
Zeder, P.A. (attorneys-at-law),
Miami, FL (since 1996); Investment
Banker (since 1997), Executive Vice
President, Douglas James Securities,
Inc. (investment banking)
(1994-1996); Of Counsel/Attorney,
Fowler, White, et al., P.A.
(attorneys-at-law), Miami, FL
(1992-1996).
James F. Jorden 56 Director (since 1982); Senior
Managing Partner, Jorden Burt Boros
Cicchetti Berenson & Johnson LLP
(attorneys-at-law), Miami, FL (since
1988).
Jack F. Kemp 62 Director (since 1995, with break in
service September 1996 through
November 1996); Co-Director, Empower
America (public policy/think tank),
Washington, DC (since 1993);
Secretary, U.S. Department of
H.U.D., Washington, D.C.
(1990-1993); Director, Landair
Services (air transport service),
Greenville, TN (since 1993);
Director, Oracle
91
<PAGE> 93
(database software provider),
Redwood Shores, CA (since 1995);
Director, Columbus Trust Realty
(Real Estate Investment Trust),
Dallas, TX (since 1993); Director,
Cyrix (designer, developer and
manufacturer of high performance
processors for personal computers),
Richardson, TX (since 1993);
Director, World Corp. (air
transportation services and
transaction processing), Herndon, VA
(since 1995).
Bernard P. Knoth, S.J. 49 Director (since 1997); President,
Loyola University (university), New
Orleans, LA (since 1995); Associate
Dean of Georgetown University
(university), Washington, D.C.
(1993-1995).
Eugene M. Matalene, Jr. 50 Director (since 1990); President,
Strada Capital (merchant banking),
New York, NY (since 1997); Managing
Director, Furman Selz (investment
banking), New York, NY (1996-1997);
Managing Director, PaineWebber
Incorporated (investment banking),
New York, NY (1987-1996).
Albert H. Nahmad 57 Director (since 1993); President,
Chairman of the Board and Chief
Executive Officer, Watsco, Inc.
(distributor of residential central
air conditioners), Miami, FL (since
1973); Director, Panama Canal
Commission (since 1995); Board
member, Florida Council of 100
(advisory board to the Governor of
Florida) (since 1994); Chairman of
the Board of Directors, Miami
Children's Hospital Foundation,
Miami, FL (since 1990); Director
Mayor's Jewelers, Miami, FL (jewelry
retailers) (since 1995); Director,
Pediatrix Medical Group (physician
management services) (since 1996).
Nicholas J. St. George 59 Director (since 1983); President,
Chief Executive Officer (since 1979)
and Director (since 1972) of Oakwood
Homes Corporation (manufacturer,
retailer and financier of
mobile/manufactured homes),
Greensboro, NC; Director, Legg
Mason, Inc. (investment banking),
Baltimore, MD (since 1983);
Director, Carey International, Inc.,
(limousine services), Washington,
D.C. (since 1997).
Robert C. Strauss 56 Director (since 1992); Director,
President and CEO, Noven
Pharmaceuticals (drug delivery
company), Miami, FL (since 1997);
President and Chief Operating
Officer, Ivax (generic drug maker)
(1997); President and Chief
Executive Officer, Cordis, a Johnson
& Johnson company (1996-1997),
Miami, FL; Chairman, President,
Chief Executive
92
<PAGE> 94
Officer, Chief Financial Officer
(1983-1995) and Director (since
1987), Cordis Corporation,
(manufacturer of internal medical
devices), Miami, FL; Director,
Columbia Labs (pharmaceutical
distribution), Miami, FL (since
1995); Director, Cardio Genesis
Corp., (manufacturer of medical
devices for the heart), Sunnyvale,
CA (since 1996).
George E. Williamson, II 52 Director (since 1985); President,
Williamson Cadillac Company,
(automobile dealer), Miami, FL
(since 1967); President, Williamson
Saturn, Inc., d/b/a Saturn of
Dadeland and Saturn of West Dade
(automobile dealer), Miami, FL
(since 1991 and 1995, respectively);
Director, Northern Trust Bank of
Florida, N.A. (banking), Miami, FL
(since 1988).
Eugene E. Becker 48 Chief Marketing Officer of the
Company (since 1996), Chief
Executive Officer (since 1996) of
ABIC and ABLAC; Executive Vice
President (since 1991) of the
Company; Chief Executive Officer of
VGI, VLHIC, and VLIC (1996); Chief
Marketing Officer of the Company
(1991-1995); President of ABIC
(1989-1996); Executive Vice
President of ABLAC (1983-1989);
Director, Financial Markets of ABIC
and ABLAC (since 1983); Director
(1989-1996), CEO (1996); President
(1993-1996) of ARIC; Chairman of the
Board (since 1991) of BALAC;
Director of BARC (since 1995);
President (1993-1996) and Chief
Operating Officer (1993-1995) of
VGI, VLHIC, and VLIC.
P. Bruce Camacho 40 Executive Vice President of Investor
Relations and International
Development of ABIC and ABLAC (since
1996); First Senior Vice President
of ABIC and ABLAC (1995-1996); Vice
President of Investor Relations,
ABIC and ABLAC (1994-1995); Vice
President Sales and Marketing
Support (1993); Director of CALAC
and CAPIC (since 1996); Director of
BIG and ABSV (1997).
Floyd G. Denison 54 Executive Vice President - Finance
of the Company, ABIC and ABLAC
(since 1995); Executive Vice
President and Director, Corporate
Asset Management of the Company
(1993-1995); Treasurer of the
Company (1986-1991); Executive Vice
President, Investments of ABIC and
ABLAC (since 1996), Senior Vice
President, Investments of ABIC and
ABLAC (1983-1996); Vice President of
BALAC (since 1991); Chairman of the
Board of BARC (since 1996); Director
of BICL (1995-1996); Director of
93
<PAGE> 95
VIIC, VLIC, VLHIC (since 1996);
Director of VPCIC (since 1993).
Jay R. Fuchs 42 President of ABLAC (since 1993);
President of ABIC (since 1995);
Executive Vice President of ABIC
(1996); Director, ABIC and ABLAC
(since 1991); Executive Vice
President, Financial Markets of ABIC
and ABLAC (1988-1991); Director
(since 1991) and President (since
1996) of BALAC; Director of VLIC and
VLHIC (since 1993); Director of VGI
(1993-1995), VIIC, VPCIC (since
1993).
Leonardo F. Garcia 47 Vice President and Treasurer of the
Company (since 1996); Secretary of
the Company (1994-1996); Senior Vice
President and Chief Investment
Officer of ABIC and ABLAC (since
1996); Senior Vice President and
Secretary, Corporate Planning and
Acquisitions of ABIC and ABLAC
(1994-1996); Vice President of
Investments (1993-1995); Secretary
of VGI (1994-1996); Assistant
Secretary of ARIC (1995-1996)
Director (since 1995) and Secretary
(1994-1996) of BALAC; Secretary of
CALAC and CAPIC (1994-1996);
Director and Secretary of BARC
(1995-1996); Secretary of VGI and
VPCIC (1994-1996); Assistant
Secretary of VIIC, VLIC and VLHIC
(1994-1996).
Arthur W. Heggen 52 Secretary of the Company (since
1996); Vice President and Treasurer
of the Company (1991-1996); Vice
President and Principal Accounting
Officer of the Company (1990-1991);
Senior Vice President (since 1990),
Secretary (since 1996) of ABIC and
ABLAC; Vice President of BALAC
(1995-1996); Secretary and Director
of BALAC (since 1996); Secretary of
VGI, VPCIC, CALAC, and CAPIC (since
1996); Assistant Secretary VIIC,
VLIC, and VLHIC (since 1996).
Robert F. Hill 35 Chief Accounting Officer of the
Company (since 1996); Senior Vice
President and Chief Accounting
Officer of ABIC and ABLAC (since
1996); Vice President of ARIC
(1995-1996); Audit Manager, Price
Waterhouse (accounting firm)
(1993-1995).
Jason J. Israel 45 Executive Vice President,
Administration (since 1996);
Executive Vice President,
Operations, of ABIC and ABLAC
(1993-1995); Senior Vice President,
Financial Operations, of ABIC and
ABLAC (1992); Senior Vice
94
<PAGE> 96
President, Profits, of ABIC and
ABLAC (1990-1992); Vice President of
BALAC (since 1995); Executive Vice
President of CALAC and CAPIC
(1995-1997).
Michael T. Ray 43 Executive Vice President,
Information Services of ABIC and
ABLAC (since 1996); First Senior
Vice President, Personal and
Financial Sales, of ABIC and ABLAC
(1994-1995); First Senior Vice
President, Marketing Director, of
ABIC and ABLAC (1992-1994); Senior
Vice President, Financial Insurance
Processing, of ABIC and ABLAC
(1990-1992).
Stephen T. Williams 45 Executive Vice President,
Subsidiaries (since 1996) of the
Company; Chief Executive Officer of
VGI, VIIC, VLIC, VLHIC, VPCIC and
ARIC (since 1996); Executive Vice
President, Marketing Director, of
ABIC and ABLAC (since 1996); First
Senior Vice President, Marketing
Director, of ABIC and ABLAC
(1994-1995); Senior Vice President,
Regional Sales, of ABIC and ABLAC
(1988-1993); Director of BALAC
(since 1991); President (1991-1995)
and Executive Vice President of
BALAC (since 1996).
b. Involvement in Certain Legal Proceedings
----------------------------------------
None of the Directors or Executive Officers named above are involved in
legal proceedings required to be disclosed under Item 401(f) of Regulation S-K.
c. Compliance with Section 16 Reporting Requirements
-------------------------------------------------
Under the U.S. federal securities laws, the Company's directors,
certain officers, and any persons holding more than ten percent of the Company's
Common Stock are required to report their ownership of the Company's Common
Stock and $3.125 Series B Preferred Stock and any changes in that ownership to
the Securities and Exchange Commission and the National Association of
Securities Dealers, until June 1997 and the New York Stock Exchange. Specific
due dates for these reports have been established and the Company is required to
report any failure to file by these dates during 1997. All of these filing
requirements were satisfied by these persons, with the exception of Messrs.
Gaston, MacNeill, and Nahmad. Each of these individuals are directors of the
Company and Mr. Gaston is also an executive officer of the Company. Mr. Gaston
transferred, by gift, to his wife 22,000 shares of Common Stock on September 19,
1997 and failed to report the gift on his Form 5 filed on February 13, 1998. An
amended Form 5 was filed on February 26, 1998. Mr. MacNeill failed to timely
report 18,745 shares received in May 1997. A Form 4 was filed on July 9, 1997 to
report this transaction. Mr. Nahmad failed to file on a timely basis 11,000
shares sold by Watsco, Inc. on October 31, 1997. A Form 4 was filed on January
9, 1998 to report this transaction. In making these statements, the Company has
relied on the written representations of its incumbent directors, officers, and
its ten percent holders and copies of the reports that they have filed with the
Commission.
95
<PAGE> 97
ITEM 11
- -------
EXECUTIVE COMPENSATION
----------------------
a. SUMMARY COMPENSATION TABLE
--------------------------
The Summary Compensation Table below indicates the cash compensation
paid by the Company and its subsidiaries as well as certain other compensation
paid or accrued for the Chief Executive Officer and the four other highest paid
executive officers, for services rendered in all capacities during the fiscal
years ended December 31, 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
---------------------------- -------------------------------------------------- ----------------------------------------
Name and Principal Position Year Salary($) Bonus($)(1) Other Annual Restricted Options/ All Other
Compensation Stock SARs Compensation
($)(2) Awards (#)(3) ($)(5)
($)(3)(4)
---------------------------- ------- ----------- ------------- ---------------- ----------- ---------- -----------------
<S> <C> <C> <C> <C>
R. Kirk Landon 1997 618,269 519,200 --- --- --- 37,531
Chairman and Chief
International Marketing
Officer of ABIG
------- ----------- ------------- ---------------- ----------- ---------- -----------------
1996 544,135 454,600 --- --- --- 21,728
------- ----------- ------------- ---------------- ----------- ---------- -----------------
1995 482,992 437,000 --- --- --- 18,954
---------------------------- ------- ----------- ------------- ---------------- ----------- ---------- -----------------
Gerald N. Gaston 1997 672,115 986,200 --- --- --- 37,623
President, Vice Chairman
and Chief Executive
Officer of ABIG
------- ----------- ------------- ---------------- ----------- ---------- -----------------
1996 560,481 919,100 --- --- --- 21,728
------- ----------- ------------- ---------------- ----------- ---------- -----------------
1995 428,230 405,600 --- --- --- 18,954
---------------------------- ------- ----------- ------------- ---------------- ----------- ---------- -----------------
Eugene E. Becker 1997 292,385 238,800 --- 170,625 9,000 37,623
Executive Vice President
and Chief Marketing
Officer of ABIG
------- ----------- ------------- ---------------- ----------- ---------- -----------------
1996 253,423 229,900 --- 123,000 4,500 21,728
------- ----------- ------------- ---------------- ----------- ---------- -----------------
1995 230,973 171,600 --- 84,700 4,200 18,954
---------------------------- ------- ----------- ------------- ---------------- ----------- ---------- -----------------
Jay R. Fuchs 1997 224,951 165,900 --- 136,500 7,200 37,669
President of ABLAC and
ABIC
------- ----------- ------------- ---------------- ----------- ---------- -----------------
1996 194,329 159,200 --- 90,200 3,300 21,728
------- ----------- ------------- ---------------- ----------- ---------- -----------------
1995 178,310 125,800 --- 66,550 3,300 18,954
---------------------------- ------- ----------- ------------- ---------------- ----------- ---------- -----------------
Floyd G. Denison 1997 193,654 135,300 --- 136,500 7,200 37,669
Executive Vice President
of Finance
------- ----------- ------------- ---------------- ----------- ---------- -----------------
1996 179,393 101,800 --- 82,000 3,000 24,847
------- ----------- ------------- ---------------- ----------- ---------- -----------------
1995 159,198 72,200 --- 48,400 2,400 18,954
---------------------------- ------- ----------- ------------- ---------------- ----------- ---------- -----------------
</TABLE>
- ---------------
(1) Estimated. Bonuses earned during a fiscal year are not paid until May
of the following fiscal year.
96
<PAGE> 98
(2) Officers also receive certain perquisites and personal benefits;
however, such items do not exceed the lesser of $50,000 or 10% of such
Officer's salary and bonus and, therefore, are not required to be
reported.
(3) Officers receive options with underlying Restricted Stock under the
1997 Equity Incentive Plan ("Incentive Plan"). The options are not
exercisable until May 23, 1998. Under the Incentive Plan, the grantees
were given options which upon the exercise the grantee will receive one
"Primary Share" and two additional shares of "Restricted Shares" for
each option. The Restricted Shares vest three years from the date of
exercise of the related option. Holders of Restricted Shares are
entitled to receive dividends equal to those granted to the holders of
the Company's Common Stock and are entitled to vote such shares. The
exercise price for the Primary Shares was $28.4375. The number of
shares underlying the options granted and the exercise price have been
adjusted for the two-for-one split declared on August 29, 1997.
(4) At December 31, 1997, Restricted Shares of Common Stock held by the
executive officers named in the table and the market value thereof were
as follows: Mr. Landon, 81,000 shares acquired under the 1991 Stock
Option/Restricted Stock Award Plan (the "1991 Plan"), $3,720,938; Mr.
Becker 11,600 acquired under the Senior Management Stock Option Plan
(the "Senior Plan"), $532,875; Mr. Fuchs, 13,200 under the Senior Plan,
$606,375; and Mr. Denison 7,200 under the Senior Plan, $330,750.
(5) For 1997, this amount represents the allocation of shares of the
Company's Common Stock under the Company's Leveraged Employee Stock
Ownership Plan. Mr. Landon, Mr. Gaston, Mr. Becker, Mr. Fuchs and Mr.
Denison were allocated 817, 819, 819, 820 and 820 shares, respectively.
The value is based on the market value at year-end of $45.9375
multiplied by the number of shares allocated to each named executive
officer.
97
<PAGE> 99
b. Option Grants In 1997
---------------------
The following table sets forth information with regard to grants of
stock options to each of the named executive officers during the year ended
December 31, 1997. Grants were made under the 1997 Equity Incentive Plan (the
"Incentive Plan"). No SARs have been granted.
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed
Annual Rates
of Stock
Number of Price
Securities Appreciation
Underlying % of Total for Option
Options Options Granted Exercise of Term
Granted to Employees in Base Price Expiration --------------- --------------
Name (#)(1)(2) Fiscal Year (3) ($/sh)(2) Date 5%($)(4) 10%($)(4)
------------------- ----------------- ----------------- ------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
R. Kirk Landon -- -- -- -- -- --
------------------- ----------------- ----------------- ------------- -------------- --------------- --------------
Gerald N. Gaston -- -- -- -- -- --
------------------- ----------------- ----------------- ------------- -------------- --------------- --------------
Eugene E. Becker 9,000 2.5% 28.4375 5/23/00 341,851 405,827
------------------- ----------------- ----------------- ------------- -------------- --------------- --------------
Jay R. Fuchs 7,200 2% 28.4375 5/23/00 273,481 324,661
------------------- ----------------- ----------------- ------------- -------------- --------------- --------------
Floyd G. Denison 7,200 2% 28.4375 5/23/00 273,481 324,661
------------------- ----------------- ----------------- ------------- -------------- --------------- --------------
</TABLE>
(1) See footnote (3) under Summary Compensation Table of this 10-K for
material terms of the options granted.
(2) Adjusted for the two-for-one split declared on August 29, 1997.
(3) As a percentage of options granted under the Incentive Plan. During
1997, options for 354,200 underlying shares were granted under the
Incentive Plan which includes options for 23,400 underlying shares
granted to the named executive officers.
(4) Assumed annual rates of appreciation of 5% and 10% would result in the
price of the Company's Common Stock increasing to $47.463 and $54.571,
respectively.
98
<PAGE> 100
c. Aggregated Option Exercises In 1997 And 1997 Year-end Option Values
-------------------------------------------------------------------
The following table sets forth information with regard to stock option
exercises during 1997 by each of the named executive officers and December 31,
1997 values of all unexercised options held by such individuals.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options at in-the-Money Options at
12/31/97(#)(2) 12/31/97 ($)(3)
Shares ------------------------- --------------------------
Acquired On Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($)(1) Unexercisable Unexercisable
- ------------------------ ---------------- --------------------- ------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
R. Kirk Landon 56,653 2,663,958 212,380/0 7,649,053/0
- ------------------------ ---------------- --------------------- ------------------------- --------------------------
Gerald N. Gaston 122,194 5,225,669 140,000/0 4,693,938/0
- ------------------------ ---------------- --------------------- ------------------------- --------------------------
Eugene E. Becker 10,196 502,969 48,938/9,000 2,137,790/328,125
- ------------------------ ---------------- --------------------- ------------------------- --------------------------
Jay R. Fuchs --- --- 0/7,200 0/262,500
- ------------------------ ---------------- --------------------- ------------------------- --------------------------
Floyd G. Denison 17,678 852,485 0/7,200 0/262,500
- ------------------------ ---------------- --------------------- ------------------------- --------------------------
</TABLE>
- ---------------
(1) Market value of shares acquired at date of exercise minus exercise
price for those shares.
(2) All unexercised options include options that were granted under the
1987 Executive Stock Option/Dividend Accrual Plan; 160,000 shares for
Mr. Landon and 140,000 shares for Mr. Gaston which are issuable upon
conversion of the debentures granted under the 1994 ABIG Key Executive
Debenture Plan; and options granted under the 1997 Equity Incentive
Plan (the "Incentive Plan"). See note (3) for the Summary Compensation
Table and the accompanying table disclosure for additional information
regarding the options granted under the Incentive Plan.
(3) Market value at year-end minus exercise price.
99
<PAGE> 101
d. Retirement Plans
----------------
The Company has a non-contributory pension plan covering substantially
all of its employees. The Company contributes such amounts as are necessary, on
an actuarial basis, to provide the plan with assets sufficient to meet the
benefits to be paid to plan members. Contributions under the plan are based on
length of service and average annual compensation. Compensation includes normal
salary and wages and does not include bonuses, overtime pay, reimbursements or
special pay. Upon normal retirement, age 65, the participant's monthly benefit
will be equal to 2% of the "average monthly earnings" multiplied by the number
of years of service to the Company less 50% of the monthly primary social
security benefits to which the individual is entitled. The participant's
"average monthly earnings" equals the average monthly compensation for the
highest 60 consecutive months of compensation within the last 120 months
immediately preceding retirement. There was no actuarially-determined pension
expense as a result of the plan reaching the full funding limitation.
On August 24, 1991, the Board of Directors approved the Non-qualified
Supplemental Benefit Plan. The plan is a non-qualified, unfunded, deferred
compensation arrangement designed solely to equalize the total benefits certain
key executives would have received under the Company's Retirement Plan, but for
the limitations on benefits imposed by Section 415 of the Internal Revenue Code
(as reflected in Section 7.01 of the Retirement Plan). The plan is intended to
benefit the Company and its affiliates by recognizing the value of the past and
present services of the key executives covered by the plan and to encourage them
to continue careers with the Company and its affiliates. The Compensation and
Nominating Committee administers and interprets the provisions of the plan.
Participants are those key executives designated from time to time by the Board
of Directors.
100
<PAGE> 102
Following are the estimated annual benefits under both Retirement Plans
for various lengths of service and compensation levels based on the assumption
that the retiree will choose a life-only benefit and is retiring at age 65
during the year 1997. Election of the other available payment options could
change the benefit; however, all benefits are actuarially equivalent. For annual
benefits in excess of $120,000 or salaries in excess of $150,000, assume the
employee is a member of both retirement plans.
PENSION ACCRUAL BASED ON YEARS OF SERVICE
<TABLE>
<CAPTION>
Average 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years 40 Years 45 Years
Annual Service Service Service Service Service Service Service Service Service
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$100,000 1,084 11,084 21,084 31,084 41,084 51,084 61,084 71,084 81,084
$150,000 6,084 21,084 36,084 51,084 66,084 81,084 96,084 111,084 126,084
$200,000 11,084 31,084 51,084 71,084 91,084 111,084 131,084 151,084 171,084
$250,000 16,084 41,084 66,084 91,084 116,084 141,084 166,084 191,084 216,084
$300,000 21,084 51,084 81,084 111,084 141,084 171,084 201,084 231,084 261,084
$350,000 26,084 61,084 96,084 131,084 166,084 201,084 236,084 271,084 306,084
$400,000 31,084 71,084 111,084 151,084 191,084 231,084 271,084 311,084 351,084
$450,000 36,084 81,084 126,084 171,084 216,084 261,084 306,084 351,084 396,084
$500,000 41,084 91,084 141,084 191,084 241,084 291,084 341,084 391,084 441,084
$550,000 46,084 101,084 156,084 211,084 266,084 321,084 376,084 431,084 486,084
$600,000 51,084 111,084 171,084 231,084 291,084 351,084 411,084 471,084 531,084
$650,000 56,084 121,084 186,084 251,084 316,084 381,084 446,084 511,084 576,084
$700,000 61,084 131,084 201,084 271,084 341,084 411,084 481,084 551,084 621,084
$750,000 66,084 141,084 216,084 291,084 366,084 441,084 516,084 591,084 666,084
$800,000 71,084 151,084 231,084 311,084 391,084 471,084 551,084 631,084 711,084
$850,000 76,084 161,084 246,084 331,084 416,084 501,084 586,084 671,084 756,084
$900,000 81,084 171,084 261,084 351,084 441,084 531,084 621,084 711,084 801,084
</TABLE>
e. Compensation Of Directors
-------------------------
ANNUAL AND MEETING FEES
Directors who are not officers or employees of the Company are paid a
quarterly fee of $5,000 ($5,500, if chairman of a committee of the ABIG Board or
chairman of the Boards of any subsidiary of the Company). Mr. Landon and Mr.
Gaston, received no additional fees for their directorships. Directors who are
not officers or employees of the Company are also paid a fee of $750 for each
meeting of the Board of Directors or its committees which they attend and $375
for each meeting attended telephonically, but only one attendance fee is paid
for attendance at meetings held on a single day. Directors who reside outside
Miami are also reimbursed for transportation and other travel expenses. The
Company's By-laws provide for indemnification of directors to the fullest extent
permitted under Florida Statutes.
DIRECTORS' DEFERRED COMPENSATION PLAN
The Company's Directors' Deferred Compensation Plan (the "Deferred
Plan") was adopted by the Board of Directors of the Company in October 1980 and
amended and restated in February 1994, subject to shareholder approval which was
obtained on May 25, 1994. Under the Deferred Plan, directors may elect to defer
the receipt of their compensation in cash or in stock equivalents. Upon
termination from
101
<PAGE> 103
the Board of Directors, the Director will receive, as elected, either cash or
actual shares of the Company's Common Stock for fees deferred as stock
equivalents. Directors who elect to defer fees must make an election in writing
prior to an annual meeting of the shareholders. All fees earned during each
director's term shall be deferred until retirement, resignation or death. The
deferral may be revoked with respect to future payments or the form of future
payments to be deferred may be changed upon written notice delivered to the
Company prior to an annual meeting of the shareholders. The revocation or change
will be effective six months following receipt of the notice. For the year ended
December 31, 1997, ten members of the Company's Board elected to defer their
compensation under the plan. Under the Deferred Plan 200,000 shares of the
Company's authorized but previously unissued Common Stock has been reserved.
NON-EMPLOYEE DIRECTORS' STOCK OPTIONS
On May 23, 1997, shareholders approved the adoption of the American
Bankers Insurance Group, Inc. 1997 Equity Incentive Plan pursuant to which
non-employee directors receive grants of options to purchase 2,000 shares of
Common Stock at the annual Board of Directors meeting. The options are
exercisable at prices equivalent to the fair market value of the Company's
common stock on the grant date. Options granted are not exercisable before the
one-year anniversary nor after the fifth year anniversary from the date of the
grant.
f. Employment Contracts, Termination Of Employment And Change of
Control Arrangements
--------------------------------------------------------------
To help ensure that Senior Management will be prepared to function in
the Company's best interests in the event of any possible change in control of
the Company, whether by merger, sale or other comparable action, and to help
ensure the continuing services of such officers, the Board of Directors (with
only non-employee directors participating) authorized the Company originally to
enter into certain contracts with selected executive officers. While there was
no reason to believe that a merger or sale was imminent, the Board of Directors
believed it in the best interest of the Company and its shareholders that it act
at that time to avoid the need for hasty action in the future and to ensure
continuity of highly qualified management.
Severance Agreements that were entered into prior to 1989 (the "Prior
Severance Agreements") provide that an officer is entitled to receive payment of
an amount (the "Designated Amount") equal to twice the officer's Current Annual
Salary (as defined in the Severance Agreement) in the event that the Company is
Merged or Sold (as defined in the Severance Agreement), regardless of whether
the officer had terminated his employment. Under the terms of the Prior
Severance Agreements, the Company would be treated as having been Merged or Sold
as a result of the consummation of the Merger, and the officers would be
entitled to payment of an amount equal to the Designated Amount.
Severance Agreements that were entered into after 1988 (the "Recent
Severance Agreements") provide that if, within 24 months following a Change of
Control (as defined in the Recent Severance Agreements) of the Company, an
officer in good faith determines that there has been a significant adverse
change in circumstances affecting such officer's position or status within the
Company, such officer may terminate his employment and be entitled to receive
payment of an amount (the "Maximum Amount") equal to the maximum amount that
will not constitute a "parachute payment" as defined in Section 280G of the
Code, as amended (or any successor provision or, if no such provision exists, as
defined in such provision immediately prior to its repeal) and as calculated by
the Company's independent auditors. The Recent Severance Agreements also provide
that within fifteen (15) business
102
<PAGE> 104
days following the occurrence of a Change in Control (as defined in the Recent
Severance Agreements) of the Company, the Company is required to deposit with an
escrow agent an amount equal to the Maximum Amount calculated as of the date of
such Change in Control.
If, at December 31, 1997, a merger or sale had occurred as set forth
above, the Company would have been obligated to make payments to Mr. Landon, Mr.
Gaston, Mr. Becker, Mr. Fuchs and Mr. Denison in the amounts of $4,305,031,
$4,794,732, $600,000, $460,940 and $1,507,384, respectively.
g. Compensation Committee Interlocks and Insiders Participation
------------------------------------------------------------
Present members of Compensation and Nominating Committee are Messrs.
Robert C. Strauss (Chairman), Armando M. Codina, Nicholas A. Buoniconti, Peter
J. Dolara and Bernard P. Knoth, S. J.
103
<PAGE> 105
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
a. Principal Shareholders
----------------------
The following persons were the only persons who on February 27, 1998,
to the knowledge of the Company, owned beneficially more than 5% of the
outstanding voting stock of the Company.
<TABLE>
<CAPTION>
- ---------------------- --------------------------------------------------- ------------------- --------------------
AMOUNT AND NATURE
OF BENEFICIAL
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP PERCENTAGE OF CLASS
- ---------------------- --------------------------------------------------- ------------------- --------------------
<S> <C> <C> <C>
$1.00 Par Value American International Group, Inc.
Common Stock 70 Pine Street 11,654,926(a) 27.192%
New York, New York 10270
- ---------------------- --------------------------------------------------- ------------------- --------------------
Morgan Stanley, Dean Witter, Discover & Co.
1585 Broadway 2,203,761(b) 5.142%
New York, New York 10036
- ---------------------- --------------------------------------------------- ------------------- --------------------
NationsBank
Building 100 3,509,652(c) 8.188%
9000 Southside Boulevard
Jacksonville, Florida 32203
- ---------------------- --------------------------------------------------- ------------------- --------------------
R. Kirk Landon
11222 Quail Roost Drive 3,052,567(d) 7.122%
Miami, Florida 33157-6596
- ---------------------- --------------------------------------------------- ------------------- --------------------
</TABLE>
- ---------------
(a) Includes 8,265,626 shares acquirable within 60 days pursuant to a Stock
Option Agreement dated as of December 21, 1997 between the Company and
American International Group, Inc. ("AIG") (the "Stock Option
Agreement") which AIG exercised on January 27, 1998 pursuant to a
notice to the Company. The consummation of the purchase of these shares
was subject to applicable regulatory approvals. Also, includes
3,389,300 for which AIG had shared voting and dispositive power
pursuant to a Voting Agreement, dated as of December 21, 1997, between
AIG and the shareholders of the Company named therein (the "Voting
Agreement"). Messrs. Landon and Gaston are parties to the Voting
Agreement. The Stock Option Agreement and the Voting Agreement were
executed in connection with the Agreement and Plan of Merger dated as
of December 21, 1997, as amended and restated as of January 7, 1998,
and as amended by Amendment No. 1 thereto dated as of January 28, 1998,
as amended and restated as of February 28, 1998, among the Company, AIG
and AIGF, Inc., a wholly-owned subsidiary of AIG (the "Merger
Agreement").
The Stock Option Agreement, Voting Agreement and Merger Agreement were
terminated as of March 23, 1998. Accordingly as of March 23, 1998 AIG
no longer was the beneficial owner of any shares of Common Stock.
104
<PAGE> 106
(b) Based upon information supplied to the Company, Morgan Stanley, Dean
Witter, Discover & Co. ("Morgan Stanley") beneficially owns 2,203,761
shares and has shared dispositive power over these shares. Of these
shares, Morgan Stanley has shared voting power with respect to
1,632,161 shares and no voting power with respect to the remaining
shares.
(c) The American Bankers Insurance Group, Inc. Leveraged Employee Stock
Ownership Trust is the beneficial owner of 3,509,652 shares. The
Trustee, NationsBank, has sole voting power with respect to 435,060
shares and shared voting power with respect to 3,074,592 shares.
(d) Includes 1,024,342 shares owned by Mr. Landon directly; 81,000
Restricted Shares under the 1991 Stock Option/Restricted Stock Award
Plan owned by Mr. Landon directly; 1,370,450 owned by the Landon
Corporation, of which Mr. Landon is the controlling shareholder;
132,000 shares owned by R. Kirk/B. Landon Foundation, of which Mr.
Landon is a director; 129,824 shares owned directly by the R. Kirk
Landon Revocable Trust, for which Mr. Landon is the trustee; 14,919
shares allocated under the Company's Leveraged Employee Stock Ownership
Plan; 52,380 options to purchase shares granted under the 1987
Executive Stock Option/Dividend Accrual Plan; 27,652 shares acquirable
under the 1994 Amended and Restated Directors' Deferred Compensation
Plan. Includes 40,000 shares subject to option exercise granted by Mr.
Landon to Jack Kemp on May 24, 1995. The options are exercisable at
$14.50 per share and expire on May 24, 2000. Includes 220,000 shares
owned by Mr. Landon's wife for which Mr. Landon disclaims beneficial
ownership.
As of February 27, 1998, Mr. Landon shared voting and dispositive power
with AIG over the shares for which Mr. Landon is the beneficial owner
pursuant to the Voting Agreement. The Voting Agreement was terminated
on March 23, 1998. Accordingly, as of March 23, 1998, AIG no longer
shared voting or dispositive power over the shares for which Mr. Landon
is the beneficial owner.
105
<PAGE> 107
SECURITY HOLDING OF MANAGEMENT
The following table sets forth the amount of Common Stock beneficially
owned or acquirable within 60 days by each director, director emeritus, named
executive officers, and directors and executive officers of the Company as a
group as of February 27, 1998:
<TABLE>
<CAPTION>
AMOUNT OF
SHARES PERCENTAGE
BENEFICIALLY OF
NAME OWNED OWNERSHIP
- ---- ------------ ---------
<S> <C> <C>
William H. Allen, Jr.......................................... 12,041 (a) *
Nicholas A. Buoniconti........................................ 15,150 (b) *
Armando M. Codina............................................. 43,290 (c) *
Peter J. Dolara............................................... 11,945 (d) *
Gerald N. Gaston.............................................. 639,621 (e) 1.492%
Daryl L. Jones................................................ 4,652 (f) *
James F. Jorden............................................... 11,700 (g) *
Jack F. Kemp.................................................. 40,000 (h) *
Bernard P. Knoth.............................................. -- *
R. Kirk Landon................................................ 3,052,567 (i) 7.122%
Eugene M. Matalene, Jr........................................ 10,000 (j) *
Albert H. Nahmad.............................................. 15,355 (k) *
Nicholas J. St. George........................................ 15,985 (l) *
Robert C. Strauss............................................. 15,340 (m) *
George E. Williamson II....................................... 37,668 (n) *
Eugene E. Becker.............................................. 213,625 (o) *
Floyd C. Denison............................................. 107,486 (p) *
Jay R. Fuchs................................................. 83,790 (q) *
Bernard Janis**.............................................. 718 *
John P. Laborde**............................................. 1,000 *
Malcolm G. MacNeill**......................................... 74,384 (r) *
Directors and Executive Officers as a Group
(26 persons including those named above).................. 4,621,165 (s) 10.782%
</TABLE>
- -----------
(a) Includes 2,041 shares acquirable under the 1994 Amended and Restated
Directors' Deferred Compensation Plan (the "Deferred Plan"), and 2,000
shares acquirable under the 1994 Non-Employee Directors' Stock Option
Plan (the "Non-Employee Directors' Plan").
(b) Includes 7,150 shares acquirable under the Deferred Plan and 6,000
shares acquirable under the Non-Employee Directors' Plan.
(c) Includes 23,290 shares acquirable under the Deferred Plan and 6,000
shares acquirable under the Non-Employee Directors' Plan.
106
<PAGE> 108
(d) Includes 1,000 shares owned by Mr. Dolara's wife; 3,000 shares owned by
his children; 2,945 shares acquirable under the Deferred Plan and 4,000
shares acquirable under the Non-Employee Directors' Plan.
(e) Includes 600,436 shares owned by Mr. Gaston directly; 22,000 shares
owned by Mr. Gaston's wife; 2,266 shares owned by Mr. Gaston's son; and
14,919 shares allocated under the Company's Leveraged Employee Stock
Ownership Plan (the "LESOP").
As of February 27, 1998, Mr. Gaston shared voting and dispositive power
with AIG over the shares for which Mr. Gaston is the beneficial owner
pursuant to the Voting Agreement. The Voting Agreement was terminated
on March 23, 1998. Accordingly, as of March 23, 1998, AIG no longer
shared voting or dispositive power over the shares for which Mr. Gaston
is the beneficial owner.
(f) Includes 4,652 shares acquirable under the Deferred Plan.
(g) Includes 440 shares held indirectly by an Individual Retirement Account
Trust and 6,000 shares acquirable under the Non-Employee Directors'
Plan.
(h) Includes 40,000 shares acquirable by Mr. Kemp upon the exercise of
options granted by Mr. Landon to Mr. Kemp. See footnote (d) under
"Principal Shareholders" of this report.
(i) See footnote (d) under "Principal Shareholders" of this report, which
sets forth shares that may be deemed to be beneficially owned by Mr.
Landon.
(j) Includes 6,000 shares acquirable under the Non-Employee Directors'
Plan.
(k) Includes 2,000 shares owned by Watsco, Inc.; 20 shares owned by Mr.
Nahmad's son; 7,335 shares acquirable under the Deferred Plan; and
6,000 shares acquirable under the Non-Employee Directors' Plan.
(l) Includes 7,965 shares acquirable under the Deferred Plan and 6,000
shares acquirable under the Non-Employee Directors' Plan.
(m) Includes 7,340 shares acquirable under the Deferred Plan and 6,000
shares acquirable under the Non-Employee Directors' Plan.
(n) Includes 31,668 shares acquirable under the Deferred Plan and 6,000
shares acquirable under the Non-Employee Directors' Plan.
(o) Includes 179,652 shares owned by Mr. Becker directly; and 11,600
Restricted Shares under the 1994 Senior Management Stock Option Plan
(the "Senior Plan") owned by Mr. Becker directly; 9,798 shares owned by
Mr. Becker's wife; and 12,575 shares allocated under the LESOP.
(p) Includes 90,094 shares owned by Mr. Denison directly; 7,200 Restricted
Shares under the Senior Plan owned by Mr. Denison directly; 20 shares
owned by Mr. Denison's son' and 10,172 shares allocated under the
LESOP.
(q) Includes 60,600 shares owned by Mr. Fuchs directly; 13,200 Restricted
Shares under the Senior Plan owned by Mr. Fuchs directly; and 9,990
shares allocated under the LESOP.
(r) Includes shares owned by Mr. MacNeill's wife; shares owned by his
daughter.
(s) The 40,000 shares subject to an option granted by Mr. Landon to Mr.
Kemp have only been counted once in determining the total number of
amount of shares beneficially owned and percentage of ownership by the
Directors and Executive Officers as a group. See footnote (h) above and
footnote (d) under "Principal Shareholders" of this report.
(t) Includes 10,200 owned by Mr. MacNeill's wife and 1,330 shares owned by
his daughter.
107
<PAGE> 109
* Denotes less than 1% ownership.
** Director Emeritus.
108
<PAGE> 110
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Jorden Burt Boros Cicchetti Berenson & Johnson LLP, of which Mr. Jorden
is a Senior Managing Partner, serves as general counsel for the Company and its
subsidiaries. In 1997, the firm received approximately $5,834,370 for legal
services rendered and costs incurred in that capacity.
Mr. St. George is President, Chief Executive Officer and Director of
Oakwood Homes Corporation. ABIC and ABLAC have reinsurance agreements with an
affiliate of Oakwood Homes Corporation. In 1997, ABIC and ABLAC ceded premiums
of approximately $ 44,614,000 to Blue Ridge Insurance Company, Limited under
these reinsurance contracts.
Mr. Williamson is President of Williamson Cadillac Company, Williamson
Saturn Inc. and WWW Enterprises (automobile dealerships). In 1997, Mr.
Williamson's automobile dealerships sold ABLAC Credit Life, Health and
Disability policies. Total net written premium by these dealerships was $137,070
in 1997.
The Company believes these transactions were made on terms no less
favorable than that which could have been received by unaffiliated third
parties.
PART IV
- -------
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K
- --------------------------------------------------------------------------
(a)
(1) The responses to this portion of Item 14 is listed on page 30 of
this report.
(2) The responses to this portion of Item 14 is listed on page 44 of
this report.
(3) Exhibits
2.1(1) Agreement and Plan of Merger, dated as of
December 21, 1997, as amended and restated as of
January 7, 1998, and as amended by Amendment No.
1 thereto dated as of January 28, 1998, and as
amended and restated as of February 28, 1998
among American Bankers Insurance Group, Inc.,
American International Group, Inc. and AIGF, Inc.
- -----------------------
(1) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9,
Amendment No. 6, dated March 2, 1998.
109
<PAGE> 111
2.2(2) Termination Agreement, dated as of March 23,
1998, among American International Group, Inc.,
AIGF, Inc. and American Bankers Insurance Group,
Inc.
2.3(3) Agreement and Plan of Merger, dated March 23,
1998 among Cendant Corporation, Season
Acquisition Corp. and American Bankers Insurance
Group, Inc.
2.4(4) Settlement Agreement dated as of March 18, 1998
by and among American Bankers Insurance Group,
Inc., American International Group, Inc. and
Cendant Corporation.
3.1 Third Amended and Restated Articles of
Incorporation, as amended on May 23, 1997, by
First Amendment to Third Amended and Restated
Articles of Incorporation, as further amended on
February 19, 1998, by Second Amendment to Third
Amended and Restated Articles of Incorporation.
3.2(5) Corporate By-Laws, as amended and restated on
April 18, 1996.
4.1(6) Form of Rights Certificate to Purchase Series A
Participating Preferred Stock.
4.2(7) Form of Rights Certificate to Purchase Series C
Participating Preferred Stock.
- -----------------------
(2) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9,
Amendment No. 11, dated March 24, 1998.
(3) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9,
Amendment No. 11, dated March 24, 1998.
(4) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9,
Amendment No. 10, dated March 19, 1998.
(5) Exhibit incorporated herein by reference from Registrant's Current Report on
Form 10-Q for March 31, 1996.
(6) Exhibit incorporated herein by reference from Exhibit B of the Rights
Agreement, dated as of February 24, 1988, between American Bankers Insurance
Group, Inc. and Manufacturers Hanover Trust Company, a New York banking
corporation, as Rights Agent, as amended and restated as of November 14,
1990, filed with Registrant's Current Report on Form 8-K, dated November 14,
1990.
(7) Exhibit incorporated herein by reference from Exhibit B of the Rights
Agreement, dated as of February 19, 1998, between American Bankers Insurance
Group, Inc. and ChaseMellon Shareholder Services, L.L.C., as Rights Agent,
filed with Registrant's Schedule 14D-9 Amendment No. 3, dated February 20,
1998.
110
<PAGE> 112
10.1(8) Stock Option Agreement, dated as of December 21,
1997, as amended and restated as of February 28,
1998 between the American Bankers Insurance
Group, Inc. and American International Group,
Inc.
10.2(9) Voting Agreement, dated as of December 21, 1997,
between AIG, and Gerald N. Gaston, R. Kirk
Landon, R. Kirk/B. Landon Foundation, R. Kirk
Landon Revocable Trust, and Landon Corporation.
10.3(10) 5 Year Competitive Advance and Revolving Credit
Facility Agreement dated as of December 1, 1995
among the American Bankers Insurance Group, Inc.,
certain banks and Barclays Bank PLC.
10.4(11) Issuance and Paying Agent Agreement (For
Commercial Paper) dated as of 21st day of
November 1995 by and between the Company and
Chemical Bank.
10.5(12) Trust Indenture and Selling Agency Agreement for
shelf filing of $200,000,000 Medium-Term Notes.
10.6(13) $75,000,000, 7.60% Medium-Term Note dated May 2,
1994.
10.7(14) $50,000,000, Floating Rate, Medium-Term Note
dated April 12, 1995.
10.8(15) Rights Agreement, dated as of February 24, 1988
between American Bankers Insurance Group, Inc.
and Manufacturers Hanover Trust Company, a New
York banking corporation, as Rights Agent, as
amended and restated as of November 14, 1990.
10.9 Amendment No. 1, dated as of December 19, 1997 to
Rights Agreement, dated as of February 24, 1998
between American Bankers Insurance Group, Inc.
and Chase Mellon Shareholder Services, L.L.C., as
successor Rights Agent, as amended and restated
as of November 14, 1990.
- ---------------------------
(8) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9,
Amendment No. 6, dated March 2, 1998.
(9) Exhibit incorporated herein by reference from Registrant's Current Report
on Form 8-K dated January 13, 1998.
(10) Exhibit incorporated herein by reference from Registrant's Current Report
on Form 10-K for 1995.
(11) Exhibit incorporated herein by reference from Registrant's Current Report
on Form 10-K for 1995.
(12) Exhibit incorporated herein by reference from Registrant's Current Report
on Form 10-Q for March 31, 1994.
(13) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1994.
(14) Exhibit incorporated herein by reference from Registrant's Current Report
on Form 10-Q for March 31, 1995.
(15) Exhibit incorporated herein by reference from Registrant's Current Report
on Form 8-K dated November 14, 1990.
111
<PAGE> 113
10.10(16) Amendment No. 2, dated as of February 5, 1998, to
the Rights Agreement, dated as of February 24,
1988, as amended and restated as of November 14,
1990 and as further amended on December 19, 1997,
between the American Bankers Insurance Group,
Inc. and Chase Mellon Shareholder Services,
L.L.C. as successor Rights Agent.
10.11(17) Amendment No. 3, dated as of February 19, 1998,
to the Rights Agreement, dated as of February 24,
1988, as amended and restated as of November 14,
1990 and as further amended on December 19, 1997
and February 5, 1998 between the American Bankers
Insurance Group, Inc. and Chase Mellon
Shareholder Services, L.L.C. as successor Rights
Agent.
10.12(18) Rights Agreement, dated as of February 19, 1998,
between American Bankers Insurance Group, Inc.
and Chase Mellon Shareholder Services, L.L.C., as
Rights Agent.
10.13(19) Amendment No. 1, dated as of March 20, 1998, to
the Rights Agreement dated as of February 19,
1998 between American Bankers Insurance Group,
Inc. and Chase Mellon Shareholder Services,
L.L.C., as Rights Agent.
10.14(20) Master License Agreement between Policy
Management Systems Corporation ("PMSC"), a South
Carolina Corporation and American Bankers
Insurance Group. Inc. ("customer").
10.15(21) Form of Executive Compensation Agreement.
- ------------------------
(16) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9,
dated February 6, 1998.
(17) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9,
Amendment No. 3, dated February 20, 1998.
(18) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9,
Amendment No. 3, dated February 20, 1998.
(19) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9,
Amendment No. 11, dated March 24, 1998.
(20) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1993.
(21) Exhibit incorporated herein by reference from Form S-3 Registration
Statement Number 2-94359.
112
<PAGE> 114
10.16(22) Form of Executive Severance Benefits Agreement.
10.17(23) Form of Executive Compensation Agreement.
10.18(24) 1987 Executive Stock Option/Dividend Accrual
Plan.
10.19(25) Nonqualified Supplemental Benefit Plan.
10.20(26) 1991 Stock Incentive Compensation Plan, as
amended February 18, 1994.
10.21(27) 1991 Stock Option/Restricted Stock Award Plan, as
amended February 18, 1994.
10.22(28) Directors' Deferred Compensation Plan, amended
and restated May 25, 1994.
10.23(29) Retirement Plan, as amended December 30, 1994.
10.24(30) Management Incentive Plan, as amended May 25,
1994.
10.25(31) 1994 Key Executive Convertible Subordinated
Debenture Plan.
10.26(32) 1994 Non-Employee Director's Stock Option Plan.
- ------------------------
(22) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1990.
(23) Exhibit incorporated herein by reference from Registrant's Current Report
on Form 10-K for 1995.
(24) Exhibit incorporated herein by reference from 1987 Annual Meeting Proxy
Statement (Exhibit "A" pages 14 through 19).
(25) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1991.
(26) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1994.
(27) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1994.
(28) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1994.
(29) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1994.
(30) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1994.
(31) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1994.
113
<PAGE> 115
10.27(33) 1994 Senior Management Stock Option Plan.
10.28(34) Amendment to the 1991 Stock Option/Restricted
Stock Award Plan.
10.29(35) 1997 Equity Incentive Plan, as amended on
August 15, 1997.
11 Statement regarding computation of earnings per
share.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
99 Additional Exhibits.
Documents relating to American Bankers Insurance
Group, Inc. Leverage Employee Stock Ownership
Plan (LESOP).
99.1(36) American Bankers Insurance Group, Inc. Leveraged
Employee Stock Ownership Plan.
99.2(37) Agreement Among American Bankers Insurance Group,
Inc. and Southeast Bank, N.A. establishing the
American Bankers Insurance Group, Inc. Leveraged
Employee Stock Ownership Trust.
99.3(38) Note.
99.4(39) Guaranty Agreement from American Bankers
Insurance Group, Inc., American Bankers Insurance
Company of Florida and American
- --------------------------------------------------------------------------------
(32) Exhibit incorporated herein by reference from Registrant's Annual Repot on
form 10-K for 1994.
(33) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1994.
(34) Exhibit incorporated herein by reference from Registrant's Current Report
on Form 10-K for 1995.
(35) Exhibit incorporated herein by reference from Registrant's Current Report
on Form 10-Q for September 30, 1997.
(36) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1988.
(37) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1988.
(38) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1988.
114
<PAGE> 116
Bankers Life Assurance Company of Florida in
favor of Sun Bank/Miami, N.A.
99.5(40) First amendment to Credit Agreement among
American Bankers Insurance Group, Inc. and
Southeast Bank, N.A.
99.6(41) Modified ESOP Note.
99.7(42) Second Amendment to Trust Agreement among
American Bankers Insurance Group and Barnett
Banks Trust Company, N.A. (Successor to Southeast
Bank, N.A., original trustee).
99.8(43) American Bankers Insurance Group, Inc. Leveraged
Employee Stock Ownership Plan, as amended
December 30, 1994.
99.9(44) Engagement Agreement, dated as of February 18,
1998, between U.S. Trust Company of California,
N.A. and the Company.
(b.) REPORTS ON FORM 8-K
No report on Form 8-K was filed during the fourth quarter 1997.
(c.) EXHIBITS
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d.) FINANCIAL STATEMENT SCHEDULES
The response to this portion of Item 14 is submitted as part of
Part II Item 8 of this report.
- --------------------------------------------------------------------------------
(39) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1988.
(40) Exhibit incorporated herein by reference from Registrant's Annual Reort on
Form 10-K for 1990.
(41) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1990.
(42) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1991.
(43) Exhibit incorporated herein by reference from Registrant's Annual Report on
Form 10-K for 1994.
(44) Exhibit incorporated herein by reference from Registrant's Schedule 14 D-9,
Amendment No. 3, dated February 20, 1998.
115
<PAGE> 117
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
American Bankers Insurance Group, Inc.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
By: /s/ Gerald N. Gaston Chief Executive Officer, President, March 30, 1998
----------------------------------- and Vice Chairman of the Board
Gerald N. Gaston
By: /s/ Robert Hill Senior Vice President and March 30, 1998
----------------------------------- Principal Accounting Officer
Robert Hill
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
signed below by the following persons on behalf of the Registrant and in
the capacities and on March 30, 1998.
American Bankers Insurance Group, Inc.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ R. Kirk Landon Chairman of the Board March 30, 1998
- --------------------------------------- and Director
R. Kirk Landon
/s/ Gerald N. Gaston Chief Executive Officer,
- --------------------------------------- President, Vice Chairman of the March 30, 1998
Gerald N. Gaston Board and Director
/s/ William H. Allen Jr. Director March 30, 1998
- ---------------------------------------
William H. Allen Jr.
Director March __, 1998
- ---------------------------------------
Nicholas A. Buoniconti
/s/ Armando M. Codina Director March 30, 1998
- ---------------------------------------
Armando M. Codina
/s/ Peter J. Dolara Director March 30, 1998
- ---------------------------------------
Peter J. Dolara
</TABLE>
116
<PAGE> 118
<TABLE>
<CAPTION>
<S> <C>
Director March ___ 1998
- ---------------------------------------
Jack F. Kemp
Director March ___ 1998
- ---------------------------------------
Bernard P. Knoth, S.J.
/s/ James F. Jorden Director March 30, 1998
- ---------------------------------------
James F. Jorden
Director March ___ 1998
- ---------------------------------------
Daryl L. Jones
Director March ___ 1998
- ---------------------------------------
Malcolm G. MacNeill
Director March ___ 1998
- ---------------------------------------
Eugene M. Matalene Jr.
/s/ Albert H. Nahmad Director March 30, 1998
- ---------------------------------------
Albert H. Nahmad
Director March ___ 1998
- ---------------------------------------
Nicholas J. St. George
/s/ Robert C. Strauss Director March 30, 1998
- ---------------------------------------
Robert C. Strauss
/s/ George E. Williamson II Director March 30, 1998
- ---------------------------------------
George E. Williamson II
</TABLE>
117
<PAGE> 119
ITEM 14(c)
EXHIBIT INDEX
Pages
-----
Exhibit 11 - Statement regarding computation of earnings per share E-1
Exhibit 21 - Subsidiaries of the registrant E-2
Exhibit 23 - Consent of Independent Certified Public Accountants E-3
Exhibit 27 - Financial Data Schedule E-4
Other exhibits have been incorporated by reference. See Item 14, Part IV of this
Annual Report on Form 10-K.
118
<PAGE> 1
EXHIBIT 3.1
THIRD AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
AMERICAN BANKERS INSURANCE GROUP, INC.
-------------------------------
American Bankers Insurance Group, Inc., a corporation organized and
existing under the laws of the State of Florida, does hereby certify pursuant to
Section 607.1007, Florida Statutes, that:
1. The name of the corporation is American Bankers Insurance Group,
Inc.
2. These Third Amended and Restated Articles of Incorporation have been
duly adopted by the Board of Directors of American Bankers Insurance Group,
Inc., without shareholder action, pursuant to a written consent to action dated
as of July 16, 1996, and include amendments to Article IV authorizing a new
class of preferred stock, referred to in these Third Amended and Restated
Articles of Incorporation as $3.125 Series B Cumulative Convertible Preferred
Stock, and setting forth the rights, preferences and limitations of such $3.125
Series B Cumulative Convertible Preferred Stock. These amendments do not require
shareholder action.
3. There are no discrepancies between the provisions of the
Corporation's Second Amended and Restated Articles of Incorporation as
heretofore amended and the provisions of these Third Amended and Restated
Articles of Incorporation other than the inclusion of the foregoing amendments
and the omission of matters of historical interest.
ARTICLE I - NAME
The name of the Corporation is American Bankers Insurance Group, Inc.
ARTICLE II - DURATION
The Corporation shall exist perpetually until dissolved according to law.
ARTICLE III - PURPOSE
The Corporation shall be authorized to exercise and enjoy all powers, rights,
and privileges granted by the laws of the State of Florida to corporations
organized thereunder, and all the powers conferred by all acts hereafter
amendatory of or supplemental to the laws of the State of Florida.
<PAGE> 2
ARTICLE IV - STATED CAPITAL
The Corporation shall be authorized to issue two classes of shares of stock to
be designated, respectively, "Common Stock" and "Preferred Stock"; the total
number of shares which the Corporation shall have authority to issue is
38,500,000; the total number of shares of Common Stock shall be 35,000,000 and
each such share shall have a par value of One Dollar ($1.00); and the total
number of shares of Preferred Stock shall be 3,500,000 and each share shall be
without par value.
Each outstanding share of Common Stock, regardless of class, shall be entitled
to one (1) vote on each matter submitted to a vote at a meeting of shareholders.
Shares of Common Stock may be issued for such consideration, having a value not
less than the par value of the shares issued therefor, as is determined from
time to time by the Board of Directors, to be paid, in whole or in part, in cash
or other property, tangible or intangible, or in labor or then services actually
performed for the Corporation. Shares of Common Stock may not be issued until
the full amount of the consideration therefor has been paid. Thereafter, such
shares shall be deemed to be paid and non-assessable.
The shares of Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is expressly vested with authority to fix by
resolution or resolutions the designations and the powers, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations and restrictions thereof, including, without limitation the voting
powers, if any, the dividend rate, conversion rights, redemption price, or
liquidation preference, of any series of shares of Preferred Stock, and to fix
the number of shares constituting any such series, and to increase or decrease
the number of shares of any such series (but not below the number of shares
thereof then outstanding). In case the number of shares of any such series shall
be so decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution or resolutions originally
fixing the number of shares of such series."
2
<PAGE> 3
SERIES A PARTICIPATING PREFERRED STOCK
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Participating Preferred Stock." The shares constituting
such series shall be without par value. The number of shares constituting such
series shall be 350,000.
Section 2. DIVIDENDS AND DISTRIBUTION.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series A Participating Preferred Stock with respect to dividends, the holders
of shares of Series A Participating Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable in cash on the last day
of March, June, September, and December in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Participating Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $3.125 or (b)
subject to the provisions for adjustment hereinafter set forth, 100 times the
aggregate per share amount of all cash dividends, and 100 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, par value $1.00 per share, of the
Corporation, (the "Common Stock") since the immediately preceding Quarterly
Dividend Payment Date, or with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series A
Participating Preferred Stock. In the event the Corporation shall at any time
after February 24, 1988 (the "Rights Declaration Date") (i) declare any dividend
on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount to which holders of
shares of Series A Participating Preferred Stock were entitled immediately prior
to such event under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Participating Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a
3
<PAGE> 4
dividend of $3.125 per share on the Series A Participating Preferred Stock shall
nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Participating Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series A
Participating Preferred Stock, unless (i) the date of issue of such shares is
prior to the record date for the first Quarterly Dividend Payment Date, in which
case dividends on such shares shall begin to accrue from the date of issue of
such shares, or (ii) the date of issue is a Quarterly Dividend Payment Date or
is a date after the record date for the determination of holders of shares of
Series A Participating Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Participating Preferred Stock in an amount less
than the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Participating Preferred Stock
entitled to receive payment of a dividend or distribution declared thereon,
which record date shall be no more than 60 days prior to the date fixed for the
payment thereof.
Section 3. VOTING RIGHTS. The holders of shares of Series A
Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Participating Preferred Stock shall entitle the holder thereof
to 100 votes on all matters submitted to a vote of the shareholders of the
Corporation. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the number of votes per share to which holders of shares of Series A
Participating Preferred Stock were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(B) Except as otherwise provided by the Third Amended and Restated
Articles of Incorporation of the Corporation, or by law, the holders of shares
of Series A Participating Preferred Stock and the holders of shares of Common
Stock (and any other capital stock
4
<PAGE> 5
of the Corporation at the time entitled thereto) shall vote together as one
class on all matters submitted to a vote of shareholders of the Corporation.
(C) Except as set forth herein, holders of Series A Participating
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
Section 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on a Series A Participating Preferred Stock as provided in Section 2 are
in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Participating
Preferred Stock outstanding shall have been paid in full, the Corporation shall
not:
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Participating Preferred
Stock;
(ii) declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding-up) with the Series A Participating
Preferred Stock, except dividends paid ratably on the Series A
Participating Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts
to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares
of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Participating
Preferred Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such parity stock in
exchange for shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation or winding up)
to the Series A Participating Preferred Stock;
(iv) purchase or otherwise acquire for consideration any shares of
Series A Participating Preferred Stock, or any shares of stock ranking
on a parity with the Series A Participating Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares
upon such terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights and
5
<PAGE> 6
preferences of the respective series and classes, shall determine in
good faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. RE-ACQUIRED SHARES. Any shares of Series A Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 6. LIQUIDATION, DISSOLUTION OR WINDING-UP.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Participating Preferred Stock unless,
prior thereto, the holders of shares of Series A Participating Preferred Stock
shall have received $100.00 per share, plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not declared, to the date
of such payment (the "Series A Liquidation Preference"). Following the payment
of the full amount of the Series A Liquidation Preference, no additional
distributions shall be made to the holders of shares of Series A Participating
Preferred Stock unless, prior thereto, the holders of shares of Common Stock
shall have received an amount per share (the "Common Adjustment") equal to the
quotient obtained by dividing (i) the Series A Liquidation Preference by (ii)
100 (as appropriately adjusted as set forth in paragraph C below to reflect such
events as stock splits, stock dividends and recapitalizations with respect to
the Common Stock) (such number in clause (ii) the "Adjustment Number").
Following the payment of the full amount of the Series A Liquidation Preference
and the Common Adjustment in respect of all outstanding shares of Series A
Participating Preferred Stock and Common Stock, respectively, holders of Series
A Participating Preferred Stock and holders of shares of Common Stock shall
receive their ratable and proportionate share of the remaining assets to be
distributed in the ratio of the Adjustment Number to one (1) with respect to
such Series A Participating Preferred Stock and Common Stock, on a per share
basis, respectively.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any,
which rank on a parity with the Series A
6
<PAGE> 7
Participating Preferred Stock, then such remaining assets shall be distributed
ratably to the holders of such parity shares in proportion to their respective
liquidation preferences. In the event, however, that there are not sufficient
assets available to permit payment in full of the Common Adjustment, then such
remaining assets shall be distributed ratably to the holders of Common Stock.
(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Participating Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to 100 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Participating Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. NO REDEMPTION. The shares of Series A Participating
Preferred Stock shall not be redeemable.
Section 9. RANKING. The Series A Participating Preferred Stock shall
rank junior to all other series of the Corporation's Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
Section 10. AMENDMENT. The Third Amended and Restated Articles of
Incorporation of the Corporation, any further amendments thereto, and any
certificate amendatory thereof or supplemental thereto shall not be amended or
further amended in any manner
7
<PAGE> 8
which would materially alter or change the powers, preferences or special rights
of the Series A Participating Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of such percentage of the
outstanding shares of Series A Participating Preferred Stock, voting separately
as a class, as may be required under (i) the Florida General Corporation Act or
(ii) the Third Amended and Restated Articles of Incorporation of the
Corporation, whichever requires a greater percentage.
Section 11. FRACTIONAL SHARES. Series A Participating Preferred Stock
may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Participating Preferred Stock.
$3.125 SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK
Section I: DESIGNATION OF SERIES AND NUMBER OF SHARES TO BE INITIALLY
ISSUABLE THEREIN. This series of Preferred Stock shall be designated "$3.125
Series B Cumulative Convertible Preferred Stock" (hereinafter called the
"Convertible Preferred Stock"), no par value, of which 2,300,000 shares shall be
initially issuable.
Section II: RANK. All shares of Convertible Preferred Stock shall rank
prior, both as to payment of dividends and as to distributions of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, to all Junior Stock.
Section III. DIVIDENDS. The holders of Convertible Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of Directors
out of funds at the time legally available therefor, dividends at the rate of
$3.125 per annum per share, and no more, which shall be fully cumulative, shall
accrue without interest from the date of initial issuance of such shares of
Convertible Preferred Stock (on a daily basis whether or not such amounts would
be available at that time for distribution to holders of shares of Convertible
Preferred Stock) and shall be payable in cash quarterly in arrears on February
1, May 1, August 1 and November 1 of each year commencing November 1, 1996 (with
respect to the period from such date of initial issuance to November 1, 1996)
(except that if any such date is not a Business Day, then such dividend shall be
payable on the next Business Day) to holders of record as they appear upon the
stock transfer books of the Corporation on such record dates, not more than
sixty days nor less than ten days preceding the payment dates for such
dividends, as are fixed by the Board of Directors (or, to the extent permitted
by applicable law, a duly authorized committee thereof). In no event shall any
such dividend record date be fixed less than (a) six Business Days prior to any
date fixed for the redemption of the Convertible Preferred Stock or (b) with
respect to the dividend payment date occurring on August 1, 2000 less than ten
Business Days prior to any date fixed for such redemption. Subject to the next
paragraph of this Section III, dividends on account of arrears for any past
dividend period may be declared and paid
8
<PAGE> 9
at any time, without reference to any regular dividend payment date. The amount
of dividends payable per share of Convertible Preferred Stock for each quarterly
dividend period shall be computed by dividing the annual dividend amount by
four. The amount of dividends payable for the initial dividend period and any
period shorter than a full quarterly period shall be computed on the basis of a
360-day year of twelve 30-day months. No interest shall be payable in respect of
any dividend payment on the Convertible Preferred Stock which may be in arrears.
No dividends or other distributions, other than dividends payable
solely in shares of Junior Stock, shall be declared, paid or set apart for
payment on shares of Junior Dividend Stock, unless and until all accrued and
unpaid dividends on the Convertible Preferred Stock for all dividend payment
periods ending on or before the payment date of such dividends or other
distributions on Junior Dividend Stock shall have been paid or declared and set
apart for payment.
No payment on account of the purchase, redemption, retirement or other
acquisition of shares of Junior Dividend Stock or Junior Liquidation Stock shall
be made unless and until all accrued and unpaid dividends on the Convertible
Preferred Stock for all dividend payment periods ending on or before such
payment for such Junior Dividend Stock or Junior Liquidation Stock shall have
been paid or declared and set apart for payment; provided, however, that the
restrictions set forth in this sentence shall not apply to the purchase,
redemption, retirement, or other acquisition of Junior Dividend Stock or Junior
Liquidation Stock either (A) pursuant to any employee or director incentive or
benefit plan or arrangement (including any employment, severance or consulting
agreement) of the Corporation or any subsidiary of the Corporation heretofore or
hereafter adopted or (B) in exchange solely for Junior Stock.
No full dividends shall be declared, paid or set apart for payment on
shares of Parity Dividend Stock for any period unless full cumulative dividends
have been, or contemporaneously are, paid or declared and set apart for such
payment on the Convertible Preferred Stock for all dividend payment periods
ending on or before the payment date of such dividends on Parity Dividend Stock.
No dividends shall be paid on Parity Dividend Stock except on dates on which
dividends are paid on the Convertible Preferred Stock. All dividends paid or
declared and set apart for payment on the Convertible Preferred Stock and the
Parity Dividend Stock shall be paid or declared and set apart for payment pro
rata so that the amount of dividends paid or declared and set apart for payment
per share on the Convertible Preferred Stock and the Parity Dividend Stock on
any date shall in all cases bear to each other the same ratio that accrued and
unpaid dividends to the date of payment on the Convertible Preferred Stock and
the Parity Dividend Stock bear to each other.
No payment on account of the purchase, redemption, retirement or other
acquisition of shares of Junior Stock, Parity Dividend Stock or Parity
Liquidation Stock shall be made,
9
<PAGE> 10
and, other than dividends to the extent permitted by the preceding paragraph, no
distributions shall be declared, paid or set apart for payment on shares of
Parity Dividend Stock or Parity Liquidation Stock, unless and until all accrued
and unpaid dividends on the Convertible Preferred Stock for all dividend payment
periods ending on or before such payment for, or the payment date of such
distributions on, such Parity Dividend Stock or Parity Liquidation Stock shall
have been paid or declared and set apart for payment; provided, however, that
the restrictions set forth in this sentence shall not apply to the purchase,
redemption, retirement, or other acquisition of Parity Dividend Stock or Parity
Liquidation Stock either (A) pursuant to any employee or director incentive or
benefit plan or arrangement (including any employment, severance or consulting
agreement) of the Corporation or any subsidiary of the Corporation hereafter
adopted or (B) in exchange solely for Junior Stock.
Any reference to "distribution" contained in this Section III shall not
be deemed, except as expressly stated, to include any distribution made in
connection with any liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary.
Section IV. LIQUIDATION PREFERENCE. In the event of a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the holders of shares of Convertible Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to
shareholders an amount equal to the dividends accrued and unpaid on such shares
on the date of final distribution to such holders, whether or not declared,
without interest, plus a sum equal to $50 per share, and no more, before any
payment shall be made or any assets distributed to the holders of shares of
Junior Liquidation Stock; provided, however, that such rights shall accrue to
the holders of shares of Convertible Preferred Stock only with respect to assets
(if any) remaining after the Corporation's payment obligations with respect to
the liquidation preferences of the shares of any class or series of the
Corporation's capital stock hereafter issued ranking prior to the Convertible
Preferred Stock as to distributions of assets upon such liquidation, dissolution
or winding up ("Senior Liquidation Stock") are fully met. The entire assets of
the Corporation available for distribution to shareholders after the liquidation
preferences of the shares of Senior Liquidation Stock are fully met shall be
distributed ratably among the holders of the Convertible Preferred Stock and any
Parity Liquidation Stock in proportion to the respective preferential amounts to
which each is entitled (but only to the extent of such preferential amounts).
After payment in full of the liquidation preferences of the share of the
Convertible Preferred Stock, the holders of such shares shall not be entitled to
any further participation in any distribution of assets by the Corporation. The
voluntary sale, lease, exchange or transfer of all or substantially all of the
Company's property or assets to, or its consolidation or merger with one or more
corporations shall not be deemed to be considered a voluntary or involuntary
liquidation, dissolution or winding up of the Corporation.
10
<PAGE> 11
Section V. REDEMPTION AT OPTION OF THE CORPORATION. The Convertible
Preferred Stock may not be redeemed by the Corporation prior to August 7, 2000.
On and after such date, the Convertible Preferred Stock may be redeemed by the
Corporation, at its option on any date set by the Board of Directors, in whole
or in part at any time, subject to the limitations, if any, imposed by the
Florida Business Corporation Act, for an amount in cash equal to the Redemption
Price.
In case of the redemption of less than all of the then outstanding
Convertible Preferred Stock, the Corporation shall designate by lot, or in such
other manner as the Board of Directors may determine to be fair, the shares to
be redeemed, or shall effect such redemption pro rata. Notwithstanding the
foregoing, the Corporation shall not redeem less than all of the Convertible
Preferred Stock at any time outstanding until all dividends accrued and in
arrears upon all Convertible Preferred Stock then outstanding shall have been
paid in full for all past dividend periods.
Not more than ninety nor less than thirty days prior to the date fixed
for redemption by the Board of Directors, notice thereof by first class mail,
postage prepaid, shall be given to the holders of record of the shares of
Convertible Preferred Stock to be redeemed, addressed to such holders at their
last addresses as shown upon the stock transfer books of the Corporation. Each
such notice of redemption shall specify the date fixed for redemption, the
Redemption Price, the place or places of payment, that payment will be made upon
presentation and surrender of the shares of Convertible Preferred Stock, that on
and after the date fixed for redemption dividends will cease to accrue on such
shares, the then-effective conversation price pursuant to Section VI, and that
the right of holders to convert shares of Convertible Preferred Stock shall
terminate at 5:00 p.m. New York City time on the Business Day prior to the date
fixed for redemption and if such conversion right is not exercised prior to such
time, such conversion right will be lost (unless the Corporation defaults in the
payment of the Redemption Price).
Any notice that is mailed as herein provided shall be conclusively
presumed to have been duly given, whether or not the holder of shares of
Convertible Preferred Stock receives such notice; and failure to give such
notice by mail, or any defect in such notice, to the holders of any shares
designated for redemption shall not affect the validity of the proceedings for
the redemption of any other shares of Convertible Preferred Stock. On or after
the date fixed for redemption as stated in such notice, each holder of the
shares called for redemption shall surrender the certificate evidencing such
shares to the Corporation at the place designated in such notice and shall
thereupon be entitled to receive payment of the Redemption Price. If less than
all the shares evidenced by any such surrendered certificate are redeemed, a new
certificate shall be issued evidencing the unredeemed shares.
No fractional shares of Convertible Preferred Stock shall be issued
upon redemption of less than all Convertible Preferred Stock. If more than one
certificate
11
<PAGE> 12
evidencing shares of Convertible Preferred Stock shall be held at one time by
the same holder, the number of full shares issuable upon redemption of less than
all of such shares of Convertible Preferred Stock shall be computed on the basis
of the aggregate number of shares of Convertible Preferred Stock so held.
Instead of any fractional share of Convertible Preferred Stock that would
otherwise be issuable to a holder upon redemption of less than all shares of
Convertible Preferred Stock, the Corporation shall pay a cash adjustment in
respect of such fractional share in an amount equal to the same fraction of the
fair value per share of Convertible Preferred Stock (as determined in good faith
by the Board of Directors or in any manner prescribed by the Board of Directors)
at the close of business on the date fixed for redemption.
Notice having been given as aforesaid, if, on the date fixed for
redemption, funds necessary for the redemption shall be available therefor and
shall have been deposited with a bank or trust company with irrevocable
instructions and authority to pay the Redemption Price to the holders of the
Convertible Preferred Stock, then, notwithstanding that the certificates
evidencing any shares so called for redemption shall not have been surrendered,
dividends with respect to the shares so called shall cease to accrue on and
after the date fixed for redemption, such shares shall no longer be deemed
outstanding, the holders thereof shall cease to be shareholders of the
Corporation and all rights whatsoever with respect to the shares so called for
redemption (except the right of the holders to receive the Redemption Price
without interest upon surrender of their certificates therefor) shall terminate.
If funds legally available for such purpose are not sufficient for redemption of
the shares of Convertible Preferred Stock which were to be redeemed, then the
certificates evidencing such shares shall be deemed not to be surrendered, such
shares shall remain outstanding, and the right of holders of shares of
Convertible Preferred Stock thereafter shall continue to be only those of a
holder of shares of the Convertible Preferred Stock.
Upon an optional redemption by the Corporation, if at any time the
Corporation does not pay amounts sufficient to redeem all Convertible Preferred
Stock, then such funds which are paid shall be applied to redeem such shares of
Convertible Preferred Stock as the Corporation may designate by lot or in such
other manner as the Board of Directors may determine to be fair, or such
redemption shall be effected pro rata.
The shares of Convertible Preferred Stock shall not be subject to the
operation of any mandatory purchase, retirement or sinking fund.
Section VI. CONVERSION PRIVILEGE.
(a) RIGHT OF CONVERSION. Each share of Convertible Preferred Stock
shall be convertible at the option of the holder thereof, at any time prior to
the 5:00 p.m. New York City time on the Business Day prior to the date fixed for
redemption of such share as herein provided, into fully paid and nonassessable
shares of Common Stock, at the rate
12
<PAGE> 13
of that number of shares of Common Stock for each full share of Convertible
Preferred Stock that is equal to $50 divided by the conversion price applicable
per share of Common Stock, or into such additional or other securities, cash or
property and at such other rates as required in accordance with the provisions
of this Section VI. For purposes of this resolution, the "conversion price"
applicable per share of Common Stock shall initially be equal to $50.065 and
shall be adjusted from time to time in accordance with the provisions of this
Section VI.
(b) CONVERSION PROCEDURES. Any holder of shares of Convertible
Preferred Stock desiring to convert such shares into Common Stock shall
surrender the certificate or certificates evidencing such shares of Convertible
Preferred Stock at the office of the transfer agent for the Convertible
Preferred Stock, which certificate or certificates, if the Corporation shall so
require, shall be duly endorsed to the Corporation or in blank, or accompanied
by proper instruments of transfer to the Corporation or in blank, accompanied by
irrevocable written notice to the Corporation that the holder elects so to
convert such shares of Convertible Preferred Stock and specifying the name or
names (with address or addresses) in which a certificate or certificates
evidencing shares of Common Stock are to be issued.
No payments or adjustments in respect of dividends on shares of
Convertible Preferred Stock surrendered for conversion or on account of any
dividend on the Common Stock issued upon conversion shall be made upon the
conversion of any shares of Convertible Preferred Stock; provided, however,
that:
(i) if a dividend record date fixed for the Convertible Preferred Stock
as established herein results in a holder who undertakes conversion
being eligible to receive on any dividend payment date both a dividend
on the Convertible Preferred Stock and a dividend on the Common Stock
issued upon conversion thereof, then such holder shall be entitled to
receive only the higher of such dividend amounts; and
(ii) if the Corporation shall, by dividend or otherwise, declare or
make a distribution on its Common Stock referred to in Section
VI(c)(iv) or VI(c)(v) (including, without limitation, dividends or
distributions referred to in the last sentence of Section VI(c)(iv)),
the holder of each share of Convertible Preferred Stock, upon the
conversion thereof subsequent to the close of business on the date
fixed for the determination of shareholders entitled to receive such
distribution and prior to the effectiveness of the conversion price
adjustment in respect of such distribution, shall also be entitled to
receive for each share of Common Stock into which such share of
Convertible Preferred Stock is converted, the portion of the shares of
Common Stock, rights, warrants, evidences of indebtedness, shares of
capital stock, cash and assets so distributed applicable to one share
of Common Stock; provided, however, that at the election of the
Corporation (whose election
13
<PAGE> 14
shall be evidenced by a resolution of the Board of Directors) with
respect to all holders so converting, the Corporation may, in lieu of
distributing to such holder any portion of such distribution not
consisting of cash or securities of the Corporation, pay such holder an
amount in cash equal to the fair market value thereof (as determined in
good faith by the Board of Directors, whose determination shall be
conclusive and described in a resolution of the Board of Directors). If
any conversion of a share of Convertible Preferred Stock described in
the immediately preceding sentence occurs prior to the payment date for
a distribution to holders of Common Stock which the holder of the share
of Convertible Preferred Stock so converted is entitled to receive in
accordance with the immediately preceding sentence, the Corporation may
elect (such election to be evidenced by a resolution of the Board of
Directors) to distribute to such holder a due bill for the shares of
Common Stock, rights, warrants, evidences of indebtedness, shares of
capital stock, cash or assets to which such holder is so entitled,
provided that such due bill (i) meets any applicable requirements of
the principal national securities exchange or other market on which the
Common Stock is then traded and (ii) requires payment or delivery of
such shares of Common Stock, rights, warrants, evidences of
indebtedness, shares of capital stock, cash or assets no later than the
date of payment or delivery thereof to holders of shares of Common
Stock receiving such distribution.
The Corporation shall, as soon as practicable after such deposit of
certificates evidencing shares of Convertible Preferred Stock accompanied by the
written notice and compliance with any other conditions herein contained,
deliver at such office of such transfer agent to the person for whose account
such shares of Convertible Preferred Stock were so surrendered, or to the
nominee or nominees of such person, certificates evidencing the number of full
shares of Common Stock to which such person shall be entitled as aforesaid,
together with a cash adjustment in respect of any fraction of a share of Common
Stock as hereinafter provided. Such conversion shall be deemed to have been made
as of the date of such surrender of the shares of Convertible Preferred Stock to
be converted, and the person or persons entitled to receive the Common Stock
deliverable upon conversion of such Convertible Preferred Stock shall be treated
for all purposes as the record holder or holders of such Common Stock on such
date.
(c) Adjustment of Conversion Price. The conversion price at which a
share of Convertible Preferred Stock is convertible into Common Stock shall be
subject to adjustment from time to time as follows:
(i) In case the Corporation shall pay or make a dividend or other
distribution on its Common Stock exclusively in Common Stock or shall
pay or make a dividend or other distribution on any other class or
series of capital stock of the Corporation which dividend or
distribution includes Common Stock, the conversion price in effect at
the opening of business on the day following the date fixed
14
<PAGE> 15
for the determination of shareholders entitled to receive such dividend
or other distribution shall be reduced by multiplying such conversion
price by: A/(A + B), where:
A = the number of shares of Common Stock outstanding at the
close of business on the date fixed for such
determination; and
B = the total number of shares of Common Stock constituting
such dividend or other distribution,
such reduction to become effective immediately after the opening of
business on the day following the date fixed for such determination.
For purposes of this subparagraph (i), the number of shares of Common
Stock at any time outstanding shall not include shares held in the
treasury of the Corporation. The Corporation shall not pay any dividend
or make any distribution on shares of Common Stock held in the treasury
of the Corporation.
(ii) In case the Corporation shall pay or make a dividend or other
distribution on its Common Stock consisting exclusively of, or shall
otherwise issue to all holders of its Common Stock, rights or warrants
entitling the holders thereof to subscribe for or purchase shares of
Common Stock at a price per share less than the Current Market Price
Per Share of the Common Stock on the date fixed for the determination
of shareholders entitled to receive such rights or warrants, the
conversion price in effect at the opening of business on the day
following the date fixed for such determination shall be reduced by
multiplying such conversion price by: (A + B)/(A + C), where:
A = the number of shares of Common Stock outstanding at
the close of business on the date fixed for such
determination,
B = the number of shares of Common Stock which the
aggregate of the offering price of the total number
of shares of Common Stock so offered for subscription
or purchase would purchase at such Current Market
Price Per Share, and
C = the number of shares of Common Stock so offered for
subscription or purchase,
such reduction to become effective immediately after the opening of
business on the day following the date fixed for such determination.
In case any rights or warrants referred to in this subparagraph (ii) in
respect of which an adjustment shall have been made shall expire
unexercised within 45 days after the shares shall have been distributed
or issued by the Corporation the
15
<PAGE> 16
conversion price shall be readjusted at the time of such expiration to
the conversion price that would have been in effect if no adjustment
had been made on account of the distribution or issuance of such
expired rights or warrants. For the purposes of this Section VI(c)(ii),
if both (A) a Distribution Date (as defined in Section 3(a) of the
Rights Agreement) and (B) an event set forth in Section 11(a)(ii) or
13(a) of the Rights Agreement shall have occurred, then the later to
occur of such events shall be deemed to constitute an issuance of
rights to purchase shares of the related common stock.
(iii) In case outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the conversion price
in effect at the opening of business on the day following the day upon
which such subdivision becomes effective shall be proportionately
reduced, and conversely, in case outstanding shares of Common Stock
shall be combined into a smaller number of shares of Common Stock, the
conversion price in effect at the opening of business on the day
following the day upon which such combination becomes effective shall
be proportionately increased, such reduction or increase, as the case
may be, to become effective immediately after the opening of business
on the day following the day upon which such subdivision or combination
becomes effective.
(iv) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Common Stock evidences of its
indebtedness, shares of any class or series of capital stock, cash or
assets (including securities, but excluding any rights or warrants
referred to in subparagraph (ii) of this Section VI(c), any dividend or
distribution paid exclusively in cash and any dividend or distribution
referred to in subparagraph (i) of this Section VI(c)), the conversion
price shall be reduced so that the same shall equal the price
determined by multiplying the conversion price in effect immediately
prior to the effectiveness of the conversion price reduction
contemplated by this subparagraph (iv) by: (A - B)/A, where:
A = the Current Market Price Per Share of the Common
Stock on the date fixed for the payment of such
distribution (the "Reference Date"), and
B = the fair market value (as determined in good faith
by the Board of Directors, whose determination shall
be conclusive and described in a resolution of the
Board of Directors), on the Reference Date, of the
portion of the evidence of indebtedness, shares of
capital stock, cash and assets so distributed
applicable to one share of Common Stock,
such reduction to become effective immediately prior to the opening of
business on the day following the Reference Date, provided, however,
that for purposes of this subparagraph (iv), any dividend or
distribution that includes shares of Common Stock or rights or warrants
to subscribe for or purchase shares of Common Stock
16
<PAGE> 17
shall be deemed instead to be (1) a dividend or distribution of the
evidences of indebtedness, cash, assets or shares of capital stock
other than such shares of Common Stock or rights or warrants (making
any further conversion price reduction required by this subparagraph
(iv)) immediately followed by (2) a dividend or distribution of such
shares of Common Stock or such rights or warrants (making any further
conversion price reduction required by subparagraph (i) or (ii) of this
Section VI(c), except (A) the Reference Date of such dividend or
distribution as defined in this subparagraph (iv) shall be substituted
as "the date fixed for the determination of shareholders entitled to
receive such dividend or other distribution", "the date fixed for the
determination of shareholders entitled to receive such rights or
warrants" and "the date fixed for such determination" within the
meaning of subparagraph (i) and (ii) of this Section VI(c) and (B) any
shares of Common Stock included in such dividend or distribution shall
not be deemed "outstanding at the close of business on the date fixed
for such determination" within the meaning of subparagraph (i) of this
Section VI(c)). If the Board of Directors determines the fair market
value of any distribution for purposes of this subparagraph (iv) by
reference to the actual or when issued trading market for any
securities comprising such distribution, it must in doing so consider
the prices in such market over the same period used in computing the
Current Market Price Per Share of Common Stock.
(v) In case the Corporation shall pay or make a dividend or other
distribution on its Common Stock exclusively in cash (excluding (A)
cash that is part of the distribution referred to in (iv) above and,
(B) in the case of any quarterly cash dividend on the Common Stock, the
portion thereof that does not exceed the per share amount of the next
preceding quarterly cash dividend on the Common Stock (as adjusted to
appropriately reflect any of the events referred to in subparagraph
(i), (ii), (iii), (iv) and (v) of this Section VI(c)), or all of such
quarterly cash dividend if the amount thereof per share amount of
Common Stock multiplied by four does not exceed 15% of the Current
Market Price Per Share of the Common Stock on the Trading Day next
preceding the date of declaration of such dividend), the conversion
price shall be reduced so that the same shall equal the conversion
price in effect immediately prior to the effectiveness of the
conversion price reduction contemplated by this subparagraph (v) by:
(A - B)/A, where:
A = the Current Market Price Per Share of the Common Stock on
the date fixed for the payment of such distribution, and
B = the amount of cash so distributed and not excluded as
provided above applicable to one share of Common Stock,
such reduction to become effective immediately prior to the opening of
business on the day following the date fixed for the payment of such
distribution.
17
<PAGE> 18
(vi) No adjustment in the conversion price shall be required unless
such adjustment would require an increase or decrease of at least 1% in
the conversion price; provided, however, that any adjustments which by
reason of this subparagraph (vi) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment.
(vii) Whenever the conversion price is adjusted as herein provided: (1)
the Corporation shall compute the adjusted conversion price and shall
prepare a certificate signed by the Treasurer of the Corporation
setting forth the adjusted conversion price and showing in reasonable
detail the facts upon which such adjustment in based, and such
certificate shall forthwith be filed with the transfer agent for the
Convertible Preferred Stock; and (2) a notice stating that the
conversion price has been adjusted and setting forth the adjusted
conversion price shall forthwith be required, and as soon as
practicable after it is required, such notice shall be mailed by the
Corporation to all record holders of shares of Convertible Preferred
Stock at their last addresses as they shall appear upon the stock
transfer books of the Corporation.
(viii) The Corporation from time to time may reduce the conversion
price by any amount for any period of time if the period is at least
twenty days, the reduction is irrevocable during the period and the
Board of Directors of the Corporation shall have made a determination
that such reduction would be in the best interest of the Corporation,
which determination shall be conclusive. Whenever the conversion price
is reduced pursuant to the preceding sentence, the Corporation shall
mail to holders of record of the Convertible Preferred Stock a notice
of the reduction at least fifteen days prior to the date the reduced
conversion price takes effect, and such notice shall state the reduced
conversion price and the period it will be in effect.
(d) NO FRACTIONAL SHARES. No fractional shares of Common Stock shall be
issued upon conversion of Convertible Preferred Stock. If more than one
certificate evidencing shares of Convertible Preferred Stock shall be
surrendered for conversion at one time by the same holder, the number of full
shares issuable upon conversion thereof shall be computed on the basis of the
aggregate number of shares of Convertible Preferred Stock so surrendered.
Instead of any fractional share of Common Stock that would otherwise be issuable
to a holder upon conversion of any shares of Convertible Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fractional share in
an amount equal to the same fraction of the market price per share of Common
Stock (as determined by the Board of Directors or in any manner prescribed by
the Board of Directors, which, so long as the Common Stock is listed on the New
York Stock Exchange or quoted on the Nasdaq National Market System, shall be the
reported last sale price regular way) at the close of business on the day of
conversion.
18
<PAGE> 19
(e) RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE OF ASSETS. In the
event that the Corporation shall be a party to any transaction (including
without limitation any recapitalization or reclassification of the Common Stock
(other than a change in par value, or from par value to no par value, or from no
par value to par value, or as a result of a subdivision or combination of the
Common Stock), any consolidation of the Corporation with, or merger of the
Corporation into, any other person, any merger of another person into the
Corporation (other than a merger which does not result in a reclassification,
conversion, exchange or cancellation of outstanding shares of Common Stock of
the Corporation), any sale or transfer of all or substantially all of the assets
of the Corporation or any share exchange) pursuant to which the Common Stock is
converted into the right to receive other securities, cash or other property,
then lawful provisions shall be made as part of the terms of such transaction
whereby the holder of each share of Convertible Preferred Stock then outstanding
shall have the right thereafter to convert such share only into (i) in the case
of any such transaction other than a Common Stock Fundamental Change and subject
to funds being legally available for such purpose under applicable law at the
time of such conversion, the kind and amount of securities, cash and other
property receivable upon such transaction by a holder of the number of shares of
Common Stock of the Corporation into which such share of Convertible Preferred
Stock might have been converted immediately prior to such transaction, after
giving effect, in the case of any Non-Stock Fundamental Change, to any
adjustment in the conversion price required by the provisions of Section VI(h),
and (ii) in the case of a Common Stock Fundamental Change, common stock of the
kind received by holders of Common Stock as a result of such Common Stock
Fundamental Change in an amount determined pursuant to the provisions of Section
VI(h). The Corporation or the person formed by such consolidation or resulting
from such merger or which acquires such assets or which acquires the
Corporation's shares, as the case may be, shall make provisions in its
certificate or articles of incorporation or other constituent document to
establish such right. Such certificate or articles of incorporation or other
constituent document shall provide for adjustments which, for events subsequent
to the effective date of such certificate or articles of incorporation or other
constituent document, shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section VI. The above provisions shall
similarly apply to successive transactions of the foregoing type.
(f) RESERVATION OF SHARES; ETC. The Corporation shall at all times
reserve and keep available, free from preemptive rights out of its authorized
and unissued stock, solely for the purpose of effecting the conversion of the
Convertible Preferred Stock, such number of shares of its Common Stock as shall
from time to time be sufficient to effect that conversion of all shares of
Convertible Preferred Stock from time to time outstanding. The Corporation shall
from time to time, in accordance with the laws of the State of Florida, in good
faith and as expeditiously as possible endeavor to cause the authorized number
of shares of Common Stock to be increased if at any time the number of shares of
authorized and unissued Common Stock shall not be sufficient to permit the
conversion of all the then-outstanding shares of Convertible Preferred Stock.
19
<PAGE> 20
If any shares of Common Stock required to be reserved for purposes of
conversion of the Convertible Preferred Stock hereunder require registration
with or approval of any governmental authority under any Federal or State law
before such shares may be issued upon conversion, the Corporation will in good
faith and as expeditiously as possible endeavor to cause such shares to be duly
registered or approved as the case may be. If the Common Stock is listed on the
New York Stock Exchange or any other national securities exchange or traded
through the Nasdaq National Market, the Corporation will, if permitted by the
rules of such exchange or market, list and keep listed on such exchange or make
and keep eligible for trading on such market (as the case may be), upon official
notice of issuance, all shares of Common Stock issuable upon conversion of the
Convertible Preferred Stock; provided, however, that such shares of Common Stock
may be delisted from such exchange or may cease to be eligible for trading
through such market (as the case may be) if, prior to or concurrent with such
delisting or cessation of eligibility for trading, the Corporation causes such
shares of Common Stock to be listed on or eligible for trading through any other
such exchange or market.
(g) PRIOR NOTICE OF CERTAIN EVENTS. In case:
(i) the Corporation shall (1) declare any dividend (or any other
distribution) on its Common Stock, other than (A) a dividend payable in
shares of Common Stock or (B) a dividend payable in cash out of its
retained earnings other than any special or nonrecurring or other
extraordinary dividend or (2) declare or authorize a redemption or
repurchase of in excess of 10% of the then-outstanding shares of Common
Stock; or
(ii) the Corporation shall authorize the granting to all holders of
Common Stock of rights or warrants to subscribe for or purchase any
shares of stock of any class or series or of any other rights or
warrants; or
(iii) of any reclassification of Common Stock (other than a subdivision
or combination of the outstanding Common Stock, or a change in par
value, or from par value to no par value, or from no par value to par
value), or of any consolidation or merger to which the Corporation is a
party and for which approval of any shareholders of the Corporation
shall be required, or of the sale or transfer of all or substantially
all of the assets of the Corporation or of any share exchange whereby
the Common Stock is converted into other securities, cash or other
property; or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation;
then the Corporation shall cause to be filed with the transfer agent for the
Convertible Preferred Stock, and shall cause to be mailed to the holders of
record of the Convertible Preferred Stock, at their last addresses as they shall
appear upon the stock transfer books
20
<PAGE> 21
of the Corporation, at least ten days prior to the applicable record or
effective date hereinafter specified, a notice stating (x) the date on which a
record (if any) is to be taken for the purpose of such dividend, distribution,
redemption, repurchase, rights or warrants or, if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distribution, redemption, rights or warrants are to be determined
or (y) the date on which such reclassification, consolidation, merger, sale,
transfer, share exchange, dissolution, liquidation or winding up is expected to
become effective and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up (but no failure to mail such notice or any defect therein or in
the mailing thereof shall affect the validity of the corporate action required
to be specified in such notice).
(h) ADJUSTMENTS IN CASE OF FUNDAMENTAL CHANGES. Notwithstanding any
other provision in this Section VI to the contrary, if any Fundamental Change
occurs, then the conversion price in effect will be adjusted immediately after
such Fundamental Change as described below. In addition, in the event of a
Common Stock Fundamental Change, each share of Convertible Preferred Stock shall
be convertible solely into common stock of the kind received by holders of
Common Stock as the result of such Common Stock Fundamental Change.
For purposes of calculating any adjustment to be made pursuant to this
Section VI(h) in the event of a Fundamental Change, immediately after such
Fundamental Change:
(i) In the case of a Non-Stock Fundamental Change, the conversion price
of the Convertible Preferred Stock shall thereupon become the lower of
(1) the conversion price in effect immediately prior to such Non-Stock
Fundamental Change, but after giving effect to any other prior
adjustments effected pursuant to this Section VI, and (2) the result of
A x $50/B, where:
A = the greater of the Applicable Price or the then
applicable Reference Market Price, and
B = (x) the then-current Redemption Price per share of
Convertible Preferred Stock or (y) for any Non-Stock
Fundamental Change that occurs before the Convertible
Preferred Stock becomes redeemable by the Corporation
pursuant to Section V, the applicable price per share
set forth for the date of such Non-Stock Fundamental
Change in the following table:
21
<PAGE> 22
DATE OF NON-STOCK FUNDAMENTAL CHANGE PRICE
------------------------------------ -----
After date of original issuance of Convertible
Preferred Stock and on or before August 6, 1997 ......................$53.13
After August 7, 1997 and on or before August 6, 1998 ..................$52.81
After August 7, 1998 and on or before August 6, 1999 ..................$52.50
After August 7, 1999 and on or before August 6, 2000 ..................$52.19
plus, in any case referred to in this clause (y), an amount equal to
all per share dividends on the Convertible Preferred Stock accrued and
unpaid thereon, whether or not declared, to but excluding the date of
such Non-Stock Fundamental Change; and
(ii) In the case of a Common Stock Fundamental Change, the conversion
price of the Convertible Preferred Stock in effect immediately prior to
such Common Stock Fundamental Change, but after giving effect to any
other prior adjustments effected pursuant to this Section VI, shall
thereupon be adjusted by multiplying such conversion price by a
fraction of which the numerator shall be the Purchaser Stock Price and
the denominator shall be the Applicable Price; provided, however, that
in the event of a Common Stock Fundamental Change in which (A) 100% by
value of the consideration received by a holder of Common Stock is
common stock of the successor, acquiror or other third party (and cash,
if any, is paid with respect to any fractional interests in such common
stock resulting from such Common Stock Fundamental Change) and (B) all
of the Common Stock shall have been exchanged for, converted into or
acquired for common stock (and cash with respect to fractional
interests) of the successor, acquiror or other third party, the
conversion price of the Convertible Preferred Stock in effect
immediately prior to such Common Stock Fundamental Change shall
thereupon be adjusted by dividing such conversion price by the number
of shares of common stock of the successor, acquiror, or other third
party received by a holder of one share of Common Stock as a result of
such Common Stock Fundamental Change.
(i) DIVIDEND OR INTEREST REINVESTMENT PLANS. Notwithstanding the
foregoing provisions, the issuance of any shares of Common Stock pursuant to any
plan providing for the reinvestment of dividends or interest payable on
securities of the Corporation and the investment of additional optional amounts
in shares of Common Stock under any such plan, and the issuance of any shares of
Common Stock or options or rights to purchase such shares pursuant to any
employee benefit plan or program of the Corporation or pursuant to any option,
warrant, right or exercisable, exchangeable or convertible security outstanding
as of the date the Convertible Preferred Stock was first designated (except as
expressly provided in Section VI(c)(ii) with respect to certain events under the
Rights
22
<PAGE> 23
Agreement), and any issuance of Rights, shall not be deemed to constitute an
issuance of Common Stock or exercisable, exchangeable or convertible securities
by the Corporation to which any of the adjustment provisions described above
applies. There shall also be no adjustment of the conversion price in case of
the issuance of any stock (or securities convertible into or exchangeable for
stock) of the Corporation except as specifically described in this Section VI.
If any action would require adjustment of the conversion price pursuant to more
than one of the provisions described above, only one adjustment shall be made
and such adjustment shall be the amount of adjustment which has the highest
absolute value to holders of Convertible Preferred Stock.
(j) SERIES A PREFERRED STOCK PURCHASE RIGHTS. So long as Rights are
attached to the outstanding shares of Common Stock of the Corporation, each
share of Common Stock issued upon conversion of the shares of Convertible
Preferred Stock prior to the earliest of any Distribution Date (as defined in
Section 3(a) of the Rights Agreement), the date of redemption of the Rights or
the date of expiration of the Rights shall be issued with Rights in an amount
equal to the amount of Rights then attached to each such outstanding share of
Common Stock.
Section VII. VOTING RIGHTS.
(a) GENERAL. The holders of shares of Convertible Preferred Stock shall
not have any voting rights except as set forth below or as otherwise from time
to time required by law. In connection with any right to vote, each holder of a
share of Convertible Preferred Stock shall have one vote for each share held.
Any shares of Convertible Preferred Stock owned, directly or indirectly, by any
entity of which the Corporation owns, directly or indirectly, a majority of the
shares entitled to vote for directors, shall not have voting rights hereunder
and shall not be counted in determining the presence of a quorum.
So long as any shares of the Corporation's Convertible Preferred Stock
are outstanding, the Corporation will not, without the affirmative vote or
consent of the holders of at least 66 2/3% of the outstanding shares of
Convertible Preferred Stock and outstanding Parity Dividend Stock, voting or
consenting (as the case may be) as a single class (i) amend, alter or repeal (by
merger or otherwise) any provision of the Corporation's Third Amended and
Restated Articles of Incorporation, as may be amended or restated from time to
time, or the by-laws so as to affect adversely the relative rights, preferences,
qualifications, limitations or restrictions of the Convertible Preferred Stock
or (ii) effect any reclassification of the Convertible Preferred Stock.
(b) DEFAULT VOTING RIGHTS. Notwithstanding any other provision of the
Corporation's Third Amended and Restated Articles of Incorporation, whenever
dividends on the Convertible Preferred Stock or any other class or series of
Parity Dividend Stock shall be in arrears in an aggregate amount equal to at
least six quarterly dividends (whether or not consecutive), (i) the number of
members of the Board of Directors of the Corporation shall
23
<PAGE> 24
be increased by two, effective as the time of election of such directors as
hereinafter provided and (ii) the holders of shares of Convertible Preferred
Stock (voting separately as a class with all other affected classes or series of
Parity Dividend Stock upon which like voting rights have been conferred and are
exercisable) shall have the exclusive right to vote for and elect such two
additional directors of the Corporation who shall continue to serve during the
period such dividends remain in arrears. The right of the holders of shares of
Convertible Preferred Stock to vote for such two additional directors shall
terminate when all accrued and unpaid dividends on the Convertible Preferred
Stock and all other affected classes or series of Parity Dividend Stock have
been declared and paid or set apart for payment. The term of office of all
directors so elected shall terminate immediately upon the termination of the
right of the holders of shares of Convertible Preferred Stock and such Parity
Dividend Stock to vote for such two additional directors, and the number of
directors of the Board of Directors of the Corporation shall immediately
thereafter be reduced by two.
The foregoing right of the holders of shares of Convertible Preferred
Stock with respect to the election of two directors may be exercised at any
annual meeting of shareholders or at any special meeting of shareholders held
for such purpose. If the right to elect directors shall have accrued to the
holders of shares of Convertible Preferred Stock more than ninety days preceding
the date established for the next annual meeting of stockholders, the President
of the Corporation shall, within twenty days after the delivery to the
Corporation at its principal office of a written request for a special meeting
signed by the holders of at least 10% of all outstanding shares of Convertible
Preferred Stock, call a special meeting of the holders of Convertible Preferred
Stock to be held within sixty days after the delivery of such request for the
purpose of electing such additional directors.
Notwithstanding any other provision of the Corporation's Third Amended
and Restated Articles of Incorporation, the holders of shares of Convertible
Preferred Stock and any Parity Dividend Stock referred to above voting as a
class shall have the right to remove, without cause and at any time, and replace
any directors such holders shall have elected pursuant to this Section VII.
Section VIII. OUTSTANDING SHARES. For purposes of this amendment, all
shares of Convertible Preferred Stock issued by the Corporation shall be deemed
outstanding except (i) from the date fixed for redemption pursuant to Section V,
all shares of Convertible Preferred Stock that have been so called for
redemption under Section V, to the extent provided thereunder; (ii) from the
date of surrender of certificates evidencing shares of Convertible Preferred
Stock, all shares of Convertible Preferred Stock converted into Common Stock;
and (iii) from the date of registration of transfer, all shares of Convertible
Preferred Stock owned, directly or indirectly, by any entity of which the
Corporation owns, directly or indirectly, a majority of the shares entitled to
vote for directors.
24
<PAGE> 25
Section IX. MISCELLANEOUS.
(a) Whenever possible, each provision hereof shall be interpreted in a
manner as to be effective and valid under applicable law, but if any provision
hereof is held to be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating or otherwise adversely affecting the remaining
provisions hereof. If a court of competent jurisdiction should determine that a
provision hereof would be valid or enforceable if a period of time were extended
or shortened or a particular percentage were increased or decreased, then such
court may make such change as shall be necessary to render the provision in
question effective and valid under applicable law.
(b) The Corporation shall pay any and all stock transfer and
documentary stamp taxes that may be payable in request of any issuance or
delivery of shares of Convertible Preferred Stock or shares of Common Stock or
other securities issued on account of Convertible Preferred Stock pursuant
hereto or certificates or instruments evidencing such shares or securities. The
Corporation shall not, however, be required to pay any such tax which may be
payable in respect of any transfer involved in the issuance or delivery of
shares of Convertible Preferred Stock or Common Stock or other securities in a
name other than that in which the shares of Convertible Preferred Stock with
respect to which such shares or other securities are issued or delivered were
registered, or in respect of any payment to any person with respect to any such
shares or securities other than a payment to the registered holder thereof, and
shall not required to make any such issuance, delivery or payment unless and
until the person otherwise entitled to such issuance, delivery or payment has
paid to the Corporation the amount of any such tax or has established, to the
satisfaction of the Corporation, that such tax has been paid or is not payable.
(c) In the event that a holder of shares of Convertible Preferred Stock
shall not by written notice designate the name in which shares of Common Stock
to be issued upon conversion of such shares should be registered or to whom
payment upon redemption of shares of Convertible Preferred Stock should be made
or the address to which the certificates or instruments evidencing such shares
or such payment should be sent, the Corporation shall be entitled to register
such shares and make such payment, in the name of the holder of such Convertible
Preferred Stock as shown on the records of the Corporation and to send the
certificates or instruments evidencing such shares or such payment, to the
address of such holder shown on the records of the Corporation.
Section X. DEFINITIONS. The following definitions shall apply to terms
used in connection with the Convertible Preferred Stock:
a. "Applicable Price" shall mean (i) in the event of a Non-Stock
Fundamental Change in which the holders of the Common Stock receive only cash,
the amount of cash received by the holder of one share of Common Stock and (ii)
in the event of any other
25
<PAGE> 26
Non-Stock Fundamental Change or any Common Stock Fundamental Change, the average
of the daily Closing Prices of the Common Stock for the ten consecutive Trading
Days prior to and including the record date for the determination of the holders
of Common Stock entitled to receive cash, securities, property or other assets
in connection with such Non-Stock Fundamental Change or Common Stock Fundamental
Change, or, if there is no such record date, the date upon which the holders of
the Common Stock shall have the right to receive such cash, securities, property
or other assets, in each case, as adjusted in good faith by the Board of
Directors of the Corporation to appropriately reflect any of the events referred
to in subparagraphs (i), (ii), (iii), (iv) and (v) of Section VI(c).
b. "Business Day" shall mean any day other than a Saturday, Sunday or
any day on which banking institutions are authorized to close in New York, New
York.
c. "Closing Price" of any common stock on any day shall mean the last
reported sale price regular way on such day or, in case no such sale takes place
on such day, the average of the reported closing bid and asked prices regular
way of the common stock in each case on the New York Stock Exchange, or, if the
common stock is not listed or admitted to trading on such Exchange, on the
principal national securities exchange or quotation system on which the common
stock is listed or admitted to trading or quoted, or, if not listed or admitted
to trading or quoted on any national securities exchange or quotation system,
the average of the closing bid and asked prices of the common stock in the
over-the-counter market on the day in question as reported by the National
Quotation Bureau Incorporated, or a similarly generally accepted reporting
service, or, if not so available in such manner, as furnished by any New York
Stock Exchange member firm selected from time to time by the Board of Directors
of the Corporation for that purpose.
d. "Common Stock" shall mean the Corporation's now or hereafter issued
Common Stock.
e. "Common Stock Fundamental Change" shall mean any Fundamental Change
in which more than 50% by value (as determined in good faith by the Board of
Directors of the Corporation) of the consideration received by holders of Common
Stock consists of common stock that for each of the ten consecutive Trading Days
referred to with respect to such Fundamental Change in Section X(a) above has
been admitted for listing or admitted for listing subject to notice of issuance
on a national securities exchange or quoted on the Nasdaq National Market;
provided, however, that a Fundamental Change shall not be a Common Stock
Fundamental Change unless either (i) the Corporation continues to exist after
the occurrence of such Fundamental Change and the outstanding shares of
Convertible Preferred Stock continue to exist as outstanding shares of
Convertible Preferred Stock, or (ii) not later than the occurrence of such
Fundamental Change, the outstanding shares of Convertible Preferred Stock are
converted into or exchanged for shares of convertible preferred stock of a
corporation succeeding to the business of the Corporation, which Convertible
Preferred Stock has powers, preferences
26
<PAGE> 27
and relative, participating, optional or other rights, and qualifications,
limitations and restrictions, substantially similar to those of the Convertible
Preferred Stock.
f. "Current Market Price Per Share" shall mean, as to the Common Stock
on any date in question, the average of the daily Closing Prices for the five
consecutive Trading Days prior to and including the date in question; provided,
however, that:
(1) if the Ex Date for any event (other than the issuance or
distribution requiring such computation) that required an adjustment to
the conversion price pursuant to subparagraphs (i), (ii), (iii), (iv),
or (v) of Section VI(c) ("Other Event") occurs after the fifth Trading
Day prior to the day in question and prior to the Ex Date for the
issuance or distribution requiring such computation (the "Current
Event"), the Closing Price for each Trading Day prior to the Ex Date
for such Other Event shall be adjusted by multiplying such Closing
Price by the same fraction by which the conversion price is so required
to be adjusted as a result of such Other Event,
(2) if the Ex Date for any Other Event occurs after the Ex Date for the
Current Event and on or prior to the date in question, the Closing
Price for each Trading Day on and after the Ex Date for such Other
Event shall be adjusted by multiplying such Closing Price by the
reciprocal of the fraction by which the conversion price is so required
to be adjusted as a result of such Other Event,
(3) if the Ex Date for any Other Event occurs on the Ex Date for the
Current Event, one of those events, as determined by the Corporation,
shall be deemed for purposes of clauses (1) and (2) of this proviso to
have an Ex Date occurring prior to the Ex Date for the other of those
events, and
(4) if the Ex Date for the Current Event is on or prior to the date in
question, then after taking into account any adjustment required
pursuant to clause (2) of this proviso, the Closing Price for each
Trading Day on or after such Ex Date shall be adjusted by adding
thereto the amount of any cash and the fair market value on the date in
question (as determined in good faith by the Board of Directors in a
manner consistent with any determination of such value for purposes of
paragraph (iv) or (v) of Section VI(c), whose determination shall be
conclusive and described in a resolution of the Board of Directors) of
the portion of the rights, warrants, evidences of indebtedness, shares
of capital stock or assets being distributed applicable to one share of
Common Stock.
g. "Ex Date" shall mean (1) when used with respect to any issuance or
distribution, means the first date on which the Common Stock trades regular way
on the relevant exchange or in the relevant market from which the Closing Price
was obtained without the
27
<PAGE> 28
right to receive such issuance or distribution and (2) when used with respect to
any subdivision or combination of shares of Common Stock, means the first date
on which the Common Stock trades regular way on such exchange or in such market
after the time at which such subdivision or combination becomes effective.
h. "Fundamental Change" shall mean the occurrence of any transaction or
event in connection with a plan pursuant to which all or substantially all of
the Common Stock shall be exchanged for, converted into, or acquired for or
constitute solely the right to receive cash, securities, property or other
assets (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization or
otherwise); provided, however, in the case of a plan involving more than one
such transaction or event, for purposes of adjustment of the conversion price,
such Fundamental Change shall be deemed to have occurred when substantially all
of the Common Stock of the Corporation shall be exchanged for, converted into,
or acquired for or constitute solely the right to receive cash, securities,
property or other assets, but the adjustment shall be based upon the highest
weighted average of consideration per share which a holder of Common Stock could
have received in such transactions or events as a result of which more than 50%
of the Common Stock of the Corporation shall have been exchanged for, converted
into, or acquired for or constitute solely the right to receive cash,
securities, property or other assets.
i. "Junior Dividend Stock" shall mean the Junior Stock and any other
capital stock of the Corporation ranking junior as to dividends to the
Convertible Preferred Stock.
j. "Junior Liquidation Stock" shall mean the Junior Stock and any other
class or series of the Corporation's capital stock ranking junior to the
Convertible Preferred Stock as to distributions of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary.
k. "Junior Stock" shall mean the Common Stock, the Series A Preferred
Stock, and the Corporation's hereafter issued capital stock ranking junior to
the Convertible Preferred Stock both as to the payment of dividends and as to
distributions of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, when and if issued.
l. "Nasdaq National Market" shall mean the National Association of
Securities Dealers Automated Quotation National Market.
m. "Non-Stock Fundamental Change" shall mean any Fundamental Change
other than a Common Stock Fundamental Change.
28
<PAGE> 29
n. "Parity Dividend Stock" shall mean any class or series of the
Corporation's capital stock hereafter issued ranking, as to dividends, on a
parity with the Convertible Preferred Stock.
o. "Parity Liquidation Stock" shall mean any class or series of the
Corporation's capital stock ranking on a parity with the Convertible Preferred
Stock as to distributions or assets upon liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary.
p. "Purchaser Stock Price" shall mean, with respect to any Common Stock
Fundamental Change, the average of the daily Closing Prices of the common stock
received in such Common Stock Fundamental Change for the ten consecutive Trading
Days prior to and including the record date for the determination of the holders
of Common Stock entitled to receive such common stock, or, if there is no such
record date, the date upon which the holders of the Common Stock shall have the
right to receive such common stock, in each case, as adjusted in good faith by
the Board of Directors of the corporation to appropriately reflect any of the
events referred to in subparagraphs, (i), (ii), (iii), (iv) and (v) of Section
VI(c); provided, however, if no such Closing Prices of the common stock for such
Trading Days exist, then the Purchaser Stock Price shall be set at a price
determined in good faith by the Board of Directors of the Corporation.
q. "Redemption Price" shall mean the applicable price per share set
forth for the date fixed for redemption in the following table:
DATE FIXED FOR REDEMPTION PRICE
------------------------- -----
On or after August 7, 2000 and on or before August 6, 2001..... $51.88
After August 7, 2001 and on or before August 6, 2002........... $51.56
After August 7, 2002 and on or before August 6, 2003........... $51.25
After August 7, 2003 and on or before August 6, 2004........... $50.94
After August 7, 2004 and on or before August 6, 2005........... $50.63
After August 7, 2005 and on or before August 6, 2006........... $50.31
Any date after August 7, 2006 ................................. $50.00
plus, in each case, an amount in cash equal to all per share dividends on the
Convertible Preferred Stock accrued and unpaid thereon, whether or not declared,
to but excluding the date fixed for redemption.
r. "Reference Market Price" shall initially mean $26.92 (which is an
amount equal to 66 2/3% of the reported last sale price for the Common Stock
quoted on the Nasdaq National Market on July 23, 1996), and in the event of any
adjustment to the conversion price other than as a result of a Fundamental
Change, the Reference Market Price shall
29
<PAGE> 30
also be adjusted so that the ratio of the Reference Market Price to the
conversion price after giving effect to any such adjustment shall always be the
same as the ratio of $26.92 to the initial conversion price per share set forth
in the last sentence of Section VI(a).
s. "Rights" shall have the meaning ascribed to such term in the Rights
Agreement.
t. "Rights Agreement" shall mean the Rights Agreement dated as of
February 24, 1988, as amended, between the Corporation and the Rights Agent
named therein.
u. "Series A Preferred Stock" shall mean the Corporation's Series A
Participating Preferred Stock, when and if issued.
v. "Trading Day" shall mean a day on which securities traded on the
national securities exchange or quotation system or in the over-the-counter
market used to determine the Closing Price.
ARTICLE V - BOARD OF DIRECTORS
Section 1. NUMBER OF DIRECTORS. The number of directors of the
Corporation shall not be less than twelve (12) or more than eighteen (18), the
exact number of directors to be determined from time to time by resolution
adopted by affirmative vote of a majority of the entire Board of Directors, and
such exact number shall be fifteen (15) until otherwise determined by resolution
adopted by affirmative vote of a majority of the entire Board of Directors.
Section 2. CLASSES OF DIRECTORS. The Board of Directors shall be
divided into three classes, Class I, Class II and Class III. Such classes shall
be as nearly equal in number of directors as possible. Each director shall serve
for a term ending at the third annual meeting following the annual meeting at
which such director was elected; provided, however, that the directors first
elected to Class I shall serve for a term ending on the annual meeting next
following the end of the 1983 fiscal year, the directors first elected to Class
II shall serve for a term ending at the second annual meeting next following the
end of the 1983 fiscal year, and the directors first elected to Class III shall
serve for a term ending at the third annual meeting next following the end of
the 1983 fiscal year, serving, in each case, until their successors shall be
elected and shall qualify. Any vacancies in the Board of Directors for any
reason, and any newly created directorships resulting from any increase in the
number of directors, shall be filled by the affirmative vote of a majority of
the remaining director(s) of the class in which such vacancy occurs or if none
so remains, by a majority vote of the directors of the other two classes, and
any directors so chosen shall hold office until the next election of the class
for which such directors shall have been chosen and until their successors shall
be elected and shall qualify. No decrease in the number of directors shall
shorten the term of any incumbent director. There shall be no cumulative voting
in the election of directors.
30
<PAGE> 31
Section 3. REMOVAL OF DIRECTORS. At a meeting of shareholders called
expressly for that purpose, any director or the entire Board of Directors may be
removed, but only for, cause, and only by the affirmative vote of the holders of
75% or more of the outstanding shares of capital stock of the Corporation then
entitled to vote at an election of directors.
Section 4. NOMINATION OF DIRECTORS. Except for the filling of any
vacancies in the Board of Directors which is governed by Section 2 of this
Article V, nominations for the election of directors may be made by the Board of
Directors or by any shareholder entitled to vote for the election of directors.
Nominations by any shareholder shall be made by notice in writing, delivered or
mailed by first class United States mail, postage prepaid, to the Secretary of
the Corporation not less than 5 days nor more than 60 days prior to any meeting
of the shareholders called for the election of directors. Each notice shall set
forth (i) the name, age, business address and, if known, residence address of
each nominee proposed in such notice, (ii) the principal occupation or
employment of each such nominee and (iii) the number of shares of stock of the
Corporation which are beneficially owned by each such nominee.
The Secretary of the Corporation shall determine whether any nomination
by any shareholder is made in conformance with the procedures set forth in this
Section 4. Nominations not made in conformance with the procedures set forth in
this Section 4 shall be null and void and shall be disregarded by the
Corporation.
ARTICLE VI - INDEMNIFICATION
The Corporation shall indemnify any present or former officer or director, or
person exercising powers and duties of a director, to the full extent now or
hereafter permitted under Florida Statutes now or hereafter in force.
ARTICLE VII - BYLAWS
The power to adopt, alter, amend or repeal Bylaws shall be vested in the Board
of Directors and the shareholders, but the Board of Directors may not alter,
amend or repeal any Bylaws adopted by the shareholders if the shareholders
provided that such Bylaws shall not be altered, amended or repealed by the Board
of Directors.
ARTICLE VIII - APPROVAL OF CERTAIN BUSINESS COMBINATIONS
A. In addition to any affirmative vote required by law or under any other
provision of these Third Amended and Restated Articles of
Incorporation, and except as otherwise expressly provided in Paragraph
C: (1) any merger or consolidation of the Corporation or any Subsidiary
(as hereinafter defined) with or into (a) any 30% Shareholder (as
hereinafter defined) or (b) any other corporation (whether or not
31
<PAGE> 32
itself a 30% Shareholder) which, after such merger or consolidation,
would be an Affiliate (as hereinafter defined) of a 30% Shareholder;
or, (2) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of related transactions) to
or with any 30% Shareholder of any assets of the Corporation or any
Subsidiary having an aggregate fair market value of $5,000,000 or more;
or, (3) the issuance or transfer by the Corporation or any Subsidiary
(in one transaction or a series of related transactions) of any
securities of the Corporation or any Subsidiary to any 30% Shareholder
in exchange for cash, securities or other property (or a combination
thereof) having an aggregate fair market value of $5,000,000 or more;
or, (4) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation; or, (5) any reclassification of
securities (including any reverse stock split), recapitalization,
reorganization, merger or consolidation of the Corporation with any of
its Subsidiaries or any similar transaction (whether or not with or
into or otherwise involving a 30% Shareholder) which has the effect,
directly or indirectly, of increasing the proportionate share of the
outstanding shares of any class of equity or convertible securities of
the Corporation or any Subsidiary which is directly or indirectly owned
by any 30% Shareholder, shall require the affirmative vote of the
holders of at least 85% of the outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of
directors, considered for the purpose of this Article VIII as one class
("Voting Shares"), which shall include the affirmative vote of at least
50% of the Voting Shares by shareholders other than any 30%
Shareholder. Such affirmative vote shall be required notwithstanding
the fact that no vote may be required, or that some lesser percentage
may be specified, by law or in any agreement with any national
securities exchange or otherwise.
B. The term "business combination" as used in this Article VIII shall mean
any transaction which is referred to in any one or more of clauses (1)
through (5) of Paragraph A hereof.
C. The provisions of Paragraph A shall not be applicable to any particular
business combination, and such business combination shall require only
such affirmative vote as is required by law if:
(1) The Board of Directors of the Corporation has by at least a
75% vote of the members of the Board then in office:
(a) given prior approval to the acquisition by the 30%
Shareholder involved in the business combination of 30% or
more of the outstanding common stock of the Corporation; or
(b) approved the business combination prior to the 30%
Shareholder involved in the business combination having become
a 30% Shareholder; or,
32
<PAGE> 33
(2) All of the following conditions are satisfied:
(a) the ratio of the aggregate amount of the cash and the fair
market value of other consideration to be received per share
by holders of common stock of the Corporation ("Common Stock")
in such business combination to the market price of the Common
Stock immediately prior to the announcement of such business
combination, is at least as great as the ratio of the highest
per share price (including brokerage commissions, transfer
taxes and soliciting dealers' fees) which such 30% Shareholder
has paid for any shares of Common Stock acquired by it within
the two-year period prior to the business combination to the
market price of the Common Stock immediately prior to the
initial acquisition by such 30% Shareholder of any Common
Stock;
(b) the aggregate amount of the cash and fair market value of
other consideration to be received per share by holders of
Common Stock in such business combination is not less than the
highest per share price (including brokerage commissions,
transfer taxes and soliciting dealers' fees) paid by such 30%
Shareholder in acquiring any of its holdings of Common Stock,
and is not less than the earnings per share of Common Stock
for the four full consecutive fiscal quarters immediately
preceding the record date for solicitation of votes on such
business combination multiplied by the then price/earnings
multiple (if any) of such 30% Shareholder as customarily
computed and reported in the financial community;
(c) the consideration to be received by holders of Common
Stock in such business combination shall be the same form and
of the same kind as the consideration paid by the 30%
Shareholder in acquiring the shares of Common Stock already
owned by it;
(d) after becoming a 30% Shareholder and prior to the
consummation of such business combination: (i) the 30%
Shareholder shall have taken steps to ensure that the
Corporation's Board of Directors included at all times
representation by continuing director(s) (as hereinafter
defined) proportionate to the ratio that the Voting Shares
which from time to time are owned by persons who are not 30%
Shareholders ("Public Holders") bear to all Voting Shares
outstanding at such respective times (with a continuing
director to occupy any resulting fractional board position);
(ii) there shall have been no reduction in the rate of
dividends payable on the Common Stock except as necessary to
insure that a quarterly dividend payment does not exceed 15%
of the net income of the Corporation for the four full
consecutive fiscal quarters immediately preceding the
declaration date of
33
<PAGE> 34
such dividend, or except as may have been approved by a
unanimous vote of all directors (the "entire Board"); (iii)
such 30% Shareholder shall not have acquired any newly issued
shares of stock, directly or indirectly, from the Corporation
(except upon conversion of convertible securities acquired by
it prior to obtaining a 30% interest or as a result of a pro
rate stock dividend or stock split); and (iv) such 30%
Shareholder shall not have acquired any additional shares of
the Common Stock or securities convertible into or
exchangeable for Common Stock except as a part of the
transaction which resulted in such 30% Shareholder acquiring
its 30% interest;
(e) prior to the consummation of such business combination,
such 30% Shareholder shall not have received the benefit,
directly or indirectly (except proportionately as a
shareholder), of any loans, advances, guarantees, pledges or
other financial assistance or tax credits provided by the
Corporation, or made any change in the Corporation's business
or equity capital structure without the unanimous approval of
the entire Board; and,
(f) a proxy statement responsive to the requirements of the
Securities Exchange Act of 1934 shall have been mailed to all
holders of Voting Shares for the purpose of soliciting
shareholder approval of such business combination. Such proxy
statement shall contain at the front thereof, in a prominent
place, any recommendations as to the advisability (or
inadvisability) of the business combination which the
continuing directors, or any of them, may have furnished in
writing and, if deemed advisable by a majority of the
continuing directors, an opinion of independent financial
advisers as to the fairness (or lack of fairness) of the terms
of such business combination, from the point of view of the
holders of Voting Shares other than any 30% Shareholder (such
independent financial advisers to be selected by a majority of
the continuing directors, and to be paid a reasonable fee for
their services upon receipt by the Corporation of such
opinion).
D. For the purposes of this Article VIII:
(1) A "person" shall mean any individual, firm, corporation or other
entity.
(2) "30% Shareholder" shall mean, in respect of any business
combination, any person (other than the Corporation or any Subsidiary)
who or which, as of the record date for the determination of
shareholders entitled to notice of and to vote on such business
combination, or immediately prior to the consummation of any such
transaction: (a) is the beneficial owner, directly or indirectly, of
not less than 30% of the Voting Shares; or, (b) is an Affiliate of the
Corporation and at any time within 2 years prior thereto was the
beneficial owner, directly or indirectly, of not
34
<PAGE> 35
less than 30% of the then outstanding Voting Shares; or, (c) is an
assignee of or has otherwise succeeded to any shares of capital stock
of the Corporation which were at any time within 2 years prior thereto
beneficially owned by any 30% Shareholder, and such assignment or
succession shall have occurred in the course of a transaction or series
of transactions not involving a public offering within the meaning of
the Securities Act of 1933.
(3) A person shall be the "beneficial owner" of any Voting Shares:(a)
which such person or any of its Affiliates and Associates (as
hereinafter defined) beneficially own, directly or indirectly; or, (b)
which such person or any of its Affiliates or Associates has (i) the
right to acquire (whether such right is exercisable immediately or only
after the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, warrants, or
options, or otherwise, or (ii) the right to vote pursuant to any
agreement, arrangement or understanding; or, (c) which are beneficially
owned, directly or indirectly, by any other person with which such
first-mentioned person or any of its Affiliates or Associates has any
agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of capital stock of the
Corporation.
(4) The outstanding Voting Shares shall include shares deemed owned
through application of sub-paragraph (3), above, but shall not include
any other Voting Shares which may be issuable pursuant to any
agreement, or upon exercise of conversion rights, warrants or options,
or otherwise.
(5) "Continuing director" shall mean a person who was a member of the
Board of Directors of the Corporation elected by the Public Holders
prior to the date as of which any 30% Shareholder acquired in excess of
5% of the then outstanding Voting Shares, or a person designated
(before his initial election as a director) as a continuing director by
a majority of the then continuing directors.
(6) "Other consideration to be received" shall mean common stock of the
Corporation retained by its Public Holders in the event of a business
combination in which the Corporation is the surviving corporation.
(7) "Affiliate" and "Associate" shall have the respective meanings
given those terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on February 23,
1983.
(8) "Subsidiary" means any corporation of which a majority of any class
of equity security (as defined in Rule 3a11-1 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as in effect on
February 23, 1983) is owned, directly or indirectly, by the
Corporation; provided, however, that for the purposes
35
<PAGE> 36
of the definition of 30% Shareholder set forth in sub-paragraph (2),
above, the term "Subsidiary" shall mean only a corporation of which a
majority of each class of equity security owned directly or indirectly,
by the Corporation.
E. A majority of the continuing directors shall have the power and duty to
determine for the purposes of this Article VIII, on the basis of
information known to them: (a) the number of Voting Shares beneficially
owned by any person; (b) whether a person is an Affiliate or Associate
of another; (c) whether a person has an agreement, arrangement or
understanding with another as to the matters referred to in
sub-paragraph (3), above, or, (d) whether the assets subject to any
business combination have an aggregate fair market value of $5,000,000
or more.
F. Nothing contained in this Article VIII shall be construed to relieve
any 30% Shareholder from any fiduciary obligation imposed by law.
ARTICLE IX
Action shall be taken by the shareholders only at annual or special meetings of
shareholders, and shareholders may not act by written consent. Special meetings
of shareholders may be called only by the holders of not less than 75% of the
Voting Shares as defined in Article VIII, or by such other persons or bodies as
may be authorized by the Bylaws of the Company.
ARTICLE X - AMENDMENTS
Any amendment, alteration, change or repeal of Article V, Article VIII, Article
IX, or Article X of this Third Amended and Restated Articles of Incorporation
shall require the affirmative vote of the holders of at least 85% of the then
outstanding Voting Shares as defined in Article VIII, which shall include the
affirmative vote of at least 50% of the Voting Shares other than any 30%
Shareholders; provided that this Article X shall not apply to, and such 85% vote
shall not be required for any amendment, alteration, change or repeal
recommended to the shareholders by at least a majority of the entire Board and
by at least two-thirds of the continuing directors, as defined in Article VIII.
36
<PAGE> 37
IN WITNESS WHEREOF, American Bankers Insurance Group, Inc. has caused
these Amended and Restated Articles of Incorporation to be executed on this ____
day of July, 1996.
(Corporate Seal) AMERICAN BANKERS INSURANCE GROUP, INC.
Attest:
By:
-----------------------------------------------
Leonardo F. Garcia, Gerald N. Gaston, Vice Chairman of the Board,
Secretary Chief Executive Officer and President
STATE OF FLORIDA )
)
COUNTY OF DADE )
The foregoing instrument was acknowledged before me this __ of July, 1996 by
Gerald N. Gaston as Vice Chairman of the Board, Chief Executive Officer and
President for American Bankers Insurance Group, Inc.
-----------------------------------------------
NOTARY PUBLIC, State of Florida
My Commission Expires:
-----------------------------------------------
Personally Known ______ OR Produced Identification________.
Type of Identification Produced___________________________.
<PAGE> 38
ARTICLES OF AMENDMENT
FIRST AMENDMENT
TO
THIRD AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
AMERICAN BANKERS INSURANCE GROUP, INC.
1. The name of the corporation is American Bankers Insurance Group,
Inc. (the "Corporation").
2. The Third Amended and Restated Articles of Incorporation of the
Corporation is amended by deleting the first paragraph of Article IV, and
substituting in its place the following:
"The Corporation shall be authorized to issue two classes of
shares of stock to be designated, respectively, "Common Stock"
and "Preferred Stock"; the total number of shares which the
Corporation shall have authority to issue is 110,000,000 the
total number of shares of Common Stock shall be 100,000,000
and each such share shall have a par value of One Dollar
($1.00); and the total number of shares of Preferred Stock
shall be 10,000,000 and each share shall be without par
value."
(the "Amendment")
3. This Amendment was recommended by the board of directors to the
holders of the Corporation's common stock, $1.00 par value (the "Common Stock
Holders"), at the Corporation's annual meeting of Common Stock Holders on May
23, 1997.
4. This Amendment was approved by a majority of the Common Stock
Holders, which is the only group entitled to vote on the Amendment, and the
number of votes cast for the Amendment was sufficient for approval.
<PAGE> 39
ARTICLES OF AMENDMENT
SECOND AMENDMENT
TO
THIRD AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
AMERICAN BANKERS INSURANCE GROUP, INC.
1. The name of the corporation is American Bankers Insurance Group,
Inc. (the "Corporation").
2. The Third Amended and Restated Articles of Incorporation of the
Corporation is amended by adding a designation for a new series of preferred
stock, the Series C Participating Preferred Stock, as attached in Exhibit A
hereto, (the "Amendment").
3. The Amendment was duly adopted by the board of directors of the
Company at a meeting held on February 19, 1998.
<PAGE> 40
IN WITNESS WHEREOF, American Bankers Insurance Group, Inc. has caused
this Articles of Amendment to be executed on this _____ day of February 1998.
(Corporate Seal) AMERICAN BANKERS INSURANCE GROUP, INC.
Attest:
/s/ ARTHUR W. HEGGEN By:/s/ GERALD N. GASTON
- ----------------------------- -----------------------------------------
Arthur W. Heggen, Gerald N. Gaston, Vice Chairman of the
Secretary Board and Chief Executive Officer
STATE OF FLORIDA )
)
COUNTY OF DADE )
The foregoing instrument was acknowledged before me this 23 day of February 1998
by Gerald N. Gaston as Vice Chairman of the Board and Chief Executive Officer of
American Bankers Insurance Group, Inc.
/s/ ANN KASAY
-----------------------------------------
NOTARY PUBLIC, State of Florida
My Commission Expires:
[SEAL]
-----------------------------------------
Personally Known x OR Produced Identification.
--------------------
Type of Identification Produced .
----------------------
<PAGE> 41
Exhibit A
SERIES C PARTICIPATING PREFERRED STOCK
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series C Participating Preferred Stock." The shares constituting
such series shall be without par value. The number of shares constituting such
series shall be 1,000,000.
Section 2. DIVIDENDS AND DISTRIBUTION.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series C Participating Preferred Stock with respect to dividends, the holders
of shares of Series C Participating Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable in cash on the last day
of March, June, September, and December in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series C Participating Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $3.125 or (b)
subject to the provisions for adjustment hereinafter set forth, 100 times the
aggregate per share amount of all cash dividends, and 100 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, par value $1.00 per share, of the
Corporation, (the "Common Stock") since the immediately preceding Quarterly
Dividend Payment Date, or with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series C
Participating Preferred Stock. In the event the Corporation shall at any time
after February 19, 1998 (the "Rights Declaration Date") (i) declare any dividend
on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount to which holders of
shares of Series C Participating Preferred Stock were entitled immediately prior
to such event under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series C Participating Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $3.125 per share on
the Series C Participating Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
1
<PAGE> 42
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series C Participating Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series C
Participating Preferred Stock, unless (i) the date of issue of such shares is
prior to the record date for the first Quarterly Dividend Payment Date, in which
case dividends on such shares shall begin to accrue from the date of issue of
such shares, or (ii) the date of issue is a Quarterly Dividend Payment Date or
is a date after the record date for the determination of holders of shares of
Series C Participating Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series C Participating Preferred Stock in an amount less
than the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series C Participating Preferred Stock
entitled to receive payment of a dividend or distribution declared thereon,
which record date shall be no more than 60 days prior to the date fixed for the
payment thereof.
Section 3. VOTING RIGHTS. The holders of shares of Series C
Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series C Participating Preferred Stock shall entitle the holder thereof
to 100 votes on all matters submitted to a vote of the shareholders of the
Corporation. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the number of votes per share to which holders of shares of Series C
Participating Preferred Stock were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(B) Except as otherwise provided by the Third Amended and Restated
Articles of Incorporation of the Corporation, as may be further amended,
modified, supplemented, restated or superseded from time to time, or by law, the
holders of shares of Series C Participating Preferred Stock and the holders of
shares of Common Stock (and any other capital stock of the Corporation at the
time entitled thereto) shall vote together as one class on all matters submitted
to a vote of shareholders of the Corporation.
(C) Except as set forth herein, holders of Series C Participating
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
2
<PAGE> 43
Section 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on a Series C Participating Preferred Stock as provided in Section 2 are
in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series C Participating
Preferred Stock outstanding shall have been paid in full, the Corporation shall
not:
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series C Participating Preferred
Stock;
(ii) declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding-up) with the Series C Participating
Preferred Stock, except dividends paid ratably on the Series C
Participating Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts
to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares
of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series C Participating
Preferred Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such parity stock in
exchange for shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation or winding up)
to the Series C Participating Preferred Stock;
(iv) purchase or otherwise acquire for consideration any shares of
Series C Participating Preferred Stock, or any shares of stock ranking
on a parity with the Series C Participating Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares
upon such terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in
good faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. RE-ACQUIRED SHARES. Any shares of Series C Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
3
<PAGE> 44
Section 6. LIQUIDATION, DISSOLUTION OR WINDING-UP.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series C Participating Preferred Stock unless,
prior thereto, the holders of shares of Series C Participating Preferred Stock
shall have received $100.00 per share, plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not declared, to the date
of such payment (the "Series C Liquidation Preference"). Following the payment
of the full amount of the Series C Liquidation Preference, no additional
distributions shall be made to the holders of shares of Series C Participating
Preferred Stock unless, prior thereto, the holders of shares of Common Stock
shall have received an amount per share (the "Common Adjustment") equal to the
quotient obtained by dividing (i) the Series C Liquidation Preference by (ii)
100 (as appropriately adjusted as set forth in paragraph C below to reflect such
events as stock splits, stock dividends and recapitalizations with respect to
the Common Stock) (such number in clause (ii) the "Adjustment Number").
Following the payment of the full amount of the Series C Liquidation Preference
and the Common Adjustment in respect of all outstanding shares of Series C
Participating Preferred Stock and Common Stock, respectively, holders of Series
C Participating Preferred Stock and holders of shares of Common Stock shall
receive their ratable and proportionate share of the remaining assets to be
distributed in the ratio of the Adjustment Number to one (1) with respect to
such Series C Participating Preferred Stock and Common Stock, on a per share
basis, respectively.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series C Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any,
which rank on a parity with the Series C Participating Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event,
however, that there are not sufficient assets available to permit payment in
full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Common Stock.
(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
4
<PAGE> 45
Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series C Participating Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to 100 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series C Participating Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. NO REDEMPTION. The shares of Series C Participating
Preferred Stock shall not be redeemable.
Section 9. RANKING. The Series C Participating Preferred Stock shall
rank junior to all other series of the Corporation's Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
Section 10. AMENDMENT. The Third Amended and Restated Articles of
Incorporation of the Corporation, as may be further amended, modified,
supplemented, restated or superseded from time to time, and any certificate
amendatory thereof or supplemental thereto shall not be amended or further
amended in any manner which would materially alter or change the powers,
preferences or special rights of the Series C Participating Preferred Stock so
as to affect them adversely without the affirmative vote of the holders of such
percentage of the outstanding shares of Series C Participating Preferred Stock,
voting separately as a class, as may be required under (i) the Florida General
Corporation Act or (ii) the Third Amended and Restated Articles of Incorporation
of the Corporation, as may be further amended, modified, supplemented, restated
or superseded from time to time, whichever requires a greater percentage.
Section 11. FRACTIONAL SHARES. Series C Participating Preferred Stock
may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series C Participating Preferred Stock.
5
<PAGE> 46
IN WITNESS WHEREOF, American Bankers Insurance Group, Inc. has caused
this Articles of Amendment to be executed on this 23rd day of May 1997.
(Corporate Seal) AMERICAN BANKERS INSURANCE GROUP, INC.
Attest:
/s/ Arthur. W. Heggen
By: /s/ Gerald N. Gaston
---------------------------------------------
Arthur W. Heggen, Gerald N. Gaston, Vice Chairman of the Board,
Secretary Chief Executive Officer and President
STATE OF FLORIDA )
)
COUNTY OF DADE )
The foregoing instrument was acknowledged before me this 23rd day of May 1997 by
Gerald N. Gaston as Vice Chairman of the Board, Chief Executive Officer and
President of American Bankers Insurance Group, Inc.
/s/ SANDRA A. HOPPE
---------------------------------------
NOTARY PUBLIC, State of Florida
My Commission Expires:
October 11, 1998
---------------------------------------
Personally Known X OR Produced Identification.
---------------------
Type of Identification Produced .
----------------------
6
<PAGE> 1
EXHIBIT 10.9
AMENDMENT NUMBER ONE TO THE RIGHTS AGREEMENT
Amendment Number One dated as of December 19, 1997 ("Amendment Number
One"), by and between American Bankers Insurance Group, Inc., a Florida
corporation (the "Company") and ChaseMellon Shareholder Services, LLC (as
successor to Manufacturers Hanover Trust Company ("Manufacturers Hanover"), a
New York banking corporation, the "Rights Agent"), to the Rights Agreement (as
hereinafter defined). Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to them in the Rights Agreement.
RECITALS
WHEREAS, the Company and Manufacturers Hanover entered into and
executed the Rights Agreement dated as of February 24, 1988, as Amended and
Restated as of November 14, 1990 (the "Rights Agreement"); and
WHEREAS, the Company and the Rights Agent have agreed to and hereby
desire to supplement and amend the Rights Agreement in the manner set forth
herein; and
WHEREAS, except as otherwise stated herein, the Rights Agreement
remains in full force and effect; and
NOW, THEREFORE, in consideration of the mutual agreements and covenants
hereinafter set forth, the Company and the Rights Agent hereby agree to amend
and supplement the Rights Agreement as follows:
SECTION 1, CERTAIN DEFINITIONS, IS HEREBY AMENDED BY DELETING THE
CURRENT DEFINITION OF "ACQUIRING PERSON" IN ITS ENTIRETY AND REPLACING SUCH
DEFINITION WITH THE FOLLOWING DEFINITION:
(a) "Acquiring Person" shall mean any Person who or which, together
with all Affiliates and Associates of such Person, shall be the Beneficial Owner
of fifteen percent (15%) or more of the shares of Common Stock then outstanding,
but shall not include the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the Company, or any Person
or entity organized, appointed or established by the Company for or pursuant to
the terms of any such plan. Notwithstanding anything to the contrary contained
herein, American International Group, Inc. (the "Parent"), AIGF, Inc. (the
"Merger Sub") or any of Parent's or Merger Sub's Affiliates shall not be deemed
to be an Acquiring Person for any purpose of this Agreement solely by reason of
the execution, delivery or consummation of the transactions contemplated by the
Agreement and Plan of Merger dated as of December 21, 1997, among the Company,
Parent and Merger Sub (the "Merger Agreement"), the Stock Option Agreement dated
as of December 21, 1997, between the Company and Parent (the "Stock Option
Agreement") and the Voting Agreement dated as of December 21, 1997, among Parent
and certain stockholders of the Company (the "Voting Agreement").
<PAGE> 2
SECTION 1, CERTAIN DEFINITIONS, IS HEREBY FURTHER AMENDED BY ADDING THE
FOLLOWING SECTION TO THE END OF SUBSECTION (c), THE DEFINITION OF "BENEFICIAL
OWNER:"
(iv) notwithstanding anything herein to the contrary, Parent, Merger
Sub or any of Parent's or Merger Sub's Affiliates shall not be deemed to be a
Beneficial Owner for any purpose of this Agreement of any shares of Common Stock
acquired or to be acquired pursuant to the execution, delivery or consummation
of the transactions contemplated by the Merger Agreement, the Voting Agreement
or the Stock Option Agreement, including without limitation the granting of an
irrevocable proxy pursuant to the Stock Option Agreement.
SECTION 3, ISSUANCE OF RIGHTS CERTIFICATES, SHALL BE AMENDED BY ADDING
THE FOLLOWING SENTENCE TO THE END OF SUBSECTION (a) IN SECTION 3:
Notwithstanding anything herein to the contrary, the date of execution,
delivery or consummation of the transactions contemplated by the Merger
Agreement, the Stock Option Agreement and the Voting Agreement shall not be
deemed to be a Distribution Date for any purpose of this Agreement solely by
reason of such execution, delivery or consummation.
This Amendment Number One may be executed in any number of counterparts
with the same effect as if the signatures thereunto and hereto were upon the
same instrument.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
Number One to be duly executed and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first written above.
ATTEST: AMERICAN BANKERS
INSURANCE GROUP, INC.
By: By:
---------------------------- ------------------------
Name: Name:
Title: Title:
ATTEST: THE CHASE MANHATTAN
BANK
By By:
---------------------------- ------------------------
Name: Name:
Title: Title:
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE DATA)
1997 1996 1995
---------- --------- ----------
Basic:
Weighted average shares outstanding 41,433 40,697 40,556
======== ======== ========
Net income $114,863 $ 94,503 $ 72,260
Less convertible preferred stock dividend 7,188 3,115 --
-------- -------- --------
Adjusted Net income $107,675 $ 91,388 $ 72,260
======== ======== ========
Per share amount:
Net income $ 2.60 $ 2.25 $ 1.78
======== ======== ========
Diluted:
Weighted average shares outstanding 41,433 40,697 40,556
Assumed conversion of convertible preferred
stock, subordinated debentures and stock
options 5,566 3,193 1,280
-------- -------- --------
Total 46,999 43,890 41,836
======== ======== ========
Net income $114,863 $ 95,503 $ 72,260
Add convertible debenture interest, net of
federal income tax effect 232 228 260
-------- -------- --------
Adjusted Net Income $115,095 $ 95,731 $ 72,520
======== ======== ========
Per share amount:
Net income $ 2.45 $ 2.16 $ 1.73
======== ======== ========
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of Percent of Voting
Significant Subsidiaries Owned Incorporation Securities
- ------------------------------------- ------------- ----------------
<S> <C> <C>
American Bankers Insurance Company of Florida Florida 100%
American Bankers Life Assurance Company of
Florida Florida 100%
Bankers American Reinsurance Company Turks & Caicos 100%
Caribbean American Life Assurance Company Puerto Rico 100%
Voyager Group, Inc. Florida 100%
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No.33-77564) and in
the Registration Statements on Form S-8 (No. 33-28936, No. 33-40802, No.
33-82342 and 333-28557) of American Bankers Insurance Group, Inc. of our report
dated March 25, 1998 appearing on page 45 of this Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Miami, Florida
March 30, 1998
E-3
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 973,790
<DEBT-CARRYING-VALUE> 836,608
<DEBT-MARKET-VALUE> 855,838
<EQUITIES> 141,274
<MORTGAGE> 9,322
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,163,111
<CASH> 23,265
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 458,289
<TOTAL-ASSETS> 3,782,451
<POLICY-LOSSES> 311,181
<UNEARNED-PREMIUMS> 1,436,034
<POLICY-OTHER> 555,797
<POLICY-HOLDER-FUNDS> 4,786
<NOTES-PAYABLE> 242,592
0
115,000
<COMMON> 41,806
<OTHER-SE> 657,063
<TOTAL-LIABILITY-AND-EQUITY> 3,782,451
1,453,783
<INVESTMENT-INCOME> 134,115
<INVESTMENT-GAINS> 10,394
<OTHER-INCOME> 23,090
<BENEFITS> 532,607
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 159,595
<INCOME-TAX> 44,732
<INCOME-CONTINUING> 114,863
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 114,863
<EPS-PRIMARY> 2.60
<EPS-DILUTED> 2.45
<RESERVE-OPEN> 185,838
<PROVISION-CURRENT> 329,151
<PROVISION-PRIOR> (3,008)
<PAYMENTS-CURRENT> 216,099
<PAYMENTS-PRIOR> 104,001
<RESERVE-CLOSE> 191,881
<CUMULATIVE-DEFICIENCY> 3,008
</TABLE>
