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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File #0-11321
Universal American Financial Corp.
(Exact name of registrant as specified in its charter)
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New York 11-2580136
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(State of Incorporation) (I.R.S. Employer I.D. Number)
Mt. Ebo Corporate Park, Brewster, NY 10509
- - --------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (914) 278-4094
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Class on which Registered
- - --------------------------------------------- -------------------
Common Stock, par value $.01 per share NASDAQ
Common Stock Warrants, expire December 31, 1999 NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 28, 1997 was approximately $7,949,412.
The number of shares outstanding of the Registrant's Common Stock and
Common Stock Warrants as of February 28, 1997 were 7,203,210 and 668,481,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the
document is incorporated:
(1) Proxy Statement for the 1997 Annual Meeting incorporated by
reference into Part III.
(2) Exhibits listed in Item 14(b), Part IV, incorporated by reference
to Form S-1 filed March 30, 1990, Forms 10-K for 1994, 1993, 1991,
1989 and 1988 and Forms 8-K for July 24, 1992, May 31, 1991 and December
9, 1987.
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PART I
ITEM 1 - BUSINESS
General
The Company is an insurance holding company, whose principal
subsidiaries are American Progressive Life and Health Insurance Company of New
York ("American Progressive") and American Pioneer Life Insurance Company
("American Pioneer"), each of which sells life insurance, accident and health
insurance and annuity products, and WorldNet Services Corp. ("WorldNet"), a
service firm that provides communication, managed care and claims adjudication
services to insurance companies and affinity groups. The references below to
insurance operations of the Company are to be understood as references to
activities of American Progressive and American Pioneer, the Company's
insurance subsidiaries. Financial items are reported on a Generally Accepted
Accounting Principles basis ("GAAP"), except where otherwise noted.
Strategic Focus
The Company has implemented, and plans to continue to pursue, the
following strategies:
Internal Growth
The Company has focused its efforts to reach targeted segments of the
insurance market as defined by product or by geography. These include:
* Senior market life, annuity and accident and health insurance
products designed for sale primarily in New York and Florida;
* Life insurance, annuity and accident and health insurance programs
sold through large independent marketing organizations.
External Growth
In the past five years, the Company has successfully acquired and
integrated two insurance companies and five blocks of business, most recently
in the fourth quarter of 1996 with the acquisition of $54 million of senior
market premium, primarily in Florida, and a senior market insurance processing
capability, in Pensacola, Florida (See Insurance Acquisitions Activity - First
National). The Company continues to seek out further acquisitions.
Insurance Marketing Activity
Historically, the Company has sold a broad range of insurance products
through a traditional general agency system. The Company has shifted its
emphasis to the senior market place and the sale of a narrower line of
products, particularly appealing to the senior market place, and largely
through marketing organizations with concentrations in this market. The
Company began to sell senior market life and accident and health insurance
products in 1993 in New York and has expanded its sales effort to Florida in
1996. The momentum into Florida was accelerated by the acquisition of
business from First National Life Insurance Company ("First National"). (See
Insurance Acquisitions Activity - First National).
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Business In Force
The following table shows the Company's growth in the in force business
as of December 31, 1994, 1995 and 1996.
As of December 31,
---------------------------------------------
1994 1995 1996
---- ---- ----
Senior Market
Accident & Health Premiums
Medicare Supplement
Direct sales $ 1,230,000 $ 2,739,000 $ 4,851,000
Acquired from First National --- --- 54,000,000
Home Health Care, Nursing Home
Direct sales --- --- 878,000
Acquired from First National --- --- 1,400,000
Hospital Indemnity 1,986,000 2,588,000 2,239,000
----------- --------- ---------
Total Senior Market A & H $ 3,216,000 $ 5,327,000 $ 63,368,000
=========== =========== ============
Life Insurance Premiums
Asset Enhancer (Note 1) --- 2,201,000 3,191,000
SL2000 --- 929,000 1,131,000
----------- ----------- ------------
Total Senior Market Life $ --- $ 3,130,000 $ 4,322,000
=========== =========== ============
Policyholder Account Balances
Asset Enhancer --- 3,279,000 11,407,000
----------- ----------- ------------
Total $ --- $ 3,279,000 $ 11,407,000
=========== =========== ============
Other Markets
Specialty Group Accident & Health
Premiums
Dental 4,031,000 5,395,000 6,440,000
DBL (Note 2) 3,693,000 4,851,000 5,000,000
NAIU Accident Pool (Note 3) 9,000,000 8,250,000 8,000,000
------------ ------------ ------------
Total Specialty Group A&H $ 16,724,000 $ 18,496,000 $ 19,440,000
============ ============ ============
Other Accident & Health Premiums
(Note 4)
Major Medical and Hospital 8,731,000 8,237,000 7,028,000
Blanket Accident 3,028,000 2,337,000 1,981,000
Supplemental Medical 3,849,000 2,032,000 1,842,000
Other Supplemental 2,635,000 2,152,000 2,145,000
------------ ------------ ------------
Total Other A & H $ 18,243,000 $ 14,759,000 $ 12,996,000
============ ============ ============
Life Insurance Premiums
Interest Sensitive Life (Note 1) 7,045,000 7,627,000 6,518,000
Traditional Life 2,989,000 3,360,000 5,108,000
Group Life 3,120,000 3,478,000 4,150,000
------------ ------------ ------------
Total General Market Life $ 13,154,000 $ 14,465,000 $ 15,776,000
============ ============ ============
Policyholder Account Balances
Annuities 76,127,000 82,207,000 88,426,000
Other Interest Sensitive Life 32,650,000 33,123,000 34,706,000
------------ ------------ ------------
$108,777,000 $115,330,000 $123,132,000
============ ============ ============
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(1) These amounts are the estimated mortality charges in force.
(2) The DBL business in force was sold as of December 31, 1996. (See
"Restructuring Activity - Sale of DBL Block", below).
(3) The Company withdrew from participation in the NAIU Accident Pool as of
December 31, 1996. (See "Restructuring Activity - Withdrawal from
NAIU", below).
(4) These are blocks of business acquired by the Company that are not
actively marketed.
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Senior Market
The following are the core products sold to the senior age market.
Medicare Supplement
The Company began to sell Medicare Supplement policies in January, 1994.
American Progressive has focused its marketing effort in New York State in
geographic areas where it is believed competition is less formidable. It
anticipates expanding gradually into other northeastern states, in a similar
manner. American Progressive has entered into Managing General Agency
relationships with three of the largest accident and health sales organizations
in upstate New York that specialize in the Senior Age market. The Medicare
supplement policies offered by both Insurance Subsidiaries are on plans A, B, C
and F and are underwritten on a simplified issue basis, except that the policies
sold in New York are on a guaranteed issue basis, subject to the community
rating laws of that state. See "Regulation-Health Care Reform". Sales
amounted to $0.8 million, $2.0 million and $3.1 million in 1994, 1995 and 1996,
respectively.
As a result of the First National acquisition (described below), American
Pioneer has been able to begin establishing sales relationships with
approximately 1,000 new agents in Florida. American Pioneer's new Medicare
Supplement policies have been approved by the Florida Insurance Department and
sales of this product are expected to begin in April, 1997. In addition, the
insurance subsidiaries are in the process of filing Medicare Select products
with the New York and Florida Insurance Departments.
Home Health Care and Nursing Home
American Progressive introduced Home Health Care and Nursing Home products in
New York in early 1996. In late 1996, American Pioneer introduced a managed
care home health care product in Florida that uses preferred provider
organization ("PPO") discounts and capitation with a home health care
network. Issued premium in 1996, the first year of sales, amounted to more
than $1.3 million.
Hospital Indemnity
American Progressive introduced a Senior Age Hospital Indemnity product in
mid-1993 and has written in excess of $2.5 million of premium as of December,
1996. Benefits under this product are fixed cash payments based upon the length
of hospital stays and are designed to provide money to meet needs ancillary to
hospitalization.
One, Five and Seven Pay Interest Sensitive Whole Life ("Asset Enhancer")
This program, marketed by National Financial Group of Scottsdale, Arizona, a
marketing organization under contract with American Pioneer, and a number of
other contracted large national marketing groups, began in 1994 and is now sold
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actively in 18 states. The product is a simplified issue interest sensitive
whole life product with one, five or seven year payment options. It is designed
as a vehicle for seniors to pass assets to heirs in an income tax-advantaged
manner. In many states, the product provides an optional nursing care rider.
In addition to American Pioneer's sales of this product, in 1996, American
Pioneer entered into an arrangement with West Coast Life Insurance Company
("West Coast Life"), an unaffiliated A+ rated carrier, under which West Coast
issues this product and reinsures one-third of the risk to American Pioneer.
Under its contract with West Coast, American Pioneer administers the product
and the relationships with the producers on a fee basis.
As a result of the success of these programs, production of multiple pay life
insurance has increased from $1.0 million in 1995, to $1.6 million of premium
in 1996. Single pay life insurance was introduced in 1995 and had production
amounting to $2.1 million in its first year and $6.2 million of premium in 1996.
Senior Life (SL2000)
This series of products, introduced in late 1995, is sold by American
Progressive, as part of its senior market effort, and American Pioneer through
a new arrangement with an independent marketing organization that began in 1996.
The Company issued $462,000 of premium of SL2000 business in 1996.
Other Markets
Modified Premium Term Life Insurance (Flex-A-Vest 88)
This program, sold by American Pioneer and marketed exclusively by Interstate
Specialty Marketing, Inc. of Tustin, California, began in late 1994 and is now
being sold actively in 21 states. In states where American Pioneer is not
licensed, an arrangement has been made with Pennsylvania Life Insurance
Company ("Pennsylvania Life"), a subsidiary of PennCorp Financial, which issues
the product and reinsures a portion of each case to the Company. In this
arrangement, American Pioneer also administers the product and the relationship
with the producer on a fee basis.
The product is a 10 year term product with an endowment payable after the 10th
year. It is designed for the middle income market as a method to provide
insurance coverage and a vehicle for retirement or college tuition funding.
American Pioneer issued $1.5 million of premium under this program in 1996,
including the premium reinsured from Pennsylvania Life, and has $1.9 million
premium in force as of December 31, 1996.
Group Life Insurance (Andalusia)
Through an arrangement with Alabama Blue Cross that has persisted since 1989,
an American Pioneer group life insurance information package, including a
premium quotation, goes out with each Alabama Blue Cross small group major
medical insurance premium quotation. This program produced $3.2 million of
premium in 1996 (new and in-force).
Annuities
The Company markets Single and Flexible Premium Deferred Annuities now
primarily through sales organizations which concentrate in the Tax Shelter
Annuity I.R.C. 403(b) market. Annuity products generally focus on the senior
and retirement market. The Company=s Tax Shelter Annuities, sold largely to
school teachers, involve people of various ages, some of whom are senior, but
most all of whom are purchasing with retirement in mind. The American
Progressive single premium annuity sold in New York, which represents the
bulk of the Company's annuity production, has a seven year surrender charge,
a one year rate guarantee and a maximum commission of 6%. Further
penetration of the senior annuity market is now being considered.
All of the Company's annuity products provide minimum interest rate
guarantees. The minimum guaranteed rates on the Company's annuity products
currently range from 4.0% to 5.5% annually and the contracts are designed to
permit the Company to change the crediting rates annually subject to the minimum
guaranteed rate. The Company takes into account the profitability of its
annuity business and its relative competitive position in determining the
frequency and extent of changes to the interest crediting rates.
Production of annuities amounted to $8.4 million, $13.7 million and $13.6
million in 1994, 1995 and 1996, respectively.
Dental Insurance
American Pioneer markets competitive group dental insurance products in the
Southeast through a core group of payroll deduction marketers. This insurance
is sold by American Pioneer under an indemnity plan, which pays a stated
percentage of the dentist's charges up to an annual maximum of $2,000, and under
a scheduled plan, which pays amounts specified in the policy up to an annual
maximum limit of $1,000. These products allow the insured a free choice of
dentists. The in-force dental block as of the end of 1996 was more than $6.5
million, a 20% increase over the previous year.
Insurance Acquisitions Activity - First National
In the fourth quarter of 1996, the Company acquired, through an assumption
reinsurance agreement, approximately $56 million of annualized senior market
premium from First National Life Insurance Company ("First National"). American
Pioneer initially contracted with First National to assume $4 million of premium
on group Medicare Supplement coverage issued to the members of the Florida
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Retired Educators Association ("FREA"). Then, after First National was placed
into Receivership by the Alabama Insurance Department in October, 1996, American
Pioneer assumed approximately an additional $50 million of Individual Medicare
Supplement premium, $1.2 million in Home Health Care premium and $0.8 million in
miscellaneous life and accident and health insurance premiums, under terms
negotiated with the Receiver. All of these assumptions were effective as of
October 1, 1996.
Simultaneously with the second assumption by American Pioneer, American
Pioneer entered into a reinsurance agreement with Transamerica Occidental Life
Insurance Company ("Transamerica"), ceding 90% of the $50 million individual
Medicare Supplement premium in force to Transamerica under reinsurance terms
believed to be favorable. American Pioneer will perform all the administration
on the reinsured business.
As part of the transaction negotiated with the Receiver, American Pioneer was
to receive assets equal to the liabilities assumed, primarily policy reserves.
However, as a result of the financial condition of First National, sufficient
assets were not available to fully cover these liabilities. In addition, the
Receiver was unable to cover certain post-closing adjustments due to American
Pioneer. The sum of the closing shortfall, the post-closing adjustments and the
costs of the transaction, total of approximately $3,400,000, constitutes the
purchase price of the transaction for GAAP purposes and will be amortized over
30 years. In addition to the premium acquired, First National had active
relationships with about 1,000 senior market producers in Florida and 2,000
agents in other states. American Pioneer is actively recruiting these producers
especially in Florida, to sell senior market products for American Pioneer.
Finally, in order to insure a smooth transition and to take advantage of the
relatively low cost operating environment in Pensacola, the Company acquired or
leased most of the physical operating assets used by First National, including
computer hardware and software, and hired many of First National's Pensacola
administrative employees.
Previous Acquisition Activity
As of January 1, 1994, American Progressive acquired by means of reinsurance a
block of supplemental health insurance with annualized premiums of
approximately $1,200,000. In this transaction, American Progressive assumed all
liability under the reinsured policies incurred after January 1, 1994, in
exchange for its receipt from the ceding company of cash equal to the unearned
premium and active lives reserves on the reinsured business, net of a $60,000
ceding commission, and future premium payments from the insureds.
In May 1993, American Progressive acquired 100% of the outstanding stock of
American Pioneer, based in Orlando, Florida, which sold life and accident and
health insurance in 32 states, primarily in the southeast. American Pioneer's
parent, American Pioneer Savings and Loan Association, had been under the
control of the Resolution Trust Company ("RTC") since May 1990. American
Pioneer had an adjusted statutory book value (book value plus asset valuation
reserve) of approximately $7,472,000, and a GAAP stockholder's equity of
approximately $14,367,000 when it was purchased by American Progressive for
$6,827,000 in cash. By December 31, 1996, American Pioneer's adjusted statutory
book value had increased to approximately $13,800,000 and its GAAP stockholder's
equity was $16,000,000.
In May 1991, the Company, through John Adams Life Insurance Company ("John
Adams"), then its only insurance company subsidiary, acquired 100% of the
outstanding common stock of American Progressive, into which John Adams then
merged on June 27, 1991, with American Progressive as the surviving company.
American Progressive was acquired from Midland National Life Insurance Company
("Midland") for (a) a cash payment of $4,197,231, and (b) 510,000 shares
($10 par value) of the Company's Series A cumulative, redeemable, convertible
preferred stock ("Series A Preferred Stock"), for a total purchase price of
$9,297,231. (The Series A Preferred Stock was redeemed by the Company on
December 30, 1994.) American Progressive's statutory book value immediately
prior to acquisition was approximately $9,200,000, its adjusted statutory book
value was approximately $9,290,000, and its GAAP stockholder's equity was
approximately $9,700,000. As of December 31, 1996, the adjusted statutory book
value was approximately $9,256,000 and the GAAP stockholder's equity was
approximately $26,442,000. American Progressive, domiciled in New York and
licensed in 24 other states, historically concentrated on the sale of individual
accident and health insurance products primarily in New York and the
northeastern United States.
Restructuring Activity
In 1996, the Company began a restructuring which will be completed by mid-
1997. As part of its decision to concentrate its marketing effort, the Company
decided to discontinue certain lines of business and reduce its emphasis on
others. In addition, the Company is taking steps to take advantage of the
lower-cost operating environment of its new location in Pensacola.
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Consolidation of Administrative Operations
As part of the First National transaction, the Company acquired in Pensacola a
relatively low cost administrative operation with particular experience in the
senior market. This has given the Company an opportunity to consolidate many of
its administrative functions in Pensacola and save a significant amount of
fixed overhead.
In December, 1996, the Company formulated a plan to move most of the policy
administrative functions, particularly in its senior market business, from the
American Progressive office in Brewster to Pensacola. This, along with other
cost saving efforts, will result in a reduction in the work force at the
American Progressive office from 62 as of June 30, 1996 to approximately 32 as
of June 30, 1997 with a modest resultant increase in personnel in Pensacola,
including some personnel employed by American Progressive. These plans were
announced to the employees of the Company on March 14, 1997.
Consequently, American Progressive has exercised its right to cancel its lease
for 15,000 square feet in Brewster as of October 31, 1997 and is currently
negotiating to lease a smaller office. The cost of this consolidation,
including severance costs, relocation costs and the cancellation penalty on the
Brewster lease, will be approximately $250,000 and was expensed in the fourth
quarter of 1996. The Company estimates that it will save $750,000 annually as a
result of this reorganization.
Sale of DBL Block
Although American Progressive continued to achieve modest success in selling
New York State Statutory Disability Insurance ("DBL"), the Company determined
that the book of business was too small and growing too slowly to become a
major contributor to the profits of the Company. Therefore, American
Progressive sold the block, which had approximately $5 million of premium in
force, to an unaffiliated New York domiciled carrier as of December 31, 1996.
The purchase price will be a minimum of $550,000 and may reach as high as
$950,000 depending upon the persistency of the business over a twelve month
period. American Progressive continues to maintain the risk for claims incurred
prior to December 31, 1996 and has $500,000 in reserves for this risk. The
purchaser will be responsible for all risks and reserves for 1997 and beyond.
Withdrawal from NAIU Pool
Effective January 1, 1994, American Progressive entered into a pooling
agreement through National Accident Insurance Underwriters ("NAIU"), an
unaffiliated agency, and three unaffiliated insurers to underwrite travel
accident and student accident insurance policies. In August, 1996, the Company
notified the accident pool of its intention to withdraw effective December 31,
1996. As of December 31, 1996, American Progressive had approximately $8
million in premiums in force under this arrangement, all of which had been
assumed from the other pool participants. Although the Company made a modest
profit in this pool over the past three years, the results were erratic and the
Company decided to allocate its capital and efforts in its core business
segments. American Progressive continues to be exposed on business prior to
December 31, 1996 and has $2.5 million in reserves for this risk.
Major Medical Reinsurance
When American Pioneer was acquired by the Company in 1993, American Pioneer
actively marketed individual major medical and major hospital policies under
intensive underwriting guidelines. These policies have deductibles on a per
confinement basis ranging from $300 to $5,000, as to major hospital, and $150
to $10,000 as to major medical. Over the past three years, the Company has
reduced its marketing emphasis on this segment and has reduced its exposure
through reinsurance. In 1994, the Company had $8.7 million of premium in force
and carried 100% of the risk up to $60,000. By the beginning of 1997, the
Company had $7.0 million of premium in force and carried 50% of the risk up to
$60,000 per year.
Premium Revenue
Life Insurance and Annuities
The following table sets forth a summary of life premium revenues and annuity
considerations on first year and renewal basis for the last three years ended
December 31, 1996, as determined in accordance with statutory accounting
principles ("SAP"). These amounts differ from the premiums reported in the
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accompanying consolidated statement of operations, since under GAAP, the annuity
and universal life insurance policies are reported under the retrospective
deposit method prescribed by Statement 97 "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sales of Investments". (See Note 2e of Notes to Consolidated
Financial Statements for further information).
Year Ended December 31,
----------------------------------------------
1994 1995 1996
---- ---- ----
(Amounts in accordance with statutory accounting principles)
Life Insurance
Premium received,
policies written in current year $ 1,912,569 $ 6,141,040 $ 10,437,377
Premium received,
policies written prior year 9,385,947 9,668,592 12,206,343
----------- ----------- ------------
Total Life Premium 11,298,516 15,809,632 22,643,720
----------- ----------- ------------
Annuities
Consideration received,
policies written in current year 7,886,462 13,377,924 13,004,354
Consideration received,
policies written in prior years 517,534 364,145 618,739
----------- ----------- -----------
Total Annuity Consideration $ 8,403,996 $ 13,742,069 $13,623,093
----------- ------------ -----------
Total Consideration and Premium $19,702,512 $ 29,551,701 $36,266,813
=========== ============ ===========
The following table presents information with respect to the Company's number
of policies in force and experience in terms of numbers of policies issued, and
reduced for surrenders, lapses or deaths for annuity and life insurance:
1994 1995 1996
---- ---- ----
Life Insurance Policies
In force, beginning of year 22,191 24,820 26,642
Acquired from First National --- --- 286
Issued during year 5,175 4,934 4,407
Lapsed or surrendered during year (2,353) (2,874) (3,193)
Deaths during year (193) (238) (212)
-------- -------- --------
In force, end of year 24,820 26,642 27,930
======== ======== ========
Annuity Policies
In force, beginning of year 4,041 4,090 5,437
Acquired from First National --- --- 40
Issued during year 494 1,956 2,119
Death and surrendered during year (445) (609) (763)
------- ------ ------
In force, end of year 4,090 5,437 6,833
======= ====== ======
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Accident & Health Insurance
The following table sets forth a summary of accident and health premium
revenues for the three years ended December 31, 1996:
Year Ended December 31,
----------------------------------------
1994 1995 1996
---- ---- ----
Premium received on policies
written in current year $ 5,218,749 $ 5,982,178 $ 9,805,305
Premium received on policies
written in prior years (1) 22,016,287 22,313,927 35,047,929
------------ ----------- ------------
Total Accident & Health Premium $ 27,235,036 $ 28,296,105 $ 44,853,234
________________________
(1) The 1996 figures include the premium revenues of First National from October
1, 1996, the date of its assumption, which amounted to $13,498,122.
Pending Private Placement Financing
On January 9, 1997, the Company entered into a Stock Purchase Agreement with
AAM Capital Partners L.P. ("AAM"), an unaffiliated investment firm, providing
for the issuance and sale of at least $4 million of a new Series C Preferred
Stock, of which at least $3 million will be purchased by AAM, or purchasers
designated by AAM, and at least $1 million will be purchased by Richard A.
Barasch, members of his family, and members and associates of the Company's
management. This transaction is scheduled to close upon receipt of the required
approval of the Florida Insurance Department, an application for which
approval is pending, (see "Regulation - General"). Management has no reason
to anticipate that such approval will not be forthcoming. The following summary
of the terms of the Stock Purchase Agreement is qualified in its entirety by
reference to the Stock Purchase Agreement which is being filed as an Exhibit to
this Form 10-K.
* The Series C Preferred shares will be convertible by the holders at any time
at a conversion price of $2.375 per share (subject to anti-dilution
adjustment).
* The Company can require conversion if it executes a public offering of
common stock at over $3.45 per share (or equivalent equity), with gross
proceeds in excess of $10 million, or if the average bid price of it's common
stock exceeds $3.45 per share for any 60 day period through December 31, 2001
In the event that the Company takes certain action without the consent of the
holders of a majority of the Series C Preferred Stock, those holders who
voted against such action have the right to require its redemption at the
Redemption Price or the Call Price, (which Prices are defined below)
depending on the nature of the action taken.
* The Company will also have the right to call all of the Series C Preferred
Stock at any time between January 1, 2000 and December 31, 2002, at a per
share call price (the "Call Price") of $150 in the year 2000 or $175 in the
years 2001 and 2002, in each case increased by the redemption accrual at the
rate of 8% of the par value.
* Unless converted or called earlier, the Series C Convertible Preferred Stock
will be redeemed on December 31, 2002, at a per share redemption price (the
"Redemption Price") equal to par, increased by a redemption accrual at the
rate of 8% per annum. The redemption price will be payable in two equal
installments on December 31, 2002 and December 31, 2003. The redemption
accrual is not payable upon any conversion.
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* No dividends will be paid on the Series C Preferred Stock, unless
dividends are paid on the common stock, in which case the Series C
Preferred Stock will participate as if converted.
* The holders of the Series C Preferred Stock (excluding a portion
of such series which may be issued without voting rights) will
have the right to elect one director of the Company.
* At least $3 million of the proceeds of this sale are required to
be used to begin implementation of the conversion of American
Pioneer from being a direct subsidiary of American Progressive to
being a direct subsidiary of Universal. See "Unstacking," below.
* The Company, AAM, the holders of the Series C Preferred Stock,
Barasch Associates Limited Partnership ("BALP") and Richard A.
Barasch will enter into a shareholders agreement at the closing of
the transaction, under which the holder of the Series C Preferred
Stock are given registration rights and informational rights, the
Series C Preferred Stock holder agrees to vote their shares for
the election of a person designated by AAM as the director elected
by that Series, and BALP and Mr. Barasch grant the Series C
holders a co-sale right should they sell any shares of the
Company's common stock held by them, except to certain "permitted
transferees".
Unstacking
American Pioneer is now a direct subsidiary of American Progressive. As
a result of the way Risk Based Capital ("RBC") is computed (see "Regulation -
Risk Based Capital Requirements"), this "stacking" of the two insurance
companies results in American Progressive's RBC Ratio for 1996 being reduced
from the 492% it would have been, if its American Pioneer stock were replaced
by investment grade bonds, to 261%. This "stacking" also adversely affects
American Progressive's ability to increase its writings of new business and
its ratings by the insurance company rating services. (See "Ratings").
Because American Pioneer is able to pay dividends while American Progressive
is not able (see "Regulation - Dividends and Distributions"), the present
stacking requires all dividends be paid into American Progressive, effectively
precluding the application of any portion of American Pioneer's statutory
profits for general corporate purposes of the Company. For these reasons, the
Company has decided to "unstack" American Pioneer, and make it a direct
subsidiary of Universal.
The proposed unstacking will strengthen the financial condition of
American Progressive and is expected to result in an improvement of American
Progressive's RBC ratio and the ratings of both American Pioneer and American
Progressive, as well as making American Pioneer dividend paying potential
available to Universal. To comply with the requirements of the Holding
Company provisions of the New York Insurance Law (see "Regulation - General"),
Universal and American Pioneer on July 26, 1996 entered into a purchase
agreement (the "Unstacking Agreement"), which has been approved by the New
York Insurance Department, providing for:
* the sale of all of American Pioneer's stock to Universal, in one
or more segments, over a period of not more than five years, at a
fixed price per share determined by an appraisal performed by an
independent actuarial firm selected by the Department. This
appraisal is now in progress.
* the completion of the purchase of the first segment of American
Pioneer stock with a purchase price of at least $6 million, within
90 days after receipt of the appraisal report.
* payment of the purchase price for the initial segment and each
subsequent segment, one half in cash and one half by Universal's
five year debenture, bearing interest at the prime rate at the
time each debenture is issued, and secured by pledge of all of the
purchased stock.
It is intended that the proceeds of the pending sale of Series C
Preferred Stock, (see "Restructuring - Pending Private Placement Financing"),
will enable the funding of the cash portion of the purchase price for the
initial segment.
10
<PAGE>
Marketing and Distribution
Historically, the Insurance Subsidiaries have sold their products
through a traditional general agency system. The Company now, however, seeks
to structure arrangements with independent marketing organizations, licensed
as general agents, that sell particular products and programs meeting
particular market niches or needs. One such arrangement, with an organization
that focuses on individual sales of deposit-term life insurance policies to
moderate income buyers, produced 14% of the Company's individual life
insurance sales in 1996. Another such arrangement with an organization that
makes individual sales of interest sensitive whole life insurance policies
through single or multi-year premium payments to middle age and senior age
buyers produced 73% of the Company's individual life insurance sales in 1996.
In 1996, American Pioneer entered into an agreement with West Coast Life, an
A+ life insurance subsidiary of Nationwide Insurance Company, to be the lead
company for the sale of the Asset Enhancer Series. The agreement calls for
American Pioneer, West Coast Life and Reinsurance Company of Hannover (ARCH@)
to each participate in one-third of the risk and for American Pioneer to be
the administrator of the product on a fee basis. A similar arrangement was
entered into with Pennsylvania Life with respect to the Flex-A-Vest 88 Term
Life Insurance product. An arrangement with a marketing organization in one
state, which primarily sells Blue Cross/Blue Shield health insurance,
accounted for almost all of the Company's group life sales.
The Company also maintains its traditional sales channels and has more
than 1,200 general agents and more than 2,500 producers under contract, most
of whom also sell similar products for other companies. In 1996, no general
agent produced as much as 5% of the Company's accident and health insurance
premiums or life insurance premiums and only one general agent produced more
than 5% of the Company's annuity premiums (42%). The agents, general agents
and producers are paid purely on a commission basis and are not Company
employees. In this marketing area, the Company believes that the Company
offers competitive commission rates and seeks to provide innovative products
and quality service to its independent general agents. In particular, the
Company believes that it provides a higher level of agent support and is more
responsive to its agents in the field than many larger organizations with
which it competes. Compensation of the Company's agents on certain products
is regulated by the various state Departments of Insurance.
The Company, through the Insurance Subsidiaries, is licensed to market
its products in 45 states and in the District of Columbia. However,
approximately 76% of its 1996 premium and annuity considerations came from the
states of New York (32%), Florida (23%), North Carolina (7%), Alabama (5%),
Texas (5%) and Georgia (4%).
Competition
The Company competes with other insurance and financial services
companies, including large multi-line organizations, both in connection with
the sale of insurance and asset accumulation products and in acquiring blocks
of business. Many of these organizations have substantially greater capital
and surplus, larger and more diversified portfolios of life and health
insurance policies, larger agency sales operations and higher ratings. In
addition, it has become increasingly difficult for small companies to compete
effectively with their larger competitors for traditional life and annuity
sales in part as a result of heightened consumer and agent awareness of the
financial size of companies.
The Company has met, and seeks to continue to meet, these competitive
pressures by offering a high level of service and accessibility to its field
force and by developing specialized products and marketing approaches.
Ratings
American Pioneer and American Progressive have been designated "B+(Very
Good)" and "B (Fair)", respectively, by A.M. Best. In evaluating a company's
financial and operating performance, A.M. Best reviews profitability, leverage
and liquidity as well as the quality of the book of business, the adequacy and
soundness of reinsurance programs, the quality and estimated market value of
assets, reserve adequacy and the experience and competence of management.
A.M. Best's ratings are based upon factors relevant to policyholders, agents,
11
<PAGE>
insurance brokers and intermediaries and are not directed to the protection of
investors. According to A.M. Best's published material, a "B+" or "B" rating
is assigned to companies which, in its opinion, have demonstrated very good
(B+) or fair (B) overall performance when compared to the standards it has
established. Companies rated (B+) have a good ability to meet their
obligations to policyholders. "B" rated companies have an adequate ability to
meet their policyholder obligations, but their financial strength is
vulnerable to adverse changes in underwriting or economic conditions.
Standard and Poor's rates American Pioneer and American Progressive as "BBBq"
and "Bq", respectively, which means that, based on their publicly available
information, they are currently able to meet policyholder obligations,
although, as to "Bq", that ability is especially vulnerable to adverse
economic and underwriting conditions. The Insurance Subsidiaries are not
currently known to be rated by the Duff and Phelps or Moody's rating
organizations. Although a higher rating by A.M. Best or another insurance
rating organization could have a favorable effect on the Company's business,
management believes that its marketing has enabled, and will continue to
enable, the Insurance Subsidiaries to compete effectively.
Underwriting Procedures
Premiums charged on insurance products are based, in part, on
assumptions about the expected mortality and morbidity experience. In that
regard, the Company has adopted and follows detailed uniform underwriting
procedures designed to assess and quantify certain insurance risks before
issuing individual life insurance and certain health insurance policies and
certain annuity policies to individuals. These procedures are generally based
on industry practices, reinsurer underwriting manuals and the Company's prior
underwriting experience. To implement the procedures, each Insurance
Subsidiary employs an experienced professional underwriting staff.
Applications for insurance to be underwritten are reviewed to determine
if any additional information is required to make an underwriting decision,
which depends on the amount of insurance applied for and the applicant's age
and medical history. Such additional information may include medical
examinations, statements from doctors who have treated the applicant in the
past and, where indicated, special medical tests. If deemed necessary, the
Company uses investigative services to supplement and substantiate
information. For certain coverages, the Company may verify information with
the applicant by telephone. After reviewing the information collected, the
Company either issues the policy as applied for, issues the policy with an
extra premium charge due to unfavorable factors, issues the policy excluding
benefits for certain conditions for a period of time or rejects the
application. For certain of its coverages, the Company has adopted simplified
policy issue procedures in which the applicant submits a single application
for coverage typically containing only a few health related questions instead
of a complete medical history. In New York and other states, certain of the
Company's products, including Medicare supplement, are subject to "Community
Rating" laws which severely limit or prevent underwriting of individual
applications. See "Regulation-Health Care Reform".
Acquired Immune Deficiency Syndrome ("AIDS"), which has received wide
publicity because of its serious public health implications, presents special
concerns to the life and health insurance industry. The Company considers
AIDS information in underwriting and pricing decisions in accordance with
applicable laws. Applicants for life insurance coverage equal to or exceeding
$100,000 and for major medical and major hospital coverages must submit to a
blood or urine test, which includes AIDS antibody screening. The Company's own
mortality and morbidity experience to date reflects no unduly adverse impact
as a result of any acceleration of AIDS-related life insurance claims. The
Company is continuing to monitor developments in this area but is necessarily
unable to predict the long-term impact of this problem on the life insurance
industry, in general, or on the Company, in particular.
Investments
The Company's investment policy is to balance the portfolio between
long-term and short-term investments so as to continue to achieve investment
returns consistent with the preservation of capital and maintenance of
liquidity adequate to meet payment of policy benefits and claims. The Company
invests in assets permitted under the insurance laws of the various states in
which it operates, such laws generally prescribe the nature, quality of and
12
<PAGE>
limitations on various types of investments which may be made. The Company
currently engages the services of an unrelated investment advisor, Asset
Allocation and Management Company, to manage the Company's fixed maturity
portfolio, under the direction of the management of the Insurance Subsidiaries
and in accordance with guidelines adopted by their respective Boards of
Directors. The Company's policy is not to invest in derivative programs or
other hybrid securities, except for GNMA's, FNMA's and investment grade
corporate collateralized mortgage obligations. It invests primarily in fixed
maturity securities of the U.S. Government and its agencies and in corporate
fixed maturity securities with investment grade ratings of "Baa3" (Moody's) or
"BBB-" (Standard & Poors) or better. However, the Company does own some
investments that are rated "BB" and one bond rated "D" (together 4.4% and 3.2%
of total fixed maturities as of both December 31, 1995 and 1996,
respectively). As of December 31, 1996, out of a securities portfolio of
$121,492,167, only one of the Company's investments with a carrying fair value
of $331,250 was in default.
In November, 1995, the Financial Accounting Standards Board ("FASB")
issued a Special Report titled "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities", which
report allowed enterprises to reassess the appropriateness of the
classifications of all securities held and account for any resulting
reclassifications between the investment accounts. This one-time reassessment
had to be made prior to December 31, 1995 and be appropriately disclosed in
the financial statements. In December, 1995, the Company did reassess the
appropriateness of the classifications of its securities and reclassified all
of the securities contained in the held to maturity account to the available
for sale account as they may be considered for sale prior to maturity as part
of the asset/liability management strategy. The carrying value of the
securities reclassed to available for sale amounted to $35,942,303 and the
fair value amounted to $36,098,026. This transfer resulted in the Company
increasing its unrealized gains by $155,723.
The following table summarizes the Company's investment portfolio as of
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
Investment Portfolio
December 31, 1995 December 31, 1996
------------------- -------------------
Percent of Percent of
Carrying Total Carrying Total
Value Carrying Value Carrying
(Fair Value) Value (Fair Value) Value
------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Fixed Maturity Securities:
U.S. Government and
Government agencies $19,789,608 14.59% 12,177,564 8.42%
Mortgage-backed 22,114,810 16.31% 35,371,543 24.45%
Investment grade corporates 69,431,937 51.20% 70,092,550 48.44%
Non-investment grade corporates 5,092,566 3.76% 3,850,510 2.66%
----------- ------ ----------- ------
Total fixed maturity securities 116,428,921 85.86% 121,492,167 83.97%
Cash and cash equivalents 12,289,801 9.06% 15,403,450 10.65%
Other Investments:
Policy loans 5,622,136 4.15% 6,421,251 4.44%
Mortgage loans 1,067,605 0.79% 1,199,110 0.83%
Real property tax liens 178,908 0.13% 131,729 0.09%
Equity securities 15,297 0.01% 33,562 0.02%
------------ ------- ------------ -------
Total invested assets $135,602,668 100.00% $144,681,269 100.00%
============ ======= ============ =======
</TABLE>
13
<PAGE>
The following table shows the distribution of the contractual maturities
of the Company's portfolio of fixed maturity securities by carrying value as
of December 31, 1996. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties:
Contractual Maturities of Fixed Maturity Securities
Percent of
Carrying Total Fixed
Available for Sale Value Maturities
------------------ ----------- ----------
Due in 1 year or less $ 2,632,028 2.16%
Due after 1 year through 5 years 23,458,901 19.31%
Due after 5 years through 10 years 36,992,088 30.45%
Due after 10 years 19,264,750 15.86%
Mortgage-backed Securities 39,144,400 32.22%
------------ -------
$121,492,167 100.00%
============ =======
The following table shows the distribution by carrying value of the
Company's fixed maturity securities portfolio according to the ratings
assigned by Standard & Poor's Corporation, along with related estimated fair
values, as of December 31, 1995 and 1996:
<TABLE>
<CAPTION>
Distribution of Fixed Maturity Securities by Rating
December 31, 1995 December 31, 1996
----------------------------------- ----------------------------------
% of % of
Total Total
Standard & Fixed Fixed
Poor's Carrying Invest- Estimated Carrying Invest- Estimated
Rating Value ments Fair Value Value ments Fair Value
- - ------ ---------- ------- ----------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
AAA $ 42,209,501 36.26% $ 42,209,501 $ 46,981,664 38.67% $ 46,981,664
AA 10,606,356 9.11% 10,606,356 7,598,298 6.25% 7,598,298
A 21,904,044 18.81% 21,904,044 21,383,442 17.60% 21,383,442
BBB 36,616,454 31.45% 36,616,454 41,678,253 34.31% 41,678,253
BB 4,848,816 4.16% 4,848,816 3,519,260 2.90% 3,519,260
D 243,750 0.21% 243,750 331,250 0.27% 331,250
------------ ------- ------------ ------------ ------- ------------
Total $116,428,921 100.00% $116,428,921 $121,492,167 100.00% $121,492,167
============ ======= ============ ============ ======= ============
</TABLE>
14
<PAGE>
At December 31, 1995 and 1996, 95.6% and 96.8%, respectively, of the
Company's investments were investment grade corporate fixed maturity
securities (i.e., those rated "BBB-" or higher by Standard & Poor's
Corporation or "Baa3" or higher by Moody's Investors Service). This included
approximately $29,946,626, at December 31, 1995, and $39,144,400, at December
31, 1996, of collateralized mortgage obligations secured by residential
mortgages. These amounts represented approximately 26% and 32% of the
Company's fixed maturity portfolio at December 31, 1995 and 1996,
respectively. Certain classes of mortgage-backed securities are subject to
significant prepayment risk. This is due to the fact that in periods of
declining interest rates, mortgages may be repaid more rapidly than scheduled,
as individuals refinance higher rate mortgages to take advantage of the lower
rates then available. As a result, holders of mortgage-backed securities may
receive higher prepayments on their investments which they may not be able to
reinvest at an interest rate comparable to the rate paid on such mortgage-
backed securities. At December 31, 1995 and 1996, less than investment grade
fixed maturity securities had aggregate carrying values (held at fair value)
of $5,092,566 and $3,850,510 respectively, amounting to 4.4% and 3.2%,
respectively, of total investments and 2.8% and 1.6%, respectively, of total
assets. The Company's holdings of less than investment grade corporate fixed
maturity securities are diversified and the investment in any one such
security at both December 31, 1995 and 1996 was less than $1,000,000, which
was approximately 0.5% and 0.4% of total assets, respectively. The Company
wrote down the value of certain securities, considered to have been subject to
an-other-than temporary decline in value, by $195,000 in 1995, which was
included in net realized gains on investments in the consolidated statements
of operations. The Company did not write down the value of any securities
during 1994 and 1996.
Investment Income
Investment income is an important part of the Company's total revenues
and profitability. Management cannot predict the impact that changes in
future interest rates will have on the Company's financial statements. The
following table shows the investment results of the Company's total invested
asset portfolio, for the three years ended December 31, 1996:
<TABLE>
<CAPTION>
Investment Results
Years Ended December 31,
-----------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Total invested assets, end of period $125,487,241 $135,602,668 $144,681,269
Net investment income before interest credited
to policyholders $9,238,789 $8,945,280 $9,850,083
Yield on average cash and investments 7.48% 6.97% 7.08%
Net realized investment gains $41,568 $673,868 $240,075
</TABLE>
Reserves
In accordance with applicable insurance regulations, the Company has
established, and carries as liabilities in its statutory financial statements,
actuarially determined reserves that are calculated to satisfy its policy and
contract obligations. Reserves, together with premiums to be received on
outstanding policies and contracts and interest thereon at certain assumed
rates, are calculated to be sufficient to satisfy policy and contract
obligations. The actuarial factors used in determining such reserves are
based on statutorily prescribed mortality tables and interest rates. Reserves
maintained also include unearned premiums, premium deposits, reserves for
claims that have been reported but are not yet paid, reserves for management's
estimate for claims that have been incurred but have not yet been reported and
claims in the process of settlement.
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<PAGE>
The reserves reflected in the Company's consolidated financial
statements are calculated in accordance with GAAP. These reserves are based
upon the Company's best estimates of mortality and morbidity, persistency,
expenses and investment income, with appropriate provisions for adverse
statistical deviation. The Company uses the net level premium method for all
non-interest sensitive products and the retrospective deposit method for
interest sensitive products. GAAP reserves differ from statutory reserves due
to the use of different assumptions regarding mortality and morbidity, and
interest rates and the introduction of lapse assumptions into the GAAP reserve
calculation.
Reinsurance
Assumption from First National Life
In the fourth quarter of 1996, the Company acquired, through an
assumption reinsurance agreement, approximately $56 million of annualized
senior market premium from First National Life Insurance Company ("First
National"). American Pioneer initially contracted with First National to
assume $4 million of premium on group Medicare Supplement coverage issued to
the members of the Florida Retired Educators Association ("FREA"). Then,
after First National was placed into Receivership by the Alabama Insurance
Department in October, 1996, American Pioneer assumed approximately an
additional $50 million of Individual Medicare Supplement premium, $1.2 million
in Home Health Care premium and $0.8 million in miscellaneous life and
accident and health insurance premiums, under terms negotiated with the
Receiver. All of these assumptions were effective as of October 1, 1996. The
Company received approval from the Florida Insurance Department to report the
premiums assumed from First National as direct premium written.
Simultaneously with the second assumption by American Pioneer, American
Pioneer entered into a reinsurance agreement with Transamerica Occidental Life
Insurance Company ("Transamerica"), ceding 90% of the $50 million Individual
Medicare Supplement to Transamerica under reinsurance terms believed to be
favorable. American Pioneer will perform all the administration on the
reinsured business.
Ceded
Consistent with the general practice of the life insurance industry, the
Company reinsures portions of the coverage provided by its life insurance
products to unaffiliated insurance companies under various reinsurance
agreements. Such agreements allow the Company to write policies in amounts
larger than the risk it is willing to retain on any one life, and to continue
writing a larger volume of new business. The mortality risk retention limit
on each policy varies generally between $25,000 and $75,000. The Company
cedes insurance primarily on an "automatic" basis and receives allowances from
its reinsurers ranging from 100% to 142% of the reinsurers' premium in the
first policy year and at varying rates of up to 40% in renewal years.
Reinsurance is not maintained on any of the annuity policies in force.
The Company has "excess of loss" reinsurance agreements with
unaffiliated insurance companies on its accident and health insurance policies
to reduce the liability on individual risks to $60,000 at American Pioneer and
$200,000 at American Progressive. On June 30, 1995, the Company effected a
"quota share" reinsurance agreement with another unaffiliated reinsurer (rated
A+ by A.M. Best) to cede 75% of the remaining $60,000 of individual accident
and health insurance risk at American Pioneer. The Company received a ceding
commission of $862,000, $625,000 of which was offset by the amortization of
the deferred acquisition cost asset related to this business. The remaining
$237,000 was recorded as deferred revenue with $80,000 and $157,000 being
amortized as income during 1995 and 1996, respectively. In addition, the
Company has a quota share agreement on its Accidental Death and Dismemberment
policies under which the reinsurer receives 90% of all premiums and pays 90%
of all losses and the Company receives allowances ranging from 20%-30% of the
ceded premium. American Pioneer also reinsures all of the risk in excess of
two years of benefits on certain disability income policies.
As part of its restructuring, American Progressive reinsured all of its
New York Statutory DBL Insurance in force and a major part of the risk on its
major medical policies to unaffiliated insurers. (See "Restructuring Activity
- - - Sale of DBL Block" and "Major Medical Reinsurance").
16
<PAGE>
The Company is contingently liable to pay claims in the unlikely event
that a reinsurer fails to meet its obligations under the reinsurance
agreement. The Company's primary reinsurers are currently rated A+ (Superior)
and A (Excellent) by A.M. Best. To the Company's knowledge, no reinsurer of
business ceded by the Company has been unable to pay any policy claims on any
reinsured business. The reinsurance agreements are subject to cancellation on
90 days notice as to future business, but policies reinsured prior to such
cancellation remain reinsured as long as they remain in force. Management
believes that if its reinsurance agreements were canceled it would be able to
obtain other reinsurance arrangements on satisfactory terms to enable it to
continue writing new business.
Other Assumed
As part of its strategy of acquiring blocks of business, the Company has
acquired several blocks of business through reinsurance.
American Progressive participates in a modified coinsurance agreement
with an unaffiliated insurer under an agreement entered into in 1986. The
business assumed consists of non-participating premium-paying Whole Life and
increasing premium Whole Life policies. At December 31, 1996, premiums in
force ceded to American Progressive under this arrangement were approximately
$400,000, the amount of insurance in force was approximately $25.5 million and
the reserves assumed were approximately $4.5 million.
In 1994, the Company assumed 100% of the risk and premium on certain
accident and health insurance policies written by three insurers not
affiliated with the Company: North American Company for Life and Health
Insurance, North American Company for Life and Health Insurance of New York
and Baptist Life Insurance Company of New York. At December 31, 1996, the
premium in force on these policies was approximately $750,000 and the
associated reserves were approximately $830,000.
Accident Insurance Pool
Effective January 1, 1994, American Progressive entered into a pooling
agreement through National Accident Insurance Underwriters, an unaffiliated
agency, and three unaffiliated insurers to underwrite travel accident and
student accident insurance policies. In August, 1996, the Company notified
the accident pool of its intention to withdraw effective December 31, 1996.
As of December 31, 1996, American Progressive had approximately $8 million in
premiums in force under this arrangement, all of which had been assumed from
the other pool participants. Although the Company made a modest profit in
this pool over the past three years, the results were erratic and the Company
decided to allocate its capital and efforts in its core business segments (see
"Business - Strategic Focus"). American Progressive continues to have the
risk on business earned prior to December 31, 1996 and maintained $2.5 million
in reserves for this risk (see "Restructuring - Withdrawal from NAIU Pool").
WorldNet
As part of the transaction to acquire the business of First National,
the Company also acquired and leased through its WorldNet subsidiary, a
portion of the operating facility in Pensacola, Florida, formerly used by
First National. Included in this acquisition is hardware and software used to
process the business and the leasing of the office facility, furniture,
fixtures and equipment. In addition, WorldNet hired most of the
administrative employees of First National in Pensacola.
The Company has identified Pensacola as a relatively low cost operating
environment in which to build WorldNet as an efficient, high quality third
party administrator for the business written by American Progressive and
American Pioneer and for unrelated third parties.
After sustaining significant losses in WorldNet for the past few years,
management believes that WorldNet is responding to cost control and
restructuring efforts, reporting a cash loss of $135,000 for 1996 and, after
depreciation, a loss of $271,000.
17
<PAGE>
Acquisitions
In January, 1992, WorldNet was a newly-formed subsidiary and acquired
certain assets and the client base of a firm that provided managed care,
travelers' medical assistance and claims administration to insurance companies
(foreign and domestic) and affinity groups, including credit card companies.
On April 1, 1994, WorldNet acquired certain assets of Health Assistance
for Travelers, Inc. ("HAT") (a subsidiary of Ontario Blue Cross of Canada
("OBC")) and an affiliated corporation for Can. $625,000 (approximately U.S.
$470,000), payable over five years. WorldNet also executed an agreement with
HAT and OBC by which WorldNet agreed to perform HAT's obligations under
certain service contracts between HAT and OBC, and other insurers. The assets
acquired included HAT's office in Miami Beach, Florida. In July 1994, the
WorldNet facility in Texas was closed and its functions and some of its
personnel were transferred to the Miami Beach facility acquired from HAT.
In 1995, substantially all of the assets of OBC (including the shares of
its subsidiary HAT) was acquired by Liberty Mutual Insurance Company ("Liberty
Health"). In February, 1996, WorldNet and Liberty Health agreed to terminate
the service agreement between OBC and WorldNet. In connection with the
termination of the service agreement, Liberty Health agreed to cancel the
promissory notes executed on April 1, 1994, which notes amounted to $370,000
at December 31, 1995. At the same time, the Company wrote off corresponding
assets, including the value of the service agreement, which assets amounted to
approximately $170,000. The resulting net income from this transaction was
approximately $200,000 and was reflected in the Company's financial statements
for the first quarter of 1996.
General
WorldNet is a fee-based company whose primary services are to provide
medical managed care and assistance to people traveling away from their homes
and to act as a third party administrator and service provider to the
Insurance Subsidiaries. These, and other related services, are sold by
WorldNet to insurance companies (for their insureds), credit card companies
(for their card members) and associations (for their members).
International Managed Care
WorldNet has achieved a significant portion of its revenue from the sale
of managed care, cost containment and claims adjudication services to foreign
(to date, primarily Canadian) insurers for their insureds while they are in
the United States. WorldNet arranges access to appropriate medical care,
manages the care and cost while the case is in process and often arranges
evacuation to the country of origin. WorldNet also provides complete claims
adjudication services including coordination of benefits, subrogation and
audits. The clients who use WorldNet's managed care services include a number
of large insurers in Canada and Europe.
Travel Assistance and Related Claims Adjudication
WorldNet's travel assistance product is sold as an enhancement for its
clients' cardholders, policyholders and members. The service provides 24-hour
telephone access to assistance for medical, legal and other problems that
arise especially while away from home. Related to this function, WorldNet
also provides claims adjudication for travel-related insurance products such
as baggage, collision damage waiver and trip-cancellations.
Operations
WorldNet operates a 24-hour multi-lingual communications center in
Miami, Florida and a third party administrative office in Pensacola, Florida.
The company has developed and acquired proprietary software applications that
have been customized for its market.
18
<PAGE>
WorldNet's revenues for years ended December 31, 1994, 1995 and 1996
were as follows:
Year Ended December 31,
-----------------------------------------
1994 1995 1996
Managed care and claims
adjudication $2,812,519 $2,099,438 $1,513,962
Travel and other assistance 1,256,480 971,103 658,379
---------- ---------- ----------
$4,068,999 $3,070,541 $2,172,341
========== ========== ==========
Regulation
General
The Insurance Subsidiaries, like other insurance companies, are subject
to the laws, regulations and supervision of the states in which they are
domiciled (New York in the case of American Progressive and Florida in the
case of American Pioneer) and in various other states in which they are
authorized to transact business. The purpose of such laws and regulations is
primarily to provide safeguards for policyholders rather than to protect the
interest of shareholders.
The insurance laws regulate, among other things, capitalization,
permissible investments, premium rates on statutory disability insurance and
other health insurance policy forms, the form and content of policies which
may be offered, specified methods of accounting (statutory accounting or SAP)
for detailed financial statements submitted to the various Insurance
Departments and minimum capital and surplus required to continue in operation.
Most states have enacted legislation or adopted administrative
regulations covering such matters as the acquisition of control of insurance
companies and transactions between insurance companies and the persons
controlling them. Additional requirements are often imposed as a condition of
approval of the acquisition of an insurance company, as occurred in the case
of the Company's acquisition of both American Pioneer and American
Progressive. The nature and extent of the legislation and administrative
regulations now in effect vary from state to state and most states require
administrative approval of the acquisition of control of an insurance company
incorporated in the state, whether by tender offer, exchange of securities,
merger or otherwise, and require the filing of detailed information regarding
the acquiring parties and the plan of acquisition. The approval of the
domiciliary insurance department is also required before a controlling
interest (10% as to New York, 5% as to Florida) of an insurance company, or of
a holding company which owns such an insurance company, can be acquired or
transferred. Every insurance company which is authorized to do business in
the state and is a member of an "insurance holding company system" is
generally required to register as such with the insurance regulatory
authorities and file periodic reports concerning its relationships with the
insurance holding company. Material transactions between registered insurance
companies and members of the holding company system are required to be "fair
and reasonable" and in some cases are subject to administrative approval, and
the books, accounts and records of each party are required to be so maintained
as to clearly and accurately disclose the precise nature and details of the
transactions.
Each Insurance Subsidiary is required to file detailed reports with the
insurance department of each state in which it is licensed to conduct
business, and its books and records are subject to examination by each such
insurance department. In accordance with the insurance codes of their
domiciliary states and the rules and practices of the National Association of
Insurance Commissioners ("NAIC"), the Insurance Subsidiaries are examined
periodically by examiners of New York and Florida and by representatives (on
an "association" or "zone" basis) of the other states in which they are
19
<PAGE>
licensed to do business. American Progressive was examined in 1995 for the
three years ended December 31, 1994 by the New York State Insurance
Department. American Pioneer was examined in 1993 for the year ended December
31, 1992 by the Florida Insurance Department and is currently under
examination for the three years ended December 31, 1995. The Company has
complied with all recommendations made on such reports, and no issues were
raised which the Company deems to be material.
Many states require deposits of assets for the protection of
policyholders either in those states or for all policyholders. At December
31, 1995 and 1996, securities totaling $6,468,000 and $7,779,000, respectively
(approximately 4.8% and 5.4 %, respectively, of the carrying value of the
Company's invested assets), were on deposit with various state treasurers or
custodians. Such deposits must consist of securities that comply with the
standards established by the particular state.
Insurance Regulatory Changes
The NAIC and state insurance regulators have recently become involved in
a process of re-examining existing laws and regulations and their application
to insurance companies. This re-examination has focused on insurance company
investment and solvency issues, risk-based capital guidelines, assumption
reinsurance, interpretations of existing laws, the development of new laws,
the interpretation of nonstatutory guidelines, and the circumstances under
which dividends may be paid. The NAIC has encouraged states to adopt model
NAIC laws on specific topics such as holding company regulations and the
definition of extraordinary dividends. It is not possible to predict the
future impact of changing state regulation on the operations of the Company.
The statutory filings of American Progressive and American Pioneer
require classifications of investments, the maintenance of an asset valuation
reserve ("AVR") and that investment gains and losses resulting from changes in
interest rate levels be deferred and taken into income over a period of years
through the interest maintenance reserve ("IMR"). Similar requirements are
not required under GAAP.
The AVR and IMR of the Insurance Subsidiaries as of December 31, 1995
and 1996 were:
December 31, 1995 December 31, 1996
----------------- -----------------
American Progressive
AVR $ 523,893 $ 456,362
IMR $ 442,394 $ 547,436
American Pioneer
AVR $ 618,676 $ 646,040
IMR(1) $(101,777) $ (94,025)
(1) For statutory accounting purposes, a negative IMR is
treated as a non-admitted asset.
New York State enacted legislation in 1992 that requires all health
insurance sold to individuals and groups with less than 50 employees, to be
offered on an open enrollment and community rated basis effective April 1,
1993. Such insurance may continue to be sold to groups with more than 50
employees on an underwriting basis, with premiums set to reflect expected or
actual expenses. The 1992 law prohibits the use of individual underwriting
techniques and health insurers must accept all who apply regardless of medical
condition. The community rating aspect of the law prohibits the use of age,
sex, health or occupational factors in rating and requires that the same
average rate be used for all persons with the same policy residing in the same
location. The Medicare supplement actively marketed by American Progressive
in New York State and some of its in force business is subject to the
community rating rules. The extension of such legislation to Florida, where
20
<PAGE>
significant medically underwritten health insurance is offered, might cause a
reconsideration of the Company's existing health care coverage offerings.
Dividend and Distribution Restrictions
Under the New York State Insurance Law, the declaration or payment of a
dividend by American Progressive requires the approval of the New York
Superintendent of Insurance, who, as a matter of present policy, would not
approve such payment until American Progressive had generated sufficient
statutory profits to offset its entire negative unassigned surplus, which was
approximately $10,293,000 at December 31, 1996.
Under current Florida State insurance law, a life insurer may pay a
dividend or make a distribution without the prior written approval of the
department when:
(a) the dividend is paid from that portion of the accumulated
and available surplus of the Company as is derived from the net
operating profits of its business and its net realized capital gains;
(b) the dividend is no more than the greater of (i) 10% of the
insurer's surplus as to policyholders derived from net operating profits
on its business and net realized capital gains; or (ii) the insurer's
entire net operating profits and realized net capital gains derived
during the immediately preceding calendar year;
(c) 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 or distribution is made; and
(d) the insurer has filed notice with the department at least 10
business days prior to the dividend payment or distribution.
American Pioneer has the capacity to pay dividends of approximately $950,000
during the year ending December 31, 1997. Dividends of $1,000,000, $500,000
and $500,000 were paid by American Pioneer to American Progressive in 1994,
1995 and 1996, respectively.
Risk-Based Capital Requirements
Effective December 31, 1993, the NAIC adopted new risk-based capital
("RBC") requirements, which have also been adopted in New York and Florida.
These are intended to provide for a measurement of statutory capital and
surplus needs based on the risks in a company's mix of products and investment
portfolio. As of December 31, 1995 and 1996, American Progressive's ratios of
total adjusted capital to RBC, based on the NAIC approved model, were
approximately 334% and 261% of the Authorized Control Level, respectively. As
of December 31, 1995 and 1996, American Pioneer's ratios of total adjusted
capital to RBC, based on the NAIC approved model, were approximately 756% and
795% of the Authorized Control Level, respectively.
Guaranty Association Assessments
All states require insurance companies to participate in guaranty
associations designed to cover certain claims against insolvent insurers. The
incurance and amount of such assessments have increased in recent years and
are generally expected to increase further in future years. American
Progressive and American Pioneer were assessed and paid approximately $12,000
and $152,000, respectively, in 1995 and $9,326 and $77,396, respectively in
1996. The likelihood and amount of any other future assessments are now
unknown and are beyond the control of the Company.
21
<PAGE>
Health Care Reform
From time to time numerous proposals have been introduced in Congress
and the state legislatures to reform the current health care system.
Proposals have included, among other things, employer-based insurance systems,
subsidized premiums for lower income people, "managed competition" among
health plans, programs to regulate policy availability and affordability and
public and private programs. Changes in health care policy could
significantly affect the Company's health insurance business.
In 1996, Congress enacted the Kassenbaum-Kennedy Act which, among other
changes, restricts the ability of insurers to utilize medical underwriting and
pre-existing condition provisions in certain health insurance policies issued
to persons who were previously insured under qualifying policies. These
changes, which will become effective in stages, may have an effect on some of
the Company's policies. Whether or not Congress passes any further health
reform measures in the foreseeable future, it is likely that health reform
will continue to reappear on the legislative agenda in the future. Such
additional healthcare reform proposals also could require standardization of
major medical or long-term care coverages, impose mandated or target loss
ratios or rate regulation, require the use of community rating or other means
that further limit the ability of insurers to differentiate among risks, or
mandate ultilization review or other managed care concepts to determine what
benefits would be paid by insurers. These or other proposals could increase
or decrease the level of competition among health insurers. In addition,
changes could be made in Medicare that could necessitate revisions in the
Company's Medicare Supplement products. Other potential initiatives, designed
to tax insurance premiums or shift medical care costs from government to
private insurers, could have effects on the Company's business, some of them
adverse. The Company is unable to predict what changes to the country's
health care system will be enacted, if any, or their effects on the Company's
business. See "Regulation".
Other Possible Changes in Legislation
Since insurance is a regulated business, with a high public profile, it
is always possible that legislation may be enacted which would have an adverse
effect on the Company's business.
An important portion of the Company's insurance business is the sale of
deferred annuities and certain life insurance products, which are attractive
to purchasers in part because policyholders generally are not subject to
federal income tax increases in the value of an annuity or life insurance
contract until some form of distribution is made from the contract. From time
to time, Congress has considered proposals to reduce or eliminate the tax
advantages of annuities and life insurance which, if enacted, might have an
adverse effect on the ability of the Company to sell the affected products in
the future. The Company is not aware that Congress is actively considering
any legislation that would reduce or eliminate the tax advantages of annuities
or life insurance; however, it is possible that the tax treatment of annuities
or life insurance could change by legislation or other means (for example, by
Internal Revenue Service regulations or judicial decisions).
Certain changes in insurance and tax laws and regulations could have a
material adverse effect on the operations of insurance companies. Specific
regulatory developments which could have a material adverse effect on the
operation of the insurance industry include, but are not limited to, the
potential repeal of the McCarran-Ferguson Act (which exempts insurance
companies from a variety of federal regulatory requirements), and adoption of
laws, such as those already in force in New York, limiting an insurer's
ability to medically underwrite and rate health insurance policies or to
exclude pre-existing conditions from coverage. In addition, the
administration of such regulations is vested in state agencies which have
broad powers and are concerned primarily with the protection of policyholders.
Federal Income Taxation of the Company
The Company files a consolidated return for federal income tax purposes,
in which the Insurance Subsidiaries are not currently permitted to be
included. At December 31, 1996 the Company (exclusive of the Insurance
Subsidiaries) had a net operating tax loss carryforwards of approximately
$6,400,000 which expire in the years 1997 to 2011.
22
<PAGE>
The Insurance Subsidiaries filed a separate consolidated federal income
tax return in which they are taxed as life insurance companies as provided in
the Tax Code. The Omnibus Budget Reconciliation Act of 1990 amended the Tax
Code to require a portion of the expenses incurred in selling insurance
products to be capitalized and amortized over a period of years, as opposed to
an immediate deduction in the year incurred. Instead of measuring actual
selling expenses, the amount capitalized for tax purposes is based on a
percentage of premiums. In general, the capitalized amounts are subject to
amortization over a ten-year period. Since this change only affects the
timing of the deductions, it does not, assuming stability of rates, affect the
provisions for taxes reflected in the Company's financial statements prepared
in accordance with GAAP. However, by deferring deductions, the change does
have the effect of increasing the current tax expense, thereby reducing
statutory surplus. Because of the Insurance Subsidiaries' net operating loss
carryforwards, there was no increase in the Company's current income tax
provision for the three years ended December 31, 1996 due to this change.
At December 31, 1996 American Progressive had net operating tax loss
carryforwards of approximately $5,000,000, which expire in the years 2003 to
2008.
At December 31, 1996 American Pioneer had net operating tax loss
carryforwards, all incurred prior to its acquisition by the Company, of
approximately $1,100,000 which expire in the years 2000 to 2002. As a result
of changes in ownership of American Pioneer in May 1993, use of all the loss
carryforwards of American Pioneer are subject to annual limitations.
Employees
At December 31, 1996, the Company employed approximately 200 employees,
none of whom is represented by a labor union. The Company considers its
relations with its employees to be satisfactory.
MANAGEMENT
Directors and Executive Officers of the Company and Officers of the
Subsidiaries
The following table sets forth certain information concerning the
Directors and Officers of the Company and the Officers of the subsidiaries:
Position with the Company,
Present Principal Occupation or Employment
Name Age and Past Five-Year Employment History
- - ---- --- ------------------------------------------
Richard A. Barasch 43 Director, President and Chief Executive
Officer of the Company; Director and
President of American Progressive; and
Chairman of the Board of American Pioneer
and WorldNet. Mr. Barasch has been a
director and executive officer of the
Company since July 1988, President since
April 1991 and Chief Executive Officer since
June 15, 1995. He has held his positions
with the Company's subsidiaries since their
acquisition or organization by the Company.
Term as a Director expires in 1997.
Marvin Barasch 74 Chairman of the Board of the Company and
Vice-Chairman of American Progressive (John
Adams) since July 1988, Chairman of American
Progressive since June 1996 and a director
of American Pioneer since May 1993. Mr.
Barasch was Chief Executive Officer of the
Company from July 1988 to June 15, 1995. He
has been in the insurance business as an
agent and broker for over 40 years. Term as
a Director expires in 1998.
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<PAGE>
Robert A. Waegelein, C.P.A. 36 Senior Vice President and Chief Financial
Officer of the Company (since October 1990)
and of the Company's subsidiaries since they
were acquired or organized. Prior to that,
Mr. Waegelein, a certified public
accountant, was employed by KPMG Peat
Marwick LLP, the Company's then independent
public accountants, in positions of
increasing responsibility, finally serving
as Senior Manager.
Gary W. Bryant, C.P.A. 47 President, CEO and Director of American
Pioneer since April 1983 and Senior Vice
President of the Company since June 15,
1995.
William E. Wehner 53 Executive Vice President and Chief Operating
Officer of American Progressive since May
1991. Mr. Wehner was employed for over
twenty years by Mutual Life Insurance
Company of New York and its affiliates in
positions of increasing responsibility,
finally serving as Vice President for Group
Insurance.
John C. Caton F.S.A. 59 Vice President of American Pioneer since May
1989.
Guy H. Hartman, FALU, CLU 61 Vice President and Chief Underwriter (since
January, 1986) and Secretary (since January,
1994) of American Pioneer.
Bradley Leonard, F.S.A.,
M.A.A.A. CLU, ChFC 52 Vice President of the Company and Senior
Vice President and Chief Actuary of American
Progressive and American Pioneer since
January, 1997. From December 1992 to
January 1997, Mr. Leonard was Vice President
& Actuary of the Federal Home Life Insurance
Companies. Prior to December 1992, he was
Senior Vice President and Chief Actuary of
American Heritage Life Insurance Company.
Sam Walden 57 Vice President-Information Systems of
American Pioneer since November, 1986.
Joan M. Ferrarone 57 Secretary of the Company and American
Progressive since June, 1995. Mrs.
Ferrarone has been employed by the Company
since 1991 and by American Progressive since
1984 in positions of increasing
responsibility.
Michael A. Barasch 41 Director of the Company since July, 1988 and
American Progressive (and its predecessor,
John Adams) from July, 1988 to June, 1995.
Since February 1995, Mr. Barasch has been a
member of the law firm of Barasch and
McGarry. He was a member of the law firm of
Altier and Barasch from February 1989 to
February 1995. Term as a Director expires
in 1999.
24
<PAGE>
Stuart Becker, C.P.A. 53 Director of the Company since July 1990. A
partner in the accounting firm of Becker &
Company, LLC and predecessors, since 1990.
Mr. Becker has more than 30 years experience
as a certified public accountant. Term as a
Director expires in 1997.
David F. Bolger 64 Director of the Company since December,
1992. Since 1966, Mr. Bolger has been Chief
Executive Officer of Bolger & Co., Inc., an
investment banking firm. Term as a Director
expires in 1999.
Mark M. Harmeling 44 Director of the Company since July 1990 and
Director of American Progressive since
December, 1992. Mr. Harmeling has been
President of Bay State Realty Advisors since
January 1994 and previously President of
Intercontinental Real Estate Corporation, a
real estate management and development
company for more than the past five years.
Mr. Harmeling is also a Director of the
following companies: Rochester Shoetree
Corporation (since 1988) and Applied
Extrusion Technologies (since 1987). Term
as a Director expires in 1998.
Bertram Harnett 73 Elected director of the Company and American
Pioneer in June 1996 and had been a director
of the Company previously (July 29, 1988 to
February 9, 1989). Mr. Harnett is President
of the law firm of Harnett Lesnick & Ripps
P.A., Boca Raton, Florida, and its
predecessors since 1988, and a practicing
lawyer since 1948. He is the author of
treatises on insurance law and is a former
Justice of New York State Supreme Court.
Term as a director expires in 1998.
Walter L. Harris 45 Director of the Company since July 1993 and
of American Progressive (and its
predecessor, John Adams) since July 1988.
Since 1979, Mr. Harris has been President of
Tanenbaum-Harber Company, Inc., a general
insurance brokerage firm. Term as a
Director expires in 1999.
Harry B. Henshel 78 Director of the Company since June 1992.
Mr. Henshel has been Chairman of the Board
of the Bulova Corporation, a manufacturer of
timepieces located in New York City, for
more than the past five years. Mr. Henshel
is also a Director of Ponce Hotel
Corporation (since 1973) and Ampal
Industries, Inc. (since 1983). Term as a
Director expires in 1997.
25
<PAGE>
Patrick J. McLaughlin 38 Director of the Company since January 1995.
Mr. McLaughlin has been Managing Director
of Emerald Capital Group, Ltd., an asset
management and consulting firm specializing
in the insurance industry, since April 1993.
Prior to that he was an Executive Vice
President and Chief Investment Officer of
Life Partners Group, Inc. (April 1990 to
April 1993), Managing Director of Conning &
Company (August 1989 to April 1990) and
Senior Vice President and Chief Investment
Officer of ICH Corporation (March 1987 to
August 1989). Term as a Director expires in
1997 .
Michael Barasch is Marvin Barasch's son. Richard Barasch is Marvin
Barasch's nephew.
All of the executive officers listed above devote their full business
time to the Company.
All of the Company's and its subsidiaries' officers are elected
annually. The Company's directors are elected for three year terms,
classified into three classes with the Directors in each class serving for
three years, with the terms staggered by class so that one class is elected at
each annual meeting of shareholders for a full three year term. All officers
and directors hold office until their successors are duly elected and
qualified, subject to early removal by the Board.
Mr. Becker was a partner in Laventhol & Horwath from 1988 to 1990 and
Mr. Wehner was an officer of JT Moran Financial Corp. and Moran & Co.
(collectively "Moran") from 1987 to 1990. In November 1990, Laventhol &
Horwath filed a petition for reorganization under Chapter 11 of the Federal
Bankruptcy Code. In July 1992, as a result of obligations arising out of the
Laventhol & Horwath failure, Mr. Becker filed personally for reorganization
under Chapter 11 of the Federal Bankruptcy Code. Moran declared bankruptcy in
January 1990, and in July 1992 the SEC instituted a civil suit against six
former officers of Moran, including Mr. Wehner. Mr. Wehner settled the SEC
suit by consenting to the entry of an injunction relating to his future
activity in the securities business, without admitting any of the allegations
of the SEC's Complaint.
The By-laws of the Company provide that the number of directors shall be
set by the Board of Directors and that the number of directors in each class
shall be equal, or as nearly as practical. The Company's Board of Directors
consists of nine directors and one vacancy.
The Board of Directors has an Audit Committee which also acts as a
Transactions Committee, consisting of Messrs. Becker, Bolger, Henshel, and
McLaughlin, a Compensation Committee consisting of Messrs. Becker, Harmeling
and Harris and an Executive Committee consisting of Messrs. Marvin, Richard
and Michael Barasch, Mr. Bolger and Mr. Harnett. The Audit Committee is
empowered to consult with the Company's independent auditors with respect to
their audit plans and to review their audit report and the accompanying
management letters and, as the Transactions Committee, reviews and makes
recommendations to the Board on certain capital transactions entertained by
the Company. The Compensation Committee reviews and recommends compensation,
including incentive stock option grants, of officers of the Company. The
Executive Committee has the authority to act between Board meetings on behalf
of the Board, on all matters allowed by law.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and Wand Partners L.P., an affiliate of Wand/Universal
Investments L.P., I and II, the holders of all of the outstanding Series B
Preferred Stock, entered into a financial advisory agreement, dated December
30, 1994, under which such Wand affiliate renders advisory services to the
Company and is paid a fee of $100,000 per year for such services reduced by
any director's fees paid to the director designated by Wand. Such services
and fees are to continue as long as Wand owns 500,000 shares of Common Stock
or common stock equivalent.
Bertram Harnett, a director of the Company, is a shareholder in Harnett,
Lesnick & Ripps P.A. of Boca Raton, Florida, which was paid $228,284 in 1996
on account of its legal services to, as well as reimbursement for
disbursements made on behalf of the Company.
26
<PAGE>
ITEM 2 - PROPERTIES
The Company currently leases from unaffiliated parties (i) approximately
15,000 square feet of office space in Brewster, New York, under a lease
expiring in October 2001, with an earlier termination on October 31, 1997 at
the sole option of the Company (the Company notified the landlord of its
intention to terminate the lease as of October 31, 1997), (ii) 18,000 square
feet in Orlando, Florida, under a lease expiring in January, 2002; (iii)
22,000 square feet in Pensacola, Florida, under a lease expiring in November,
1997, with annual renewals at the Company's option for a period of three years
and (iv) 8,000 square feet in Miami, Florida, under a month to month lease
arrangement. These leases represent the principal offices of American
Progressive, American Pioneer and WorldNet, respectively, and carry an
aggregate annual rental of approximately $688,000. The Company also leases a
smaller office in Andalusia, Alabama, for an aggregate annual rental of
approximately $17,000.
ITEM 3 - LEGAL PROCEEDINGS
No reportable litigation was pending at December 31, 1996. The Company
is party to various lawsuits arising out of the ordinary conduct of its
business, none of which, the Company believes, would have a material adverse
effect upon the business of the Company if it were to be adversely determined.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted by the Company to a vote of
stockholders, through the solicitation of proxies or otherwise, during the
fourth quarter of the fiscal year for which this report is filed.
27
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Publicly Traded Securities
The Company's Common Stock has been traded in the over-the-counter market and
quoted on the Nasdaq National Market under the symbol UHCO since May 12,
1983. The 1999 Warrants have been so traded and so quoted, under the symbol
UHCOW, since September 1990. The following table sets forth the high and low
sales prices per share of Common Stock and 1999 Warrants as reported on the
Nasdaq National Market for the periods indicated.
Common Stock 1999 Warrants
------------ -------------
High Low High Low
1994
First Quarter 5 3-1/8 4-3/8 2-1/4
Second Quarter 4-1/8 2-5/8 2 1-3/4
Third Quarter 3-1/2 2-3/8 1-3/4 1-3/4
Fourth Quarter 3-1/2 2-1/16 1-3/4 1-3/4
1995
First Quarter 3-3/8 2-1/8 1-3/4 1-3/4
Second Quarter 3-3/4 2-5/8 1-3/4 1-3/4
Third Quarter 3-5/8 2-5/8 1-3/4 1-1/4
Fourth Quarter 3-1/8 2-1/8 1-1/4 1-1/4
1996
First Quarter 3-1/8 2-1/4 1-1/2 1-1/2
Second Quarter 3-1/8 2 1-1/4 1-1/4
Third Quarter 3-1/8 2-31/32 1-3/4 1-1/4
Fourth Quarter 2-11/16 1-1/2 1-3/8 1-1/4
1997
First Quarter (through February 28) 2-31/64 1-3/4 1-1/8 1-1/8
As of February 28, 1996, there were approximately 1,700 holders of the Common
Stock and 100 holders of the 1999 Warrants. On February 28, 1997, the bid
and ask sales prices for the Common Stock were $1-7/8 and $2-1/4. On January
30, 1997, the last date on which the 1999 Warrants were traded, the sales
price was $1-1/8.
Dividends
The Company has neither declared nor paid dividends on its Common Stock and
no such dividends are likely in the foreseeable future. Any future decision
to pay dividends will be made by the Board of Directors in light of
conditions then existing, including the Company's results of operations,
financial condition and requirements, loan covenants, insurance regulatory
restrictions, business conditions and other factors. In addition, the ability
of the Company to pay cash dividends, if and when it should wish to do so, may
depend on the ability of its subsidiaries to pay dividends to the Company.
See "Regulation--Dividend and Distribution Restrictions".
28
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ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with the consolidated financial statements of the Company, the
related notes thereto and the auditors' report thereon and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
The selected consolidated financial data presented below for, and at the end
of, each of the years from December 31, 1992 through 1995 are derived from the
consolidated financial statements of the Company, which have been audited and
reported upon by KPMG Peat Marwick LLP, independent certified public
accountants. The selected consolidated financial data presented below for,
and at the end of December 31, 1996, have been audited and reported upon by
Ernst & Young LLP, independent certified public accountants. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations".
Year ended December 31,
----------------------------------------
1992 1993 1994 1995 1996
(In thousands, except for per share data)
Income Statement Data:
Gross premium and policyholder
fees $10,588 $24,885 $40,652 $46,145 $55,287
Reinsurance premium assumed 671 616 13,564 8,866 10,522
Reinsurance premium ceded (1,515) (3,975) (13,564) (18,200) (25,664)
------- ------- ------- ------- -------
Net premium and other policyholder
fees 9,744 21,526 40,324 36,811 40,145
Net investment income 5,997 7,974 9,239 8,945 9,850
Realized gains (losses) (193) 676 42 674 240
Fee income 1,554 2,466 4,126 3,137 2,872
Other income -- 801 219 244 280
Total revenues 17,102 33,443 53,950 49,811 53,387
Total benefits, claims and other
deductions 16,709 31,818 51,712 47,161 53,014
Net income after taxes and before
extraordinary credit 145 1,553 2,228 2,642 104
Net income after taxes and
extraordinary credit(1) 393 1,553 2,228 2,642 104
Net income (loss) applicable
to common shareholders(2) (94) 1,024 3,173 2,642 104
Net income (loss) per share of
Common Stock after taxes and
extraordinary credit (0.02) 0.14 0.37 0.25 0.01
December 31,
-----------------------------------------------
1992 1993 1994 1995(3) 1996
(In thousands, except for per share data)
Balance Sheet Data:
Total investments $77,551 $123,038 $125,487 $135,603 $144,681
Total assets 95,616 153,687 164,862 182,994 242,237
Policyholder account balances 64,780 105,091 108,777 118,609 134,539
Series A Preferred Stock 6,034 6,564 -- -- --
Series B Preferred Stock -- -- 4,000 4,000 4,000
Stockholders' equity 13,902 16,377 15,321 24,114 22,079
Stockholders' equity per share
of Common Stock(4) 1.71 1.87 1.83 2.89 2.53
---------------------------
(1) The extraordinary credit reported in the year ended December 31, 1992
represents the realization of the tax benefit for operating loss
carryforwards accounted for prior to Financial Accounting Standards Board
Statement 109, "Accounting for Income Taxes," which Statement was adopted by
the Company as of January 1, 1993.
(2) After provision for Series A Preferred Stock dividends of $487,000,
$529,000 and $576,000 for the years ended December 31, 1992, 1993 and 1994,
respectively.
(3) See "Management's Discussion and Analysis of Financial Condition and
Results of OperationsCEffects of Accounting Pronouncements" for a discussion
of the impact of changes in accounting principles.
(4) Stockholders' equity per share of common stock represents stockholders'
equity less the Series A and Series B Preferred Stock divided by outstanding
shares of common stock.
29
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company is an insurance holding company representing the strategic
combination of two life insurance companies, American Progressive and American
Pioneer, and WorldNet, an international managed care company. These companies
were assembled in 1991-1993, with the Insurance Subsidiaries each being
acquired at prices approximately equal to or below their adjusted statutory
book value. Management is now focused on growth, both internal, through
aggressive marketing and product development programs directed at specialty
life and accident and health insurance products, and by seeking further
acquisitions of insurance companies or blocks of business. It also has
embarked on a program to rationalize operations through consolidation of
administrative and processing facilities.
The Insurance Subsidiaries had revenues of approximately $43.9 million,
$40.5 million and $44.5 million for the years ended December 31, 1994, 1995
and 1996, respectively, representing 91%, 93% and 95%, of the Company's
total revenues for each period, respectively. Although American Progressive,
domiciled in New York, primarily sells its products in New York and the
northeastern United States and American Pioneer, domiciled in Florida,
primarily sells its products in Florida and the southeastern United States,
one or both of the Insurance Subsidiaries is licensed in 45 states and in the
District of Columbia. American Pioneer and American Progressive have been
rated "B+" and "B" by A.M. Best, respectively. A.M. Best's ratings are based
upon factors relevant to policyholders, agents, insurance brokers and
intermediaries and are not directed to the protection of shareholders in the
rated company. See "BusinessCRatings".
Results of Operations
Years Ended December 31, 1995 and 1996
The results of operations for the year ended December 31, 1995 and 1996
include the operations of American Progressive, American Pioneer and WorldNet.
Net Income. For the year ended December 31, 1996, the Company earned
net income of approximately $104,000 resulting in an earnings per share
applicable to common shareholders of $0.01. For the year ended December 31,
1995, the Company earned net income of approximately $2,642,000, resulting in
an earnings per share of $0.25.
Operating income before income taxes decreased $2,278,000 from
$2,651,000 in 1995 to $373,000 in 1996. Certain individually large items
account for a significant amount of this decrease, including (i) a decrease in
the operating results of the NAIU accident pool participated in by American
Progressive, which decrease was $1,100,000; (ii) a decrease in realized gains
on investment of $434,000 and (iii) the $250,000 expense accrual made at
December 31, 1996 for the restructuring activity of the Company. These three
items represent $1,784,000 of the $2,278,000 decrease.
Revenues. Total revenues increased approximately $3,576,000 from total
revenues of approximately $49,811,000 for the year ended December 31, 1995 to
approximately $53,387,000 for the year ended December 31, 1996. Net premiums
and policyholder fees earned increased approximately $3,334,000. Supplemental
health insurance premiums at American Progressive increased approximately
$1,258,000 (primarily Medicare supplement, hospital indemnity and home health
care) and its life premiums grew approximately $30,000, while American
Pioneer's life premiums grew approximately $374,000 and its group dental
premiums grew approximately $919,000. The increase in these life and
supplemental health premiums of $2,581,000 was offset by the decrease of
approximately $547,000 in American Pioneer's major hospital and major medical
premiums and the decrease in American Progressive's premiums from its other
accident and health products that are no longer being actively marketed by the
Company (approximately $754,000). The Company had an increase in premiums
from the NAIU pool of $1,798,000 and the NYS DBL business of $256,000.
Realized gains on investments decreased approximately $434,000 to
approximately $240,000, compared to a gain of approximately $674,000 for the
prior year. Net investment income increased approximately $905,000 from
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$8,945,000 in 1995 to $9,850,000 in 1996. This increase is attributed to
higher invested assets in 1996 compared to 1995.
Fee income for the year ended December 31, 1996 reflects the fees earned
by WorldNet for managed care, travel assistance, claims administration and
communication services and the $450,000 deposit received by American
Progressive in connection with the sale of the New York DBL business.
WorldNet's fee income decreased by $716,000 which reduction primarily results
from the Company's termination of its service agreement with Liberty Mutual in
February, 1996. For the year ended December 31, 1996, the Company amortized
approximately $280,000 of deferred revenue compared to $244,000 amortized in
the same period in 1995.
Benefits, Claims and Other Deductions. Total benefits, claims and other
deductions increased approximately $5,754,000 to $53,014,000 for the year
ended December 31, 1996. The change in future policy benefits amounted to an
increase of approximately $3,192,000. The increase in reserves for the year
ended December 31, 1996 was $1,855,000 and primarily relates to the increase
in life reserves at American Pioneer of $971,000, the increase in the unearned
premium reserve at NAIU of $256,000 and the increase in the senior market
supplemental health insurance unearned premium reserves of $628,000. This
increase compares to a decrease in 1995 of approximately $1,337,000, which
decrease in 1995 primarily relates to the reduction in the 1995 NAIU premium
($491,000), the runoff accident and health business of American Progressive
($827,000) and the major hospital and major medical of American Pioneer
($430,000) offset by an increase in the senior market supplemental health
insurance reserves ($559,000). Claims and other benefits increased
approximately $1,676,000. This increase is a result of increased mortality of
approximately $516,000, increased American Progressive's senior market
supplemental health benefits of approximately $1,062,000 and the claims
incurred on the First National business acquired of $1,077,000, and increased
morbidity of $388,000 on the group dental business. The runoff health
business at both insurance companies had a reduction in benefits totalling
$3,145,000 due to the decision to reinsure 75% of the major hospital and major
medical benefits at American Pioneer. The benefits incurred on the NAIU
business increased $1,083,000 and NYS DBL benefits increased $695,000. The
increase in deferred acquisition costs decreased approximately $1,106,000 and
was due to the decrease in capitalized expenses of $228,000 and the increase
in amortization of $878,000.
Commissions decreased $265,000 to $5,076,000 for the year ended December
31, 1996. The increase in gross commissions of $4,967,000 was due to the
increase in gross premiums noted above, offset by a corresponding increase in
reinsurance allowances of $5,231,000. Other operating costs and expenses
decreased approximately $175,000. Expenses incurred by the insurance
subsidiaries during 1996 exceeded the 1995 amount by approximately $1,405,000.
New business expenses and premium taxes increased approximately $166,000, the
expenses incurred on the administration of the acquired First National
business amounted to $550,000, while the expense incurred by the NAIU accident
pool decreased $397,000. The general overhead expenses of the insurance
companies increased approximately $1,086,000 which increase directly relates
to the increase in business being administered by the Company. These
administrative general expense increases are partially recovered from the
increase in this reinsurance allowances noted above. The remaining decrease
of $1,580,000 results from a decrease of continuing operation expenses
incurred by WorldNet (approximately $1,292,000) and a decrease in the Parent
Company expenses ($288,000). Amortization of the present value of future
profits was approximately $205,000 for 1995, which amount fully amortized the
asset.
Years Ended December 31, 1994 and 1995
The results of operations for the year ended December 31, 1994 and 1995
include the operations of American Progressive, American Pioneer and WorldNet.
Net Income. For the year ended December 31, 1995, the Company earned
net income of approximately $2,642,000 resulting in an earnings per share
applicable to common shareholders of $0.25. For the year ended December 31,
1994, the Company earned net income of approximately $2,228,000 before its
dividend requirement on the Series A Preferred Stock, which dividend amounted
to approximately $576,000, resulting in an earnings per share of $0.20. On
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December 30, 1994, the Company redeemed the Series A Preferred Stock at a
discount of approximately $1,522,000 ($0.17 per share), which discount
increased the 1994 net income applicable to common shareholders to
approximately $3,173,000, or $0.37 per share.
Revenues. Total revenues decreased approximately $4,138,000 from total
revenues of approximately $53,950,000 for the year ended December 31, 1994 to
approximately $49,812,000 for the year ended December 31, 1995. Total
premiums and policyholder fees earned decreased approximately $3,514,000.
Supplemental health insurance premiums at American Progressive increased
approximately $1,842,000 (primarily in NYS DBL, Medicare supplement and
hospital indemnity) and its life premiums grew approximately $340,000, while
American Pioneer's life premiums grew approximately $656,000 and its group
dental premiums grew approximately $892,000. The increase in these life and
supplemental health premiums of $3,730,000 was offset by the decrease of
approximately $4,757,000 in American Pioneer's major hospital and major
medical premiums and the decrease in American Progressive's premiums from its
participation in NAIU accident pool (approximately $1,531,000) and other
accident and health products that are no longer being actively marketed by the
Company (approximately $956,000). Realized gains on investments increased
approximately $632,000 to approximately $674,000, compared to a gain of
approximately $42,000 for the prior year, and are primarily attributed to
increasing interest rates throughout 1995. As a result of realizing these
investment gains, net investment income decreased approximately $293,000.
Fee income for the year ended December 31, 1995 decreased approximately
$988,000 which reflects the fees earned by WorldNet for managed care, travel
assistance, claims administration and communication services. This reduction
is a result of the Company's termination of certain nonprofitable contracts.
For the year ended December 31, 1995, the Company amortized approximately
$244,000 of the deferred revenue compared to the $219,000 amortized in the
same period in 1994, which increase is attributable to the $80,000 of
additional amortization generated by the 75% quota share reinsurance agreement
effected on July 1, 1995. See "Business-Reinsurance Ceded".
Benefits, Claims and Other Deductions. Total benefits, claims and other
deductions decreased approximately $4,551,000 to $47,161,000 for the year
ended December 31, 1995. The change in future policy benefits amounted to a
decrease of approximately $4,267,000. The decrease in reserves for the year
ended December 31, 1995 was $1,337,000 and primarily relates to the reduction
in the 1995 NAIU premium, (approximately $491,000) the non-marketed accident
and health business of American Progressive ($827,000) and the major hospital
and major medical of American Pioneer ($430,000) offset by an increase in the
supplemental health insurance reserves currently being sold (approximately
$559,000). This decrease compares to an increase in 1994 of approximately
$2,930,000, which increase in 1994 primarily relates to the increase in
reserves of American Progressive when it entered the NAIU accident pool and
assumed the North American Company businesses of approximately $2,556,000 (See
"Business - Reinsurance"). Claims and other benefits increased approximately
$1,247,000. This increase is a result of increased mortality of approximately
$344,000 at American Progressive and increased supplemental health benefits of
approximately $2,456,000 and increased morbidity of approximately $651,000 on
the non-marketed health business at both insurance companies. This increase
was offset by a reduction of approximately $2,204,000 in major hospital and
major medical benefits at American Pioneer, which reduction is a result of the
lower premium revenue discussed above. Interest credited to policyholders
increased $173,000 to $6,090,000 due to higher outstanding policyholder
account balances in 1995. The increase in deferred acquisition costs
increased approximately $386,000 and was due to the increase in new business
production noted above.
Commissions and other operating costs and expenses decreased
approximately $1,286,000. Expenses incurred by the insurance subsidiaries
during 1995 exceeded the 1994 amount by approximately $151,000. Commissions,
new business expenses and premium taxes increased approximately $509,000,
while the general overhead expenses decreased approximately $358,000. The
remaining decrease of $1,437,000 results from a decrease of continuing
operation expenses incurred by WorldNet (approximately $1,708,000) resulting
from the termination of certain unprofitable contracts, (approximately
$1,208,000) and the relocation of WorldNet to Florida from Texas in 1994
(approximately $500,000) offset by an increase by the Parent Company
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(approximately $271,000). Amortization of the present value of future profits
was approximately $205,000 for 1995 compared to $237,000 in 1994, which
decrease is due to the lower amount of insurance in force.
Liquidity and Capital Resources
The Company's need for capital has historically been to maintain or
increase the surplus of its Insurance Subsidiaries and to support the Company
as an insurance holding company, including the maintenance of its status as a
public company. In addition, the Company requires capital to fund its
anticipated growth through acquisitions of other companies and blocks of
insurance business.
The Company
The Company requires cash to pay the operating expenses necessary to
support its status as an insurance holding company (which under applicable
Insurance Department regulations must bear its own expenses) and to meet the
cost involved in being a publicly-owned company and will require cash to meet
Universal's obligations under the Unstacking Agreement and the debentures to
be issued thereunder. The $3 million of cash required to fund the initial
segment of the Unstacking Agreement is expected to be provided by the sale of
at least $4 million of Series C Preferred Stock, the completion of which is
awaiting approval of the transaction by the Florida Insurance Department.
On September 30, 1996, the Company amended its loan agreement with its
commercial bank, under which amendment, the Company borrowed $800,000 on a one
year term loan, extendable by the Company for a second year. The loan is
secured by the pledge of 100% of the outstanding common stock of Quincy
Coverage Corp. ("Quincy"), an immaterial subsidiary engaged in the insurance
brokerage business, the receivables of Quincy and WorldNet and 9.9% of the
outstanding common stock of American Progressive. As of December 31, 1995 and
December 31, 1996, $800,000 was outstanding on this loan agreement, which
bears interest at 1.0% over prime.
Insurance Subsidiaries
American Progressive and American Pioneer are required to maintain
minimum amounts of capital and surplus as determined by statutory accounting.
The minimum statutory capital and surplus requirements of American
Progressive and American Pioneer as of December 31, 1996 for the maintenance
of authority to do business were $2,500,000 and $2,130,000, respectively, but
substantially more than this is needed to permit continued writing of new
business. At December 31, 1996 the adjusted statutory capital and surplus,
including asset valuation reserve, of American Progressive and American
Pioneer were $7,920,366 and $13,379,191 respectively.
The NAIC has adopted risk based capital ("RBC") rules which became
effective December 31, 1993 and have been adopted by both New York and
Florida. See "RegulationCRisk-Based Capital Requirements" The new RBC rules
provide for various actions when the ratio of a company's total adjusted
surplus to its RBC falls below 200%. At December 31, 1996, American
Progressive and American Pioneer had RBC ratios of approximately 261% and 795%
of the Authorized Control Level, respectively. Consummation of the Unstacking
Agreement is expected to increase American Progressive's RBC ratio.
Liquidity for the life insurance subsidiaries is measured by their
ability to pay scheduled contractual benefits, pay operating expenses, and
fund investment commitments. Sources of liquidity include scheduled and
unscheduled principal and interest payments on investments, premium payments
and deposits and the sale of liquid investments. These sources of liquidity
for the insurance subsidiaries significantly exceed scheduled uses.
Liquidity is also affected by unscheduled benefit payments including
death benefits, benefits under accident and health policies and interest-
sensitive policy surrenders and withdrawals. The amount of surrenders and
withdrawals is affected by a variety of factors such as credited interest
rates for similar products, general economic conditions and events in the
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industry which affect policyholders' confidence. Although the contractual
terms of substantially all of the Company's in force life insurance policies
and annuities give the holders the right to surrender the policies and
annuities, the Company imposes penalties for early surrenders. At December
31, 1996 the Company held reserves that exceeded the underlying cash surrender
values of its in force life insurance and annuities by more than $12.9
million. The insurance companies have not experienced any material changes in
surrender and withdrawal activity in recent years.
Changes in interest rates may affect the incidence of policy surrenders
and withdrawals. In addition to the potential impact on liquidity,
unanticipated surrenders and withdrawals in a changed interest rate
environment could adversely affect earnings if the Company were required to
sell investments at reduced values in order to meet liquidity demands. The
Company manages the asset and liability portfolios in order to minimize the
adverse earnings impact of changing market rates. The Company seeks to invest
in assets which have duration and interest spread characteristics similar to
the liabilities which they support.
The net yield on cash and invested assets increased from 6.97% in 1995
to 7.08% in 1996. A significant portion of these securities are held to
support the liabilities for policyholder account balances, which liabilities
are subject to periodic adjustments to their credited interest rates. The
credited interest rates of the interest-sensitive policyholder account
balances are determined by management based upon factors such as portfolio
rates of return and prevailing market rates and typically follow the pattern
of yields on the assets supporting these liabilities.
At December 31, 1996, the investment portfolios of the life insurance
subsidiaries included cash and short-term investments totaling $15,044,000, as
well as fixed maturity securities that could readily be converted to cash with
carrying values (and fair values) of $121,492,000. The fair values of these
liquid investments totalled more than $136,536,000 and constituted
approximately 94% of the Company's investments at December 31, 1996. At
December 31, 1996, all of the Company investments were income producing and
current in interest and principal payments except for one security with a
carrying value of $331,250. In addition, the Company has no investment in any
derivative instruments or other hybrid securities that contain any off balance
sheet risk or investments in other securities whose fair values and principal
repayments would be highly volatile to changes in interest rates, except for
GNMA's, FNMA's and investment grade corporate collateralized mortgage
obligations.
WorldNet
In February, 1996, the service agreement between WorldNet and Ontario
Blue Cross ("OBC"), which had been entered into in 1994 in connection with
WorldNet's purchase of certain assets from subsidiaries of OBC was terminated.
The termination of the service agreement was the result of the acquisition of
OBC by Liberty Mutual Insurance Company ("Liberty Health") in 1995.
Simultaneously with the termination of the service agreement, Liberty Mutual
agreed to cancel certain promissory notes executed on April 1, 1994 as part
payment for the acquired assets, which had a balance of $370,000 at December
31, 1996. At the same time, the Company wrote off the corresponding assets,
including the value of the $170,000. The resulting net income from this
transaction was approximately $200,000.
Through December 31, 1995, the Company had provided approximately $3.4
million to WorldNet with no additional funding required during 1996. These
funds were used to support WorldNet's start-up costs, a portion of the costs
of acquiring the HAT assets and the cost of acquiring WorldNet's Dallas, Texas
facility and later closing it and relocating certain of its operations to the
facility purchased from HAT in Miami Beach, Florida. WorldNet's revenues were
$4,068,000, $3,071,000 and $2,172,000 for 1994, 1995 and 1996, respectively.
WorldNet incurred a net loss of approximately $1,375,000, $665,000 and
$271,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
The 1996 loss included certain non-cash expenses amounting to $136,000.
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Effects of Accounting Pronouncements
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement 115, "Accounting for Certain Debt and Equity Securities", which is
effective for fiscal years beginning after December 15, 1993, with earlier
adoption permitted. Statement 115 requires that debt and equity securities be
classified into three categories and accounted for as follows:
* Debt securities that the Company has the positive intent and
the ability to hold to maturity would be classified as "held to
maturity" and reported at amortized cost.
* Debt and equity securities that are held for current resale
would be classified as "trading securities" and reported at fair value,
with unrealized gains and losses included in earnings.
* Debt and equity securities not classified as held to
maturity or as trading securities would be classified as "available for
sale" and reported at fair value. Unrealized gains and losses would not
be reflected in earnings but would be reported as a separate component
of stockholders' equity.
The Company adopted Statement 115 on January 1, 1994, the effect of
which increased its unrealized gains by $494,541. In November, 1995, the FASB
issued a Special Report titled "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities", which
report allows enterprises to reassess the appropriateness of the
classifications of all securities held and account for any resulting
reclassifications between the investment accounts. This one-time reassessment
had to be made prior to December 31, 1996 and be appropriately disclosed in
the financial statements. In December, 1995, the Company did reassess the
appropriateness of the classifications of its securities and reclassified all
of the securities contained in the held to maturity account to the available
for sale account as they may be considered for sale prior to maturity as part
of the asset/liability management strategy. The carrying value of the
securities reclassed to available for sale amounted to $35,942,303 and the
fair value amounted to $36,098,026. This transfer resulted in the Company
increasing its unrealized gains by $155,723. As changes in interest rates
occur, the carrying value of the securities classified as available for sale,
as well as any securities which may in the future be classified as held for
maturity, will be impacted. Typically, as interest rates rise, the carrying
value of these securities may decline. Conversely, if interest rates decline,
the carrying value of these securities may increase. Management cannot
predict the impact that changes in future interest rates will have on the
Company's financial statements.
In October, 1995, the FASB issued Statement 123, "Accounting for Stock-
Based Compensation" (Statement 123) which requires companies to recognize
compensation expense for stock options based on their fair value on the date
of grant and is effective for financial statements for fiscal years beginning
after December 15, 1995, with earlier adoption permitted. Statement 123
allows companies to remain under the existing method of accounting for stock
options, Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25). If companies elect to remain under APB 25 then
the companies are required to disclose the pro forma effects of Statement 123
on their net income and earnings per share resulting from the grant of these
options and other stock awards. Under APB 25, to the extent the exercise
price of the Company's stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized. The
Company has elected to follow APB 25 and related interpretations in accounting
for its stock options and will disclose the pro forma effects of Statement 123
on the Company's net income and earnings per share in the footnotes to the
financial statements. The pro forma effects of Statement 123 result in
additional compensation expense for December 31, 1995 and 1996 of $10,756 and
$133,208, respectively. The results of which reduce earnings per share for
December 31, 1995 and 1996, on a pro forma basis, $0.00 and $0.01,
respectively.
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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary schedules are listed in the
accompanying Index to Consolidated Financial Statements and Financial
Statement Schedules on Page F - 1.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 15, 1996, the Board of Directors of the Company approved the
engagement of Ernst & Young, LLP as its independent auditors for the fiscal
year ending December 31, 1996 to replace the firm of KPMG Peat Marwick, LLP,
who were dismissed as auditors of the Company effective July 15, 1996. The
audit committee of the Board of Directors approved the change in auditors on
July 15, 1996.
The reports of KPMG Peat Marwick LLP on the Company=s financial
statements for the two fiscal years ended December 31, 1995 did not contain an
adverse opinion or a disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope, or accounting principles.
In connection with the audits of the Company=s financial statements for
each of the two fiscal years ended December 31, 1995 and 1994, and in the
subsequent interim period, there were no disagreements with KPMG Peat Marwick
LLP on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not resolved to the
satisfaction of KPMG Peat Marwick LLP, would have caused KPMG Peat Marwick LLP
to make reference to the matter in their report.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the Registrant
is set forth in Part I, Item 1, under the caption "Executive Officers and
Directors".
ITEM 11 - EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by
reference to Universal American Financial Corp.'s definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934 within 120 days after the end of the Company's fiscal year ended December
31, 1996.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of Universal American
Financial Corp.'s voting securities by directors, officers and persons who, to
the best knowledge of the Company, are known to be the beneficial owners of
more than 5% of the Company's voting securities as of December 31, 1996, is
incorporated by reference to Universal American Financial Corp.'s definitive
proxy statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 within 120 days after the end of the Company's fiscal
year ended December 31, 1996.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference to Universal American Financial Corp.'s definitive
proxy statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 within 120 days after the end of the Company's fiscal
year ended December 31, 1996.
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PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2 Financial Statements and Financial Statement Schedules
See separate index to Financial Statements and Financial Statement
Schedules on Page F - 1.
3 Exhibits and Reports on Form 8-K
(a) Exhibits
3(a) Restated Certificate of Incorporation, consisting of :
(i) Restated Certificate of Incorporation filed October 4,
1993, is hereby incorporated by reference to Exhibit
3(a)(3) to Form 10-Q dated November 11, 1994.
(ii) Certificate of Correction of Restated Certificate of
Incorporation, dated December 13, 1993, is hereby
incorporated by reference to Exhibit 3(a)(2) to Form
10-K dated March 28, 1994.
(iii) Certificate of Amendment to Restated Certificate of
Incorporation relating to Series B Peferred Stock, is
hereby incorporated by reference to Exhibit 3.2(III)
to Form 8-K dated January 18, 1995.
3(b) By-Laws, as amended, are hereby incorporated by
reference to Exhibit 3(b) to Form 10-K for 1989.
4(a) Form of Warrant Certificate:
(i) for Warrants registered under the Exchange Act of
1934, as amended, is hereby incorporated by reference
to Exhibit 4 to Current Report on Form 8-K dated July
24, 1992; and
(ii) for Warrants not so registered under the Exchange Act
of 1934, is hereby incorporated by reference to
Exhibit 4.2 to Form S-1 filed March 30, 1990, as
amended by the Warrant Exchange Agreement dated July
15, 1992, filed as Exhibit 28(I) to Current Report on
Form 8-K dated July 24, 1992.
10(a) Agreement dated March 7, 1994 among Registrant and Midland with
Exhibit A is hereby incorporated by reference to Exhibit 10(d)(1)
to Form 10-K for 1993.
10(b) Stock Subscription Agreement as of August 12, 1994, between
Registrant and Wand/Universal L.P., as amended by Agreement dated
November 23, 1994 is incorporated by reference to Exhibit 10(e) to
Current Report on Form 8-K dated August 12, 1994 and Exhibit
10.4(1) to Current Report on Form 8-K dated January 18, 1995.
10(c) Financial Advisory Agreement as of September 1, 1994 between
Registrant and Wand Partners L.P. is incorporated by reference to
Exhibit 10(f) to Current Report on Form 8-K dated August 12, 1994.
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10(d) Shareholder Agreement among the Registrant, Wand/Universal
Investments L.P., Barasch Associates Limited Partners and Others,
dated December 30, 1994 is incorporated by reference to Exhibit
10(d) to Form 10-K for 1994.
10(e) Special Commitments to the Superintendent of Insurance of the
State of New York, dated January 6, 1995, signed by:
(i) the Registrant, American Progressive, BALP and NMRB
Corp. and
(ii) WAND, Wand (Universal) Inc., David S. Callard and
Bruce W. Schnitzer are incorporated by reference to
Exhibit 10(e) to Form 10-K for 1994.
10(f) Loan Agreement between Registrant and Country Bank, dated
September 30, 1994, incorporated by reference to Exhibit 10(e) of
Form 10-Q dated November 11, 1994.
10(g) Stock purchase agreement between Registrant and AAM Capital
Partners, L.P. dated July 7, 1997, including:
(i) Exhibit 10, proposed Certificate of Amendment of
Incorporation relating to Series C Preferred Stock;
and
(ii) Exhibit 11, proposed shareholder agreement. The
other exhibits and schedules to this agreement are
omitted and will be furnished upon request.
11 Computation of primary earnings per share.
22 List of Subsidiaries:
Name Place of Incorporation
---------------------------------- ----------------------------
American Progressive Life & Health
Insurance Company of New York New York
American Pioneer Life Insurance Co. Florida
Amerifirst Insurance Company Indiana
Quincy Coverage Corporation New York
WorldNet Services Corporation Florida
WorldNet Services Corporation Ontario, Canada
23(a) Consent of Ernst & Young, LLP
23(b) Consent of KPMG Peat Marwick LLP
(b) Reports on Form 8-K
On October 21, 1996 and December 20, 1996 the Company filed
Current Reports on Form 8-K to report the assumption of business
from First National Life Insurance Company.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 28th day of
March 1997.
UNIVERSAL AMERICAN FINANCIAL CORP.
(Registrant)
By: /s/ Richard A. Barasch
----------------------
Richard A. Barasch
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 28, 1997 by the following persons
in the capacities indicated:
Signatures Title
---------- -----
/s/ Richard A. Barasch President and Chief Executive Officer
- - ----------------------- and Director
Richard A. Barasch (Principal Executive Officer
/s/ Marvin Barasch Chairman of the Board and Director
- - -----------------------
Marvin Barasch
/s/ Robert A. Waegelein Senior Vice President and Chief
- - ----------------------- Financial Officer
Robert A. Waegelein (Principal Accounting Officer)
/s/ Michael A. Barasch Director
- - -----------------------
Michael A. Barasch
/s/ Stuart Becker Director
- - -----------------------
Stuart Becker
Director
- - -----------------------
David F. Bolger
/s/ Mark M. Harmeling Director
- - -----------------------
Mark M. Harmeling
/s/ Bertram Harnett Director
- - -----------------------
Bertram Harnett
/s/ Walter L. Harris Director
- - -----------------------
Walter L. Harris
Director
- - -----------------------
Harry B. Henshel
/s/ Patrick J. McLaughlin Director
- - -------------------------
Patrick J. McLaughlin
38
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES OF THE REGISTRANT:
Independent Auditors' Reports F-2 & F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996 F-4
Consolidated Statements of Operations
for the Three Years Ended December 31, 1996 F-5
Consolidated Statements of Stockholders' Equity
for the Three Years Ended December 31, 1996 F-6
Consolidated Statements of Cash Flows
for the Three Years Ended December 31, 1996 F-7
Notes to Consolidated Financial Statements F-9
Schedule I -- Summary of Investments - other than investments in
related parties (incorporated in Note 4 to Consolidated Financial
Statements)
Schedule II -- Condensed Financial Information of Registrant F-30
Schedule III -- Supplementary Insurance Information F-33
Schedule IV -- Reinsurance (incorporated in Note 8 of Notes to
Consolidated Financial Statements)
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Universal American Financial Corp.:
We have audited the accompanying consolidated balance sheet as of December 31,
1996 and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1996 of Universal
American Financial Corp. and subsidiaries. Our audit also included the
consolidated financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statements
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Universal
American Financial Corp. and subsidiaries as of December 31, 1996, and the
results of their operations and their cash flows for the year ended December
31, 1996 in conformity with generally accepted accounting principles. Also in
our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects, the information set forth therein.
Ernst & Young, LLP
New York, New York
March 26, 1997
F-2
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Universal American Financial Corp.:
We have audited the accompanying consolidated balance sheet as of December 31,
1995 and the related statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1995 and 1994 of Universal American
Financial Corp. and subsidiaries. In connection with our audits of the
consolidated financial statements, we also have audited the consolidated
financial statement schedules for the periods indicated above as listed in the
accompanying index. These consolidated financial statements and financial
statements schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Universal
American Financial Corp. and subsidiaries as of December 31, 1995, and the
results of their operations and their cash flows for each of the years in the
two year period ended December 31, 1995 in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for debt and equity securities in 1994 to
adopt the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities".
KPMG Peat Marwick LLP
New York, New York
March 26, 1996
F-3
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1996
<TABLE>
<CAPTION>
ASSETS 1995 1996
----------- -----------
<S> <C> <C>
Investments (Notes 2c and 4)
Cash and cash equivalents $ 12,289,801 $ 15,403,450
Fixed maturities available for sale, at fair
value (amortized cost $114,112,556 and
$122,511,012, respectively) 116,428,921 121,492,167
Equity securities, at fair value (cost $46,133
and $46,133, respectively) 15,297 33,562
Policy loans 5,622,136 6,421,251
Property tax liens 178,908 131,729
Mortgage loans 1,067,605 1,199,110
----------- -----------
Total investments 135,602,668 144,681,269
Accrued investment income 2,412,576 2,875,497
Deferred policy acquisition costs (Note 2d) 16,564,450 19,091,514
Amounts due from reinsurers 17,635,580 60,838,289
Due and unpaid premiums 2,826,833 2,712,021
Deferred income tax asset (Note 5) 1,328,314 2,069,876
Goodwill --- 3,529,529
Other assets 6,623,966 6,438,743
----------- -----------
Total assets 182,994,387 242,236,738
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policyholder account balances (Note 2e) 118,608,836 134,538,954
Reserves for future policy benefits 22,099,350 40,156,185
Policy and contract claims - life 693,679 1,186,702
Policy and contract claims - health 8,681,136 24,628,019
Short-term debt (Note 9) 800,000 800,000
Notes payable (Notes 3 & 6) 369,698 ---
Amounts due to reinsurers 1,294,295 11,129,232
Deferred revenues 638,293 357,957
Other liabilities 5,694,824 7,361,163
----------- -----------
Total liabilities 158,880,111 220,158,212
Commitments and contingencies (Note 10) --- ---
STOCKHOLDERS' EQUITY (Note 6)
Series B preferred stock (Issued and outstanding
400 and 400, respectively) 4,000,000 4,000,000
Common stock (Authorized 20,000,000; issued and
outstanding 6,957,532 and 7,149,221, respectively) 69,575 71,492
Common stock warrants (Authorized, issued and
outstanding 679,621 and 668,481, respectively --- ---
Additional paid-in capital 15,849,542 16,049,888
Net unrealized investment gains (losses) (Note 4) 1,369,651 (972,237)
Retained earnings 2,825,508 2,929,383
----------- -----------
Total stockholders' equity 24,114,276 22,078,526
----------- -----------
Total liabilities and stockholders' equity $182,994,387 $242,236,738
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended December 31, 1996
<TABLE>
<CAPTION>
REVENUES: (Notes 2e and f) 1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Gross premium and policyholder fees earned $40,652,820 $46,145,360 $55,286,610
Reinsurance premiums assumed 13,563,982 8,866,010 10,521,987
Reinsurance premiums ceded (13,892,322) (18,200,433) (25,663,224)
---------- ---------- ----------
Net premiums and policyholders
fees earned (Note 8) 40,324,480 36,810,937 40,145,373
Net investment income (Note 4) 9,238,789 8,945,280 9,850,083
Realized gains on investments (Note 4) 41,568 673,868 240,075
Fee income 4,125,753 3,137,294 2,871,319
Amortization of deferred revenue (Note 2g) 219,261 244,202 280,335
---------- ---------- ----------
Total revenues 53,949,851 49,811,581 53,387,185
BENEFITS, CLAIMS AND OTHER DEDUCTIONS:
Increase (decrease) in future policy benefits 2,929,747 (1,337,161) 1,854,539
Claims and other benefits 21,120,441 22,367,066 24,042,876
Interest credited to policyholders 5,916,936 6,089,860 6,614,176
Increase in deferred acquisition costs (2,977,769) (3,317,523) (2,257,617)
Amortization of present value of future profits 236,716 204,564 ---
Commissions 7,471,754 5,340,278 5,075,622
Other operating costs and expenses 17,014,295 17,813,643 17,684,697
---------- ---------- ----------
Total benefits, claims and other deductions 51,712,120 47,160,727 53,014,293
---------- ---------- ----------
Operating income before income taxes 2,237,731 2,650,854 372,892
Federal income tax expense (Note 5) 9,974 9,032 269,017
---------- ---------- ----------
Net income 2,227,757 2,641,822 103,875
Dividends on Series A preferred stock (Note 6) (575,961) --- ---
Discount on the redemption of Series A
preferred stock (Note 6) 1,521,695 --- ---
---------- ---------- ----------
Net income applicable to common shareholders $ 3,173,491 $ 2,641,822 $ 103,875
========== ========== ==========
Earnings per common share:
Net income per common share $ 0.37 $ 0.25 $ 0.01
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended December 31, 1996
<TABLE>
<CAPTION>
NET
SERIES A SERIES B ADDITIONAL UNREALIZED RETAINED
PREFERRED PREFERRED COMMON PAID-IN INVESTMENT EARNINGS
STOCK STOCK STOCK CAPITAL GAIN (LOSS) (DEFICIT) TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 6,563,796 $ --- $ 52,463 $12,538,935 $ 211,451 $(2,989,805) $16,376,840
Issuance of common stock --- --- 9,300 1,962,954 --- --- 1,972,254
Implementation of
Statement No. 115 --- --- --- --- 494,541 --- 494,541
Change in net unrealized
investment gain(loss) --- --- --- --- (4,132,738) --- (4,132,738)
Net income --- --- --- --- --- 2,227,757 2,227,757
Series A preferred stock dividends 575,961 --- --- --- --- (575,961) ---
Redemption of Series
A preferred stock (7,139,757) --- --- --- --- 1,521,695 (5,618,062)
Issuance of Series
B preferred stock --- 4,000,000 --- --- --- --- 4,000,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 --- 4,000,000 61,763 14,501,889 (3,426,746) 183,686 $15,320,592
Issuance of common stock --- --- 7,812 1,347,653 --- --- 1,355,465
Transfer of investments from
held to maturity to available
for sale --- --- --- --- 155,723 --- 155,723
Change in net unrealized
investment gain(loss) --- --- --- --- 4,640,674 --- 4,640,674
Net income --- --- --- --- --- 2,641,822 2,641,822
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 --- 4,000,000 69,575 15,849,542 1,369,651 2,825,508 24,114,276
Issuance of common stock --- --- 1,917 200,346 --- --- 202,263
Change in net unrealized
investment gain (loss) --- --- --- --- (2,341,888) --- (2,341,888)
Net income --- --- --- --- --- 103,875 103,875
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 $ --- $ 4,000,000 $ 71,492 $16,049,888 $ (972,237) $ 2,929,383 $22,078,526
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended December 31, 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,227,757 $ 2,641,822 $ 103,875
Adjustments to reconcile net
income to net cash used by
operating activities:
Change in reserves for future policy
benefits 6,459,856 (575,449) 3,526,269
Change in policy and contract claims 86,385 (158,474) 677,167
Change in deferred policy acquisition
costs (2,977,769) (3,317,523) (2,257,617)
Amortization of present value of
future profits 236,716 204,564 ---
Change in deferred revenue (219,261) (244,202) (280,336)
Change in policy loans (618,900) (111,995) (746,103)
Change in accrued investment income (184,583) (260,817) (427,870)
Change in reinsurance balance (3,618,516) (4,596,165) (11,773,467)
Realized gains on investment (41,568) (673,868) (240,075)
Other, net (1,224,772) 1,010,861 1,509,292
----------- ----------- -----------
Net cash (used by) provided from
operating activities 125,345 (6,081,246) (9,908,865)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of fixed
maturities available for sale 53,509,107 50,442,336 18,329,599
Proceeds from sale of fixed
maturities held to maturity 187,500 928,180 ---
Proceeds from redemption of fixed
maturities available for sale 6,250,281 8,049,240 25,436,976
Proceeds from redemption of fixed
maturities held to maturity 7,084,125 2,210,089 ---
Cost of fixed maturities purchased
available for sale (65,538,303) (68,529,621) (48,466,456)
Cost of fixed maturities purchased
held to maturity (15,306,019) (795,741) ---
Proceeds from sale of equity
securities --- --- 506,250
Cost of equity securities purchased (46,133) --- (501,250)
Change in other invested assets 4,761,115 76,571 269,702
Purchase of business, net of cash
acquired (502,843) --- 1,685,010
----------- ----------- -----------
Net cash used by investing activities (9,601,170) (7,618,946) (2,740,169)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of
common stock 1,972,254 1,355,465 202,263
Proceeds from the issuance of
Series B preferred stock 4,000,000 --- ---
Redemption of the Series A
preferred stock (4,000,000) --- ---
Increase in policyholder account
balances 3,686,182 9,831,827 15,930,118
Change in short-term debt 400,000 --- ---
Change in notes payable 369,698 (1,618,062) (369,698)
----------- ----------- -----------
Net cash provided from financing
activities 6,428,134 9,569,230 15,762,683
----------- ----------- -----------
Net (decrease) increase in cash and
cash equivalents (3,047,691) (4,130,962) 3,113,649
Cash and cash equivalents at
beginning of year 19,468,454 16,420,763 12,289,801
----------- ----------- -----------
Cash and cash equivalents at end of year $16,420,763 $12,289,801 $15,403,450
=========== =========== ===========
(Continued)
</TABLE>
F-7
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
For the Three Years Ended December 31, 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 38,650 $ 96,289 $ 83,852
=========== =========== ===========
Income taxes $ --- $ --- $ ---
=========== =========== ===========
Supplemental schedule of non-cash investing and
financing activities:
Implementation of Statement 115 (Note 2c):
Transfer of securities from available
for sale to held to maturity $16,624,288 $ --- $ ---
=========== ============ ===========
Transfer of securities held to
maturity to available for sale $18,780,607 $ 36,098,026 $ ---
=========== ============ ===========
</TABLE>
On December 30, 1994, the Company redeemed the Series A preferred stock at a
discount for part cash and issuanceof a debenture (see Note 6).
Liquidation preference $ 7,139,757
Cash paid (4,000,000)
Fair value of debenture issued (1,618,062)
-----------
Amount credited to retained earnings $ 1,521,695
===========
See notes to consolidated financial statements.
F-8
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND COMPANY BACKGROUND:
------------------------------------
Universal American Financial Corp. (the "Company" formerly Universal
Holding Corp.) was incorporated under the laws of the State of New York in
August 1981, for the purpose of conducting insurance and related business
primarily through its then wholly-owned subsidiary, John Adams Life Insurance
Company of New York ("John Adams"). On May 17, 1991, the Company acquired
100% of the outstanding common stock of American Progressive Life & Health
Insurance Company of New York ("American Progressive") and on June 27, 1991
merged John Adams into American Progressive. In 1988, the Company organized
Quincy Coverage Corp. ("Quincy") an insurance agent and broker. In January,
1992, the Company began operations in WorldNet Services Corp. ("WorldNet"), a
provider of managed care and assistance to travelers. On May 26, 1993, the
Company acquired 100% of the outstanding common stock of American Pioneer Life
Insurance Company ("American Pioneer") (see Note 3).
The Company's marketing emphasis is to sell a narrow line of products,
particularly appealing to the senior market place, and largely through
marketing organizations with concentrations in this market. The Company began
to sell senior market life and accident and health insurance products in 1993
in New York and has expanded its sales effort to Florida. The momentum into
Florida was accelerated by the acquisition of business from First National
Life Insurance Company. (See Note 3). The core products sold to the senior
age market include Medicare supplement, home health care, nursing home,
hospital indemnity and senior life insurance. In addition, the Company sells
certain program life insurance and annuity products through independent
marketing organizations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
a. Basis of Presentation: The significant accounting policies
followed by Universal American Financial Corp. and subsidiaries
that materially affect financial reporting are summarized below.
The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles (GAAP) which, as to American Progressive and American
Pioneer, differ from statutory accounting practices prescribed or
permitted by regulatory authorities. The preparation of financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the
reported revenues and expenses during the reporting period.
Actual results could differ from those estimates.
b. Principles of Consolidation: The accompanying consolidated
financial statements include the accounts of Universal American
Financial Corp. and its wholly-owned subsidiaries. All material
intercompany transactions and balances have been eliminated.
c. Investments: Investments are shown on the following bases:
In May, 1993, the Financial Accounting Standards Board ("FASB")
issued Statement 115, "Accounting for Certain Debt and Equity
Securities" and is effective for fiscal years beginning after
December 15, 1993, with earlier adoption permitted. Statement 115
requires that debt and equity securities be classified into three
categories and accounted for as follows: Debt securities that the
Company has the positive intent and the ability to hold to
maturity would be classified as "held to maturity" and reported at
amortized cost. Debt and equity securities that are held for
current resale would be classified as "trading securities" and
reported at fair value, with unrealized gains and losses included
in earnings. Debt and equity securities not classified as held to
maturity or as trading securities would be classified as
"available for sale" and reported at fair value. Unrealized gains
and losses would be excluded from earnings and reported as a
separate component of stockholders' equity, net of tax.
F-9
<PAGE>
The Company adopted Statement 115 on January 1, 1994, the effect
of which was an increase in unrealized gains of $494,541. In
November, 1995, the FASB issued a Special Report titled "A Guide
to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities", which report allows
enterprises to reassess the appropriateness of the classifications
of all securities held at the time of the Special Report issuance.
In December, 1995, the Company did reassess the appropriateness
of the classifications of its securities and reclassified all of
the securities contained in the held to maturity account to the
available for sale account as they may be considered for sale
prior to maturity as part of the asset/liability management
strategy. The carrying value of the securities reclassed to
available for sale amounted to $35,942,303 and the fair value
amounted to $36,098,026. This transfer resulted in the Company
increasing its unrealized gains by $155,723, net of tax and
deferred policy acquisition cost adjustment.
Fixed maturity securities classified as investments held to
maturity prior to reclassification were carried at amortized cost
because the Company had the positive intent and ability to hold
such investments until maturity. All other fixed maturity
securities were classified as available for sale and were carried
at fair value, with the unrealized gain or loss, net of tax and
other adjustments (deferred policy acquisition costs), included in
stockholders' equity. As of December 31, 1995 and 1996, all fixed
maturity securities were classified as available for sale. Equity
securities are carried at current fair value. Policy loans and
mortgage loans are stated at the unpaid principal balance. Short
term investments are carried at cost which approximates fair
value. Property tax liens are carried at cost. Investment income
is recorded when earned. Realized investment gains and losses on
the sale of securities are based on the specific identification
method. Unrealized gains and losses from revaluation of equity
investments and fixed maturity securities to current market value
are reflected in stockholders' equity.
d. Deferred Policy Acquisition Costs: The cost of acquiring new
business, principally commissions and certain expenses of the
policy issuance and underwriting departments, all of which vary
with, and are primarily related to the production of new and
renewal business, have been deferred. These costs are being
amortized in relation to the present value of expected gross
profits on the policies arising principally from investment,
mortality and expense margins for FASB Statement No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the
Sale of Investments", (Statement No. 97") products and in
proportion to premium revenue using the same assumptions used in
estimating the liabilities for future policy benefits for FASB
Statement No. 60, "Accounting and Reporting by Insurance
Enterprises", (Statement No. 60") products. Deferred policy
acquisition costs would be written off to the extent that it is
determined that future policy premiums and investment income or
gross profits would not be adequate to cover related losses and
expenses. There were no write offs for the years ended December
31, 1994, 1995 and 1996. Details with respect to deferred policy
acquisition costs for the three years ended December 31, 1996 are
as follows:
Balance at January 1, 1994 $11,104,667
Capitalized costs 4,653,342
Adjustment relating to unrealized
loss on available for sale securities 403,414
Amortization (1,675,573)
-----------
Balance at December 31, 1994 14,485,850
Capitalized costs 5,270,498
Adjustment relating to unrealized
gain on available for sale securities (613,715)
Amortization (2,578,183)
-----------
Balance at December 31, 1995 16,564,450
Capitalized costs 5,042,137
Adjustment relating to unrealized
loss on available for sale securities 269,447
Amortization (2,784,520)
-----------
Balance at December 31, 1996 $19,091,514
===========
F-10
<PAGE>
e. Recognition of Revenues, Contract Benefits and Expenses for
Investment and Universal Life Type Policies: Revenues for
universal life-type policies and investment products consist of
mortality charges for the cost of insurance and surrender charges
assessed against policyholder account balances during the period.
Benefit claims incurred in excess of policyholder account
balances are expensed. The liability for policyholder account
balances for universal life-type policies and investment products
under Statement No. 97 are determined following a "retrospective
deposit" method and consist principally of policy account values
before any applicable surrender charges. Credited interest rates
for these products range from 5.00% to 7.25%. For the three years
ended December 31, 1994, 1995 and 1996, one general agency of
American Progressive produced $3,645,611, $4,477,034 and
$5,813,765 of annuity receipts, respectively, which represented
approximately 41%, 41% and 43%, respectively, of total annuity
receipts of American Progressive.
f. Recognition of Premium Revenues and Policy Benefits for Accident
and Health Insurance Products: Premiums are recorded when due and
recognized as revenue over the period to which the premiums
relate. Benefits and expenses are associated with earned premiums
so as to result in recognition of profits over the life of the
policies. This association is accomplished by recording a
provision for future policy benefits, establishing an unearned
premium reserve and amortizing deferred policy acquisition costs.
Claim reserves are established for future payments not yet due on
claims already incurred, primarily relating to individual
disability insurance and group long-term disability insurance
products. These reserves are established based on past experience
and are continuously reviewed and updated with any related
adjustments recorded to current operations. Claim liabilities
represent policy benefits due but unpaid at year end and primarily
relate to individual health insurance products. Activity in the
accident and health policy and contract claim liability is as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 8,001,097 $ 8,698,434 $ 8,681,136
Less reinsurance recoverables (1,532,736) (1,947,218) (2,650,646)
----------- ----------- -----------
Net balance at beginning of year 6,468,361 6,751,216 6,030,490
----------- ----------- -----------
Balance acquired with First National --- --- 3,374,535
Incurred related to:
Current year 19,423,563 33,533,192 23,029,175
Prior years (1,737,163) (14,743,820) (2,511,056)
----------- ----------- -----------
Total incurred 17,686,400 18,789,372 20,518,119
----------- ----------- -----------
Paid related to:
Current year 13,107,971 14,830,355 15,671,699
Prior years 4,295,574 4,679,743 4,892,735
----------- ----------- -----------
Total paid 17,403,545 19,510,098 20,564,434
----------- ----------- -----------
Net balance at end of year 6,751,216 6,030,490 9,358,710
Plus reinsurance recoverables 1,947,218 2,650,646 15,269,309
------------ ----------- -----------
Balance at end of year $ 8,698,434 $ 8,681,136 $24,628,019
============ =========== ===========
</TABLE>
g. Deferred Revenue: The Company entered into a 75% quota share
reinsurance agreement with an unaffiliated reinsurer on the
F-11
<PAGE>
$60,000 retention of certain individual accident & health
insurance policies in force as of June 30, 1995. The Company
received $862,000 as a ceding commission, $625,000 of which was
offset by the amortization of the deferred acquisition cost asset
related to this business. The remaining $237,000 was recorded as
deferred revenue and will be recognized as income over the
expected life of the reinsured business. The Company amortized
$79,098 and $157,902 of this deferred revenue during 1995 and
1996, respectively.
The Company entered into a 90% quota share reinsurance agreement
with an unaffiliated reinsurer on certain life insurance policies
in force as of June 30, 1993. The Company ceded $3,696,101 of
life insurance reserves and received $1,665,000 as a ceding
commission, which ceding commission was recorded as deferred
revenue. The Company amortized $219,261, $165,104 and $122,433 of
deferred revenue during 1994, 1995 and 1996 respectively.
h. WorldNet Services Corp.: WorldNet began operations in early 1992
and, on January 15, 1992, it purchased certain assets of
Interclaim Services Corp. by assuming related liability
commitments which totaled approximately $150,000. In 1993,
WorldNet began operations in Canada to market its services.
During 1993 and 1994, WorldNet capitalized $144,247 and $189,749,
respectively, of organizational expenses, which expenses were
being amortized over a five year period. The Company wrote off an
additional $100,000 of these capitalized expenses at December 31,
1996.
i. Income Taxes: The Company's method of accounting for income taxes
is the asset and liability method. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
j. Reinsurance Accounting: Amounts paid for a recoverable under
reinsurance contracts are included in total assets as reinsurance
recoverable amounts. The cost of reinsurance related to long-
duration contracts is accounted for over the life of the
underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies.
k. Earnings Per Common Share: Net income per common share was
computed by dividing the net income applicable to common share-
holders by the weighted average number of common equivalent shares
outstanding during each period. Income before extraordinary
credit and net income were adjusted to deduct the dividend
requirements of the Series A preferred stock for the year ended
December 31, 1994 and includes the discount earned on the
redemption of the Series A preferred stock in 1994.
l. Cash Flow Information: Included in cash and cash equivalents are
cash on deposit, money market funds, and short term investments
which had an original maturity of three months or less from the
time of purchase.
m. Reclassifications: Certain reclassifications have been made to
prior years' financial statements to conform with current period
classifications.
F-12
<PAGE>
3. RECENT ACQUISITIONS:
--------------------
First National Life
In the fourth quarter of 1996, the Company acquired, through an
assumption reinsurance agreement, approximately $56 million of annualized
senior market premium from First National Life Insurance Company (AFirst
National@). American Pioneer initially contracted with First National to
assume $4 million of premium on group Medicare Supplement coverage issued to
the members of the Florida Retrired Educators Association ("FREA"). Then,
after First National was placed into Receivership by the Alabama Insurance
Department in October, 1996, American Pioneer assumed approximately an
additional $50 million of Individual Medicare Supplement premium, $1.2 million
in Home Health Care premium and $0.8 million in miscellaneous life and
accident and health insurance premiums, under terms negotiated with the
Receiver. All of these assumptions were effective as of October 1, 1996.
Simultaneously with the second assumption by American Pioneer, American
Pioneer entered into a reinsurance agreement with Transamerica Occidental Life
Insurance Company ("Transamerica"), ceding 90% of the $50 million Individual
Medicare Supplement to Transamerica.
As part of the transaction negotiated with the Receiver, American
Pioneer was to receive assets equal to the liabilities assumed, primarily
policy reserves. However, as a result of the financial condition of First
National, sufficient assets were not available to fully cover these
liabilities. In addition, the Receiver was unable to cover certain amounts
due to American Pioneer. The sum of the closing shortfall and the costs of
the transaction, net of deferred tax benefits, amounted to $3,529,529, which
constitutes the purchase price of the transaction, and will be amortized over
30 years.
As part of the First National transaction, the Company acquired in
Pensacola a relatively low cost administrative operation with particular
experience in the senior market. This has given the Company an opportunity to
consolidate many of its administrative functions in Pensacola and save a
significant amount of fixed overhead.
In December, 1996, the Company formulated a plan to move most of the
policy administrative functions, particularly in its senior market business,
from the American Progressive office in Brewster to Pensacola. This, along
with other cost saving efforts, will result in a reduction in the work force
at the American Progressive office from 62 as of June 30, 1996 to
approximately 32 as of June 30, 1997 with a modest resultant increase in
personnel in Pensacola, including some personnel employed by American
Progressive. These plans were announced to the employees of the Company on
March 14, 1997.
Consequently, American Progressive has exercised its right to cancel its
lease for 15,000 square feet in Brewster as of October 31, 1997 and is
currently negotiating to lease a smaller office. The cost of this
consolidation, including severance costs, relocation costs and the
cancellation penalty on the Brewster lease, will be approximately $250,000 and
was expensed in the fourth quarter of 1996.
WorldNet
On April 1, 1994, the Company, through WorldNet Services Corp., a newly
formed Florida corporation (WorldNet - Florida), purchased from Health
Assistance for Travelers, Inc. ("HAT") (a subsidiary of Ontario Blue Cross of
Canada ("OBC")) certain assets of HAT and an affiliated corporation for
Canadian $625,000 (approximately US $470,000), payable over five years. The
note payable to HAT requires annual payments of Canadian $125,000 plus accrued
interest beginning on April 1, 1994 and bears interest at 6%. WorldNet -
Florida also executed an agreement with HAT for the subcontracting of HAT's
obligations under certain service contracts between HAT and OBC, and other
insurers. For the year ended December 31, 1994 and 1995 the Company received
$1,036,639 and $1,204,270, respectively, under these service agreements. In
1995, substantially all of the assets of OBC (including the shares of OBC's
subsidiary HAT) was acquired by Liberty Mutual Insurance Company ("Liberty
Health"). In February, 1996, WorldNet and Liberty Health agreed to terminate
the service agreement between OBC and WorldNet. In connection with the
termination of the service agreement, Liberty Health agreed to cancel the
promissory notes executed on April 1, 1994, which notes amounted to $370,000
at December 31, 1996. At the same time, the Company wrote off corresponding
assets, including the value of the service agreement, which assets amounted to
approximately $170,000. The resulting net income from this transaction was
F-13
<PAGE>
approximately $200,000 and was reflected in the Company's financial statements
for the first quarter of 1996.
4. INVESTMENTS:
------------
As of December 31, 1995 and 1996, investments consisted of the
following:
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------
Face Amortized Fair Carrying
Classification Value Cost Value Value
- - -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 12,289,801 $ 12,289,801 $ 12,289,801
US Treasury bonds and notes $ 11,565,000 11,719,311 11,957,792 11,957,792
Corporate bonds 103,056,601 102,393,245 104,471,129 104,471,129
Common stocks 46,133 15,297 15,297
------------ ------------ ------------
Sub-total $126,448,490 $128,734,019 $128,734,019
============
Property tax liens 178,908 178,908
Policy loans 5,622,136 5,622,136
Mortgage loans 1,067,605 1,067,605
------------ ------------
Total investments $133,317,139 $135,602,668
============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------
Face Amortized Fair Carrying
Classification Value Cost Value Value
- - -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 15,403,450 $ 15,403,450 $ 15,403,450
US Treasury bonds and notes $ 8,383,814 8,516,908 8,505,972 8,505,972
Corporate bonds 113,722,375 113,994,104 112,986,195 112,986,195
Common stocks 46,133 33,562 33,562
------------ ------------ ------------
Sub-total 137,960,596 $136,929,179 $136,929,179
============
Property tax liens 131,729 131,729
Policy loans 6,421,251 6,421,251
Mortgage loans 1,199,110 1,199,110
------------ ------------
Total investments $145,712,686 $144,681,269
============ ============
</TABLE>
F-14
<PAGE>
The amortized cost and fair value of debt securities classified as
available for sale investments as of December 31, 1995 and 1996 are as
follows:
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Classification Cost Gains Losses Value
- - -------------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
US Treasury securities
and obligations of
US government $ 19,546,697 $ 393,356 $ (150,445) $ 19,789,608
Corporate debt securities 72,149,554 2,669,249 (294,300) 74,524,503
Mortgage-backed securities 22,416,305 373,429 (674,924) 22,114,810
------------ ---------- ----------- ------------
$114,112,556 $3,436,034 $(1,119,669) $116,428,921
============ ========== =========== ============
</TABLE>
December 31, 1996
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Classification Cost Gains Losses Value
- - -------------- ------------ ---------- ----------- ------------
US Treasury securities
and obligations of
US government $ 12,141,823 $ 121,631 $ (85,890) $ 12,177,564
Corporate debt securities 74,020,305 1,167,066 (1,244,311) 73,943,060
Mortgage-backed securities 36,348,884 414,210 (1,391,551) 35,371,543
------------ ---------- ----------- ------------
$122,511,012 $1,702,907 $(2,721,752) $121,492,167
============ ========== ============ ============
The amortized cost and fair value of fixed maturities at December
31, 1996 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
---------- ----------
Due in 1 year or less $ 2,608,064 $ 2,632,028
Due after 1 year through 5 years 23,328,057 23,458,901
Due after 5 years through 10 years 36,638,197 36,992,088
Due after 10 years 19,860,589 19,264,750
Mortgage-backed securities 40,076,105 39,144,400
----------- -----------
$122,511,012 $121,492,167
=========== ===========
Included in fixed maturities at December 31, 1995 and 1996 were
securities with carrying values of $6,467,700 and $7,779,124, respectively,
held by various states as security for the policyholders of American Pioneer
and American Progressive within such states.
F-15
<PAGE>
The details of net investment income for the three years ended December
31, 1996 are as follows:
1994 1995 1996
--------- --------- ---------
Investment Income:
Fixed maturities $ 7,920,429 $ 8,389,695 $ 9,048,143
Short-term investment 633,052 531,572 731,924
Property tax liens 832,038 58,920 (1,297)
Policy loans 340,711 363,390 487,740
Mortgage loans 99,946 102,293 86,858
--------- --------- ----------
Gross investment income 9,826,176 9,445,870 10,353,368
Investment expenses 587,387 500,590 503,285
--------- --------- ----------
Net investment income $ 9,238,789 $ 8,945,280 $ 9,850,083
========= ========= ==========
There was one fixed maturity with a carrying value of $331,250 that was
non-income producing as of December 31, 1996.
Gross realized gains and gross realized losses included in the
consolidated statements of operations for the three years ended December 31,
1996 are as follows:
1994 1995 1996
Realized gains:
Fixed maturities, available for sale $ 384,517 $ 1,070,230 $ 363,927
Fixed maturities, held to maturity --- 6,921 ---
Equity securities --- --- 5,000
------- --------- -------
Total realized gains 384,517 1,077,151 368,927
------- --------- -------
Realized losses:
Fixed maturities, available for sale (273,967) (385,223) (128,852)
Fixed maturities, held to maturity (62,500) (3,060) ---
Equity securities --- (15,000) ---
Real estate (6,482) --- ---
------- ------- -------
Total realized losses (342,949) (403,283) (128,852)
------- ------- -------
Net realized gains $ 41,568 $ 673,868 $ 240,075
======= ========= =======
During the year ended December 31, 1995, the Company wrote down the
value of certain fixed maturity securities by $194,955 which was included in
realized gains on investments.
The components of the change in unrealized gains and losses included in
the consolidated statements of stockholders' equity for the three years ended
December 31, 1996 are as follows:
1994 1995 1996
------------ --------- ----------
Change in net unrealized gains (losses):
Fixed maturities $ (4,508,521) $ 5,963,167 $ (3,335,207)
Equity securities (27,631) (3,205) 18,264
Implementation of Statement No. 115 494,541 155,723 ---
Adjustment relating to deferred
policy acquisition costs 403,414 (613,710) 269,477
--------- --------- ---------
Change in net unrealized gains
(losses) before income tax (3,638,197) 5,501,975 (3,047,466)
Income tax expense (benefit) --- 705,578 (705,578)
--------- --------- ---------
Change in net unrealized losses $ (3,638,197) $ 4,796,397 $ (2,341,888)
========= ========= =========
F-16
<PAGE>
Gross unrealized gains and gross unrealized losses of equity securities
as of December 31, 1995 and 1996 are as follows:
1995 1996
------- ------
Gross unrealized gains $ --- $ ---
Gross unrealized losses (30,836) (12,572)
------ ------
Net unrealized losses $ (30,836) $ (12,572)
====== ======
5. INCOME TAXES:
The Company and its non-life subsidiaries file a consolidated federal
income tax return. The life insurance subsidiaries file a separate
consolidated federal income tax return.
The Company's federal income tax expense consisted of:
Year Ended December 31,
---------------------------
1994 1995 1996
----- ----- -------
Current $ 9,974 $ 9,032 $ ---
Deferred --- --- 269,017
----- ----- -------
Total tax expense $ 9,974 $ 9,032 $269,017
===== ===== =======
A deferred tax asset related to the acquisition of certain business from
First National amounted to $305,000. A deferred tax benefit for 1995 was
$1,642,819, which amount was charged directly to the present value of future
profits since the benefit was derived from the recognition of acquired tax
loss carryforwards of American Pioneer that previously were included in the
valuation allowance.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying value of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 1995 and 1996
are as follows:
Deferred tax assets: 1995 1996
---------- ----------
Reserves for future policy benefits $ 2,695,120 $ 4,689,676
Deferred revenues 217,020 121,705
Net operating loss carryforwards 4,893,375 4,507,233
AMT credit carryforward 95,760 106,947
Investment valuation differences 138,899 185,849
Unrealized losses on investments --- 319,569
Other --- 147,061
---------- ----------
Total gross deferred tax assets 8,040,174 10,078,040
Less valuation allowance (1,134,555) (1,641,538)
---------- ----------
Net deferred tax assets 6,905,619 8,436,502
---------- ----------
Deferred tax liabilities:
Deferred policy acquisition costs (4,800,279) (5,226,080)
Unrealized gains on investments (705,578) ---
Goodwill --- (1,140,546)
Other (71,448) ---
--------- ---------
Total gross deferred tax liabilities (5,577,305) (6,366,626)
--------- ---------
Net deferred tax asset $ 1,328,314 $ 2,069,876
========= =========
At December 31, 1995 and 1996, the Company has established valuation
allowances of $1,134,555 and $1,641,538, respectively, with respect to its
deferred tax assets. Based on the Company's future expectation of adjusted
taxable income and through its ability to change its investment strategy and
F-17
<PAGE>
use of prudent and feasible tax planning strategies, management believes it is
more likely than not that the Company will realize the recorded net deferred
tax assets.
A reconciliation of the "expected" tax expense at 34% with the Company's
actual tax expense applicable to operating income before taxes reported in the
Consolidated Statements of Operations is as follows:
Year Ended December 31,
------------------------------
1994 1995 1996
------- ------- -------
"Expected" tax expense $ 760,828 $ 901,294 $ 126,783
Change in the beginning of the
year balance of the valuation
allowance for deferred tax assets
allocated to income tax expense (811,915) (903,878) 187,414
Tax exempt interest income (1,415) (1,415) ---
Other 62,476 13,031 (45,180)
------- ------- -------
Actual tax expense $ 9,974 $ 9,032 $ 269,017
======= ======= =======
As of December 31, 1996, the Company (exclusive of American Progressive
and American Pioneer) has net operating tax loss carryforwards of
approximately $6,400,000 which expire in the years 1997 to 2011.
As of December 31, 1996, American Progressive has net operating tax
loss carryforwards of approximately $5,000,000 which expire in the years 2003
to 2008.
As of December 31, 1996, American Pioneer has net operating tax loss
carryforwards of approximately $1,100,000 which expire in the years 2000 to
2002. As a result of the change in ownership of American Pioneer in May,
1993, use of all these loss carryforwards are subject to annual limitations.
6. STOCKHOLDERS' EQUITY:
Preferred Stock
The Company has 2,000,000 authorized shares of preferred stock to be
issued in series with 400 shares issued and outstanding at December 31, 1995
and 1996, respectively.
Series A Preferred Stock
On May 17, 1991, the Company issued 510,000 shares of Series A
cumulative, redeemable, convertible preferred stock ("Series A preferred
stock") to Midland National Life Insurance Company in connection with the
acquisition of American Progressive (see note 3). The Series A Preferred
Stock had an initial liquidating preference of $5,263,714 (which included
accrued dividends of $163,714 for the period January 1 to May 17, 1991), with
dividends payable quarterly at 8.5% per year on a cumulative basis since
January 1, 1991. Dividends were not required to be paid in cash and any
unpaid dividend accumulated as part of the Series A Preferred Stock
liquidating preference. During the two years ended December 31, 1993,
$486,784 and $529,497, respectively, of dividends accumulated and were added
to the outstanding balance of Series A Preferred Stock. At December 31, 1993,
the Series A Preferred Stock had a liquidating preference of $6,563,796.
Prior to March, 1994, such preferred stock was redeemable by the company at
any time at its liquidating preference, plus any accumulated dividends and
preferred stock with liquidating preference of up to $1,500,000 was
convertible at any time into common stock at $1.00 per share, subject to anti-
dilution adjustments. These redemption and conversion features would have
been reinstated if the Series A Preferred Stock had not been redeemed by
February 28, 1995. In addition, two-thirds of such preferred stock
outstanding at the end of five years from its issuance on May 17, 1991 (or
earlier upon the occurrence of defined events) was convertible into an amount
of common stock equal to two-thirds of the common stock outstanding
immediately after the conversion. The Series A Preferred Stock was non-
voting.
F-18
<PAGE>
In March, 1994 Midland granted the Company the right, exercisable at any
time prior to March 1, 1995, to redeem the preferred stock in exchange for
$4,000,000 in cash and a $1,000,000 five year debenture, convertible to either
666,667 shares of common stock (if the preferred stock was redeemed prior to
August 1, 1994) or 750,000 shares of common stock (if the preferred stock was
redeemed on or after August 1, 1994, but prior to March 1, 1995). The
liquidation preference of the Series A Preferred Stock as of December 30, 1994
was $7,139,757, and such stock was redeemed on that date for an aggregate
redemption price of $5,618,062 (the "Redemption Price"), paid by a cash
payment of $4,000,000 and the issuance of a convertible debenture with a fair
value of $1,618,062 and a face amount of $1,000,000 (the "Debenture"). The
Debenture was called for redemption on February 12, 1995, at which time
$106,496 of principal was paid in cash and the balance of the principal was
converted into 671,807 shares of Common Stock.
Series B Preferred Stock
As of December 30, 1994, the Company sold 400 shares of Series B
Convertible Preferred Stock, with a par value of $10,000 per share, to
Wand/Universal Investments L.P. ("Wand") for $4 million pursuant to a stock
subscription agreement entered into on August 12, 1994, under which Wand
agreed to purchase, at the Company's option, either 400 or 500 shares of
Series B Preferred Stock for a total purchase price of $4 million or $5
million, respectively. Pursuant to the Stock Subscription Agreement, the
Company paid Wand $225,000 for its services and expenses incurred in
structuring the Wand Transaction and in due diligence related thereto. The
proceeds of the sale were used to redeem all of the Series A Preferred Stock
discussed above.
The Series B Preferred Stock is convertible into Common Stock at $2.25
per share (subject to adjustment) and is entitled to dividends as if already
converted, only when and if dividends are declared on the Common Stock. The
holder of the Series B Preferred Stock may not require the Company to redeem
it unless the Company engages in certain defined transactions. The Company
has the right to require a conversion if it raises additional equity from the
public on pricing terms that meet certain criteria.
The holders of the Series B Preferred Stock have the right to elect one
Director of the Company, and have the right to vote on all other matters
submitted to the vote of the holders of the Common Stock, as if their Series B
Preferred Stock had been converted to Common Stock. In addition, under the
New York Business Corporation Law, any amendment to the Certificate of
Incorporation which would make certain changes affecting the Series B
Preferred Stock must be approved by the holders of a majority of the
outstanding Series B Preferred Stock, voting separately as a class.
Pursuant to the stock subscription agreement, Wand, the Company and
certain shareholders of the Company, including Barasch Associates Limited
Partnership (ABALP@), entered into a shareholders' agreement contemporaneously
with the issuance of the Series B Preferred Stock to Wand. Under the
shareholders' agreement, the holder of the Series B Preferred Stock agreed to
vote such shares, and the Common Stock issued upon their conversion, for the
nominees of BALP for election as directors of the Company and, after the
conversion of the Series B Preferred Stock to Common Stock, all parties agreed
to vote their shares for the election of one director designated by Wand. The
shareholders' agreement also contained "stand still," "tag along" and
registration rights provisions. The stand still provision will prohibit Wand
from acquiring more than an additional 5% of the Company's outstanding Common
Stock without the Company's consent, as long as BALP and certain partners in
BALP continue to hold at least certain percentages of the Company's Common
Stock, on an outstanding and fully diluted basis. The tag along will prohibit
BALP and certain of its partners from making private sales of their shares of
Common Stock unless Wand is given the opportunity to sell a proportionate part
of its holding on the same terms.
The Company and Wand Partners L.P., an affiliate of Wand, have also
entered into a financial advisory agreement, under which such Wand affiliate
is to render advisory services to the Company and is to be paid a fee of
$100,000 per year for such services as long as Wand owns 500,000 shares of
Common Stock, or its common stock equivalent, reduced by any directors' fee
paid to the director designated by Wand.
In connection with the determination by the New York Superintendent of
Insurance (the "Superintendent") that Wand is not a controlling shareholder of
F-19
<PAGE>
Company, within the meaning of the New York Insurance Law (see "Regulation"),
certain commitments were made to the Superintendent. These commitments
included a commitment by Wand, Wand's general partner and Wand's general
partner's shareholders that, as long as Wand owns 10% or more of the voting
power of Universal's outstanding stock, Wand will not acquire any additional
shares of Universal, except by exercise of its conversion rights, and will not
attempt to obtain or exercise control of Universal, without the consent of the
Superintendent. Universal, American Progressive, BALP, BALP's general partner
and certain limited partners, and the shareholders of BALP's general partner
also entered into commitments, including commitments that as long as Wand owns
10% or more of the voting power of Universal's outstanding shares, the size of
Universal's Board would not be reduced below ten directors and that no
transaction between Universal or American Progressive, on the one hand, and
Wand or its partners of controlling parties, on the other hand, would be
entered without the approval of the Superintendent, except for the
shareholders agreement and the financial advisory agreement referred to
herein.
Common Stock
The par value of common stock is $.01 per share with 20,000,000 shares
authorized for issuance. The shares issued and outstanding at December 31,
1995 and 1996 were 6,957,532, and 7,149,221, respectively. During the years
ended December 31, 1994, 1995 and 1996, the Company issued 930,017, 781,242
and 191,689 shares, respectively, of its common stock.
Common Stock Warrants
The Company had 679,621 and 668,481 common stock warrants issued and
outstanding at December 31, 1995 and 1996, respectively, which are registered
under the Securities Exchange Act of 1934. During the years ended December
31, 1995 and 1996, 10,250 and 11,140 warrants, respectively, were converted
into common shares at $1.00. At December 31, 1996 the Company had 2,015,760
warrants outstanding which are not registered under the Securities Exchange
Act of 1934. The warrants have no par value, have an exercise price to
purchase common stock on a one to one basis at $1.00 and expire on December
31, 1999.
Incentive Stock Option Plan
In 1983, the Company adopted an incentive stock option plan which, as
amended, reserves 1,000,000 shares of common stock. Since its adoption,
256,500 shares have been exercised, leaving 743,500 shares reserved as of
December 31, 1996. Stock options totaling 273,000 and 297,000 expire five
years and ten years, respectively, after the date granted or upon the earlier
termination of employment. Options are exercisable one year after grant, and
at December 31, 1996, 429,000 options are exercisable. Additional information
with respect to the Company's stock option plan is as follows:
Shares Under
Options Exercise
Outstanding Price
----------- --------
Balance, December 31, 1993 551,000
Options granted in 1994 159,000 $2.50 - $3.33
Options exercised in 1994 (63,000) $0.50 - $0.80
Options terminated in 1994 (39,000) $0.80 - $3.25
------
Balance, December 31, 1994 607,500
Options granted in 1995 65,000 $2.25 - $2.48
Options exercised in 1995 (34,500) $0.50 - $0.80
Options terminated in 1995 (27,000) $0.80 - $3.12
------
Balance, December 31, 1995 611,000
Options granted in 1996 141,000 $2.00 - $2.20
Options exercised in 1996 (135,000) $0.50 - $1.35
Options terminated in 1996 (47,000) $2.87 - $3.25
-------
Balance, December 31, 1996 570,000 $1.25 - $3.33
=======
F-20
<PAGE>
Stock Option Plan for Directors
At the 1992 Annual Shareholders' Meeting, the Universal American
Financial Corp. non-employee Directors Plan ("Stock Option Plan for
Directors") was approved. This stock option plan for Directors reserves
75,000 shares of common stock and provides that options shall be granted on
June 30 of each year to each eligible Director, then in office, at the rate of
1,000 options for each additional year of service completed since the last
grant. Options are exercisable one year after grant.
Options Exercise
Outstanding Price
----------- --------
Balance, December 31, 1993 14,000
Options granted in 1994 6,000 $3.12
Options exercised in 1994 (5,000) $0.56 - $1.38
------
Balance, December 31, 1994 15,000
Options granted in 1995 6,000 $3.12
------
Balance, December 31, 1995 21,000
Options granted in 1996 7,000 $2.50
------
Balance, December 31, 1996 28,000 $0.56 - $3.50
======
Other Stock Options
On December 15, 1995, the Board of Directors approved a plan under which
up to 200,000 options may be granted to agents of the Company's subsidiaries
(subject to insurance law restrictions) and to other persons as to whom the
Board of Directors believes the grant of such options will serve the best
interests of the Corporation, provided that no options may be granted under
this plan to officers, directors or employees of the Company or of any
subsidiary, while they are serving as such. On December 15, 1995, the
Board of Directors granted options to three individuals, two of whom are
members of the Company's law firm and the other of whom is a consultant to the
Company, to purchase a total of 40,000 shares of the Company's common stock,
at a price of $2.50 per share, which was the quoted market price for the such
shares at the time of the grant. Such options will expire 10 years from the
date of the grant.
Accounting for Stock-Based Compensationn
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 because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
The Company's Incentive Stock Option Plan has authorized the grant of
options for up to 1,000,000 shares of the Company's common stock. Under the
Company's Stock Option Plan for Directors 75,000 shares of the Company's
common stock have been reserved. The Company has also reserved 200,000 shares
of the Company's stock under the Agents Stock Option Plan. All options expire
five years or ten years from the date of grant and have a vesting period of
one year for the date of grant.
F-21
<PAGE>
Pro forma information regarding net income and earnings per share is required
by statement 123, and has been determined as if the Company had accounted for
its employee stock option under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively,: risk-free interest rates of
6.21% - 6.27% and 6.32% - 6.38%; dividend yields of 0% and 0%; volatility
factors of the expected market price of the Company's common stock of 51.58%
- - - 51.75% and 52.20% - 52.74%; and a weighted-average expected life of the
option of 4.5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
option.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for earnings per
share information):
1995 1996
----------- -----------
Net Income $2,641,822 $ 103,875
Less: Pro forma estimated fair value
options granted 10,756 133,208
---------- ------------
Pro forma net income $2,631,066 $ (29,333)
========== ============
Pro forma earnings per common share $ 0.25 $ 0.00
========== ============
A summary of the status of the Company's three stock option plans as of
December 31, 1995 and 1996, and changes during the years ending on those dates
is presented below:
1995 1996
---------------------------- -----------------------------
Weighted-Average Weighted-Average
Fixed Options Options Exercise Price Options Excercise Price
- - ------------- ------- ---------------- ------- -----------------
Outstanding
beginning of
year 622,500 $1.67 672,000 $1.83
Granted 111,000 2.46 148,000 2.08
Exercised (34,500) 0.52 (135,000) 0.66
Forfeited (27,000) 2.49 (47,000) 3.03
-------- ---- --------- ----
Outstanding
end of year 672,000 1.83 638,000 2.03
======= ==== ======= ====
Options exercisable
at end of year 561,000 490,000
======= =======
Weighted-average
fair value of
options granted
during the year $ 1.18 $ 1.01
======== ========
F-22
<PAGE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/96 Life Price at 12/31/96 Price
- - -------- ------------ ----------- -------- ----------- ---------
$ .56 to .72 4,000 5.0 years $ .64 4,000 $ .64
1.25 to 1.63 271,000 1.4 1.43 271,000 1.43
2.00 to 2.50 247,000 9.5 2.17 99,000 2.31
3.12 to 3.50 116,000 7.4 3.20 116,000 3.20
------- -------
$ .56 to 3.50 638,000 5.7 2.03 490,000 2.02
======= =======
7. STATUTORY CAPITAL AND SURPLUS REQUIREMENTS AND DIVIDEND RESTRICTIONS:
American Progressive and American Pioneer are required to meet minimum
statutory capital requirements imposed by the Insurance Departments of the
states in which they are licensed in order to operate as an insurance company
without restrictions. The minimum statutory capital and surplus requirements
of American Pioneer and American Progressive for the maintenance of authority
to do business at December 31, 1996 was $2,130,247 and $2,500,000,
respectively. As of December 31, 1995 and 1996 the statutory capital and
surplus amounts of American Pioneer and American Progressive were $13,196,681
and $12,733,157, respectively (American Pioneer) and $8,731,953 and $7,464,004,
respectively (American Progressive). Their statutory gain (loss) for the
years ended December 31, 1994, 1995 and 1996 were $1,672,923, $1,694,711 and
$955,714, respectively (American Pioneer) and $(228,821), $(262,049) and
$(672,127), respectively (American Progressive). The insurance companies
have calculated their risk-based capital (ARBC@) requirements and, as of
December 31, 1996, both American Pioneer and American Progressive's ratios of
total adjusted capital to RBC are sufficiently in excess of the authorized
control levels.
Dividend payments from American Progressive to the Company would require
regulatory approval which, in all likelihood, would not be obtained until
American Progressive generated enough statutory profits to offset its entire
negative unassigned surplus, which was approximately $10,293,280 at December
31, 1996. American Pioneer may pay a dividend or make a distribution without
the prior written approval of the Florida Insurance Department when (a) the
dividend is equal to or less than the greater of (1) 10% of the insurer's
surplus as to policyholders derived from net operating profits on its business
and net realized capital gains ("policyholder surplus from operations"); or
(2) the insurer's entire net operating profits and realized net capital gains
derived during the immediately preceding calendar year but not more than its
policyholder surplus from operations; (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 or distribution is made; and
(c) the insurer has filed notice with the department at least 10 business days
prior to the dividend payment or distribution. American Pioneer paid American
Progressive $1,000,000, $500,000 and $500,000 in dividends during 1994, 1995
and 1996, respectively. No dividends or distributions were made by American
Progressive during 1994 through 1996.
8. REINSURANCE:
The Company is party to several reinsurance agreements on its life and
accident and health insurance risks. The Company's senior market accident and
health insurance products are reinsured under coinsurance treaties with
unaffiliated insurers, while the life insurance risks are reinsured under
either coinsurance or yearly-renewable term treaties with unaffiliated
insurers. Under coinsurance treaties, the reinsurer receives an agreed upon
percentage of all premiums and reimburses the Company that same percentage of
the losses. In addition, the Company receives certain allowances from the
reinsurers to cover commissions, expenses and premium taxes. Under yearly-
renewable term treaties, the reinsuring company receives premiums at an agreed
upon rate and holds the required reserves for its share of the risk on a
yearly-renewable term basis. A contingent liability exists with respect to
reinsurance which may become a liability of the Company in the unlikely event
that the reinsurers should be unable to meet the obligations which they
assumed. The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk to minimize its exposure to significant
losses from reinsurer insolvencies. At December 31, 1996, amounts due from
reinsurers with a total carrying value of $41,089,163 were associated with
three reinsurers, which reinsurers were rated A+ by A.M. Best.
F-23
<PAGE>
A summary of reinsurance activity for the three years ended December 31, 1996
is presented below:
Life insurance in force As of December 31,
---=----------------------------------------
(amounts in thousands) 1994 1995 1996
----------- ----------- ------------
Gross amount $ 1,760,000 $ 1,955,809 $ 2,118,265
Ceded to other companies (754,124) (944,697) (889,132)
Assumed from other companies 28,943 27,294 25,484
----------- ----------- ------------
Net amount $ 1,034,819 $ 1,038,406 $ 1,254,617
=========== =========== ============
Percentage of assumed to net 3% 3% 2%
Year Ended December 31,
---------------------------------------------
Premiums 1994 1995 1996
----------- ----------- -----------
Life insurance $ 12,925,886 $ 17,231,562 $ 9,923,021
Accident and health 27,235,036 28,290,413 44,853,225
------------ ------------ ------------
Total gross premiums 40,160,922 45,521,975 54,776,246
------------ ------------ ------------
Ceded to other companies
Life insurance (3,323,496) (10,703,350) (2,870,540)
Accident and health (10,568,826) (7,497,083) (22,792,684)
------------ ------------ ------------
Total ceded premiums (13,892,322) (18,200,433) (25,663,224)
------------ ------------ ------------
Assumed from other companies
Life insurance 402,875 386,254 391,456
Accident and health 13,161,107 8,479,756 10,130,531
------------ ----------- ------------
Total assumed premium 13,563,982 8,866,010 10,521,987
Net amount
Life insurance 10,005,265 6,914,466 7,443,937
Accident and health 29,827,317 29,273,086 32,191,072
------------ ------------ -----------
Total net premium $ 39,832,582 $ 36,187,552 $39,635,009
Percentage of assumed to net
Life insurance 4% 6% 5%
============ ============ ===========
Accident and health 44% 29% 31%
============ ============ ===========
Total assumed to total net 34% 25% 27%
============ ============ ===========
9. SHORT-TERM DEBT:
On September 30, 1996, the Company amended its loan agreement with its
commercial bank, under which amendment the Company borrowed $800,000 on a one
year term loan extendable by the Company for a second year. The loan is
secured by the pledge of 100% of the outstanding common stock of Quincy, a
subsidiary engaged in the insurance brokerage business, the receivables of
Quincy and WorldNet and 9.9% of the outstanding common stock of American
Progressive. As of December 31, 1996, $800,000 was outstanding on this loan
agreement. The loan bears interest at 1.0% over prime. The following table
sets forth summary information with respect to short-term borrowings of the
Company for the three years ended December 31, 1996:
F-24
<PAGE>
As of December 31, Year Ended December 31,
- - ---------------------- ------------------------------------
Weighted
Maximum Average(a) Average
Amount Interest Amount Amount Interest Interest
Outstanding Rate Outstanding Outstanding Rate (b) Expense
---------- -------- ----------- ----------- --------- --------
1994 $800,000 10.50% $800,000 $533,333 7.25% $38,650
======== ====== ======== ======== ====== =======
1995 $800,000 10.50% $800,000 $800,000 10.94% $87,539
======== ====== ======== ======== ====== =======
1996 $800,000 9.50% $800,000 $800,000 10.48% $83,852
======== ====== ======== ======== ====== =======
(a) The average amounts of short term borrowings outstanding were computed
by determining the arithmetic average of the months' end short term borrowings.
(b) The weighted average interest rates were determined by dividing interest
expense related to short term borrowings by the average amounts outstanding
of such borrowings.
10. COMMITMENTS:
The Company is obligated on a lease for its executive and administrative
offices in Brewster, New York, which expires on October 31, 2001 with an
earlier termination on October 31, 1997 at the sole option of the Company and
carries a base annual rent of $150,000. In February, 1997, The Company
exercised its option to terminate the lease. The Company is obligated on a
lease for its American Pioneer operations in Orlando, Florida, which expires
in January, 2002 and carries an annual base rent of approximately $220,000.
The Company is obligated on a lease for administrative offices in Pensacola,
Florida, which expires in November, 1997 with annual renewals at the sole
option of the Company through November, 1999 and carries a base annual rent of
$220,000. The Company is obligated on a month to month lease for its WorldNet
operations in Bay Harbor Island in Miami, Florida and carries an approximate
monthly base rent of $12,000.
Rent expense for the three years ended December 31, 1994, 1995 and 1996 was
$852,124, $721,848 and $640,524, respectively. The minimum rental
commitments, subject to escalation clauses, at December 31, 1996 under non-
cancelable operating leases are as follows:
Pensacola, Orlando, Miami,
Brewster Florida Florida Florida Total
1997 $ 125,000 $ 220,000 $ 233,000 -- $ 578,000
1998 -- -- 238,000 -- 238,000
1999 -- -- 246,000 -- 246,000
2000 -- -- 252,000 -- 252,000
2001 -- -- 258,000 -- 258,000
2002 -- -- 21,000 -- 21,000
--------- ---------- ---------- -------- -----------
Totals $ 125,000 $ 220,000 $1,248,000 $ -- $ 1,593,000
========= ========== ========== ======== ===========
11. UNIVERSAL AMERICAN FINANCIAL CORP. 401(K) SAVINGS PLAN:
Effective April 1, 1992, the Company adopted the Universal American Financial
Corp. 401(k) Savings Plan ("Savings Plan"). The Savings Plan is a voluntary
contributory plan under which employees may elect to defer compensation for
federal income tax purposes under Section 401(k) of the Internal Revenue Code
of 1986. The employee is entitled to participate in the Savings Plan by
contributing through payroll deductions up to 20% of the employee's
compensation. The Company may match the employee's contribution up to 1% of
the employee's compensation which contribution will be made with Company
common stock. As of December 31, 1996, 199,745 shares of the Company's
common stock were held by the Savings Plan.
F-25
<PAGE>
The participating employee is not taxed on these contributions until
they are distributed. Moreover, the employer's contributions vest at the rate
of 25% per plan year. Amounts credited to employee's accounts under the
Savings Plan are invested by the employer-appointed investment committee.
Generally, a participating employee is entitled to distributions from the
Savings Plan upon termination of employment, retirement, death or disability.
Savings Plan participants who qualify for distributions may receive a single
lump sum, have the assets transferred to another qualified plan or individual
retirement account, or receive a series of specified installment payments.
Total matching contributions by the Company under the Savings Plan were
$51,048, $42,325 and $38,478 in 1994, 1995 and 1996, respectively.
12. FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK:
For the three years ended December 31, 1996, the Company held unrated
or less-than-investment grade corporate debt securities with carrying and
estimated fair values as follows:
1994 1995 1996
----------- ----------- -----------
Carrying value $ 4,446,205 $ 5,092,566 $ 3,850,510
=========== =========== ===========
Estimated fair value $ 4,314,977 $ 5,092,566 $ 3,850,510
=========== =========== ===========
Percentage of total assets 2.7% 2.8% 1.6%
=========== =========== ===========
The holdings of less-than-investment grade securities are widely
diversified and the investment in any one such security is currently less than
$1,000,000, which is approximately 0.4% of total assets.
13. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
a. Fixed maturities held to maturity and available for sale: For
those securities held to maturity and available for sale, fair
value equals quoted market price, if available. If a quoted
market price is not available, fair value is estimated using
quoted market prices for similar securities.
b. Equity securities: For equity securities carried at fair value,
fair value equals quoted market price.
c. Cash and cash equivalents: For short-term investments, the
carrying amount is a reasonable estimate of fair value.
d. Investment contract liabilities: For annuity and universal life
type contracts, cash surrender value is a reasonable estimate of
fair value due to the deposit nature of the account.
e. Short term debt and notes payable: For short-term borrowings and
notes payable, the carrying value is a reasonable estimate of fair
value due to their short-term nature.
f. Accounts receivable and uncollected premiums: Accounts receivable
and uncollected premiums are primarily insurance contract related
receivables which are determined based upon the underlying
insurance liabilities and added reinsurance amounts.
F-26
<PAGE>
The estimated fair values of the Company's financial instruments as of
December 31, 1995 and 1996 are as follows:
1995
--------------------------------
Carrying
Amount Fair Value
------------- -------------
Financial assets:
Fixed maturities available for sale $116,428,921 $116,428,921
Equity securities 15,297 15,297
Policy loans (a) 5,622,136
Property tax liens (b) 178,908
Mortgage loans (c) 1,067,605
Cash and cash equivalents 12,289,801 12,289,801
Financial liabilities:
Investment contract liabilities 118,608,836 108,636,182
Short-term debt 800,000 800,000
Notes payable 369,698 369,698
1996
---------------------------------
Carrying
Amount Fair Value
------------- -------------
Financial assets:
Fixed maturities available for sale $121,492,167 $121,492,167
Equity securities 33,562 33,562
Policy loans (a) 6,421,251
Property tax liens (b) 131,729
Mortgage loans (c) 1,199,110
Cash and cash equivalents 15,403,450 15,403,450
Financial liabilities:
Investment contract liabilities 134,538,954 121,649,219
Short-term debt 800,000 800,000
(a) It is not practicable to estimate the fair value of policy loans as
they have no stated maturity and their rates are set at a fixed spread to
related policy liability rates. Policy loans are carried at the aggregate
unpaid principal balances in the consolidated balance sheets, and earn
interest at rates between 6% to 8%. Individual policy liabilities, in all
cases, equal or exceed outstanding policy loan balances.
(b) Property tax liens are carried at cost. The determination of fair
value for these invested assets is not practical because there is no active
trading market for such invested assets. Individual liens in all cases are
first priority liens with collateral in excess of 300% of the carrying value
of the lien.
(c) Mortgage loans are carried at the aggregate unpaid balances and the
fair market value was not determined as the amount involved was considered to
be immaterial.
F-27
<PAGE>
14. CONDENSED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The quarterly results of operations for the three years ended December
31, 1996 are presented below:
1994 Three Months Ended
- - ---- ----------------------------------------------------------
March 31, June 30, September 30, December 31,
----------- ----------- ------------- ------------
Total revenue $12,466,438 $12,930,193 $13,381,250 $15,171,970
Total benefits,
claims & other
expenses 11,804,791 12,477,134 12,847,742 14,582,453
----------- ----------- ----------- -----------
Operating income
before income taxes 661,647 453,059 533,508 589,517
Federal income tax
expense --- --- --- 9,974
---------- ---------- ---------- ----------
Net income 661,647 453,059 533,508 579,543
Dividends on Series A
preferred stock (139,481) (142,445) (145,472) (148,563)
Discount on the
redemption of
Series A
preferred stock --- --- --- 1,521,695
---------- ----------- ----------- ----------
Net income applicable
to common
shareholders $ 522,166 $ 310,614 $ 388,036 $ 1,952,675
=========== =========== =========== ===========
Net income per
common share $ 0.07 $ 0.03 $ 0.05 $ 0.22
=========== =========== =========== ===========
1995 Three Months Ended
- - ---- ---------------------------------------------------------
March 31, June 30, September 30, December 31,
---------- ----------- -------------- -------------
Total revenue $12,264,057 $12,518,785 $12,891,128 $12,137,611
Total benefits,
claims & other
expenses 11,671,626 11,461,004 12,405,619 11,622,468
----------- ----------- ----------- -----------
Operating income
before income taxes 592,431 1,057,781 485,509 515,143
Federal income tax
expense (benefit) 201,426 359,646 165,073 (717,113)
----------- ----------- ------------ ------------
Net income applicable
to common
shareholders $ 391,005 $ 698,135 $ 320,436 $ 1,232,246
=========== =========== =========== ============
Net income per
common share $ 0.03 $ 0.07 $ 0.03 $ 0.12
=========== =========== =========== ============
1996 Three Months Ended
- - ---- ----------------------------------------------------------
March 31, June 30, September 30, December 31,
--------- ---------- ------------- ------------
Total revenue $12,257,842 $11,737,328 $14,199,901 $15,192,114
Total benefits,
claims & other
expenses 11,930,299 11,550,317 14,049,636 15,484,041
----------- ----------- ----------- -----------
Operating income
before income taxes 327,543 187,011 150,265 (291,927)
Federal income tax
expense (benefit) 45,948 63,584 49,011 110,474
----------- ----------- ----------- ------------
Net income (loss)
applicable to common
shareholders $ 281,595 $ 123,427 $ 101,254 $ (402,401)
=========== =========== =========== ============
Net income per
(loss) common share $ 0.03 $ 0.01 $ 0.01 $ (0.04)
=========== =========== =========== ============
During the fourth quarter of 1996 the Company accrued $250,000 for its
restructuring (see Note 3) and $500,000 for its withdrawal from its
participation in the National Accident Insurance Underwriters accident pool as
of December 31, 1996. Offsetting these amounts was the amount received by the
Company on the sale of its New York State DBL business, which amounted to
$200,000, net of additional reserves established.
F-28
<PAGE>
15. SUBSEQUENT EVENT:
On January 9, 1997, the Company entered into a Stock Purchase Agreement
with AAM Capital Partners L.P. ("AAM"), an unaffiliated investment firm,
providing for the issuance and sale of at least $4 million of a new Series C
Preferred Stock, of which at least $3 million will be purchased by AAM, or
purchasers designated by AAM, and at least $1 million will be purchased by
Richard A. Barasch, members of his family, and members and associates of the
Company's management. This transaction is scheduled to close upon receipt of
the required approval of the Florida Insurance Department, an application for
which approval is pending. The following summary of the terms of the Stock
Purchase Agreement is qualified in its entirety by reference to the Stock
Purchase Agreement which is being filed as an Exhibit to this Form 10-K.
* The Series C Preferred shares will be convertible by the holders at any
time at a conversion price of $2.375 per share (subject to anti-dilution
adjustment).
* The Company can require conversion if it executes a public offering of
common stock at over $3.45 per share (or equivalent equity), with gross
proceeds in excess of $10 million, or if the average bid price of it's
common stock exceeds $3.45 per share for any 60 day period through
December 31, 2001. In the event that the Company takes certain action
without the consent of the holders of a majority of the Series C
Preferred Stock, those holders who voted against such action have the
right to require its redemption at the Redemption Price or the Call
Price, (which Prices are defined below) depending on the nature of the
action taken.
* The Company will also have the right to call all of the Series C
Preferred Stock at any time between January 1, 2000 and December 31,
2002, at a per share call price (the "Call Price") of $150 in the year
2000 or $175 in the years 2001 and 2002, in each case increased by the
redemption accrual at the rate of 8% of the par value.
* Unless converted or called earlier, the Series C Convertible Preferred
Stock will be redeemed on December 31, 2002, at a per share redemption
price (the "Redemption Price") equal to par, increased by a redemption
accrual at the rate of 8% per annum. The redemption price will be
payable in two equal installments on December 31, 2002 and December 31,
2003. The redemption accrual is not payable upon any conversion.
* No dividends will be paid on the Series C Preferred Stock, unless
dividends are paid on the common stock, in which case the Series C
Preferred Stock will participate as if converted.
* The holders of the Series C Preferred Stock (excluding a portion of such
series which may be issued without voting rights) will have the right to
elect one director of the Company.
* At least $3 million of the proceeds of this sale are required to be used
to begin implementation of the conversion of American Pioneer from being
a direct subsidiary of American Progressive to being a direct subsidiary
of Universal.
* The Company, AAM, the holders of the Series C Preferred Stock, BALP and
Richard A. Barasch will enter into a shareholders agreement at the
closing of the transaction, under which the holder of the Series C
Preferred Stock are given registration rights and informational rights,
the Series C Preferred Stock holder agrees to vote their shares for the
election of a person designated by AAM as the director elected by that
Series, and BALP and Mr. Barasch grant the Series C holders a co-sale
right should they sell any shares of the Company's common stock held by
them, except to certain "permitted transferees".
F-29
<PAGE>
Schedule II - Condensed Financial Information of Registrant
UNIVERSAL AMERICAN FINANCIAL CORP.
(Parent Company)
CONDENSED BALANCE SHEETS
December 31, 1995 and 1996
1995 1996
-------- --------
ASSETS
Cash and cash equivalents $ 19,963 $ 76,844
Investments in subsidiaries at equity 24,332,016 22,382,683
Due from subsidiary 259,974 290,974
Deferred tax asset 883,077 883,077
Other assets 71,046 77,597
----------- -----------
Total assets 25,566,076 23,711,175
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term debt 800,000 800,000
Due to subsidiary 587,530 794,690
Amounts payable and other liabilities 64,270 37,959
------------ ------------
Total liabilities 1,451,800 1,632,649
------------ ------------
Total stockholders' equity 24,114,276 22,078,526
------------ ------------
Total liabilities and stockholders' equity $ 25,566,076 $ 23,711,175
============ ============
See notes to consolidated financial statements.
F-30
<PAGE>
Schedule II - continued
UNIVERSAL AMERICAN FINANCIAL CORP.
(Parent Company)
CONDENSED STATEMENTS OF OPERATIONS
For the Three Years Ended December 31, 1996
1994 1995 1996
--------- --------- ---------
REVENUES:
Net investment income $ 991 $ 165 $ 75
--------- --------- ---------
Total revenues 991 165 75
--------- --------- ---------
EXPENSES:
Selling, general and administrative expenses 367,027 640,632 301,235
--------- --------- ---------
Total expenses 367,027 640,632 301,235
--------- --------- ---------
Operating loss before provision for federal
income taxes and equity income (366,036) (640,467) (301,160)
Federal income taxes . . . . . - - -
--------- --------- ---------
Net loss before equity income (366,036) (640,467) (301,160)
Equity in undistributed income 2,593,791 3,282,289 405,035
---------- ---------- ----------
Net income $2,227,755 $2,641,822 $ 103,875
========== ========== ==========
See notes to consolidated financial statements.
F-31
<PAGE>
Schedule II - continued
UNIVERSAL AMERICAN FINANCIAL CORP.
(Parent Company)
CONDENSED STATEMENTS OF CASH FLOWS
For the Three Years Ended December 31, 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,227,757 $ 2,641,822 $ 103,875
Adjustments to reconcile net income to
net cash used by operating activities:
Amortization and depreciation, net 8,293 4,147 -
Increase in investment in subsidiaries (2,593,893) (5,476,975) (392,557)
Change in amounts due to/from subsidiaries (1,863,217) 2,904,984 176,160
Change in other assets and liabilities (254,157) 200,050 (32,860)
------------ ---------- ------------
Net cash (used by) provided from operating activities (2,475,217) 274,028 (145,382)
------------ ---------- ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,972,254 1,355,465 202,263
Proceeds from issuance of Series B preferred stock 4,000,000 - -
Redemption of the Series A preferred stock (4,000,000) - -
Redemption of note payable - (1,618,062) -
Change in short-term debt 400,000 - - C
----------- ---------- -----------
Net cash provided from (used by) financing activities 2,372,254 (262,597) 202,263
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents (102,963) 11,431 56,881
Cash and cash equivalents:
At beginning of year 111,495 8,532 19,963
----------- ---------- -----------
At end of year $ 8,532 $ 19,963 $ 76,844
=========== ========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 38,650 $ 96,289 $ 83,852
=========== ========== ===========
Income taxes $ - $ - $ -
=========== ========== ===========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
On December 30, 1994, the Company redeemed the Series A preferred stock
at a discount for part cash and issuance of a debenture (see Note 6).
Liquidation preference $ 7,139,757
Cash paid (4,000,000)
Fair value of debenture issued (1,618,062)
------------
Amount credited to retained earnings $ 1,521,695
============
See notes to consolidated financial statements
F-32
<PAGE>
Schedule III - Supplementary Insurance Information
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
1994 1995 1996
------------ ------------ ------------
Deferred policy acquisition costs $ 14,485,850 $ 16,564,450 $ 19,091,514
============ ============ ============
Policyholder account balances $108,777,009 $118,608,836 $134,538,954
============ ============ ============
Policy and contract claims $ 9,533,289 $ 9,374,815 $ 25,814,721
============ ============ ============
Premiums and policyholder fees earned $ 40,324,480 $ 36,810,937 $ 40,145,373
============ ============ ============
Net investment income $ 9,238,789 $ 8,945,280 $ 9,850,083
============ ============ ============
Interest credited to policyholders $ 5,916,936 $ 6,089,860 $ 6,614,176
============ ============ ============
Claims and other benefits and
change in future policy benefits $ 24,050,188 $ 21,029,905 $ 25,897,415
============ ============ ============
Increase in deferred acquisition costs $ 2,977,769 $ 3,317,523 $ 2,257,617
============ ============ ============
Commissions and other operating costs
and expenses $ 24,486,049 $ 23,153,921 $ 22,760,319
============ ============ ============
F-33
================================================================================
STOCK PURCHASE AGREEMENT
between
UNIVERSAL AMERICAN FINANCIAL CORP.
and
AAM CAPITAL PARTNERS, L.P.
January 9, 1997
<PAGE>
STOCK PURCHASE AGREEMENT
------------------------
AGREEMENT dated as of January 9, 1997, between UNIVERSAL AMERICAN
FINANCIAL CORP., a New York corporation, with an address of Mt. Ebo Corporate
Park, Brewster, New York 10509 ("Universal"), and AAM CAPITAL PARTNERS, L.P., a
Delaware limited partnership, with an office at 30 North LaSalle Street, 36th
Floor, Chicago, Illinois 60602 (the "Purchaser").
W I T N E S S E T H
-------------------
1. Subscription and Use of Proceeds.
---------------------------------
1.1 Subscription. On the terms and subject to the conditions set forth
below, at the Closing, the Purchaser, directly and through one or more entities
controlled by or under common control with Purchaser, hereby agrees to
subscribe for 30,000 shares (the "Stock") of Universal's Series C Preferred
Stock, at a subscription price of One Hundred Dollars ($100.00) per share, for
a total purchase price of $3,000,000 and otherwise on the terms set forth
below, and Universal agrees to accept the subscription; provided, however, that
up to 15,000 shares of such subscription may be met by the purchase of shares
of Series C Preferred Stock by one or more purchasers designated by Purchaser,
and each such designated purchaser shall execute and deliver a Stock Purchase
Agreement substantially in the form of this Agreement. Nothing above relieves
the Purchaser from making the purchase under this Section 1.1 should any entity
or designated purchaser referred to in the previous sentence fail to consummate
the transaction contemplated in this Agreement in accordance with its terms.
1.2 Additional Stock. It is contemplated that certain additional
shares of Series C Preferred Stock (the "Additional Stock") will or may be sold
by Universal contemporaneously therewith, as follows:
(a) Additional Stock Sold to Purchaser or its Designees. Prior to
the Closing, Purchaser shall have the right, subject to Universal=s approval,
to increase the number of shares of Series C Preferred Stock comprising the
Stock by up to 40,000 shares, to a total of 70,000 shares, at the same price
per share, and to designate one or more alternate purchasers (each, an
<PAGE>
"Alternate Purchaser") for such shares. If such right is exercised and any
Alternate Purchaser is designated, each Alternate Purchaser and Universal shall
execute and deliver a Stock Purchase Agreement substantially in the form of
this Agreement.
(b) Additional Stock Sold to Barasch Interests. Not less than
10,000 shares nor more than 20,000 shares of the Additional Stock shall be sold
to Richard A. Barasch, other officers, directors or consultants of Universal or
its Subsidiaries, and members of their families (the "Barasch Interests"), at a
price of One Hundred Dollars ($100.00) per share, pursuant to a Stock Purchase
Agreement substantially in the form of this Agreement.
(c) Additional Stock Sold to WAND or its Designees. Not more than
10,000 shares of the Additional Stock may be sold to Wand/Universal Investments
L.P. I and II, (collectively, "WAND") or their designee, at a price of One
Hundred Dollars ($100.00) per share, pursuant to a Stock Purchase Agreement
substantially in the form of this Agreement.
1.3 Use of Proceeds. The proceeds of the issuance of the Stock and the
Additional Stock shall be used only for the following purposes:
(a) Not less than $3,000,000 of such proceeds shall be used to
make the initial payment payable to American Progressive Life and Health
Insurance Company of New York ("Progressive") for the purchase of all of the
issued and outstanding shares of common stock of American Pioneer Life
Insurance Company ("Pioneer"), pursuant to the Purchase Agreement dated July
26, 1996, (the "Pioneer Purchase Agreement") between Progressive and Universal,
a copy of which is annexed as Exhibit 1.3; and
(b) The balance of the proceeds shall be used for general
corporate purposes, including, but not limited to, possible acquisitions and
possible additional payments on the Pioneer Purchase Agreement.
2. Due Diligence.
--------------
2.1 [Intentionally Omitted].
2.2 Access to Information and Records. From and after the date hereof
2
<PAGE>
and until either the Closing or the earlier termination of this Agreement (as
provided elsewhere herein), the Purchaser shall be entitled, through its
employees and other representatives, including its counsel and independent
certified public accountants, to make such investigation of the business,
affairs and financial condition of Universal and its Subsidiaries as the
Purchaser desires. Without limiting the generality of the foregoing, Universal
shall afford Purchaser, through its employees and such other representatives,
with reasonable access to Universal's and its Subsidiaries' books, records,
personnel (including accountants, actuaries and other professionals) and
property. The Purchaser shall use such information only in accordance with the
confidentiality agreement set forth in Section 2.3 below.
2.3 Confidentiality. The Purchaser shall:
(a) treat all information Universal has heretofore furnished or
hereafter furnishes to Purchaser about Universal or any of its Subsidiaries
(except information contained in publicly released or filed documents) as
confidential;
(b) utilize such information solely for the purpose of evaluating
the transaction contemplated by this Agreement;
(c) disclose such information only (i) to such of the Purchaser's
partners, employees, representatives and advisors as it reasonably deems
desirable to enable it to consider or implement this transaction and who have
been made aware of the confidential nature of the information, (ii) as may be
required by law, or (iii) after such information has become or is generally
available or has been disclosed to the Purchaser from sources other than
Universal and not subject to a confidentiality agreement; and
(d) if this Agreement is terminated without a Closing, return or
destroy all copies of information Universal has provided about itself or its
Subsidiaries upon its written request. This Section 2.3 shall survive the
termination of the Agreement and may be enforced by temporary, preliminary or
permanent injunction.
3
<PAGE>
3. Regulatory Approvals. To the extent required by the applicable insurance
code, Purchaser shall promptly prepare and file (with the assistance of, and
subject to the approval of, Universal) a request for a determination by the
Superintendent of Insurance of the State of New York (the "New York
Superintendent") that, upon acquisition of the Stock, Additional Stock or the
conversion of the Stock into Common Stock, none of Purchaser, the Alternate
Purchaser (singly or in the aggregate) or the Purchaser and the Alternate
Purchasers, collectively, will be in control (as defined in the New York
Insurance Law) of Progressive. To the extent required by the applicable
insurance code, Purchaser shall promptly prepare and file (with the assistance
of, and subject to the approval of, Universal) (i) an application for approval
by the Insurance Commissioner of the State of Florida and (ii) an application
for approval by or a disclaimer of control from the Insurance Commissioner of
the State of Indiana. If it is determined that the approval or non-disapproval
of such acquisition by the New York Superintendent is required, Purchaser shall
promptly prepare and file (with the assistance of, and subject to the approval
of, Universal) an application for such approval or non-disapproval. In either
case, the parties shall cooperate in seeking the issuance of all necessary
Regulatory Approvals. Such cooperation shall include, if necessary, the
execution and delivery of Commitment Agreements similar to those executed by
WAND in connection with the determination by the New York Superintendent that
WAND's acquisition of the Series B Preferred Stock did not constitute an
acquisition of control of Progressive, the usual Commitment Agreements required
by the New York Superintendent and such other commitments or undertakings as
the Regulators may require, but neither party shall be required to execute any
other commitment, undertaking or agreement to which it has a reasonable
objection. Universal shall pay all fees and expenses in connection with
obtaining all necessary Regulatory Approvals, including, without limitation,
filing fees and the reasonable fees and expenses of Purchaser's counsel in
connection therewith, subject to the limitations set forth in Section 9(a) or
13.6, as the case may be.
4
<PAGE>
4. Purchaser's Representations. In order to induce Universal to accept this
subscription and issue the Stock, the Purchaser makes the following
representations to Universal:
4.1 Organization and Power. The Purchaser is a limited partnership,
validly organized and existing in good standing under the laws of the State of
Delaware, the general partner of which is AAM Partners, L.P., an Illinois
limited partnership. The Purchaser has full power and authority to carry on
its business as presently conducted and to own and operate the properties and
assets now owned and operated by it.
4.2 Execution and Delivery of this Agreement. The Purchaser has the
requisite partnership power to execute and deliver this agreement, to perform
its obligations hereunder, and such execution, delivery and performance have
been duly authorized by all necessary partnership action on the part of the
Purchaser. The general partner executing the Agreement on behalf of the
Purchaser is validly authorized to do so.
4.3 Eligibility of Purchaser. The Purchaser is either an "accredited
investor," as that term is defined in ' 230.501(a) of the Regulations of the
Securities and Exchange Commission ("SEC"), or a person described in '
230.506(b)(ii) of such Regulations.
4.4 Opportunity to Investigate. Purchaser acknowledges that it has been
afforded the opportunity to ask questions of, and receive answers from,
Universal or persons acting on its or their behalf concerning the terms and
conditions of the transaction and to obtain any additional information, to the
extent Universal possesses such information or can acquire it without
unreasonable effort or expense, necessary to verify the accuracy of the
information furnished; and has availed itself of such opportunity to the extent
it considers appropriate in order to permit it to evaluate the merits and risks
of the proposed transaction. Purchaser acknowledges that no representations or
inducements have been made to the Purchaser to acquire the Stock hereunder,
other than those representations made in Article 5 below. In making this
5
<PAGE>
purchase,the Purchaser has relied only on its own business judgment and the
representations made in Article 5 below.
4.5 Investment Intent. The Stock is being acquired by the Purchaser for
its account solely for investment and not with a view to, or for, resale, or in
connection with any distribution thereof.
4.6 Restriction on Transfer. The Purchaser has been advised and fully
understands that transfers of the Stock or any part of the Stock is restricted
under the Securities Act of 1933, as amended (the "Securities Act"), and to
evidence the restricted nature of their transferability each certificate to be
issued for such shares will bear a legend substantially as follows:
The shares evidenced by this certificate have not been registered
under the Securities Act of 1933 and may not be transferred or
disposed of unless a written opinion from counsel reasonably
satisfactory to Universal is obtained to the effect that such
transfer or disposition will not violate the Securities Act of
1933.
The Purchaser agrees that said legend shall remain on said certificates so long
as, in the reasonable opinion of counsel to Universal, such legend is necessary
to assure compliance with the Securities Act.
4.7 Approvals Required. No authorization, approval, order or other
consent by any court or governmental authority is required in connection with
the execution, delivery and performance of this Agreement by the Purchaser or
the consummation of the transaction contemplated hereby, other than as set
forth in Article 3 above, and the Purchaser does not know of any facts about
itself which would reasonably lead it to expect that the Regulatory Approvals
will not be obtained.
5. Universal's Representations. As a material inducement to the Purchaser to
enter into this Agreement and purchase the Stock, Universal hereby represents
to the Purchaser:
5.1 Organization and Power. Universal is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of New York. Each of Universal's Subsidiaries is a corporation duly
incorporated, validly existing and in good standing under the laws of their
6
<PAGE>
respective states of incorporation. Universal and each of its Subsidiaries
have full power and authority to carry on their business as presently conducted
and to own, lease and operate the properties, assets and business now owned and
operated by it and them and is duly qualified to do business as a foreign
corporation in good standing in those jurisdictions, other than the state of
its incorporation, in which the nature of the respective businesses conducted
or property owned by it makes such qualification necessary, except for any
failures so to qualify which would not have, individually or in the aggregate,
a material adverse effect on the business, condition or results of operations
of Universal and its Subsidiaries, taken as a whole (a "Universal Material
Adverse Effect"). Except for securities held for investment and as set forth
on Schedule 5.1, Universal does not have any ownership interest in any other
corporation, partnership, trust, joint venture, limited liability company or
other entity.
5.2 Execution and Delivery of this Agreement. Universal has the
requisite legal and corporate power to issue the Stock and the shares of Common
Stock to which it is convertible, to execute and deliver this Agreement, and
the Shareholders Agreement, to perform its obligations hereunder and
thereunder, and such issuance, execution, delivery and performance have been
duly authorized by all necessary corporate action on the part of Universal,
except for the approval of Universal's Board of Directors, which shall be
obtained prior to Closing. The officer executing this Agreement and the
Shareholders Agreement on behalf of Universal is validly authorized to do so.
5.3 Capitalization. The authorized capital stock of Universal consists
of:
(i) 20,000,000 shares of Common Stock, par value $.01 per
share (the "Common Stock"), of which 7,059,221 shares are outstanding;
and
(ii) 2,000,000 shares of preferred stock, par value $1.00 per
share (the "Preferred Stock") of which 400 shares of Series B Preferred
Stock, par value $1.00 per share (the "Series B Preferred Stock"), are
7
<PAGE>
outstanding. All of the outstanding shares of Common Stock and Series B
Preferred Stock have been duly authorized and validly issued, and are
fully paid and non-assessable.
As of December 30, 1994 all 400 shares of Universal's issued and
outstanding Series A Preferred Stock, par value $1.00 per share (the "Series A
Preferred Stock") were redeemed, by payment of $4 million in cash and issuance
of a $1,000,000 convertible debenture. On February 12, 1995, $106,496 of the
debenture was paid in cash and the balance was converted to an aggregate of
671,807 shares of the Common Stock in accordance with its terms.
Immediately following the Closing there will be outstanding:
(i) 7,059,221 shares of Common Stock, increased by any Common
Stock issued between the date hereof and the date of Closing as a result
of the exercise of Universal's outstanding stock options and warrants
listed and described on Schedule 5.3(a), and its Agent Stock Purchase
Plan;
(ii) 400 shares of Series B Preferred Stock; and
(iii) up to 100,000 shares of Series C Preferred Stock,
consisting of the Stock and the Additional Stock.
Except:
(i) for the outstanding shares of Series B Preferred Stock;
(ii) for the Pioneer Purchase Agreement; and
(iii) as set forth in Schedule 5.3(b),
there are no outstanding preemptive, conversion or other rights, options,
warrants or agreements granted or issued by or binding upon Universal or any
Subsidiary for the purchase or acquisition of any shares of capital stock of
Universal or of any Subsidiary of Universal or any other securities convertible
into, exchangeable for or evidencing the right to subscribe for any shares of
such capital stock. Except for the provisions of Universal's Certificate of
Incorporation relating to redemption of the Series B Preferred Stock and the
Pioneer Purchase Agreement, neither Universal nor any Subsidiary is subject to
8
<PAGE>
any obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of the capital stock of Universal or of any of its
Subsidiaries, or any convertible securities, rights or options of the type
described in the preceding sentence. Universal is not a party to, and does not
have knowledge of, any agreement expressly restricting the transfer of any
shares of the capital stock of Universal or any of its Subsidiaries, other
than:
(i) restrictions on the transfer of 4,435,885 shares of the
Common Stock which were issued without registration under the Securities
Act and all of the Series B Preferred Stock, all of which are subject to
the restriction that they may not be transferred in the absence of such
registration, or an opinion of counsel that no such registration is
required;
(ii) as provided in the Shareholders Agreement among WAND,
Barasch Associates Limited Partnership ("BALP"), Universal and others
dated December 30, 1994; and
(iii) restrictions on the transfer of shares of common stock
of Progressive contained in Commitment Agreements with the Superintendent
of Insurance of the State of New York.
Schedule 5.3(c) sets forth the entire authorized capital stock and the
total number of issued and outstanding shares of capital stock and the holders
thereof of each of Universal's Subsidiaries.
5.4 Financial Statements.
(a) The audited consolidated balance sheets at December 31,
1995, 1994 and 1993 of Universal and its Subsidiaries and the related
consolidated statements of operations, stockholders' equity and cash flows and
for each of the years then ended, including the related notes to consolidated
financial statements and auditors' reports thereon (the "Consolidated Financial
Statements") provided to Purchaser prior to the date hereof:
(i) are complete and, to Universal's knowledge, correct in
all material respects and are consistent with the books and records of
9
<PAGE>
Universal and its Subsidiaries (which books and records are complete and,
to Universal's knowledge, accurate in all material respects);
(ii) present fairly on a GAAP basis the consolidated
financial condition of Universal at the dates thereof and present fairly
the results of operations and cash flows for each of the years then
ended; and
(iii) have been prepared in conformity with generally
accepted accounting principles ("GAAP") applied consistently with respect
to the immediately preceding fiscal year period except as set forth in
the notes to the Consolidated Financial Statements or in the auditors'
reports thereon.
(b) The unaudited consolidated balance sheets at March 31,
June 30, and September 30, 1996 of Universal and its Subsidiaries and the
related consolidated statements of operations and cash flows for the three, six
and nine months then ended (such March, June and September Balance Sheets and
related consolidated statements, collectively, the "Interim Financial
Statements"):
(i) are complete and, to Universal's knowledge, correct in
all material respects and are consistent with the books and records of
Universal and its Subsidiaries (which books and records are complete and,
to Universal's knowledge, accurate in all material respects);
(ii) present fairly on a GAAP basis, in all material
respects, the financial condition of Universal at their respective dates,
and present fairly its consolidated results of operations and cash flows
for the three, six or nine months then ended; and
(iii) have been prepared in conformity with GAAP, applied
consistently with the Consolidated Financial Statements, subject to
normal year-end adjustments.
(c) Universal has previously delivered or made available to
the Purchaser a true and complete copy of the annual statements filed by each
of the Insurance Company Subsidiaries prepared in accordance with SAP (as
10
<PAGE>
hereinafter defined), together with all notes, exhibits and schedules thereto
for the years ended December 31, 1995, 1994 and 1993 (the "Annual Statements").
Since January 1, 1996, each Insurance Company Subsidiary has timely filed with
all applicable state insurance regulatory authorities each annual statement and
each quarterly statement required to be filed by it, except to the extent that
any untimely filing or failure to file would not, individually or in the
aggregate, have a Material Adverse Effect on Universal. Universal has
furnished or made available to the Purchaser true and complete copies of each
quarterly statement filed by each of the Insurance Company Subsidiaries
pursuant to the insurance laws and regulations of its domiciliary state,
together with all notes, exhibits and schedules thereto, for periods subsequent
to December 31, 1995 and (if required to be filed prior to the date hereof)
prior to the date hereof (the "Quarterly Statements"). Each of the Annual
Statements and Quarterly Statements (collectively, the "Statutory Statements"):
(i) was prepared, in all material respects, in accordance
with SAP, subject, in the case of the Quarterly Statements, to normal
year-end adjustments; and
(ii) in the case of the Annual Statements, presents fairly on
an SAP, in all material respects, the financial condition of the
respective Insurance Company Subsidiary as of the date of the balance
sheet contained therein and, in the case of the Quarterly Statements,
presents fairly on an SAP basis, in all material respects, its results of
operation and cash flows for the period to which such Quarterly Statement
relates, consistent with the Statutory Statement filed with respect to
the immediately preceding fiscal year, except as otherwise expressly
noted therein and except for any changes required by the domiciliary
state's insurance laws and regulations or SAP.
As used in the Agreement, "SAP" means the accounting procedures and practices
prescribed or permitted from time to time by the National Association of
Insurance Commissioners and adopted or promulgated by the insurance regulatory
authorities of the domiciliary states.
11
<PAGE>
5.5 SEC Reports. Universal has filed all reports, statements, forms and
documents with the SEC that it was required to file since December 31, 1992
(the "SEC Reports"), all of which have complied in all material respects with
all applicable requirements of the Securities Act and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), except as set forth in
Schedule 5.5. As of their respective dates, each such report, statement, form
or document, including without limitation any financial statement or schedule
included therein, did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statement therein, in light of the circumstances under which they were
made, not misleading. None of Universal's Subsidiaries is required to file any
reports, forms or other documents with the SEC.
5.6 Actions Pending. There is no action, suit, claim, investigation or
proceeding pending or, to the knowledge of Universal, threatened, against
Universal or any of its Subsidiaries which questions the validity of this
Agreement or any action taken or to be taken pursuant hereto. There is no
material action, suit, claim, investigation or proceeding pending or, to the
knowledge of Universal, threatened, against or involving Universal, any of its
Subsidiaries, any Employee Benefit Plan (as defined in Section 5.23) or any of
their respective properties or assets, except policy claims in the ordinary
course under insurance policies issued by its Subsidiaries and those suits and
proceedings listed in Schedule 5.6. There are no outstanding orders,
judgments, injunctions, awards or decrees of any court, arbitrator or
governmental or regulatory body against Universal or any of its Subsidiaries,
except the judgement entered in the Circuit Court of Jefferson County, Alabama,
against Pioneer in Williamson v. American Pioneer Life Insurance Company (Civil
Action No.CV-89-9560), which judgement has been appealed from and has been
fully bonded by funds provided by American Pioneer Holding Corporation,
pursuant to an Escrow Agreement dated May 26, 1993, among American Pioneer
Holding Corporation, Universal and Levine & Geiger, P.A., as Escrowee.
5.7 Compliance with Law. Except for any noncompliance which would not,
12
<PAGE>
individually or in the aggregate, have a Universal Material Adverse Effect, the
business of Universal and each of its Subsidiaries has been and is presently
being conducted so as to comply with all applicable federal, state and local
governmental laws, rules, regulations and ordinances. Except to an extent which
would not, individually or in the aggregate, have a Universal Material Adverse
Effect, Universal and each of its Subsidiaries has all franchises, permits,
licenses, consents and other governmental or regulatory authorizations and
approvals necessary for the conduct of its business as now being conducted by
it, and Universal and each of its Subsidiaries is in compliance therewith.
5.8 No Violations. Neither Universal nor any of its Subsidiaries is:
(i) except for any violations or defaults which would not
have, individually or in the aggregate, a Material Adverse Effect on
Universal, in violation of, or default under, (x) any term of its
respective Certificate of Incorporation or By-Laws, (y) any of its
contracts or agreements, or (z) any instrument by which Universal or such
Subsidiary is bound, any outstanding indenture or other debt instrument,
or
(ii) in material default with respect to the payment of
principal of or interest on any outstanding Indebtedness, except for any
amounts which are being contested in good faith, for which adequate
provision has been made on the applicable financial statements.
5.9 Taxes.
(a) Tax Returns. Universal has duly and timely filed, or caused
to be filed, and until the Closing will duly and timely file, or cause to be
filed, with the appropriate taxing authority all Tax Returns (as defined below)
required to be filed on or before the date hereof or by the Closing, as
applicable, by or with respect to Universal and its Subsidiaries.
(b) Payment or Provision. Universal has paid or caused to be paid
in full or has made adequate provision for on its balance sheet all material
Taxes shown to be due on such Tax Returns. There are no liens for Taxes upon
the assets of either Universal or the Subsidiaries except for statutory liens
13
<PAGE>
for current Taxes not yet due.
(c) Examination of Tax Returns. Except as set forth in
Schedule 5.9, all Tax Returns filed by or on behalf of Universal and its
Subsidiaries have been examined by the appropriate taxing authorities or the
statute of limitations with respect to each such Tax Return has expired.
(d) Notice of Deficiency or Assessments. Except as set forth in
Schedule 5.9, hereto, Universal has not received any notice of deficiency or
assessment from any taxing authority with respect to liabilities or obligations
for Taxes with respect to Universal which has not been fully paid or finally
settled, and any such deficiency or assessment shown in Schedule 5.9 hereto is
being contested in good faith through appropriate proceedings. Universal and
its Subsidiaries have not given any outstanding waivers or comparable consents
extending the application of the statute of limitations with respect to any
Taxes or Tax Returns with respect to Universal or any of its Subsidiaries.
(e) Payroll and Withholding Taxes. Universal and its Subsidiaries
have complied in all material respects with all applicable laws, rules and
regulations relating to the payment and withholding of payroll and employment
taxes and have, within the time and in the manner prescribed by law, withheld
from employee wages and paid over to the proper governmental authorities all
material payroll and employment taxes required to be so withheld and paid over.
(f) Audits. No audit or other administrative proceeding or court
proceeding which is material to the financial condition of Universal or any of
its Subsidiaries is presently pending with regard to any Taxes or Tax Returns
of Universal or its Subsidiaries.
5.10 Status of Stock and Common Stock Upon Issuance. The shares of
Stock to be issued at the Closing have been duly authorized by all necessary
corporate action on the part of Universal, subject to the adoption of the
Certificate of Amendment provided for in Section 10 below. When issued and
paid for as provided in this Agreement, the Stock will be validly issued and
outstanding, fully paid and nonassessable, and the issuance of the Stock is not
and will not be subject to preemptive rights of any other stockholder of
14
<PAGE>
Universal. The shares of Common Stock to be issued upon conversion of the
Stock have been duly authorized by all necessary corporate action on the part
of Universal and, subject to the adoption of the Certificate of Amendment
provided for in Section 10 below, as of the Closing, will be duly reserved for
issuance. When the shares of Common Stock are issued upon conversion of the
Stock, such shares will be validly issued and outstanding, fully paid and
nonassessable and the issuance of such shares will not be subject to preemptive
rights of any other stockholder of Universal.
5.11 Approvals Required. No authorization, approval, order or other
consent by any court or governmental authority is required in connection with
the execution, delivery and performance of this Agreement by Universal or the
consummation of the transaction contemplated hereby, other than as set forth in
Article 3 above, and Universal does not know of any facts about itself or its
Subsidiaries which would reasonably lead it not to expect that any Regulatory
Approvals which may be required will be obtained.
5.12 Agreements. Attached as Schedule 5.12 is a list which includes
each agreement or instrument (including any and all amendments thereto) to
which Universal and its Subsidiaries is a party as of the date hereof and which
is or, immediately following the consummation of the transactions contemplated
by this Agreement, will be, material to the business, condition or results of
operations of Universal, on a consolidated basis. Each agreement and
instrument listed therein is in full force and effect and constitutes a legal,
valid and binding obligation of Universal or the relevant Subsidiary. Neither
Universal nor the relevant Subsidiary has received any notice that it is
materially in default or breach of (with or without the giving of notice or the
passage of time) any such material agreement or instrument and no such party
has any knowledge of any event or circumstance that could reasonably be
expected to give rise to such a default or breach. To Universal's knowledge,
no other person is materially in default or in breach of (with or without the
giving of notice or the passage of time) of any such agreement or instrument.
5.13 Information Furnished. Universal has provided to the Purchaser,
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prior to the date hereof, true, complete and accurate copies of the following:
(i) Universal's reports to the SEC on Form 10-K as of
December 31, 1993, 1994 and 1995, its quarterly report to the SEC on Form
10-Q as of March 31, 1996, June 30, 1996, and September 30, 1996, and the
Proxy Statements and shareholder's report it distributed to shareholders
in 1994, 1995 and 1996. Universal agrees to furnish Purchaser promptly
with a copy of any Forms 8-K or 10-Q which are filed prior to the
Closing, and any amendment to any documents previously filed by Universal
with the SEC;
(ii) the Annual and Quarterly Statements of Progressive and
Pioneer to their respective domiciliary Insurance Departments for the
year ended December 31, 1995 and the quarters ended March 31, 1996, June
30, 1996 and September 30, 1996. (Universal agrees to furnish Purchaser
with a copy of any Annual Statement or Quarterly Statement to such
domiciliary state which is filed prior to the Closing, and any amendment
to any Annual or Quarterly Statements previously filed by an Insurance
Company Subsidiary with such Insurance Departments.)
(iii) Universal's 1996 Business Plan, dated June, 1996,
including the projections prepared as part thereof, which projections
were prepared in good faith based on the assumptions set forth therein,
which management believed were and continues to believe are reasonable.
Such projections are forward looking statements within the meaning of '
27A of the Securities Act. Purchaser has been cautioned that actual
results may differ materially from those contained in such statements for
the reasons set forth in Schedule 5.13.
5.14 Private Offering. Assuming the accuracy of the Purchaser's
representations set forth in Sections 4.3 and 4.5 herein, the offer and sale of
the Stock hereunder is exempt from the registration and prospectus delivery
requirement of the Securities Act. Neither Universal nor any person acting on
behalf of it has taken or will take any action which would subject the offering
and issuance of any of such securities to the provisions of Section 5 of the
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Securities Act or to the registration or prospectus provisions of any
securities law, rule or regulation of any applicable jurisdiction as a result
of the sale hereunder.
5.15 Transaction Not a Breach. Neither the execution and delivery of
this Agreement, the Shareholders Agreement or the issuance of the Stock (or the
Common Stock into which the Stock is convertible) by Universal nor the
performance by it of the transactions contemplated hereby or thereby will:
(a) violate or conflict with or result in a breach of any
provision of any applicable law, statute, rule, regulation, order, permit,
judgment, ruling, injunction, decree or other decision of any court or other
tribunal or any governmental entity or agency binding on Universal, any of its
Subsidiaries or any of their respective properties, or conflict with or result
in the breach of any of the terms, conditions or provisions thereof;
(b) constitute a default under the organizational documents of
Universal or any of its Subsidiaries, or of any of the agreements or
instruments listed or required to be listed on Schedule 5.12 or the Reinsurance
Treaties (as defined in Section 5.19) listed or required to be listed or
Schedule 5.19;
(c) constitute an event which would permit any party to terminate,
or accelerate the maturity of any Indebtedness or other obligation for borrowed
money under, any agreements or instruments listed or required to be listed on
Schedule 5.12 or the Reinsurance Treaties listed or required to be listed on
Schedule 5.19; or
(d) result in the creation or imposition of any lien, encumbrance,
charge or other restriction upon Universal's or any of its Subsidiaries'
capital stock or assets.
5.16 Conduct in Ordinary Course. Except as set forth on Schedule 5.16,
since December 31, 1995, Universal and each of its Subsidiaries has conducted
its business only in the ordinary course of business consistent with past
custom and practice, and has incurred no liabilities other than in the ordinary
course of business consistent with past custom and practice and there has been
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no material adverse change in the assets, condition (financial or otherwise),
operating results, employee, policyholder or producer relations or business of
Universal or any of its Subsidiaries. Without limitation of the foregoing and
except as set forth on Schedule 5.16, since December 31, 1995, neither
Universal nor any of its Subsidiaries has:
(a) sold, assigned or transferred any material part of the assets
of its business, (except for sales of investments, reinsurance or other
insurance activity in the ordinary course of business) or mortgaged, pledged or
subjected them to any lien, encumbrance, charge or other restriction;
(b) sold, assigned, transferred, abandoned or permitted to lapse
any material licenses or permits or any material Proprietary Rights or other
intangible assets, or disclosed any material proprietary confidential
information to any person (except in the ordinary course of business or subject
to confidentiality agreements), granted any license or sublicense of any rights
under or with respect to any Proprietary Rights or waived any other rights of
material value except for such sales, assignments, transfers, abandonments,
lapses, licenses, sublicenses, disclosures or waivers which, individually or in
the aggregate, would not be likely to have a Material Adverse Effect on
Universal;
(c) made or granted any material increase in, or amended or
terminated, any existing Employee Benefit Plan or adopted any new Employee
Benefit Plan, or entered into any new collective bargaining agreement;
(d) conducted its cash management customs and practices (including
the timing of collection of receivables and payment of payables and other
current liabilities) and maintained its books and records other than in the
usual and ordinary course of business consistent with past custom and practice;
(e) made any loans or advances to, or guarantees for the benefit
of, or entered into any transaction with any agent, broker or production
source, employee, officer or director other than in the ordinary course of
business;
(f) suffered any extraordinary loss, damage, destruction or
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casualty loss to its business, whether or not covered by insurance and whether
or not in the ordinary course of business;
(g) received notification that any material production source,
reinsurer or policyholder will stop or decrease in any material respect the
rate of business done with Universal or any of its Subsidiaries which has had
or is likely to have a Material Adverse Effect on Universal;
(h) received notification that any reinsurer will increase rates,
decrease limits, reduce ceding commissions or change coinsurance percentages
with respect to the terms and rating structure of any reinsurance or
coinsurance agreements with Universal or any of its Subsidiaries, which has had
or is likely to have a Material Adverse Effect on Universal;
(i) declared, set aside or paid any dividend or distribution of
cash or other property to any shareholder (in its capacity as such) or
purchased, redeemed or otherwise acquired any shares of its capital stock, or
made any other payments to any shareholder (in its capacity as such);
(j) amended or authorized the amendment of its organizational
documents, other than the change of name from Universal Holding Corp. to
Universal American Financial Corp.;
(k) entered into any other material transaction, other than in the
ordinary course of business consistent with past custom and practice;
(l) issued any notes, bonds or other debt securities, or any
equity securities, or any securities (debt or equity) convertible into,
exchangeable for or exercisable for any equity securities (except as described
in Section 5.3);
(m) made any substantial change in the nature of its investment
portfolio; or
(n) committed to do any of the foregoing.
5.17 Absence of Undisclosed Liabilities. All liabilities of which
Universal has knowledge on the date hereof and on the closing date which, if
matured, would have a Material Adverse Effect on Universal (whether or not
contingent, whether or not for a liquidated amount, and whether or not such
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effect is viewed as being remote) have either been (i) provided for or
disclosed in the Consolidated Financial Statements or (ii) are listed in
Schedule 5.17.
5.18 Reserves. Without limiting the generality of Section 5.4, all
information made available by Universal to the Purchaser with respect to the
determination of the policy and contract reserves and other liabilities of each
Insurance Company Subsidiary is true, correct and complete in all material
respects. The policy and contract reserve and liability amounts presented in
each of the Annual Statements (i) are, as of their respective dates, computed
in accordance with commonly accepted actuarial standards consistently applied
and are fairly stated in accordance with sound actuarial principles; (ii) are
based on actuarial assumptions which are in accordance with or more
conservative than those typically applied by the actuarial profession for
similar lines of business; and (iii) meet the adequacy and other requirements
of the insurance laws of the applicable states in all material respects.
5.19 Reinsurance Treaties and Agreements. Schedule 5.19 hereto contains
a list of all reinsurance treaties or agreements (including facultative
agreements) whereby either Insurance Company Subsidiary has ceded any liability
or potential liability relating to any insurance policy and under which such
Insurance Company Subsidiary may recover with respect to currently pending or
future claims submitted to it ("Reinsurance Treaties"). True and complete
copies of all Reinsurance Treaties, as amended to date, have been provided to
the Purchaser. All Reinsurance Treaties are in full force and effect and are
enforceable in accordance with their terms. Neither Insurance Company
Subsidiary nor any other party to the Reinsurance Treaties is in default or
alleged to be in default under the terms of thereof, and there exists no
condition which, after notice or lapse of time or both, would constitute a
default thereunder. Each Insurance Company Subsidiary has given all notice
required under the Reinsurance Treaties with respect to claims submitted to
such Insurance Company Subsidiary. Except as provided for in the Consolidated
Financial Statements, or as disclosed in Schedule 5.19 hereto, all reinsurance
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represented by the Reinsurance Treaties is fully and absolutely collectible and
represents an admitted asset or a contra-liability of the applicable Insurance
Company Subsidiary. Except as disclosed in Schedule 5.19, neither Universal
nor either Insurance Company Subsidiary believes or has notice that any party
to any of the Reinsurance Treaties will be unable or unwilling to meet its
contractual obligations thereunder. Except as specifically indicated in
Schedule 5.19, no consent from any assuming reinsurer under any of the
Reinsurance Treaties is required in order for Universal to validly and
effectively sell the Stock to the Purchaser as provided hereunder. The
consummation of the transactions which are to take place at the Closing will
not affect either Insurance Company Subsidiary's rights under the Reinsurance
Treaties or result in the cancellation or termination of any of the Reinsurance
Treaties.
5.20 No Illegal Payments. Neither Universal nor any Subsidiary has made
or committed to make any payments for illegal political contributions or made
any bribes, kickback payments or other illegal payments.
5.21 Insurance Policies. Schedule 5.21 is a correct and complete list
and description, including policy numbers, of all self-insurance programs and
insurance policies owned by Universal and the Subsidiaries, correct and
complete copies of which policies have previously been delivered to the
Purchaser. Such policies are in full force and effect, and neither Universal
nor any Subsidiary is in default under any of them. Neither Universal nor any
Subsidiary has received any notice of cancellation or intent to cancel or
increase or intent to increase premiums with respect to such insurance policies
nor, to the knowledge of Universal, is there any basis for any such action.
Schedule 5.21 also contains a list of all pending claims with any insurance
company and any instances within the previous three years of a denial of
coverage of Universal or any Subsidiary by any insurance company.
5.22 Regulatory Authority of Insurance Company Subsidiaries. Each
Insurance Company Subsidiary has all regulatory authority necessary to carry on
its business as currently conducted. The Purchaser previously has been
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provided with an accurate copy of each Insurance Company Subsidiary's current
Certificates of Authority from the applicable states. Such Certificates of
Authority are valid and effective, and each Insurance Company Subsidiary
currently has all of the authority specified in each of its Certificates of
Authority. With respect to each Insurance Company Subsidiary, Schedule 5.22
hereto contains a list of all jurisdictions in which it is authorized or
eligible to conduct its insurance business and/or maintains a valid and
effective Certificate of Authority from the applicable insurance regulatory
departments, indicating any date upon which such authority is subject to
expiration without regulatory action. All of the Insurance Company
Subsidiaries' Certificates of Authority provide for life, accident and health,
and annuity authority. With respect to each Insurance Company Subsidiary,
Schedule 5.22 contains a list of all jurisdictions in which applications for
new or amended licenses, Certificates of Authority or other eligibility for it
are pending, and a description of the current status of each. Except as
disclosed in Schedule 5.22, no Insurance Company Subsidiary (i) has had any
license, Certificate of Authority, eligibility or other governmental or
regulatory authorization, approval or listing, or application therefor, denied,
revoked, suspended or limited, (ii) has received any notice from any
governmental or regulatory authority of any specific fact or condition which
remains uncured and which, if left uncured, could result in the denial,
revocation, suspension, limitation or non-renewal of any license, Certificate
of Authority, eligibility, approval or listing or (iii) has received any
notice, order or inquiry from any governmental or regulatory authority of any
fact or condition relating to it which could have an Material Adverse Effect on
such Insurance Company Subsidiary. The information presented in Schedule 5.22
is a true, complete and accurate summary of all the information it purports to
contain.
5.23 Employee Benefit Plans. Except as set forth in Schedule 5.23,
neither Universal nor any Plan Affiliate has maintained, sponsored, adopted,
made contributions to or obligated itself to make contributions to or to pay
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any benefits or grant rights under or with respect to any "Employee Pension
Benefit Plan" (as defined in Section 3(2) of ERISA), "Employee Welfare Benefit
Plan" (as defined in Section 3(1) of ERISA), "multi-employer plan" (as defined
in Section 3(37) of ERISA), plan of deferred compensation, medical plan, life
insurance plan, long-term disability plan, dental plan or other plan providing
for the welfare of any of Universal's or any Subsidiary's employees or former
employees or beneficiaries thereof, personnel policy (including but not limited
to vacation time, holiday pay, bonus programs, moving expense reimbursement
programs and sick leave), excess benefit plan, bonus or incentive plan
(including but not limited to stock options, restricted stock, stock bonus and
deferred bonus plans), salary reduction agreement, change-of-control agreement,
employment agreement, consulting agreement or any other benefit, program or
contract (collectively, "Employee Benefit Plans"), whether or not written or
pursuant to a collective bargaining agreement, which could give rise to or
result in Universal or such Plan Affiliate having any debt, liability, claim or
obligation of any kind or nature, whether accrued, absolute, contingent,
direct, indirect, known or unknown, perfected or inchoate or otherwise and
whether or not due or to become due. Correct and complete copies of all
Employee Benefit Plans previously have been furnished to the Purchasers. The
Employee Benefit Plans are in substantial compliance with governing documents
and agreements and with applicable laws.
5.24 Personnel Agreements, Plans and Arrangements. Except as listed in
Schedule 5.24, neither Universal nor any Subsidiary is a party to or obligated
in connection with its business with respect to any (a) outstanding contracts
with current or former employees, agents, brokers, reinsurers, intermediaries,
consultants, advisers, sales representatives, independent contractors, dealers
or any other Person, under which it has paid, or expects to pay or accrue, in
excess of $100,000 in 1996, other than contracts with general agents or
marketing organizations and reinsurance premiums and other reinsurance charges
paid or accrued under agreements listed in Schedule 5.19 or (b) collective
bargaining agreements or contracts with any labor union or other representative
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of employees or any employee benefits provided for by any such agreement,
correct and complete copies of which previously have been furnished to the
Purchasers. Except as set forth in Schedule 5.24, no strike, union
organizational activity, allegation, charge or complaint of employment
discrimination or other similar occurrence has occurred or is pending or, to
the knowledge of Universal, threatened against Universal or any Subsidiary, nor
does Universal know any basis for any such allegation, charge, or complaint.
To the knowledge of Universal, Universal and each Subsidiary has complied in
all material respects with all applicable laws relating to the employment of
labor, including provisions thereof relating to wages, hours, equal
opportunity, collective bargaining and the payment of social security and other
taxes. Except as set forth in Schedule 5.24, there are no administrative
charges or court complaints pending or, to the knowledge of Universal,
threatened against Universal or any Subsidiary before the U.S. Equal Employment
Opportunity Commission or any state or federal court or agency concerning
alleged employment discrimination or any other matters relating to the
employment of labor.
5.25 Affiliate Transaction. Schedule 5.25 sets forth the parties to and
the date, nature and amount of each transaction involving the transfer of any
cash, property or rights to or from Universal or any Subsidiary from, to or for
the benefit of any Affiliate or former Affiliate of Universal or any
Subsidiary, except for transactions between Universal and one or more wholly-
owned Subsidiaries, or among two or more wholly-owned Subsidiaries ("Affiliate
Transactions") during the period commencing January 1, 1992 through the date
hereof and any existing commitments of Universal or any Subsidiary to engage in
the future in any Affiliate Transactions except for transactions between
Universal and one or more wholly-owned Subsidiaries, or among two or more
wholly-owned Subsidiaries. Each Affiliate Transaction was effected on terms no
less favorable to Universal or any Subsidiary than those which would have been
established in an arms-length negotiation, except as disclosed on Schedule
5.25.
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5.26 Production Sources. Except as set forth on Schedule 5.26, neither
Universal nor any Subsidiary has ever treated any of its independent producers,
agents or brokers ("Production Sources") as an employee for any period and has
never been required to file any federal tax returns for any of the Production
Sources. Furthermore, Universal represents and warrants that the information
provided to the Purchasers relating to the relationship between Universal, the
Subsidiaries and the Production Sources set forth on Schedule 5.26 is complete
and accurate in all respects.
5.27 Interest in Production Sources, etc. Except as set forth in
Schedule 5.27, neither Universal nor any of its Affiliates has any direct or
indirect interest in any of Universal's or any Subsidiary's competitors,
production sources, reinsurance intermediaries, reinsurers or policyholders or
in any Person from whom or to whom Universal or any of its Affiliates leases
any real or personal property, or in any other Person with whom Universal or
any of its Affiliates has any business relationship.
5.28 No Misrepresentation. None of the representations and warranties
of Universal set forth in this Agreement, in any of the certificates,
schedules, lists, documents, exhibits, or other instruments delivered, or to be
delivered, to the Purchasers as contemplated by any provision hereof
(including, without limitation, the Shareholders Agreement), contains any
untrue statement of a material fact or omits to state a material fact necessary
to make the statements contained herein or therein not misleading. To the
knowledge of Universal, there is no material fact which has not been disclosed
to the Purchasers which materially adversely affects or could reasonably be
anticipated to materially adversely affect its business or Universal's ability
to consummate the transactions contemplated hereby.
5.29 AmeriFirst Insurance Company. Pioneer has acquired all of the
issued and outstanding shares of AmeriFirst Insurance Company ("AmeriFirst")
from First National Life Insurance Company, and Pioneer owns all such shares
free and clear of all liens, encumbrances, charges, restrictions and adverse
claims. AmeriFirst had no business in force at the time of such acquisition,
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has no business in force currently and will have no business in force as of the
Closing. To Universal's knowledge, AmeriFirst has no material liabilities.
6. Pre-Closing Covenants. During the period from the date of this Agreement
and continuing until the Closing, each of the parties hereto respectively
agrees that:
6.1 No Transfer or Inconsistent Action. Universal and its Subsidiaries
shall not sell, transfer or otherwise dispose of or in any way encumber any
shares of its capital stock or take any action inconsistent with the approval
and consummation of this Agreement or the Shareholders Agreement or the
transactions contemplated hereby and thereby.
6.2 Conduct of Business in Ordinary Course. Universal and its
Subsidiaries shall carry on their respective businesses in the usual, regular
and ordinary course in substantially the same manner as heretofore conducted
and use all reasonable efforts to preserve intact its present business
organization, keep available the services of their present officers and
employees and preserve their relationships with policyholders, producers,
reinsurers and others having business dealings with them, to the end that their
goodwill and ongoing businesses shall not be impaired in any material respect
at the Closing.
6.3 No Breach of Representations, Warranties or Covenants. No party
hereto shall undertake any action or fail to take any action that will result
in a breach of the representations, warranties and covenants hereto made by
such party.
6.4 No Solicitations. No party hereto shall, nor shall any of them
authorize or permit any of its officers, directors or employees or any
investment banker, financial advisor, attorney, accountant or other
representative retained by any of them to solicit, initiate or encourage
(including by way of furnishing information), or take any other action to
facilitate, any inquiries or the making of any proposal which constitutes, or
may reasonably be expected to lead to, any tender or exchange offer, proposal
for a merger, consolidation or other business combination involving Universal
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or any Subsidiary, or any proposal or offer to acquire in any manner a material
equity interest in, or a material portion of the assets of, Universal or any
Subsidiary, other than the transactions contemplated by this Agreement or agree
to or endorse any such proposal, or engage in any negotiations or discussions
with any person relating to any such proposal. Each party shall promptly
advise the other parties orally and in writing of any inquiries regarding, or
offers of, any such proposal. This section shall not be breached by any action
taken by an officer or director of Universal or its Subsidiaries which such
person reasonably believed he or she was required to take to perform his or her
legal fiduciary duty.
6.5 Advise of Changes; Filings. The parties hereto shall promptly
advise one another orally and in writing of any change or event having, or
which, insofar as can reasonably be foreseen, could have, a Universal Material
Adverse Effect. The parties shall promptly make available copies of all
filings made with any state, federal or local governmental entity in connection
with this Agreement and the transactions contemplated hereby.
7. Conditions of the Purchaser's Obligation to Close. Unless waived in
writing by the Purchaser, the obligations of the Purchaser to consummate the
transactions provided for in this Agreement shall be subject to satisfaction of
each of the following conditions of this Article 7.
7.1 Representations. All the representations of Universal contained in
this Agreement or given in any certificate delivered in connection therewith
shall have been true and correct when made and shall be true and correct on and
as of the Closing as if then made or given.
7.2 Additional Subscriptions. The Barasch Interests shall have
purchased not less than 10,000 shares of the Additional Stock.
7.3 Covenants. Universal shall have performed and observed all of its
covenants, agreements and obligations contained in this Agreement required to
be performed or observed as of the Closing.
7.4 Delivery of Stock. Universal shall have delivered to the Purchaser
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stock certificates evidencing the Stock, registered in Purchaser's name, or the
name of its nominee, fully paid and non-assessable, free and clear of all
liens, encumbrances, charges and restrictions (except the restriction on
transfer as set forth above) and adverse claims.
7.5 Shareholders Agreements. Universal shall have executed the
Shareholders Agreement provided for in Section 11 below.
7.6 Board Representation. One person designated in writing by the
Purchaser pursuant to the terms of the Shareholders Agreement, shall have been
elected to the Board of Directors of Universal.
7.7 Other Documents. Universal shall have delivered all such
certificates, releases, assurances and other instruments and documents as the
Purchaser may reasonably request for the purpose of verifying satisfaction of
the representations and covenants of Universal contained in this Agreement,
verifying the satisfaction of other conditions precedent to the Purchaser's
obligations hereunder or carrying out the transactions contemplated by this
Agreement.
7.8 Regulatory Approvals. The Regulatory Approvals shall have been
obtained in accordance with Article 3 above, to the extent required by the
applicable insurance code.
7.9 Material Adverse Change. Since December 31, 1995, there has not
been, with respect to Universal or any of its Subsidiaries, any material
adverse change in its business, condition or results of operations.
7.10 Certificate. The Purchaser shall have received a certificate from
the President of Universal certifying to the matters set forth in Sections 7.1
through 7.9.
7.11 Opinion of Counsel. The Purchaser shall have received an opinion
from Harnett Lesnick & Ripps P.A., counsel to Universal, dated the date of the
Closing, in form and substance reasonably acceptable to Purchaser.
8. Conditions of Universal's Obligation to Close. Unless waived in writing by
Universal, the obligations of Universal to consummate the transactions provided
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for in this Agreement shall be subject to satisfaction of the conditions set
forth in this Article 8.
8.1 Representations. All the representations of the Purchaser contained
in this Agreement or given in any certificate delivered therewith shall have
been true and correct when made and shall be true and correct on and as of the
Closing as if then made or given.
8.2 Covenants. The Purchaser shall have performed and observed all of
its covenants, agreements and obligations contained in this Agreement required
to be performed and observed as of the Closing.
8.3 Payment of Consideration. The Purchaser shall have paid and
delivered the funds required to be paid by Article 1, with such funds being
paid in certified New York Clearing House funds, or wire transfer.
8.4 Regulatory Approvals. The Regulatory Approvals shall have been
obtained in accordance with Article 3 above, to the extent required by the
applicable insurance code.
8.5 Further Certifications. Universal shall have received a certificate
from the general partner of the Purchaser certifying on behalf of the Purchaser
as to the matters set forth in Sections 8.1 through 8.4, above.
8.6 Board Approval. Universal shall have obtained the approval of
its Board of Directors to the transactions contemplated hereby.
8.7 Other Documents. Universal shall have received all such
certificates, releases, assurances and other instruments and documents as
Universal may reasonably request for the purpose of verifying the
representations and warranties of the Purchaser contained in this Agreement,
verifying the satisfaction of the other conditions precedent to its obligations
hereunder or carrying out the transactions contemplated by this Agreement.
9. Expenses. Each party shall bear its own expenses in negotiating and
consummating this transaction, except as specified in Article 3 and except
that:
(a) Upon the Closing of this Agreement, Universal shall pay to
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Katten, Muchin & Zavis, its reasonable fee for its services in representing
Purchaser and any Additional Purchaser, and its disbursements incurred in
connection therewith, not to exceed $75,000 in total, which shall include the
fees and disbursements referred to in Article 3.
(b) Upon the Closing of this Agreement, Universal shall pay
Purchaser a fee of 4% of the consideration received by Universal for the Stock
and Additional Stock sold and paid for pursuant to Sections 1.1 and 1.2(a), for
its services in structuring and performing due diligence hereunder.
10. Amendment to Restated Certificate of Incorporation. Prior to the Closing,
Universal shall adopt and file an amendment to its Restated Certificate of
Incorporation, in the form annexed as Exhibit 10, setting forth the terms of
the Series C Preferred Stock; provided, however, that Purchaser may elect to
require that such form be reasonably revised solely for the purpose of
establishing two subseries of Series C Preferred Stock, identical in all
respects except that one subseries would be voting and the other subseries
would be non-voting.
11. Shareholders Agreement. At the Closing, Universal and Purchaser shall
execute and deliver the Shareholders Agreement substantially in the form and
context annexed hereto as Exhibit 11; provided, however, that no revision to
the form of Shareholders Agreement annexed hereto shall substantially impair
Universal's, BALP's or Richard A. Barasch's substantive rights thereunder.
12. Time and Place of Closing. The closing of the transaction provided for in
this Agreement (the "Closing") shall take place at the offices of Katten,
Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago, Illinois, at
10:00 a.m. on or before the eleventh business day after the Regulatory
Approvals are obtained as provided in Article 3 above, provided that if all
other conditions to the Closing have been not met or waived by that time, the
Closing shall be deferred until the eleventh business day after the last such
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condition has been met or waived.
13. Indemnification.
----------------
13.1 General.
(a) Universal's Indemnity. Universal agrees to indemnify and save
harmless the Purchaser (and its partners and their respective directors,
officers, partners, stockholders, Affiliates, representatives, agents,
employees, advisors, successors and assigns) and any partners in the Purchaser
to which the Stock or the Common Stock into which it is convertible is
transferred from and against any Loss incurred by the Purchaser as a result of
any breach of the representations, warranties or covenants made by Universal
herein or in the Shareholders Agreement.
(b) Purchaser's Indemnity. The Purchaser agrees to indemnify and
save harmless Universal (and its directors, officers, representatives,
advisors, agents, employers, successors and assigns) from and against any Loss
incurred by Universal as a result of any breach of the representations,
warranties or covenants made by the Purchaser herein or in the Shareholders
Agreement. Notwithstanding the foregoing, no party shall be entitled to
indemnification hereunder until the aggregate amount of such party's Losses
exceed $100,000, provided that then all such Losses shall be indemnified.
13.2 Indemnification Procedure. Any party entitled to indemnification
under this Article 13 (an "indemnified party") will give written notice to the
party from which indemnification is sought (the "indemnifying party") of any
claim with respect to which it seeks indemnification within fifteen (15) days
of learning of such claim; provided that the failure of any party entitled to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this Article 13 except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any action, proceeding or claim is brought against an
indemnified party in respect of which indemnification is sought hereunder, the
indemnifying party shall be entitled to participate in and, unless in the
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reasonable judgment of the indemnified party a conflict of interest between it
and the indemnifying party may exist in respect of such action, proceeding or
claim, to assume the defense thereof, with counsel reasonably satisfactory to
the indemnified party. In the event that the indemnifying party advises an
indemnified party that it will contest such a claim for indemnification
hereunder, or fails, within thirty (30) days of receipt of any indemnification
notice to notify, in writing, such person of its election to defend, settle or
compromise, at its sole cost and expense, any action, proceeding or claim (or
discontinues its defense at any time after it commences such defense), then the
indemnified party may, at its option, in good faith, defend, settle or
otherwise compromise or pay such action or claim without prior consent of the
indemnifying party and the indemnifying party will be liable for all costs,
expenses, settlement amounts or other losses paid or incurred in connection
therewith. In any event, unless and until the indemnifying party elects in
writing to assume and does so assume the defense of any such claim, proceeding
or action, the indemnified party's costs and expenses arising out of the
defense, settlement or compromise of any such action, claim or proceeding shall
be Losses subject to indemnification hereunder. To the extent not prejudicial
to the interests of the indemnified party, the indemnified party shall
cooperate fully with the indemnifying party in connection with any negotiation
or defense of any such action or claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
indemnified party which relates to such action or claim. The indemnifying
party shall keep the indemnified party fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto. If
the indemnifying party elects to defend any such action or claim, then the
indemnified party shall be entitled to participate in such defense with counsel
of its choice at its sole cost and expense. Anything in this Article 13 to the
contrary notwithstanding, the indemnifying party shall not, without the
indemnified party's prior written consent, settle or compromise any claim or
consent to entry of any judgment in respect thereof which imposes injunctive or
32
<PAGE>
other equitable relief against the indemnified party, which imposes any future
obligation on the indemnified party or which does not include, as an
unconditional term thereof, the giving by the claimant or the plaintiff to the
indemnified party of a release from all liability in respect of such claim.
The indemnification required by this Article 13 shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, as and when bills are received or expense, loss, damage or liability
is incurred. The indemnity agreements contained herein shall be in addition
to:
(i) any cause of action or similar right of the indemnified
party against the indemnifying party or others, and
(ii) any liabilities the indemnifying party may be subject to
pursuant to the law.
13.3 Contribution. If any indemnity provided for in this Article 13 is
not available solely because it is found to be contrary to public policy or
otherwise unlawful, then the indemnifying party and the indemnified party shall
contribute to the amount payable in such proportion as is appropriate to
reflect the relative faults and benefits and any other relevant equitable
considerations.
13.4 Survival of Indemnities. The indemnities provided in this Article
13 shall survive indefinitely; provided that the representations and warranties
made by the parties in this Agreement or in any certificate or other document
delivered pursuant to this Agreement shall survive the Closing until the second
anniversary of the Closing.
13.5. Termination. This Agreement may be terminated at any time prior to
the Closing, whether before or after approval of the matters presented in
connection herewith, by Universal or the Purchaser:
(a) [intentionally omitted];
(b) by mutual consent;
(c) by the Purchaser (i) if there has been a material breach of
33
<PAGE>
any representation, warranty, covenant or agreement on the part of Universal
set forth in this Agreement, which breach has not been cured, in the case of a
representation or warranty, prior to the Closing or, in the case of a covenant
or agreement, within 30 days following receipt by the breaching party of notice
of such breach, or (ii) if any permanent injunction or other order of a court
or other competent authority preventing the consummation of the sale of the
Stock shall have become final and non-appealable;
(d) by Universal (i) if there has been a material breach of any
representation, warranty, covenant or agreement on the part of the Purchaser
set forth in this Agreement, which breach has not been cured, in the case of a
representation or warranty, prior to the Closing or, in the case of a covenant
or agreement, within 30 days following receipt by the breaching party of notice
of such breach, or (ii) if any permanent injunction or other order of a court
or other competent authority preventing the consummation of the sale of the
Stock shall have become final or nonappealable; or
(e) by either of the Purchaser or Universal if the Closing shall
not have been consummated on or before March 31, 1997, or if the Purchaser
shall not have successfully obtained the Regulatory Approvals; provided that
the right to terminate this Agreement under this Section 13.5(e) shall not be
available to any party whose willful failure to fulfill any material obligation
under this Agreement has been the cause of, or resulted in, the failure of the
Closing to occur on or before such date.
13.6 Effect of Termination. The parties hereto agree that if this
Agreement is terminated by Universal (other than pursuant to Section 13.5(d)(i)
or Section 13.5(d)(ii), if the injunction or the order is based on facts
relating to the Purchaser, or Section 13.5(e) above) or by the Purchaser
pursuant to Section 13.5(c)(i), the Purchaser believes that it is impossible to
accurately determine the amount of damages it would incur by virtue of such
termination, and consequently Universal shall, within three business days
following notification of such a termination, pay to the Purchaser $200,000 as
liquidated damages, and the obligations of the parties pursuant to this
34
<PAGE>
Agreement shall then cease.
14. Certain Definitions. As used herein, the following terms shall have the
following meanings:
"Affiliate" as applied to any Person means any other Person directly or
indirectly controlling, controlled by, or under common control with, that
Person. The term "control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with"), as applied to
any Person, means the possession, directly or indirectly, of the power to vote
10% or more of the Voting Stock (or in the case of a Person which is not a
corporation, 10% or more of the ownership interest, beneficial or otherwise) of
such Person or otherwise to direct or cause the direction of the management and
policies of that Person, whether through the ownership of Voting Stock or other
ownership interest, by contract or otherwise. All of Universal's executive
officers, 10% shareholders, directors, Subsidiaries, joint ventures and
partners shall be deemed to be Affiliates of Universal for purposes of this
Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Indebtedness" means at a particular time, without duplication, (a)
indebtedness for borrowed money or for the deferred purchase price of property
or services in respect of which any Person is liable, contingently or
otherwise, as obligor or otherwise (other than trade payables and other current
liabilities incurred in the ordinary course of business) or any commitment by
which any Person assures a creditor against loss, including contingent
reimbursement obligations with respect to letters of credit, (b) indebtedness
guaranteed in any manner by any Person, including guarantees in the form of an
agreement to repurchase or reimburse, (c) obligations under capitalized leases
in respect of which obligations any Person is liable, contingently or
otherwise, as obligor, guarantor or otherwise, or in respect of which
obligations any Person assures a creditor against loss and (d) any unsatisfied
35
<PAGE>
obligation of any Person for "withdrawal liability" to a "multiemployer plan"
as such terms are defined under ERISA.
"Insurance Company Subsidiaries" shall mean Progressive and Pioneer.
"Loss" means any and all losses, liabilities, deficiencies, costs,
damages, obligations, judgments, suits, claims, disbursements and expenses
(including, without limitation, interest, penalties, reasonable attorneys'
fees, charges and disbursements).
"Material Adverse Effect" means a material adverse effect on the
business, operations, assets or financial condition of a Person taken as a
whole.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization or a governmental entity or any
department, agency or political subdivision thereof.
"Plan Affiliate" means any Person with whom Universal or a Subsidiary
constitutes all or part of a controlled group (as defined) in the Internal
Revenue Code of 1986, as amended.
"Proprietary Rights" means all patents, patent applications, patent
disclosures and inventions (whether or not patentable and whether or not
reduced to practice); all trademarks, service marks, trade names and corporate
names; all registered and unregistered statutory and common law copyrights; all
registrations, applications and renewals for any of the foregoing; all trade
secrets, confidential information, ideas, formulae, compositions, know-how,
manufacturing and production processes and techniques, research and development
information, drawings, specifications, designs, plans, improvements, proposals,
technical and computer data, documentation and software, financial, business
and marketing plans, and franchisee, customer and supplier lists and related
information and all other proprietary rights.
"Regulators" shall mean the Superintendent of Insurance of the State of
New York (the "New York Superintendent"), the Insurance Commissioner of the
State of Florida, the Insurance Commissioner of the State of Indiana, and any
36
<PAGE>
other insurance regulatory authority having or asserting jurisdiction to
disapprove the acquisition of control (as defined in the applicable insurance
law) of either of the Insurance Company Subsidiaries.
"Regulatory Approval" shall mean a writing, in form and content
satisfactory to both parties, issued by a Regulator either (i) confirming that
upon acquisition of the Stock, Additional Stock and the Common Stock into which
the Stock is convertible, none of Purchaser, the Alternate Purchaser (singly or
in the aggregate) or the Purchaser and the Alternate Purchasers, collectively,
will control the applicable Insurance Company Subsidiary or (ii) approving or
non-disapproving such acquisition.
"Subsidiary" means any corporation of which the shares of stock having a
majority of the general voting power in electing the board of directors are, at
the time as of which any determination is being made, owned by Universal either
directly or indirectly through Subsidiaries; provided, however, that such term
shall not include AmeriFirst Insurance Company.
"Tax Return" means any report, return or other information filed with any
taxing authority with respect to Taxes imposed upon or attributable to the
operations of Universal or its Subsidiaries.
"Taxes" means any and all taxes, charges, fees, levies or other like
assessments (and all related interest, additions to tax and penalties),
including, but not limited to, income, transfer, gains, gross receipts, excise,
inventory, property (real, personal or intangible), custom, duty, sales,
premium, use, license, withholding, payroll, employment, capital stock and
franchise taxes, imposed by the United States, or any state, local or foreign
taxing authority, whether computed on a unitary, combined or any other basis.
"Voting Stock" of any Person means securities of any class or classes of
such Person the holders of which are ordinarily, in the absence of
contingencies, entitled to elect a majority of the directors of such Person.
15. Notices. All notices which are required or may be given pursuant to the
terms of this Agreement shall be in writing and shall be delivered personally
37
<PAGE>
(and receipted for) or by facsimile (provided receipt is acknowledged in
writing), certified mail, return receipt requested, postage prepaid, or by
Federal Express or other recognized overnight courier, as follows:
If intended for the Purchaser to:
AAM Capital Partners, L.P.
30 North LaSalle Street
36th Floor
Chicago, Illinois 60602
Attn: Richard A. Veed
Fax No.: (312) 263-1196
With a copy of each notice intended for the Purchasers to:
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661
Attn: Michael P. Goldman, Esq.
Fax No.: (312) 902-1061
If intended for Universal:
Universal Holding Corp.
Mt. Ebo Corporate Park
Brewster, New York 10509-0023
Attn: Richard A. Barasch
Fax No.: (914) 278-4067
With a copy of each notice intended for Universal to:
Harnett Lesnick & Ripps P.A.
150 East Palmetto Park Road
Suite 500
Boca Raton, Florida 33432-4831
Attn: Bertram Harnett, Esq. and
Irving I. Lesnick, Esq.
Fax No.: (561) 368-4315
Any such notice shall be deemed effective when delivered. Any party may change
the address to which notices intended for it shall be sent by a notice to the
other party given in the manner specified in this Article 15.
16. Miscellaneous.
--------------
16.1 Cooperation. The parties shall each use its or their best efforts
to cooperate with each other and to take or cause to be taken all such actions
and do or cause to be done all such things as may be necessary or advisable and
lawful and proper under all applicable laws to implement and make effective the
issuance of the Stock contemplated by this Agreement and to ensure that as of
the Closing there will be no material, corporate, legal or contractual
38
<PAGE>
restriction which would prohibit the issuance of the Stock contemplated by this
Agreement or which would be contravened by such issuance of the Stock.
16.2 Public Announcements. Universal and Purchaser will consult with
each other before issuing any press release or otherwise making any public
statements with respect to the transactions contemplated by this Agreement, and
shall not issue any such press release or make any such public statement prior
to such consultation, except as may be required by applicable law. Except as
may be required by applicable law, Universal shall not disclose the identity of
Purchaser in any such press release or other public statement without the prior
written consent of Purchaser, which shall not unreasonably be withheld or
delayed.
16.3 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
16.4 Assignment. Neither this Agreement nor any rights hereunder may be
assigned by any party without the consent of the other party.
16.5 Parties in Interest. This Agreement shall inure only to the
benefit of the parties, and their respective legal representatives, successors
and (to the extent permitted) assigns. Nothing contained in this Agreement,
express or implied, is intended to confer upon any other person or entity any
benefits, rights or remedies.
16.6 Headings. The section and other headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement or any provision hereof.
16.7 Amendments. This Agreement may be amended only by a writing signed
by both parties, expressing an intent to amend it.
16.8 Governing Law. All questions concerning the construction, validity
and interpretation of this Agreement, and the performance of the obligations
imposed by this Agreement, shall be governed by the laws of the State of New
York applicable to contracts made and wholly to be performed in that state.
16.9 Entire Agreement. This Agreement supersedes all prior
39
<PAGE>
negotiations and undertakings, including, without limitation, the Term Sheet,
and expresses the entire agreement of the parties with respect to the subject
matter.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
40
<PAGE>
IN WITNESS WHEREOF, the parties have executed the Agreement as of the
date first above written.
UNIVERSAL AMERICAN FINANCIAL CORP.
By: __________________________________
Richard A. Barasch, President
AAM CAPITAL PARTNERS, L.P.
By: AAM PARTNERS, L.P., general partner
By: AAM INVESTMENT BANKING GROUP, LTD.,
general partner
By: VEED CORP., general partner
By: ___________________________________
Richard A. Veed, President
41
<PAGE>
STOCK PURCHASE AGREEMENT
BETWEEN
UNIVERSAL AMERICAN FINANCIAL CORP.
AND
AAM CAPITAL PARTNERS, L.P.
JANUARY 9, 1997
TABLE OF CONTENTS
1. Subscription and Use of Proceeds...................................... 1
1.1 Subscription................................................... 1
1.2 Additional Stock............................................... 2
(a) Additional Stock Sold to Purchaser or its Designees...... 2
(b) Additional Stock Sold to Barasch Interests............... 2
(c) Additional Stock Sold to WAND or its Designees........... 2
1.3 Use of Proceeds................................................ 2
2. Due Diligence......................................................... 3
2.1 [Intentionally Omitted]........................................ 3
2.2 Access to Information and Records.............................. 3
2.3 Confidentiality................................................ 3
3. Regulatory Approvals.................................................. 4
4. Purchaser's Representations........................................... 5
4.1 Organization and Power......................................... 5
4.2 Execution and Delivery of this Agreement....................... 5
4.3 Eligibility of Purchaser....................................... 6
4.4 Opportunity to Investigate..................................... 6
4.5 Investment Intent.............................................. 6
4.6 Restriction on Transfer........................................ 6
4.7 Approvals Required............................................. 7
5. Universal's Representations........................................... 7
5.1 Organization and Power......................................... 7
5.2 Execution and Delivery of this Agreement....................... 8
5.3 Capitalization................................................. 8
5.4 Financial Statements........................................... 10
5.5 SEC Reports.................................................... 13
5.6 Actions Pending................................................ 13
5.7 Compliance with Law............................................ 14
5.8 No Violations.................................................. 14
5.9 Taxes.......................................................... 15
(a) Tax Returns.............................................. 15
(b) Payment or Provision..................................... 15
(c) Examination of Tax Returns............................... 15
(d) Notice of Deficiency or Assessments...................... 15
(e) Payroll and Withholding Taxes............................ 16
(f) Audits................................................... 16
5.10 Status of Stock and Common Stock Upon Issuance................. 16
5.11 Approvals Required............................................. 16
5.12 Agreements..................................................... 17
5.13 Information Furnished.......................................... 17
5.14 Private Offering............................................... 18
5.15 Transaction Not a Breach....................................... 18
5.16 Conduct in Ordinary Course..................................... 19
5.17 Absence of Undisclosed Liabilities............................. 22
5.18 Reserves....................................................... 22
5.19 Reinsurance Treaties and Agreements............................ 22
5.20 No Illegal Payments............................................ 23
(1)
5.21 Insurance Policies............................................. 23
5.22 Regulatory Authority of Insurance Company Subsidiaries......... 24
5.23 Employee Benefit Plans......................................... 25
5.24 Personnel Agreements, Plans and Arrangements................... 26
5.25 Affiliate Transaction.......................................... 26
5.26 Production Sources............................................. 27
5.27 Interest in Production Sources, etc............................ 27
5.28 No Misrepresentation........................................... 27
5.29 AmeriFirst Insurance Company................................... 28
6. Pre-Closing Covenants................................................. 28
6.1 No Transfer or Inconsistent Action............................. 28
6.2 Conduct of Business in Ordinary Course......................... 28
6.3 No Breach of Representations, Warranties or Covenants.......... 29
6.4 No Solicitations............................................... 29
6.5 Advise of Changes; Filings..................................... 29
7. Conditions of the Purchaser's Obligation to Close..................... 30
7.1 Representations................................................ 30
7.2 Additional Subscriptions....................................... 30
7.3 Covenants...................................................... 30
7.4 Delivery of Stock.............................................. 30
7.5 Shareholders Agreements........................................ 30
7.6 Board Representation........................................... 30
7.7 Other Documents................................................ 31
7.8 Regulatory Approvals........................................... 31
7.9 Material Adverse Change........................................ 31
7.10 Certificate.................................................... 31
7.11 Opinion of Counsel............................................. 31
(2)
8. Conditions of Universal's Obligation to Close......................... 31
8.1 Representations................................................. 31
8.2 Covenants....................................................... 32
8.3 Payment of Consideration........................................ 32
8.4 Regulatory Approvals............................................ 32
8.5 Further Certifications.......................................... 32
8.6 Board Approval.................................................. 32
8.7 Other Documents................................................. 32
9. Expenses............................................................. 32
10. Amendment to Restated Certificate of Incorporation................... 33
11. Shareholders Agreement............................................... 33
12. Time and Place of Closing............................................ 33
13. Indemnification...................................................... 34
13.1 General....................................................... 34
(a) Universal's Indemnity................................... 34
(b) Purchaser's Indemnity................................... 34
13.2 Indemnification Procedure.................................... 34
13.3 Contribution................................................. 36
13.4 Survival of Indemnities...................................... 36
13.5. Termination.................................................. 37
13.6 Effect of Termination......................................... 38
14. Certain Definitions.................................................. 38
15. Notices.............................................................. 41
16. Miscellaneous........................................................ 43
16.1 Cooperation.................................................. 43
16.2 Public Announcements......................................... 43
16.3 Counterparts................................................. 43
16.4 Assignment................................................... 43
16.5 Parties in Interest.......................................... 43
16.6 Headings..................................................... 44
16.7 Amendments................................................... 44
16.8 Governing Law................................................ 44
16.9 Entire Agreement............................................. 44
(3)
[DESCRIPTION] CERT OF AMEND ANNEXED TO EXHIBIT 10(G)
EXHIBIT 10
CERTIFICATE OF AMENDMENT OF THE
RESTATED CERTIFICATE OF INCORPORATION OF
UNIVERSAL AMERICAN FINANCIAL CORP.
Under Section 805 of the Business Corporation Law
* * * * * *
WE, THE UNDERSIGNED, RICHARD A. BARASCH AND JOAN FERRARONE, being respectively
the President and the Secretary of UNIVERSAL AMERICAN FINANCIAL CORP., hereby
certify:
I. The name of the corporation is: UNIVERSAL AMERICAN FINANCIAL CORP. (the
"Company").
II. The Certificate of Incorporation of said corporation was filed with the
Department of State on the 31st day of August, 1981, under the name "Universal
Holding Corp."
III. The Certificate of Incorporation is amended to set forth the designation,
relative rights, preferences and limitations of 100,000 shares of the preferred
stock authorized by Article Fourth (a)(ii) of the Certificate of Incorporation.
To accomplish such amendment, a new Article XX is added to the Certificate of
Incorporation, to read as follows:
<PAGE>
XX. DESIGNATIONS, PREFERENCES AND SPECIAL RIGHTS OF SERIES C PREFERRED STOCK
Designation, Amount and Rank. One Hundred Thousand (100,000) shares of a pre-
ferred stock, $1.00 par value per share, shall constitute a series of such
preferred stock designated as "Series C Convertible Preferred Stock" (the
"Series C Preferred Stock"). The Series C Preferred Stock will be issued as
one of two sub-series of preferred stock: Series C-1 Voting Preferred Stock
(the "Series C-1 Preferred Stock") and Series C-2 Non-Voting Preferred Stock
(the "Series C-2 Preferred Stock"), the number of shares of each such series to
be determined by resolution of the Board of Directors of the Company. The
respective rights and preferences of the Series C Preferred Stock, with respect
to dividend rights, redemption rights and rights on liquidation, winding up and
dissolution, shall be as set forth herein. The Series C Preferred Stock shall
be issued pursuant to the following additional terms and conditions:
1. Series C Convertible Preferred Stock.
1.1. Definitions. As used herein, unless the context otherwise
requires, the following terms have the following meanings:
1.1.1. "Additional Shares of Common Stock" means all shares
(including treasury shares) of Common Stock issued or sold (or, pursuant to
Sections 1.7.2 or 1.7.3, deemed to be issued) by the Company after January 8,
1997, whether or not subsequently reacquired or retired by the Company other
than (i) the issuance of shares upon conversion of the Series B Preferred
Stock; (ii) shares issued upon the exercise of the Common Stock Purchase
Warrants outstanding on January 8, 1997; (iii) shares to be issued to
directors, employees, agents and others, pursuant to the Company's Incentive
Stock Option Plan for Employees, Stock Option Plan for Directors and Stock
Option Plan for Agents and Others, as in effect on January 8, 1997; and (iv)
such additional number of shares, if any, as may become issuable upon the con-
version or exercise of any of the securities referred to in the foregoing
clauses (i) through (iii) pursuant to the terms of the instruments governing
such securities as in effect on the date of filing this Certificate of
Amendment.
2
<PAGE>
1.1.2. "Adjusted Stated Value" shall mean the Stated Value,
increased at the rate of 8% per annum from the date of original issuance of
each share of Series C Preferred Stock, accruing daily, compounded annually.
The date on which the Company initially issues any share of Series C Preferred
Stock will be deemed to be its "date of issuance" regardless of the number of
times transfer of such share of Series C Preferred Stock is made on the stock
records maintained by or for the Company and regardless of the number of
certificates which may be issued to evidence such share of Series C Preferred
Stock.
1.1.3. "Affiliate" as applied to any Person means any other
Person directly or indirectly controlling, controlled by, or under common
control with, that Person. The term "control" (including, with correlative
meanings, the terms "controlling," "controlled by" and "under common control
with"), as applied to any Person, means the possession, directly or indirectly,
of the power to vote 10% or more of the voting stock (or in the case of a
Person which is not a corporation, 10% or more of the ownership interest,
beneficial or otherwise) of such Person or otherwise to direct or cause the
direction of the management and policies of that Person, whether through the
ownership of voting stock or other ownership interest, by contract or
otherwise. All of the Company's executive officers, 10% stockholders,
directors, Subsidiaries, joint ventures and partners shall be deemed to be
Affiliates of the Company for purposes of this Agreement.
1.1.4. "Business Day" means any day other than a Saturday or
a Sunday or a day on which commercial banking institutions in the City of New
York are authorized by law or other governmental action to be closed. Any
reference to "days" (unless Business Days are specified) shall mean calendar
days.
3
<PAGE>
1.1.5. "Call Price" means the following price per share plus
eight percent (8%) accrued on the Stated Value thereof from the original date
of issuance of such Series C Preferred Stock through the applicable Redemption
Date, compounded annually.
Redemption
Date Price
---------- -----
Prior to or on
December 31, 2000 $150
After December 31,
2000 $175
1.1.6. "Common Stock" means the Company's Common Stock, $.01
par value, such term to include any stock into which such Common Stock shall
have been changed or any stock resulting from any reclassification of such
Common Stock, and all other stock of any class or classes (however designated)
of the Company the holders of which have the right, without limitation as to
amount, either to all or to a share of the balance of current dividends and
liquidating dividends and distributions after the payment of dividends and
distributions on any shares entitled to preference.
1.1.7. "Conversion Event" shall mean (a) any public
offering, or public sale of securities of the Company (including a public
offering registered under the Securities Act of 1933 and a public sale pursuant
to Rule 144 of the Securities and Exchange Commission or any similar rule then
in force), (b) any sale of securities of the Company to a person or group of
persons (within the meaning of the Securities Exchange Act of 1934, as amended
(the "1934 Act")) if, after such sale, such person or group of persons in the
aggregate would own or control securities which possess in the aggregate the
ordinary voting power to elect a majority of the Company's directors (provided
that such sale has been approved by the Company's Board of Directors or
committee thereof, (c) any sale of securities of the Company to a person or
group of persons (within the meaning of the 1934 Act) if, after such sale, such
person or group of persons in the aggregate would own or control securities of
the Company (excluding any Series C-2 Preferred Stock being converted and
disposed of in connection with such Conversion Event) which possess in the
4
<PAGE>
aggregate the ordinary voting power to elect a majority of the Company's
directors, (d) any sale of securities of the Company to a person or group of
persons (within the meaning of the 1934 Act) if, after such sale, such person
or group of persons would not, in the aggregate, own, control or have the right
to acquire more than two percent (2%) of the outstanding securities of any
class of voting securities of the Company and (e) a merger, consolidation or
similar transaction involving the Company if, after such transaction, a person
or group of persons (within the meaning of the 1934 Act) in the aggregate would
own or control securities which possess in the aggregate the ordinary voting
power to elect a majority of the surviving corporation's directors (provided
that the transaction has been approved by the Company's Board of Directors or a
committee thereof).
1.1.8. "Conversion Price" means $2.375, subject to
adjustment from time to time pursuant to Section 1.7.
1.1.9. "Convertible Securities" means any evidences of
indebtedness, shares of stock (other than Common Stock) or other securities
directly or indirectly convertible into or exchangeable for Additional Shares
of Common Stock.
1.1.10. "Indebtedness" shall mean at a particular time,
without duplication, (i) indebtedness for borrowed money or for the deferred
purchase price of property or services in respect of which any Person is
liable, contingently or otherwise, as obligor or otherwise (other than trade
payables and other current liabilities incurred in the ordinary course of
business) or any commitment by which any Person assures a creditor against
loss, including contingent reimbursement obligations with respect to letters of
credit, (ii) indebtedness guaranteed in any manner by any Person, including
guarantees in the form of an agreement to repurchase or reimburse, (iii)
obligations under capitalized leases in respect of which obligations any Person
is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in
respect of which obligations any Person assures a creditor against loss and
(iv) any unsatisfied obligation of any Person for "withdrawal liability" to a
"multiemployer plan" as such terms are defined under the Employee Retirement
Income Security Act of 1974, as amended.
5
<PAGE>
1.1.11. "Junior Securities" means any of the Company's
equity securities other than the Series C Preferred Stock (including the Series
B Preferred Stock and the Common Stock) whether now outstanding or hereafter
issued.
1.1.12. "Liquidation" means liquidation, dissolution or
winding-up (including, without limitation, a liquidation or reorganization
under Chapter 7 or 11 of Title 11 of the United States Code, as amended).
1.1.13. "Options" means rights, options or warrants to
subscribe for, purchase or otherwise acquire either Additional Shares of Common
Stock or Convertible Securities.
1.1.14. "Organic Change" means any capital reorganization,
reclassification, consolidation, merger, lease, or sale of all or substantially
all of the Company's assets to another Person which is effected in such a way
that holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for shares of Common Stock.
1.1.15. "Other Securities" means any stock (other than
Common Stock) and other securities of the Company or any other Person
(corporate or otherwise) which the holders of Series B Preferred Stock at any
time shall be entitled to receive, or shall have received, upon the conversion
of Series B Preferred Stock, in lieu of or in addition to Common Stock, or
which at any time shall be issuable or shall have been issued in exchange for
or in replacement of Common Stock or Other Securities.
1.1.16. "Person" means an individual, a partnership, a
corporation, a limited liability company, an association, a joint stock
company, a trust, a joint venture, an unincorporated organization or a
governmental entity or any department, agency or political subdivision thereof.
1.1.17. "Regulated Stockholder" means any Series C Preferred
Stockholder that is subject to the provisions of Regulation Y of the Board of
Governors of the Federal Reserve System, 12 C.F.R. Part 225 (or any successor
to such Regulation).
1.1.18. "Regulatory Problem" means any set of facts or
circumstances wherein it has been asserted by any governmental regulatory
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agency (or a Regulated Stockholder reasonably believes that there is a risk of
such assertion) that such Regulated Stockholder is not entitled to acquire,
own, hold or control, or exercise any significant right (including the right to
vote) with respect to any securities of the Company or any subsidiary of the
Company.
1.1.19. "Restricted Stock" means, with respect to any
Regulated Stockholder, any outstanding shares of stock ever held of record by
such Regulated Stockholder or its Affiliates, excluding treasury shares;
provided, however, that any such shares shall cease to be Restricted Stock with
respect to such Regulated Stockholder when such shares are transferred in a
transaction which is a Conversion Event or when such shares are acquired by the
Company or any subsidiary of the Company; and provided, further, that the
Company shall have no responsibility for determining whether any outstanding
shares of stock constitute Restricted Stock with respect to a particular
Regulated Stockholder, but shall instead be entitled to receive, and rely
exclusively upon, a written notice provided by such Regulated Stockholder
designating such shares as Restricted Stock.
1.1.20. "Series B Preferred Stock" means the Series B
Convertible Preferred Stock, $1.00 par value, of the Company created pursuant
to a Certificate of Amendment filed December 21, 1994 with the Secretary of
State of the State of New York.
1.1.21. "Stated Value" per share means, with respect to the
Series C Preferred Stock, One Hundred Dollars ($100) per share, as adjusted for
any stock splits, stock combinations, stock dividends or reclassifications
affecting the Series C Preferred Stock after the date of filing of this
Certificate of Amendment.
1.1.22. "Subsidiary" means any corporation of which the
shares of stock having a majority of the general voting power in electing the
board of directors are, at the time as of which any determination is being
made, owned by the Company either directly or indirectly through Subsidiaries.
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1.1.23. "Triggering Amount" means the following amount in
any 60-day period ending in the applicable calendar year:
Triggering Calendar
Amount Year
---------- --------
$3.45 1999
$4.25 2000
$5.15 2001
in each case as adjusted for stock splits, stock combinations, stock dividends
or reclassifications affecting the Common Stock after the date of filing of
this Certificate of Amendment. If the sixty (60) day period includes portions
in two calendar years, the Triggering Amount applicable shall be the average of
the figures shown above for the two years, weighted to reflect in number the
days in each year included such sixty (60) day period.
1.1.24. "Triggering Bid Price" means that the average of the
high and low bid price reported on (i) the principal national securities
exchange on which the Common Stock is then listed or admitted to trading, or
(ii) if not so listed or admitted, the NASD automated quotation system, on
those days on which a bid price was so reported during each period of sixty
(60) consecutive calendar days between January 1, 1999 and December 31, 2001.
1.1.25. "Triggering Event" means the consummation of a
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offering and sale of shares of
Common Stock or of securities convertible into Common Stock (i) in which the
aggregate proceeds to the Company exceed $10,000,000 and (ii) in which the
price per share at which the Common Stock is initially offered to the public
equals or exceeds $3.45 per share or the other securities are initially offered
to the public with a conversion price of $3.45 or more per share (in each case
as adjusted for stock splits, stock combinations, stock dividends or
reclassifications affecting the Common Stock after the date of filing of this
Certificate of Amendment).
1.2. Dividends. The Company shall not, without the prior written
consent of the holders of a majority of the shares of Series C Preferred Stock
then outstanding, pay or declare any dividend or distribution on any Junior
Securities (other than on Common Stock, and on Series B Preferred Stock to the
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extent of participation in dividends declared on the Common Stock). In the
event that the Company declares a dividend or distribution on the Common Stock,
the holders of the Series C Preferred Stock and the holders of the Series B
Preferred Stock and the Common Stock shall share pro rata (based, in the case
of holders of Series C and Series B Preferred Stock, on the number of shares of
Common Stock which each holder of Series C and Series B Preferred Stock would
be entitled to receive upon conversion of its Series C and Series B Preferred
Stock into Common Stock, respectively) in such dividend or distribution;
provided, that if the dividend consists of voting securities or options,
warrants, or rights to acquire such voting securities, or securities
convertible into or exchangeable for such voting securities (the "Voting
Securities") of the Company, the Company shall make available to each holder of
Series C-2 Preferred Stock, at such holder's request, dividends consisting of
non-voting securities or options, warrants or rights to acquire such non-voting
securities, or securities convertible into or exchangeable for such non-voting
securities of the Company which are otherwise identical to the Voting
Securities and which are convertible into or exchangeable for such Voting
Securities.
1.3. Rights on Liquidation.
In the event of any Liquidation, the holders of shares of the
Series C Preferred Stock then issued and outstanding shall be entitled to be
paid the amount specified below out of the assets of the Company available for
distribution to its stockholders, pari-passu with the holders of the Series B
Preferred Stock and before any payment shall be made to the holders of any
other Junior Securities. If, upon any Liquidation of the Company, the assets
of the Company available for distribution to its stockholders (the "Available
Assets") shall be insufficient (a "Liquidation Insufficiency") to pay the
holders of shares of the Series B Preferred Stock and Series C Preferred Stock
the full amounts to which they shall respectively be entitled, the holders of
the Series B Preferred Stock and Series C Preferred Stock shall be entitled to
receive the Available Assets as follows:
(i) the holders of Series C Preferred Stock shall be
entitled to receive (pro rata based on the number of
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shares of Series C Preferred Stock held by them) an
amount equal to the Available Assets times the quotient
derived by dividing (x) the amount of the Available
Assets the holders of Series C Preferred Stock would be
entitled to upon Liquidation if there had been no
Liquidation Insufficiency by (y) the total amount of
the Available Assets the holders of Series B Preferred
Stock and Series C Preferred Stock would be entitled to
upon Liquidation if there had been no Liquidation
Insufficiency; and
(ii) the holders of Series B Preferred Stock shall be
entitled to receive (pro rata based on the number of
shares of Series B Preferred Stock held by them) an
amount equal to the Available Assets times the quotient
derived by dividing (x) the amount of the Available
Assets the holders of Series B Preferred Stock would be
entitled to upon Liquidation if there had been no
Liquidation Insufficiency by (y) the total amount of
the Available Assets the holders of Series B Preferred
Stock and Series C Preferred Stock would be entitled to
upon Liquidation if there had been no Liquidation
Insufficiency; and
if there is no Liquidation Insufficiency, then the holders of shares of the
Series C Preferred Stock shall be entitled to receive the greater of (a) an
amount equal to the Adjusted Stated Value per share, calculated to and
including the date of Distribution with respect to such shares of Series C
Preferred Stock, or (b) the amount which would be distributed in such
liquidation on the shares of Common Stock into which the Series C Preferred
Stock is convertible at the date of the Liquidation of the Company, had such
Series C Preferred Stock been converted.
1.4. Voting Power.
1.4.1. Series C-1 Preferred Stock.
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(a) In General. Except as otherwise expressly provided
herein or as required by law,
(i) the holders of shares of Series C-1 Preferred
Stock and Common Stock shall vote together as a
single class with respect to all matters as to
which stockholders of the Company are entitled
to vote; provided, however, the holders of the
Series C-1 Preferred Stock shall not be entitled
to vote with respect to the election of
directors to the Board of Directors of the
Company except with respect to the election of
the Series C Director as set forth in
Section 1.4.1(b);
(ii) each holder of Series C-1 Preferred Stock shall
be entitled to cast a number of votes equal to
the greatest number of whole shares of Common
Stock into which such holder's shares of Series
C-1 Preferred Stock could be converted, pursuant
to the provisions of Section 1.6 hereof, at the
record date for the determination of stock-
holders entitled to vote on such matter or, if
no such record date is established, at the date
such vote is taken or any written consent of
stockholders is first solicited.
(b) Election of Directors. As long as at least 20% of the
shares of Series C Preferred Stock originally issued are
outstanding, the holders of Series C-1 Preferred Stock shall
have the right, voting separately as a class, unless waived
in writing by the holders of a majority of the outstanding
Series C-1 Preferred Stock, and to the exclusion of all other
classes of the Company's stock, to elect, remove and replace
(including the filling of a vacancy) one (1) director to the
Board of Directors of the Company (the "Series C Director"),
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which, so long as the Series C-1 Preferred Stock has the
right to elect a director, shall be composed of no more than
twelve (12) directors. Any and all committees of the Board
of Directors of the Company shall have as a member the Series
C Director, unless no such director is willing or able to so
serve. The special right of the holders of Series C-1
Preferred Stock to elect and remove the Series C Director
contained in this Section 1.4.1(b) may be exercised either at
a special meeting of the holders of Series C-1 Preferred
Stock called as provided below, at any annual or special
meeting of the stockholders of the Company, or by written
consent of the holders of Series C-1 Preferred Stock in lieu
of a meeting. At any time when the holders of Series C-1
Preferred Stock have the special rights set forth in this
Section 1.4.1(b), the secretary of the Company shall, upon
the written request of the holders of record of shares of
Series C-1 Preferred Stock having at least 10% of the votes
possessed by the then outstanding Series C-1 Preferred Stock,
call a special meeting of the holders of Series C-1 Preferred
Stock for the purpose of electing or removing the Series C
Director. Such meeting shall be held at the earliest practi-
cable date at the Company's principal office or at such other
place designated by the holders of Series C-1 Preferred Stock
having at least 10% of the votes possessed by the then
outstanding Series C-1 Preferred Stock. If such meeting
shall not be called by a proper officer of the Company within
ten (10) days after personal service of said written request
upon the secretary of the Company or within twenty (20) days
after mailing the same to the secretary of the Company at the
Company's principal office, then the holders of record of
Series C-1 Preferred Stock having at least 10% of the votes
possessed by the then outstanding Series C-1 Preferred Stock
may designate in writing one of their number to call such
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<PAGE>
meeting at the expense of the Company, and such meeting may
be called by such persons so designated upon the shortest
legally permissible notice. Any holders of Series C-1
Preferred Stock so designated shall have reasonable access to
the stock books of the Company during regular business hours,
at the principal office of the Company or its transfer agent,
for the purpose of calling a meeting of the stockholders
pursuant to these provisions.
At any stockholders meeting at which the holders of
Series C-1 Preferred Stock shall have the special right to
elect or remove the Series C Director as provided in this
Section 1.4.1(b), the presence, in person or by proxy, of the
holders of record of shares of Series C-1 Preferred Stock
having a majority of the votes possessed by the then out-
standing Series C-1 Preferred Stock shall be required to
constitute a quorum of the Series C-1 Preferred Stock for
such election or removal. At any such meeting or adjournment
thereof, the absence of a separate quorum of the Series C
Preferred Stock shall not prevent the election of those
directors to be elected at such meeting, other than the
Series C Director. In the absence of a separate quorum of
the Series C-1 Preferred Stock, the holders of record of
shares representing a majority of the voting power present in
person or by proxy of the Series C-1 Preferred Stock shall
have power to adjourn the meeting for the election of the
Series C Director without notice other than announcement at
the meeting.
(c) Special Matters. The Company shall not authorize,
effect or validate any of the following without (i) the
consent in writing or by votes at a meeting of the holders of
at least 50% of all of the shares of the Series C-1 Preferred
Stock at the time outstanding, if any, voting together as a
separate class and to the exclusion of all other classes of
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the Company's stock or (ii) complying with the terms of
Section 1.5.3 below:
(i) Ten Percent Redemptions. Subject to Section 1.8 below,
directly or indirectly redeem, purchase or otherwise
acquire, or permit any Subsidiary to directly or
indirectly redeem, purchase or otherwise acquire, ten
percent (10%) or more of any of the Company's, or any
Subsidiary's (except wholly-owned Subsidiary's),
outstanding equity securities except as required by the
terms of the Series C Preferred Stock and other than
pursuant to the terms of the agreements with employees,
officers, directors and consultants of the Company,
pursuant to which the Company may repurchase such
shares upon the occurrence of certain events, in all
cases as in effect on the date of filing of this
Certificate of Amendment.
(ii) Security Issuances. Authorize, issue, or enter into
any agreement providing for the issuance (contingent or
otherwise) by the Company or any of its Subsidiaries
of, (x) any notes or debt securities convertible into
or exchangeable for equity securities, issued in
connection with the issuance of equity securities or
containing profit participation features or (y) any
equity securities (or any securities convertible into
or exchangeable for any equity securities), provided,
however, that this Section 1.4.1(c)(ii) shall not
prevent the issuance of Junior Securities, or
securities convertible or exchangeable for Junior
Securities.
(iii) Mergers. Merge or consolidate with any Person or
permit any Subsidiary to merge or consolidate with any
Person except for (i) mergers of a wholly-owned
Subsidiary with or into the Company or any other
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<PAGE>
wholly-owned Subsidiary or (ii) mergers or
consolidations in which the Company or Subsidiary is
the surviving corporation and at the conclusion of
which the shareholders of the Company immediately
preceding such consolidation or merger own greater than
fifty percent (50%) of the equity securities of the
surviving corporation.
(iv) Liquidations. Liquidate, dissolve or effect a
recapitalization or reorganization in any form of
transaction or make an assignment for the benefit of
creditors or admit in writing the Company's or any
Subsidiary's inability to pay its debts generally as
they become due; or petition or apply to any tribunal
for the appointment of a custodian, trustee, receiver
or liquidator of the Company or a Subsidiary, or of any
substantial part of the assets of the Company or a
Subsidiary, or commence any proceeding (other than a
proceeding for the voluntary liquidation and
dissolution of a Subsidiary) relating to the Company or
a Subsidiary under any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction.
(v) Charter Amendments. Make or authorize any amendment to
the Company's articles of incorporation or by-laws, or
any Subsidiary's organizational documents, or file any
resolution of the Board of Directors of the Company or
any Subsidiary, with the Secretary of State or any
other incorporation agency in the state in which it is
organized, in each case which would have the effect of
amending, altering or changing the designations,
powers, preferences, rights, privileges or restrictions
of the Series C Preferred Stock or otherwise have an
adverse effect on the Series C Preferred Stock.
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(vi) Affiliate Transactions. Enter into, or permit any
Subsidiary to enter into, any transaction with any of
its or any Subsidiary's Affiliates, except for (i)
normal employment arrangements and benefit programs on
reasonable terms, (ii) transactions among Universal
and/or one or more of its wholly-owned Subsidiaries,
and (iii) transactions not less favorable to Universal
and its Subsidiaries, taken as a whole, than would be
one entered into at arm's length with unaffiliated
parties.
(vii) Sale of Assets. Sell, lease or otherwise dispose of,
all or substantially all assets of the Company,
directly or through a Subsidiary of the Company, in any
transaction or series of related transactions,
including the sale by the Company of any one of
American Pioneer Life Insurance Company or American
Progressive Life and Health Insurance Company of New
York (together, the "Insurance Company Subsidiaries").
This Section 1.4.1(c)(vii) shall not, however, prevent
transactions in which ownership of assets is
transferred among Universal and/or one or more of its
wholly-owned Subsidiaries.
(viii) Indebtedness. Create, incur, assume or suffer to
exist, or permit the Company and its Subsidiaries,
taken as a whole, to create, incur, assume or suffer to
exist, Indebtedness in an aggregate amount which result
in the sum of (i) the aggregate principal amount of all
Indebtedness outstanding, plus (ii) the par value of
all Preferred Stock outstanding, to exceed 80% of the
statutory book value (including "Asset Valuation
Reserve" and "Interest Maintenance Reserve") of both
Insurance Company Subsidiaries, except (x) trade debt
incurred in the normal course of business and (y)
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Indebtedness, if any, provided for in the Company's
annual budget approved by the Board of Directors.
The taking by the Company of an action described in (i) through
(vi) above without obtaining the consent required by this Section 1.4.1(c)
shall be referred to as a "Call Price Action" and the taking by the Company of
an action described in (vii) and (viii) above without first obtaining the
consent required by this Section 1.4.1(c) shall be referred to as an "Adjusted
Stated Value Action."
1.4.2. Voting Rights of Series C-2 Preferred Stock. Except
as set forth herein or as otherwise required by law, no outstanding share of
Series C-2 Preferred Stock shall be entitled to vote on any matter on which the
stockholders of the Company shall be entitled to vote, and no shares of Series
C-2 Preferred Stock shall be included in determining the number of shares
voting or entitled to vote on any such matters; provided that the holders of
Series C-2 Preferred Stock shall have the right to vote as a separate class on
any merger or consolidation of the Corporation with or into another entity or
entities, or any recapitalization or reorganization, in which shares of Series
C-2 Preferred Stock would receive or be exchanged for consideration different
on a per share basis from consideration received with respect to or in exchange
for the shares of Series C-1 Preferred Stock or would otherwise be treated
differently from shares of Series C-1 Preferred Stock in connection with such
transaction, except that if the consideration received with respect to, or in
exchange for, Series C-1 includes voting securities, shares of Series C-2
Preferred Stock may, without such a separate class vote, receive or be
exchanged for non-voting securities which are otherwise identical on a per
share basis in amount and form to the voting securities received with respect
to or exchanged for the Series C-1 Preferred Stock so long as (i) such non-
voting securities are convertible into such voting securities on the same terms
as the Series C-2 Preferred Stock is convertible into voting stock and (ii) all
other consideration is equal on a per share basis. Notwithstanding the
foregoing, holders of shares of Series C-2 Preferred Stock shall be entitled to
vote as a separate class on any amendment to this paragraph (2) of this Section
A and on any amendment, repeal or modification of any provision of this
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Certificate of Incorporation that adversely affects the powers, preferences or
special rights of holders of the Series C-2 Preferred Stock.
1.5. Redemption.
1.5.1. Fixed Redemption. On December 31, 2002 (the "Fixed
Redemption Date") all of the then issued and outstanding Series C Preferred
Stock shall be redeemed at a redemption price (the "Fixed Redemption Price")
equal to the Adjusted Stated Value on December 31, 2002. One-half of the Fixed
Redemption Price shall be paid in cash to the person whose name appears in the
records of the Company as the owner of the shares redeemed, by check mailed to
such person's address on such records on the Fixed Redemption Date, and the
other half shall be payable in the same manner, on the first anniversary of the
Fixed Redemption Date.
1.5.2. Call by the Company. The Series C Preferred Stock
may be redeemed by the Company, at its option, upon ninety (90) days prior
written notice to the Holders, at the Call Price then in effect.
Such redemption may be effected under this Section 1.5.2 at
any time after January 1, 2000 and before December 31, 2002. The conversion
right set forth in Section 1.6.1 shall not be affected by the giving of a
redemption notice hereunder until the close of business the Business Day prior
to the date specified in such notice as the proposed effective date of the
redemption.
1.5.3. Non-Compliance Provisions. If the Company proposes
to take any action which constitutes either a Call Price Action or an Adjusted
Stated Value Action without securing the approval by vote or in writing
required by Section 1.4.1(c) (each such action or breach, an AEvent of Non-
Compliance@) then each of the holders of the Series C Preferred Stock may
require redemption of all or any part of such holder=s Series C Preferred Stock
at a redemption price in cash equal to (i) in the event of a Call Price Action,
the Call Price in effect on the Non-Compliance Redemption Date and (ii) in the
event of an Adjusted Stated Value Action, the Adjusted Stated Value in effect
on the Non-Compliance Redemption Date. In implementation of this Section
1.5.3:
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(a) At least 15 days before the consummation of any Event
of Non-Compliance, each holder of Series C Preferred
Stock will receive a notice from the Company (i) stat-
ing that an Event of Non-Compliance is contemplated,
(ii) setting forth a redemption date (the "Non-
Compliance Redemption Date"), which shall be the date
of the Event of Non-Compliance, (iii) setting forth the
Conversion Price in effect with respect to such shares
of Series C Preferred Stock, up to and including the
date of consummation of the Event of Non-Compliance,
and (iv) stating that during such 15-day period, each
shareholder wishing to require the Company to redeem
all or any part of its Series C Preferred Stock,
pursuant to subsection (b) below, must give the Company
written notice of its intention to require such
redemption prior to the consummation of the Event of
Non-Compliance.
(b) Any holder of Series C-1 Preferred Stock that withheld
its consent to the Event of Non-Compliance and any
holder of Series C-2 Preferred Stock that has advised
the Company in writing prior to consummation of an
Event of Non-Compliance of its intention to require the
Company to redeem its shares, may require that the
Company redeem any shares hereunder by surrendering its
shares to the Company on the Non-Compliance Redemption
Date or within thirty (30) days thereafter and will be
entitled to payment therefor within ten (10) days of
such surrender in full satisfaction of such shares.
(c) Any holder of shares of Series C-1 Preferred Stock that
does not tender such shares pursuant to Section
1.5.3(b) above shall be deemed to have consented to the
subject Event of Non-Compliance.
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(d) It is an express condition of this Series C Preferred
Stock that this Section 1.5.3 shall constitute the sole
remedy of the Series C Preferred Stockholders with
respect to the Company's failure to obtain the consent
otherwise required by Section 1.4.1(c) above. Without
limitation, there shall be no right to injunctive or
any other kind of equitable relief, or to any other
remedy at law whatsoever, by virtue of the Company's
failure to obtain the consent otherwise required by
Section 1.4.1(c) above with respect to such Event of
Non-Compliance.
1.5.4. Failure to Pay Redemption Price or Installment. If
payment of the Fixed Redemption Price is not made as provided in Section 1.5.1
and said default is not cured within fifteen (15) days, the holder of each
share of Series C Preferred Stock which was redeemed shall be entitled to
require the Company to issue a promissory note for the unpaid portion of the
Fixed Redemption Price, including any amount which would otherwise not have
been payable until the first anniversary of the Fixed Redemption Date, which
note shall be due one year after the Fixed Redemption Date (or the first
anniversary thereof, whichever is applicable), together with interest at twenty
(20%) percent per annum until paid, subject to pre-payment at any time, with
interest accrued, without penalty. Any such promissory note shall contain
substantially the same terms and conditions of the Series C Preferred Stock,
including negative and affirmative covenants equal to the rights of the holders
of the Series C-1 Preferred Stock set forth in Section 1.4.1(c) and board
observation rights comparable to the rights of the holders of Series C-1
Preferred Stock set forth in Section 1.4.1(b).
1.5.5. Legal Availability. If the funds of the Company
legally available for redemption of Series C Preferred Stock on any Redemption
Date are insufficient to redeem the total number of Series C Preferred Stock to
be redeemed on such date, those funds which are legally available shall be used
to redeem the maximum possible number of Series C Preferred Stock ratably among
the holders of the Series C Preferred Stock to be redeemed. At any time
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thereafter when additional funds of the Company are legally available for the
redemption of Series C Preferred Stock, such funds shall immediately be used to
redeem the balance of the Series C Preferred Stock which the Company has become
obligated to redeem on any Redemption Date but which it has not redeemed. In
case fewer than the total number of Series C Preferred Shares represented by
any certificate are redeemed, a new certificate representing the number of
unredeemed Series C Preferred Stock shall be issued to the holder thereof
without cost to such holder within three Business Days after surrender of the
certificate representing the redeemed Series C Preferred Stock. In the event
that any Series C Preferred Stock is redeemed under Section 1.5.1, 1.5.2 or
1.5.3 and the certificates for the Series C Preferred Stock to be redeemed have
not been delivered to the Company, from and after the date on which the Company
makes the entire Fixed Redemption Price or Call Price, as the case may be,
available or irrevocably deposits an amount equal to such Fixed Redemption
Price or Call Price, as the case may be, for the shares of Series C Preferred
Stock to be redeemed in trust for the holders of such shares with a bank having
capital and surplus in excess of $100 million, which bank shall be named in the
redemption notice, all rights of the holders of such Series C Preferred Stock,
except the right to receive the Fixed Redemption Price or Call Price, as the
case may be (whether in cash or in the form of the promissory note provided for
in Section 1.5.4, above, without interest except as provided with respect to
the promissory note), upon surrender of their certificate or certificates,
shall cease with respect to such shares, and such shares shall not thereafter
be transferred on the books of the Company or be deemed to be outstanding for
any purpose whatsoever.
1.5.6. Other Redemptions or Acquisitions. Neither the
Company nor any Subsidiary shall redeem or otherwise acquire any share of
Series C Preferred Stock, except as expressly authorized herein or pursuant to
a purchase offer made pro rata to all holders of Series C Preferred Stock on
the basis of the number of shares owned by each such holder.
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<PAGE>
1.6. Conversion Rights.
1.6.1. At the Option of the Holder. Each holder of the
outstanding shares of Series C Preferred Stock shall have the right to convert
all or any portion of such shares of Series C Preferred Stock into the number
of fully paid and non-assessable shares of Common Stock computed by multiplying
the number of shares of Series C Preferred Stock to be converted times the
Stated Value and dividing the result by the Conversion Price. Within 15 days
of any such conversion of Series C-2 Preferred Stock into Common Stock, such
converted shares may be converted back into the same number of Series C-2
Preferred Shares, provided that such shares were not voted following the
initial conversion of Series C-2 Preferred Stock into Common Stock. Series C
Preferred Stock may be converted by the holder thereof during normal business
hours on any Business Day by surrender of the required number of shares of
Series C Preferred Stock, accompanied by written evidence (in form reasonably
satisfactory to the Company) of the holder's election to convert such holder's
Series C Preferred Stock or portion thereof, to the Company at its principal
executive offices.
1.6.2. At the Option of a Transferee of Series C-2 Preferred
Stock. Subject to Section 1.6.4, below, each outstanding share of Series C-2
Preferred Stock may be converted into one fully paid and nonassessable share of
Series C-1 Preferred Stock by any transferee of such shares of Series C-2
Preferred Stock, provided that each holder of Series C-2 Preferred Stock may
convert such shares into Series C-1 Preferred Stock if such holder reasonably
believes that such converted shares will be transferred within fifteen (15)
days pursuant to a Conversion Event and such holder agrees not to vote any such
shares of Series C-1 Preferred Stock prior to such Conversion Event and
undertakes to promptly convert such shares back into Series C-2 Preferred Stock
if such shares are not transferred pursuant to a Conversion Event. Series C-2
Preferred Stock may be converted by the transferee during normal business hours
on any Business Day by surrender of the certificate or certificates
representing the Series C-2 Preferred Stock (or, if no stock certificate has
yet been issued to the holder of the Series C-2 Preferred Stock, a written
statement that the holder has not yet received a stock certificate and
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instructing the Company to treat such certificate, when and if issued, as if
such certificate had been surrendered by the holder) to the Company at its
principal executive offices. The surrendered certificate or certificates shall
be accompanied by written evidence (in form reasonably satisfactory to the
Company) of the transferee's election to convert its Series C-2 Preferred Stock
or portion thereof.
1.6.3. At the Option of the Company. Upon the occurrence of
a Triggering Event, or if the Triggering Bid Price for any period of sixty (60)
consecutive calendar days has exceeded the Triggering Amount, the Company may
require that each of the outstanding shares of Series C Preferred Stock be con-
verted into Common Stock computed by multiplying the number of shares of Series
C Preferred Stock to be converted times the Stated Value and dividing the
result by the Conversion Price in effect at the time of such conversion. Such
right may be exercised by written notice to the holders thereof given (i) not
less than ten (10) days prior to the date of closing of a Triggering Event or
(ii) within thirty (30) days after the end of any sixty (60) day period in
which the Triggering Bid Price has exceeded the Triggering Amount, which notice
shall specify the record date set for conversion. Such conversion shall be
effected, automatically and without any further action by the holders of such
shares and whether or not the certificates representing such shares are
surrendered to the Company or its transfer agent.
1.6.4. Restricted Stock. Series C-2 Preferred Stock
constituting Restricted Stock with respect to a particular Regulated
Stockholder may not be converted into Common Stock or Series C-1 Preferred
Stock to the extent that immediately prior thereto, or as a result of such
conversion, the number of shares of Common Stock or Series C-1 Preferred Stock
which constitute such Restricted Stock held by all holders thereof would exceed
the number of shares of Common Stock or Series C-1 Preferred Stock which such
Regulated Stockholder reasonably determines it and its Affiliates may own,
control or have the power to vote under any law, regulation, rule or other
requirement of any governmental authority at the time applicable to such
Regulated Stockholder or its Affiliates. Each Regulated Stockholder may
provide for further restrictions upon the conversion of any shares of
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Restricted Stock by providing the Company with signed, written instructions
specifying such additional restrictions and legending such shares as to the
existence of such restrictions.
1.6.5. Conversion Procedure. Upon the conversion of Series
C Preferred Stock, the holders of such Series C Preferred Stock shall surrender
the certificates representing such shares at the office of the Company. The
Company shall not be obligated to issue certificates evidencing the shares of
stock issuable upon such conversion unless certificates evidencing such shares
of Series C Preferred Stock being converted are either delivered to the Company
or the holder notifies the Company that such certificates have been lost,
stolen, or destroyed and delivers to the Company an agreement satisfactory to
the Company, with a surety satisfactory to the Company, to indemnify the Compa-
ny from any loss incurred by it in connection therewith.
1.6.6. Time of Conversion. Each conversion of Series C
Preferred Stock pursuant to Sections 1.6.1 and 1.6.2 shall be deemed to have
been effected immediately prior to the close of business on the Business Day on
which such Series C Preferred Stock shall have been surrendered to the Company
as provided herein (except that, in the case of a conversion subject to Section
1.6.7 below, the conversion shall be deemed to be effective upon the expiration
of the Deferral Period referred to therein). Each conversion pursuant to
Section 1.6.3 shall be deemed to have been effected as of the record date
specified in the notice therefor, and such conversion shall be at the Conver-
sion Price in effect at such time (except that, in the case of a conversion
subject to Section 1.6.7 below, the conversion shall be deemed to be effective
upon the expiration of the Deferral Period referred to therein). On each such
day that the conversion of shares of Series C Preferred Stock is deemed
effected, the Person or Persons in whose name or names any certificate or
certificates for shares of stock are issuable upon such conversion shall be
deemed to have become the holder or holders of record thereof.
1.6.7. Notice of Conversion to Regulated Stockholders. The
Company shall not convert or directly or indirectly redeem, purchase or
otherwise acquire any shares of any class of capital stock of the Company or
take any other action affecting the voting rights of such shares, if such
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action will increase the percentage of any class of outstanding voting
securities owned or controlled by any Regulated Stockholder (other than any
such stockholder which requested that the Company take such action, or which
otherwise waives in writing its rights under this Section 1.6.7), unless the
Company gives written notice (the "Deferral Notice") of such action to each
Regulated Stockholder. The Company will defer making any such conversion,
redemption, purchase or other acquisition, or taking any such other action for
a period of twenty (20) days (the "Deferral Period") after giving the Deferral
Notice in order to allow each Regulated Stockholder to determine whether it
wishes to convert or take another action with respect to the stock it owns,
controls or has the power to vote, and if any such Regulated Stockholder then
elects to convert any shares of its stock, it shall notify the Company in
writing within ten (10) days of the issuance of the Deferral Notice, in which
case the Company shall (i) promptly notify from time to time prior to the end
of such 20-day period each other Regulated Stockholder holding shares of each
proposed conversion, and (ii) effect the conversions requested by all Regulated
Stockholders in response to the notices issued pursuant to this Section 1.6.7
at the end of the Deferral Period. Upon complying with the procedures
hereinabove set forth in this Section 1.6.7, the Company may so convert or
directly or indirectly redeem, purchase or otherwise acquire any shares of any
other class of capital stock of the Company or take any other action affecting
the voting rights of such shares.
1.6.8. Issuance of Certificate for Common Stock. As
promptly as practical after the conversion of shares of Series C Preferred
Stock, in whole or in part, and in any event within five (5) Business Days
thereafter, the Company at its expense (including the payment by it of any
applicable issue, stamp or other taxes, other than any income taxes and other
than any taxes arising by reason of issuance of shares of stock to any Person
other than such holder) will cause to be issued in the name of and delivered to
the holder thereof or as such holder may direct, a certificate or certificates
for the number of shares of stock to which such holder shall be entitled upon
such conversion; provided, however, that if such conversion is subject to
Section 1.6.7 above, the Company shall not issue such certificate or
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certificates until the expiration of the Deferral Period referred to therein.
In case fewer than all the shares of Series C Preferred Stock represented by
any surrendered certificate are converted, a new certificate representing the
shares of Series C Preferred Stock not converted shall be issued without cost
to the holder thereof.
1.6.9. Books of Corporation. The Company will not close its
books against the transfer of Series C Preferred Stock or of stock issued or
issuable upon conversion of Series C Preferred Stock in any manner which
interferes with the timely conversion of Series C Preferred Stock. The Company
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock and Series C-1 Preferred stock, solely for the
purpose of issuance upon the conversion of the Series C Preferred Stock, such
number of shares of Common Stock issuable upon the conversion of all
outstanding Series C Preferred Stock and such number of shares of Series C-1
Preferred Stock issuable upon the conversion of all outstanding Series C-2
Preferred Stock. All shares of Common Stock which are so issuable shall, when
issued, be duly and validly issued, fully paid and nonassessable and free from
all taxes, liens and charges. The Company shall take all such actions as may
be necessary to assure that all such shares of Common Stock and Series C-1
Preferred Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of Common Stock and Series C-1 Preferred Stock may be listed
(except for official notice of issuance which shall be immediately delivered by
the Corporation upon each such issuance).
1.7. Anti-Dilution Adjustments. The number of shares of Common
Stock issuable upon any conversion provided for in Section 1.6 shall be subject
to adjustment, from time to time, in accordance with the following provisions:
1.7.1. Issuance of Additional Shares of Common Stock. In
case the Company at any time or from time to time after the date hereof shall
issue or sell Additional Shares of Common Stock (including Additional Shares of
Common Stock deemed to be issued pursuant to Section 1.7.2 or 1.7.3) without
consideration or for a consideration per share less than the Conversion Price
in effect immediately prior to such issue or sale, then, in each such case,
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subject to Section 1.7.7, such Conversion Price shall be reduced, concurrently
with such issue or sale, to a price (calculated to the nearest .001 of a cent)
determined by multiplying such Conversion Price by a fraction
(a) the numerator of which shall be (i) the number of
shares of Common Stock into which the outstanding
Series C Preferred Stock is convertible immediately
prior to such issue or sale plus (ii) the number of
shares of Common Stock which the aggregate
consideration received by the Company for the total
number of such Additional Shares of Common Stock so
issued or sold would purchase at such Conversion Price,
and
(b) the denominator of which shall be (i) the number of
shares of Common Stock into which the outstanding
Series C Preferred Stock is convertible immediately
prior to such issue or sale plus (ii) the number of
Additional Shares so issued or sold immediately after
such issue or sale,
provided that, for the purposes of this Section 1.7.1, (x) immediately after
any Additional Shares of Common Stock are deemed to have been issued pursuant
to Section 1.7.2 or 1.7.3, such Additional Shares shall be deemed to be
outstanding and (y) treasury shares shall not be deemed to be outstanding.
1.7.2. Treatment of Options and Convertible Securities. In
case the Company at any time or from time to time after the date hereof shall
issue, sell, grant or assume, or shall fix a record date for the determination
of holders of any class of securities entitled to receive, any Options or
Convertible Securities, then and in each such case, the maximum number of
Additional Shares of Common Stock (as set forth in the instrument relating
thereto, without regard to any provisions contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or, in
the case of Convertible Securities and Options therefor, the conversion or
exchange of such Convertible Securities, shall be deemed to be Additional
Shares of Common Stock issued as of the time of such issue, sale, grant or
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assumption or, in case such a record date shall have been fixed, as of the
close of business on such record date (or, if the Common Stock trades on an ex-
dividend basis, on the date prior to the commencement of ex-dividend trading),
provided that such Additional Shares of Common Stock shall not be deemed to
have been issued unless the consideration per share (determined pursuant to
Section 1.7.4) of such shares would be less than the Conversion Price in effect
on the date of and immediately prior to such issue, sale, grant or assumption
or immediately prior to the close of business on such record date (or, if the
Common Stock trades on an ex-dividend basis, on the date prior to the
commencement of ex-dividend trading), as the case may be, and provided,
further, that in any such case in which Additional Shares of Common Stock are
deemed to be issued
(a) no further adjustment of the Conversion Price shall be
made upon the subsequent issue or sale of Convertible
Securities or shares of Common Stock upon the exercise
of such Options or the conversion or exchange of such
Convertible Securities;
(b) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise,
for any increase in the consideration payable to the
Company, or decrease in the number of Additional Shares
of Common Stock issuable, upon the exercise, conversion
or exchange thereof (by change of rate or otherwise),
the Conversion Price computed upon the original issue,
sale, grant or assumption thereof (or upon the
occurrence of the record date, or date prior to the
commencement of ex-dividend trading, as the case may
be, with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed
to reflect such increase or decrease insofar as it
affects such Options, or the rights of conversion or
exchange under such Convertible Securities, which are
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outstanding at such time;
(c) upon the expiration (or purchase by the Company and
cancellation or retirement) of any such Options which
shall not have been exercised or the expiration of any
rights of conversion or exchange under any such
Convertible Securities which shall not have been
exercised (or purchase by the Company and cancellation
or retirement of any such Convertible Securities the
rights of conversion or exchange under which shall not
have been exercised), the Conversion Price computed
upon the original issue, sale, grant or assumption (or
upon the occurrence of the record date, or date prior
to the commencement of ex-dividend trading, as the case
may be, with respect thereto), and any subsequent
adjustments based thereon, shall, upon such expiration
(or such cancellation or retirement, as the case may
be), be recomputed as if:
(i) in the case of Options for Common
Stock or Convertible Securities, the only
Additional Shares of Common Stock issued or sold
were the Additional Shares of Common Stock, if
any, actually issued or sold upon the exercise
of such Options or the conversion or exchange of
such Convertible Securities and the
consideration received therefor was the
consideration actually received by the Company
for the issue, sale, grant or assumption of all
such options, whether or not exercised, plus the
consideration actually received by the Company
upon such exercise, or for the issue or sale of
all such Convertible Securities which were
actually converted or exchanged, plus the
additional consideration, if any, actually
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<PAGE>
received by the Company upon such conversion or
exchange, and
(ii) in the case of Options for
Convertible Securities, only the Convertible
Securities, if any, actually issued or sold upon
the exercise of such Options were issued at the
time of the issue, sale, grant or assumption of
such Options, and the consideration received by
the Company for the Additional Shares of Common
Stock deemed to have then been issued was the
consideration actually received by the Company
for the issue, sale, grant or assumption of all
such Options, whether or not exercised, plus the
consideration deemed to have been received by
the Company (pursuant to Section 1.7.4) upon the
issue or sale of such Convertible Securities
with respect to which such Options were actually
exercised;
(d) no readjustment pursuant to subdivision (b) or (c)
above shall have the effect of increasing the
Conversion Price by an amount in excess of the amount
of the adjustment thereof originally made in respect of
the issue, sale, grant or assumption of such Options or
Convertible Securities; and
(e) in the case of any such Options which expire by their
terms not more than thirty (30) days after the date of
issue, sale, grant or assumption thereof, no adjustment
of the Conversion Price shall be made until the
expiration or exercise of all such Options, whereupon
such adjustment shall be made in the manner provided in
subdivision (c) above.
1.7.3. Treatment of Stock Dividends, Stock Splits, etc. In
case the Company at any time or from time to time after the date hereof shall
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<PAGE>
declare or pay any dividend on the Common Stock payable in Common Stock, or
shall effect a subdivision of the outstanding shares of Common Stock into a
greater number of shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in Common Stock), then, and in each such case,
Additional Shares of Common Stock shall be deemed to have been issued (a) in
the case of any such dividend, immediately after the close of business on the
record date for the determination of holders of any class of securities
entitled to receive such dividend, or (b) in the case of any such subdivision,
at the close of business on the date immediately prior to the day upon which
such corporate action becomes effective.
1.7.4. Computation of Consideration. For the purposes of
this Section 1.7,
(a) the consideration for the issue or sale of any
Additional Shares of Common Stock shall, irrespective
of the accounting treatment of such consideration,
(i) insofar as it consists of cash, be
computed at the net amount of cash received by
the Company, without deducting any expenses paid
or incurred by the Company or any commissions or
compensation paid or concessions or discounts
allowed to underwriters, dealers or others
performing similar services in connection with
such issue or sale,
(ii) insofar as it consists of property
(including securities) other than cash, be
computed at the fair value thereof at the time
of such issue or sale, as determined in good
faith by the Board of Directors of the Company
(subject to confirmation by a firm of
independent certified public accountants of
recognized national standing approved by either
the holders of a majority of the Series C
Preferred Stock or the Series C Director), and
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(iii) in case Additional Shares of Common
Stock are issued or sold together with other
stock or securities or other assets of the
Company for a consideration which covers both,
be the portion of such consideration so
received, computed as provided in clauses (i)
and (ii) above, allocable to such Additional
Shares of Common Stock, all as determined in
good faith by the Board of Directors of the
Company (subject to confirmation by a firm of
independent certified public accountants of
recognized national standing approved by either
the holders of a majority of the Series C
Preferred Stock or the Series C Director);
(b) Additional Shares of Common Stock deemed to have been
issued pursuant to Section 1.7.2, relating to Options
and Convertible Securities, shall be deemed to have
been issued for a consideration per share determined by
dividing
(i) the total amount, if any, received
and receivable by the Company as consideration
for the issue, sale, grant or assumption of the
Options or Convertible Securities in question,
plus the minimum aggregate amount of additional
consideration (as set forth in the instruments
relating thereto, without regard to any
provision contained therein for a subsequent
adjustment of such consideration to protect
against dilution) payable to the Company upon
the exercise in full of such Options or the
conversion or exchange of such Convertible
Securities or, in the case of Options for
Convertible Securities, the exercise of such
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Options for Convertible Securities and the
conversion or exchange of such Convertible
Securities, in each case computing such
consideration as provided in the foregoing
subdivision (a),
by
(ii) the maximum number of shares of
Common Stock (as set forth in the instruments
relating thereto, without regard to any
provision contained therein for a subsequent
adjustment of such number to protect against
dilution) issuable upon the exercise of such
Options or the conversion or exchange of such
Convertible Securities; and
(c) Additional Shares of Common Stock deemed to have been
issued pursuant to Section 1.7.3, relating to stock
dividends, stock splits, etc., shall be deemed to have
been issued for no consideration.
1.7.5. Adjustments for Combinations, etc. In case the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
the Conversion Price in effect immediately prior to such combination or
consolidation shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.
1.7.6. Dilution in Case of Other Securities. In case any
Other Securities shall be issued or sold or shall become subject to issue or
sale upon the conversion or exchange of any stock (or Other Securities) of the
Company (or any issuer of Other Securities or any other Person referred to in
Section 1.9) or to subscription, purchase or other acquisition pursuant to any
Options issued or granted by the Company (or any such other issuer or Person)
for a consideration such as to dilute, on a basis consistent with the standards
established in the other provisions of this Section 1.7, the conversion rights
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<PAGE>
granted to holders of Series C Preferred Stock, then, and in each such case,
the computations, adjustments and readjustments provided for in this Section
1.7 with respect to the Conversion Price shall be made as nearly as possible in
the manner so provided and applied to determine the amount of Common Stock from
time to time receivable upon the conversion of the shares of Series C Preferred
Stock, so as to protect the holders of the Series C Preferred Stock against the
effect of such dilution.
1.7.7. Minimum Adjustment of Conversion Price. If the
amount of any adjustment of the Conversion Price required pursuant to this
Section 1.7 would be less than five percent (5%) of the Conversion Price in
effect at the time such adjustment is otherwise so required to be made, such
adjustment shall not then be made and such amount shall be carried forward and
adjustment with respect thereto made at the time of and together with any
subsequent adjustment which, together with such amount and any other amount or
amounts so carried forward, shall aggregate at least five percent (5%) of such
Conversion Price. Notwithstanding the foregoing, the Conversion Price shall be
adjusted at the time of, and be effective with respect to, any conversion or
redemption of any shares of Series C Preferred Stock.
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<PAGE>
1.7.8. Reorganization, Reclassification, Consolidation,
------------------------------------------------
Merger or Sale.
- - ---------------
(a) Company Survives. Upon the consummation of an
Organic Change (other than a transaction in
which the Company is not the surviving entity)
the terms of the Series C Preferred Stock shall
be deemed modified, without payment of any
additional consideration therefor, so as to
provide that upon the conversion of shares of
Series C Preferred Stock following the
consummation of such Organic Change, the holder
of such shares of Series C Preferred Stock shall
have the right to acquire and receive (in lieu
of or in addition to the shares of Common Stock
acquirable and receivable prior to the Organic
Change) such shares of stock, securities or
assets as such holder would have received if
such holder had converted its shares of Series C
Preferred Stock into Common Stock immediately
prior to such Organic Change, in each case
giving effect to any adjustment of the
Conversion Price made after the date of
consummation of the Organic Change. All other
terms of the Series C Preferred Stock shall
remain in full force and effect following such
an Organic Change. The provisions of this
Section 1.7.8(a) shall similarly apply to
successive Organic Changes.
(b) Company Does Not Survive. No Organic Change
that is a transaction in which the Company is
not the surviving entity shall become effective
unless the surviving entity shall have issued
new securities to the holders of shares of
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<PAGE>
Series C Preferred Stock, without payment of any
additional consideration therefor, with terms
that provide that upon the conversion of such
securities following the consummation of such
Organic Change, the holder of such securities
shall have the right to acquire and receive (in
lieu of or in addition to the shares of Common
Stock acquirable and receivable prior to the
Organic Change) such shares of stock, securities
or assets as such holder would have received if
such holder had converted its shares of Series C
Preferred Stock into Common Stock immediately
prior to such Organic Change, in each case
giving effect to any adjustment of the
Conversion Price of such new securities made
after the date of consummation of the Organic
Change on an equivalent basis to the adjustments
provided for the Conversion Price herein. All
other terms of the new securities shall be
equivalent to the terms of the Series C
Preferred Stock provided for herein. The
provisions of this Section 1.7.8(b) shall
similarly apply to successive Organic Changes.
1.8. Restrictions on Redemptions, Purchases and Acquisitions. The
Company shall not redeem, purchase, acquire or take any other action affecting
outstanding shares of stock if, after giving effect to such redemption,
purchase, acquisition or other action, a Regulated Stockholder would own more
than 4.99% of any class of voting securities of the Company (other than any
class of voting securities which is (or is made prior to any such redemption,
purchase, acquisition or other action) convertible into a class of nonvoting
securities which are otherwise identical to the voting securities and
convertible into such voting securities on terms reasonably acceptable to such
Regulated Stockholder) or more than 24.99% of the total equity of the Company
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<PAGE>
or more than 24.99% of the total value of all capital stock and subordinated
debt of the Company (in each case determined by assuming such Regulated
Stockholder (but no other holder) has exercised, converted or exchanged all of
its options, warrants and other convertible or exchangeable securities). The
Company shall not be a party to a merger, consolidation, recapitalization,
reorganization or other transaction pursuant to which a Regulated Stockholder
would be required to take any securities or subordinated debt which might
reasonably be expected to cause such person to have a Regulatory Problem.
1.9. Notices.
(a) Immediately upon any adjustment of the Conversion
Price, the Company will give written notice thereof to
all holders of Series C Preferred Stock.
(b) The Company will give written notice to all holders of
Series C Preferred Stock at least twenty (20) days
prior to the date on which the Company closes its books
or takes a record (1) with respect to any dividend or
distribution upon Common Stock, (2) with respect to any
pro rata subscription offer to holders of Common Stock
or (3) for determining rights to vote with respect to
any Organic Change, dissolution or liquidation.
(c) The Company will also give written notice to the
holders of Series C Preferred Stock at least twenty
(20) days prior to the date on which any Organic Change
will take place.
(d) All notices which are required or may be given pursuant
to the terms of this Article shall be in writing and
shall be delivered personally (and receipted for) or by
facsimile (provided receipt is acknowledged in
writing), certified mail, return receipt requested,
postage prepaid, or by Federal Express or other
recognized overnight courier, and any such notice shall
be deemed effective when delivered.
1.10. Other Rights.
-------------
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1.10.1. Purchase Rights. If at any time the Company
distributes, grants or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property to all record holders of
any class of Common Stock (the "Purchase Rights"), then each holder of Series C
Preferred Stock will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock
acquirable upon conversion of such holder's Series C Preferred Stock
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the
distribution, issue or sale of such Purchase Rights.
1.10.2. Pre-Emptive Rights. If the Company authorizes the
issuance and sale of any Additional Shares of Common Stock, other than a sale
to the public, the Company will offer to sell to the holders of Series C
Preferred Stock, and each holder of Series C Preferred Stock may elect to
purchase, up to that number of Additional shares of Common Stock such that
following such purchase, the holder is able to maintain the same percentage
ownership (on a fully-diluted basis) of the outstanding shares of Common Stock
of the Company which such holder possessed by virtue of its ownership of shares
of Series C Preferred Stock (or Common Stock issued upon the conversion
thereof) immediately prior to the issuance and sale of the Additional Shares of
Common Stock. Holders of Series C Preferred Stock will be entitled to purchase
the Additional Shares of Common Stock at the same price and upon the same terms
as such shares of Common Stock are being offered to any other Persons; provided
that, if such Persons are to pay for such Additional Securities in whole or in
part with consideration other than cash, then the Board of Directors shall make
a good faith determination of the fair market value of such non-cash
consideration and the holders of the Series C Preferred Stock will be entitled
to pay cash equal to the fair market value of the non-cash consideration such
holders would otherwise pay hereunder in the purchase of such Additional Shares
of Common Stock. Notwithstanding the foregoing, a holder of Series C Preferred
Stock will not be permitted to exercise its rights under this Section 1.10.2
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<PAGE>
unless such holder agrees to purchase all securities offered as a package or
unit in the issuance of the Additional Shares of Common Stock. The Company
must give written notice of the issuance of Additional Shares of Common Stock,
which notice shall set forth the price and other terms of such issuance, to the
holders of Series C Preferred Stock no later than thirty (30) days following
the issuance date of the Additional Shares of Common Stock (the "Issuance
Date"). Upon receipt of such notice, the holders may exercise the right
granted by this Section 1.10.2 by giving written notice to the Company within
thirty (30) days following receipt of the aforesaid notice, which written
notice from a holder shall specify the number of Additional Shares of Common
Stock being purchased by such holder, and be accompanied by a cashier's or
certified check in the full amount of the price for the Additional Shares of
Common Stock being purchased. The Company shall promptly make delivery to such
holders of certificates for the Additional Shares of Common Stock or other
securities upon execution of such documents and instruments as shall govern the
issuance of such Additional Shares of Common Stock or other securities.
Notwithstanding the foregoing, if a holder of Series C Preferred Stock shall
exercise its rights under this Section 1.10.2 such holder shall not be required
to pay for the Additional Shares of Common Stock purchased by it unless and
until all other parties have paid for their Additional Shares of Common Stock.
In addition, if a holder of Series C Preferred Stock shall exercise its rights
under this Section 1.10.2 following the Issuance Date, then such holder shall
be deemed to have owned the Additional Shares of Common Stock purchased by it
as of the Issuance Date for the purpose of any benefits of ownership relating
to such Additional Shares of Common Stock, including the right to receive cash
or stock dividends declared or other distributions, to participate in a merger
or reorganization or to reflect any reclassification of Additional Shares of
Common Stock between the Issuance Date and the date upon which such holder
purchases the Additional Shares of Common Stock.
1.11. Registration of Transfer. The Company will keep at its
principal office or at the principal office of its transfer agent a register
for the registration of the Series C Preferred Stock. Upon the surrender of
any certificate representing Series C Preferred Stock at such place, the
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Company will, at the request of the record holder of such certificate, execute
and deliver (at the Company's expense) a new certificate or certificates in
exchange therefor representing in the aggregate the number of shares of Series
C Preferred Stock represented by the surrendered certificate. Each such new
certificate will be registered in such name and will represent such number of
shares of Series C Preferred Stock as is requested by the holder of the
surrendered certificate and will be substantially identical in form to the
surrendered certificate; provided, however, that any transfer shall be subject
to any applicable restrictions on the transfer of such shares and the payment
of any applicable transfer taxes, if any, by the holder thereof.
1.12. Replacement. Upon receipt of evidence reasonably
satisfactory to the Company (an affidavit of the registered holder will be
satisfactory) of the ownership and the loss, theft, destruction or mutilation
of any certificate evidencing shares of Series C Preferred Stock, and in the
case of any such loss, theft or destruction, upon receipt of indemnity
reasonably satisfactory to the Company (provided that if the holder is an
institutional investor its own agreement will be satisfactory), or, in the case
of any such mutilation, upon surrender of such certificate, the Company will
(at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of shares of Series C
Preferred Stock represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
1.13. Retirement of Converted or Redeemed Shares. No share or
shares of Series C Preferred Stock acquired by the Company by reason of re-
demption, purchase, conversion or otherwise shall be re-issued and all such
shares shall be canceled, retired and eliminated from the shares which the
Company shall be authorized to issue. The Company may from time to time take
such appropriate corporate action as may be necessary to reduce the authorized
number of shares of Series C Preferred Stock accordingly.
* * * * *
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<PAGE>
IV. Pursuant to Section 502(c) of the Business Company Law, this
amendment was authorized by the Board of Directors of the Company at a meeting
duly called and at which a quorum was present throughout.
IN WITNESS WHEREOF, the Company has caused this Certificate to be
signed in its name and on its behalf and attested on this __ day of
_________________, 1997 by duly authorized officers of this Company.
UNIVERSAL AMERICAN FINANCIAL CORP.
By:________________________________
Name:
Title: President
ATTEST
By:____________________________
Name:
Title: Secretary
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UNIVERSAL AMERICAN FINANCIAL CORP.
PROPOSED PROVISIONS OF CERTIFICATE OF INCORPORATION
RELATING TO SERIES C PREFERRED STOCK
TABLE OF CONTENTS
1. Series C Convertible Preferred Stock................................. -2-
1.1. Definitions.................................................. -2-
1.2. Dividends.................................................... -9-
1.3. Rights on Liquidation........................................ -10-
1.4. Voting Power................................................. -11-
1.4.1. Series C-1 Preferred Stock
(a) In General........................................ -12-
(b) Election of Directors............................. -12-
(c) Special Matters................................... -15-
1.5. Redemption................................................... -20-
1.5.1. Fixed Redemption..................................... -20-
1.5.2. Call by the Company.................................. -20-
1.5.3. Non-Compliance Provisions............................ -20-
1.5.4. Failure to Pay Redemption Price or Installment....... -22-
1.5.5. Legal Availability................................... -23-
1.5.6. Other Redemptions or Acquisitions.................... -24-
1.6. Conversion Rights............................................ -24-
1.6.1. At the Option of the Holder.......................... -24-
1.6.3. At the Option of the Company......................... -25-
1.6.5. Conversion Procedure................................. -26-
1.6.6. Time of Conversion................................... -27-
1.6.8. Issuance of Certificate for Common Stock............. -28-
1.6.9. Books of Corporation................................. -29-
1.7. Anti-Dilution Adjustments.................................... -29-
1.7.1. Issuance of Additional Shares of Common Stock........ -29-
1.7.2. Treatment of Options and Convertible Securities...... -30-
1.7.3. Treatment of Stock Dividends, Stock Splits, etc...... -34-
1.7.4. Computation of Consideration......................... -35-
1.7.5. Adjustments for Combinations, etc.................... -37-
1.7.6. Dilution in Case of Other Securities................. -37-
1.7.7. Minimum Adjustment of Conversion Price............... -38-
1.7.8. Reorganization, Reclassification, Consolidation,
Merger or Sale.................................... -38-
1.8. Restrictions on Redemptions, Purchases and Acquisitions...... -40-
1.9. Notices...................................................... -41-
1.10. Other Rights................................................. -42-
1.10.1. Purchase Rights...................................... -42-
1.10.2. Pre-Emptive Rights................................... -42-
1.11. Registration of Transfer..................................... -44-
1.12. Replacement.................................................. -44-
1.13. Retirement of Converted or Redeemed Shares................... -45-
(i)
[DESCRIPTION] SHAREHOLDERS AGREEMENT
SHAREHOLDERS AGREEMENT
----------------------
AGREEMENT dated as of _______________, 1997, between UNIVERSAL AMERICAN
FINANCIAL CORP., a New York corporation, with an address of Mt. Ebo Corporate
Park, Brewster, New York 10509 ("Universal") and AAM CAPITAL PARTNERS, L.P., a
Delaware limited partnership, with an office at 30 N. LaSalle Street, Chicago,
Illinois 60602 ("AAM"), BARASCH ASSOCIATES LIMITED PARTNERSHIP, a Delaware
limited partnership with an office at Mt. Ebo Corporate Park, Brewster, New
York 10509 ("BALP"), RICHARD A. BARASCH, an individual who has executed this
Agreement solely for the purpose of agreeing to the provisions of Sections 2
and 3, below (BALP and RICHARD A. BARASCH, collectively, the "BALP Parties")
and those purchasers of the Series C Preferred Stock of Universal set forth on
Schedule 1 hereto (together with AAM and the BALP Parties, the "Series C
Holders").
W I T N E S S E T H
-------------------
WHEREAS, AAM has agreed to purchase certain shares of Universal's Series
C Preferred Stock pursuant to the Stock Purchase Agreement, and the execution
and delivery of this Agreement is a condition precedent to the consummation of
the transactions contemplated by the Stock Purchase Agreement.
THEREFORE, in consideration of the premises and other mutual covenants
and agreements contained herein, the parties hereto hereby agree as follows:
1. Definitions.
As used in this Agreement, the following terms shall have the following
respective meanings:
"GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or any
successor authority) that are applicable as of the date of determination,
consistently applied.
<PAGE>
"Insurance Company Subsidiaries" shall mean American Progressive
Life and Health Insurance Company of New York, American Pioneer Life
Insurance Company, AmeriFirst Insurance Company and any other insurance
company that comes under the control of Universal according to the
provisions of the applicable insurance code.
"Series C Holders" shall have the meaning given such term in the
introduction hereto and shall include any transferee of Subject Shares.
"Stock Purchase Agreement" shall mean the agreement, so titled,
between Universal and AAM dated January 9, 1997.
"Subject Shares" shall mean (i) all of the shares of Series C
Preferred Stock issued by Universal pursuant to the Stock Purchase
Agreement, (ii) any Common Stock, par value $.01 per share, of Universal
("Common Stock") issued upon conversion thereof, and (iii) any additional
securities of Universal issued in respect thereto.
"Subsidiary" means any corporation of which the shares of stock
having a majority of the general voting power in electing the board of
directors are, at the time as of which any determination is being made,
owned by Universal either directly or indirectly through Subsidiaries.
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2. Board Representation.
---------------------
For so long as AAM holds Subject Shares representing at least 20% of the
Series C Preferred Stock it originally purchased, each Series C Holder agrees
to take all action necessary including, without limitation, the voting of their
shares of Series C Preferred Stock, the execution of written consents, the
calling of special meetings, the removal of directors, the filling of vacancies
on Universal's Board of Directors, the waiving of notice and the attending of
meetings, so as to cause the member of the Board of Directors of Universal, to
be elected by the holders of the Series C Preferred Stock, voting separately as
a class, to be a person designated from time to time by AAM. Notwithstanding
the foregoing, AAM hereby agrees that any person so designated by AAM shall be
acceptable as a director of Universal by all applicable state regulatory
agencies, and shall not be an employee, director, representative or controlling
shareholder of any competitor of Universal or any Subsidiary thereof. Each
Series C Holder agrees not to transfer any shares of Series C Preferred Stock
unless the transferee of such shares agrees in writing to be bound by the
provisions of this Section 2.
3. Right of Participation in Sales.
--------------------------------
3.1 Definitions. For purposes of this Section 3:
(i) "Permitted Transferee" shall mean the general and
limited partners of BALP, the BALP Parties, and their respective shareholders,
spouses and lineal descendants, or a trust or trusts for the benefit of any
such persons, provided such Permitted Transferee agrees in writing, prior to
the transfer, to be bound by all of the provisions of this Agreement.
(ii) "Sell" and "Sale" shall include sale, transfer and any
other form of exchange of Common Stock for money or other property, but does
not include (a) any tender offer, merger or other transaction in which all
holders of Common Stock are treated equally or, (b) any sale of Common Stock to
the public.
3.2 Co-Sale Right. If any BALP Party shall sell any shares of Common
Stock to any party other than a Permitted Transferee (the "Buyer"), then such
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<PAGE>
BALP Party shall notify the Series C Holders in writing of such offer and its
terms and conditions. Upon receipt of such notice, each of the Series C
Holders shall have the right to sell to the Buyer, in lieu of the sale to the
Buyer by the BALP Party, that number of shares of Common Stock equal to the
product attained by multiplying (a) the number of shares of Common Stock held
by such Series C Holder included in the Subject Shares (or issuable upon
conversion of the shares of Series C Preferred Stock held by such Series C
Holder) times (b) the quotient derived by dividing (i) the number of shares of
Common Stock which otherwise would have been sold by such BALP Party to the
Buyer by (ii) the aggregate of total number of shares of Common Stock included
in the Subject Shares held by such BALP Party and the total number of shares of
Common Stock held by all of the Series C Holders (or issuable upon conversion
of the shares of Series C Preferred Stock). The Series C Holders' right to
sell pursuant to this Section 3.2 can be exercised by delivery of a written
notice to the selling BALP Party within twenty (20) days following the delivery
of the notice to the Series C Holders of the sale to Buyer by such BALP Party.
4. Registration Rights.
4.1 Definitions. For purposes of this Section 4:
(a) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal statute then in effect, and a
reference to a particular Section thereof shall be deemed to include a
reference to the comparable Section, if any, of any such similar federal
statute.
(b) "Registrable Securities" shall mean (a) the Subject Shares;
and (b) all securities of Universal issued upon conversion of, as a
dividend or other distribution with respect to, or in exchange for, the
Subject Shares. As to any particular Registrable Securities, once
issued, such securities shall cease to be Registrable Securities when (I)
such securities shall have been registered under the Securities Act, the
registration statement with respect to the sale of such securities shall
have become effective under the Securities Act and such securities shall
have been disposed of pursuant to such effective registration statement,
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<PAGE>
or (ii) such securities shall have been sold pursuant to Rule 144 (or any
similar provision then in force) under the Securities Act, or (iii) such
securities shall have been otherwise transferred, if new certificates or
other evidences of their ownership not bearing a legend restricting
further transfer and confirmation that such securities are not subject to
a stop transfer order or other restrictions on transfer shall have been
delivered by Universal and subsequent disposition of such securities does
not require registration or qualification of such securities under the
Securities Act or any state securities laws then in force, or (iv) such
securities shall cease to be outstanding.
(c) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute then in effect, and a reference
to a particular Section thereof shall be deemed to include a reference to
the comparable Section, if any, of any such similar federal statute.
(d) "SEC" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act or
the Exchange Act.
4.2 Piggy-Back Registration. Whenever Universal proposes to register any
of its securities for its own or others' account under the Securities Act
(other than a registration on Form S-4 or Form S-8 or any successor form to
such forms or filed in connection with an exchange offer or an offering of
securities solely to the existing shareholders or employees of Universal),
Universal shall give each of the Series C Holders written notice of its intent
to do so at least 30 days before the anticipated filing date and such notice
shall offer to each of the Series C Holders the opportunity to register, at
Universal's expense, such amount of Registrable Securities as such Series C
Holder may request. Universal will use its best efforts to cause to be
included in such registration all of the Registrable Securities which a
Series C Holder requests to be included. If Universal receives an opinion from
the managing underwriter or underwriters of the securities being offered
5
<PAGE>
pursuant to any registration statement under this Section 4.2 that the number
of shares requested to be sold by the Series C Holders is greater than the
number of such shares which can be offered without adversely affecting the
offering, Universal may reduce the number of shares offered for the account of
the Series C Holders to a number deemed satisfactory by such managing
underwriter or underwriters (pro rata based on the number of Registrable
Securities held by each Series C Holder so requesting registration), provided,
however, that if such offering includes shares of holders other than Universal
and the Series C Holders, the reduction in the Series C Holders' shares to be
included shall be pro-rata to reductions in the shares to be included on behalf
of such other holders. Universal has not heretofore, and shall not hereafter,
enter into any agreement granting to any person the right to require reduction
in the number of shares to be offered by the Series C Holders in any offering
on a pro-rata basis by the foregoing sentence of this Section 4.2.
4.3 Demand Registrations. If at any time after January 1, 1998, the
holders of a majority of Registrable Securities notify Universal in writing
that it or they intend to offer or cause to be offered for sale Registrable
Securities and request Universal to cause such Registrable Securities to be
registered under the Securities Act, Universal will use its best efforts as
soon as practicable thereafter to register such Registrable Securities. Within
ten (10) days after receipt of any request pursuant to this Section 4.3,
Universal will give written notice of such request to all other holders of
Registrable Securities and will include in such registration all Registrable
Securities with respect to which Universal has received written requests for
inclusion within fifteen (15) days after delivery of Universal's notice.
Universal shall not be required to register Registrable Securities under this
Section 4.3 unless the anticipated proceeds of the sale by Series C Holders,
net of underwriters' commission and discounts, will exceed Two Million Dollars
($2,000,000). Such rights to require registration shall be in addition to the
rights of the Series C Holders under Section 4.2 hereof. Universal may not
6
<PAGE>
include any securities for the account of persons other than Series C Holders
in any registration statement requested pursuant to this Section 4.3 which
relates to an underwritten offering unless the underwriter or underwriters
managing the offering shall deliver an opinion that such inclusion will not
adversely impact or interfere with the successful marketing of the Registrable
Securities to be offered by the Series C Holders. The registration rights set
forth in this Section 4.3 may be exercised by the Series C Holders only twice,
provided, however, such registration rights shall not be deemed to have been
exercised unless the registration statement required to be filed upon exercise
of such right shall either (x) become and remain effective in accordance with
the provisions hereof or (y) be duly filed by Universal but fail to become or
remain effective in accordance with the provisions hereof because of the
failure of the Series C Holders to comply with their respective obligations
hereunder or because the Series C Holders determine not to proceed with the
offering.
4.4 Alternative Performance.
(a) If AAM demands a registration as provided above, Universal
may, within 20 days of its receipt of the demand, make a written offer to buy
the shares as to which registration has been demanded at a price equal to the
average of the "Market Price" of Universal's Common Stock over the 15 trading
days prior to the date of AAM's demand, determined as set forth in Section
4.4(e) below.
(b) If the offer provided for in Section 4.4(a) above, is made and
accepted in writing within 10 days from its receipt by AAM, the sale shall
close at the offices of Universal on the 30th business day after the acceptance
of the offer by delivery of the certificates for the shares to be sold,
properly endorsed, with signature guaranteed and any transfer taxes paid,
against payment of the purchase price by certified or cashier's check.
(c) If the offer provided for in Section 4.4(a) above, is made and
is not accepted in writing within 10 days from its receipt by AAM, the offer
shall expire.
(d) The rejection by AAM of an offer by Universal pursuant to
7
<PAGE>
Section 4.4(a) shall in no way effect or reduce AAM's registration rights
pursuant to Section 4.3.
(e) As used herein, "Market Price" means on any date specified
herein, the amount per share of the Common Stock, equal to (i) the last sale
price of such Common Stock, regular way, on such date or, if no such sale takes
place on such date, the average of the closing bid and asked prices thereof on
such date, in each case as officially reported on the principal national
securities exchange on which such Common Stock is then listed or admitted to
trading, or (ii) if such Common Stock is not then listed or admitted to trading
on any national securities exchange but is designated as a national market
system security by the NASD, the last trading price of the Common Stock on such
date, or (iii) if there shall have been no trading on such date or if the
Common Stock is not so designated, the average of the closing bid and asked
prices of the Common Stock on such date as shown by the NASD automated
quotation system, or (iv) if such Common Stock is not then listed or admitted
to trading on any national securities exchange or quoted in the over-the-
counter market, the value as determined by any firm of independent public
accountants of recognized national standing selected by the Board of Directors
of the Company (and approved by AAM) as of the last date of any month ending
within thirty (30) days preceding the date as of which the determination is to
be made.
4.5 Expenses. All expenses incurred in connection with Universal
registrations under this Section 4 (including the reasonable fees and expenses
of one legal counsel for the Series C Holders chosen by the holders of a
majority of the Registrable Securities, expenses for registration, filing,
qualification, printing, accounting and legal fees, but excluding underwriting
commissions and discounts relating to the Registrable Securities and the fees
of other counsel to the Series C Holders) shall be borne by Universal,
regardless of whether any such registration becomes effective.
4.6 Registration Statement. In connection with registrations pursuant
to this Agreement, Universal shall (i) prepare and file with the SEC, as soon as
8
<PAGE>
reasonably practicable following receipt of the applicable notice, a
registration statement with respect to the Registrable Securities and use its
best efforts to cause such registration to promptly become and remain effective
for such period as may be required to complete the sale of the Registrable
Securities; (ii) prepare and file with the SEC such amendments and post-
effective amendments to the registration statement as may be necessary to keep
the registration statement effective for the applicable period, or such shorter
period that will terminate when all Registrable Securities covered by such
registration statement have been sold; cause the prospectus to be amended or
supplemented by any required prospectus, amendment or supplement, and as so
amended or supplemented, to be filed pursuant to Rule 424 under the Securities
Act; and comply with the provisions of the Securities Act with respect to the
disposition of all Registrable Securities covered by such registration
statement during the applicable period in accordance with the intended method
or methods of distribution by the holders thereof set forth in such
registration statement or amendment or supplement to the prospectus; (iii)
furnish to the Series C Holders requesting registration such number of copies
of the prospectus contained in such registration statement (including each
preliminary prospectus), in conformity with the requirements of the Securities
Act, and such other documents as the Series C Holders requesting registration
may reasonably request in order to facilitate the disposition of the
Registrable Securities being sold by the Series C Holders requesting
registration; (iv) use its best efforts to register and qualify the Registrable
Securities covered by such registration statement under applicable state
securities laws as shall be reasonably requested by the Series C Holders
requesting registration or the underwriters; and (v) take all such other
actions as are reasonable and necessary to comply with the requirements of the
Securities Act and the regulations thereunder, or the reasonable request of the
Series C Holders requesting registration, with respect to the registration and
distribution of the Registrable Securities. Universal shall not be obligated
to effect registration or qualification in any jurisdiction requiring it to
qualify to do business or to execute a general consent to service of process.
9
<PAGE>
4.7 Certain Delays. Universal shall have the right, on not more than
one occasion with respect to each registration hereunder, to defer for a
reasonable period (not to exceed 90 days) the filing of any registration
statement requested under Section 4.3 if, in the reasonable judgment of
Universal's Board of Directors, such registration would materially interfere
with or materially and adversely affect any then existing negotiations for
financing arrangements or financing plans of Universal, or any arrangement or
plan of Universal, then pending or being negotiated in good faith, relating to
any acquisition, disposition, merger or similar transaction or (solely because
of the passage of time since the date of Universal's last audit) would require
an audit of Universal other than the regularly scheduled annual audit.
4.8 Notification.
-------------
(a) At any time when there is a registration statement effective
relating to Registrable Securities, Universal shall promptly notify each Series
C Holder requesting registration upon learning of any event which results in
the prospectus included in such registration statement, as then in effect,
containing an untrue statement of a material fact or omitting to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
Universal shall forthwith prepare and furnish to each Series C Holder
requesting registration, after securing such approvals as may be necessary, a
reasonable number of copies of any supplement to or amendment of such
prospectus that may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
in the light of the circumstances then existing.
(b) Universal shall promptly notify each Series C Holder requesting
registration of any stop order or similar proceeding initiated by state or
10
<PAGE>
federal regulatory bodies which affects Registrable Securities which it is
selling or offering for sale and shall use its best efforts or take all
reasonably necessary steps expeditiously to remove such stop order or similar
proceeding.
4.9 Furnishing of Documents. In connection with all registrations
pursuant to this Agreement, at the request of AAM, Universal will furnish to
each underwriter, if any, and to each Series C Holder requesting registration,
a legal opinion of its counsel, a letter from its independent certified public
accountants, and all other documents reasonably required by the underwriters to
be furnished in such transactions, each in customary form and substance, at
such time or times as such documents are customarily provided in the type of
offering involved.
4.10 Reports Under the Exchange Act. With a view to making available to
the Series C Holders the benefits of Rule 144 promulgated under the Securities
Act and any other rule or regulation of the SEC that may at any time permit the
Series C Holders to sell securities of Universal to the public without
registration or pursuant to registration on Form S-3, Universal agrees to file
on a timely basis all reports required to be filed by it under the Exchange
Act.
4.11 Preparation of Registration Statements. Whenever Universal is
registering any securities under the Securities Act and a Series C Holder is
proposing to sell any securities under such registration or determines that it
may be deemed to be an "affiliate" or "parent," as such terms are defined in
the rules and regulations under the Exchange Act or the Securities Act,
Universal will allow AAM to participate in the preparation of the registration
statement, will include in the registration statement such information as AAM
may reasonably request and will take all such other action as AAM may
reasonably request.
4.12 Indemnification by Universal. Universal will indemnify and hold
harmless each Series C Holder and each underwriter with respect to Registrable
Securities being offered for sale, against all losses, claims, settlements,
damages and liabilities (or actions in respect thereof) arising out of or based
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<PAGE>
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement relating to such Registrable Securities
(or in any related registration statement, notification or the like) or any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
any violation by Universal of the Securities Act or any state securities law or
any rule or regulation promulgated thereunder in connection with any such
registration, qualification or compliance, and will reimburse each Series C
Holder and each underwriter for any legal or any other expenses ("Defense
Costs") incurred in connection with investigating or defending any such claim,
loss, damage, liability or action and will enter into an indemnification
agreement with such underwriters containing customary provisions, including
provisions for contribution, as AAM or the underwriters shall reasonably
request; provided, however, that Universal will not be liable in any such case
to the extent that any such claim, loss, damage or liability arises out of or
is based on any untrue statement or omission based upon information furnished
to Universal by a Series C Holder or underwriters in writing specifically for
use in such registration statement.
4.13 Indemnification by the Series C Holder. Each Series C Holder with
respect to its Registrable Securities being offered for sale by it will
indemnify and hold harmless Universal, each of its directors, each of its
officers who has signed the registration statement and each person, if any, who
controls Universal within the meaning of Section 15 of the Securities Act, each
underwriter and each person who controls any underwriter within the meaning of
Section 15 of the Securities Act, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any registration statement relating to the Registrable Securities (or in any
related registration statement, notification or the like) or any omission (or
alleged omission) to state therein a material fact required to be stated
12
<PAGE>
therein or necessary to make the statements therein not misleading, and will
reimburse Universal and each such director, officer or controlling person for
any Defense Costs incurred with respect to any such claim, loss, damage,
liability or action and will enter into an indemnification agreement with
Universal and each such person containing customary provisions, including
provisions for contribution, as Universal or each such person shall reasonably
request; provided, however, that such Series C Holder will not be liable in any
such case except to the extent that any such claim, loss, damage or liability
arises out of or is based on any untrue statement or omission based upon
information furnished to Universal by such Series C Holder in writing
specifically for use in such registration statement and provided that the
obligation to indemnify will be several, not joint and several, among such
holders of Registrable Securities and the liability of each such holder of
Registrable Securities will be in proportion to and limited to the net amount
received by such holder from the sale of Registrable Securities pursuant to
such registration statement.
4.14 Indemnification Procedures. If any lawsuit or enforcement action
is filed against any party entitled to the benefit of indemnity under this
Section 4 by any third party, written notice thereof shall be given to the
indemnifying party as promptly as practicable; provided that the failure of any
indemnified party to give timely notice shall not affect rights to
indemnification hereunder except to the extent such delay actually results in
damage to the indemnifying party. After such notice, if the indemnifying party
shall acknowledge in writing to such indemnified party that such indemnifying
party shall be obligated under the terms of its indemnity hereunder in
connection with such lawsuit or action, then the indemnifying party shall be
entitled, if it so elects, to take control of the defense and investigation of
such lawsuit or action and to employ and engage attorneys of its own choice to
handle and defend the same, at the indemnifying party's cost, risk and expense;
and such indemnified party shall cooperate in all reasonable respects, at the
indemnifying party's cost, risk and expense, with the indemnifying party and
such attorneys in the investigation, trial and defense of such lawsuit or
13
<PAGE>
action and any appeal arising therefrom; provided, however, that the
indemnified party may, at its own cost, participate in such investigation,
trial and defense of such lawsuit or action and any appeal arising therefrom.
However, if the defendants in any action include both the indemnifying party
and the indemnified party, and the indemnified party concludes that
representation of both the indemnifying party and the indemnified party by the
same counsel is inappropriate under applicable standards of professional
conduct due to actual or potential differing interests between them or for some
other reason, then the indemnified party shall have the right, at the expense
of the indemnifying party, to select separate counsel to assume such legal
defense and to otherwise participate in the defense of such action on behalf of
the indemnified party. Where the indemnified party is entitled to
reimbursement for Defense Costs, such reimbursement shall be payable as such
Defense Costs are incurred by the indemnified party, upon presentation of
reasonably detailed billing, but not more frequently then once each month,
subject to repayment if it is ultimately determined that the indemnified party
is not entitled to such reimbursement.
4.15 Survival. The indemnification provided for under this Agreement
will remain in full force and effect regardless of any investigation made by or
on behalf of the indemnified party or any officer, director or controlling
person of such indemnified party and will survive the transfer of securities.
4.16 Contribution. If for any reason the indemnification provided for
in Sections 4.12 or 4.13 hereof is unavailable to an indemnified party as
contemplated thereby, the indemnifying party shall contribute to the amount
paid or payable by the indemnified party as a result of such loss, claim,
damage or liability in such proportion as is appropriate to reflect not only
the relative benefits received by the indemnified party and the indemnifying
party, but also the relative fault of the indemnified party and the
indemnifying party, as well as any other relevant equitable considerations.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 4.16 were determined by pro rata
14
<PAGE>
allocation or by any other method of allocation that does not take account of
the equitable considerations referred to in the immediately preceding sentence.
Notwithstanding the provisions of this Section 4.16, an indemnifying party
that is a selling holder of Registrable Securities shall not be required to
contribute, in the aggregate, any amount in excess of such holder's Maximum
Contribution Amount. A selling holder's "Maximum Contribution Amount" shall
equal the excess of (i) the aggregate proceeds received by such holder pursuant
to the sale of such Registrable Securities (net of payment of all expenses)
over (ii) the aggregate amount of damages that such holder has otherwise been
required to pay by reason of untrue or alleged untrue statement or omission or
alleged omission contained in a registration statement filed by Universal. No
party guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any party
who was not guilty of fraudulent misrepresentation.
5. Financial Statements and Other Information.
-------------------------------------------
For as long as any Series C Preferred Stock remains outstanding,
Universal will deliver to AAM and to each holder of Series C Preferred Stock
who has requested it in writing and has undertaken (and AAM hereby undertakes)
to hold any non-public information furnished hereunder in confidence and to
refrain from any use thereof which would violate the securities laws or other
laws of the United States or any state:
(a) Audited Financial Statements. As soon as practicable
after the end of each fiscal year of Universal, and in
any event within one hundred and twenty (120) days
thereafter, consolidated and consolidating balance
sheets of Universal and its Subsidiaries, as at the end
of such year, and consolidated and consolidating
statements of operations and sources and uses of funds
of Universal and its Subsidiaries, for such fiscal
year, prepared in accordance with GAAP and setting
15
<PAGE>
forth in each case in comparative form the figures for
the previous fiscal year, all in reasonable detail and,
in the case of the consolidated statements, certified,
without qualification by or another nationally
recognized independent public accountants selected by
Universal and acceptable to AAM;
(b) Interim Financial Statements. As soon as practicable
after the end of each quarter and in any event within
thirty (30) days thereafter, consolidated and
consolidating balance sheets of Universal and its
Subsidiaries as of the end of such period, and
consolidated and consolidating statements of operations
of Universal and its Subsidiaries for such period and
for the current fiscal year to date, prepared in
accordance with GAAP and setting forth in comparative
form the figures for the corresponding periods of the
previous fiscal year, together with a comparison of
such statements to Universal's budget, subject to
changes resulting from normal year-end audit
adjustments, all in reasonable detail and certified by
the principal financial officer of Universal;
(c) Insurance Financial Information. As soon as
practicable (i) after the end of each calendar year and
quarter, as applicable, and in any event by the date on
which filing is required with the applicable department
of insurance, the Annual Statement and Quarterly
Statement of the Insurance Company Subsidiaries with
respect to such period, and any related actuarial
opinion and report, management's discussion and
analysis, risk-based capital report, statutory audit
report and IRIS ratio results, and (ii) after the end
16
<PAGE>
of each month, and in any event within thirty (30) days
thereafter, the internal statutory financial statements
of the Insurance Company Subsidiaries.
(d) Budget. Not less than thirty (30) days prior to the
commencement of each fiscal year, an annual business
plan, including a budget and financial projections for
Universal and its Subsidiaries, for each month during
such period, together with underlying assumptions (in
each case in such detail as is currently provided by
Universal in its 1996 Business Plan) and approved by a
majority of the entire board of directors of Universal;
(e) Auditors' Reports. Promptly upon receipt thereof,
copies of all other reports, if any, submitted to
Universal by independent public accountants in
connection with any annual or interim audit of the
books of Universal and its Subsidiaries made by such
accountants;
(f) Lender Information. A copy of each financial
statement, report, notice or communication that
Universal or any Subsidiary delivers to any of their
lenders or creditors;
(g) Insurance Holding Company System Filings. Promptly
upon filing or notice thereof, a copy of each
registration, notice or other filing made by an
Insurance Company Subsidiary or a member of its
insurance holding company system pursuant to the
insurance holding company system provisions of the
applicable insurance code;
(h) Litigation. Promptly upon Universal's learning
thereof, notice of any litigation, other than insurance
17
<PAGE>
policy litigation, or administrative proceeding that
could reasonably be expected to have a material adverse
effect on Universal or any Subsidiary, whether or not
the claim is considered by Universal to be covered by
insurance;
(i) Regulatory Correspondence. Promptly upon receipt
thereof, a copy of any and all correspondence from
regulatory authorities in which such authorities allege
material violations by or relating to an Insurance
Company Subsidiary.
(j) Default. Promptly upon the occurrence thereof notice
of any failure of Universal or any Subsidiary to duly
observe or perform any covenant, condition or agreement
required to be performed by Universal or a Subsidiary
under this Agreement or the Restated Certificate of
Incorporation of Universal (including a Call Price
Action or an Adjusted Stated Value Action as defined
therein).
(k) Other Information. With reasonable promptness, all
press releases issued by Universal or any Subsidiary,
any filings made with the SEC by Universal or any
Subsidiary and such other data and information as from
time to time may be reasonably requested by the holders
of Series C Preferred Stock or such other formal and/or
official communications as Universal may from time to
time furnish to any of the holders of its securities or
its directors in their capacities as such.
(l) Accounting. Universal will maintain and will cause
each of its Subsidiaries to maintain a system of
accounting established and administered in accordance
with GAAP and all financial statements or information
delivered under this Section 5 will be prepared in
18
<PAGE>
accordance with GAAP, with the exception of the
accounting systems and financial statements of the
Insurance Company Subsidiaries which are maintained and
prepared in accordance with SAP (as defined in the
Stock Purchase Agreement).
Any promissory note issued pursuant to Section 1.5.4 of the Restated
Certificate of Incorporation of Universal shall contain affirmative covenants
equal to the rights of the holders of the Series C Preferred Stock set forth in
this Section 5.
6. Miscellaneous.
--------------
6.1 Parties in Interest. This Agreement and all provisions hereof will
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, including, without limitation, any assignee
or transferee of any and all of the Registrable Securities.
6.2 Entire Agreement. This Agreement contains the entire understanding
of the parties with respect to its subject matter.
6.3 Headings. The section headings contained in this Agreement are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
6.4 Amendments. Except as otherwise expressly provided herein, the
provisions of this Agreement may be amended or waived at any time only by the
written agreement of Universal and AAM. Any waiver, permit, consent or
approval of any kind or character on the part of AAM of any provisions or
conditions of this Agreement must be made in writing and shall be effective
only to the extent specifically set forth in such writing.
19
<PAGE>
6.5 Notices. All notices, claims, certificates, requests, demands and
other communications hereunder shall be in writing and shall be deemed to have
been duly given if delivered or mailed (express, registered or certified mail,
postage prepaid, return receipt requested), sent by Federal Express or other
recognized overnight courier or transmitted by telecopier (with receipt
acknowledged by the recipient or confirmed electronically) as follows:
(a) If to Universal:
Universal Holding Corp.
P.O. Box 23
Mt. Ebo Corporate Park
Brewster, New York 10509-0023
Attention: Richard A. Barasch, President
with a copy to:
Harnett Lesnick & Ripps P.A.
150 East Palmetto Park Road
Suite 500
Boca Raton, Florida 33432
Attention: Bertram Harnett, Esq. and
Irving I. Lesnick, Esq.
Fax No.: (561) 368-4315
(b) If to AAM:
AAM Capital Partners, L.P.
30 North LaSalle Street
36th Floor
Chicago, Illinois 60602
Attention: Richard A. Veed
Fax No.: (312) 263-1196
With a copy of each notice intended for AAM to:
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661
Attn: Michael P. Goldman, Esq.
Fax No.: (312) 902-1061
(c) If to BALP on the BALP Parties:
Barasch Associates Limited Partners
Mt. Ebo Corporate Park
Brewster, New York 10509-0023
Attention: Richard A. Barasch
20
<PAGE>
with a copy to:
Harnett Lesnick & Ripps P.A.
150 East Palmetto Park Road
Suite 500
Boca Raton, Florida 33432
Attention: Bertram Harnett, Esq. and
Irving I. Lesnick, Esq.
Fax No.: (561) 368-4315
or to such other address as the person to whom notice is to be given may have
previously furnished to the other persons in writing in the manner set forth
above.
6.6 Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of New York (regardless
of the laws that might otherwise govern under applicable principles of
conflicts of law of such state).
6.7 No Inconsistent Agreements. Universal will not hereafter enter into
any agreement with respect to its securities which is inconsistent with the
rights granted to the holders of Registrable Securities in this Agreement.
6.8 Adjustments Affecting Registrable Shares. Universal will not take
any action, or permit any change to occur, with respect to its securities which
would adversely and materially affect the ability of the holders of Registrable
Securities to include such Registrable Securities in a registration undertaken
pursuant to this Agreement.
6.9 Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed and delivered shall be
deemed an original, and such counterparts together shall constitute one
instrument.
21
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the parties hereto as of the date first above written.
UNIVERSAL AMERICAN FINANCIAL CORP.
By:_____________________________________
Name:___________________________________
Title:__________________________________
AAM CAPITAL PARTNERS, L.P.
By: AAM PARTNERS, L.P., general partner
By: AAM INVESTMENT BANKING
GROUP, LTD., general partner
By: VEED CORP., general partner
By:_____________________________________
Richard A. Veed, President
BARASCH ASSOCIATES LIMITED PARTNERSHIP
By: NMRB CORP., general partner
By:_____________________________________
Richard A. Barasch, President
________________________________________
Richard A. Barasch, Individually
[Other Series C Holders]
22
<PAGE>
EXHIBIT 11
SHAREHOLDERS AGREEMENT
AMONG
AAM CAPITAL PARTNERS, L.P.,
BARASCH ASSOCIATES LIMITED PARTNERSHIP,
RICHARD A. BARASCH
AND
UNIVERSAL AMERICAN FINANCIAL CORP.
________________, 1997
TABLE OF CONTENTS
1. Definitions............................................................. 2
2. Board Representation.................................................... 3
3. Right of Participation in Sales......................................... 3
3.1 Definitions...................................................... 3
3.2 Co-Sale Right.................................................... 4
4. Registration Rights..................................................... 4
4.1 Definitions...................................................... 4
4.2 Piggy-Back Registration.......................................... 5
4.3 Demand Registrations............................................. 6
4.4 Alternative Performance.......................................... 7
4.5 Expenses......................................................... 9
4.6 Registration Statement........................................... 9
4.7 Certain Delays.................................................. 10
4.8 Notification.................................................... 10
4.9 Furnishing of Documents......................................... 11
4.10 Reports Under the Exchange Act.................................. 11
4.11 Preparation of Registration Statements.......................... 12
4.12 Indemnification by Universal.................................... 12
4.13 Indemnification by the Series C Holder.......................... 13
4.14 Indemnification Procedures...................................... 14
4.15 Survival........................................................ 15
4.16 Contribution.................................................... 15
5. Financial Statements and Other Information............................. 16
6. Miscellaneous.......................................................... 20
6.1 Parties in Interest............................................. 20
6.2 Entire Agreement................................................ 20
6.3 Headings........................................................ 20
6.4 Amendments...................................................... 20
6.5 Notices......................................................... 20
6.6 Governing Law................................................... 22
6.7 No Inconsistent Agreements...................................... 22
6.8 Adjustments Affecting Registrable Shares........................ 22
6.9 Execution in Counterparts....................................... 22
Exhibit 11
Computation of Primary Earnings Per Share
<TABLE>
<CAPTION>
Primary Earnings Per Share of Common Stock and Common Stock Equivalents
Years Ended December 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income applicable to common stock $ 3,173,491 $ 2,641,822 $ 103,875
Add back dividends on the assumed conversion of Series A
Preferred Stock 95,625 - -
----------- ----------- -----------
Adjusted net income applicable to common stock $ 3,269,116 $ 2,641,822 $ 103,875
=========== =========== ===========
Average number of common shares outstanding 5,359,551 6,789,151 6,999,085
Add:
Assumed conversion of Series A Preferred Stock 1,497,922 - -
Assumed conversion of Series B Preferred Stock 4,938 1,777,777 1,777,777
Assumed exercise of dilutive stock options 2,060,530 1,986,626 1,763,865
----------- ----------- -----------
Total common stock and common stock equivalent 8,922,941 10,553,554 10,540,729
=========== =========== ===========
Net income per share assuming dilution of common
stock equivalents $ 0.37 $ 0.25 $ 0.01
=========== =========== ===========
</TABLE>
Exhibit 23(a)
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 11-258016) pertaining to the Universal American Financial Corp.
401K Plan of our report dated March 26, 1997, with respect to the consolidated
financial statements and financial statement schedules included in the Annual
Report (Form 10-K) of Universal American Financial Corp. for the year ended
December 31, 1996.
New York, New York Ernst & Young LLP
March 26, 1997
Exhibit 23(b)
Consent of Independent Auditors
The Board of Directors and Stockholders
Universal American Financial Corp.:
We consent to incorporation by reference in Registration Statement
No. 11-258016 on Form S-8 of our report dated March 26, 1996, with respect
to the consolidated financial statements and financial statements
schedules included in the Annual Report (Form 10-K) of Universal American
Financial Corp. for the years ended December 31, 1995 and 1994.
Our report refers to the adoption of the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
in 1994.
New York, New York KPMG Peat Marwick LLP
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 121,492,167
<DEBT-CARRYING-VALUE> 121,492,167
<DEBT-MARKET-VALUE> 121,492,167
<EQUITIES> 33,562
<MORTGAGE> 1,199,110
<REAL-ESTATE> 0
<TOTAL-INVEST> 144,681,269
<CASH> 15,403,450
<RECOVER-REINSURE> 60,838,289
<DEFERRED-ACQUISITION> 19,091,514
<TOTAL-ASSETS> 242,236,738
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 40,156,185
<POLICY-HOLDER-FUNDS> 134,538,954
<NOTES-PAYABLE> 0
0
4,000,000
<COMMON> 71,492
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 242,236,738
40,145,373
<INVESTMENT-INCOME> 9,850,083
<INVESTMENT-GAINS> 240,075
<OTHER-INCOME> 3,151,654
<BENEFITS> 25,897,415
<UNDERWRITING-AMORTIZATION> (2,257,617)
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 372,892
<INCOME-TAX> 269,017
<INCOME-CONTINUING> 103,875
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,875
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
