<PAGE> 1
As filed with the Securities and Exchange Commission on July 18, 1997
REGISTRATION NO. 333-28749
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
ACCEPTANCE INSURANCE COMPANIES INC.
AICI CAPITAL TRUST
(Exact name of Registrants as specified in their respective charters)
------------------
<TABLE>
<S> <C>
DELAWARE 31-0742926
DELAWARE PENDING
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
222 S. 15TH STREET, SUITE 600 NORTH
OMAHA, NEBRASKA 68102
(402) 344-8800
(Address, including zip code, and telephone number,
including area code, of each Registrant's principal executive offices)
------------------
WILLIAM J. GERBER
VICE PRESIDENT
ACCEPTANCE INSURANCE COMPANIES INC.
222 S. 15TH STREET, SUITE 600 NORTH
OMAHA, NEBRASKA 68102
(402) 344-8800
(Name, address, including zip code, and telephone number,
including area code, of agent for service for each Registrant)
------------------
Copies to:
<TABLE>
<C> <C>
ROBERT S. RACHOFSKY, ESQ.
LARS BANG-JENSEN, ESQ. STEVEN KAPLAN, ESQ.
LEBOEUF, LAMB, GREENE & MACRAE, L.L.P. ARNOLD & PORTER
125 WEST 55TH STREET 555 12TH STREET, N.W.
NEW YORK, NEW YORK 10019 WASHINGTON, D.C. 20004
(212) 424-8000 (202) 942-5998
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
investment reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 18, 1997
$65,000,000
AICI CAPITAL TRUST
% Preferred Securities
(Liquidation Amount $25 per Preferred Security)
AIC LOGO fully and unconditionally guaranteed, as described herein, by
ACCEPTANCE INSURANCE COMPANIES INC.
The Preferred Securities offered hereby represent preferred undivided
beneficial interests in the assets of AICI Capital Trust, a statutory business
trust created under the laws of the State of Delaware (the "Issuer Trust").
Acceptance Insurance Companies Inc., a Delaware corporation (the "Company"),
will be the holder of all of the beneficial interests represented by common
securities of the Issuer Trust (the "Common Securities" and, together with the
Preferred Securities, the "Trust Securities"). The Issuer Trust exists for the
sole purpose of issuing the Trust Securities and investing the proceeds thereof
in % Junior Subordinated Deferrable Interest Debentures (the "Junior
Subordinated Debentures", and together with the Trust Securities, the
"Securities") to be issued by the Company. The Junior Subordinated Debentures
will mature on , 2027, which date may be shortened (such date, as it
may be shortened, the "Stated Maturity") to a date not earlier than ,
2002, if certain conditions are met (such shortening of the maturity date, the
"Maturity Adjustment"). The Preferred Securities will have a preference under
certain circumstances over the Common Securities with respect to cash
distributions and amounts payable on liquidation, redemption or otherwise. See
"Description of Preferred Securities -- Subordination of Common Securities."
(Continued on next page)
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 HEREOF FOR CERTAIN INFORMATION THAT
SHOULD BE CAREFULLY CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE PREFERRED
SECURITIES.
------------------------------
THE COMPANY HAS MADE APPLICATION TO LIST THE PREFERRED SECURITIES ON THE NEW
YORK STOCK EXCHANGE (THE "NYSE") UNDER THE SYMBOL "AIF PRT." IF SUCH APPLICATION
IS APPROVED, TRADING IN THE PREFERRED SECURITIES IS EXPECTED TO COMMENCE WITHIN
A 30-DAY PERIOD AFTER THE INITIAL DELIVERY OF THE PREFERRED SECURITIES. SEE
"UNDERWRITING."
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
======================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) ISSUER TRUST(3)(4)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Preferred Security.................................... $25.00 (4) $25.00
- ----------------------------------------------------------------------------------------------------------------------
Total(5).................................................. $65,000,000 (4) $65,000,000
======================================================================================================================
</TABLE>
(1) Plus accrued Distributions, if any, from , 1997.
(2) The Company and the Issuer Trust have each agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933,
as amended (the "Securities Act").
(3) Before deduction of expenses payable by the Company estimated at $ .
(4) In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures, the
Company has agreed to pay to the Underwriters, as compensation for arranging
the investment therein of such proceeds, $ per Preferred Security (or
$ in the aggregate). See "Underwriting."
(5) The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
$9,750,000 aggregate liquidation amount of the Preferred Securities on the
same terms as set forth above, solely to cover over-allotments, if any. If
such over-allotment option is exercised in full, the total Price to Public
and Proceeds to Issuer Trust will be $ and $ ,
respectively. See "Underwriting."
------------------------------
The Preferred Securities are offered by the Underwriters subject to receipt
and acceptance by them, prior sale and the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Preferred Securities will be made in
book-entry form through the book-entry facilities of The Depository Trust
Company on or about , 1997, against payment therefor in immediately
available funds.
------------------------------
ADVEST, INC. EVEREN SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 3
(cover page continued)
The Preferred Securities will be represented by one or more global
securities registered in the name of a nominee of The Depository Trust Company,
as depositary ("DTC"). Beneficial interests in the global securities will be
shown on, and transfer thereof will be effected only through, records maintained
by DTC and its participants. Except as described under "Description of Preferred
Securities," Preferred Securities in definitive form will not be issued and
owners of beneficial interests in the global securities will not be considered
holders of the Preferred Securities. Application will be made to include the
Preferred Securities on the New York Stock Exchange. Settlement for the
Preferred Securities will be made in immediately available funds. The Preferred
Securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity for the Preferred Securities will therefore settle in
immediately available funds.
Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash distributions accumulating from , 1997
and payable quarterly in arrears on March 31, June 30, September 30 and December
31 of each year commencing , 1997, at the annual rate of % of
the Liquidation Amount of $25 per Preferred Security ("Distributions"). The
Company has the right to defer payment of interest on the Junior Subordinated
Debentures at any time or from time to time for a period not exceeding 20
consecutive quarterly periods with respect to each deferral period (each, an
"Extension Period"), provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures. No interest shall be due
and payable during any Extension Period, except at the end thereof. Upon the
termination of any such Extension Period and the payment of all amounts then
due, the Company may elect to begin a new Extension Period subject to the
requirements set forth herein. If interest payments on the Junior Subordinated
Debentures are so deferred, Distributions on the Preferred Securities will also
be deferred and the Company will not be permitted, subject to certain exceptions
described herein, to declare or pay any cash distributions with respect to the
Company's capital stock or with respect to debt securities of the Company that
rank pari passu in all respects with or junior to the Junior Subordinated
Debentures. During an Extension Period, interest on the Junior Subordinated
Debentures will continue to accrue (and the amount of Distributions to which
holders of the Preferred Securities are entitled will accumulate) at the rate of
% per annum, compounded quarterly, and holders of Preferred Securities will
be required to accrue interest income for United States federal income tax
purposes. See "Description of Junior Subordinated Debentures -- Option to Extend
Interest Payment Period" and "Certain Federal Income Tax Consequences -- US
Holders -- Interest Income and Original Issue Discount."
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures and the Junior Subordinated Indenture (each as defined
herein), taken together, fully, irrevocably and unconditionally guaranteed all
the Issuer Trust's obligations under the Preferred Securities as described
below. See "Relationship Among the Preferred Securities, the Junior Subordinated
Debentures and the Guarantee -- Full and Unconditional Guarantee." The Guarantee
of the Company guarantees the payment of Distributions and payments on
liquidation or redemption of the Preferred Securities, but only in each case to
the extent of funds held by the Issuer Trust, as described herein (the
"Guarantee"). See "Description of Guarantee." If the Company does not make
payments on the Junior Subordinated Debentures held by the Issuer Trust, the
Issuer Trust will have insufficient funds to pay Distributions on the Preferred
Securities. The Guarantee does not cover payment of Distributions when the
Issuer Trust does not have sufficient funds to pay such Distributions. In the
event the Issuer Trust does not have sufficient funds to pay such Distributions,
a holder of Preferred Securities may institute a legal proceeding directly
against the Company to enforce payment of such Distributions to such holder. See
"Description of Junior Subordinated Debentures -- Enforcement of Certain Rights
by Holders of Preferred Securities." The obligations of the Company under the
Guarantee and the Preferred Securities are subordinate and junior in right of
payment to all Senior Indebtedness (as defined in "Description of Junior
Subordinated Debentures -- Subordination") of the Company.
The Preferred Securities are subject to mandatory redemption (i) in whole,
but not in part, upon repayment of the Junior Subordinated Debentures at Stated
Maturity or, at the option of the Company, their earlier redemption in whole
upon the occurrence of a Tax Event or an Investment Company Event (each as
defined herein) and (ii) in whole or in part at any time on or after
, 2002 contemporaneously with the optional redemption by the Company
of the Junior Subordinated Debentures in whole or in part. The
2
<PAGE> 4
Junior Subordinated Debentures are redeemable prior to maturity at the option of
the Company (i) on or after , 2002, in whole at any time or in part
from time to time, or (ii) in whole, but not in part, at any time within 90 days
following the occurrence and continuation of a Tax Event or an Investment
Company Event, at a redemption price set forth herein, which includes the
accrued and unpaid interest on the Junior Subordinated Debentures so redeemed to
the date fixed for redemption. See "Description of Junior Subordinated
Debentures -- Redemption" and "Description of Preferred Securities --
Redemption."
The holders of the outstanding Common Securities have the right at any time
to dissolve the Issuer Trust and, after satisfaction of liabilities to creditors
of the Issuer Trust as provided by applicable law, to cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities and Common Securities in liquidation of the Issuer Trust. See
"Description of Preferred Securities -- Liquidation Distribution Upon
Dissolution."
In the event of the dissolution of the Issuer Trust, after satisfaction of
liabilities to creditors of the Issuer Trust as provided by applicable law, the
holders of the Preferred Securities will be entitled to receive a Liquidation
Amount of $25 per Preferred Security plus accumulated and unpaid Distributions
thereon to the date of payment, subject to certain exceptions, which may be in
the form of a distribution of such amount in Junior Subordinated Debentures. See
"Description of Preferred Securities -- Liquidation Distribution Upon
Dissolution."
The Junior Subordinated Debentures are unsecured and subordinated to all
Senior Indebtedness of the Company. See "Description of Junior Subordinated
Debentures -- Subordination."
---------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED
SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTTING THE PREFERRED SECURITIES AND
BIDDING FOR AND PURCHASING SUCH PREFERRED SECURITIES AT A LEVEL ABOVE THAT WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING." SUCH STABILIZING TRANSACTIONS, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
---------------------------
FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR ADEQUACY OF
THIS DOCUMENT.
---------------------------
FORWARD-LOOKING STATEMENTS
This Prospectus contains and incorporates by reference certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the results of operations and
businesses of the Company. These forward-looking statements involve certain
risks and uncertainties. Factors that may cause actual results to differ
materially from those contemplated or projected, forecast, estimated or budgeted
in such forward-looking statements include, among others, the following
possibilities: (i) heightened competition, including specifically the
intensification of price competition, the entry of new competitors and the
development of new products by new and existing competitors; (ii) adverse state
and federal legislation and regulation, including changes in federal crop
insurance laws, limitations on premium levels, increases in minimum capital and
reserves, and other financial viability requirements; (iii) failure to develop
new specialty insurance programs or maintain existing programs at current
levels; (iv) inability to carry out marketing and sales plans, including, among
others, changes to certain products and acceptance of the revised products in
the market; (v) loss of key executives; (vi) changes in interest rates causing a
reduction of investment income; (vii) general economic and business conditions
which are less favorable than expected; and (viii) unanticipated changes in
industry trends. See "Risk Factors."
3
<PAGE> 5
ACCEPTANCE INSURANCE COMPANIES INC. AND PRINCIPAL OPERATING SUBSIDIARIES
<TABLE>
<S><C>
----------------------
|Acceptance Insurance|
| Companies Inc. |
| ("Holdings") |
| (Delaware) |
----------------------
|
|
|
|
-----------------------------------------|--------------------------------------------------
| | |
| | |
| | |
---------------------------- ------------------------- -------------------------
| Acceptance | | Redland Insurance | | American |
| Insurance Company | | Company | | Agrisurance Inc. |
| ("Acceptance Insurance")| | ("Redland Insurance") | | ("Am Ag") |
| (Nebraska) | | (Iowa) | | (Iowa) |
---------------------------- ------------------------- -------------------------
| |
| |
| |
---------------------------- ---------------------------------
| | | |
| | | |
| | | |
- ------------------------ ------------------------- ----------------------- ---------------------------
|Acceptance Indemnity | | Phoenix Indemnity | | American Growers | | Acceptance Casualty |
| Insurance Company | | Insurance Company | | Insurance Company | | Insurance Company |
| ("Acceptance | | ("Phoenix Indemnity") | |("American Growers") | | ("Acceptance Casualty") |
| Indemnity") | | (Arizona) | | (Nebraska) | | (Texas) |
| (Nebraska) | | | | | | |
- ------------------------ ------------------------- ----------------------- ---------------------------
</TABLE>
Principle Business:
[ ] Crop Insurance
[ ] Specialty Property and Casualty
4
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and the notes thereto
contained elsewhere or incorporated by reference in this Prospectus. Unless
otherwise indicated, information contained in this Prospectus is based on the
assumption that the Underwriters (as defined herein) do not exercise their
over-allotment option. See "Glossary of Selected Insurance Terms" for
explanations of certain insurance terms used herein.
Unless the context indicates otherwise, (i) the "Company" or "Acceptance"
refers to Acceptance Insurance Companies Inc., a Delaware corporation and its
subsidiaries, (ii) the "Insurance Companies" collectively refers to the
Company's insurance company subsidiaries: Acceptance Insurance Company
("Acceptance Insurance"), Acceptance Indemnity Insurance Company ("Acceptance
Indemnity"), Acceptance Casualty Insurance Company ("Acceptance Casualty"),
American Growers Insurance Company ("American Growers"), Phoenix Indemnity
Insurance Company ("Phoenix Indemnity"), and Redland Insurance Company ("Redland
Insurance"), and (iii) "Am Ag" refers to American Agrisurance Inc.
THE COMPANY
Acceptance through its six insurance subsidiaries underwrites specialty
property and casualty coverages throughout most of the United States. The
Company's principal insurance divisions are the Crop Insurance Division, which
provides Multi-Peril Crop Insurance ("MPCI") and crop hail insurance, and the
Specialty Property and Casualty Division, which provides: (i) specialty property
and casualty coverages through a network of general agents ("General Agency"),
(ii) tailored coverages for specific industries written primarily through agents
specializing in such coverages ("Program"), and (iii) non-standard automobile
coverages for private passenger automobiles principally in the southwestern
United States ("Non-Standard Automobile").
The Company's total revenues and net income were $381.4 million and $30.3
million, respectively, for the year ended December 31, 1996. As of March 31,
1997, the Company had $848.6 million of total assets and $211.1 million of total
equity.
The Company's strategy is to leverage its expertise and relationships
developed in the property and casualty insurance business by focusing on niche
markets not adequately served by other insurers. In furtherance of this
strategy, the Company seeks (i) to identify capacity shortages or other
dislocations in the market and to develop the opportunities presented by these
shortages; and (ii) to establish relationships with agents and other individuals
who have established books of business with a proven track record in niche
markets. The Company's goal is to maintain a diversified mix of business which
has the potential to mitigate the volatility of the Company's underwriting
results. In an effort to limit its exposure to large losses, the Company
implements underwriting standards and reinsurance programs specific to its
business lines.
Crop Insurance Division. The Company is the fourth largest writer of MPCI
premiums in the United States with an approximate 15% market share, based on
premium information compiled in 1996 by the Federal Crop Insurance Corporation
("FCIC") and National Crop Insurance Services, Inc. The Company, through Redland
Insurance, has written MPCI since the opening of this federally subsidized
insurance program to private insurers in 1980. MPCI has historically provided a
yield guarantee mechanism for farmers who suffer an insured crop loss due to
weather or other natural perils. The Company developed a new crop insurance
product, Crop Revenue Coverage ("CRC"), which was approved by the FCIC and
introduced in Iowa and Nebraska for corn and soybeans as part of the MPCI
program in 1996. CRC provides farmers with a minimum guaranteed revenue return
by combining the traditional yield guarantee of the standard MPCI program with a
price protection element. CRC was made available for wheat in six states and for
corn and soybeans in eleven additional states for the 1997 crop year. CRC will
be available for all wheat states in 1998.
The Company believes that recent changes in the law in 1994 and 1996
generally have encouraged more farmers to participate in the MPCI program, which
has led to an increase in the number of farm acres insured and growth in the
national MPCI market. These recent changes in law have permitted the United
States
5
<PAGE> 7
Department of Agriculture ("USDA") to limit its role in the delivery system for
MPCI by reducing the availability of MPCI through USDA field offices, and
provided the Company the opportunity to realize increased revenues from the
distribution of its MPCI and CRC product. In addition, many lending institutions
require farmers to purchase crop insurance. These events resulted in an increase
in the Company's MPCI Premiums to $248.3 million in 1996 from $183.3 million in
1995 and $128.4 million in 1994. The Company's gross premiums written and income
before income taxes from its Crop Insurance Division were $242.9 million and
$42.1 million, respectively, for the year ended December 31, 1996. For further
information about the Company's MPCI business, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General -- Crop
Insurance Division" and "Risk Factors -- Risk Factors Relating to the Company --
Nature of Crop Insurance Business."
Specialty Property and Casualty Division. The Company's other principal
insurance segment is its Specialty Property and Casualty Division, which
consists of the Company's General Agency, Program, and Non-Standard Automobile
operations. The Company's gross premiums written and loss before income taxes
from its Specialty Property and Casualty Division were $408.1 million and $8.6
million, respectively, for the year ended December 31, 1996.
General Agency. The Company offers a variety of specialty property and
casualty insurance coverages in its General Agency operations which are
marketed through a network of approximately 120 general agents who write
business in specific geographic territories and who have binding
authority for specific lines of business. The general agents provide the
Company access to many niche areas through their familiarity with local
and regional markets. The principal lines of business within General
Agency operations are surplus lines liability and substandard property,
specialty automobile, and complex general liability risks.
Program. The Company's Program operations provide coverage written for
selected classes of business through focused independent agents who
specialize in that particular class of business. Transportation programs
include property and casualty insurance for long haul truckers and upper
Midwest regional and national trucking companies hauling rural products.
The Company offers insurance in rural areas through rural agents for
farm owners, automobiles, livestock mortality, as well as limited
commercial coverages. Other programs provide tailored coverages for
condominiums, temporary help agencies, daily auto rental, family
restaurants, and fine arts. The Company continually evaluates
underwriting performance and opportunities in this area and seeks growth
through new programs.
Non-Standard Automobile. The Company's Non-Standard Automobile
operations provide non-standard private passenger automobile coverages
written principally in non-urban areas in the southwestern United States
through approximately 600 independent agents. Insureds are usually
unable to obtain coverage from standard carriers for any one of several
reasons, including the insured's prior driving record and other
underwriting criteria and market conditions. Non-standard auto insurance
is generally provided on a basic limits of liability basis, and premium
rates are usually higher than those offered for preferred or standard
risk drivers. The Company intends to expand its Non-Standard Automobile
business to a broader geographic area where the Company currently writes
other lines of business.
For additional information, see "Business -- Specialty Property and
Casualty Division."
Each of the Insurance Companies is rated "A-" (Excellent) by A.M. Best
Company, Inc. ("A.M. Best"), with the exception of American Growers for which as
a crop insurance company there is no applicable A.M. Best rating. A.M. Best
bases its ratings upon factors that concern policyholders and agents and not
upon factors related to investor protection.
The Company's principal executive offices are located at 222 South 15th
Street, Suite 600 North, Omaha, Nebraska 68102, and its telephone number is
(402) 344-8800.
6
<PAGE> 8
AICI CAPITAL TRUST
The Issuer Trust is a statutory business trust formed under Delaware law
for the exclusive purposes of (i) issuing and selling the Preferred Securities
and Common Securities, (ii) using the proceeds from the sale of Preferred
Securities and Common Securities to acquire the Junior Subordinated Debentures
issued by the Company and (iii) engaging in only those other activities
necessary, advisable or incidental thereto (such as registering the transfer of
the Preferred Securities). The principal executive office of the Issuer Trust is
222 South 15th Street, Suite 600 North, Omaha, Nebraska 68102, and its telephone
number is (402) 344-8800. See "AICI Capital Trust."
7
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1992 1993 1994 1995(1) 1996 1996 1997
---- ---- ---- ------- ---- ---- ----
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:(2)
Gross premiums written........... $152,091 $256,042 $447,483 $537,349 $651,060 $123,729 $125,345
Net premiums written............. 84,085 137,505 229,176 286,183 366,949 70,834 71,315
Net premiums earned.............. 79,164 128,082 202,659 271,584 348,653 67,504 71,062
Net investment income............ 8,220 10,844 13,276 20,651 26,491 6,464 6,520
Net realized capital gains....... 1,046 2,250 554 2,707 5,216 1,181 1,311
Agency income.................... 3,992 4,119 3,629 2,863 1,035 629 --
Real estate revenues............. 2,610 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total revenues............... 95,032 145,295 220,118 297,805 381,395 75,778 78,893
Operating Profit................. 4,641 10,566 19,676 8,105 39,296 7,555 6,518
Net income (loss) from continuing
operations..................... $ (826) $ 7,586 $ 21,075 $ 4,155 $ 30,280 $ 4,478 $ 3,914
GAAP RATIOS:(3)
Loss and LAE ratio............... 75.8% 72.5% 70.5% 78.2% 69.8% 68.0% 70.1%
Expense ratio.................... 29.7 28.8 26.0 26.7 27.5 31.5 31.0
-------- -------- -------- -------- -------- -------- --------
Combined ratio................... 105.5% 101.3% 96.5% 104.9% 97.3% 99.5% 101.1%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Investments...................... $124,311 $187,986 $264,743 $368,001 $405,926 $385,002 $432,253
Total assets..................... 257,734 409,385 543,087 781,034 884,380 734,500 848,617
Loss and loss adjustment expense
reserves....................... 127,666 211,600 221,325 369,244 432,173 324,998 380,529
Unearned Premiums................ 41,709 60,114 97,170 124,122 140,217 130,653 145,700
Borrowings and term debt(4)...... 33,567 18,951 29,000 69,000 69,000 69,000 69,000
Stockholders' equity............. 34,523 95,717 159,754 177,787 207,820 178,943 211,062
OTHER DATA:
Statutory surplus of Insurance
Companies(4)(5)................ $ 34,527 $ 73,910 $126,272 $169,628 $191,455 $172,425 $194,632
Ratio of earnings to fixed
charges(6)..................... 1.07x 4.07x 8.07x 2.52x 6.63x 5.03x 4.48x
</TABLE>
- ------------
(1) Operating profit was reduced in 1995 by an increase in loss reserves in the
amount of approximately $22.3 million for 1994 and prior year losses
primarily in the commercial auto liability and general liability and
commercial multi-peril lines of insurance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Year Ended December 31, 1995 Compared to Year Ended December
31, 1994" and "Business -- Loss and Loss Adjustment Expense Reserves."
(2) For a discussion of the accounting treatment of the Company's MPCI business,
the results of which are included beginning July 1, 1993, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General -- Crop Insurance Division."
(3) The loss and loss adjustment expense ("LAE") ratio is calculated by dividing
losses and loss adjustment expenses by net premiums earned. The expense
ratio is calculated by dividing underwriting expenses by net premiums
earned. The combined ratio is the sum of the loss and LAE and expense
ratios. The Company's loss, expense and combined ratios include the results
of the Crop Insurance Division.
8
<PAGE> 10
(4) Reflects statutory surplus of the Insurance Companies on a consolidated
basis. On June 30, 1997, one of the Company's insurance subsidiaries issued
a surplus note to the Company in exchange for $20.0 million. As of March 31,
1997 the pro forma statutory surplus of the Insurance Companies would have
been $214.6 million as adjusted for this surplus note. The Company's
investment was funded through an increase in its borrowings under the
Company's Revolving Credit Facility (as defined herein) which aggregated
$90.0 million at June 30, 1997. See "Management's Discussion and Analysis of
Operating Results -- General -- Crop Insurance Division."
(5) Statutory data has been derived from the separate financial statements of
the Insurance Companies prepared in accordance with Statutory Accounting
Principles ("SAP").
(6) For the purpose of computing the ratio of earnings to fixed charges, (i)
"earnings" consist of income (loss) from continuing operations before income
taxes and minority interests plus fixed charges and (ii) "fixed charges"
consist of all interest expense and the interest portion of rents.
9
<PAGE> 11
THE OFFERING
Securities Offered............ The $65,000,000 aggregate liquidation amount of
Preferred Securities offered hereby represents
preferred undivided beneficial interests in the
Issuer Trust's assets, which will consist
solely of the Junior Subordinated Debentures.
The Trust has granted the Underwriters an
option, exercisable within 30 days after the
date of this Prospectus, to purchase up to an
additional $9,750,000 aggregate liquidation
amount of Preferred Securities at the offering
price, solely to cover over-allotments, if any.
Offering Price................ $25 per Preferred Security (Liquidation Amount
$25), plus accumulated Distributions, if any,
from , 1997.
Distributions................. Distributions payable on each Preferred
Security will be fixed at a rate per annum of
% of the stated liquidation amount per
Preferred Security, will be cumulative, will
accrue from , 1997, the date of
issuance of the Preferred Securities, and will
be payable quarterly in arrears on March 31,
June 30, September 30 and December 31 of each
year, commencing , 1997. See
"Description of Preferred Securities --
Distributions."
Junior Subordinated
Debentures.................... The Issuer Trust will invest the proceeds from
the issuance of the Preferred Securities and
Common Securities in an equivalent amount of
% Junior Subordinated Debentures of the
Company. The Junior Subordinated Debentures
will mature on , 2027, subject to
the Maturity Adjustment. The Junior
Subordinated Debentures will rank subordinate
and junior in right of payment to all Senior
Indebtedness of the Company to the extent and
in the manner set forth in the Junior
Subordinated Indenture. In addition, the
Company's obligations under the Junior
Subordinated Debentures will be structurally
subordinated to all existing and future
liabilities and obligations of its
subsidiaries.
Guarantee..................... Under the terms of the Guarantee, the Company
has guaranteed the payment of Distributions and
payments on liquidation or redemption of the
Preferred Securities, but only in each case to
the extent of funds held by the Issuer Trust
described herein. The Company and the Issuer
Trust believe that the obligations of the
Company under the Guarantee, the Trust
Agreement, the Junior Subordinated Debentures
and the Junior Subordinated Indenture taken
together, fully, irrevocably and
unconditionally guarantee all of the Issuer
Trust's obligations relating to the Preferred
Securities. The obligations of the Company
under the Guarantee and the Preferred
Securities are subordinate and junior in right
of payment to all Senior Indebtedness. See
"Description of Guarantee."
Right to Defer Interest....... So long as no Debenture Event of Default (as
defined herein) has occurred and is continuing,
the Company has the right, at any time, to
defer payments of interest on the Junior
Subordinated Debentures for a period not
exceeding 20 consecutive quarters; provided
that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated
Debentures. As a consequence of the Company's
extension of the interest payment period,
quarterly
10
<PAGE> 12
Distributions on the Preferred Securities will
be deferred (though such Distribution would
continue to accrue with interest thereon
compounded quarterly, since interest will
continue to accrue and compound on the Junior
Subordinated Debentures during any such
Extension Period). During an Extension Period,
the Company will be prohibited, subject to
certain exceptions described herein, from
declaring or paying any cash distributions with
respect to its capital stock or debt securities
that rank pari passu with or junior to the
Junior Subordinated Debentures. Upon the
termination of any Extension Period and the
payment of all amounts then due, the Company
may commence a new Extension Period, subject to
the foregoing requirements. See "Description of
Junior Subordinated Debentures -- Option to
Extend Interest Payment Period."
Should an Extension Period occur, Preferred
Security holders will continue to accrue
interest income (and de minimis original issue
discount, if any) for United States federal
income tax purposes. See "Certain Federal
Income Tax Consequences -- US Holders --
Interest Income and Original Issue Discount."
Redemption.................... The Preferred Securities are subject to
mandatory redemption (i) in whole, but not in
part, at the Stated Maturity upon repayment of
the Junior Subordinated Debentures, (ii) in
whole, but not in part, contemporaneously with
the optional redemption at any time by the
Company of the Junior Subordinated Debentures
upon the occurrence and continuation of a Tax
Event or an Investment Company Event and (iii)
in whole or in part at any time on or after
, 2002, contemporaneously with
the optional redemption by the Company of the
Junior Subordinated Debentures in whole or in
part, in each case at the applicable Redemption
Price (as defined herein). See "Description of
Preferred Securities -- Redemption."
Liquidation of the Issuer
Trust......................... The Company, as holder of the Common
Securities, has the right at any time to
dissolve the Issuer Trust and cause the Junior
Subordinated Debentures to be distributed to
holders of Preferred Securities in liquidation
of the Issuer Trust. See "Description of
Preferred Securities -- Liquidation
Distribution Upon Dissolution."
Limited Voting Rights......... Generally, the holders of the Preferred
Securities will have limited voting rights. See
"Description of Preferred Securities -- Voting
Rights; Amendment of Trust Agreement" and "Risk
Factors -- Risk Factors Relating to the
Offering -- Limited Voting Rights."
Use of Proceeds............... The proceeds from the sale of the Preferred
Securities offered hereby will be used by the
Issuer Trust to purchase the Junior
Subordinated Debentures issued by the Company.
The proceeds received by the Company from the
sale of the Junior Subordinated Debentures will
be used to reduce the Company's existing bank
debt under the Revolving Credit Facility, the
balance of which is currently $90.0 million in
principal amount. See "Use of Proceeds."
ERISA Considerations.......... Prospective purchasers must carefully consider
the information set forth under "Certain ERISA
Considerations."
11
<PAGE> 13
Ratings....................... The Preferred Securities are expected to be
rated "Ba1" by Moody's Investors Service, Inc.
("Moody's") and "BB+" by Standard & Poor's
Ratings Group ("Standard & Poor's"). A security
rating is not a recommendation to buy, sell or
hold securities and may be subject to revision
or withdrawal at any time by the assigning
rating organization.
Symbol........................ Application has been made to have the Preferred
Securities approved for listing on the New York
Stock Exchange under the symbol "AIF PrT."
RISK FACTORS
Prospective investors should carefully consider the matters set forth under
"Risk Factors," beginning on page 13.
12
<PAGE> 14
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Preferred Securities offered by this Prospectus. Certain statements in this
Prospectus and documents incorporated herein by reference are forward-looking
and are identified by the use of forward-looking words or phrases. These
forward-looking statements are based on the Company's current expectations. To
the extent any of the information contained in this Prospectus constitutes a
"forward-looking statement" as defined in Section 27A(i)(1) of the Securities
Act, the risk factors set forth below are cautionary statements identifying
important factors that could cause results to differ materially from those in
the forward-looking statement. See "Forward-Looking Statements."
RISK FACTORS RELATING TO THE OFFERING
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE JUNIOR
SUBORDINATED DEBENTURES
The obligations of the Company under the Guarantee issued by the Company
for the benefit of the holders of Preferred Securities and under the Junior
Subordinated Debentures are subordinate and junior in right of payment to all
Senior Indebtedness of the Company (as defined herein). The Senior Indebtedness
of the Company aggregated $90.0 million as of June 30, 1997. None of the Junior
Subordinated Indenture, the Guarantee or the Trust Agreement places any
limitation on the amount of secured or unsecured debt, including Senior
Indebtedness, that may be incurred by the Company. See "Description of Guarantee
- --Status of the Guarantee" and "Description of Junior Subordinated Debentures --
Subordination."
The ability of the Issuer Trust to pay amounts due on the Preferred
Securities is solely dependent upon the Company's making payments on the Junior
Subordinated Debentures as and when required.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES
So long as no Event of Default (as defined in the Junior Subordinated
Indenture) with respect to the Junior Subordinated Debentures (a "Debenture
Event of Default") has occurred and is continuing, the Company has the right
under the Junior Subordinated Indenture to defer the payment of interest on the
Junior Subordinated Debentures at any time or from time to time for a period not
exceeding 20 consecutive quarterly periods with respect to each Extension
Period, provided that no Extension Period may extend beyond the Stated Maturity
of the Junior Subordinated Debentures. See "Description of Junior Subordinated
Debentures -- Option to Extend Interest Payment Period." As a consequence of any
such deferral, quarterly Distributions on the Preferred Securities by the Issuer
Trust will be deferred during any such Extension Period. Distributions to which
holders of the Preferred Securities are entitled will accumulate additional
Distributions thereon during any Extension Period at the rate of % per annum,
compounded quarterly from the relevant payment date for such Distributions,
computed on the basis of a 360-day year of twelve 30-day months and the actual
days elapsed in a partial month in such period. Additional Distributions payable
for each full Distribution period will be computed by dividing the rate per
annum by four. The term "Distribution" as used herein shall include any such
additional Distributions. During any such Extension Period, the Company may not
(i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of the Company's
capital stock, or (ii) make any payment of principal of or interest of or
premium, if any, on or repay, repurchase or redeem any debt securities of the
Company that rank pari passu in all respects with or junior in interest to the
Junior Subordinated Debentures (other than (a) repurchases, redemptions or other
acquisitions of shares of capital stock of the Company in connection with any
employment contract, benefit plan or other similar arrangement with or for the
benefit of any one or more employees, officers, directors or consultants, in
connection with a dividend reinvestment or stockholder stock purchase plan or in
connection with the issuance of capital stock of the Company (or securities
convertible into or exercisable for such capital stock) as consideration in an
acquisition transaction entered into prior to the applicable Extension Period,
(b) as a result of an exchange or conversion of any class or series of the
Company's capital stock (or any capital stock of a subsidiary of the Company)
for any class or series of the Company's capital stock or of any class or series
of the Company's indebtedness for any class or series of the Company's capital
stock, (c) the purchase of fractional interests in
13
<PAGE> 15
shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
(d) any declaration of a dividend in connection with any stockholder's rights
plan, or the issuance of rights, stock or other property under any stockholder's
rights plan, or the redemption or purchase of rights pursuant thereto, or (e)
any dividend in the form of stock, warrants, options or other rights where the
dividend stock or the stock issuable upon exercise of such warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks pari passu with or junior to such stock). Prior to the termination of any
such Extension Period, the Company may further defer the payment of interest,
provided that no Extension Period may exceed 20 consecutive quarterly periods or
extend beyond the Stated Maturity of the Junior Subordinated Debentures. Upon
the termination of any Extension Period and the payment of all interest then
accrued and unpaid (together with interest thereon at the annual rate of %,
compounded quarterly, to the extent permitted by applicable law), the Company
may elect to begin a new Extension Period subject to the above conditions. No
interest shall be due and payable during an Extension Period, except at the end
thereof. The Company must give the holders of the Preferred Securities and the
Issuer Trustees (as defined herein) notice of its election to begin an Extension
Period at least one Business Day (as defined herein) prior to the earlier of (i)
the date the Distributions on the Preferred Securities would have been payable
but for the election to begin such Extension Period and (ii) the date the
Property Trustee (as defined herein) is required to give notice to holders of
the Preferred Securities of the record date or the date such Distributions are
payable, but in any event not less than one Business Day prior to such record
date. The Property Trustee will give notice of the Company's election to begin a
new Extension Period to the holders of the Preferred Securities. Subject to the
foregoing, there is no limitation on the number of times that the Company may
elect to begin an Extension Period. See "Description of Preferred Securities --
Distributions" and "Description of Junior Subordinated Debentures -- Option to
Extend Interest Payment Period."
Should an Extension Period occur, a holder of Preferred Securities will
continue to accrue income (in the form of original issue discount ("OID")) for
United States federal income tax purposes in respect of its pro rata share of
the Junior Subordinated Debentures held by the Issuer Trust, which will include
a holder's pro rata share of both the stated interest and de minimus OID, if
any, on the Junior Subordinated Debentures. As a result, a holder of Preferred
Securities will include such OID in gross income for United States federal
income tax purposes in advance of the receipt of cash, and will not receive the
cash related to such income from the Issuer Trust if the holder disposes of the
Preferred Securities prior to the record date for the payment of Distributions.
See "Certain Federal Income Tax Consequences -- US Holders -- Interest Income
and Original Issue Discount" and "-- Sales of Preferred Securities."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures. However, should the Company elect to exercise such
right in the future, the market price of the Preferred Securities is likely to
be affected. A holder that disposes of its Preferred Securities during an
Extension Period, therefore, might not receive the same return on its investment
as a holder that continues to hold its Preferred Securities. In addition, as a
result of the existence of the Company's right to defer interest payments, the
market price of the Preferred Securities (which represent preferred undivided
beneficial interests in the assets of the Issuer Trust) may be more volatile
than the market prices of other securities on which OID or interest accrues that
are not subject to such deferrals.
TAX EVENT OR INVESTMENT COMPANY EVENT REDEMPTION
Upon the occurrence and during the continuation of a Tax Event or an
Investment Company Event the Company has the right to redeem the Junior
Subordinated Debentures in whole, but not in part, at any time within 90 days
following the occurrence of such Tax Event or an Investment Company Event and
thereby cause a mandatory redemption of the Preferred Securities. Any such
redemption shall be at a price equal to the liquidation amount of the Preferred
Securities, together with accumulated Distributions to but excluding the date
fixed for redemption. See "Description of Junior Subordinated Debentures --
Redemption" and "Description of Preferred Securities -- Liquidation Distribution
Upon Dissolution."
14
<PAGE> 16
A "Tax Event" means the receipt by the Issuer Trust of an opinion of
counsel to the Company experienced in such matters to the effect that, as a
result of any amendment to, or change (including any announced prospective
change) in, the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein, or as a result of
any official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement, action or decision is announced on or after
the date of issuance of the Preferred Securities, there is more than an
insubstantial risk that (i) the Issuer Trust is, or will be within 90 days of
the delivery of such opinion, subject to United States federal income tax with
respect to income received or accrued on the Junior Subordinated Debentures,
(ii) interest payable by the Company on the Junior Subordinated Debentures is
not, or within 90 days of the delivery of such opinion will not be, deductible
by the Company, in whole or in part, for United States federal income tax
purposes, or (iii) the Issuer Trust is, or will be within 90 days of the
delivery of the opinion, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.
"Investment Company Event" means the receipt by the Issuer Trust of an
opinion of counsel to the Company experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, there is more than an insubstantial risk that
the Issuer Trust is or will be considered an "investment company" that is
required to be registered under the Investment Company Act of 1940, as amended
(the "Investment Company Act"), which change or prospective change becomes
effective or would become effective, as the case may be, on or after the date of
the issuance of the Preferred Securities.
See "-- Proposed Tax Law Changes" and "Certain Federal Income Tax
Consequences -- Proposed Tax Law Changes" for a discussion of certain
legislative proposals that, if adopted, could give rise to a Tax Event, which
may permit the Company to cause a redemption of the Preferred Securities prior
to , 2002.
EXCHANGE OF PREFERRED SECURITIES FOR JUNIOR SUBORDINATED DEBENTURES
The holders of all the outstanding Common Securities have the right at any
time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities in liquidation of the Issuer Trust. See "Description of Preferred
Securities -- Liquidation Distribution Upon Dissolution."
Under current United States federal income tax law and interpretations and
assuming, as expected, that the Issuer Trust will not be taxable as a
corporation, a distribution of the Junior Subordinated Debentures upon a
liquidation of the Issuer Trust will not be a taxable event to holders of the
Preferred Securities. However, if a Tax Event were to occur that would cause the
Issuer Trust to be subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, a distribution
of the Junior Subordinated Debentures by the Issuer Trust would be a taxable
event to the Issuer Trust and the holders of the Preferred Securities. See
"Certain Federal Income Tax Consequences -- US Holders -- Receipt of Junior
Subordinated Debentures or Cash Upon Liquidation of the Issuer Trust."
RIGHTS UNDER THE GUARANTEE
Bankers Trust Company will act as the trustee (the "Trustee" or the
"Guarantee Trustee") under the Guarantee and will hold the Guarantee for the
benefit of the holders of the Preferred Securities. Bankers Trust Company will
also act as the debenture trustee (the "Debenture Trustee") for the Junior
Subordinated Debentures and as property trustee (the "Property Trustee") under
the Trust Agreement. Bankers Trust (Delaware) will act as Delaware Trustee under
the Trust Agreement. The Guarantee guarantees to the holders of the Preferred
Securities the following payments, to the extent not paid by or on behalf of the
Issuer Trust: (i) any accumulated and unpaid Distributions required to be paid
on the Preferred Securities, to the extent that the Issuer Trust has funds on
hand available therefor at the payment date, (ii) the Redemption Price with
respect to any Preferred Securities called for redemption, to the extent that
the Issuer Trust has funds on hand available therefor at such time, and (iii)
upon a voluntary or involuntary dissolution, winding up
15
<PAGE> 17
or liquidation of the Issuer Trust (unless the Junior Subordinated Debentures
are distributed to holders of the Preferred Securities), the lesser of (a) the
aggregate of the Liquidation Amount (as defined herein) and all accumulated and
unpaid Distributions required to be paid on the Preferred Securities to the
extent that the Issuer Trust has funds on hand available therefor at such time,
and (b) the amount of assets of the Issuer Trust remaining available for
distribution to holders of the Preferred Securities on liquidation of the Issuer
Trust. The Guarantee is subordinated as described under "-- Ranking of
Subordinated Obligations Under the Guarantee and the Junior Subordinated
Debentures" and "Description of Guarantee -- Status of the Guarantee." The
holders of not less than a majority in aggregate Liquidation Amount of the
outstanding Preferred Securities have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Guarantee
Trustee in respect of the Guarantee or to direct the exercise of any trust power
conferred upon the Guarantee Trustee under the Guarantee. Any holder of the
Preferred Securities may institute a legal proceeding directly against the
Company to enforce its rights under the Guarantee without first instituting a
legal proceeding against the Issuer Trust, the Guarantee Trustee or any other
person or entity.
If the Company were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Issuer Trust may lack funds for
the payment of Distributions or amounts payable on redemption of the Preferred
Securities or otherwise, and, in such event, holders of the Preferred Securities
would not be able to rely upon the Guarantee for payment of such amounts.
Instead, if a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Junior Subordinated Debentures on the payment date on which
such payment is due and payable, then a holder of Preferred Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of any amounts payable in respect of such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities of such holder (a "Direct
Action"). In connection with such Direct Action, the Company will have a right
of set-off under the Junior Subordinated Indenture to the extent of any payment
made by the Company to such holder of Preferred Securities in the Direct Action.
Except as described herein, holders of Preferred Securities will not be able to
exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures or assert directly any other rights in respect of the
Junior Subordinated Debentures. See "Description of Junior Subordinated
Debentures -- Enforcement of Certain Rights by Holders of Preferred Securities"
and "-- Debenture Events of Default," and "Description of Guarantee." The Trust
Agreement provides that each holder of Preferred Securities by acceptance
thereof agrees to the provisions of the Guarantee and the Junior Subordinated
Indenture.
LIMITED VOTING RIGHTS
Holders of Preferred Securities will have limited voting rights relating
generally to the modification of the Preferred Securities and the Guarantee and
the exercise of the Issuer Trust's rights as holder of the Junior Subordinated
Debentures. Holders of Preferred Securities will not be entitled to appoint,
remove or replace the Property Trustee or the Delaware Trustee except upon the
occurrence of certain events specified in the Trust Agreement. The Property
Trustee and the holders of all the Common Securities may, subject to certain
conditions, amend the Trust Agreement without the consent of holders of
Preferred Securities to cure any ambiguity or make other provisions not
inconsistent with the Trust Agreement or to ensure that the Issuer Trust (i)
will not be taxable as a corporation for United States federal income tax
purposes, or (ii) will not be required to register as an "investment company"
under the Investment Company Act. See "Description of Preferred Securities --
Voting Rights; Amendment of Trust Agreement" and "-- Removal of Issuer Trustees;
Appointment of Successors," and "Description of Guarantee -- Amendments and
Assignment."
ABSENCE OF PRIOR MARKET
The Company has made application to list the Preferred Securities on the
NYSE. However, there can be no assurance that an active trading market for the
Preferred Securities will develop or continue or that the market price of the
Preferred Securities will not decline below the price to public set forth on the
cover page of this Prospectus. See "Underwriting."
16
<PAGE> 18
MARKET PRICES
There can be no assurance as to the market prices for Preferred Securities,
or the market prices for Junior Subordinated Debentures that may be distributed
in exchange for Preferred Securities if a liquidation of the Issuer Trust
occurs. Accordingly, the Preferred Securities or the Junior Subordinated
Debentures that a holder of Preferred Securities may receive on liquidation of
the Issuer Trust may trade at a discount to the price that the investor paid to
purchase the Preferred Securities offered hereby. Because holders of Preferred
Securities may receive Junior Subordinated Debentures on termination of the
Issuer Trust, prospective purchasers of Preferred Securities are also making an
investment decision with regard to the Junior Subordinated Debentures and should
carefully review all the information regarding the Junior Subordinated
Debentures contained herein. See "Description of Junior Subordinated
Debentures."
PROPOSED TAX LAW CHANGES
On February 6, 1997, President Clinton released his budget proposals for
fiscal year 1998. One of the tax proposals therein (the "Tax Proposal") would
generally deny corporate issuers a deduction for interest related to certain
debt obligations that have a maximum term in excess of 15 years and are not
shown as indebtedness on the separate balance sheet of the issuer or, where the
instrument is issued to a related party (other than a corporation), where the
holder of some other related party issues a related instrument that is not shown
as indebtedness on the issuer's consolidated balance sheet. As drafted, the Tax
Proposal would be effective generally for instruments issued on or after the
date of first Congressional committee action. The House of Representatives has
passed the Revenue Reconciliation Act of 1997 (the "Revenue Act"), which does
not contain any provision similar to the Tax Proposal except for debt
instruments payable in stock of the issuer or a related party. The version of
the Revenue Act passed by the Senate also does not contain any provision similar
to the Tax Proposal denying the deduction of interest on debt instruments
because they may contain equity features. Accordingly, the Revenue Act in its
current form, as passed by the House of Representatives and the Senate, does not
apply to the Junior Subordinated Debentures. There can be no assurance, however,
that the Revenue Act, if enacted, will be enacted as currently drafted or that
other legislation enacted after the date hereof will not adversely affect the
tax treatment of the Junior Subordinated Debentures or cause a Tax Event,
resulting in the distribution of the Junior Subordinated Debentures to holders
of Preferred Securities. See "Description of Preferred Securities --
Redemption." Such a change could give rise to a Tax Event, which may permit the
Company to cause a redemption of the Preferred Securities before ,
2002. See "Description of Junior Subordinated Debentures -- Redemption" and
"Description of Preferred Securities -- Redemption." See also "Certain Federal
Income Tax Consequences -- Proposed Tax Law Changes." Under current law, the
Company will be able to deduct interest on the Junior Subordinated Debentures.
RISK FACTORS RELATING TO THE COMPANY
NATURE OF BUSINESS; COMPETITION
Insurers compete based on a number of factors, including pricing and other
terms, service provided to agents and policyholders, and ratings. Since the last
half of the 1980s, there has been severe competition in pricing and terms of
coverage in the property and casualty insurance industry, resulting in
underwriting losses for the industry. The Company continues to experience
pricing competition in certain segments of its business as the conditions of
heightened price competition and impaired underwriting performance continue in
the industry as a whole. In addition, many of the Company's competitors have
substantially greater financial and other resources, and some offer a broader
variety of coverages than those offered by the Company. The continuation of
these market conditions for many property and casualty lines may result in
additional competitors seeking to write business in certain of the Company's
specialized lines. In addition, since the Company acquires books of business in
niche insurance markets in which it has limited experience in underwriting the
risk involved, the Company may encounter difficulty in underwriting and pricing
such policies, which in turn may lead to unfavorable underwriting results.
17
<PAGE> 19
The Company's results are also influenced by other factors affecting the
insurance industry generally and which are largely beyond the Company's control.
Such factors include: (a) weather-related and other catastrophes; (b) taxation
and regulatory reform at both the federal and state levels; (c) changes in
industry standards regarding rating and policy forms; (d) changes in law as a
result of court decisions and in judicial attitudes toward liability claims; and
(e) changes in the rate of inflation, interest rates and general economic
conditions.
Property and casualty insurance is a capital intensive business. The
Company must maintain minimum levels of surplus in the Insurance Companies in
order to continue to write business and at the same time meet the standards
established by state insurance regulatory authorities and insurance rating
bureaus. Without additional capital, the Company could be required to curtail
growth or even to reduce its volume of premium writings in order to satisfy
state regulations or to maintain the current ratings from A.M. Best for the
Insurance Companies.
The Company's growth has resulted in part from acquisitions and other
equity investments, and the Company intends to continue to pursue additional
opportunities in the insurance business. Such growth requires capital, and as a
result the Company may seek additional debt or equity financing in the future,
the amounts of which may be significant. There can be no assurance that the
Insurance Companies will have access to sufficient capital in future periods to
continue their growth and also satisfy the capital requirements of rating
agencies and regulators. Such growth has also involved and may continue to
involve entering new lines of insurance in which the Company has limited prior
operating experience. Although the Company follows the practice of hiring
experienced personnel to manage its new lines of business, there can be no
assurance that it will be successful in writing such new lines.
NATURE OF CROP INSURANCE BUSINESS
The Company's operating results from its crop insurance program can vary
substantially from period to period as a result of various factors, including
timing and severity of losses from storms, droughts, floods, freezes and other
natural perils and the timing of crop production cycles. Therefore, the results
for any quarter or year are not necessarily indicative of results for any future
period. The underwriting results of the crop insurance business primarily are
recognized by the Company in the third and fourth quarter of the year.
The Company's operating results may also be significantly affected by
legislative and regulatory changes in the MPCI program or in the terms of the
annual contract with the FCIC. The MPCI program has historically been subject to
modification since its establishment in 1980, and certain of these modifications
have significantly affected the Company's crop insurance business. No assurance
can be given that future changes will not significantly affect the MPCI program
and the Company's crop insurance business.
The Federal Crop Insurance Reform Act of 1994 (the "1994 Reform Act")
reduced the expense reimbursement rate payable to the Company for its costs of
servicing MPCI policies that exceed the minimum available level of MPCI (such
policies, "Buy-up Coverage") for the 1997, 1998 and 1999 crop years to 29%, 28%
and 27.5%, respectively, which is a decrease from the 31% level established for
the 1994, 1995 and 1996 crop years. CRC policies, which have a higher premium
base, will receive a 25% expense reimbursement rate in 1997. Although the 1994
Reform Act directs the FCIC to alter program procedures and administrative
requirements so that the administrative and operating costs of private insurance
companies participating in the MPCI program will be reduced in an amount that
corresponds to the reduction in the expense reimbursement rate, there can be no
assurance that the Company's actual costs will not exceed the reimbursement
rate.
The Company is currently participating in discussions with the FCIC
regarding the 1998 contract. The government currently proposes to reduce the
expense reimbursement on standard MPCI and CRC coverages and change the profit
sharing arrangement to increase participation in profit and loss by private
insurance companies. The standard MPCI Buy-up Coverage premium and the CRC
premium were approximately $185.5 million and $35.0 million, respectively, for
1996. The Company intends to take steps to mitigate the effect of any reduction
in the expense reimbursement formula, including cost containment and additional
MPCI or CRC policy sales. Any reduction in the expense reimbursement terms which
are not (i) offset by higher attendant premiums, (ii) able to be mitigated by
the Company, or (iii) offset by cost reductions of the
18
<PAGE> 20
MPCI program by the FCIC as discussed above, or any combination thereof, may
adversely effect the Company's results of operations for this component of the
MPCI program.
The 1994 Reform Act also directs the FCIC to establish adequate premiums
for all MPCI coverages at such rates as the FCIC determines are actuarially
sufficient to attain a targeted loss ratio. Since 1980, the average MPCI loss
ratio has exceeded this target ratio. There can be no assurance that the FCIC
will not increase rates to farmers in order to achieve the targeted loss ratio
in a manner that could adversely affect participation by farmers in the MPCI
program.
The Federal Agricultural Improvement and Reform Act of 1996 (the "1996
Reform Act") provides that MPCI coverage is not required for federal farm
program benefits if producers sign a written waiver that waives eligibility for
emergency crop loss assistance. There can be no assurance as to the ultimate
effect that the 1996 Reform Act may have on the business or operations of the
Company.
Total MPCI Premium for each farmer depends upon the type of crops grown,
acreage planted and other factors determined by the FCIC. Each year, the FCIC
sets, by crop, the maximum per unit commodity price ("Price Election") to be
used in computing MPCI Premiums. Any reduction of the Price Election by the FCIC
will reduce the MPCI Premium charged per policy, and accordingly will adversely
impact MPCI Premium volume.
A significant portion of the MPCI premiums written by the Company in 1997
relate to CRC policies. In view of the recent introduction of CRC and the
limited experience of the Company, the FCIC and the industry in underwriting
this product, there can be no assurance as to the adequacy of the pricing and
future loss experience related to this product.
The Company's crop insurance business is also affected by market conditions
in the agricultural industry which vary depending on such factors as federal
legislation and administration policies, foreign country policies relating to
agricultural products and producers, demand for agricultural products, weather,
natural disasters, technological advances in agricultural practices,
international agricultural markets and general economic conditions both in the
United States and abroad. For example, the number of MPCI Buy-up Coverage
policies written has historically tended to increase after a year in which a
major natural disaster adversely affecting crops occurs, and to decrease
following a year in which favorable weather conditions prevail. See "Business --
General -- Crop Insurance Division."
LOSS RESERVES
The reserves for losses and LAE established by the Company are estimates of
amounts needed to pay reported and unreported claims and related LAE based on
facts and circumstances then known. Reserves are based on estimates of trends in
claims severity, judicial theories of liability and other factors.
The Company underwrites both property and casualty coverages in a number of
specialty areas of business which may involve greater risks than standard
property and casualty lines, including the risks associated with the absence of
a long-term, reliable historical claims experience. These risk components may
make more difficult the task of estimating reserves for losses, and cause the
Company's underwriting results to fluctuate.
The establishment of appropriate reserves is an inherently uncertain
process, and it has been necessary, and over time may continue to be necessary,
to revise estimated loss reserve liabilities. Adverse loss experience related to
prior years resulted in a strengthening of loss reserves in each of 1994, 1995
and 1996, in the amounts of $5.1 million, $22.3 million and $9.5 million,
respectively. There can be no assurance that the ultimate liability will not
materially exceed the Company's loss and LAE reserves and have a material
adverse effect on the Company's results of operations and financial condition in
the future. Conditions and trends that have affected the development of loss
reserves in the past may not necessarily occur in the future. See "Business --
Loss and Loss Adjustment Expense Reserves."
19
<PAGE> 21
REINSURANCE
In order to reduce risk and to increase its underwriting capacity, the
Company purchases reinsurance. Reinsurance does not relieve the Company of
liability to its insureds for the risks ceded to reinsurers. As such, the
Company is subject to credit risk with respect to the risks ceded to reinsurers.
Although the Company places its reinsurance with reinsurers it believes to be
financially stable, a significant reinsurer's insolvency or inability to make
payments under the terms of a reinsurance treaty could have a material adverse
effect on the Company.
The amount and cost of reinsurance available to companies writing property
and casualty insurance are subject, in large part, to prevailing market
conditions beyond the control of such companies. The Company's ability to
provide insurance at competitive premium rates and coverage limits on a
continuing basis depends upon its ability to obtain adequate reinsurance in
amounts and at rates that will not adversely affect its competitive position.
Due to continuing market uncertainties regarding reinsurance capacity, no
assurances can be given as to the Company's ability to maintain its current
reinsurance facilities, which generally are subject to annual renewal. If the
Company is unable to renew such facilities upon their expiration and is
unwilling to bear the associated increase in net exposures, the Company may need
to reduce the levels of its underwriting commitments. See "Business --
Reinsurance."
INVESTMENTS
All of the Company's securities investment portfolio has been designated as
available-for-sale pursuant to Statement of Financial Accounting Standards No.
115 ("SFAS 115") relating to accounting for investments. SFAS 115 requires that
unrealized gains and losses in the estimated value of the available-for-sale
portfolio be "marked to market" and reflected as a separate item in
stockholders' equity (net of tax). Stockholders' equity will continue to reflect
the unrealized gains and losses (net of tax) of these investments. There can be
no assurance that the market value of the Company's investment portfolio will
not decline, causing a corresponding decline in stockholders' equity.
Management believes that several factors will affect the market values of
the Company's investment portfolio. These include, but are not limited to,
changes in interest rates or expectations of changes, the degree of volatility
in the securities markets, inflation rates or expectations of inflation and the
slope of the interest rate yield curve. (The yield curve refers to the
differences between longer-term and shorter-term interest rates. A positively
sloped yield curve means shorter-term rates are lower than longer-term rates.)
Also, the passage of time will affect the market values of the securities, in
that the closer they are to maturing, the closer the market price should be to
par value. In addition to the foregoing, there are other factors that impact
specific categories of the portfolio differently. See "Business -- Investments."
REGULATION
The Company's insurance business is subject to comprehensive regulation
throughout the United States, under statutes which delegate regulatory,
supervisory and administrative powers to state insurance commissioners. The
primary purpose of such regulation and supervision is the protection of
policyholders and claimants rather than stockholders or other investors.
Depending on whether the insurance company is domiciled in the state and whether
it is an admitted or non-admitted insurer, such authority may extend to such
things as: (i) periodic reporting of the insurer's financial condition; (ii)
periodic financial examination; (iii) approval of rates and policy forms; (iv)
loss reserve adequacy; (v) insurer solvency; (vi) the licensing of insurers and
their agents; (vii) restrictions on the payment of dividends and other
distributions; (viii) approval of changes in control; and (ix) the type and
amount of permitted investments.
The Company also is subject to laws governing insurance holding companies
in Nebraska, Iowa, Arizona and Texas, where the Insurance Companies are
domiciled. These laws, among other things, require the Company to file periodic
information with state regulatory authorities including information concerning
its capital structure, ownership, financial condition and general business
operations; regulate certain transactions
20
<PAGE> 22
between the Company, its affiliates and the Insurance Companies, including the
amount of dividends and other distributions and the terms of surplus notes; and
restrict the ability of any one person to acquire certain levels of the
Company's voting securities (generally 10%) without prior regulatory approval.
Insurance regulatory agencies and the National Association of Insurance
Commissioners ("NAIC") reexamine from time to time existing laws and regulations
and their application to insurance companies. In addition, the Company's MPCI
and CRC program,s are regulated and are subject to oversight by the federal
government, including the FCIC. The MPCI and CRC programs require compliance
with federal guidelines with respect to all aspects of the MPCI and CRC program,
and the Company is required to perform continuous internal audits and is subject
to audit by several federal government agencies. There can be no assurance that
existing insurance-related laws and regulations will not become more restrictive
in the future or that laws and regulations enacted in the future at the state or
federal level will not be more restrictive or otherwise have a material adverse
effect on the Company. For further information as to regulatory issues affecting
the Insurance Companies, see "Business -- Regulation" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
HOLDING COMPANY STRUCTURE; DIVIDENDS AND OTHER RESTRICTIONS
The Company is an insurance holding company with assets consisting
primarily of the capital stock of its subsidiaries, surplus notes issued by two
of the Insurance Companies and investment assets held at the holding company
level. Following the Offering, the ability of the Company to make interest
payments on the Junior Subordinated Debentures will be dependent upon the
receipt of interest payments on the surplus notes, payments from the profit
sharing arrangement with Am Ag, tax sharing payments from its subsidiaries, net
investment income from, and proceeds from the sale of, holding company
investments, and dividends or other distributions from the subsidiaries of the
Company. Dividends from the Insurance Companies are regulated by the regulatory
authorities of the states in which each subsidiary is domiciled. The laws of
such states generally restrict dividends from insurance companies to parent
companies to certain statutorily approved limits. In 1997, the statutory
limitation on dividends from the Insurance Companies to the Company without
further insurance department approval is approximately $10.4 million, none of
which has been paid. Although the Company believes that amounts required for it
to meet its financial and operating obligations will be available, there can be
no assurance in this regard. For further information about the Company's sources
of cash flow and restrictions thereon, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The maximum dividend permitted by law is not necessarily indicative of an
insurer's actual ability to pay dividends or other distributions to a parent
company, which also may be constrained by business and regulatory
considerations, such as the impact of dividends on surplus, which could affect
an insurer's competitive position, the amount of premiums that can be written
and the ability to pay future dividends. Further, state insurance laws and
regulations require that the statutory surplus of an insurance company following
any dividend or distribution by such company be reasonable in relation to its
outstanding liabilities and adequate for its financial needs.
DEPENDENCE ON KEY PERSONNEL
The future success of the Company depends significantly upon the efforts of
Kenneth C. Coon, Chairman and Chief Executive Officer of the Company, John P.
Nelson, President and Chief Operating Officer of the Company, Richard C. Gibson,
Chief Executive Officer of Am Ag, Bruce W. Slaughter, Senior Vice President of
Redland Insurance, and Thomas D. Stamm, Senior Vice President of Acceptance
Insurance. The loss of any of these officers or of the business derived from the
efforts of these officers could adversely affect the Company's business. Messrs.
Coon, Nelson, and Gibson are each employed under an employment agreement which
is automatically renewed from calendar year to calendar year, unless terminated
by either party with one year's notice.
21
<PAGE> 23
AICI CAPITAL TRUST
The Issuer Trust is a statutory business trust created under Delaware law
pursuant to the filing of a Certificate of Trust with the Delaware Secretary of
State on June 5, 1997. The Issuer Trust will be governed by the Trust Agreement
among the Company, as Depositor, Bankers Trust (Delaware), as Delaware Trustee,
and Bankers Trust Company, as Property Trustee (together with the Delaware
Trustee, the "Issuer Trustees"). Two individuals will be selected by the holder
of the Common Securities to act as administrators with respect to the Issuer
Trust (the "Administrators"). The Company, while holder of the Common
Securities, intends to select two individuals who are employees or officers of
or affiliated with the Company to serve as the Administrators. See "Description
of Preferred Securities -- Miscellaneous." The Issuer Trust exists for the
exclusive purposes of (i) issuing and selling the Trust Securities, (ii) using
the proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debentures and (iii) engaging in only those other activities
necessary, advisable or incidental thereto (such as registering the transfer of
the Trust Securities). Accordingly, the Junior Subordinated Debentures will be
the sole assets of the Issuer Trust, and payments under the Junior Subordinated
Debentures will be the sole source of revenue of the Issuer Trust.
All the Common Securities will be owned by the Company. The Common
Securities will rank pari passu, and payments will be made thereon pro rata,
with the Preferred Securities, except that upon the occurrence and during the
continuation of a Debenture Event of Default arising as a result of any failure
by the Company to pay any amounts in respect of the Junior Subordinated
Debentures when due, the rights of the holder of the Common Securities to
payment in respect of Distributions and payments upon liquidation, redemption or
otherwise will be subordinated to the rights of the holders of the Preferred
Securities. See "Description of Preferred Securities -- Subordination of Common
Securities." The Company will acquire Common Securities in an aggregate
liquidation amount equal to 3% of the total capital of the Issuer Trust. The
Issuer Trust has a term of 31 years, but may terminate earlier as provided in
the Trust Agreement. The address of the Delaware Trustee is Bankers Trust
(Delaware), 1001 Jefferson Street, Wilmington, Delaware 19801, telephone number
(302) 576-3301. The address of the Property Trustee, the Guarantee Trustee and
the Debenture Trustee is Bankers Trust Company, Four Albany Street, 4th Floor,
New York, New York 10006, telephone number (212) 250-2500.
ACCOUNTING TREATMENT
For financial reporting purposes, the Issuer Trust will be treated as a
subsidiary of the Company and, accordingly, the accounts of the Issuer Trust
will be included in the consolidated financial statements of the Company. The
Preferred Securities will be included in the consolidated balance sheets of the
Company and appropriate disclosures about the Preferred Securities, the
Guarantee and the Junior Subordinated Debentures will be included in the notes
to the consolidated financial statements of the Company. For financial reporting
purposes, Distributions on the Preferred Securities will be recorded in the
consolidated statements of income of the Company.
USE OF PROCEEDS
All the proceeds to the Issuer Trust from the sale of the Preferred
Securities will be invested by the Issuer Trust in the Junior Subordinated
Debentures. The Company intends to use the net proceeds it receives from the
sale of the Junior Subordinated Debentures to reduce its outstanding bank debt
which at June 30, 1997 aggregated $90.0 million in principal amount. As of March
31, 1997, the average interest rate of borrowings under the Company's Revolving
Credit Facility was 6.7%. The Company may from time to time engage in additional
financings of a character and in amounts to be determined.
22
<PAGE> 24
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of the
Company at March 31, 1997, (ii) the pro forma consolidated capitalization of the
Company, as of March 31, 1997, after giving effect to additional borrowings of
$21.0 million by the Company subsequent to March 31, 1997, and (iii) the pro
forma consolidated capitalization of the Company as adjusted to reflect the
issuance of the Preferred Securities hereby offered by the Issuer Trust and
application by the Company of the net proceeds from the corresponding sale of
the Junior Subordinated Debentures to the Issuer Trust as if the sale of the
Preferred Securities had been consummated on March 31, 1997.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------
PRO AS
ACTUAL FORMA ADJUSTED
------ ----- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Borrowings and term debt.................................. $ 69,000 $ 90,000 $ 28,000(1)
Company-obligated mandatorily redeemable Preferred
Securities of AICI Capital Trust, holding solely Junior
Subordinated Debentures of the Company(2)............... -- -- 65,000
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares
authorized, none issued.............................. -- -- --
Common stock, $0.40 par value; 20,000,000 shares
authorized, 15,329,548 shares issued................. 6,109 6,109 6,109
Capital in excess of par value.......................... 196,259 196,259 196,259
Unrealized loss on available for sale securities, net of
tax.................................................. (2,323) (2,323) (2,323)
Retained earnings.................................... 15,346 15,346 15,346
LESS:
Treasury stock, at cost, 38,680 shares.................... (1,629) (1,629) (1,629)
Contingent stock, 240,000 shares(3)....................... (2,700) (2,700) (2,700)
-------- -------- --------
Total stockholders' equity.............................. 211,062 211,062 211,062
-------- -------- --------
Total capitalization............................... $280,062 $301,062 $304,062
======== ======== ========
</TABLE>
- ------------
(1) Assumes the Company will use approximately $62 million of the net proceeds
from the sale of the Junior Subordinated Debentures to pay down existing
bank debt.
(2) Preferred Securities representing beneficial interests in an aggregate
principal amount of $65 million of the % Junior Subordinated Debentures
of the Company. The Junior Subordinated Debentures will mature on ,
2027 subject to the Maturity Adjustment.
(3) Contingent stock represents shares issued by the Company as part of the
consideration for the Redland acquisition which are currently held in escrow
as a fund against which the Company may assert certain claims arising out of
the acquisition.
For additional information regarding the Company's Revolving Credit
Facility and other capital resources, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
23
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data
and should be read in conjunction with, and is qualified in its entirety by, the
Consolidated Financial Statements and the notes thereto incorporated by
reference in this Prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere herein. This
selected consolidated financial data has been derived from the audited and
unaudited Consolidated Financial Statements of the Company and its subsidiaries.
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------ --------------------
1992 1993 1994 1995(1) 1996 1996 1997
---- ---- ---- ------- ---- ---- ----
(IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:(2)
Insurance Revenues:
Gross premiums written.............. $152,091 $256,042 $447,483 $537,349 $651,060 $123,729 $125,345
Net premiums written................ 84,085 137,505 229,176 286,183 366,949 70,834 71,315
Net premiums earned................. 79,164 128,082 202,659 271,584 348,653 67,504 71,062
Net investment income............... 8,220 10,467 12,864 19,851 25,677 6,285 6,347
Net realized capital gains.......... 1,046 2,250 554 2,531 5,206 1,181 1,311
Agency income....................... 3,992 4,119 3,629 2,863 1,035 629 --
-------- -------- -------- -------- -------- -------- --------
Insurance revenues................ 92,422 144,918 219,706 296,829 380,571 75,599 78,720
Non-insurance revenues................ 2,610 377 412 976 824 179 173
-------- -------- -------- -------- -------- -------- --------
Total revenues.................. $ 95,032 $145,295 $220,118 $297,805 $381,395 $ 75,778 $ 78,893
======== ======== ======== ======== ======== ======== ========
Insurance expenses:
Losses and loss adjustment
expenses.......................... $ 60,025 $ 92,805 $142,951 $212,337 $243,257 $ 45,883 $ 49,807
Underwriting and other expenses..... 23,523 36,905 52,627 72,602 95,803 21,274 22,044
Agency expenses..................... 3,736 3,794 3,180 2,596 1,024 531 --
-------- -------- -------- -------- -------- -------- --------
Insurance expenses.................. 87,284 133,504 198,758 287,535 340,084 67,688 71,851
Non-insurance expenses................ 3,107 1,225 1,684 2,165 2,015 535 524
-------- -------- -------- -------- -------- -------- --------
Total expenses.................. $ 90,391 $134,729 $200,442 $289,700 $342,099 $ 68,223 $ 72,375
======== ======== ======== ======== ======== ======== ========
Operating profit...................... 4,641 10,566 19,676 8,105 39,296 7,555 6,518
Other expense:
Interest expense.................... 4,428 2,235 1,693 2,591 4,896 1,253 1,157
Other expense, net.................. 823 340 271 171 910 6 38
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes and
minority interests................ (610) 7,991 17,712 5,343 33,490 6,296 5,323
Provision (benefit) for income
taxes(3)............................ -- 167 (3,443) 1,188 3,210 1,818 1,409
Minority interests in net income of
consolidated subsidiaries........... 216 238 80 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) from continuing
operations.......................... $ (826) $ 7,586 $ 21,075 $ 4,155 $ 30,280 $ 4,478 $ 3,914
======== ======== ======== ======== ======== ======== ========
GAAP RATIOS:(4)
Loss ratio............................ 75.8% 72.5% 70.5% 78.2% 69.8% 68.0% 70.1%
Expense ratio......................... 29.7 28.8 26.0 26.7 27.5 31.5 31.0
-------- -------- -------- -------- -------- -------- --------
Combined loss and expense ratio....... 105.5% 101.3% 96.5% 104.9% 97.3% 99.5% 101.1%
======== ======== ======== ======== ======== ======== ========
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Investments......................... $124,311 $187,986 $264,743 $368,001 $405,926 $385,002 $432,253
Total assets........................ 257,734 409,385 543,087 781,034 884,380 734,500 848,617
Loss and loss adjustment expense
reserves.......................... 127,666 211,600 221,325 369,244 432,173 324,998 380,529
Unearned premiums................... 41,709 60,114 97,170 124,122 140,217 130,653 145,700
Borrowings and term debt(5)......... 33,567 18,951 29,000 69,000 69,000 69,000 69,000
Stockholders' equity................ 34,523 95,717 159,754 177,787 207,820 178,943 211,062
OTHER DATA:
Statutory surplus of Insurance
Companies(5)(6)................... $ 34,527 $ 73,910 $126,272 $169,628 $191,455 $172,425 $194,632
Ratio of earnings to fixed
charges(7).......................... 1.07x 4.07x 8.07x 2.52x 6.63x 5.03x 4.48x
</TABLE>
Footnotes on following page
24
<PAGE> 26
- ------------
(1) Operating profit was reduced in 1995 by an increase in loss reserves in the
amount of approximately $22.3 million for 1994 and prior year losses
primarily in the commercial auto liability and general liability and
commercial multi-peril lines of insurance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Year Ended December 31, 1995 Compared to Year Ended December
31, 1994" and "Business -- Loss and Loss Adjustment Expense Reserves."
(2) For a discussion of the accounting treatment of the Company's MPCI business,
the results of which are included beginning July 1, 1993, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
General -- Crop Insurance Division."
(3) Results for 1994 and 1993 reflect the utilization of tax loss carryforwards
and other temporary differences resulting from prior non-insurance
operations.
(4) The loss and LAE ratio is calculated by dividing losses and loss adjustment
expenses by net premiums earned. The expense ratio is calculated by dividing
underwriting expenses by net premiums earned. The combined ratio is the sum
of the loss and LAE and expense ratios. The Company's loss, expense and
combined ratios include the results of the Crop Insurance Division.
(5) Reflects statutory surplus of the Insurance Companies on a consolidated
basis. On June 30, 1997, one of the Company's insurance subsidiaries issued
a surplus note to the Company in exchange for $20 million. As of March 31,
1997 the pro forma statutory surplus of the Insurance Companies would have
been $214.6 million as adjusted for this surplus note. The Company's
investment was funded through an increase in its borrowings under the
Company's Revolving Credit Facility which aggregated $90.0 million at June
30, 1997. See "Management's Discussion and Analysis of Operating Results --
General -- Crop Insurance Division."
(6) Statutory data has been derived from the separate financial statements of
the Insurance Companies prepared in accordance with SAP.
(7) For the purpose of computing the ratio of earnings to fixed charges, (i)
"earnings" consist of income (loss) from continuing operations before income
taxes and minority interests plus fixed charges and (ii) "fixed charges"
consist of all interest expense and the interest portion of rents.
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
historical financial statements and the other information incorporated herein by
reference. See "Available Information" and "Incorporation of Certain Documents
by Reference."
GENERAL
The Company's business is conducted in two principal divisions, the Crop
Insurance Division and the Specialty Property and Casualty Division. The
Specialty Property and Casualty Division consists of the Company's General
Agency, Program, and Non-Standard Automobile operations. The following table
presents historical segment data for the Company's Crop Insurance and Specialty
Property and Casualty Divisions.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------- -------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
CROP INSURANCE DIVISION:(1)
Gross premiums written................... $161,614 $174,184 $242,917 $ 21,044 $23,636
Net premiums written..................... 34,592 46,950 66,649 3,414 501
Net premiums earned...................... 34,592 46,950 66,649 3,414 501
Income (loss) before income taxes........ 9,780 14,891 42,129 3,064 1,217
SPECIALTY PROPERTY AND CASUALTY DIVISION:
GENERAL AGENCY:
Gross premiums written................ 165,158 208,847 225,690 55,809 52,413
Net premiums written.................. 114,635 135,125 162,156 35,640 36,080
Net premiums earned................... 94,664 132,327 155,334 35,001 36,624
Income (loss) before income taxes..... 505 (10,107) 3,776 3,214 3,302
PROGRAM:
Gross premiums written................ 90,524 124,966 139,739 37,001 36,475
Net premiums written.................. 50,070 75,279 95,806 21,886 22,055
Net premiums earned................... 44,123 64,281 89,488 20,883 23,792
Income (loss) before income taxes..... 6,020 (1,225) (8,821) 48 856
NON-STANDARD AUTOMOBILE:
Gross premiums written................ 30,187 29,352 42,714 9,875 12,821
Net premiums written.................. 29,879 28,829 42,338 9,897 12,679
Net premiums earned................... 29,280 28,026 37,182 8,206 10,145
Income (loss) before income taxes..... 1,407 1,784 (3,594) (30) (52)
GAAP RATIOS (SPECIALTY PROPERTY AND
CASUALTY ONLY):
Loss and LAE ratio....................... 71.4% 80.6% 78.0% 70.4% 70.4%
Expense ratio............................ 30.8 32.0 33.3 33.5 32.0
-------- -------- -------- -------- -------
Combined ratio........................... 102.2% 112.6% 111.3% 103.9% 102.4%
</TABLE>
- ------------
(1) See "-- Crop Insurance Division" for a discussion of the accounting
treatment of the Company's MPCI business. Net premiums and profit and loss
on MPCI business are recognized primarily in the second half of the year.
Crop Insurance Division
The principal products of the Crop Insurance Division are Multi Peril Crop
Insurance, including Crop Revenue Coverage, and crop hail insurance. MPCI is a
government-sponsored program with accounting
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<PAGE> 28
treatment that differs from more traditional property and casualty insurance
lines. For income statement purposes, gross premiums written includes only the
aggregate amount of MPCI premiums paid by farmers, and does not include any
related federal premium subsidies or expense reimbursement. The Company's profit
or loss from its MPCI business is determined after the crop season ends, on the
basis of a profit sharing formula established by law and the Risk Management
Agency ("RMA"). For income statement purposes, any such profit share earned by
the Company, net of the cost of third party reinsurance, is shown as net
premiums written, which equals net premiums earned for MPCI business; whereas,
any share of losses payable by the Company is charged to losses and loss
adjustment expenses. Due principally to crop production cycles, the profit or
loss on MPCI premiums is primarily recognized in the second half of the calendar
year. The Company relies on loss information from the field to determine the
level of losses that should be considered in estimating the profit or loss
during this period. Based upon available loss information, the Company records
an estimate of the profit or loss during the third quarter and then re-evaluates
the estimate using additional loss information available at year-end to
determine any remaining portion to be recorded in the fourth quarter. All
expense reimbursements received are credited to underwriting expenses.
Certain characteristics of the Company's crop business may affect
comparisons to other specialty property and casualty insurance companies,
including: (i) the seasonal nature of the business whereby profits or losses are
generally recognized in the second half of the year; (ii) the nature of crop
business whereby losses are known within a short time period; and (iii) the
limited amount of investment income associated with crop business. In addition,
cash flows from such business differ from cash flows from certain more
traditional lines. See "-- Liquidity and Capital Resources" below. The seasonal
and short term nature of the Company's crop business, as well as the impact on
such business of weather and other natural perils, may produce more volatility
in the Company's operating results on a quarter to quarter or year to year basis
than would certain other insurance lines. The accounting treatment accorded to
the MPCI business also affects the comparability of the Company's loss, expense
and combined ratios.
Specialty Property and Casualty Division
The Company's Specialty Property and Casualty Division includes General
Agency, Program and Non-Standard Automobile operations. Premiums are generally
recognized as income over the terms of the related policies. Certain costs of
acquiring insurance business, principally commissions, premium taxes, and other
underwriting expenses, have been deferred and are amortized as related premiums
are earned. Changes in estimated reserve liabilities relating to prior years
will be reflected in the results of operations for the period in which the
change in the estimate occurs. See "Business -- Reserves."
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
The Company's gross premiums written increased 1.3% in the first quarter of
1997 to $125.3 million from $123.7 million in the 1996 quarter. Net premiums
written increased 0.7% in the 1997 period to $71.3 million from $70.8 million in
the 1996 period. Net premiums earned increased by 5.3% to $71.1 million, from
$67.5 million in the 1996 period. As shown in the table above, there were modest
changes in the revenue mix among the Company's lines of business in the quarter
to quarter comparison.
The Company's investment income increased 0.9% to $6.52 million during the
first quarter of 1997 from $6.46 million in the first quarter of 1996. This
increase resulted from an increase in the average size of the Company's
portfolio from $380.8 million during the three months ended March 31, 1996 to
$423.7 million during the three months ended March 31, 1997, which was largely
offset by a decrease in the annualized investment yield of the portfolio from
6.8% during the first three months of 1996 to 6.2% during the same period in
1997. This decrease in annualized investment yields was principally a result of
an increase in the amount of tax-advantaged securities in the Company's
portfolio during the first quarter of 1997 as compared to the first quarter of
1996. At March 31, 1997, 25.8% of the Company's total invested assets were
invested in municipal bonds and 15.8% in preferred stocks, while at March 31,
1996 the percentages for these two classes of securities were 17.4% and 13.3%,
respectively. The impact of this shift is reflected in the reduction in the
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<PAGE> 29
Company's effective income tax rate during the two periods, as described below.
The Company's net realized capital gains also increased slightly to $1.3 million
in the first quarter of 1997 from $1.2 million in the 1996 quarter.
The Company's operating profit and net income both decreased 12.6% during
the three months ended March 31, 1997 as compared to the same period in 1996.
The decrease in operating profit was approximately $1.0 million, decreasing from
$7.5 million in the first quarter of 1996 to $6.5 million in the first quarter
of 1997, while the decrease in net income was approximately $0.6 million,
decreasing from $4.5 million during the first quarter of 1996 to $3.9 million
during the first quarter of 1997. During the first quarter of 1996, the
Company's operating profit benefitted from $2.8 million of underwriting profits
in the Company's Crop Insurance Division. The principal component of this $2.8
million profit was the recording in that quarter of $3.8 million in profit
sharing from 1995 in the Company's MPCI business, which had been affected by
changes in FCIC rules, unusual weather conditions, and an unusually late
harvest. During the first quarter of 1997, the Company had underwriting profits
of approximately $0.9 million in its Crop Insurance Division. The Company
believes that the crop results for the first quarter of 1997 were more typical
seasonal results than those experienced in the first quarter of 1996.
The decrease in operating income from the Crop Insurance Division was
partially offset by improved operating results in the Specialty Property and
Casualty Division. During the first three months of 1997, the Specialty Property
and Casualty Division recorded a combined ratio of 102.4% as compared to a
combined ratio of 103.9% during the same period in 1996. This improvement
resulted from a reduction in the Company's underwriting expense ratio from 33.4%
to 32.0% as the Company's loss ratio in this Division remained approximately
constant at 70.4% during both periods. The Division's underwriting results
during the first three months of 1997 were adversely affected by results in its
commercial automobile lines of business. The adverse loss experience for
commercial automobile lines was offset by improvement in loss ratios in certain
other property and casualty business lines, most notably the General Agency,
Rural America, and special products lines of business.
During the first three months of 1997, interest expense decreased
approximately $0.09 million to $1.16 million from $1.25 million in the 1996
quarter. This decrease resulted from a decrease in the Company's average
interest rate under its bank credit facility from 7.3% during the three months
ended March 31, 1996 to 6.7% during the three months ended March 31, 1997. The
principal amount of the Company's outstanding borrowings under the Revolving
Credit Facility was $69.0 million during both periods.
Net income benefitted from a lower effective income tax rate during the
first quarter of 1997 as compared to the first quarter of 1996, as the rate
decreased from 28.9% during the first quarter of 1996 to 26.5% during the same
period in 1997. This reduction in the Company's income tax rate reflected
additional income from tax-advantaged securities in the Company's investment
portfolio such as preferred stocks and municipal bonds as noted above.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
The Company's gross premiums written increased by $113.8 million, or 21.2%,
to $651.1 million in 1996 from $537.3 million in 1995. This increase resulted
from a $68.8 million, or 39.5% increase, in the Crop Insurance Division, and a
$45.0 million, or 12.4% increase, in the Specialty Property and Casualty
Division. Net premiums written increased $80.7 million, or 28.2%, in 1996 to
$366.9 million from $286.2 million in 1995, primarily as a result of a $27.0
million increase in the General Agency business, a $20.5 million increase in the
Program business, and a $19.7 million increase in the Crop Insurance Division.
Net premiums earned increased $77.1 million, or 28.4%, to $348.7 million in 1996
from $271.6 million in 1995, primarily due to a $23.0 million increase in the
General Agency business, a $25.2 million increase in the Program business, and a
$19.7 million increase in the Crop Insurance Division.
The Company's investment income increased 28.3% to $26.5 million in 1996
from $20.7 million in 1995. The increase in investment income was principally
due to an increase in the average size of the investment portfolio. The average
size of the Company's investment portfolio increased by 25.3% from $321.3
million for the twelve months ended December 31, 1995 to $402.4 million for the
twelve months ended December 31,
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<PAGE> 30
1996, while the pre-tax yield on the portfolio increased from 6.4% in 1995 to
6.6% in 1996. The size of the Company's investment portfolio increased from
retained earnings and positive cash flows from operations. Realized investment
gains increased to $5.2 million in 1996 from $2.7 million in 1995.
The Company experienced a somewhat higher expense ratio during 1996 than in
1995. This ratio increased from 26.7% in 1995 to 27.5% in 1996 primarily due to
higher net commission expense in the Program operations of the Company. This
higher net commission expense was a result of a changing mix of business with a
lesser percentage of Program premiums produced in lower commission programs such
as workers' compensation and transportation and a higher percentage of premiums
produced in higher commission lines of business. In addition, the Company
decreased the use of quota share reinsurance in the Program operations during
1996, reducing ceding commissions. Underwriting expenses increased 32.0% to
$95.8 million in 1996 from $72.6 million in 1995 as a result of increased
premium volumes and the foregoing increase in the expense ratio.
The Company's operating profit increased from $8.1 million in the year
ended December 31, 1995 to $39.3 million in the year ended December 31, 1996,
while its net income increased for such periods from $4.2 million to $30.3
million. These increases resulted from improved underwriting results from the
Company's Crop Insurance Division and General Agency operations, growth in
premium revenues, increased investment income and realized gains, and a decrease
in the effective tax rate of the Company. These positive factors were offset by
a decline in operating profit from the Company's Program operations, increased
interest expense, and a somewhat higher expense ratio for the Company. Further,
increases in prior year reserves for losses and loss adjustment expenses
significantly affected 1995 results.
The most significant contribution to the improved results was made by the
Company's Crop Insurance Division. The Crop Insurance Division increased its
MPCI Premiums from $183.3 million for the year ended December 31, 1995 to $248.3
million for 1996. In addition to this growth in MPCI Premiums, the Company
increased MPCI Retention (the portion of MPCI Premiums on which the Company
retains the risk of loss) from $104.3 million in 1995 to $161.4 million in 1996.
This growth was due in part to an increase in commodity prices for the major
crops insured by the Company, leading to higher premiums under the relevant MPCI
program formulas, and the Company's introduction of CRC policies, which generate
higher premiums per policy than the traditional MPCI policy. Improved weather
conditions also contributed significantly to the improved results in the Crop
Insurance Division as the Company's MPCI profit sharing percentage (the ratio of
profit sharing received to MPCI Retention) during 1996 increased to 23.5% from
13.4% during 1995. In addition, the 1996 year benefitted from $4.3 million of
additional profit sharing realized in 1996 as final results of the late 1995
harvest were available. Crop Insurance Division results also were influenced by
changes in the MPCA Program, described under "Business -- General" and "-- Crop
Insurance."
Underwriting results in the General Agency lines also improved in 1996 as
compared to 1995, as the Company's combined ratio in this division improved from
116.4% in 1995 to 106.9% in 1996. The Company's 1995 results were affected by a
$22.3 million strengthening of reserves for prior year losses (see "-- Year
Ended December 31, 1995 Compared to Year Ended December 31, 1994"), of which
$16.5 million was attributable to the General Agency business, contributing to
the 116.4% combined ratio recorded during 1995. However, when comparing accident
year loss ratios for 1995 and 1996 in General Agency Operations, the results
were relatively stable; the General Agency 1995 accident year loss ratio was
69.8% as compared to a 1996 accident year loss ratio of 69.9%. The General
Agency business was also able to improve its combined ratio through a reduction
in expenses during 1996, as its expense ratio fell to 31.9% in 1996 as compared
to 34.1% in 1995.
The positive results of the Crop Insurance Division and the General Agency
business were partially offset by underwriting results in the Company's Program
operations. The combined ratio for this business increased from 113.6% during
1995 to 117.5% during 1996. A variety of factors contributed to the
deterioration in the underwriting results: (i) in the Rural America line (which
provides standard property and casualty coverages for the rural market) of the
Program business, storms in areas where the Company had concentrations of farm
business adversely affected the Company's loss ratio, (ii) in the special
products line of business, prolonged sub-zero temperatures in the greater
Chicago area increased the number and severity of freeze losses
29
<PAGE> 31
experienced in the Company's condominium program; and (iii) the Company has
taken steps to reduce its geographic concentrations in its Rural America
business, and is making changes in the reinsurance structure of both of these
departments in order to reduce volatility and improve net underwriting results.
Program results were also affected by a change in the Company's strategy in
its workers' compensation underwriting activities during 1996. In 1995 and
previous years, the Company had followed a strategy of depopulating assigned
risk pools through the application of intensive case management techniques to
risks which had become unacceptable to the standard market due to frequency
rather than severity of loss. With the improvement of workers' compensation
results for the industry as a whole, more companies were willing to write
workers' compensation, and therefore, the number of risks fitting the Company's
profile for removal from assigned risk pools was substantially reduced. As a
result, during 1996 the Company moved to a strategy of partnership arrangements
with select agencies in which the agent accepts part of the underwriting risk in
return for an enhanced profit sharing from the Company. Due to the competitive
market, this strategy is developing slowly, and the Company experienced a 65%
decrease in its direct written premiums in this line of business in 1996. The
initial implementation of this change in strategy resulted in the increase in
the expense ratio in this line of business to more than 100%.
The foregoing factors were offset in part by improved results in the
transportation line of the Program business. Within transportation, the
Company's combined ratio improved from 120.6% during the year ended December 31,
1995 to 103.6% during 1996. The improvement in the foregoing ratios resulted in
part from the positive effects of actions taken during 1995 and 1996 to
reorganize this line of business.
The Company's Non-Standard Automobile underwriting activities experienced
unprofitable results for the first time in six years as a result of an increase
in both the severity and frequency of losses, particularly in the area of
physical damage losses. In an effort to address these problems, the Company has
instituted rate increases beginning in 1996 and continuing into 1997, reduced
commissions in certain areas with poor experience, and canceled agents with loss
ratios not consistent with the Company's expectations.
The Company's interest expense increased during 1996 to $4.9 million as
compared to $2.6 million in 1995. This increase was due to an increase in the
Company's borrowings under its bank facility from an average of $34.3 million
during the 1995 to $69.0 million during 1996. Offsetting this increase in the
size of borrowings was a decline in the average interest rate under the bank
facility from 7.6% during 1995 to 7.1% during 1996. The additional borrowings
under the bank facility were contributed to the Company's subsidiaries in order
to support underwriting activities and maintain capital adequacy ratios at a
level commensurate with the Insurance Companies' current "A-" rating by A.M.
Best.
While the Company's income tax expense increased from $1.2 million for 1995
to $3.2 million for 1996, the effective tax rate declined from 22.2% in 1995 to
9.6% in 1996. The Company's 1996 taxes were positively affected by a decrease in
the valuation allowance relating to the unrealized loss from the Company's
investment in Major Realty Corporation, an unconsolidated real estate company in
which the Company owns a 33% equity interest ("Major Realty").
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The Company's gross premiums written increased $89.8 million, or 20.1%, to
$537.3 million in 1995 from $447.5 million in 1994. This increase principally
resulted from a $43.7 million increase in the General Agency business and a
$34.4 million increase in the Program business. Net premiums written increased
$57.0 million, or 24.9% to $286.2 million in 1995 from $229.2 million in 1994,
primarily as a result of a $20.5 million increase in the General Agency business
and a $25.2 million increase in the Program business. Net premiums earned
increased $68.9 million, or 34.0%, to $271.6 million in 1995, from $202.7
million in 1994, primarily due to a $37.7 million increase in the General Agency
business, and a $20.2 million increase in the Program business.
Net investment income increased 55.6% from $13.3 million in 1994 to $20.7
million in 1995 while the Company's net realized capital gains increased from
$0.6 million in 1994 to $2.7 million in 1995. Investment income increased due to
both an increase in the average size of the Company's investment portfolio as
well as an increase in the average yield on the Company's fixed income
investments. The average size of the
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<PAGE> 32
investment portfolio increased from $220.1 million in 1994 to $321.3 million in
1995 while the Company's pre-tax yield on its portfolio increased from 6.0% in
1994 to 6.4% in 1995. The size of the investment portfolio increased due to
additional borrowings under the Company's credit facility, positive cash flows
from operations; and funds from the exercise of warrants in December 1994, as
well as from retained earnings. Investment yields increased as the overall
interest rate environment provided higher yields during 1995 than in 1994.
The Company's operating profit declined 58.8% to $8.1 million in 1995 from
$19.7 million in 1994, and its net income fell 80.3% to $4.2 million in 1995
from $21.1 million in 1994. These reductions principally resulted from higher
than expected losses in the General Agency and Program operations, including an
increase in the Company's reserves for unpaid losses and LAE related to prior
years of $22.3 million in 1995, an increase in the Company's expense ratio and a
change in the Company's tax status, which more than offset premium growth in
General Agency and Program operations, an increase in investment income, and an
increase in underwriting profits from the Crop Insurance Division.
The Crop Insurance Division experienced strong premium growth in 1995 as
gross written premiums increased 7.8% to $174.2 million in 1995 from $161.6
million in 1994. This premium growth resulted from changes in the Federal MPCI
program, as well as from increases in premium levels under the Company's crop
hail insurance program resulting from an increase in rates and the writing of
more exposure units in certain states. In late 1994, Congress expanded the MPCI
program by enacting the 1994 Reform Act. This Act sought to encourage farmers to
participate in the MPCI program and thereby reduce dependency on traditional
disaster relief measures. As a result, the Company's MPCI Premium increased
42.8% from $128.4 million in 1994 to $183.3 million in 1995, and its MPCI
Retention also increased from $77.4 million in 1994 to $104.3 million in 1995.
Further, the crop insurance industry had experienced several years of adverse
experience in the crop hail business prior to 1995, and as a result, crop hail
rates increased while capacity decreased. Therefore, the Company was able to
increase its crop hail writings from $46.5 million in direct written premiums in
1994 to $62.8 million in direct written premiums for 1995.
While 1995 was a difficult growing season, the Company's underwriting
income in its Crop Insurance Division increased from $12.3 million in 1994 to
$14.9 million in 1995. This increase was a result of the growth in MPCI Premium
and improved results in the Company's crop hail business, offsetting unfavorable
results in the Company's named peril crop programs principally from an active
storm season in California during 1995. The 1995 growing season in the upper
Midwest was affected by wet weather during the planting season resulting in
delayed planting of crops, followed by periods of severe heat in July, damaging
newly emerging crops, and an early frost in September 1995. More favorable
weather prevailed in 1994. In addition, among the changes in the MPCI program
that were made by the 1994 Reform Act was an increase in the insurer's share of
profit and loss sharing, particularly for companies accepting risks in the
commercial pool. See "Business -- Crop Insurance" and "-- Reinsurance." These
two factors combined to change the percentage of the Company's profit sharing
under the MPCI program from 22.0% in 1994 to 13.4% in 1995. The Company's
reported results from the MPCI program for 1995 do not include additional profit
sharing in respect of 1995 which was recognized in 1996 when certain Federal
rules governing the program for 1995 were finalized.
The Company experienced strong premium growth in its General Agency
operations as gross premiums written increased 26.5% to $208.8 million for the
year ended December 31, 1995 from $165.2 million for the year ended December 31,
1994, and net premiums earned grew 39.8% to $132.3 million in 1995 from $94.7
million in 1994. Earned premiums grew more rapidly than written premiums as
premium growth slowed progressively in each quarter of 1995. The growth in this
division came from the continued growth in new business produced from the
Company's Scottsdale office which was established in late 1993. The rate of
premium growth in 1995 slowed due to an increase in the competitive environment
for General Agency lines of business.
The Company's Program operations also experienced strong premium growth
during 1995 as gross premiums written increased to $125.0 million in 1995 from
$90.5 million in 1994, an increase of 38.0%. Net earned premium increased at a
rate of 45.7% from $44.1 million in 1994 to $64.3 million in 1995. This premium
growth was principally from new programs established during 1994 and 1995.
31
<PAGE> 33
The foregoing positive factors were offset, however, by higher than
expected losses in the Company's General Agency and Program operations,
including losses resulting from the strengthening of reserves during 1995 for
prior year losses. During the second quarter of 1995, the Company experienced a
deterioration in the loss ratio of its commercial automobile liability business.
At that time, this deterioration was principally attributable to a more rapid
emergence of losses from the 1994 year than had been expected by the Company.
This trend continued in the third quarter of 1995, and while the noted
deterioration was principally in the automobile liability business, the Company
believed that similar deviations were likely to appear in other lines of
business which develop more slowly than automobile, and therefore, the Company
chose in the third quarter to evaluate all major lines of business. After an
extensive study by the Company in consultation with its independent actuaries, a
pre-tax charge of $17.5 million was made in the third quarter for prior year
losses. For the year, the Company increased its reserves for 1994 and prior year
losses by $22.3 million pre-tax.
After the Company completed its review of prior year losses, the new loss
development pattern assumptions were used to estimate ultimate losses for the
then-current 1995 accident year. These new assumptions, together with the
effects of severe wind and hail storms in Texas during the second quarter of the
year, and adverse results in a few of the Company's business lines such as
nursing home liability, homeowners business in South Carolina and used car
dealer business in California, combined to create a $5.7 million underwriting
loss in the Specialty Property and Casualty Division for the 1995 accident year.
Management intends to continue to closely monitor statistical and other
information with respect to loss reserves, in particular those lines of
insurance that are more difficult to predict. However, estimates of loss
reserves are inherently uncertain and such estimates may continue to change as
more information becomes available.
The Company's Non-Standard Auto premiums remained relatively stable with
$29.4 million in gross written premium during 1995 as compared to $30.2 million
in 1994. This lack of growth resulted primarily from the Company's desire to
implement a shift to new computer software for its Non-Standard Automobile
business before seeking additional growth opportunities.
Underwriting expenses increased from $52.6 million in 1994 to $72.6 million
in 1995, resulting in an increase when expressed as a percentage of earned
premium from 26.0% during 1994 to 26.7% during 1995. General and administrative
expenses also increased by $0.5 million from 1994 to 1995. Expenses in the Crop
Insurance Division net of ceding commissions from reinsurers and expense
reimbursements from the Federal Government under the MPCI program decreased
slightly from $0.8 million in 1994 to $0.7 million in 1995. The increase in
underwriting expense levels in the Specialty Property and Casualty Division was
principally attributable to increases in Non-Standard Automobile expenses
related to the implementation of new computer software designed to make the
Company's product more saleable in the marketplace and to reduce expense ratios
in future years as these operations grow. In addition, the Company sought to
strengthen its information systems and audit procedures within the Program and
General Agency lines, also increasing expenses. The cost of implementation of
several new programs in the Program business also added to the higher expense
ratio for 1995 as compared to 1994.
The Company's net income during 1995 was also affected by the impact of
income taxes. The Company received a benefit of $3.4 million from income taxes
in 1994 as opposed to an expense of $1.2 million from income taxes in 1995. As a
result of prior non-insurance operations, the Company generated significant tax
loss carryforwards and other temporary differences, all of which were used by
the end of 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company - Parent Only
As an insurance holding company, the Company's assets consist primarily of
the capital stock of its subsidiaries, surplus notes issued by two of the
Insurance Companies, and investments held at the holding company level. The
Company's primary sources of liquidity are receipt of interest payments on the
surplus notes, payments from the profit sharing agreement with Am Ag, tax
sharing payments from its subsidiaries,
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<PAGE> 34
net investment income from, and proceeds from the sale of, holding company
investments, and dividends and other distributions from the subsidiaries of the
Company. The Company's liquidity needs are primarily to service debt, pay
operating expenses and taxes, and make investments in subsidiaries. The Company
currently has $10.0 million available under the Revolving Credit Facility, and
following the offering the Company will have approximately $45.0 million
available under the Revolving Credit Facility. Under the Am Ag profit sharing
agreement, during a profitable crop insurance year Am Ag will receive
approximately 50% of the crop insurance profit based on a formula established by
the Company and approved by the Nebraska Department of Insurance. Any loss year
will result in a carryover loss to the Am Ag profit share amount in future
years.
Dividends from the insurance subsidiaries of the Company are regulated by
the regulatory authorities of the states in which each subsidiary is domiciled.
The laws of such states generally restrict dividends from insurance companies to
parent companies to certain statutorily approved limits. In 1997, the statutory
limitation on dividends from the Insurance Companies to the Company without
further insurance departmental approval is approximately $10.4 million.
The Company currently holds three surplus notes, each in the amount of $20
million, issued by two of the Insurance Companies bearing interest at the rate
of 9% per annum, payable semi-annually and quarterly. Although repayment of all
or part of the principal of these surplus notes requires prior insurance
department approval, no prior approval of interest payment is currently
required.
The Company is a party to a tax sharing agreement with its subsidiaries,
under which such subsidiaries pay the Company amounts in general equal to the
federal income tax that would be payable by such subsidiaries on a stand-alone
basis.
The Company is also a party to a Credit Agreement which provides a
five-year revolving credit facility (the "Revolving Credit Facility"), with a
final maturity of 2002, in amounts not to exceed $100 million. Under the
Revolving Credit Facility, interest is payable quarterly at a rate selected by
the Company equal to either the "Floating Rate" (defined as the higher of the
agent bank's corporate base rate and 1% over the federal funds rate) or LIBOR
plus a margin which varies depending on the Company's ratio of funded debt to
total capitalization. The common stock of certain of the Company's subsidiaries
has been pledged as collateral for the Revolving Credit Facility. At June 30,
1997, the outstanding balance under the Revolving Credit Facility was $90.0
million, with an interest cost of 6.7%. Borrowings under the facility were used
to provide capital for the Insurance Companies and to repay other debt. The
commitment under the Revolving Credit Facility is required to be permanently
reduced in an amount equal to 40% of the proceeds of most debt and equity
financing including this offering.
Insurance Companies
The principal liquidity needs of the Insurance Companies are to fund losses
and loss adjustment expense payments and to pay underwriting expenses, including
commissions and other expenses. The available sources to fund these requirements
are net premiums received and, to a lesser extent, cash flows from the Company's
investment activities, which together have been adequate to meet such
requirements on a timely basis. The Company monitors the cash flows of the
Insurance Companies and attempts to maintain sufficient cash to meet current
operating expenses, and to structure its investment portfolio at a duration
which approximates the estimated cash requirements for the payment of loss and
loss adjustment expenses.
The Company's profit or loss from its MPCI business is determined after the
crop season ends on the basis of a profit sharing formula established by law and
the RMA. At such time, the Company receives a profit share in cash, with any
amount in excess of 15% of its MPCI Retention for the current year carried
forward to future years, or it must pay its share of losses.
In the crop hail insurance business, premiums are generally not received
until after the harvest, while losses and other expenses are paid throughout the
year.
The NAIC has established a Risk Based Capital ("RBC") formula for property
and casualty insurance companies. The RBC initiative is designed to enhance the
current regulatory framework for the evaluation of
33
<PAGE> 35
the capital adequacy of a property and casualty insurer. The formula requires an
insurer to compute the amount of capital necessary to support four areas of risk
facing property and casualty insurers: (a) asset risk (default on fixed income
assets and market decline), (b) credit risk (losses from unrecoverable
reinsurance and inability to collect agents' balances and other receivables),
(c) underwriting risk (premium pricing and reserve estimates), and (d) off
balance sheet/growth risk (excessive premium growth and unreported liabilities).
The Insurance Companies have reviewed and applied the RBC formula for the 1996
year and have exceeded these requirements.
CONSOLIDATED FINANCIAL CONDITION AND CASH FLOWS
The Company's stockholders' equity increased by approximately $3.2 million
at March 31, 1997 as compared to December 31, 1996. The principal components of
this increase were net income of $3.9 million in the first quarter of 1997 and
an increase in the unrealized loss on available for sale securities, net of tax,
in the Company's investment portfolio of approximately $0.8 million. This
increase was comprised of an increase of $1.7 million net of tax in the
unrealized loss on the Company's fixed maturity portfolio as the general
interest rate environment rose and an increase of $0.9 million net of tax in the
unrealized gains on the Company's equity portfolio.
Through an equity rights offering in 1993 and the exercise in 1994 of
warrants issued as part of the rights offering, the Company realized net
proceeds of $31.2 million and $53.4 million, respectively. These proceeds were
used to reduce the Company's indebtedness and to increase the capital surplus of
its insurance subsidiaries.
Cash flows from operating activities increased from $19.4 million during
the first three months of 1996 to $25.2 million during the same three months in
1997. The largest component of net cash provided by operating activities in both
periods was profit sharing payments received from the federal government's MPCI
program. During the first three months of 1996 this component of operating cash
flows was $15.9 million while in the first three months of 1997 it was $25.5
million.
Cash flows from the Company's MPCI and crop hail businesses differ in
certain respects from cash flows associated with more traditional property and
casualty lines. MPCI premiums are not received from farmers until the covered
crops are harvested, and when received are promptly remitted by the Company in
full to the government. Covered losses are paid by the Company during the
growing season as incurred, with such expenditures reimbursed by the government
within three business days. Policy acquisition and administration expenses are
paid by the Company as incurred during the year. The Company periodically
throughout the year receives a payment in reimbursement of its policy
acquisition and administration expenses.
INFLATION
The Company does not believe that inflation has had a material impact on
its financial condition or results of operations.
34
<PAGE> 36
BUSINESS
GENERAL
Acceptance, through its six insurance subsidiaries underwrites specialty
property and casualty coverages throughout most of the United States. The
Company's principal insurance divisions are the Crop Insurance Division, which
provides MPCI and crop hail insurance, and the Specialty Property and Casualty
Division, which provides: (i) specialty property and casualty coverages through
a network of general agents (General Agency), (ii) tailored coverages for
specific industries written primarily through agents specializing in such
coverages (Program), and (iii) non-standard automobile coverages for private
passenger automobiles principally in the southwestern United States
(Non-Standard Automobile).
The Company's total revenues and net income were $381.4 million and $30.3
million, respectively, for the year ended December 31, 1996. As of March 31,
1997, the Company had $848.6 million of total assets and $211.1 million of total
equity.
The insurance operations of the Company have been developed and expanded
through strategic acquisitions and the addition of experienced underwriters and
other managers with proven expertise in certain specialty lines. Since 1992, the
Company has focused exclusively on its insurance operations which have been
managed by the Chief Executive Officer of the Company since 1979. In July 1993,
the Company acquired Redland, an Iowa based property and casualty insurance
group specializing in MPCI and crop hail insurance. Redland's insurance business
was founded in 1979 by the Company's current President and Chief Operating
Officer to write crop hail insurance and other insurance products marketed to
the rural community through rural agents. Redland began offering MPCI after the
establishment of the MPCI program under the Federal Crop Insurance Act in 1980.
In August 1993 and October 1994, the Company also expanded its specialty
property and casualty insurance business by hiring experienced executives who
brought significant underwriting expertise, agency contacts, and premium growth
to the Company. In April 1994, the Company acquired the exclusive general agent
for the Company's non-standard automobile insurance business, including the
remaining minority interest of this general agent in Phoenix Indemnity, a
non-standard automobile insurer which had been jointly owned by the Company and
this general agent.
The Company's objective is to write business on both an admitted and a
non-admitted basis in each state in which it operates. The Company believes that
this ability is a competitive advantage since certain lines of specialty
insurance can be written more effectively on a non-admitted, or excess and
surplus lines, basis. The Company's insurance subsidiaries write business in 47
states, the District of Columbia, Puerto Rico and the Virgin Islands, with 66.7%
of direct premiums for the year ended December 31, 1996 written on an admitted
basis and 33.3% written on a non-admitted basis.
The following table sets forth the Company's premiums written and income
(loss) before income taxes by line of business for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1994 1995 1996
----------------------------------- ----------------------------------- --------
(IN THOUSANDS)
GROSS NET INCOME (LOSS) GROSS NET INCOME (LOSS) GROSS
PREMIUMS PREMIUMS BEFORE INCOME PREMIUMS PREMIUMS BEFORE INCOME PREMIUMS
WRITTEN WRITTEN TAXES WRITTEN WRITTEN TAXES WRITTEN
-------- -------- ------------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Crop Insurance(1).... $161,614 $ 34,592 $ 9,780 $174,184 $ 46,950 $ 14,891 $242,917
Specialty Property
and Casualty
Insurance:
General Agency...... 165,158 114,635 505 208,847 135,125 (10,107) 225,690
Program............. 90,524 50,070 6,020 124,966 75,279 (1,225) 139,739
Non-Standard
Automobile.......... 30,187 29,879 1,407 29,352 28,829 1,784 42,714
-------- -------- ------- -------- -------- -------- --------
Total............. $447,483 $229,176 $17,712 $537,349 $286,183 $ 5,343 $651,060
======== ======== ======= ======== ======== ======== ========
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------ ENDED MARCH 31,
1996 1997
------------------------ -----------------------------------
(IN THOUSANDS)
NET INCOME (LOSS) GROSS NET INCOME (LOSS)
PREMIUMS BEFORE INCOME PREMIUMS PREMIUMS BEFORE INCOME
WRITTEN TAXES WRITTEN WRITTEN TAXES
-------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Crop Insurance(1).... $ 66,649 $42,129 $ 23,636 $ 501 $1,217
Specialty Property
and Casualty
Insurance:
General Agency...... 162,156 3,776 52,413 36,080 3,302
Program............. 95,806 (8,821) 36,475 22,055 856
Non-Standard
Automobile.......... 42,338 (3,594) 12,821 12,679 (52)
-------- ------- -------- ------- ------
Total............. $366,949 $33,490 $125,345 $71,315 $5,323
======== ======= ======== ======= ======
</TABLE>
- ------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- General -- Crop Insurance Division" for discussion of
seasonal factors affecting the crop insurance business.
35
<PAGE> 37
STRATEGY
The Company's strategy is to leverage its expertise and relationships
developed in the property and casualty insurance business by focusing on niche
markets not adequately served by other insurers. In furtherance of this
strategy, the Company seeks (i) to identify capacity shortages or other
dislocations in the market and to develop the opportunities presented by these
shortages; and (ii) to establish relationships with agents and individuals who
have established books of business with a proven track record in niche markets.
The Company's goal is to maintain a diversified mix of business which has the
potential to mitigate the volatility of the Company's underwriting results. The
Company's business mix can be expected to vary over time as it changes the
emphasis among its lines of business and develops new opportunities. In an
effort to limit its exposure to large losses, the Company implements
underwriting standards and reinsurance programs specific to its business lines.
The Company has experienced significant revenue growth over the last five
years through growth in existing programs and through acquisition of insurance
operations or books of business. The Company regularly explores new
opportunities where it can obtain business by establishing relationships with
agents and other individuals with an established record in a particular line of
business.
CROP INSURANCE
Industry Background
MPCI is a federally-subsidized program which is designed to provide
insurance to participating farmers who suffer insured crop losses as result of
adverse weather or other natural perils. All of the material terms of the MPCI
program and of the participation of private insurers, such as the Company, in
the program are set by the FCIC under applicable law. In 1980, the delivery
system for MPCI was expanded to permit private insurance companies and licensed
agents and brokers to sell MPCI policies, and the FCIC was authorized to
reimburse participating companies for their administrative expenses and to
provide federal reinsurance for the majority of the risk assumed by such private
companies.
The 1994 Reform Act required farmers for the first time to purchase at
least a basic level of MPCI coverage, CAT Coverage, in order to be eligible for
other federally sponsored farm benefits, including, but not limited to, low
interest loans and crop price supports. The 1994 Reform Act also limited the
local USDA offices to the marketing and selling of CAT Coverage.
Farmers may purchase CAT Coverage upon payment of a small fixed
administrative fee. CAT Coverage insures 50% of historic crop yield at 60% of
the FCIC-set crop price for the applicable commodities standard unit of measure,
i.e., bushel, pound, etc. CAT Coverage can be obtained from private insurers
such as the Company.
In addition to CAT Coverage, Buy-up Coverage, MPCI policies that provide a
greater level of protection than the CAT Coverage level, are also offered. Most
farmers purchasing MPCI have historically purchased at Buy-up Coverage levels,
with the most frequently sold policy providing coverage for 65% of historic crop
yield at 100% of the FCIC-set crop price per bushel. Buy-up Coverages require
payment of a premium in an amount determined by formula set by the FCIC. Buy-up
Coverage can only be purchased from private insurers.
The 1996 Reform Act permitted the USDA to limit its role in the delivery of
MPCI by reducing the availability of MPCI through USDA field offices and also
eliminated the linkage between CAT Coverage and qualification for certain
federal farm program benefits. In accordance with the 1996 Reform Act, the USDA
announced in July, 1996, the following 14 states in which CAT Coverage will no
longer be available through USDA offices but rather will be solely available
through private insurers: Arizona, Colorado, Illinois, Indiana, Iowa, Kansas,
Minnesota, Montana, Nebraska, North Carolina, North Dakota, South Dakota,
Washington and Wyoming. The Company believes that any future potential negative
impact of the delinkage mandated by the 1996 Reform Act will be mitigated by,
among other factors, the likelihood that farmers will continue to purchase MPCI
to provide basic protection against natural disasters since ad hoc federal
disaster relief programs are less likely to be available for farmers. In
addition, the Company believes that (i) lending
36
<PAGE> 38
institutions will likely continue to require this coverage as a condition to
crop lending and (ii) many of the farmers who entered the MPCI program as a
result of the 1994 Reform Act have come to appreciate the reasonable price of
the protection afforded by the MPCI Program and will remain with the program
regardless of delinkage.
The Company is the fourth largest writer of MPCI premiums in the United
States with an approximate 15% market share, based on premium information
compiled in 1996 by the FCIC and National Crop Insurance Services, Inc. The
Company, through Redland Insurance, has written MPCI since the opening of this
federally subsidized insurance program to private insurers in 1980. MPCI has
historically provided a yield guarantee mechanism for farmers who suffer an
insured crop loss due to weather or other natural perils. In 1996, the Company
developed a new crop insurance product, CRC, which was approved by the FCIC and
introduced in Iowa and Nebraska for corn and soybeans as part of the MPCI
program. CRC provides farmers with a minimum guaranteed revenue return by
combining the traditional yield guarantee of the standard MPCI program with a
price protection element. CRC was made available for wheat in six states and for
corn and soybeans in eleven additional states for the 1997 crop year. CRC will
be available for all wheat states in 1998.
Strategy
The Company's strategy is to enhance underwriting profits and reduce the
volatility of its crop insurance business through the appropriate allocation of
risks among the federal reinsurance pools and the effective use of federal and
third-party catastrophic reinsurance arrangements. In addition, the Company
continues to develop and maintain a proprietary knowledge-based underwriting
system which utilizes a database of Company-specific underwriting guidelines,
and has sought to strengthen its independent agency network by using technology
to provide fast, efficient service to its agencies and application documentation
designed for simplicity and convenience. The Company also maintains an
established relationship with a large number of independent full time claims
adjusters in order to promptly adjust its losses. The Company continues to
explore growth opportunities and product diversification through new specialty
coverages, including Crop Revenue Coverage.
Marketing; Distribution Network
The Company markets its crop insurance products to the owners and operators
of farms in 37 states through approximately 10,000 agents associated with
approximately 3,700 independent insurance agencies, with a substantial portion
of its retained risk in the states of Nebraska, Iowa, and Minnesota. The Company
is currently developing software that will provide on-line communication with
its agency force.
Mechanics of MPCI
The Company, like other private insurers participating in the MPCI program,
participates in a profit-sharing arrangement in which it receives from the
government a portion of the aggregate profit, or pays a portion of the aggregate
loss, in respect of the business it writes. In addition, the Company receives
administrative fees for marketing, issuing and administering policies.
Products
The principal lines of the Company's Crop Insurance Division are MPCI,
including CRC, and crop hail insurance.
Standard MPCI Coverages. MPCI provides coverage for insured crops against
substantially all natural perils. Purchasing an MPCI policy permits a farmer to
insure against the risk that his crop yield for any growing season will be less
than 50% to 75% (as selected by the farmer at the time of policy application or
renewal) of his historic crop yield. If a farmer's crop yield for the year is
greater than the yield coverage he selected, no payment is made to the farmer
under the MPCI program. However, if a farmer's crop yield for the year is less
than the yield coverage selected, MPCI entitles the farmer to payment equal to
the yield
37
<PAGE> 39
shortfall multiplied by 60% to 100% of the price for such crop (as selected by
the farmer at the time of policy application or renewal) for that season as set
by the FCIC.
Crop Revenue Coverage. In 1996, the Company developed and launched CRC. In
contrast to standard MPCI coverage, which features a yield guarantee or coverage
for the loss of production, CRC provides the insured with a guaranteed revenue
stream by combining both yield and price variability protection. CRC protects
against a grower's loss of revenue resulting from fluctuating crop prices and/or
low yields by providing coverage when any combination of crop yield and price
results in revenue that is less than the revenue guarantee provided by the
policy. CRC was approved by the FCIC as a pilot program for revenue insurance
coverage plans for the 1996 crop year, and was available for corn and soybeans
in all counties in Iowa and Nebraska beginning with such crop year. CRC policies
represented approximately 32% of the total MPCI policies written by the Company
in Iowa and Nebraska for the 1996 crop year. In July, 1996, the FCIC announced
that CRC would be made available in 1997 for wheat in six additional states, and
for corn and soybeans in eleven additional states. CRC will be available in all
wheat states in 1998. Since the FCIC generally regulates CRC as one of its own
programs, the material aspects of the CRC program are substantially similar to
those of other federal programs such as MPCI, including the FCIC profit-sharing
arrangement, standardized pricing, the use of reinsurance pools and expense
reimbursement payments paid by the FCIC.
CRC uses the policy terms and conditions of the Actual Production History
("APH") plan of MPCI as the basic provisions for coverage. The APH provides the
yield component by utilizing the insured's historic yield records. The CRC
revenue guarantee is the producer's approved APH times the coverage level, times
the higher of the spring futures price or harvest futures price (in each case,
for post-harvest delivery) of the insured crop for each unit of farmland. The
spring futures price is used to establish the initial policy revenue guarantee
and premium, and the harvest futures price is used to establish the crop value
to count against the revenue guarantee and to recompute the revenue guarantee
(and resulting indemnity payments) when the harvest price is higher than the
spring price. The coverage levels and exclusions in a CRC policy are similar to
those in a standard MPCI policy. As with MPCI policies, the Company receives
from the FCIC an expense reimbursement payment equal to 25% of gross premiums
written in respect of each CRC policy it writes in 1997. The amount of the
expense reimbursement payment for the 1998 and 1999 crop years is currently
under discussion. See "Risk Factors -- Nature of Crop Insurance Business."
The Company's share of profit or loss on the MPCI business it writes
(including CRC) is determined under a complex profit sharing formula established
by the FCIC. Under this formula, the primary factors that determine the
Company's MPCI profit or loss share are (i) the gross premiums of the Company is
credited with having written; (ii) the amount of such credited premiums retained
by the Company after ceding premiums to certain federal reinsurance pools (the
"commercial pool" where the Company generally retains 100% of the risk, the
"developmental pool" where the Company generally retains 35% of the risk, and
the "assigned risk pool" where the Company retains 20% of the risk); and (iii)
the loss experience of the Company's insureds. For the year ended December 31,
1996, the Company was the fourth largest writer of MPCI business in the United
States with a market share of approximately 15%.
Crop Hail and Named Peril. The Company offers stand alone crop hail
insurance, which insures growing crops against damage resulting from hail storms
and which involves no federal participation. The Company also sells a small
volume of insurance against damage to specific crops from other named perils.
SPECIALTY PROPERTY AND CASUALTY PROGRAMS
General Agency
The Company offers a variety of specialty property and casualty insurance
coverages in its General Agency operations, which include the following
principal lines: surplus lines liability and substandard property coverages;
specialty automobile; and complex general liability risks. Specialty automobile
coverage includes liability and physical damage coverages for local haulers of
specialized freight, and other classes of motor vehicles not normally
underwritten by standard carriers. Surplus lines liability and substandard
property coverages include general liability, garage excess liability, liquor
liability, property and commercial multi-peril
38
<PAGE> 40
coverages for small businesses which normally do not satisfy the underwriting
criteria of standard carriers. Complex general liability risks include products
and professional liability. These coverages are underwritten by the Company and
marketed through a network of approximately 120 general agents who write
business in specific geographic territories and who have binding authority for
specific lines of business. The general agents provide the Company access to
many niche programs due to their expertise and knowledge of the local and
regional markets they serve.
The Company significantly increased its underwriting expertise in this
segment in August of 1993, through the hiring of a new senior vice president,
who was employed by a large national specialty property and casualty insurer and
managed a division which underwrote a substantial book of specialty insurance
premiums similar to the book the Company has historically written, and his key
staff. Since their addition, the Company has grown to a staff of 90 in its
Scottsdale branch office, has appointed approximately 30 new general agents with
whom previous business relationships existed, and have written approximately
$100.0 million of additional gross premiums.
Program
The Company's Program operations provide coverage written for selected
classes of business through focused independent agents who specialize in that
particular class of business. The three largest segments of the Program business
are transportation, Rural America and workers' compensation. Transportation
programs include property and casualty insurance for long haul truckers and
upper Midwest regional and national trucking companies hauling rural products.
Rural America consists of standard property and casualty coverages offered
through Redland's agents, which includes farm owners, automobile, livestock
mortality, and limited commercial coverages. The workers' compensation program
is based principally in Minnesota, Illinois, Iowa, and Maine and focuses
principally on medium and larger risks where specialized underwriting and claims
techniques can be effectively implemented to reduce loss ratios. Other programs
provide tailored coverage for specialty areas, including greyhound race tracks,
condominiums, temporary help agencies, daily auto rental, family restaurants,
and fine arts.
The Company seeks to develop marketing programs by recruiting individuals
who have a proven expertise in a particular line of business, and who bring an
established book of business to the Company. The Company conducts periodic
reviews of each of these lines of business. In addition, the Company has
terminated contracts and eliminated underwriting authority generally for agents
whose underwriting results did not meet the Company's expectations.
Non-Standard Automobile
The Company's Non-Standard Automobile operations provide non-standard
private passenger automobile coverages written principally in non-urban areas in
the southwestern United States. Non-standard insureds are those individuals who
are unable to obtain insurance through standard market carriers due to factors
such as poor premium payment history, driving experience, record of prior
accidents or driving violations, particular occupation or type of vehicle.
Premium rates for nonstandard risks are higher than for standard risks.
Nonstandard policies have relatively short policy periods and low limits of
liability. The Company underwrites this line of business through approximately
600 independent agents.
Marketing
The Company markets its property and casualty insurance products through a
network of independent general agents who process and accept applications for
insurance coverages from retail agents who sell insurance to insurance buyers.
The Company also markets a portion of its property and casualty insurance
products through a network of retail agents who specialize in the lines of
insurance marketed by them. The Company compensates its agents through
commissions based on a percentage of premiums produced. The Company also offers
its agents a contingent commission based on volume and profitability and other
programs designed to encourage agents to enhance the placement of profitable
business with the Company.
39
<PAGE> 41
The Company attempts to foster strong service relationships with its
agencies and customers. The Company is currently developing software that will
provide on-line communication with its agency force. In addition, to deliver
prompt service with more consistent underwriting, the Company offers rating
software to its agents in some states which permits them to evaluate risks in
their offices. The agent has the authority to sell and bind insurance coverages
in accordance with procedures established by the Company, which is a common
practice in the property and casualty insurance business. The Company promptly
reviews all coverages bound by the agents and generally accepts all coverages
which fall within its stated underwriting criteria. In most jurisdictions, the
Company has the right within a specified time period to cancel any policy even
if the risk falls within its underwriting criteria.
The following table presents direct premiums written for the top five
states for Specialty Property and Casualty Division for the years ended December
31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
STATE 1994 1995 1996
----- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Texas....................................................... $ 35,789 $ 47,164 $ 52,500
California.................................................. 37,167 40,627 41,791
Arizona..................................................... 20,047 21,011 28,928
Illinois.................................................... 13,456 30,709 28,660
Florida..................................................... 12,531 19,219 24,517
Other States................................................ 159,417 194,824 212,379
-------- -------- --------
Total.................................................. $278,407 $353,554 $388,775
======== ======== ========
</TABLE>
Underwriting
The Company organizes its underwriting staff by product line, enabling
underwriters to focus on the unique risks associated with the specialty
coverages written by the Company. The Company seeks to ensure that each
specialty product or program fits into the Company's goals through a strategic
planning process whereby divisional managers evaluate the historical and
expected levels of underwriting profitability of the coverages written by such
division. The Company then allocates its capital among product lines where it
believes the best underwriting opportunities exist.
Within each division, each underwriter is required to comply with risk
parameters, retention limits and rates and forms prescribed by the Company. All
underwriting operations of the Company are subject to review by the Company's
home office personnel and the reinsurers who accept a portion of these risks.
Generally, the Company grants general agents the authority to sell and bind
insurance coverages in accordance with detailed procedures and limitations
established by the Company. The Company promptly reviews coverages bound by
agents, decides whether the insurance is written in accordance with such
procedures and limitations, and, subject to state law limits and policy terms,
may cancel coverages that are not in compliance.
Within the General Agency operations, Acceptance Risk Managers and
Professional Liability Insurance Managers, who underwrite more difficult
casualty and professional lines business, grant no underwriting authority to
general agents. Instead, each risk must be submitted to the underwriter for
individual consideration.
The Company grants limited binding authority to certain independent agents
in certain lines of business, and requires that all other agents submit all
quotes to the Company's underwriting staff in order for such coverages to be
bound. Business that is outside an agent's binding authority must be submitted
to the Company's underwriting staff to obtain approval to bind such coverages.
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<PAGE> 42
Claims
The Company's claims department administers all claims and directs all
legal and adjustment aspects of the claims handling process. To assist in
settling claims the Company regularly uses independent adjusters, attorneys and
investigators. Recently, the Company reorganized its claims department into two
parts, each supervised by a recently appointed senior claims vice president. The
Litigation Department, which is broken down by geographic area, handles larger
litigation claims files and other complex and serious claims. The Claims
Department, which is also broken down by geographic area, handles the other
claims files and supervises the claims handlers. Under the new structure, the
Company will emphasize the use of internal staff rather than independent
adjusters, improving claims processing systems and rapid response mechanisms.
Use of these systems has already significantly reduced the number of claims
handled by each claims examiner. The Company believes that the new structure may
help to reduce loss adjustment expense, shorten the life of open claim files and
permit the Company to estimate more rapidly and consistently future claim
liabilities.
COMBINED RATIOS
The statutory combined ratio, which reflects underwriting results before
taking into account investment income, is a traditional measure of the
underwriting performance of a property and casualty insurer. A combined ratio of
less than 100% indicates underwriting profitability whereas a combined ratio in
excess of 100% indicates unprofitable underwriting. The following table reflects
the statutory loss ratios, expense ratios and combined ratios of the Company's
Specialty Property and Casualty Division; the Company overall, including the
Crop Insurance Division; and the property and casualty insurance industry,
computed in accordance with SAP, for the periods shown.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------ ENDED MARCH 31,
1994 1995 1996 1997
---- ---- ---- ---------------
<S> <C> <C> <C> <C>
Specialty Property and Casualty Division
Loss Ratio......................................... 72.2% 80.6%(1) 78.0% 70.4%
Expense Ratio...................................... 30.4 31.2 32.9 32.5
----- ----- ----- -----
Combined Ratio..................................... 102.6% 111.8% 110.9% 102.9%
===== ===== ===== =====
The Company(2)
Loss Ratio......................................... 70.8% 78.2% 69.8% 70.1%
Expense Ratio...................................... 25.6 26.1 26.6 31.0
----- ----- ----- -----
Combined Ratio..................................... 96.4% 104.3% 96.4% 101.1%
===== ===== ===== =====
Industry Average(3)
Loss Ratio......................................... 81.0% 78.9% 78.6% 74.1%
Expense Ratio...................................... 27.3 27.5 27.3 27.1
----- ----- ----- -----
Combined Ratio..................................... 108.3% 106.4% 105.9% 101.2%
===== ===== ===== =====
</TABLE>
- ------------
(1) The $22.3 million loss reserve strengthening taken by the Company in 1995
with respect to prior years accounts for 9.9 percentage points of the loss
ratio for 1995. See "Loss and Loss Adjustment Expense Reserves."
(2) Includes loss, expense and combined ratios for crop insurance business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General -- Crop Insurance Division" for a discussion of the
accounting treatment accorded to MPCI business and its effect on the
calculation of such ratios.
(3) Source: Best's Aggregates & Averages - Property Casualty (1996 Edition).
Ratios for 1996 are from A.M. Best. Ratios for 1997 are from Insurance
Services Office, Inc.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
In the property and casualty insurance industry, it is not unusual for
significant periods of time, ranging up to several years, to elapse between the
writing of the policy, the occurrence of an insured loss, the report of the loss
to the insurer and the insurer's payment of that loss. The liability for losses
and loss adjustment expenses is determined by management based on historical
patterns and expectations of claims reported and
41
<PAGE> 43
paid, losses which have occurred but which are not yet reported, trends in claim
experience, information available on an industry-wide basis, changes in the
Company's claim handling procedures and premium rates. The Company's lines of
specialty insurance business are considered less predictable than standard
insurance coverages. The effects of inflation are implicitly reflected in these
loss reserves through the industry data utilized in establishing such reserves.
The Company does not discount its reserves to estimated present value for
financial reporting purposes.
In examining reserve adequacy, historical data is reviewed, and, as
additional experience and other data become available and is reviewed, these
estimates and judgments are revised, resulting in increases or decreases to
reserves for insured events of prior years. In 1994, 1995 and 1996 the Company
made additional provisions through a charge to earnings of $5.1 million, $22.3
million and $9.5 million, respectively, for its reestimated liability for losses
and loss adjustment expenses for prior accident years.
The liability established represents management's best estimate and is
based on sources of currently available evidence including an analysis prepared
by an independent actuary engaged by the Company. Even with such extensive
analyses, the Company believes that its ultimate liability may from time to time
vary from such estimates. There can be no assurance that the ultimate liability
will not materially exceed the Company's loss and LAE reserves and have a
material adverse effect on the Company's results of operations and financial
condition in the future.
The Company annually obtains an independent review of its loss reserving
process and reserve estimates by an independent professional actuary as part of
the annual audit of its financial statements.
The following table presents an analysis of the Company's reserves,
reconciling beginning and ending reserve balances for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss and loss adjustment expense reserves at beginning
of year................................................... $115,714 $141,514 $201,356
Provisions for net losses and loss adjustment expenses for
claims occurring in the current year...................... 137,881 190,019 233,727
Increase in net reserves for claims occurring in prior
years(1).................................................. 5,070 22,318 9,530
-------- -------- --------
142,951 212,337 243,257
-------- -------- --------
Net losses and loss adjustment expenses paid for claims
occurring during:
The current year.......................................... (60,375) (80,281) (102,565)
Prior years............................................... (56,776) (72,214) (95,296)
-------- -------- --------
(117,151) (152,495) (197,861)
-------- -------- --------
Net loss and loss adjustment expense reserves at end of
year...................................................... 141,514 201,356 246,752
Reinsurance recoverable on unpaid losses and loss adjustment
expenses.................................................. 79,811 167,888 185,421
-------- -------- --------
Gross loss and loss adjustment expense reserves............. $221,325 $369,244 $432,173
======== ======== ========
</TABLE>
- ------------
(1) See "Risk Factors -- Loss Reserves" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations" for discussion concerning increase in reserves for claims
occurring in prior years.
The following table presents the development of balance sheet net loss
reserves from calendar years 1986 through 1996. The top line of the table shows
the loss reserves at the balance sheet date for each of the indicated years.
These amounts are the estimates of losses and loss adjustment expenses for
claims arising in all prior years that are unpaid at the balance sheet date,
including losses that had been incurred but not yet reported to the Company. The
middle section of the table shows the cumulative amount paid, expressed as a
42
<PAGE> 44
percentage of the initial reserve amount, with respect to previously recorded
reserves as of the end of each succeeding year. The lower section of the table
shows the reestimated amount, expressed as a percentage of the initial reserve
amount, of the previously recorded reserves based on experience as of the end of
each succeeding year. The estimate changes as more information becomes known
about the frequency and severity of claims for individual years. The "Net
cumulative redundancy (deficiency)" caption represents the aggregate percentage
increase (decrease) in the initial reserves estimated. The table presents the
"run off" of balance sheet reserves, rather than accident or policy year loss
development. The Company computes the cumulative redundancy (deficiency)
annually on a calendar year basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net reserves for
unpaid losses and
loss adjustment
expenses............. $17,373 $27,730 $34,092 $43,380 $58,439 $ 66,132 $ 77,627 $115,714
Cumulative amount of
net liability paid
through:
One year later....... 32.5% 30.6% 30.5% 30.0% 40.6% 45.7% 36.1% 49.1%
Two years later...... 63.1% 56.7% 52.1% 59.5% 70.8% 72.3% 73.6% 80.5%
Three years later.... 84.7% 72.9% 68.7% 76.1% 88.5% 96.6% 94.5% 100.9%
Four years later..... 93.4% 81.8% 77.0% 84.5% 101.2% 108.1% 109.0%
Five years later..... 100.1% 84.7% 81.5% 89.2% 107.5% 115.1%
Six years later...... 100.5% 87.1% 85.3% 93.4% 109.7%
Seven years later.... 100.9% 88.2% 89.8% 94.5%
Eight years later.... 102.2% 95.0% 90.3%
Nine years later..... 112.4% 95.2%
Ten years later...... 112.4%
Net reserves
reestimated as of:
One year later....... 99.3% 96.6% 97.9% 99.1% 100.3% 103.5% 103.3% 104.4%
Two years later...... 104.7% 97.6% 92.3% 95.2% 102.3% 109.9% 109.7% 114.5%
Three years later.... 107.3% 91.3% 87.3% 91.4% 107.4% 116.9% 117.9% 113.1%
Four years later..... 103.0% 89.7% 84.9% 92.5% 110.7% 120.1% 117.7%
Five years later..... 103.6% 88.1% 85.3% 94.0% 112.7% 119.9%
Six years later...... 102.5% 88.8% 86.6% 95.9% 112.0%
Seven years later.... 102.7% 88.9% 91.0% 95.4%
Eight years later.... 103.0% 95.4% 90.7%
Nine years later..... 112.7% 95.2%
Ten years later...... 112.4%
Net cumulative
redundancy
(deficiency)......... (12.4)% 4.8% 9.3% 4.6% (12.0)% (19.9)% (17.7)% (13.1)%
Gross reserves for
unpaid loss and loss
adjustment
expenses............. $127,666 $211,600
Reinsurance
recoverable on unpaid
loss and loss
adjustment
expenses............. 50,039 95,886
-------- --------
Net reserves for
unpaid loss and loss
adjustment
expenses............. 77,627 115,714
Reestimated gross
reserves for unpaid
loss and loss
adjustment
expenses............. 108.9% 112.4%
Reestimated
reinsurance
recoverable on unpaid
loss and loss
adjustment
expenses............. 95.2% 111.6%
-------- --------
Reestimated net
reserves for unpaid
loss and loss
adjustment
expenses............. 117.7% 113.1%
Gross cumulative
redundancy
(deficiency)......... (8.9)% (12.4)%
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net reserves for
unpaid losses and
loss adjustment
expenses............. $141,514 $201,356 $246,752
Cumulative amount of
net liability paid
through:
One year later....... 51.0% 47.3%
Two years later...... 86.1%
Three years later....
Four years later.....
Five years later.....
Six years later......
Seven years later....
Eight years later....
Nine years later.....
Ten years later......
Net reserves
reestimated as of:
One year later....... 115.8% 104.7%
Two years later...... 115.7%
Three years later....
Four years later.....
Five years later.....
Six years later......
Seven years later....
Eight years later....
Nine years later.....
Ten years later......
Net cumulative
redundancy
(deficiency)......... (15.7)%(1) (4.7)%
Gross reserves for
unpaid loss and loss
adjustment
expenses............. $221,325 $369,244 $432,173
Reinsurance
recoverable on unpaid
loss and loss
adjustment
expenses............. 79,811 167,888 $185,421
-------- -------- --------
Net reserves for
unpaid loss and loss
adjustment
expenses............. $141,514 $201,356 $246,752
Reestimated gross
reserves for unpaid
loss and loss
adjustment
expenses............. 116.6% 98.8%
Reestimated
reinsurance
recoverable on unpaid
loss and loss
adjustment
expenses............. 118.2% 91.7%
-------- --------
Reestimated net
reserves for unpaid
loss and loss
adjustment
expenses............. 115.7% 104.7%
Gross cumulative
redundancy
(deficiency)......... (16.6)% 1.2%
</TABLE>
- ------------
(1) Cumulative deficiencies appearing in the Company's reserve estimates for
1994 resulted from adverse development of losses occurring in 1994 and prior
accident years primarily in its commercial automobile, general liability and
commercial multi-peril lines of business. The actual loss experience of
these lines differed from estimated losses. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Year Ended December 31, 1995 Compared To Year Ended December
31, 1994."
43
<PAGE> 45
The establishment of reserves is an inherently uncertain process. The
Company underwrites both property and casualty coverages in a number of
specialty areas of business which may involve greater risks than standard
property and casualty lines. These risk components may make more difficult the
task of estimating reserves for losses, and cause the Company's underwriting
results to fluctuate. Further, conditions and trends that have affected the
development of loss reserves in the past may not necessarily occur in the
future. Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on this information.
The Company adopted Statement of Financial Accounting Standards No. 113
("SFAS #113"), "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts," effective January 1, 1993. The application of SFAS
#113 resulted in the reclassification of amounts ceded to reinsurers, which
amounts were previously reported as a reduction in unearned premium and unpaid
losses and loss adjustment expenses, to assets on the consolidated balance
sheet. The table above includes a reconciliation of net loss and loss adjustment
expense reserves to amounts presented on the consolidated balance sheet after
reclassifications related to the adoption of SFAS #113. The gross cumulative
deficiency is presented for 1992 through 1995, the only years on the table for
which the Company has restated amounts in accordance with SFAS #113.
REINSURANCE
A significant component of the Company's business strategy involves the
structuring of reinsurance to reduce volatility in its business segments as well
as to avoid large or catastrophic loss exposure. Reinsurance involves an
insurance company transferring, or ceding, all or a portion of its exposure on
insurance to a reinsurer. The reinsurer assumes the ceded exposure in return for
a portion of the premium received by the insurance company. Reinsurance does not
discharge the insurer from its obligations to its insured. If the reinsurer
fails to meet its obligations, the ceding insurer remains liable to pay the
insured loss, but the reinsurer is liable to the ceding insurer to the extent of
the reinsured portion of any loss.
The Company limits its exposure under individual policies by purchasing
excess of loss and quota share reinsurance, as well as maintaining catastrophe
reinsurance to protect against catastrophic occurrences where claims can arise
under several policies from a single event, such as a hurricane, earthquake,
wind storm, riot, tornado or other extraordinary event.
The Company generally retains the first $500,000 of risk under its property
and casualty lines, ceding the next $1,500,000 and $2,500,000, respectively, to
reinsurers. On its complex liability and property exposures, the Company cedes
losses in excess of $1,000,000 to its excess reinsurers and maintains a separate
80% quota share treaty on the first $1,000,000 of risk. To the extent that
individual policies exceed reinsurance treaty limits, the Company purchases
reinsurance on a facultative (specific policy) basis.
The Company maintains catastrophe reinsurance for its casualty lines which
provides coverages of $17 million in excess of $3 million of aggregate risk per
occurrence, and for its property lines, which provides catastrophe coverage of
95% of $77.5 million in excess of a retention of $2.5 million per occurrence.
The Company reviews the concentrations of property values in its property lines
of business continually, and models possible losses from catastrophic events
through computer simulations of different levels of storm activity, adjusting
the required limit of the liability or the concentrations of property coverages
as appropriate.
In its workers' compensation line, the Company buys excess of loss
protection on a statutory basis in excess of a $500,000 per occurrence
retention.
The Company reinsures its MPCI business with various federal reinsurance
pools administered by the RMA. In 1996, the Company ceded to the RMA an
aggregate of 35% of its gross MPCI premium. The Company's net exposure on MPCI
business is further reduced by excess of loss reinsurance purchased from private
carriers. This excess of loss reinsurance generally provides coverage for 95% of
losses in excess of a $3,000,000 deductible after the Company's loss ratio
reaches specified limits for each line of business, specifically 77% on crop
hail and named peril business and 100% on MPCI business. Additionally 50% of the
Company's crop hail business is reinsured through quota share agreements.
44
<PAGE> 46
At December 31, 1996, 93% of the Company's outstanding reinsurance
recoverables were from domestic reinsurance companies or the federal government,
98% of which was from reinsurance companies rated "A-" (excellent) or better by
A.M. Best or from the federal government. The balance was primarily placed with
major international reinsurers.
The following table provides information with respect to the Company's
principal reinsurers at December 31, 1996:
<TABLE>
<CAPTION>
REINSURANCE RECOVERABLES
REINSURERS A.M. BEST RATING AT DECEMBER 31, 1996
---------- ---------------- ------------------------
(IN THOUSANDS)
<S> <C> <C>
Federal Crop Insurance Corp.............................. N/A $ 79,866
Constitution Reinsurance Corp............................ A+ 30,469
Swiss Re American Reinsurance Co......................... A 10,218
Odyssey Reinsurance Corporation.......................... A- 8,898
Reliance Re Corp/Reliance Insurance Co................... A- 8,622
PMA Reinsurance Corp..................................... A+ 8,454
Zurich Reinsurance Centre, Inc........................... A 6,792
Christiania General Ins. Corp............................ A- 6,601
Re Capital Reinsurance Co................................ A 6,232
Continental Casualty Co.................................. A 4,505
-----------
$170,657
===========
</TABLE>
INVESTMENTS
The Company's investment policy is to maximize the after-tax yield of the
portfolio while emphasizing the stability and preservation of the Company's
capital base. Further, the Company seeks to invest the portfolio in types of
securities and in an aggregate duration which reflect the nature of the
Company's liabilities and expected liquidity needs. The Company manages its
portfolio internally. The Company's fixed
45
<PAGE> 47
maturity securities are classified as available-for-sale and carried at
estimated fair value. The investment portfolio at December 31, 1995, December
31, 1996, and March 31, 1997, consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------------------- -----------------------------------
AMORTIZED ESTIMATED % AMORTIZED ESTIMATED %
TYPE OF INVESTMENT COST FAIR VALUE OF TOTAL COST FAIR VALUE OF TOTAL
------------------ --------- ---------- -------- --------- ---------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
FIXED MATURITY
SECURITIES:
U.S. Treasury and
government
securities........ $ 51,022 $ 51,689 14.0% $ 86,359 $ 86,253 21.2%
States,
municipalities and
political
subdivisions...... 69,433 71,194 19.3 93,293 94,607 23.3
Other debt
securities........ 27,484 28,197 7.7 34,581 34,309 8.5
Mortgage-backed
securities........ 72,359 67,220 18.3 60,138 52,835 13.0
-------- -------- ----- -------- -------- -----
Total fixed
maturity
securities.... 220,298 218,300 59.3 274,371 268,004 66.0
-------- -------- ----- -------- -------- -----
Common stocks....... 15,211 17,929 4.9 17,112 20,873 5.2
Preferred stocks.... 31,299 30,608 8.3 62,628 62,964 15.5
Commercial
mortgages......... 11,290 11,290 3.1 11,149 11,149 2.7
Real estate......... 3,354 3,354 0.9 3,342 3,342 0.8
Short-term
investments(1).... 86,520 86,520 23.5 39,594 39,594 9.8
-------- -------- ----- -------- -------- -----
Total........... $367,972 $368,001 100.0% $408,196 $405,926 100.0%
======== ======== ===== ======== ======== =====
<CAPTION>
MARCH 31, 1997
-----------------------------------
AMORTIZED ESTIMATED %
TYPE OF INVESTMENT COST FAIR VALUE OF TOTAL
------------------ --------- ---------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
FIXED MATURITY
SECURITIES:
U.S. Treasury and
government
securities........ $ 99,009 $ 98,328 22.8%
States,
municipalities and
political
subdivisions...... 112,245 112,567 26.0
Other debt
securities........ 59,650 51,538 11.9
Mortgage-backed
securities........ 32,588 32,080 7.4
-------- -------- -----
Total fixed
maturity
securities.... 303,492 294,513 68.1
-------- -------- -----
Common stocks....... 18,607 21,922 5.1
Preferred stocks.... 68,853 70,943 16.4
Commercial
mortgages......... 10,977 10,977 2.5
Real estate......... 3,339 3,339 0.8
Short-term
investments(1).... 30,559 30,559 7.1
-------- -------- -----
Total........... $435,827 $432,253 100.0%
======== ======== =====
</TABLE>
- ------------
(1) Due to the short-term nature of crop insurance, the Company must maintain
short-term investments to fund amounts due to pay losses. Historically,
these short-term funds are highest in the fall corresponding to the cash
flow in the agricultural industry.
The following table sets forth, as of December 31, 1995 and 1996 and March
31, 1997, the ratings assigned to the fixed maturity securities of the Company.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1995 1996 MARCH 31, 1997
--------------------- --------------------- ---------------------
ESTIMATED ESTIMATED ESTIMATED
RATING(1) FAIR VALUE PERCENT FAIR VALUE PERCENT FAIR VALUE PERCENT
--------- ---------- ------- ---------- ------- ---------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Aaa or AAA............................. $167,835 76.9% $191,916 71.6% $211,505 71.8%
Aa or AA............................... 11,312 5.2 21,443 8.0 30,326 10.3
A...................................... 28,549 13.1 24,121 9.0 20,654 7.0
Baa or BBB............................. 3,276 1.5 14,406 5.4 16,204 5.5
Ba or BB............................... 1,378 0.6 5,888 2.2 3,901 1.3
Other below investment grade........... 3,573 1.6 6,400 2.4 6,083 2.1
Not rated.............................. 2,377 1.1 3,830 1.4 5,840 2.0
-------- ----- -------- ----- -------- -----
Total............................. $218,300 100.0% $268,004 100.0% $294,513 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
- ------------
(1) Ratings are assigned by Moody's, and when not available are based on ratings
assigned by Standard & Poor's.
46
<PAGE> 48
At March 31, 1997, the average duration of the Company's portfolio of fixed
maturity investments was 4.9 years. The following table sets forth, as of
December 31, 1996, the composition of the Company's fixed maturity securities
portfolio by time to maturity:
<TABLE>
<CAPTION>
ESTIMATED
MATURITY FAIR VALUE PERCENT
-------- ---------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C>
1 year or less.............................................. $ 14,300 5.3%
More than 1 year through 5 years............................ 50,689 18.9
More than 5 years through 10 years.......................... 56,133 21.0
More than 10 years.......................................... 94,047 35.1
Mortgage-backed securities.................................. 52,835 19.7
-------- -----
Total.................................................. $268,004 100.0%
======== =====
</TABLE>
The Company's investment results for the periods indicated are set forth
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
---- ---- ----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Net investment income....................................... $ 13,276 $ 20,651 $ 26,491
Average investment portfolio(1)............................. 220,128 321,251 402,404
Pre-tax return on average investment portfolio.............. 6.0% 6.4% 6.6%
Net realized gains.......................................... $ 554 $ 2,707 $ 5,216
</TABLE>
- ------------
(1) Represents the average of the beginning and ending investment portfolio
(excluding real estate) computed on a quarterly basis.
A.M. BEST RATINGS
Each of the Insurance Companies is rated "A-" (Excellent) by A.M. Best,
with the exception of American Growers, for which, as a crop insurance company,
there is no applicable A.M. Best rating. A.M. Best bases its ratings upon
factors that concern policyholders and agents and not upon factors related to
investor protection. A.M. Best classifications include "A++" and "A+"
(superior), "A" and "A-" (excellent), "B++" and "B+" (very good), "B" and "B-"
(fair), "C++" and "C+" (marginal), "C" and "C-" (weak), "D" (poor), "E" (under
regulatory supervision), "F" (in liquidation) and "S" (rating suspended).
REGULATION
General
As a general rule, an insurance company must be licensed to transact
insurance business in each jurisdiction in which it operates, and almost all
significant operations of a licensed insurer are subject to regulatory scrutiny.
Licensed insurance companies are generally known as "admitted" insurers. Most
states provide a limited exemption from licensing for insurers issuing insurance
coverages that generally are not available from admitted insurers. Their
coverages are referred to as "surplus lines" insurance and these insurers as
"surplus lines" or "non-admitted" companies.
The Company, a holding company, underwrites its insurance products through
the Insurance Companies. Collectively, the Insurance Companies are admitted in
46 states and the District of Columbia, and operate on a non-admitted basis in
46 states, the District of Columbia, Puerto Rico and the Virgin Islands.
Acceptance Insurance, Acceptance Indemnity, and American Growers are insurance
companies domiciled in Nebraska; Acceptance Casualty is domiciled in Texas;
Redland is domiciled in Iowa; and Phoenix Indemnity is domiciled in Arizona. The
Company's insurance agency and insurance service subsidiaries principally write
and service insurance coverages placed with one of the Insurance Companies.
47
<PAGE> 49
The Company's admitted insurance business is subject to comprehensive,
detailed regulation throughout the United States, under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. The primary purpose of such regulations and supervision is the
protection of policyholders and claimants rather than stockholders or other
investors. Depending on whether the insurance company is domiciled in the state
and whether it is an admitted or non-admitted insurer, such authority may extend
to such things as (i) periodic reporting of the insurer's financial condition;
(ii) periodic financial examination; (iii) approval of rates and policy forms;
(iv) loss reserve adequacy; (v) insurer solvency; (vi) the licensing of insurers
and their agents; (vii) restrictions on the payment of dividends and other
distributions; (viii) approval of changes in control; and (ix) the type and
amount of permitted investments.
Insurance Holding Company Regulation
The Company also is subject to laws governing insurance holding companies
in Nebraska, Iowa, Arizona and Texas, where the Insurance Companies are
domiciled. These laws, among other things, require the Company to file periodic
information with state regulatory authorities including information concerning
its capital structure, ownership, financial condition and general business
operations; regulate certain transactions between the Company, its affiliates
and the Insurance Companies, including the amount of dividends and other
distributions and the terms of surplus notes; and restrict the ability of any
one person to acquire certain levels of the Company's voting securities
(generally 10%) without prior regulatory approval.
Except for interest on surplus notes issued by the Insurance Companies and
payments on the Am Ag profit sharing, the Company is dependent for funds to pay
its operating and other expenses upon dividends and other distributions from the
Insurance Companies, the payment of which are subject to review and
authorization by state insurance regulatory authorities. Under Nebraska law, no
domestic insurer may make a dividend or distribution which, together with
dividends or distributions paid during the preceding twelve months, exceeds the
greater of (i) 10% of such insurer's policyholders' surplus as of the preceding
December 31 or (ii) such insurer's statutory net income (excluding realized
capital gains) for the preceding calendar year, until either it has been
approved, or a thirty-day waiting period shall have passed during which it has
not been disapproved by the Nebraska Insurance Director. Iowa and Texas have
similar laws governing the payment of dividends or distributions of insurance
companies domiciled in their state. Under Arizona law, payment of dividends or
distributions by a domestic insurer is limited to the lesser of (i) 10% of such
insurer's policyholders' surplus as of the preceding December 31 or (ii) such
insurer's net investment income for the preceding calendar year. During 1997,
the statutory limitation on dividends from the Insurance Companies to Acceptance
without further insurance department approval is approximately $10.4 million.
Other regulatory and business considerations may further limit the ability
of the Insurance Companies to pay dividends. For example, the impact of
dividends on surplus could affect an insurers' competitive position, the amount
of premiums that it can write and its ability to pay future dividends. Further,
the insurance laws and regulations of Nebraska, Iowa, Arizona and Texas require
that the statutory surplus of an insurance company domiciled therein, following
any dividend or distribution by such company, be reasonable in relation to its
outstanding liabilities and adequate for its financial needs.
While the non-insurance company subsidiaries are not subject directly to
the dividend and other distribution limitations, insurance holding company
regulations govern the amount which a subsidiary within the holding company
system may charge any of the Insurance Companies for services (e.g., agents'
commissions).
Federal Crop Insurance Regulation
The Company's MPCI program is federally-regulated and supported by the
federal government by means of premium subsidies to farmers and expense
reimbursement and federal reinsurance pools for private insurers. Consequently,
the MPCI program is subject to oversight by the federal government, including
the RMA. The MPCI program regulations prescribe premiums which may be charged
and require compliance with federal
48
<PAGE> 50
guidelines with respect to all aspects of the MPCI and CRC programs. The Company
is required to perform periodic internal audit procedures and is subject to
audit by several federal government agencies.
Underwriting and Market Restrictions
During the past several years, various regulatory and legislative bodies
have adopted or proposed new laws or regulations to deal with the cyclical
nature of the insurance industry, catastrophic events and insurance capacity and
pricing. These regulations include (i) the creation of "market assistance plans"
under which insurers are induced to provide certain coverages, (ii) restrictions
on the ability of insurers to cancel certain policies in mid-term, (iii) advance
notice requirements or limitations imposed for certain policy non-renewals and
(iv) limitations upon or decreases in rates permitted to be charged.
Risk Based Capital
The NAIC has approved and recommended that states adopt and implement
several regulatory initiatives designed to be used by regulators as an early
warning tool to identify deteriorating or weakly capitalized insurance companies
and to decrease the risk of insolvency of insurance companies. These initiatives
include the implementation of the RBC standards for determining adequate levels
of capital and surplus to support four areas of risk facing property and
casualty insurers: (a) asset risk (default on fixed income assets and market
decline), (b) credit risk (losses from unrecoverable reinsurance and inability
to collect agents' balances and other receivables), (c) underwriting risk
(premium pricing and reserve estimates), and (d) off-balance sheet/growth risk
(excessive premium growth and unreported liabilities). At December 31, 1996 the
Insurance Companies met the RBC requirements as promulgated by the domiciliary
states of the Insurance Companies and the NAIC.
Insurance Regulatory Information System
The NAIC has developed its Insurance Regulatory Information System ("IRIS")
to assist state insurance departments in identifying significant changes in the
operations of an insurance company, such as changes in its product mix, large
reinsurance transactions, increases or decreases in premiums received and
certain other changes in operations. Such changes may not result from any
problems with an insurance company but may merely indicate changes in certain
ratios outside ranges defined as normal by the NAIC. When an insurance company
has four or more ratios falling outside "normal ranges," state regulators may
investigate to determine the reasons for the variance and whether corrective
action is warranted. At December 31, 1996, none of the Insurance Companies had
more than three ratios falling outside "normal ranges."
Regulation of Surplus Lines Insurers
The eligibility of the Insurance Companies to write insurance on a surplus
lines basis is dependent on their compliance with certain financial standards,
including the maintenance of a requisite level of capital and surplus and the
establishment of certain statutory deposits. State surplus lines laws typically:
(i) require the insurance producer placing the business to show that he or she
was unable to place the coverage with admitted insurers; (ii) establish minimum
financial requirements for surplus lines insurers operating in the state; and
(iii) require the insurance producer to obtain a special surplus lines license.
In recent years, many jurisdictions have increased the minimum financial
standards applicable to surplus lines eligibility.
Guaranty Funds
The Insurance Companies also may be required under the solvency or guaranty
laws of most states in which they are licensed to pay assessments (up to certain
prescribed limits) to fund policyholder losses or liabilities of insolvent or
rehabilitated insurance companies. These assessments may be deferred or forgiven
under most guaranty laws if they would threaten an insurer's financial strength
and, in certain instances, may be offset against future premium taxes. Some
state laws and regulations further require participation by the
49
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Insurance Companies in pools or funds to provide types of insurance coverages
which they would not ordinarily accept.
COMPETITION
The property and casualty insurance business is highly competitive, with
over 3,000 insurance companies in the United States, many of which have
substantially greater financial and other resources, and may offer a broader
variety of coverages than those offered by the Company. Beginning in the latter
half of the 1980s, there has been severe price competition in the insurance
industry which has resulted in a reduction in the volume of premiums written by
the Company in some of its lines of businesses, because of its unwillingness to
reduce prices to meet competition. The specialty property and casualty coverages
underwritten by the Company may involve greater risks than more standard
property and casualty lines. These risks may include a lack of predictability,
and in some instances, the absence of a long-term, reliable historical data base
upon which to estimate future losses. In the crop insurance business, the
Company competes with other crop insurance companies primarily on the basis of
service and commissions to agents.
EMPLOYEES
At March 31, 1997 the Company and its subsidiaries employed approximately
1100 employees. The Company believes that relations with its employees are good.
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MANAGEMENT
Set forth below is certain information concerning directors and certain
executive officers of the Company. Each director holds office until the next
annual meeting of stockholders and until his or her successor has been elected
and qualified. The information concerning the directors has been furnished by
them to the Company.
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Company is currently composed of nine
members, each of whom serves for a term of one year. Executive officers are
elected annually by the directors of the Company.
The following table sets forth information with respect to the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
CURRENT
TERM AS
DIRECTOR/ DIRECTOR DIRECTOR
EXECUTIVE OFFICER AGE(1) POSITION SINCE EXPIRES
----------------- ------ -------- -------- --------
<S> <C> <C> <C> <C>
Kenneth C. Coon............. 46 Chairman, Chief Executive Officer and Director 1992 1998
John P. Nelson.............. 56 President, Chief Operating Officer and Director 1993 1998
G. Thomas Bolton............ 51 Senior Vice President, Claims
Greg D. Ewald............... 43 Senior Vice President, Underwriting
William J. Gerber........... 39 Vice President, Investments and Investor
Relations
Richard C. Gibson........... 61 Chief Executive Officer of American Agrisurance,
Inc.
Robert W. Haney............. 55 Senior Vice President, Claims
Peter A. Knolla............. 50 Assistant Secretary
Georgia M. Mace............. 47 Treasurer and Chief Financial Officer
George P. Mang.............. 66 Senior Vice President and Chief Operating
Officer of Phoenix Indemnity
Mark R. Shapland............ 38 Vice President and Chief Actuary
Raymond N. Siebert.......... 49 Vice President, Administration
Bruce W. Slaughter.......... 60 Senior Vice President, Redland Insurance Company
Joseph G. Smith............. 42 Vice President, Budget, Audit and Strategic
Planning
Thomas D. Stamm............. 50 Senior Vice President, Acceptance Insurance
Company
John R. Svoboda............. 44 Vice President, Regulatory Affairs
Jay A. Bielfield............ 51 Director 1992 1998
Edward W. Elliot, Jr. ...... 53 Director 1992 1998
Robert LeBuhn............... 64 Director 1992 1998
Michael R. McCarthy......... 45 Director 1986 1998
R.L. Richards............... 48 Director 1991 1998
David L. Treadwell.......... 42 Director 1992 1998
Doug T. Valassis............ 44 Director 1992 1998
</TABLE>
- ------------
(1) At April 29, 1997
BIOGRAPHICAL INFORMATION
Directors and Executive Officers of the Company. The principal occupation
of each director and executive officer of the Company is set forth below.
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<PAGE> 53
Kenneth C. Coon has been associated with the Company as an executive
officer since its inception in 1979. He has been Chairman and Chief Executive
Officer of the Company and has been a director of the Company since December
1992. He served as Interim Chief Executive Officer of the Company beginning in
February 1992, and as Chairman and President from December 1992 until March
1994, when he was elected Chairman and Chief Executive Officer. Mr. Coon has
been President and Chief Executive Officer, and a director, of Acceptance
Insurance Holdings Inc., a subsidiary of the Company, since its formation and of
each of its subsidiaries since their formation or acquisition; and, since August
1993 has served as a director of The Redland Group, Inc., and each of its
subsidiaries, all of which are subsidiaries of the Company. Mr. Coon also serves
as a director of Major Realty Corporation.
John P. Nelson has been President and Chief Operating Officer of the
Company since March 1994, and has been a director since August 1993. Mr. Nelson
has been President of Redland Insurance since its formation in 1979. Mr. Nelson
also serves as a director of Redland, and its insurance subsidiaries, all of
which are subsidiaries of the Company. Since August 1993 he has served as a
director of Acceptance Insurance Holdings Inc. and each of its subsidiaries.
G. Thomas Bolton has been Senior Vice President, Claims since January 1996.
Mr. Bolton came to Acceptance from Arthur Andersen LLP, where he was a Property
and Casualty Claims Consultant. Prior to that time he was employed for 16 years
by, and was the Eastern Territorial Claim Executive and Assistant Vice President
for the Home Insurance Group.
Greg D. Ewald has been Senior Vice President of Underwriting of the Company
since October 1993. Mr. Ewald has been Vice President of Underwriting for
Acceptance Insurance and Acceptance Indemnity since April 1990. Prior to that
time, Mr. Ewald was Vice President, Treaty Underwriting, at Underwriters
Reinsurance Company.
William J. Gerber has been Vice President, Investments and Investor
Relations of the Company since December 1992, and of Acceptance Insurance
Holdings Inc. since July 1, 1991. Beginning in August 1987, he was Director of
Financial Reporting and Acquisitions for the Company. Prior to that time, he was
a certified public accountant with Coopers & Lybrand.
Richard C. Gibson has been Executive Vice President of Redland, since
August 1993, and effective January 1996, President of American Growers and
Chairman and Chief Executive Officer of American Agrisurance, Inc., a
wholly-owned marketing subsidiary of the Company. Mr. Gibson served as President
of American Agrisurance, Inc., from its formation in November 1976 until January
1996. From 1973 through 1976, Mr. Gibson was Vice President and Marketing
Manager of Blakley Crop Hail and prior to that time, from 1964 through 1973,
Branch Manager of the Crop Division of the Insurance Company of North America.
Robert W. Haney has been Senior Vice President of Claims of the Company
since July 1993. For the prior 11 years, Mr. Haney was Assistant Vice President
of Claims for Empire Fire & Marine Insurance Company.
Peter A. Knolla has been Assistant Secretary of the Company since December
of 1992. He has been Secretary of the majority of the Acceptance subsidiaries
since July of 1991. Prior to that time he was associated with the Central
National Insurance Group and Empire Fire and Marine Insurance Company for 15
years.
Georgia M. Mace has been Treasurer and Chief Financial Officer of the
Company since May 1992. Ms. Mace has been Treasurer and Chief Financial Officer
of Acceptance Insurance since its formation and of each of the Acceptance
subsidiaries since their formation or acquisition. She also has served as a
director of Acceptance Insurance and Phoenix Indemnity since their formation.
Ms. Mace formerly was Treasurer of Cornhusker Casualty, a division of Berkshire
Hathaway.
George P. Mang has been Senior Vice President and Chief Operating Officer
of Phoenix Indemnity since April 1994. Mr. Mang served as Secretary of Phoenix
Indemnity from its organization in 1988 until 1994. Prior to that time, Mr. Mang
was Executive Vice President of Statewide Insurance for 25 years.
Mark R. Shapland has been Vice President and Chief Actuary since August
1996. During the preceding six years, Mr. Shapland was an actuary with Zurich
Insurance Company, and Vice President and Chief Actuary with Empire Fire &
Marine Insurance Company.
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<PAGE> 54
Raymond N. Siebert has been Vice President of Administration for the
Company since May 1995. Prior to that, Mr. Siebert was an Assistant Vice
President for Systems and Operations for the Home Insurance Company. Mr. Siebert
held various administrative and operations support positions at Home Insurance
for 13 years. He also has held positions in a similar capacity for the IL. FAIR
Plan, Chubb and Son, and Allstate Insurance Co., dating back to 1975.
Bruce W. Slaughter has been Senior Vice President of Redland Insurance
since October of 1995. Prior to coming to Acceptance in October of 1994, Mr.
Slaughter was Executive Vice President of Home Insurance Company. Prior to that
time he was Vice President with Chubb Insurance Group, having been with them for
24 years.
Joseph G. Smith has been Vice President of Budget, Audit and Strategic
Planning since August 1993. Mr. Smith served as Vice President and Treasurer of
Redland Insurance from September 1982 to October 1994. Prior to joining Redland
Insurance, Mr. Smith worked as a certified public accountant with Ernst &
Whinney for six years.
Thomas D. Stamm has been Senior Vice President of Acceptance Insurance
since October 1993. Prior to that time, Mr. Stamm was a founding officer and
Senior Vice President of Underwriting for the Scottsdale Insurance Company.
Prior to that time, Mr. Stamm was a Vice President of Underwriting for Great
Southwest Fire Insurance Company for 10 years.
John R. Svoboda has been Vice President of Regulatory Affairs for the
Company since July 1991. He has been with the Company since 1987. For the prior
13 years Mr. Svoboda was a Senior Examiner with the Nebraska Department of
Insurance.
Jay A. Bielfield has been a director of the Company since December 1992.
Mr. Bielfield is an employee of Little Ceasar International, Inc. Mr. Bielfield
is a director of Major Realty Corporation.
Edward W. Elliot, Jr. has been a director of the Company since December
1992. Mr. Elliot is Vice-Chairman and Chief Financial Officer of Franklin
Enterprises, Inc., a private investment management firm located in Deerfield,
Illinois. Mr. Elliot also serves as a director of Warehouse Club, Inc.
Robert LeBuhn has been a director of the Company since December 1992. Mr.
LeBuhn is a private investor. He was Chairman of Investor International (U.S.),
Inc., an investment firm in New York, New York, until September 1994. Mr. LeBuhn
serves as a director of USAir Group, Inc., Cambrex Corp., New Jersey Steel, and
Enzon, Inc.
Michael R. McCarthy has been a director of the Company since December 1992.
Mr. McCarthy has been Chairman and a director of McCarthy & Co., a firm engaged
in the investment banking business in Omaha, Nebraska, since it was organized in
1986. He is also a director and Chairman of McCarthy Group, Inc., which is an
investment and merchant banking firm and the parent of McCarthy & Co. Mr.
McCarthy also serves as a director of Major Realty Corporation.
R.L. Richards has been a director of the Company since January 1991. Mr.
Richards serves as Managing Director of RDT Limited, a private investment
company located in Dublin, Ohio. Prior to the organization of RDT Limited in
December 1994, he served as President and director of its predecessor and has
held various positions with that company since 1978.
David L. Treadwell has been a director of the Company since December 1992.
Mr. Treadwell has been Chief Executive Officer of Major Realty since March 1992.
Mr. Treadwell also is President of Heritage Network, Incorporated, which is
responsible for a portfolio of investments, including operating businesses in
automotive supply, newspaper publishing, real estate development and residential
construction. Mr. Treadwell has also been Community Bank Director of Old Kent
Bank, SE, since April 1992.
Doug T. Valassis has been a director of the Company since December 1992.
Mr. Valassis is President and Chief Operating Officer and a director of Franklin
Enterprises, Inc., an investment management firm in Deerfield, Illinois. Mr.
Valassis also serves as a director of Warehouse Club, Inc., and serves as a
director and officer of Lindner Investments, Massachusetts Trust, a complex of
six investment funds; Mr. Valassis serves as director for each of the six funds.
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<PAGE> 55
DESCRIPTION OF PREFERRED SECURITIES
Pursuant to the terms of the Trust Agreement for the Issuer Trust, the
Issuer Trustees on behalf of the Issuer Trust will issue the Preferred
Securities and the Common Securities. The Preferred Securities will represent
preferred undivided beneficial interests in the assets of the Issuer Trust and
the holders thereof will be entitled to a preference in certain circumstances
with respect to Distributions and amounts payable on redemption or liquidation
over the Common Securities, as well as other benefits as described in the Trust
Agreement. This summary of certain provisions of the Preferred Securities and
the Trust Agreement does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all the provisions of the Trust
Agreement, including the definitions therein of certain terms. Wherever
particular defined terms of the Trust Agreement are referred to herein, such
defined terms are incorporated herein by reference. A copy of the form of the
Trust Agreement is available upon request from the Issuer Trustees.
GENERAL
The Preferred Securities will be limited to $65,000,000 aggregate
Liquidation Amount outstanding (which amount may be increased by up to
$9,750,000 aggregate liquidation amount of Preferred Securities for exercise of
the Underwriters' over-allotment option). See "Underwriting." The Preferred
Securities will rank pari passu, and payments will be made thereon pro rata,
with the Common Securities except as described under "-- Subordination of Common
Securities." The Junior Subordinated Debentures will be registered in the name
of the Issuer Trust and held by the Property Trustee in trust for the benefit of
the holders of the Preferred Securities and Common Securities. The Guarantee
will be a guarantee on a subordinated basis with respect to the Preferred
Securities but will not guarantee payment of Distributions or amounts payable on
redemption or liquidation of such Preferred Securities when the Issuer Trust
does not have funds on hand available to make such payments. See "Description of
Guarantee."
DISTRIBUTIONS
The Preferred Securities represent preferred undivided beneficial interests
in the assets of the Issuer Trust, and Distributions on each Preferred Security
will be payable at the annual rate of % of the stated Liquidation Amount of
$25, payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year (each a "Distribution Date"), to the holders of the
Preferred Securities at the close of business on the 15th day of March, June,
September and December (whether or not a Business Day (as defined below)) next
preceding the relevant Distribution Date. Distributions on the Preferred
Securities will be cumulative. Distributions will accumulate from , 1997.
The first Distribution Date for the Preferred Securities will be , 1997.
The amount of Distributions payable for any period less than a full Distribution
period will be computed on the basis of a 360-day year of twelve 30-day months
and the actual number of days elapsed in a partial month in such period.
Distributions payable for each full Distribution period will be computed by
dividing the rate per annum by four. If any date on which Distributions are
payable on the Preferred Securities is not a Business Day, then payment of the
Distributions payable on such date will be made on the next succeeding day that
is a Business Day (without any additional Distributions or other payment in
respect of any such delay), with the same force and effect as if made on the
date such payment was originally payable.
So long as no Debenture Event of Default has occurred and is continuing,
the Company has the right under the Junior Subordinated Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for an Extension Period, provided that no Extension Period may
extend beyond the Stated Maturity of the Junior Subordinated Debentures. As a
consequence of any such deferral, quarterly Distributions on the Preferred
Securities by the Issuer Trust will be deferred during any such Extension
Period. Distributions to which holders of the Preferred Securities are entitled
will accumulate additional Distributions thereon at the rate of % per annum,
compounded quarterly from the relevant payment date for such Distributions,
computed on the basis of a 360-day year of twelve 30-day months and the actual
days elapsed in a partial month in such period. Additional Distributions payable
for each full Distribution period will be computed by dividing the rate per
annum by four. The term "Distributions" as used herein shall include any such
additional Distributions. During any such Extension Period, the Company may
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<PAGE> 56
not (i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of the Company's
capital stock or (ii) make any payment of principal of or interest or premium,
if any, on or repay, repurchase or redeem any debt securities of the Company
that rank pari passu in all respects with or junior in interest to the Junior
Subordinated Debentures (other than (a) repurchases, redemptions or other
acquisitions of shares of capital stock of the Company in connection with any
employment contract, benefit plan or other similar arrangement with or for the
benefit of any one or more employees, officers, directors or consultants, in
connection with a dividend reinvestment or stockholder stock purchase plan or in
connection with the issuance of capital stock of the Company (or securities
convertible into or exercisable or exchangeable for such capital stock) as
consideration in an acquisition transaction entered into prior to the applicable
Extension Period, (b) as a result of an exchange or conversion of any class or
series of the Company's capital stock (or any capital stock of a subsidiary of
the Company) for any class or series of the Company's capital stock or of any
class or series of the Company's indebtedness for any class or series of the
Company's capital stock, (c) the purchase of fractional interests in shares of
the Company's capital stock pursuant to the conversion or exchange provisions of
such capital stock or the security being converted or exchanged, (d) any
declaration of a dividend in connection with any stockholder's rights plan, or
the issuance of rights, stock or other property under any stockholder's rights
plan, or the redemption or repurchase of rights pursuant thereto, or (e) any
dividend in the form of stock, warrants, options or other rights where the
dividend stock or the stock issuable upon exercise of such warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks pari passu with or junior to such stock). Prior to the termination of any
such Extension Period, the Company may further defer the payment of interest,
provided that no Extension Period may exceed 20 consecutive quarterly periods or
extend beyond the Stated Maturity of the Junior Subordinated Debentures. Upon
the termination of any such Extension Period and the payment of all amounts then
due, the Company may elect to begin a new Extension Period. No interest shall be
due and payable during an Extension Period, except at the end thereof. The
Company must give the holders of the Preferred Securities and the Issuer
Trustees notice of its election of such Extension Period at least one Business
Day prior to the earlier of (i) the date the Distributions on the Preferred
Securities would have been payable but for the election to begin such Extension
Period and (ii) the date the Property Trustee is required to give notice to
holders of the Preferred Securities of the record date or the date such
Distributions are payable, but in any event not less than one Business Day prior
to such record date. The Property Trustee will give notice of the Company's
election to begin a new Extension Period to the holders of the Preferred
Securities. Subject to the foregoing, there is no limitation on the number of
times that the Company may elect to begin an Extension Period. See "Description
of Junior Subordinated Debentures -- Option To Extend Interest Payment Period"
and "Certain Federal Income Tax Consequences -- Interest Income and Original
Issue Discount."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures.
The revenue of the Issuer Trust available for distribution to holders of
the Preferred Securities will be limited to payments under the Junior
Subordinated Debentures in which the Issuer Trust will invest the proceeds from
the issuance and sale of the Preferred Securities. See "Description of Junior
Subordinated Debentures." If the Company does not make payments on the Junior
Subordinated Debentures, the Issuer Trust may not have funds available to pay
Distributions or other amounts payable on the Preferred Securities. The payment
of Distributions and other amounts payable on the Preferred Securities (if and
to the extent the Issuer Trust has funds legally available for and cash
sufficient to make such payments) is guaranteed by the Company on a limited
basis as set forth herein under "Description of Guarantee."
REDEMPTION
Upon the repayment or redemption, in whole or in part, of the Junior
Subordinated Debentures, whether at maturity or upon earlier redemption as
provided in the Junior Subordinated Indenture, the proceeds from such repayment
or redemption shall be applied by the Property Trustee to redeem a Like Amount
(as defined below) of the Preferred Securities, upon not less than 30 nor more
than 60 days' notice, at a redemption price (the "Redemption Price") equal to
the aggregate Liquidation Amount of such Preferred Securities plus
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<PAGE> 57
accumulated but unpaid Distributions thereon to the date of redemption (the
"Redemption Date") and the related amount of the premium, if any, paid by the
Company upon the concurrent redemption of such Junior Subordinated Debentures.
See "Description of Junior Subordinated Debentures -- Redemption." If less than
all the Junior Subordinated Debentures are to be repaid or redeemed on a
Redemption Date, then the proceeds from such repayment or redemption shall be
allocated to the redemption pro rata of the Preferred Securities and the Common
Securities. The amount of premium, if any, paid by the Company upon the
redemption of all or any part of the Junior Subordinated Debentures to be repaid
or redeemed on a Redemption Date shall be allocated to the redemption pro rata
of the Preferred Securities and the Common Securities.
The Company has the right to redeem the Junior Subordinated Debentures (i)
on or after , 2002, in whole at any time or in part from time to time, or
(ii) in whole, but not in part, at any time within 90 days following the
occurrence and during the continuation of a Tax Event or an Investment Company
Event. See "-- Liquidation Distribution Upon Dissolution." A redemption of the
Junior Subordinated Debentures would cause a mandatory redemption of a Like
Amount of the Preferred Securities and Common Securities at the Redemption
Price.
"Business Day" means a day other than (a) a Saturday or Sunday, (b) a day
on which banking institutions in the City of New York, New York or in the City
of Omaha, Nebraska are authorized or required by law or executive order to
remain closed, or (c) a day on which the Property Trustee's Corporate Trust
Office or the Corporate Trust Office of the Debenture Trustee is closed for
business.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount (as defined below) equal to that
portion of the principal amount of Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Junior Subordinated Indenture,
allocated to the Common Securities and to the Preferred Securities based upon
the relative Liquidation Amounts of such classes and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities in
connection with a dissolution or liquidation of the Issuer Trust, Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of the Trust Securities of the holder to whom such Junior Subordinated
Debentures are distributed.
"Liquidation Amount" means the stated amount of $25 per Trust Security.
"Tax Event" means the receipt by the Issuer Trust of an opinion of counsel
to the Company experienced in such matters to the effect that, as a result of
any amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Preferred Securities, there is more than an insubstantial
risk that (i) the Issuer Trust is, or will be within 90 days of the delivery of
such opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures, (ii) interest payable
by the Company on the Junior Subordinated Debentures is not, or within 90 days
of the delivery of such opinion, will not be, deductible by the Company, in
whole or in part, for United States federal income tax purposes or (iii) the
Issuer Trust is, or will be within 90 days of the delivery of such opinion,
subject to more than a de minimis amount of other taxes, duties or other
governmental charges.
"Investment Company Event" means the receipt by the Issuer Trust of an
opinion of counsel to the Company experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, there is more than an insubstantial risk that
the Issuer Trust is or will be considered an "investment company" that is
required to be registered under the Investment Company Act, which change or
prospective change becomes effective or would become effective, as the case may
be, on or after the date of the issuance of the Preferred Securities.
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<PAGE> 58
If a Tax Event described in clause (i) or (iii) of the definition of Tax
Event above has occurred and is continuing and the Issuer Trust is the holder of
all the Junior Subordinated Debentures, the Company will pay Additional Sums (as
defined below), if any, on the Junior Subordinated Debentures.
"Additional Sums" means the additional amounts as may be necessary in order
that the amount of Distributions then due and payable by the Issuer Trust on the
outstanding Preferred Securities and Common Securities of the Issuer Trust will
not be reduced as a result of any additional taxes, duties and other
governmental charges to which the Issuer Trust has become subject as a result of
a Tax Event.
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date shall be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures. Redemptions of the Preferred
Securities shall be made and the Redemption Price shall be payable on each
Redemption Date only to the extent that the Issuer Trust has funds on hand
available for the payment of such Redemption Price. See also "-- Subordination
of Common Securities."
If the Issuer Trust gives a notice of redemption in respect of the
Preferred Securities, then, by 12:00 noon, New York City time, on the Redemption
Date, to the extent funds are available, in the case of Preferred Securities
held in book-entry form, the Property Trustee will deposit irrevocably with DTC
funds sufficient to pay the applicable Redemption Price and will give DTC
irrevocable instructions and authority to pay the Redemption Price to the
holders of the Preferred Securities. With respect to Preferred Securities not
held in book-entry form, the Property Trustee, to the extent funds are
available, will irrevocably deposit with the paying agent for the Preferred
Securities funds sufficient to pay the applicable Redemption Price and will give
such paying agent irrevocable instructions and authority to pay the Redemption
Price to the holders thereof upon surrender of their certificates evidencing the
Preferred Securities. Notwithstanding the foregoing, Distributions payable on or
prior to the Redemption Date for any Preferred Securities called for redemption
shall be payable to the holders of the Preferred Securities on the relevant
record dates for the related Distribution Dates. If notice of redemption shall
have been given and funds deposited as required, then upon the date of such
deposit, all rights of the holders of such Preferred Securities so called for
redemption will cease, except the right of the holders of such Preferred
Securities to receive the Redemption Price, but without interest on such
Redemption Price, and such Preferred Securities will cease to be outstanding. If
any date fixed for redemption of Preferred Securities is not a Business Day,
then payment of the Redemption Price payable on such date will be made on the
next succeeding day which is a Business Day (without any interest or other
payment in respect of any such delay), except that, if such Business Day falls
in the next calendar year, such payment will be made on the immediately
preceding Business Day. In the event that payment of the Redemption Price in
respect of Preferred Securities called for redemption is improperly withheld or
refused and not paid either by the Issuer Trust or by the Company pursuant to
the Guarantee as described under "Description of Guarantee," Distributions on
such Preferred Securities will continue to accumulate at the then applicable
rate, from the Redemption Date originally established by the Issuer Trust for
such Preferred Securities to the date such Redemption Price is actually paid, in
which case the actual payment date will be the date fixed for redemption for
purposes of calculating the Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities laws), the Company or its affiliates may at any time and from
time to time purchase outstanding Preferred Securities by tender, in the open
market or by private agreement, and may resell such securities.
If less than all the Preferred Securities and Common Securities are to be
redeemed on a Redemption Date, then the aggregate Liquidation Amount of such
Preferred Securities and Common Securities to be redeemed shall be allocated pro
rata to the Preferred Securities and the Common Securities based upon the
relative Liquidation Amounts of such classes. The particular Preferred
Securities to be redeemed shall be selected on a pro rata basis not more than 60
days prior to the Redemption Date by the Property Trustee from the outstanding
Preferred Securities not previously called for redemption, or if the Preferred
Securities are then held in the form of a global Preferred Security, in
accordance with DTC's customary procedures. The Property Trustee shall promptly
notify the securities registrar for the Trust Securities in writing of the
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<PAGE> 59
Preferred Securities selected for redemption and, in the case of any Preferred
Securities selected for partial redemption, the Liquidation Amount thereof to be
redeemed. For all purposes of the Trust Agreement, unless the context otherwise
requires, all provisions relating to the redemption of Preferred Securities
shall relate, in the case of any Preferred Securities redeemed or to be redeemed
only in part, to the portion of the aggregate Liquidation Amount of Preferred
Securities which has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each registered holder of Preferred
Securities to be redeemed at its address appearing on the securities register
for the Trust Securities. Unless the Company defaults in payment of the
Redemption Price on the Junior Subordinated Debentures, on and after the
Redemption Date interest will cease to accrue on the Junior Subordinated
Debentures or portions thereof (and, unless payment of the Redemption Price in
respect of the Preferred Securities is withheld or refused and not paid either
by the Issuer Trust or the Company pursuant to the Guarantee, Distributions will
cease to accumulate on the Preferred Securities or portions thereof) called for
redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, and the
Liquidation Distribution (as defined herein) in respect of, the Preferred
Securities and Common Securities, as applicable, shall be made pro rata based on
the Liquidation Amount of such Preferred Securities and Common Securities.
However, if on any Distribution Date or Redemption Date a Debenture Event of
Default has occurred and is continuing as a result of any failure by the Company
to pay any amounts in respect of the Junior Subordinated Debentures when due, no
payment of any Distribution on, or Redemption Price of, or Liquidation
Distribution in respect of, any of the Common Securities, and no other payment
on account of the redemption, liquidation or other acquisition of such Common
Securities, shall be made unless payment in full in cash of all accumulated and
unpaid Distributions on all the outstanding Preferred Securities for all
Distribution periods terminating on or prior thereto, or in the case of payment
of the Redemption Price the full amount of such Redemption Price on all the
outstanding Preferred Securities then called for redemption, shall have been
made or provided for, and all funds available to the Property Trustee shall
first be applied to the payment in full in cash of all Distributions on, or
Redemption Price of, the Preferred Securities then due and payable.
In the case of any Event of Default (as defined below) resulting from a
Debenture Event of Default, the holders of the Common Securities will be deemed
to have waived any right to act with respect to any such Event of Default under
the Trust Agreement until the effects of all such Events of Default with respect
to such Preferred Securities have been cured, waived or otherwise eliminated.
See "-- Events of Default; Notice" and "Description of Junior Subordinated
Debentures -- Debenture Events of Default." Until all such Events of Default
under the Trust Agreement with respect to the Preferred Securities have been so
cured, waived or otherwise eliminated, the Property Trustee will act solely on
behalf of the holders of the Preferred Securities and not on behalf of the
holders of the Common Securities, and only the holders of the Preferred
Securities will have the right to direct the Property Trustee to act on their
behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
The amount payable on the Preferred Securities in the event of any
liquidation of the Issuer Trust is $25 per Preferred Security plus accumulated
and unpaid Distributions, subject to certain exceptions, which may be in the
form of a distribution of such amount in Junior Subordinated Debentures.
The holders of all the outstanding Common Securities have the right at any
time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities and Common Securities in liquidation of the Issuer Trust.
Pursuant to the Trust Agreement, the Issuer Trust will automatically
dissolve upon expiration of its term or, if earlier, will dissolve on the first
to occur of: (i) certain events of bankruptcy, dissolution or liquidation of the
Company or the holder of the Common Securities, (ii) the distribution of a Like
Amount of the Junior Subordinated Debentures to the holders of the Trust
Securities, if the holders of Common Securities have
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given written direction to the Property Trustee to dissolve the Issuer Trust
(which direction, subject to the foregoing restrictions, is optional and wholly
within the discretion of the holders of Common Securities), (iii) the repayment
of all the Preferred Securities in connection with the redemption of all the
Trust Securities as described under "-- Redemption" and (iv) the entry of an
order for the dissolution of the Issuer Trust by a court of competent
jurisdiction.
If dissolution of the Issuer Trust occurs as described in clause (i), (ii)
or (iv) above, the Issuer Trust will be liquidated by the Property Trustee as
expeditiously as the Property Trustee determines to be possible by distributing,
after satisfaction of liabilities to creditors of the Issuer Trust as provided
by applicable law, to the holders of such Trust Securities a Like Amount of the
Junior Subordinated Debentures, unless such distribution is not practical, in
which event such holders will be entitled to receive out of the assets of the
Issuer Trust available for distribution to holders, after satisfaction of
liabilities to creditors of the Issuer Trust as provided by applicable law, an
amount equal to, in the case of holders of Preferred Securities, the aggregate
of the Liquidation Amount plus accumulated and unpaid Distributions thereon to
the date of payment (such amount being the "Liquidation Distribution"). If such
Liquidation Distribution can be paid only in part because the Issuer Trust has
insufficient assets available to pay in full the aggregate Liquidation
Distribution, then the amounts payable directly by the Issuer Trust on its
Preferred Securities shall be paid on a pro rata basis. The holders of the
Common Securities will be entitled to receive distributions upon any such
liquidation pro rata with the holders of the Preferred Securities, except that
if a Debenture Event of Default has occurred and is continuing as a result of
any failure by the Company to pay any amounts in respect of the Junior
Subordinated Debentures when due, the Preferred Securities shall have a priority
over the Common Securities. See "-- Subordination of Common Securities."
After the liquidation date fixed for any distribution of Junior
Subordinated Debentures (i) the Preferred Securities will no longer be deemed to
be outstanding, (ii) DTC or its nominee, as the registered holder of Preferred
Securities, will receive a registered global certificate or certificates
representing the Junior Subordinated Debentures to be delivered upon such
distribution with respect to Preferred Securities held by DTC or its nominee and
(iii) any certificates representing the Preferred Securities not held by DTC or
its nominee will be deemed to represent the Junior Subordinated Debentures
having a principal amount equal to the stated Liquidation Amount of the
Preferred Securities and bearing accrued and unpaid interest in an amount equal
to the accumulated and unpaid Distributions on the Preferred Securities until
such certificates are presented to the security registrar for the Trust
Securities for transfer or reissuance.
If the Company does not redeem the Junior Subordinated Debentures prior to
maturity and the Issuer Trust is not liquidated and the Junior Subordinated
Debentures are not distributed to holders of the Preferred Securities, the
Preferred Securities will remain outstanding until the repayment of the Junior
Subordinated Debentures and the distribution of the Liquidation Distribution to
the holders of the Preferred Securities.
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities if a dissolution and liquidation of the Issuer
Trust were to occur. Accordingly, the Preferred Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive on
dissolution and liquidation of the Issuer Trust, may trade at a discount to the
price that the investor paid to purchase the Preferred Securities offered
hereby.
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an "Event of Default" under the
Trust Agreement (an "Event of Default") with respect to the Preferred Securities
(whatever the reason for such Event of Default and whether it is voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description of
Junior Subordinated Debentures -- Debenture Events of Default"); or
(ii) default by the Issuer Trust in the payment of any Distribution when
it becomes due and payable, and continuation of such default for a
period of 30 days; or
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(iii) default by the Issuer Trust in the payment of any Redemption Price
of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Issuer Trustees in the Trust
Agreement (other than a covenant or warranty a default in the
performance of which or the breach of which is dealt with in clause
(ii) or (iii) above), and continuation of such default or breach for
a period of 60 days after there has been given, by registered or
certified mail, to the Issuer Trustees and the Company by the holders
of at least 25% in aggregate Liquidation Amount of the outstanding
Preferred Securities, a written notice specifying such default or
breach and requiring it to be remedied and stating that such notice
is a "Notice of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee if a successor Property Trustee has
not been appointed within 90 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of Trust Securities and the
Administrators, unless such Event of Default has been cured or waived. The
Company, as Depositor, and the Administrators are required to file annually with
the Property Trustee a certificate as to whether or not they are in compliance
with all the conditions and covenants applicable to them under the Trust
Agreement.
If a Debenture Event of Default has occurred and is continuing as a result
of any failure by the Company to pay any amounts in respect of the Junior
Subordinated Debentures when due, the Preferred Securities will have a
preference over the Common Securities with respect to payments of any amounts in
respect of the Preferred Securities as described above. See "-- Subordination of
Common Securities," "-- Liquidation Distribution Upon Dissolution" and
"Description of Junior Subordinated Debentures -- Debenture Events of Default."
REMOVAL OF ISSUER TRUSTEES; APPOINTMENT OF SUCCESSORS
The holders of at least a majority in aggregate Liquidation Amount of the
outstanding Preferred Securities may remove an Issuer Trustee for cause or, if a
Debenture Event of Default has occurred and is continuing, with or without
cause. If an Issuer Trustee is removed by the holders of the outstanding
Preferred Securities, the successor may be appointed by the holders of at least
25% in Liquidation Amount of the outstanding Preferred Securities. If an Issuer
Trustee resigns, such Trustee will appoint its successor. If an Issuer Trustee
fails to appoint a successor, the holders of at least 25% in Liquidation Amount
of the outstanding Preferred Securities may appoint a successor. If a successor
has not been appointed by the holders, any holder of Preferred Securities or
Common Securities or the other Issuer Trustee may petition a court in the State
of Delaware to appoint a successor. Any Delaware Trustee must meet the
applicable requirements of Delaware law. Any Property Trustee must be a national
or state-chartered bank, and at the time of appointment have securities rated in
one of the three highest rating categories by a nationally recognized
statistical rating organization and have capital and surplus of at least $50.0
million. No resignation or removal of an Issuer Trustee and no appointment of a
successor trustee shall be effective until the acceptance of appointment by the
successor trustee in accordance with the provisions of the Trust Agreement.
MERGER OR CONSOLIDATION OF ISSUER TRUSTEES
Any entity into which the Property Trustee or the Delaware Trustee may be
merged or converted or with which it may be consolidated, or any entity
resulting from any merger, conversion or consolidation to which such Issuer
Trustee is a party, or any entity succeeding to all or substantially all the
corporate trust business of such Issuer Trustee, will be the successor of such
Issuer Trustee under the Trust Agreement, provided such entity is otherwise
qualified and eligible.
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MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE ISSUER TRUST
The Issuer Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to, any entity, except as described below or as
otherwise set forth in the Trust Agreement. The Issuer Trust may, at the request
of the holders of the Common Securities and with the consent of the holders of
at least a majority in aggregate Liquidation Amount of the outstanding Preferred
Securities, merge with or into, consolidate, amalgamate, or be replaced by or
convey, transfer or lease its properties and assets substantially as an entirety
to a trust organized as such under the laws of any State, so long as (i) such
successor entity either (a) expressly assumes all the obligations of the Issuer
Trust with respect to the Preferred Securities or (b) substitutes for the
Preferred Securities other securities having substantially the same terms as the
Preferred Securities (the "Successor Securities") so long as the Successor
Securities have the same priority as the Preferred Securities with respect to
distributions and payments upon liquidation, redemption and otherwise, (ii) a
trustee of such successor entity, possessing the same powers and duties as the
Property Trustee, is appointed to hold the Junior Subordinated Debentures, (iii)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not cause the Preferred Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, if then rated, (iv) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Preferred Securities (including
any Successor Securities) in any material respect, (v) such successor entity has
a purpose substantially identical to that of the Issuer Trust, (vi) prior to
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease, the Issuer Trust has received an opinion from independent counsel
experienced in such matters to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect and (b)
following such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither the Issuer Trust nor such successor entity will be
required to register as an investment company under the Investment Company Act,
and (vii) the Company or any permitted successor or assignee owns all the common
securities of such successor entity and guarantees the obligations of such
successor entity under the Successor Securities at least to the extent provided
by the Guarantee. Notwithstanding the foregoing, the Issuer Trust may not,
except with the consent of holders of 100% in aggregate Liquidation Amount of
the Preferred Securities, consolidate, amalgamate, merge with or into, or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to, any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if such consolidation,
amalgamation, merger, replacement, conveyance, transfer or lease would cause the
Issuer Trust or the successor entity to be taxable as a corporation for United
States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided above and under "-- Removal of Issuer Trustees;
Appointment of Successors" and "Description of Guarantee -- Amendments and
Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the holders of a
majority of the Common Securities and the Property Trustee, without the consent
of the holders of the Preferred Securities, (i) to cure any ambiguity, correct
or supplement any provisions in the Trust Agreement that may be inconsistent
with any other provision, or to make any other provisions with respect to
matters or questions arising under the Trust Agreement, provided that any such
amendment does not adversely affect in any material respect the interests of any
holder of Trust Securities, or (ii) to modify, eliminate or add to any
provisions of the Trust Agreement to such extent as may be necessary to ensure
that the Issuer Trust will not be taxable as a corporation for United States
federal income tax purposes at any time that any Trust Securities are
outstanding or to ensure that the Issuer Trust will not be required to register
as an "investment company" under the Investment Company Act, and any amendments
of the Trust Agreement will become effective when notice of such amendment is
given to the holders of Trust Securities. The Trust Agreement may be amended by
the holders of a majority of the Common Securities and the Property Trustee with
(i) the consent of holders representing
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not less than a majority in aggregate Liquidation Amount of the outstanding
Preferred Securities and (ii) receipt by the Issuer Trustees of an opinion of
counsel to the effect that such amendment or the exercise of any power granted
to the Issuer Trustees in accordance with such amendment will not affect the
issuer Trust's not being taxable as a corporation for United States federal
income tax purposes or the Issuer Trust's exemption from status as an
"investment company" under the Investment Company Act, except that, without the
consent of each holder of Trust Securities affected thereby, the Trust Agreement
may not be amended to (i) change the amount or timing of any Distribution on the
Trust Securities or otherwise adversely affect the amount of any Distribution
required to be made in respect of the Trust Securities as of a specified date or
(ii) restrict the right of a holder of Trust Securities to institute suit for
the enforcement of any such payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Issuer Trust,
the Property Trustee will not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
execute any trust or power conferred on the Property Trustee with respect to the
Junior Subordinated Debentures, (ii) waive any past default that is waiveable
under Section 5.13 of the Junior Subordinated Indenture, (iii) exercise any
right to rescind or annul a declaration that the Junior Subordinated Debentures
shall be due and payable or (iv) consent to any amendment, modification or
termination of the Junior Subordinated Indenture or the Junior Subordinated
Debentures, where such consent shall be required, without, in each case,
obtaining the prior approval of the holders of at least a majority in aggregate
Liquidation Amount of the outstanding Preferred Securities, except that, if a
consent under the Junior Subordinated Indenture would require the consent of
each holder of Junior Subordinated Debentures affected thereby, no such consent
will be given by the Property Trustee without the prior consent of each holder
of the Preferred Securities. The Property Trustee may not revoke any action
previously authorized or approved by a vote of the holders of the Preferred
Securities except by subsequent vote of the holders of the Preferred Securities.
The Property Trustee will notify each holder of Preferred Securities of any
notice of default with respect to the Junior Subordinated Debentures. In
addition to obtaining the foregoing approvals of the holders of the Preferred
Securities, before taking any of the foregoing actions, the Property Trustee
will obtain an opinion of counsel experienced in such matters to the effect that
the Issuer Trust will not be taxable as a corporation for United States federal
income tax purposes on account of such action.
Any required approval of holders of Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or pursuant
to written consent. The Property Trustee will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be given
to each registered holder of Preferred Securities in the manner set forth in the
Trust Agreement.
No vote or consent of the holders of Preferred Securities will be required
to redeem and cancel Preferred Securities in accordance with the Trust
Agreement.
Notwithstanding that holders of Preferred Securities are entitled to vote
or consent under any of the circumstances described above, any of the Preferred
Securities that are owned by the Company, the Issuer Trustees or any affiliate
of the Company or any Issuer Trustees, will, for purposes of such vote or
consent, be treated as if they were not outstanding.
EXPENSES AND TAXES
In the Junior Subordinated Indenture, the Company, as borrower, has agreed
to pay all debts and other obligations (other than with respect to the Preferred
Securities) and all costs and expenses of the Issuer Trust (including costs and
expenses relating to the organization of the Issuer Trust, the fees and expenses
of the Issuer Trustees and the costs and expenses relating to the operation of
the Issuer Trust) and to pay any and all taxes and all costs and expenses with
respect thereto (other than United States withholding taxes) to which the Issuer
Trust might become subject. The foregoing obligations of the Company under the
Junior Subordinated Indenture are for the benefit of, and shall be enforceable
by, any person to whom any such debts, obligations, costs, expenses and taxes
are owed (a "Creditor") whether or not such Creditor has received notice
thereof. Any such Creditor may enforce such obligations of the Company directly
against the Company,
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and the Company has irrevocably waived any right or remedy to require that any
such Creditor take any action against the Issuer Trust or any other person
before proceeding against the Company. The Company has also agreed in the Junior
Subordinated Indenture to execute such additional agreements as may be necessary
or desirable to give full effect to the foregoing.
BOOK ENTRY, DELIVERY AND FORM
The Preferred Securities will be issued in the form of one or more fully
registered global securities which will be deposited with, or on behalf of, DTC
and registered in the name of DTC's nominee. Unless and until it is exchangeable
in whole or in part for the Preferred Securities in definitive form, a global
security may not be transferred except as a whole by DTC to a nominee of DTC or
by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such
nominee to a successor of such Depository or a nominee of such successor.
Ownership of beneficial interests in a global security will be limited to
persons that have accounts with DTC or its nominee ("Participants") or persons
that may hold interests through Participants. The Company expects that, upon the
issuance of a global security, DTC will credit, on its book-entry registration
and transfer system, the Participants' accounts with their respective principal
amounts of the Preferred Securities represented by such global security.
Ownership of beneficial interests in such global security will be shown on, and
the transfer of such ownership interests will be effected only through, records
maintained by DTC (with respect to interests of Participants) and on the records
of Participants (with respect to interests of Persons held through
Participants). Beneficial owners will not receive written confirmation from DTC
of their purchase, but are expected to receive written confirmations from the
Participants through which the beneficial owner entered into the transaction.
Transfers of ownership interests will be accomplished by entries on the books of
Participants acting on behalf of the beneficial owners.
So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Preferred Securities represented by such global security
for all purposes under the Junior Subordinated Indenture. Except as provided
below, owners of beneficial interests in a global security will not be entitled
to receive physical delivery of the Preferred Securities in definitive form and
will not be considered the owners or holders thereof under the Junior
Subordinated Indenture. Accordingly, each person owning a beneficial interest in
such a global security must rely on the procedures of DTC and, if such person is
not a Participant, on the procedures of the Participant through which such
person owns its interest, to exercise any rights of a holder of Preferred
Securities under the Junior Subordinated Indenture. The Company understands
that, under DTC's existing practices, in the event that the Company requests any
action of holders, or an owner of a beneficial interest in such a global
security desires to take any action which a holder is entitled to take under the
Junior Subordinated Indenture, DTC would authorize the Participants holding the
relevant beneficial interests to take such action, and such Participants would
authorize beneficial owners owning through such Participants to take such action
or would otherwise act upon the instructions of beneficial owners owning through
them. Redemption notices will also be sent to DTC. If less than all of the
Preferred Securities are being redeemed, the Company understands that it is
DTC's existing practice to determine by lot the amount of the interest of each
Participant to be redeemed.
Distributions on the Preferred Securities registered in the name of DTC or
its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the global security representing such Preferred Securities.
None of the Company, the Issuer Trustees, the Administrators, any Paying Agent
or any other agent of the Company or the Issuer Trustees will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global
security for such Preferred Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Disbursements of Distributions to Participants shall be the responsibility of
DTC. DTC's practice is to credit Participants' accounts on a payable date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on the payable date. Payments
by Participants to beneficial owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of DTC, the Company, the Issuer
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Trustees, the Paying Agent or any other agent of the Company, subject to any
statutory or regulatory requirements as may be in effect from time to time.
DTC may discontinue providing its services as securities depository with
respect to the Preferred Securities at any time by giving reasonable notice to
the Company or the Issuer Trustees. If DTC notifies the Company that it is
unwilling to continue as such, or if it is unable to continue or ceases to be a
clearing agency registered under the Exchange Act and a successor depository is
not appointed by the Company within ninety days after receiving such notice or
becoming aware that DTC is no longer so registered, the Company will issue the
Preferred Securities in definitive form upon registration of transfer of, or in
exchange for, such global security. In addition, the Company may at any time and
in its sole discretion determine not to have the Preferred Securities
represented by one or more global securities and, in such event, will issue
Preferred Securities in definitive form in exchange for all of the global
securities representing such Preferred Securities.
DTC has advised the Company and the Issuer Trust as follows: DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book entry changes to accounts of its Participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers (such as the Underwriter), banks, trust companies and clearing
corporations and may include certain other organizations. Certain of such
Participants (or their representatives), together with other entities, own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship with a Participant, either directly or indirectly.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Preferred Securities will be made by the Underwriters in
immediately available funds.
Secondary trading in Preferred Securities of corporate issuers is generally
settled in clearinghouse or next-day funds. In contrast, the Preferred
Securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity in the Preferred Securities will therefore be required
by DTC to settle in immediately available funds. No assurance can be given as to
the effect, if any, of settlement in immediately available funds on trading
activity in the Preferred Securities.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities will be made to DTC, which
will credit the relevant accounts at DTC on the applicable Distribution Dates
or, if the Preferred Securities are not held by DTC, such payments will be made
by check mailed to the address of the holder entitled thereto as such address
appears on the securities register for the Trust Securities. The paying agent
(the "Paying Agent") will initially be the Property Trustee and any co-paying
agent chosen by the Property Trustee and acceptable to the Administrators. The
Paying Agent will be permitted to resign as Paying Agent upon 30 days' written
notice to the Property Trustee and the Administrators. If the Property Trustee
is no longer the Paying Agent, the Property Trustee will appoint a successor
(which must be a bank or trust Company reasonably acceptable to the
Administrators) to act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
Preferred Securities.
Registration of transfers of Preferred Securities will be effected without
charge by or on behalf of the Issuer Trust, but upon payment of any tax or other
governmental charges that may be imposed in connection with any transfer or
exchange. The Issuer Trust will not be required to register or cause to be
registered the transfer of the Preferred Securities after the Preferred
Securities have been called for redemption.
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INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than during the occurrence and continuance of
an Event of Default, undertakes to perform only such duties as are specifically
set forth in the Trust Agreement and, after such Event of Default, must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to this provision, the Property
Trustee is under no obligation to exercise any of the powers vested in it by the
Trust Agreement at the request of any holder of Preferred Securities unless it
is offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
MISCELLANEOUS
The Administrators and the Property Trustee are authorized and directed to
conduct the affairs of and to operate the Issuer Trust in such a way that the
Issuer Trust will not be deemed to be an "investment company" required to be
registered under the Investment Company Act or taxable as a corporation for
United States federal income tax purposes and so that the Junior Subordinated
Debentures will be treated as indebtedness of the Company for United States
federal income tax purposes. In this connection, the Property Trustee and the
holders of Common Securities are authorized to take any action, not inconsistent
with applicable law, the certificate of trust of the Issuer Trust or the Trust
Agreement, that the Property Trustee and the holders of Common Securities
determine in their discretion to be necessary or desirable for such purposes, as
long as such action does not materially adversely affect the interests of the
holders of the Preferred Securities.
Holders of the Preferred Securities have no preemptive or similar rights.
The Issuer Trust may not borrow money, issue debt or mortgage or pledge any
of its assets.
GOVERNING LAW
The Trust Agreement will be governed by and construed in accordance with
the laws of the State of Delaware.
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under the Junior
Subordinated Indenture, under which Bankers Trust Company is acting as Debenture
Trustee. This summary of certain terms and provisions of the Junior Subordinated
Debentures and the Junior Subordinated Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, all the
provisions of the Junior Subordinated Indenture, including the definitions
therein of certain terms. Whenever particular defined terms of the Junior
Subordinated Indenture (as amended or supplemented from time to time) are
referred to herein, such defined terms are incorporated herein by reference. A
copy of the form of Junior Subordinated Indenture is available from the
Debenture Trustee upon request.
GENERAL
Concurrently with the issuance of the Preferred Securities, the Issuer
Trust will invest the proceeds thereof, together with the consideration paid by
the Company for the Common Securities, in the Junior Subordinated Debentures
issued by the Company. The Junior Subordinated Debentures will bear interest,
accruing from , 1997, at the annual rate of % of the principal
amount thereof, payable quarterly in arrears on March 31, June 30, September 30
and December 31 of each year (each, an "Interest Payment Date"), commencing
, 1997, to the person in whose name each Junior Subordinated
Debenture is registered at the close of business on the 15th day of March, June,
September or December (whether or not a Business Day) next preceding such
Interest Payment Date. It is anticipated that, until the liquidation, if any, of
the Issuer Trust, each Junior Subordinated Debenture will be registered in the
name of the Issuer Trust and held by the Property Trustee in trust for the
benefit of the holders of the Trust Securities. The amount of interest payable
for any period less than a full interest period will be computed on the basis of
a
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360-day year of twelve 30-day months and the actual days elapsed in a partial
month in such period. The amount of interest payable for any full interest
period will be computed by dividing the rate per annum by four. If any date on
which interest is payable on the Junior Subordinated Debentures is not a
Business Day, then payment of the interest payable on such date will be made on
the next succeeding day that is a Business Day (without any interest or other
payment in respect of any such delay), with the same force and effect as if made
on the date such payment was originally payable. Accrued interest that is not
paid on the applicable Interest Payment Date will bear additional interest on
the amount thereof (to the extent permitted by law) at the rate per annum of
%, compounded quarterly and computed on the basis of a 360-day year of twelve
30-day months and the actual days elapsed in a partial month in such period. The
amount of additional interest payable for any full interest period will be
computed by dividing the rate per annum by four. The term "interest" as used
herein includes quarterly interest payments, interest on quarterly interest
payments not paid on the applicable Interest Payment Date (as defined below) and
Additional Sums, as applicable.
The Junior Subordinated Debentures will mature on , 2027,
subject to the Maturity Adjustment (such date, as it may be shortened by the
Maturity Adjustment is referred to herein as the Stated Maturity). The Maturity
Adjustment represents the right of the Company to shorten the maturity date once
at any time to any date not earlier than , 2002. In the event the
Company elects to shorten the Stated Maturity of the Junior Subordinated
Debentures, it will give notice to the registered holders of the Junior
Subordinated Debentures, the Debenture Trustee and the Issuer Trust of such
shortening no less than 90 days prior to the effectiveness thereof. The Property
Trustee must give notice to the holders of the Trust Securities of the
shortening of the Stated Maturity at least 30 but not more than 60 days before
such date.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Indebtedness of the
Company. The Junior Subordinated Debentures will not be subject to a sinking
fund. The Junior Subordinated Indenture does not limit the incurrence or
issuance of other secured or unsecured debt by the Company, including Senior
Indebtedness, whether under the Junior Subordinated Indenture or any existing or
other indenture that the Company may enter into in the future or otherwise. See
"-- Subordination."
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as no Debenture Event of Default has occurred and is continuing,
the Company has the right at any time during the term of the Junior Subordinated
Debentures to defer the payment of interest at any time or from time to time for
a period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. During any such Extension Period
the Company shall have the right to make partial payments of interest on any
interest payment date. At the end of such Extension Period, the Company must pay
all interest then accrued and unpaid (together with interest thereon at the
annual rate of %, compounded quarterly and computed on the basis of a 360-day
year of twelve 30-day months and the actual days elapsed in a partial month in
such period, to the extent permitted by applicable law). The amount of
additional interest payable for any full interest period will be computed by
dividing the rate per annum by four. During an Extension Period, interest will
continue to accrue and holders of Junior Subordinated Debentures (or holders of
Preferred Securities while outstanding) will be required to accrue interest
income for United States federal income tax purposes. See "Certain Federal
Income Tax Consequences -- Interest Income and Original Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of the Company in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or stockholder stock purchase plan or in connection with the
issuance of capital stock of the Company (or securities convertible into or
exercisable or exchangeable for such capital
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stock) as consideration in an acquisition transaction entered into prior to the
applicable Extension Period, (b) as a result of an exchange or conversion of any
class or series of the Company's capital stock (or any capital stock of a
subsidiary of the Company) for any class or series of the Company's capital
stock or of any class or series of the Company's indebtedness for any class or
series of the Company's capital stock, (c) the purchase of fractional interests
in shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
(d) any declaration of a dividend in connection with any stockholder's rights
plan, or the issuance of rights, stock or other property under any stockholders
rights plan, or the redemption or repurchase of rights pursuant thereto, or (e)
any dividend in the form of stock, warrants, options or other rights where the
dividend stock or the stock issuable upon exercise of such warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks pari passu with or junior to such stock). Prior to the termination of any
such Extension Period, the Company may further defer the payment of interest,
provided that no Extension Period may exceed 20 consecutive quarterly periods or
extend beyond the Stated Maturity of the Junior Subordinated Debentures. Upon
the termination of any such Extension Period and the payment of all amounts then
due, the Company may elect to begin a new Extension Period subject to the above
conditions. No interest shall be due and payable during an Extension Period,
except at the end thereof. The Company must give the Issuer Trustees notice of
its election of such Extension Period at least one Business Day prior to the
earlier of (i) the date the Distributions on the Preferred Securities would have
been payable but for the election to begin such Extension Period and (ii) the
date the Property Trustee is required to give notice to holders of the Preferred
Securities of the record date or the date such Distributions are payable, but in
any event not less than one Business Day prior to such record date. The Property
Trustee will give notice of the Company's election to begin a new Extension
Period to the holders of the Preferred Securities. There is no limitation on the
number of times that the Company may elect to begin an Extension Period.
REDEMPTION
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of the Company (i) on or after , 2002, in whole at any
time or in part from time to time, or (ii) in whole, but not in part, at any
time within 90 days following the occurrence and during the continuation of a
Tax Event (defined under "Description of Preferred Securities -- Redemption"),
at the redemption price described below. The proceeds of any such redemption
will be used by the Issuer Trust to redeem the Preferred Securities.
The redemption price for Junior Subordinated Debentures is the outstanding
principal amount of the Junior Subordinated Debentures plus accrued interest
(including any Additional Interest or any Additional Sums) thereon to but
excluding the date fixed for redemption.
ADDITIONAL SUMS
The Company has covenanted in the Junior Subordinated Indenture that, if
and for so long as (i) the Issuer Trust is the holder of all Junior Subordinated
Debentures and (ii) the Issuer Trust is required to pay any additional taxes,
duties or other governmental charges as a result of a Tax Event, the Company
will pay as additional sums ("Additional Sums") on the Junior Subordinated
Debentures such amounts as may be required so that the Distributions payable by
the Issuer Trust will not be reduced as a result of any such additional taxes,
duties or other governmental charges. See "Description of Preferred Securities
- --Redemption."
REGISTRATION, DENOMINATION AND TRANSFER
The Junior Subordinated Debentures will initially be registered in the name
of the Issuer Trust. If the Junior Subordinated Debentures are distributed to
holders of Preferred Securities, it is anticipated that the depositary
arrangements for the Junior Subordinated Debentures will be substantially
identical to those in effect for the Preferred Securities. See "Description of
Preferred Securities -- Book Entry, Delivery and Form."
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Although DTC has agreed to the procedures described above, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days of receipt of notice from DTC to such effect, the
Company will cause the Junior Subordinated Debentures to be issued in definitive
form.
Payments on Junior Subordinated Debentures represented by a global security
will be made to Cede & Co., the nominee for DTC, as the registered holder of the
Junior Subordinated Debentures, as described under "Description of Preferred
Securities -- Book Entry, Delivery and Form." If Junior Subordinated Debentures
are issued in certificated form, principal and interest will be payable, the
transfer of the Junior Subordinated Debentures will be registrable, and Junior
Subordinated Debentures will be exchangeable for Junior Subordinated Debentures
of other authorized denominations of a like aggregate principal amount, at the
corporate trust office of the Debenture Trustee in New York, New York or at the
offices of any paying agent or transfer agent appointed by the Company, provided
that payment of interest may be made at the option of the Company by check
mailed to the address of the persons entitled thereto. However, a holder of $1
million or more in aggregate principal amount of Junior Subordinated Debentures
may receive payments of interest (other than interest payable at the Stated
Maturity) by wire transfer of immediately available funds upon written request
to the Debenture Trustee not later than 15 calendar days prior to the date on
which the interest is payable.
Junior Subordinated Debentures will be exchangeable for other Junior
Subordinated Debentures of like tenor, of any authorized denominations, and of a
like aggregate principal amount.
Junior Subordinated Debentures may be presented for exchange as provided
above, and may be presented for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar appointed under the
Junior Subordinated Debenture or at the office of any transfer agent designated
by the Company for such purpose without service charge and upon payment of any
taxes and other governmental charges as described in the Junior Subordinated
Indenture. The Company will appoint the Debenture Trustee as securities
registrar under the Junior Subordinated Indenture. The Company may at any time
designate additional transfer agents with respect to the Junior Subordinated
Debentures.
In the event of any redemption, neither the Company nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption or (ii) transfer or
exchange any Junior Subordinated Debentures so selected for redemption, except,
in the case of any Junior Subordinated Debentures being redeemed in part, any
portion thereof not to be redeemed.
Any monies deposited with the Debenture Trustee or any paying agent, or
then held by the Company in trust, for the payment of the principal of (and
premium, if any) or interest on any Junior Subordinated Debenture and remaining
unclaimed for two years after such principal (and premium, if any) or interest
has become due and payable shall, at the request of the Company, be repaid to
the Company and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to the Company for
payment thereof.
RESTRICTIONS ON CERTAIN PAYMENTS; CERTAIN COVENANTS OF THE COMPANY
The Company has covenanted that it will not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of the Company in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or stockholder stock purchase plan or in connection with the
issuance of capital stock of
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the Company (or securities convertible into or exercisable or exchangeable for
such capital stock) as consideration in an acquisition transaction entered into
prior to the applicable Extension Period or other event referred to below, (b)
as a result of an exchange or conversion of any class or series of the Company's
capital stock (or any capital stock of a subsidiary of the Company) for any
class or series of the Company's capital stock or of any class or series of the
Company's indebtedness for any class or series of the Company's capital stock,
(c) the purchase of fractional interests in shares of the Company's capital
stock pursuant to the conversion or exchange provisions of such capital stock or
the security being converted or exchanged, (d) any declaration of a dividend in
connection with any stockholder's rights plan, or the issuance of rights, stock
or other property under any stockholder's rights plan, or the redemption or
repurchase of rights pursuant thereto, or (e) any dividend in the form of stock,
warrants, options or other rights where the dividend stock or the stock issuable
upon exercise of such warrants, options or other rights is the same stock as
that on which the dividend is being paid or ranks pari passu with or junior to
such stock), if at such time (i) there has occurred any event (a) of which the
Company has actual knowledge that with the giving of notice or the lapse of
time, or both, would constitute a Debenture Event of Default and (b) that the
Company has not taken reasonable steps to cure, (ii) if the Junior Subordinated
Debentures are held by the Issuer Trust, the Company is in default with respect
to its payment of any obligations under the Guarantee or (iii) the Company has
given notice of its election of an Extension Period as provided in the Junior
Subordinated Indenture and has not rescinded such notice, or such Extension
Period, or any extension thereof, is continuing.
The Company has covenanted in the Junior Subordinated Indenture (i) to
continue to hold, directly or indirectly, 100% of the Common Securities,
provided that certain successors that are permitted pursuant to the Junior
Subordinated Indenture may succeed to the Company's ownership of the Common
Securities, (ii) as holder of the Common Securities, not to voluntarily
terminate, windup or liquidate the Issuer Trust, other than (a) in connection
with a distribution of Junior Subordinated Debentures to the holders of the
Preferred Securities in liquidation of the Issuer Trust or (b) in connection
with certain mergers, consolidations or amalgamations permitted by the Trust
Agreement and (iii) to use its reasonable efforts, consistent with the terms and
provisions of the Trust Agreement, to cause the Issuer Trust to continue not to
be taxable as a corporation for United States federal income tax purposes.
MODIFICATION OF JUNIOR SUBORDINATED INDENTURE
From time to time, the Company and the Debenture Trustee may, without the
consent of any of the holders of the outstanding Junior Subordinated Debentures,
amend, waive or supplement the provisions of the Junior Subordinated Indenture
to: (1) evidence succession of another corporation or association to the Company
and the assumption by such person of the obligations of the Company under the
Junior Subordinated Debentures, (2) add further covenants, restrictions or
conditions for the protection of holders of the Junior Subordinated Debentures,
(3) cure ambiguities or correct the Junior Subordinated Debentures in the case
of defects or inconsistencies in the provisions thereof, so long as any such
cure or correction does not adversely affect the interest of the holders of the
Junior Subordinated Debentures in any material respect, (4) change the terms of
the Junior Subordinated Debentures to facilitate the issuance of the Junior
Subordinated Debentures in certificated or other definitive form, (5) evidence
or provide for the appointment of a successor Debenture Trustee, or (6) qualify,
or maintain the qualification of, the Junior Subordinated Indentures under the
Trust Indenture Act. The Junior Subordinated Indenture contains provisions
permitting the Company and the Debenture Trustee, with the consent of the
holders of not less than a majority in principal amount of the Junior
Subordinated Debentures, to modify the Junior Subordinated Indenture in a manner
affecting the rights of the holders of the Junior Subordinated Debentures,
except that no such modification may, without the consent of the holder of each
outstanding Junior Subordinated Debenture so affected, (i) change the Stated
Maturity of the Junior Subordinated Debentures, or reduce the principal amount
thereof, the rate of interest thereon or any premium payable upon the redemption
thereof, or change the place of payment where, or the currency in which, any
such amount is payable or impair the right to institute suit for the enforcement
of any Junior Subordinated Debenture or (ii) reduce the percentage of principal
amount of Junior Subordinated Debentures, the holders of which are required to
consent to any such modification of the Junior Subordinated Indenture.
Furthermore, so long as any of the Preferred Securities remain outstanding, no
such modification may be made that adversely affects the holders of such
Preferred
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Securities in any material respect, and no termination of the Junior
Subordinated Indenture may occur, and no waiver of any Debenture Event of
Default or compliance with any covenant under the Junior Subordinated Indenture
may be effective, without the prior consent of the holders of at least a
majority of the aggregate Liquidation Amount of the outstanding Preferred
Securities unless and until the principal of (and premium, if any, on) the
Junior Subordinated Debentures and all accrued and unpaid interest thereon have
been paid in full and certain other conditions are satisfied.
DEBENTURE EVENTS OF DEFAULT
The Junior Subordinated Indenture provides that any one or more of the
following described events with respect to the Junior Subordinated Debentures
that has occurred and is continuing constitutes an "Event of Default" with
respect to the Junior Subordinated Debentures:
(i) failure to pay any interest on the Junior Subordinated Debentures
when due and continuance of such default for a period of 30 days
(subject to the deferral of any due date in the case of an
Extension Period); or
(ii) failure to pay any principal of or premium, if any, on the Junior
Subordinated Debentures when due whether at the Stated Maturity or
otherwise; or
(iii) failure to observe or perform in any material respect certain other
covenants contained in the Junior Subordinated Indenture for 90 days
after written notice to the Company from the Debenture Trustee or the
holders of at least 25% in aggregate outstanding principal amount of
the outstanding Junior Subordinated Debentures; or
(iv) the Company consents to the appointment of a receiver or other
similar official in any liquidation, insolvency or similar
proceeding with respect to the Company or all or substantially all
its property.
For purposes of the Trust Agreement and this Prospectus, each such Event of
Default under the Junior Subordinated Debenture is referred to as a "Debenture
Event of Default." As described in "Description of Preferred Securities --
Events of Default; Notice," the occurrence of a Debenture Event of Default will
also constitute an Event of Default in respect of the Trust Securities.
The holders of at least a majority in aggregate principal amount of
outstanding Junior Subordinated Debentures have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Debenture Trustee. The Debenture Trustee or the holders of not less than 25% in
aggregate principal amount of outstanding Junior Subordinated Debentures may
declare the principal due and payable immediately upon a Debenture Event of
Default, and, should the Debenture Trustee or such holders of Junior
Subordinated Debentures fail to make such declaration, the holders of at least
25% in aggregate Liquidation Amount of the outstanding Preferred Securities
shall have such right. The holders of a majority in aggregate principal amount
of outstanding Junior Subordinated Debentures may annul such declaration and
waive the default if all defaults (other than the non-payment of the principal
of Junior Subordinated Debentures which has become due solely by such
acceleration) have been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee. Should the holders of Junior
Subordinated Debentures fail to annul such declaration and waive such default,
the holders of a majority in aggregate Liquidation Amount of the outstanding
Preferred Securities shall have such right.
The holders of at least a majority in aggregate principal amount of the
outstanding Junior Subordinated Debentures affected thereby may, on behalf of
the holders of all the Junior Subordinated Debentures, waive any past default,
except a default in the payment of principal (or premium, if any) or interest
(unless such default has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee) or a default in respect of a covenant
or provision which under the Junior Subordinated Indenture cannot be modified or
amended without the consent of the holder of each outstanding Junior
Subordinated Debenture affected thereby. See "-- Modification of Junior
Subordinated Indenture." The Company is required to file annually with the
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Debenture Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Junior Subordinated Indenture.
If a Debenture Event of Default occurs and is continuing, the Property
Trustee will have the right to declare the principal of and the interest on the
Junior Subordinated Debentures, and any other amounts payable under the Junior
Subordinated Indenture, to be forthwith due and payable and to enforce its other
rights as a creditor with respect to the Junior Subordinated Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Junior Subordinated Debentures on the date such amounts are
otherwise payable, a registered holder of Preferred Securities may institute a
Direct Action against the Company for enforcement of payment to such holder of
an amount equal to the amount payable in respect of Junior Subordinated
Debentures having a principal amount equal to the aggregate Liquidation Amount
of the Preferred Securities held by such holder. The Company may not amend the
Junior Subordinated Indenture to remove the foregoing right to bring a Direct
Action without the prior written consent of the holders of all the Preferred
Securities. The Company will have the right under the Junior Subordinated
Indenture to set-off any payment made to such holder of Preferred Securities by
the Company in connection with a Direct Action.
The holders of the Preferred Securities are not able to exercise directly
any remedies available to the holders of the Junior Subordinated Debentures
except under the circumstances described in the preceding paragraph. See
"Description of Preferred Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Junior Subordinated Indenture provides that the Company may not
consolidate with or merge into any other Person or convey, transfer or lease its
properties and assets substantially as an entirety to any Person, and no Person
may consolidate with or merge into the Company or convey, transfer or lease its
properties and assets substantially as an entirety to the Company, unless (i) if
the Company consolidates with or merges into another Person or conveys or
transfers its properties and assets substantially as an entirety to any Person,
the successor Person is organized under the laws of the United States or any
state or the District of Columbia, and such successor Person expressly assumes
the Company's obligations in respect of the Junior Subordinated Debentures; (ii)
immediately after giving effect thereto, no Debenture Event of Default, and no
event which, after notice or lapse of time or both, would constitute a Debenture
Event of Default, has occurred and is continuing; and (iii) certain other
conditions as prescribed in the Junior Subordinated Indenture are satisfied.
The provisions of the Junior Subordinated Indenture do not afford holders
of the Junior Subordinated Debentures protection in the event of a highly
leveraged or other transaction involving the Company that may adversely affect
holders of the Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Junior Subordinated Indenture provides that when, among other things,
all Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation (i) have become due and payable, (ii) will become due
and payable at the Stated Maturity within one year, and the Company deposits or
causes to be deposited with the Debenture Trustee funds, in trust, for the
purpose and in an amount sufficient to pay and discharge the entire indebtedness
on the Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation, for the principal (and premium, if any) and interest
to the date of the deposit or to the Stated Maturity, as the case may be, then
the Junior Subordinated Indenture will cease to be of further effect (except as
to the Company's obligations to pay all other sums due pursuant to the Junior
Subordinated Indenture and to provide the officers' certificates and opinions of
counsel described therein), and the Company will be deemed to have satisfied and
discharged the Junior Subordinated Indenture.
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SUBORDINATION
The Junior Subordinated Debentures will be subordinate and junior in right
of payment, to the extent set forth in the Junior Subordinated Indenture, to all
Senior Indebtedness (as defined below) of the Company. If the Company defaults
in the payment of any principal, premium, if any, or interest, if any, or any
other amount payable on any Senior Indebtedness when the same becomes due and
payable, whether at maturity or at a date fixed for redemption or by declaration
of acceleration or otherwise, then, unless and until such default has been cured
or waived or has ceased to exist or all Senior Indebtedness has been paid, no
direct or indirect payment (in cash, property, securities, by setoff or
otherwise) may be made or agreed to be made on the Junior Subordinated
Debentures, or in respect of any redemption, repayment, retirement, purchase or
other acquisition of any of the Junior Subordinated Debentures.
As used herein, "Senior Indebtedness" means, whether recourse is to all or
a portion of the assets of the Company and whether or not contingent, (i) every
obligation of the Company for money borrowed; (ii) every obligation of the
Company evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of the Company with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of the Company; (iv) every obligation of the Company issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of the Company; (vi) every
obligation of the Company for claims (as defined in Section 101(4) of the United
States Bankruptcy Code of 1978, as amended) in respect of derivative products
such as interest and foreign exchange rate contracts, commodity contracts and
similar arrangements; and (vii) every obligation of the type referred to in
clauses (i) through (vi) of another person and all dividends of another person
the payment of which, in either case, the Company has guaranteed or is
responsible or liable, directly or indirectly, as obligor or otherwise; provided
that Senior Indebtedness shall not include (i) any obligations which, by their
terms, are expressly stated to rank pari passu in right of payment with, or to
not be superior in right of payment to, the Junior Subordinated Debentures, (ii)
any Senior Indebtedness of the Company which when incurred and without respect
to any election under Section 1111(b) of the United States Bankruptcy Code of
1978, as amended, was without recourse to the Company, (iii) any indebtedness of
the Company to any of its subsidiaries, (iv) indebtedness to any executive
officer or director of the Company, or (v) any indebtedness in respect of debt
securities issued to any trust, or a trustee of such trust, partnership or other
entity affiliated with the Company that is a financing entity of the Company in
connection with the issuance of such financing entity of securities that are
similar to the Preferred Securities.
In the event of (i) certain events of bankruptcy, dissolution or
liquidation of the Company or the holder of the Common Securities, (ii) any
proceeding for the liquidation, dissolution or other winding up of the Company,
voluntary or involuntary, whether or not involving insolvency or bankruptcy
proceedings, (iii) any assignment by the Company for the benefit of creditors or
(iv) any other marshalling of the assets of the Company, all Senior Indebtedness
(including any interest thereon accruing after the commencement of any such
proceedings) shall first be paid in full before any payment or distribution,
whether in cash, securities or other property, shall be made on account of the
Junior Subordinated Debentures. In such event, any payment or distribution on
account of the Junior Subordinated Debentures, whether in cash, securities or
other property, that would otherwise (but for the subordination provisions) be
payable or deliverable in respect of the Junior Subordinated Debentures will be
paid or delivered directly to the holders of Senior Indebtedness in accordance
with the priorities then existing among such holders until all Senior
Indebtedness (including any interest thereon accruing after the commencement of
any such proceedings) has been paid in full.
In the event of any such proceeding, after payment in full of all sums
owing with respect to Senior Indebtedness, the holders of Junior Subordinated
Debentures, together with the holders of any obligations of the Company ranking
on a parity with the Junior Subordinated Debentures, will be entitled to be paid
from the remaining assets of the Company the amounts at the time due and owing
on the Junior Subordinated Debentures and such other obligations before any
payment or other distribution, whether in cash, property or otherwise, will be
made on account of any capital stock or obligations of the Company ranking
junior to the Junior Subordinated Debentures and such other obligations. If any
payment or distribution on account of the
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Junior Subordinated Debentures of any character or any security, whether in
cash, securities or other property is received by any holder of any Junior
Subordinated Debentures in contravention of any of the terms hereof and before
all the Senior Indebtedness has been paid in full, such payment or distribution
or security will be received in trust for the benefit of, and must be paid over
or delivered and transferred to, the holders of the Senior Indebtedness at the
time outstanding in accordance with the priorities then existing among such
holders for application to the payment of all Senior Indebtedness remaining
unpaid to the extent necessary to pay all such Senior Indebtedness in full. By
reason of such subordination, in the event of the insolvency of the Company,
holders of Senior Indebtedness may receive more, ratably, and holders of the
Junior Subordinated Debentures may receive less, ratably, than the other
creditors of the Company. Such subordination will not prevent the occurrence of
any Event of Default in respect of the Junior Subordinated Debentures.
The Junior Subordinated Indenture places no limitation on the amount of
additional Senior Indebtedness that may be incurred by the Company. The Company
expects from time to time to incur additional indebtedness constituting Senior
Indebtedness.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee, other than during the occurrence and continuance of
a default by the Company in performance of its obligations under the Junior
Subordinated Debenture, is under no obligation to exercise any of the powers
vested in it by the Junior Subordinated Indenture at the request of any holder
of Junior Subordinated Debentures, unless offered reasonable indemnity by such
holder against the costs, expenses and liabilities that might be incurred
thereby. The Debenture Trustee is not required to expend or risk its own funds
or otherwise incur personal financial liability in the performance of its duties
if the Debenture Trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
GOVERNING LAW
The Junior Subordinated Indenture and the Junior Subordinated Debentures
will be governed by and construed in accordance with the laws of the State of
New York.
DESCRIPTION OF GUARANTEE
The Guarantee will be executed and delivered by the Company concurrently
with the issuance of Preferred Securities by the Issuer Trust for the benefit of
the holders from time to time of the Preferred Securities. Bankers Trust Company
will act as Guarantee Trustee under the Guarantee. This summary of certain
provisions of the Guarantee does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all the provisions of the
Guarantee, including the definitions therein of certain terms. A copy of the
form of Guarantee is available upon request from the Guarantee Trustee. The
Guarantee Trustee will hold the Guarantee for the benefit of the holders of the
Preferred Securities.
GENERAL
The Company will irrevocably and unconditionally agree to pay in full on a
subordinated basis, to the extent set forth in the Guarantee and described
herein, the Guarantee Payments (as defined below) to the holders of the
Preferred Securities, as and when due, regardless of any defense, right of
set-off or counterclaim that the Issuer Trust may have or assert other than the
defense of payment. The following payments with respect to the Preferred
Securities, to the extent not paid by or on behalf of the Issuer Trust (the
"Guarantee Payments"), will be subject to the Guarantee: (i) any accrued and
unpaid Distributions required to be paid on such Preferred Securities, to the
extent that the Issuer Trust has funds on hand available therefor at such time,
(ii) the Redemption Price with respect to any Preferred Securities called for
redemption, to the extent that the Issuer Trust has funds on hand available
therefor at such time, and (iii) upon a voluntary or involuntary termination,
winding up or liquidation of the Issuer Trust (unless the Junior Subordinated
Debentures are distributed to holders of the Preferred Securities), the lesser
of (a) the aggregate of the Liquidation Amount and all accumulated and unpaid
Distributions to the date of payment, to the extent that the Issuer Trust has
funds on hand available therefor at such time, and (b) the amount of assets of
the Issuer Trust remaining
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available for distribution to holders of the Preferred Securities on liquidation
of the Issuer Trust. The Company's obligation to make a Guarantee Payment may be
satisfied by direct payment of the required amounts by the Company to the
holders of the Preferred Securities or by causing the Issuer Trust to pay such
amounts to such holders.
The Guarantee will be an irrevocable guarantee of payment on a subordinated
basis of the Issuer Trust's obligations under the Preferred Securities, but will
apply only to the extent that the Issuer Trust has funds sufficient to make such
payments, and is not a guarantee of collection.
If the Company does not make payments on the Junior Subordinated Debentures
held by the Issuer Trust, the Issuer Trust will not be able to pay any amounts
payable in respect of the Preferred Securities and will not have funds legally
available therefor. The Guarantee will rank subordinate and junior in right of
payment to all Senior Indebtedness of the Company. See "-- Status of the
Guarantee." The Guarantee does not limit the incurrence or issuance of other
secured or unsecured debt of the Company, including Senior Indebtedness, whether
under the Junior Subordinated Indenture, any other indenture that the Company
may enter into in the future or otherwise.
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures and the Junior Subordinated Indenture, taken together,
fully, irrevocably and unconditionally guaranteed all the Issuer Trust's
obligations under the Preferred Securities on a subordinated basis. No single
document standing alone or operating in conjunction with fewer than all the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Issuer Trust's obligations in respect of the
Preferred Securities. See "Relationship Among the Preferred Securities, the
Junior Subordinated Debentures and the Guarantee."
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Indebtedness
of the Company in the same manner as the Junior Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held by the Guarantee Trustee for the benefit of the holders
of the Preferred Securities. The Guarantee will not be discharged except by
payment of the Guarantee Payments in full to the extent not paid by the Issuer
Trust or distribution to the holders of the Preferred Securities of the Junior
Subordinated Debentures.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no consent will
be required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of the
outstanding Preferred Securities. The manner of obtaining any such approval will
be as set forth under "Description of Preferred Securities -- Voting Rights;
Amendment of Trust Agreement." All guarantees and agreements contained in the
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of the Company and shall inure to the benefit of the holders of
the Preferred Securities then outstanding.
EVENTS OF DEFAULT; RIGHTS OF HOLDERS OF PREFERRED SECURITIES
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder, or to
perform any non-payment obligation if such non-payment default remains
unremedied for 30 days.
The holders of not less than a majority in aggregate Liquidation Amount of
the outstanding Preferred Securities have the right to direct the time, method
and place of conducting any proceeding for any remedy
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available to the Guarantee Trustee in respect of the Guarantee or to direct the
exercise of any trust or power conferred upon the Guarantee Trustee under the
Guarantee.
Any registered holder of Preferred Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Issuer Trust,
the Guarantee Trustee or any other person or entity.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after the
occurrence of an event of default with respect to the Guarantee, must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by the
Guarantee at the request of any holder of the Preferred Securities unless it is
offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Preferred Securities, upon full
payment of the amounts payable with respect to the Preferred Securities upon
liquidation of the Issuer Trust or upon distribution of Junior Subordinated
Debentures to the holders of the Preferred Securities in exchange for all of the
Preferred Securities. The Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of the Preferred
Securities must restore payment of any sums paid under the Preferred Securities
or the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York.
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent the Issuer Trust has funds available for such payment) are
irrevocably guaranteed, on a subordinated basis, by the Company as and to the
extent set forth under "Description of Guarantee." Taken together, the Company's
obligations under the Junior Subordinated Debentures, the Junior Subordinated
Indenture, the Trust Agreement and the Guarantee provide, in the aggregate, a
full, irrevocable and unconditional guarantee of payments of Distributions and
other amounts due on the Preferred Securities. No single document standing alone
or operating in conjunction with fewer than all the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing full, irrevocable and unconditional guarantee of the
Issuer Trust's obligations in respect of the Preferred Securities. If and to the
extent that the Company does not make payments on the Junior Subordinated
Debentures, the Issuer Trust will not have sufficient funds to pay Distributions
or other amounts due on the Preferred Securities. The Guarantee does not cover
payment of amounts payable with respect to the Preferred Securities when the
Issuer Trust does not have sufficient funds to pay such amounts. In such event,
the remedy of a holder of the Preferred Securities is to institute a legal
proceeding directly against the Company for enforcement of payment of the
Company's obligations under Junior Subordinated Debentures having a principal
amount equal to the Liquidation Amount of the Preferred Securities held by such
holder.
The obligations of the Company under the Junior Subordinated Debentures and
the Guarantee are subordinate and junior in right of payment to all Senior
Indebtedness.
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SUFFICIENCY OF PAYMENTS
As long as payments are made when due on the Junior Subordinated
Debentures, such payments will be sufficient to cover Distributions and other
payments distributable on the Preferred Securities, primarily because (i) the
aggregate principal amount of the Junior Subordinated Debentures will be equal
to the sum of the aggregate stated Liquidation Amount of the Preferred
Securities and Common Securities; (ii) the interest rate and interest and other
payment dates on the Junior Subordinated Debentures will match the Distribution
rate, Distribution Dates and other payment dates for the Preferred Securities;
(iii) the Company will pay for any and all costs, expenses and liabilities of
the Issuer Trust except the Issuer Trust's obligations to holders of the Trust
Securities; and (iv) the Trust Agreement further provides that the Issuer Trust
will not engage in any activity that is not consistent with the limited purposes
of the Issuer Trust.
Notwithstanding anything to the contrary in the Junior Subordinated
Indenture, the Company has the right to set-off any payment it is otherwise
required to make thereunder against and to the extent the Company has
theretofore made, or is concurrently on the date of such payment making, a
payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES
A holder of any Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, the Issuer
Trust or any other person or entity. See "Description of Guarantee."
A default or event of default under any Senior Indebtedness of the Company
would not constitute a default or Event of Default in respect of the Preferred
Securities. However, in the event of payment defaults under, or acceleration of,
Senior Indebtedness of the Company, the subordination provisions of the Junior
Subordinated Indenture provide that no payments may be made in respect of the
Junior Subordinated Debentures until such Senior Indebtedness has been paid in
full or any payment default thereunder has been cured or waived. See
"Description of Junior Subordinated Debentures -- Subordination."
LIMITED PURPOSE OF ISSUER TRUST
The Preferred Securities represent preferred undivided beneficial interests
in the assets of the Issuer Trust, and the Issuer Trust exists for the sole
purpose of issuing its Preferred Securities and Common Securities and investing
the proceeds thereof in Junior Subordinated Debentures. A principal difference
between the rights of a holder of a Preferred Security and a holder of a Junior
Subordinated Debenture is that a holder of a Junior Subordinated Debenture is
entitled to receive from the Company payments on Junior Subordinated Debentures
held, while a holder of Preferred Securities is entitled to receive
Distributions or other amounts distributable with respect to the Preferred
Securities from the Issuer Trust (or from the Company under the Guarantee) only
if and to the extent the Issuer Trust has funds available for the payment of
such Distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution of the Issuer Trust, other
than any such dissolution involving the distribution of the Junior Subordinated
Debentures, after satisfaction of liabilities to creditors of the Issuer Trust
as required by applicable law, the holders of the Preferred Securities will be
entitled to receive, out of assets held by the Issuer Trust, the Liquidation
Distribution in cash. See "Description of Preferred Securities -- Liquidation
Distribution Upon Dissolution." Upon any voluntary or involuntary liquidation or
bankruptcy of the Company, the Issuer Trust, as registered holder of the Junior
Subordinated Debentures, would be a subordinated creditor of the Company,
subordinated and junior in right of payment to all Senior Indebtedness as set
forth in the Junior Subordinated Indenture, but entitled to receive payment in
full of all amounts payable with respect to the Junior Subordinated Debentures
before any stockholders of the Company receive payments or distributions. Since
the Company is the guarantor under the Guarantee and has agreed under the Junior
Subordinated Indenture to pay for all costs, expenses and liabilities of the
Issuer Trust (other than the Issuer Trust's obligations to the holders of the
Trust Securities), the positions of a holder of
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the Preferred Securities and a holder of such Junior Subordinated Debentures
relative to other creditors and to stockholders of the Company in the event of
liquidation or bankruptcy of the Company are expected to be substantially the
same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations thereunder, and administrative and judicial
interpretations thereof, each as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. The authorities on which this summary
is based are subject to various interpretations, and the opinions of Tax Counsel
are not binding on the Internal Revenue Service (the "IRS") or the courts,
either of which could take a contrary position. Moreover, no rulings have been
or will be sought from the IRS with respect to the transactions described
herein. Accordingly, there can be no assurance that the IRS will not challenge
the opinions expressed herein or that a court would not sustain such a
challenge.
Except as otherwise stated, this summary deals only with the Preferred
Securities held as a capital asset by a holder who or which (i) purchased the
Preferred Securities upon original issuance (an "Initial Holder") at their
original offering price and (ii) is a US Holder (as defined below). This summary
does not address all the tax consequences that may be relevant to a US Holder,
nor does it address the tax consequences, except as stated below, to holders
that are not US Holders ("Non-US Holders") or to holders that may be subject to
special tax treatment (such as banks, thrift institutions, real estate
investment trusts, regulated investment companies, insurance companies, brokers
and dealers in securities or currencies, other financial institutions,
tax-exempt organizations, persons holding the Preferred Securities as a position
in a "straddle," or as part of a "synthetic security," "hedging," as part of a
"conversion" or other integrated investment, persons having a functional
currency other than the U.S. Dollar and certain United States expatriates).
Further, this summary does not address (a) the income tax consequences to
shareholders in, or partners or beneficiaries of, a holder of the Preferred
Securities, (b) the United States federal alternative minimum tax consequences
of the purchase, ownership or disposition of the Preferred Securities, or (c)
any state, local or foreign tax consequences of the purchase, ownership and
disposition of Preferred Securities.
A "US Holder" is a holder of the Preferred Securities who or which is (i) a
citizen or individual resident (or is treated as a citizen or individual
resident) of the United States for income tax purposes, (ii) a corporation or
partnership created or organized (or treated as created or organized for income
tax purposes) in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is includible in its
gross income for United States federal income tax purposes without regard to its
source, or (iv) a trust if (a) a court within the United States is able to
exercise primary supervision over the administration of the trust and (b) one or
more United States trustees have the authority to control all substantial
decisions of the trust.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER
TAX LAWS.
US HOLDERS
CHARACTERIZATION OF THE ISSUER TRUST. In connection with the issuance of
the Preferred Securities, Tax Counsel will render its opinion generally to
effect that, under then current law and based on the representations, facts and
assumptions set forth in this Prospectus, and assuming full compliance with the
terms of the Trust Agreement (and other relevant documents), and based on
certain assumptions and qualifications referenced in the opinion, the Issuer
Trust will be characterized for United States federal income tax purposes as a
grantor trust and will not be characterized as an association taxable as a
corporation. Accordingly, for
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United States federal income tax purposes, each holder of the Preferred
Securities generally will be considered the owner of an undivided interest in
the Junior Subordinated Debentures and each US Holder will be required to
include in gross income all interest on (OID accrued) or gain recognized for
United States federal income tax purposes with respect to its allocable share of
the Junior Subordinated Debentures.
CHARACTERIZATION OF THE JUNIOR SUBORDINATED DEBENTURES. The Company and the
Issuer Trust will agree to treat the Junior Subordinated Debentures as
indebtedness for all United States federal income tax purposes. In connection
with the issuance of the Junior Subordinated Debentures, Tax Counsel will render
its opinion generally to the effect that, under then current law and based on
the representations, facts and assumptions set forth in this Prospectus, and
assuming full compliance with the terms of the Junior Subordinated Indenture
(and other relevant documents) and based on certain assumptions and
qualifications referenced in the opinion, the Junior Subordinated Debentures
will be characterized for United States federal income tax purposes as debt of
the Company.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT. Under recently issued Treasury
regulations (the "Regulations") applicable to all debt instruments that, like
the Junior Subordinated Debentures, are issued on or after August 13, 1996,
remote contingencies that stated interest will not be timely paid are ignored in
determining whether a debt instrument is issued with OID, which determination
depends in part on whether interest is "unconditionally payable" on the debt
instrument. OID must be included in income by all holders as it accrues
economically on a daily basis, without regard to when it is paid in cash or
whether a particular holder generally uses the cash method of accounting. The
Company has concluded that the likelihood of its exercising its option to defer
payments of interest is remote. This conclusion is based on the Company's
analysis, as of the date of issue of the Junior Subordinated Debentures, of
various facts and circumstances deemed relevant to exercising such deferral
option, including, among other things, the inability of the Company to declare
dividends on its stock while interest on the Junior Subordinated Debentures is
being deferred, and the likely impact of the non-payment of dividends upon the
ratings of the Company's securities if the deferral option is exercised. Based
upon this conclusion and in the absence of any specific definition of "remote"
in the applicable income tax regulations, the Company intends to take the
position that the Junior Subordinated Debentures do not include OID. As a
consequence, holders of the Preferred Securities should report interest under
their own methods of accounting (e.g., cash or accrual) instead of under the
daily economic accrual rules for OID instruments.
Under the Regulations, if the Company exercises its option to defer
payments of interest, the Junior Subordinated Debentures would be treated as
redeemed and reissued for OID purposes and the sum of the remaining interest
payments (and any de minimis OID) on the Junior Subordinated Debentures would
thereafter be treated as OID, which would accrue, and be includible in a US
Holder's taxable income, on an economic accrual basis (regardless of the US
Holder's method of accounting for income tax purposes) over the remaining term
of the Junior Subordinated Debentures (including any period of interest
deferral), without regard to the timing of payments under the Junior
Subordinated Debentures. A holder who disposes of the Preferred Securities
during such a Deferral Period may suffer a loss because the market value of the
Preferred Securities will likely fall if the Company exercises its option to
defer payments of interest on the Junior Subordinated Debentures. Furthermore,
the market value of the Preferred Securities may not reflect the accumulated
distribution that will be paid at the end of the Deferral Period, and a holder
who sells the Preferred Securities during the Deferral Period will not receive
from the Company any cash related to the interest (OID) income the holder
accrued and included in its taxable income under the OID rules (because that
cash will be paid to the holder of record at the end of the Deferral Period).
If the possibility of the Company's exercise of its option to defer
payments of interest is not remote, the Junior Subordinated Debentures would be
treated as initially issued with OID in an amount equal to the aggregate stated
interest (plus any de minimis OID) over the term of the Junior Subordinated
Debentures. That OID would generally be includible in a US Holder's taxable
income, over the term of the Junior Subordinated Debentures, on an economic
accrual basis.
The Regulations have not been addressed in any rulings or other
interpretations by the Internal Revenue Service other than the preamble to the
Treasury Decision that issued the new Regulations, which added the
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concept of "remote contingencies" to existing definitions used to determine
whether interest payable under a debt instrument is "unconditionally payable."
The new Regulations could be viewed as a favorable reversal of the Internal
Revenue Service's previous position, as expressed in a 1995 Revenue Ruling that
has not been withdrawn. It is possible that the IRS could take a position
contrary to the interpretation herein.
CHARACTERIZATION OF INCOME. Because the income underlying the Preferred
Securities will not be characterized as dividends for income tax purposes,
corporate holders of the Preferred Securities will not be entitled to a
dividends-received deduction for any income recognized with respect to the
Preferred Securities.
MARKET DISCOUNT AND BOND PREMIUM. Holders of the Preferred Securities other
than Initial Holders may be considered to have acquired their undivided
interests in the Junior Subordinated Debentures with market discount or
acquisition premium (as each phrase is defined for United States federal income
tax purposes).
RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE
ISSUER TRUST. Under certain circumstances described herein (See "Description of
the Preferred Securities -- Liquidation Distribution Upon Dissolution"), the
Issuer Trust may distribute the Junior Subordinated Debentures to holders in
exchange for the Preferred Securities and in liquidation of the Issuer Trust.
Except as discussed below, such a distribution would not be a taxable event for
United States federal income tax purposes, and each US Holder would have an
aggregate adjusted basis in its Junior Subordinated Debentures for United States
federal income tax purposes equal to such holder's aggregate adjusted basis in
its Preferred Securities. For United States federal income tax purposes, a US
Holder's holding period in the Junior Subordinated Debentures received in such a
liquidation of the Issuer Trust would include the period during which the
Preferred Securities were held by the holder. If, however, the relevant event is
a Tax Event which results in the Issuer Trust being treated as an association
taxable as a corporation, the distribution would constitute a taxable event to
both the Issuer Trust and US Holders of the Preferred Securities for United
States federal income tax purposes.
Under certain circumstances described herein (see "Description of the
Preferred Securities"), the Junior Subordinated Debentures may be redeemed for
cash and the proceeds of such redemption distributed to holders in redemption of
their Preferred Securities. Such a redemption would be taxable for United States
federal income tax purposes, and a US Holder would recognize gain or loss as if
it had sold the Preferred Securities for cash. See "-- Sales of Preferred
Securities" below.
SALES OF PREFERRED SECURITIES. A holder that sells Preferred Securities
will recognize gain or loss equal to the difference between its adjusted tax
basis in the Preferred Securities and the amount realized on the sale of such
Preferred Securities. To the extent of any accrued but unpaid interest the
amount realized on the sale of such Preferred Securities will be treated as
ordinary income. Assuming the Company does not defer interest on the Junior
Subordinated Debentures by extending the interest payment period, a holder's
adjusted tax basis in the Preferred Securities generally will equal its initial
purchase price. Subject to the market discount rules described above and the
discussion below regarding accrued and unpaid interest, such gain or loss
generally will be a capital gain or loss and generally will be a long-term
capital gain or loss if the Preferred Securities have been held for more than
one year.
The Preferred Securities may trade at a price that does not fully reflect
the value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. If the Company exercises its right to defer payments of
interest, the Junior Subordinated Debentures will become OID instruments and a
holder who disposes of Preferred Securities between record dates for payments of
distributions thereon will be required to include in income as ordinary income,
accrued and unpaid interest on the Junior Subordinated Debentures through the
date of disposition, and to add such amount to such holder's adjusted tax basis
in its pro rata share of the underlying Junior Subordinated Debentures deemed
disposed of. To the extent the selling price is less than the holder's adjusted
tax basis (which will include all accrued but unpaid interest) a holder will
recognize a capital loss. Subject to certain limited exceptions, capital losses
cannot be applied to offset ordinary income for United States federal income tax
purposes. Accrual basis taxpayers would be subjected to similar treatment
without regard to the Company's election to defer.
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PROPOSED TAX LAW CHANGES
On February 6, 1997, President Clinton released his budget proposals for
fiscal year 1998. One Tax Proposal therein would generally deny corporate
issuers a deduction for interest related to certain debt obligations that have a
maximum term in excess of 15 years and are not shown as indebtedness on the
separate balance sheet of the issuer or, where the instrument is issued to a
related party (other than a corporation), where the holder of some other related
party issues a related instrument that is not shown as indebtedness on the
issuer's consolidated balance sheet. As drafted, the Tax Proposal would be
effective generally for instruments issued on or after the date of first
Congressional committee action. The House of Representatives has passed the
Revenue Act, which does not contain any provision similar to the Tax Proposal
except for debt instruments payable in stock of the issuer or a related party.
The Junior Subordinated Debentures were described in a filing with the
Securities and Exchange Commission made prior to June 8, 1997 and such filing
was required solely by reason of their distribution. The version of the Revenue
Act passed by the Senate does not contain any provision similar to the Tax
Proposal denying the deduction of interest on debt instruments because they may
contain equity features. Accordingly, the Revenue Act in its current form, as
passed by the House of Representatives and the Senate, does not apply to the
Junior Subordinated Debentures. There can be no assurance, however, that the
Revenue Act, if enacted, will be enacted as currently drafted rule or that other
legislation enacted after the date hereof will not adversely affect the tax
treatment of the Junior Subordinated Debentures or cause a Tax Event, resulting
in the distribution of the Junior Subordinated Debentures to holders of
Preferred Securities. See "Description of Preferred Securities -- Redemption."
NON-US HOLDERS
The following discussion applies to a Non-US Holder.
Payments to a holder of a Preferred Security which is a Non-US Holder will
generally not be subject to withholding of income tax, provided that (a) the
beneficial owner of the Preferred Security does not (directly or indirectly,
actually or constructively) own 10% or more of the total combined voting power
of all classes of stock of the Company entitled to vote, (b) the beneficial
owner of the Preferred Security is not a controlled foreign corporation that is
related to the Company through stock ownership, and (c) either (i) the
beneficial owner of the Preferred Securities certifies to the Issuer Trust or
its agent, under penalties of perjury, that it is a Non-US Holder and provides
its name and address, or (ii) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business (a "Financial Institution"), and holds the Preferred
Security in such capacity, certifies to the Issuer Trust or its agent, under
penalties of perjury, that such a statement has been received from the
beneficial owner by it or by another Financial Institution between it and the
beneficial owner in the chain of ownership, and furnishes the Issuer Trust or
its agent with a copy thereof.
As discussed above (see "-- Proposed Tax Law Changes"), changes in
legislation affecting the income tax consequences of the Junior Subordinated
Debentures are possible, and could adversely affect the ability of the Company
to deduct the interest payable on the Junior Subordinated Debentures. Moreover,
any such legislation could adversely affect Non-US Holders by characterizing
income derived from the Junior Subordinated Debentures as dividends, generally
subject to a 30% income tax (on a withholding basis) when paid to a Non-US
Holder, rather than as interest which, as discussed above, is generally exempt
from income tax in the hands of a Non-US Holder.
A Non-US Holder of a Preferred Security will generally not be subject to
withholding of income tax on any gain realized upon the sale or other
disposition of a Preferred Security.
A Non-US Holder which holds the Preferred Securities in connection with the
active conduct of a United States trade or business will be subject to income
tax on all income and gains recognized with respect to its proportionate share
of the Junior Subordinated Debentures.
80
<PAGE> 82
INFORMATION REPORTING
In general, information reporting requirements will apply to payments made
on, and proceeds from the sale of, the Preferred Securities held by a
noncorporate US Holder within the United States. In addition, payments made on,
and payments of the proceeds from the sale of, the Preferred Securities to or
through the United States office of a broker are subject to information
reporting unless the holder thereof certifies as to its Non-United States status
or otherwise establishes an exemption from information reporting and backup
withholding. See "-- Backup Withholding." Taxable income on the Preferred
Securities for a calendar year should be reported to US Holders on the
appropriate forms (Forms 1099) by the following January 31st.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the Preferred Securities
may be subject to a "backup" withholding tax of 31% unless the holder complies
with certain identification or exemption requirements. Any amounts so withheld
will be allowed as a credit against the holder's income tax liability, or
refunded, provided the required information is provided to the IRS.
THE PRECEDING DISCUSSION IS ONLY A SUMMARY AND DOES NOT ADDRESS THE
CONSEQUENCES TO A PARTICULAR HOLDER OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF THE PREFERRED SECURITIES. POTENTIAL HOLDERS OF THE PREFERRED SECURITIES ARE
URGED TO CONTACT THEIR OWN TAX ADVISORS TO DETERMINE THEIR PARTICULAR TAX
CONSEQUENCES.
CERTAIN ERISA CONSIDERATIONS
The Company and certain affiliates of the Company may each be considered a
"party in interest" within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or a "disqualified person" within the
meaning of Section 4975 of the Code with respect to certain employee benefit
plans ("Plans") that are subject to ERISA or Section 4975 of the Code. The
purchase of the Preferred Securities by a Plan that is subject to the fiduciary
responsibility provisions of ERISA or the prohibited transaction provisions of
Section 4975(e)(1) of the Code and with respect to which the Company, or any
affiliate of the Company is a service provider (or otherwise is a party in
interest or a disqualified person) may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Code, unless the Preferred
Securities are acquired pursuant to and in accordance with an applicable
exemption. Any pension or other employee benefit plan proposing to acquire any
Preferred Securities should consult with its counsel.
81
<PAGE> 83
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") dated , 1997, among the Company, the Issuer
Trust and the underwriters named therein (the "Underwriters"), for whom Advest,
Inc. and EVEREN Securities, Inc. are acting as Representatives, the Issuer Trust
has agreed to sell to the Underwriters, and the Underwriters have severally
agreed to purchase from the Issuer Trust, the following respective aggregate
Liquidation Amount of Preferred Securities at the public offering price:
<TABLE>
<CAPTION>
LIQUIDATION AMOUNT OF
UNDERWRITER: PREFERRED SECURITIES:
------------ ---------------------
<S> <C>
Advest, Inc................................................. $
EVEREN Securities, Inc......................................
-----------
Total....................................................... $65,000,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the Preferred Securities offered hereby if any
of such Preferred Securities are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Preferred Securities to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per Preferred Security. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per Preferred Security to certain other dealers. After the public
offering, the offering price and other selling terms may be changed by the
Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
additional $9,750,000 aggregate Liquidation Amount of the Preferred Securities
at the public offering price. To the extent that the Underwriters exercise such
option, the Company will be obligated, pursuant to the option, to sell such
Preferred Securities to the Underwriters. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of the
Preferred Securities offered hereby. If purchased, the Underwriters will offer
such additional Preferred Securities on the same terms as those on which the
$65,000,000 aggregate Liquidation Amount of the Preferred Securities are being
offered. The Company has further agreed not to otherwise sell any securities
substantially similar to the Preferred Securities during the 180 day period
following the completion of the sale of the Preferred Securities.
In connection with the offering of the Preferred Securities, the
Underwriters and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the Preferred Securities. Such
transactions may include over-allotment transactions in which the Underwriters
create a short position for their own account by selling more Preferred
Securities than they are committed to purchase from the Issuer Trust. In such a
case, to cover all or part of the short position, the Underwriters may exercise
the over-allotment option described above or may purchase Preferred Securities
in the open market following completion of the initial offering of the Preferred
Securities. The Underwriters also may engage in stabilizing transactions in
which they bid for, and purchase, shares of the Preferred Securities at a level
above that which might otherwise prevail in the open market for the purpose of
preventing or retarding a decline in the market price of the Preferred
Securities. The Underwriters also may reclaim any selling concessions allowed to
an Underwriter or dealer if the Underwriters repurchase shares distributed by
that Underwriter or dealer. Any of the foregoing transactions may result in the
maintenance of a price for the Preferred Securities at a level above that which
might otherwise prevail in the open market. Neither the Company nor any of the
Underwriters makes any representation or prediction as to the direction
82
<PAGE> 84
or magnitude of any effect that the transactions described above may have on the
price of the Preferred Securities. The Underwriters are not required to engage
in any of the foregoing transactions and, if commenced, such transactions may be
discontinued at any time without notice.
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures issued by
the Company, the Underwriting Agreement provides that the Company will pay as
compensation for the Underwriter's arranging the investment therein of such
proceeds an amount of $. per Preferred Security (or $ ($ if the
over-allotment option is exercised in full) in the aggregate).
Because the National Association of Securities Dealers, Inc. ("NASD") is
expected to view the Preferred Securities as interests in a direct participation
program, the offering of the Preferred Securities is being made in compliance
with the applicable provisions of Rule 2810 of the NASD's Conduct Rules.
The Company has made application to list the Preferred Securities on the
NYSE. However, there can be no assurance that an active trading market for the
Preferred Securities will develop or continue or that the market price of the
Preferred Securities will not decline below the price to public set forth on the
cover page of this Prospectus. If such application is approved, trading in the
Preferred Securities is expected to commence within a 30-day period after the
initial delivery of the Preferred Securities.
The Company and the Issuer Trust have each agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
Certain of the Underwriters may in the future perform various services to
the Company, including investment banking services, for which may receive
customary fees for such services.
83
<PAGE> 85
VALIDITY OF SECURITIES
The validity of the Guarantee and the Junior Subordinated Debentures and
certain tax matters will be passed upon for the Company by LeBoeuf, Lamb, Greene
& MacRae, L.L.P., a limited liability partnership including professional
corporations, New York, New York, and certain legal matters will be passed upon
for the Underwriters by Arnold & Porter, Washington, D.C. and New York, New
York. Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the creation of the
Issuer Trust will be passed upon by Richards, Layton & Finger, special Delaware
counsel to the Company and the Issuer Trust. LeBoeuf, Lamb, Greene & MacRae,
L.L.P. and Arnold & Porter will rely as to certain matters of Delaware law on
the opinion of Richards, Layton & Finger.
EXPERTS
The consolidated financial statements and the related financial statement
schedules of the Company incorporated by reference in its Annual Report of Form
10-K for the year ended December 31, 1996, have been audited by Deloitte &
Touche LLP, independent auditors, as set forth in their reports thereon
incorporated by reference or set forth therein and incorporated herein by
reference in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, Suite
1300, New York, New York 10048 and Suite 1400, Citicorp Center, 14th Floor, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained at prescribed rates by writing to the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such material
also may be accessed electronically by means of the Commission's home page on
the Internet at http://www.sec.gov. The Common Stock of the Company is listed on
the New York Stock Exchange and such reports, proxy statements, and other
information concerning the Company can be inspected at the offices of the New
York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Commission pursuant to the Securities Act
with respect to the Preferred Securities, the Debentures, and the Guarantee.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules filed as a part thereof,
as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Preferred Securities, the
Debentures, and the Guarantee, reference is hereby made to the Registration
Statement, including the exhibits and schedules filed as a part thereof.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to herein are not necessarily complete and where such
contract or other document is an exhibit to the Registration Statement, each
such statement is qualified in all respects by the provisions of such exhibit,
to which reference is hereby made for a full statement of the provisions
thereof. The Registration Statement, including the exhibits and schedules filed
as a part thereof, may be inspected without charge at the public reference
facilities maintained by the Commission as set forth in the preceding paragraph.
Copies of these documents may be obtained at prescribed rates from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549.
No separate financial statements of the Issuer Trust have been included or
incorporated by reference herein. The Company and the Issuer Trust do not
consider that such financial statements would be material to holders of the
Preferred Securities because the Issuer Trust is a newly formed special purpose
entity, has no operating history or independent operations and is not engaged in
and does not propose to engage in any activity other than holding as trust
assets the Junior Subordinated Debentures and issuing the Trust Securities.
84
<PAGE> 86
See "AICI Capital Trust," "Description of Preferred Securities," "Description of
Junior Subordinated Debentures" and "Description of Guarantee." In addition, the
Company does not expect that the Issuer Trust will be filing reports under the
Exchange Act with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company (File No. 1 - 7461)
with the Commission pursuant to the Exchange Act, and are incorporated herein by
reference:
1. The Company's Annual Report on Form 10-K for the year ended December 31,
1996; and
2. The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997.
In addition, all documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to the
termination of the offering hereunder shall be deemed to be incorporated by
reference in this Prospectus and to be part hereof from the date of filing of
such documents. Any statement contained in a document incorporated by reference
herein shall be deemed to be modified or superseded for all purposes to the
extent that a statement contained herein or in any other subsequently filed
document which is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as modified or superseded, to constitute a part of this
Prospectus.
The Company will provide, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any and all of the documents incorporated by reference (not including
the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Requests for such copies should be
directed to William J. Gerber, Vice President, Acceptance Insurance Companies
Inc., 222 S. 15th Street, Suite 600 North, Omaha, Nebraska 68102, or by
telephone at (402) 344-8800 or facsimile at (402) 345-9190.
85
<PAGE> 87
GLOSSARY OF SELECTED INSURANCE TERMS
Admitted Insurer.............. An insurance company licensed by a state
regulatory authority to transact insurance
business in that state. An admitted insurer is
subject to the rules and regulations of each
state in which it is licensed governing
virtually all aspects of its insurance
operations and financial condition. A
non-admitted insurer, also known as an excess
and surplus lines insurer, is not licensed to
transact insurance business in a given state
but may be permitted to write certain business
in that state in accordance with the provisions
of excess and surplus lines insurance laws
which generally involve less rate, form and
operational regulation.
Buy-up Coverage............... Multi-Peril Crop Insurance policy providing
coverage in excess of that provided by CAT
Coverage. Buy-up Coverage is offered only
through private insurers.
CAT Coverage (CAT)............ The minimum available level of Multi-Peril Crop
Insurance, providing coverage for 50% of a
farmer's historical yield for eligible crops at
60% of the price per unit for such crop set by
the FCIC. This coverage is offered through
private insurers and USDA field offices.
Combined Ratio................ The sum of the expense ratio and the loss ratio
determined in accordance with GAAP or SAP.
Crop Revenue Coverage (CRC)... An extension of the MPCI program that insures a
producer of crops with varying levels of
protection against loss of revenues caused by
changes in crop prices, low yields, or a
combination of the two.
Direct Written Premiums....... Total premiums collected in respect of policies
issued by an insurer during a given period
without any reduction for premiums ceded to
reinsurers.
Excess of Loss Reinsurance.... A form of reinsurance in which the reinsurer,
subject to a specified limit, agrees to
indemnify the ceding company for the amount of
each loss, on a defined class of business, that
exceeds a specified retention.
Expense Ratio................. Under statutory accounting, the ratio of
underwriting expenses to net premiums written.
Under GAAP accounting, the ratio of
underwriting expenses to net premiums earned.
Federal Crop Insurance
Corporation
(FCIC)........................ A wholly-owned federal government corporation
within the Farm Services Agency.
Generally Accepted Accounting
Principles (GAAP)............. Accounting practices as set forth in opinions
and pronouncements of the Accounting Principles
Board of American Institute of Certified Public
Accountants and statements and pronouncements
of the Financial Accounting Standards Board and
which are applicable in the circumstances as of
the date in question.
Gross Written Premiums........ Direct written premiums plus premiums collected
in respect of policies assumed, in whole or in
part, from other insurance carriers.
86
<PAGE> 88
Insurance Regulatory
Information
System (IRIS)................. A system of ratio analysis developed by the
NAIC primarily intended to assist state
insurance departments in executing their
statutory mandates to oversee the financial
condition of insurance companies.
Loss Adjustment Expenses
(LAE)......................... Expenses incurred in the settlement of claims,
including outside adjustment expenses, legal
fees and internal administrative costs
associated with the claims adjustment process,
but not including general overhead expenses.
Loss Ratio.................... The ratio of losses and LAE incurred to
premiums earned.
Loss Reserves................. Liabilities established by insurers to reflect
the estimated ultimate cost of claim payments
as of a given date.
MPCI Premium.................. For purposes of the profit/loss sharing
arrangement with the federal government, the
amount of premiums credited to the Company for
all Buy-up Coverages paid by farmers, plus the
amount of any related federal premium
subsidies.
MPCI Retention................ The aggregate amount of MPCI Premium and MPCI
Imputed Premium on which the Company retains
risk after allocating farms to the three
federal reinsurance pools.
Multi-Peril Crop Insurance
(MPCI)........................ A federally-regulated subsidized crop insurance
program that insures a producer of crops with
varying levels of protection against loss of
yield from substantially all natural perils to
growing crops.
NAIC.......................... The National Association of Insurance
Commissioners.
Net Premiums Earned........... The portion of net premiums written applicable
to the expired period of policies and,
accordingly, recognized as income during a
given period.
Net Premiums Written.......... Total premiums for insurance written (less any
return premiums) during a given period, reduced
by premiums ceded in respect to liability
reinsured by other carriers.
Policyholders' or Statutory
Surplus....................... As determined under SAP (hereinafter defined),
the excess of total admitted assets over total
liabilities.
Price Election................ The maximum per unit commodity price by crop to
be used in computing MPCI Premiums, which is
set each year by the FCIC.
Quota Share Reinsurance....... A form of reinsurance whereby the reinsurer
agrees to indemnify the cedent for a stated
percentage of each loss, subject to a specified
limit the cedent pays, on a defined class of
business.
Reinsurance................... The practice whereby a company called the
"reinsurer" assumes, for a share of the
premium, all or part of a risk originally
undertaken by another insurer called the
"ceding" company or "cedent." Reinsurance may
be affected by "treaty" reinsurance, where a
standing agreement between the ceding and
reinsuring companies automatically covers all
risks of a defined category, amount and type,
or by "facultative" reinsurance where
reinsurance is negotiated and accepted on a
risk-by-risk basis.
Retention..................... The amount of liability, premiums or losses
which an insurance company keeps for its own
account after application of reinsurance.
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<PAGE> 89
Risk-based Capital (RBC)...... Capital requirements for property and casualty
insurance companies adopted by the NAIC to
assess minimum capital requirements and to
raise the level of protection that statutory
surplus provides for policyholder obligations.
Risk Management Agency
(RMA)......................... A division of the United State Department of
Agriculture ("USDA") which, along with the
Federal Crop Insurance Corporation ("FCIC")
administers and provides reinsurance for the
federally-regulated MPCI and CRC programs.
Statutory Accounting
Principles (SAP).............. Accounting practices which consist of recording
transactions and preparing financial statements
in accordance with the rules and procedures
prescribed or permitted by state regulatory
authorities. Statutory accounting emphasizes
solvency rather than matching revenues and
expenses during an accounting period.
Surplus Lines Insurance....... The business of insuring risks for which
insurance is generally unavailable from
admitted insurers in whole or in part. Such
business is placed by the broker or agent with
nonadmitted insurers in accordance with the
excess and surplus lines provisions of state
insurance laws.
88
<PAGE> 90
=========================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE ISSUER TRUST OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements................ 3
Prospectus Summary........................ 5
Risk Factors.............................. 13
AICI Capital Trust........................ 22
Accounting Treatment...................... 22
Use of Proceeds........................... 22
Capitalization............................ 23
Selected Consolidated Financial Data...... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 26
Business.................................. 35
Management................................ 51
Description of Preferred Securities....... 54
Description of Junior Subordinated
Debentures.............................. 65
Description of Guarantee.................. 73
Relationship Among the Preferred
Securities, the Junior Subordinated
Debentures and the Guarantee............ 75
Certain Federal Income Tax Consequences... 77
Certain ERISA Considerations.............. 81
Underwriting.............................. 82
Validity of Securities.................... 84
Experts................................... 84
Available Information..................... 84
Incorporation of Certain Documents by
Reference............................... 85
Glossary of Selected Insurance Terms...... 86
</TABLE>
=========================================================
=========================================================
$65,000,000
AIC LOGO
AICI CAPITAL TRUST
% PREFERRED SECURITIES
(LIQUIDATION AMOUNT $25 PER
PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED
HEREIN, BY
ACCEPTANCE INSURANCE
COMPANIES INC.
------------------------------
PROSPECTUS
------------------------------
ADVEST, INC.
EVEREN SECURITIES, INC.
, 1997
=========================================================
<PAGE> 91
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the distribution of the Preferred
Securities are set forth in the following table. All amounts except the
Securities and Exchange Commission registration fee are estimated. The expenses
set forth below will be borne by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $22,652
Listing fee................................................. *
Trustee's fees and expenses................................. *
Legal fees and expenses..................................... *
Accountants' fees and expenses.............................. *
Printing and engraving expenses............................. *
Rating agencies' fees....................................... *
Blue Sky fees and expenses.................................. *
Miscellaneous............................................... *
-------
Total..................................................... *
=======
</TABLE>
- ------------
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Certificate of Incorporation and Bylaws provide for
indemnification of directors and officers of the Registrant to the full extent
permitted by Delaware law.
Section 145 of the General Corporation Law of the State of Delaware
provides generally that a corporation may indemnify any person who was or is a
part or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was a director,
officer, employee or agent of the corporation, or is or was serving at its
request in such capacity in another corporation or business association, against
expenses (including attorneys fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he or she acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
In addition, pursuant to the authority of Delaware law, the Certificate of
Incorporation of the Registrant also eliminates the monetary liability of
directors to the fullest extent permitted by Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers or persons
controlling the Registrant pursuant to the foregoing provisions, the Registrant
has been informed that in the opinion of the Securities and Exchange Commission
(the "Commission") such indemnification is against public policy as expressed in
the Act and is therefore unenforceable.
II-1
<PAGE> 92
ITEM 16. EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
</TABLE>
1.1 Underwriting Agreement*
4.1 Restated and Amended Certificate of Incorporation of
Acceptance Insurance Companies Inc. (Exhibit 3.1 to
Acceptance Insurance Companies Inc.'s March 31, 1997 10-Q)
4.2 Restated By-laws of Acceptance Insurance Companies Inc.
(Exhibit 3.2 to Acceptance Insurance Companies Inc.'s March
31, 1997 10-Q)
4.3 Form of Preferred Security*
4.4 Form of Guarantee Agreement Between Acceptance Insurance
Companies Inc. and Bankers Trust Company**
4.5 Form of Junior Subordinated Indenture Between Acceptance
Insurance Companies Inc. and Bankers Trust Company**
4.6 Certificate of Trust of AICI Capital Trust**
4.7 Declaration of Trust of AICI Capital Trust*
4.8 Form of Amended and Restated Trust Agreement among
Acceptance Insurance Companies Inc., Bankers Trust Company
and Bankers Trust (Delaware)**
5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.*
5.2 Opinion of Richards, Layton & Finger*
8.1 Tax Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.*
10.1 Intercompany Federal Income Tax Allocation Agreement between
Acceptance Insurance Holdings Inc. and its subsidiaries and
Registrant dated April 12, 1990, and related agreements
(Exhibit 10.2 to Acceptance Insurance Companies Inc.'s
December 31, 1996 10-K)
10.2 Employment Agreement dated February 19, 1990 between
Acceptance Insurance Holdings Inc., Registrant and Kenneth
C. Coon (Exhibit 10.3 to Acceptance Insurance Companies
Inc.'s December 31, 1996 10-K)
10.3 Employment Agreement dated July 2, 1993, between Redland
Insurance Group, Inc., and John P. Nelson (Exhibit 10.4 to
Acceptance Insurance Companies Inc.'s December 31, 1996
10-K)
10.4 Employment Agreement dated July 2, 1993 between Redland
Insurance Group, Inc., and Richard C. Gibson (Exhibit 10.5
to Acceptance Insurance Companies Inc.'s December 31, 1996
10-K)
10.5 $100,000,000 Amended and Restated Credit Agreement By and
Among the Company, The First National Bank of Chicago,
Comerica Bank, First National Bank of Omaha, First Bank,
N.A., Wells Fargo Bank, National Association and Mercantile
Bank, N.A. and The First National Bank of Chicago, As Agent,
and Comerica Bank, First National Bank of Omaha, and First
Bank, N.A., As Co-Agents, dated as of June 6, 1997
10.6 Employment Agreement dated July 2, 1993 between Registrant
and Richard C. Gibson (Exhibit 10.7 to Acceptance Insurance
Companies Inc.'s December 31, 1996 10-K)
12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio
of Earnings to Fixed Charges and Preferred Stock Dividends*
23.1 Independent Auditors' Consent -- Deloitte & Touche LLP**
23.2 Independent Auditor's Consent -- Deloitte & Touche LLP
23.3 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P (included
in Exhibit 5.1)*
23.4 Consent of Richards, Layton & Finger*
24.1 Powers of Attorney**
II-2
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
25.1 Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939, as amended, of Bankers Trust Company
as Trustee under the Junior Subordinated Indenture**
25.2 Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939, as amended, of Bankers Trust Company
as Trustee of the Preferred Securities of AICI Capital Trust
(included in Exhibit 25.1)
25.3 Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939, as amended, of Bankers Trust Company
as Trustee of the Preferred Securities Guarantee of
Acceptance Insurance Companies Inc. for the benefit of
holders of Preferred Securities of AICI Capital Trust
(included in Exhibit 25.1)
</TABLE>
- ------------
* To be filed by amendment.
** Previously filed.
ITEM 17. UNDERTAKINGS
A. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
C. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, AICI Capital
Trust certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-3 and that it has duly caused this
Registration Statement or amendment thereto to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Omaha and State of
Nebraska on July , 1997.
AICI CAPITAL TRUST
By: /s/ WILLIAM J. GERBER
------------------------------------
William J. Gerber
Administrator
By: /s/ KENNETH C. COON
------------------------------------
Kenneth C. Coon
Administrator
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Omaha, State of Nebraska, on July , 1997.
ACCEPTANCE INSURANCE COMPANIES INC.
By: /s/ KENNETH C. COON
------------------------------------
Kenneth C. Coon
Chairman and Chief Executive Officer
By: /s/ GEORGIA M. MACE
------------------------------------
Georgia M. Mace
Chief Financial Officer and
Treasurer
II-4
<PAGE> 95
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated as of June 6, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Chairman, Chief Executive Officer and Director
- --------------------------------------------- (Principal Executive Officer)
Kenneth C. Coon
* President, Chief Operating Officer and Director
- ---------------------------------------------
John P. Nelson
* Treasurer and Chief Financial Officer
- --------------------------------------------- (Principal Financial and Accounting Officer)
Georgia M. Mace
* Director
- ---------------------------------------------
Jay A. Bielfield
* Director
- ---------------------------------------------
Edward W. Elliott, Jr.
* Director
- ---------------------------------------------
Robert LeBuhn
* Director
- ---------------------------------------------
Michael R. McCarthy
* Director
- ---------------------------------------------
R. L. Richards
* Director
- ---------------------------------------------
David L. Treadwell
* Director
- ---------------------------------------------
Doug T. Valassis
*By /s/ WILLIAM J. GERBER
---------------------------------------
As Attorney in Fact
</TABLE>
II-5
<PAGE> 96
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S> <C>
</TABLE>
1.1 Underwriting Agreement*
4.1 Restated and Amended Certificate of Incorporation of
Acceptance Insurance Companies Inc. (Exhibit 3.1 to
Acceptance Insurance Companies Inc.'s March 31, 1997 10-Q)
4.2 Restated By-laws of Acceptance Insurance Companies Inc.
(Exhibit 3.2 to Acceptance Insurance Companies Inc.'s March
31, 1997 10-Q)
4.3 Form of Preferred Security*
4.4 Form of Guarantee Agreement Between Acceptance Insurance
Companies Inc. and Bankers Trust Company**
4.5 Form of Junior Subordinated Indenture Between Acceptance
Insurance Companies Inc. and Bankers Trust Company**
4.6 Certificate of Trust of AICI Capital Trust**
4.7 Declaration of Trust of AICI Capital Trust*
4.8 Form of Amended and Restated Trust Agreement among
Acceptance Insurance Companies Inc., Bankers Trust Company
and Bankers Trust (Delaware)**
5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.*
5.2 Opinion of Richards, Layton & Finger*
8.1 Tax Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.*
10.1 Intercompany Federal Income Tax Allocation Agreement between
Acceptance Insurance Holdings Inc. and its subsidiaries and
Registrant dated April 12, 1990, and related agreements
(Exhibit 10.2 to Acceptance Insurance Companies Inc.'s
December 31, 1996 10-K)
10.2 Employment Agreement dated February 19, 1990 between
Acceptance Insurance Holdings Inc., Registrant and Kenneth
C. Coon (Exhibit 10.3 to Acceptance Insurance Companies
Inc.'s December 31, 1996 10-K)
10.3 Employment Agreement dated July 2, 1993, between Redland
Insurance Group, Inc., and John P. Nelson (Exhibit 10.4 to
Acceptance Insurance Companies Inc.'s December 31, 1996
10-K)
10.4 Employment Agreement dated July 2, 1993 between Redland
Insurance Group, Inc., and Richard C. Gibson (Exhibit 10.5
to Acceptance Insurance Companies Inc.'s December 31, 1996
10-K)
10.5 $100,000,000 Amended and Restated Credit Agreement By and
Among the Registrant, The First National Bank of Chicago,
Comerica Bank, First National Bank of Omaha, First Bank,
N.A., Wells Fargo Bank, National Association and Mercantile
Bank, N.A. and The First National Bank of Chicago, As Agent,
and Comerica Bank, First National Bank of Omaha, and First
Bank, N.A., As Co-Agents, dated as of June 6, 1997
10.6 Employment Agreement dated July 2, 1993 between Registrant
and Richard C. Gibson (Exhibit 10.7 to Acceptance Insurance
Companies Inc.'s December 31, 1996 10-K)
12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio
of Earnings to Fixed Charges and Preferred Stock Dividends*
23.1 Independent Auditors' Consent -- Deloitte & Touche LLP**
23.2 Independent Auditor's Consent -- Deloitte & Touche LLP
23.3 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P (included
in Exhibit 5.1)*
23.4 Consent of Richards, Layton & Finger*
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S> <C>
24.1 Powers of Attorney**
25.1 Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939, as amended, of Bankers Trust Company
as Trustee under the Junior Subordinated Indenture**
25.2 Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939, as amended, of Bankers Trust Company
as Trustee of the Preferred Securities of AICI Capital Trust
(included in Exhibit 25.1)
25.3 Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939, as amended, of Bankers Trust Company
as Trustee of the Preferred Securities Guarantee of
Acceptance Insurance Companies Inc. for the benefit of
holders of Preferred Securities of AICI Capital Trust
(included in Exhibit 25.1)
</TABLE>
- ------------
* To be filed by amendment.
** Previously filed.
<PAGE> 1
EXHIBIT 10.5
ACCEPTANCE INSURANCE COMPANIES INC.
============================================
$100,000,000
AMENDED AND RESTATED CREDIT AGREEMENT
dated as of June 6, 1997
============================================
THE FIRST NATIONAL BANK OF CHICAGO,
as Agent
COMERICA BANK
FIRST NATIONAL BANK OF OMAHA
and
FIRST BANK, N.A.,
as Co-Agents
THE FIRST NATIONAL BANK OF CHICAGO
COMERICA BANK
FIRST NATIONAL BANK OF OMAHA
FIRST BANK, N.A.
WELLS FARGO BANK, NATIONAL ASSOCIATION
and
MERCANTILE BANK, N.A.,
as Banks
<PAGE> 2
TABLE OF CONTENTS
ARTICLE PAGE
ARTICLE I. DEFINITIONS.............................................. 1
1.1 Certain Definitions................................. 1
1.2 Other Definitions; Rules of Construction............ 15
ARTICLE II. THE COMMITMENTS AND THE LOANS............................ 16
2.1 Commitments of the Banks............................ 16
2.2 Termination and Reduction of Commitments............ 16
(a) Optional Termination or Reduction............... 16
(b) Scheduled Commitment Reductions................. 16
(c) Mandatory Commitment Reductions................. 17
(d) Proportionate Reductions; No Reinstatement...... 17
2.3 Fees................................................ 17
(a) Commitment Fee.................................. 17
(b) Closing Fee..................................... 17
(c) Agent's Fees.................................... 17
2.4 Disbursement of Loans............................... 18
2.5 Conditions for First Disbursement................... 19
(a) Charter Documents............................... 19
(b) By-Laws and Corporate Authorizations............ 19
(c) Incumbency Certificate.......................... 19
(d) Notes........................................... 19
(e) Security Documents.............................. 20
(f) Legal Opinion................................... 20
(g) Consents, Approvals, Etc........................ 20
(h) Fees............................................ 20
(i) Termination of Original Credit Agreement........ 20
(j) Subrogation and Contribution Agreement.......... 20
(k) Pledged Subsidiary Good-Standing Certificates... 20
(l) Adequacy of Reserves for 1996................... 20
(m) Approval of American Agrisurance/AGIC Agreement. 20
(n) Other Documents and Matters..................... 21
2.6 Further Conditions for Disbursement................. 21
2.7 Subsequent Elections as to Borrowings............... 21
2.8 Limitation of Requests and Elections................ 22
2.9 Minimum Amounts; Limitation on Number of
Borrowings; Etc..................................... 22
2.10 Security and Collateral............................. 22
ARTICLE III. PAYMENTS AND PREPAYMENTS OF BORROWINGS................... 23
3.1 Principal Payments and Prepayments................... 23
3.2 Interest Payments.................................... 23
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<PAGE> 3
ARTICLE
PAGE
3.3 Payment Method....................................... 24
3.4 No Setoff Deduction.................................. 24
3.5 Payment on Non-Business Day; Payment Computations.... 25
3.6 Additional Costs..................................... 25
3.7 Illegality and Impossibility......................... 26
3.8 Indemnification...................................... 26
ARTICLE IV. REPRESENTATIONS AND WARRANTIES............................ 27
4.1 Corporate Existence and Power........................ 27
4.2 Corporate Authority.................................. 28
4.3 Binding Effect....................................... 28
4.4 Subsidiaries......................................... 28
4.5 Litigation........................................... 28
4.6 Financial Condition.................................. 28
4.7 Use of Loans......................................... 29
4.8 Consents, Etc........................................ 29
4.9 Taxes................................................ 29
4.10 Title to Properties.................................. 29
4.11 ERISA................................................ 30
4.12 Disclosure........................................... 30
4.13 Environmental Matters................................ 30
4.14 Integrated Operation................................. 31
4.15 American Agrisurance/AGIC Agreement.................. 31
4.16 Material Adverse Change.............................. 31
4.17 Material Agreements.................................. 31
ARTICLE V. COVENANTS................................................. 32
5.1 Affirmative Covenants................................. 32
(a) Preservation of Corporate Existence, Etc.......... 32
(b) Compliance with Laws, Etc......................... 32
(c) Maintenance of Properties; Insurance.............. 32
(d) Reporting Requirements............................ 33
(e) Accounting; Access to Records, Books, Etc......... 35
(f) Additional Collateral............................. 35
(g) Further Assurances................................ 35
5.2 Negative Covenants.................................... 35
(a) Augmented Cash Flow Coverage Ratio................ 36
(b) Funded Debt to Total Capitalization............... 36
(c) Maximum Operating Leverage........................ 36
(d) Net Worth......................................... 36
(e) Investment, Loans and Advances.................... 36
(f) Quality of Reinsurers............................. 36
(g) NAIC Ratio Requirements........................... 37
-ii-
<PAGE> 4
ARTICLE PAGE
(h) Merger; Acquisitions; Etc......................... 37
(i) Disposition of Assets............................. 37
(j) Nature of Business................................ 37
(k) Stock of Subsidiaries............................. 37
(l) Indebtedness...................................... 37
(m) Liens............................................. 38
(n) Contingent Liabilities............................ 40
(o) Inconsistent Agreements........................... 40
(p) Dividends and Other Restricted Payments........... 40
(q) Transactions with Affiliates...................... 40
(r) Payments and Modification of Subordinated Debt.... 40
(s) Tax Sharing Agreement............................. 41
(t) Negative Pledge Prohibition....................... 41
ARTICLE VI. DEFAULT................................................... 41
6.1 Events of Default..................................... 41
(a) Nonpayment........................................ 41
(b) Misrepresentation................................. 41
(c) Certain Covenants................................. 41
(d) Other Defaults.................................... 41
(e) Cross Default..................................... 41
(f) Judgments......................................... 42
(g) ERISA............................................. 42
(h) Insolvency, Etc................................... 43
(i) Security Documents................................ 43
(j) Key Management.................................... 43
(k) Regulatory Action................................. 43
(l) Maintenance of Catastrophic Reinsurance........... 43
(l) Change in Control................................. 44
(l) Distribution on Trust Preferred Securities........ 44
6.2 Remedies.............................................. 44
ARTICLE VII. THE AGENT AND THE BANKS................................... 45
7.1 Appointment and Authorization......................... 45
7.2 Agent and Affiliates.................................. 45
7.3 Scope of Agent's Duties............................... 45
7.4 Reliance by Agent..................................... 45
7.5 Default............................................... 46
7.6 Liability of Agent.................................... 46
7.7 Nonreliance on Agent and Other Banks.................. 46
7.8 Indemnification....................................... 46
7.9 Successor Agent....................................... 47
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<PAGE> 5
ARTICLE PAGE
7.10 Sharing of Payments...................................47
7.11 The Co-Agents.........................................48
ARTICLE VIII. MISCELLANEOUS..............................................49
8.1 Amendments, Etc........................................49
8.2 Notices................................................49
8.3 No Waiver By Conduct; Remedies Cumulative..............50
8.4 Reliance on and Survival of Various Provisions.........50
8.5 Expenses; Indemnification..............................50
8.6 Successors and Assigns.................................51
8.7 Counterparts...........................................54
8.8 Governing Law..........................................54
8.9 Table of Contents and Headings.........................54
8.10 Construction of Certain Provisions....................54
8.11 Integration and Severability..........................55
8.12 Independence of Covenants.............................55
8.13 Interest Rate Limitation..............................55
8.14 WAIVER OF JURY TRIAL..................................55
EXHIBITS
Exhibit A Revolving Credit Note
Exhibit B Request for Borrowing
Exhibit C Request for Continuation or Conversion of Borrowing
Exhibit D Guaranty Agreement
Exhibit E-1, E-2 & E-3 Pledge Agreements
Exhibit F Note Pledge Agreement
Exhibit G Tax Sharing Agreement
Exhibit H Subrogation and Contribution Agreement
Exhibit I Investment Policies
Exhibit J Assignment and Acceptance
SCHEDULES
Schedule 4.4 Subsidiaries
Schedule 4.5 Litigation
Schedule 5.2(e) Investments
Schedule 5.2(1) Indebtedness
Schedule 5.2(m) Liens
-iv-
<PAGE> 6
THIS AMENDED AND RESTATED CREDIT AGREEMENT, dated as of June 6, 1997
(this "Agreement"), is by and among ACCEPTANCE INSURANCE COMPANIES INC., a
Delaware corporation (the "Company"), the banks set forth on the signature pages
hereof and each bank that otherwise becomes a party hereto pursuant to Section
8.6 (collectively the "Banks" and individually a "Bank"), THE FIRST NATIONAL
BANK OF CHICAGO, a national banking association, as agent for the Banks (in such
capacity, the "Agent"), and COMERICA BANK, a Michigan banking corporation, FIRST
NATIONAL BANK OF OMAHA, a national banking association, and FIRST BANK, N.A., a
national banking association, as co-agents (in such capacity, collectively the
"Co-Agents" and individually a "Co-Agent").
INTRODUCTION
The Company, certain Banks (collectively the "Original Banks" and
individually an "Original Bank"), NBD Bank, a Michigan banking corporation, as
agent (in such capacity, the "Original Agent") for the Original Banks, and the
Co-Agents have entered into the Credit Agreement, dated as of July 26, 1995 (as
amended or modified from time to time, the "Original Credit Agreement"),
pursuant to which the Original Banks provided to the Company (i) a three year
revolving credit facility in the principal amount of $75,000,000 and (iii) a
364-day line of credit facility in the principal amount of $15,000,000, in order
to provide funds for the Company's general corporate purposes. The Company now
desires that such credit facilities be combined into one five-year revolving
credit facility in the principal amount of $100,000,000, and in connection
therewith the parties hereto desire to amend and restate the Original Credit
Agreement on the terms and conditions herein set forth.
In consideration of the premises and of the mutual agreements herein
contained, the parties hereto hereby amend and restate the Original Credit
Agreement, and otherwise agree, as follows:
ARTICLE I.
DEFINITIONS
1.1 Certain Definitions. As used herein and in the Exhibits and
Schedules hereto, the following terms shall have the following respective
meanings:
"Adjusted Debt Service" shall mean, as of the last day of any fiscal
quarter of the Company, the sum of (a) Interest Expense for the period of four
fiscal quarters of the Company then ended, plus (b) Distributions on Trust
Preferred Securities for the period of four fiscal quarters of the Company then
ended, plus (c) the amount equal to all payments of principal, including,
without limitation, all payments in connection with reductions of the
Commitments required under Section 2.2, mahlring or payable during the next
succeeding four fiscal quarters of the Company on Indebtedness of the Company
and its Subsidiaries for borrowed money, including, without limitation, all such
Indebtedness under this Agreement and the Notes, determined for the Company and
its Subsidiaries on a consolidated basis in accordance with
-1 -
<PAGE> 7
Generally Accepted Accounting Principles, but excluding the payment in
connection with the final scheduled reduction of the Commitments on the
Maturity Date.
"Affiliate", when used with respect to any person, shall mean
any other person which, directly or indirectly, controls or is controlled by or
is under common control with such person. For purposes of this definition
"control" (including the correlative meanings of the terms "controlled by" and
"under common control with"), with respect to any person, shall mean possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such person, whether through the ownership of voting
securities or by contract or otherwise.
"AIC" shall mean Acceptance Insurance Company, a Nebraska corporation.
"AIH" shall mean Acceptance Insurance Holdings Inc., a Nebraska
corporation.
"American Agrisurance/AGIC Agreement" shall mean that certain
Agreement, dated the 1st day of January, 1997, by and between American
Agrisurance, Inc. and American Growers Insurance Company, regarding services and
fees relative to the crop insurance business, copies of which have been provided
to the Banks.
"APFC" shall mean Acceptance Premium Finance Company, Inc., an Arizona
corporation.
"APFC Debt Guaranty" shall mean the Second Amended and Restated
Guaranty Agreement, dated as of January 17, 1997, made by the Company in favor
of First Chicago, as agent, relating to certain Indebtedness of APFC, as such
guaranty may be amended, supplemented, extended, restated or otherwise modified
from time to time.
"Applicable Commitment Fee Rate" shall mean, for purposes of
determining the commitment fee payable in arrears for any calendar quarter (the
"Application Quarter"), the "Applicable Commitment Fee Rate" per annum
determined in accordance with the chart below based upon the ratio of Funded
Debt to Total Capitalization (the "Relevant Ratio") as of the end of the second
to last fiscal quarter of the Company that started prior to the Application
Quarter:
Ratio of Funded
Debt to Total Applicable
Capitalization Commitment Fee Rate
-------------- -------------------
Equal to or greater
than 0.30 to 1.00 0.375%
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<PAGE> 8
Equal to or greater
than 0.25 to 1.00
but less than 0.30
to 1.00 0.32%
Equal to or greater
than 0.20 to 1.00
but less than 0.25
to 1.00 0.25%
Equal to or greater
than 0.15 to 1.00
but less than 0.20
to 1.00 0.175%
Equal to or greater
than 0.10 to 1.00
but less than 0.15
to 1.00 0.15%
Less than 0.10 to 1.00 0.125%
Each change in the Applicable Commitment Fee Rate in accordance with this
definition shall become effective for each Application Quarter on the first day
of each such Application Quarter. Notwithstanding anything in this Agreement to
the contrary, and without limiting any of the other rights of the Agent and the
Banks under this Agreement, if the Company shall have failed to deliver to the
Agent the certificate of the chief financial officer of the Company as required
under Section 5.1(d)(ii) or (iii) for any fiscal quarter of the Company prior to
the last Business Day of the second calendar quarter immediately following such
fiscal quarter, then, until such time as the Company shall have delivered such
certificate to the Agent, the "Applicable Commitment Fee Rate" for such second
following calendar quarter shall be determined based upon the assumption that
the Relevant Ratio as of the end of such preceding fiscal quarter was equal to
or greater than 0.30 to 1.00, and upon delivery of such certificate for such
preceding fiscal quarter, the Applicable Commitment Fee Rate shall be adjusted
(if necessary) in accordance with this definition and the Relevant Ratio,
subject to the other rights of the Agent and the Banks under this Agreement.
"Applicable Margin" shall mean, for purposes of determining the
Eurodollar Rate applicable to Eurodollar Rate Loans outstanding during any
calendar quarter (the "Application Quarter"), the "Applicable Margin" determined
in accordance with the chart below based upon the ratio of Funded Debt to Total
Capitalization (the "Relevant Ratio") as of the end of the second to last fiscal
quarter of the Company that started prior to the Application Quarter:
-3-
<PAGE> 9
Ratio of Funded
Debt to Total
Capitalization Applicable Margin
--------------- -----------------
Equal to or greater
than 0.30 to 1.00 1.25%
Equal to or greater
than 0.25 to 1.00
but less than 0.30
to 1.00 1.00%
Equal to or greater
than 0.20 to 1.00
but less than 0.25
to 1.00 0.875%
Equal to or greater
than 0.15 to 1.00
but less than 0.20
to 1.00 0.75%
Equal to or greater
than 0.10 to 1.00
but less than 0.15
to 1.00 0.625%
Less than 0.10 to
1.00 0.50%
Each change in the Applicable Margin in accordance with this definition shall
become effective on the first day of each Application Quarter. Notwithstanding
anything in this Agreement to the contrary, and without limiting any of the
other rights of the Agent and the Banks under this Agreement, if the Company
shall have failed to deliver to the Agent the certificate of the chief financial
officer of the Company as required under Section 5.1(d)(ii) or (iii) for any
fiscal quarter of the Company prior to the first day of the second calendar
quarter immediately following such fiscal quarter, then, until such time as the
Company shall have delivered such certificate to the Agent, the "Applicable
Margin" for such second following calendar quarter shall be determined based
upon the assumption that the Relevant Ratio as of the end of such preceding
fiscal quarter was equal to or greater than 0.30 to 1.00, and upon delivery of
such certificate for such preceding fiscal quarter, the Applicable Margin shall
be adjusted (if necessary) in accordance with this definition and the Relevant
Ratio, subject to the other rights of the Agent and the Banks under this
Agreement. Any change in the Applicable Margin with respect to any Eurodollar
Rate Loan shall occur on the date determined in accordance with this definition
of "Applicable Margin", regardless of the fact that such date may occur during
the Eurodollar Interest Period with respect
-4-
<PAGE> 10
to such Eurodollar Rate Loan and that such date may not be the last day of such
Eurodollar Interest Period. In accordance with this definition, the Applicable
Margin as of the Effective Date is 0.875%.
"Assignment and Acceptance" shall have the meaning ascribed thereto in
Section 8.6.
"Augmented Cash Flow" shall mean, for any period, the sum, without
double counting, of (a) Cash and Cash Equivalents of the Company as of the end
of such period, plus (b) the interest income of the Company for such period,
plus (c) Net Tax Sharing Payments for such period, plus (d) Dividends Received
or Receivable for such period, minus (e) all expenses of the Company on a
nonconsolidated basis for such period.
"Borrowing" shall mean the aggregation of Loans of the Banks to be
made to the Company, or continuations and conversions of any Loans, made
pursuant to Article II on a single date and, in the case of any Eurodollar Rate
Loans, for a single Interest Period, which Borrowings may be classified for
purposes of this Agreement by reference to the type of Loans comprising the
related Borrowing, e.g., a "Eurodollar Rate Borrowing" is a Borrowing comprised
of Eurodollar Rate Loans and a "Floating Rate Borrowing" is a Borrowing
comprised of "Floating Rate Loans."
"Business Day" shall mean a day other than a Saturday, Sunday or other
day on which the Agent is not open to the public for carrying on substantially
all of its banking functions in Chicago, Illinois.
"Capital Expenditures" shall mean, with respect to any period, the
Dollar amount of all gross expenditures (including the capitalized portion of
obligations for such period under Capital Leases) made for fixed assets, real
property, plant and equipment and all renewals thereof and improvements and
replacements thereto (but not repairs thereof) and all other expenditures made
or committed to be made during such period that are required to be capitalized
in accordance with Generally Accepted Accounting Principles.
"Capital Lease" of any person shall mean any lease which, in
accordance with generally accepted accounting principles, is or should be
capitalized on the books of such person.
"Cash and Cash Equivalents" shall mean, as of any date, (a) cash that
is then owned by the Company and (b) any of the following then owned by the
Company: (i) commercial paper of any United States issuer having a rating of P-1
(or the equivalent thereof) or higher then given by Moody's Investors Service,
Inc. or A-1 (or the equivalent thereof) or higher then given by Standard &
Poor's Ratings Group, (ii) direct obligations of, and obligations fully
guaranteed by, the United States of America, and (iii) certificates of deposit
of any commercial bank that is a member of the Federal Reserve System and that
has capital, surplus and undivided profits (as shown on its most recently
published statement of condition) aggregating not less than $100,000,000,
provided, that each of the foregoing has a maturity date not later than 180 days
after the date of acquisition thereof by the Company.
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<PAGE> 11
"Change in Control" means (a) the acquisition by any Person, or two or
more Persons acting in concert, of beneficial ownership (within the meaning of
Rule 13d-3 of the Securities and Exchange Commission under the Securities
Exchange Act of 1934) of twenty percent (20%) or more of the outstanding shares
of voting stock of the Company, or (b) during any period of twenty-five (25)
consecutive calendar months, commencing on the date of this Agreement, the
ceasing of those individuals (the "Continuing Directors") who (i) were directors
of the Company on the first day of each such period or (ii) subsequently became
directors of the Company and whose initial election or initial nomination for
election subsequent to that date was approved by a majority of the Continuing
Directors then on the board of directors of the Company, to constitute a
majority of the board of directors of the Company
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and the regulations thereunder.
"Commitment" shall mean, with respect to any Bank, the commitment of
such Bank to make Loans pursuant to Section 2.1, in amounts not exceeding in
aggregate principal amount outstanding at any time the "Commitment Amount" for
such Bank set forth next to the name of such Bank in the signature pages hereof
(or, with respect to any Bank that becomes a party hereto pursuant to Section
8.6, set forth in such Bank's Assignment and Acceptance), as such amount may be
reduced from time to time pursuant to Section 2.2.
"Consolidated" or "consolidated" shall mean, when used with reference
to any financial term in this Agreement, the aggregate for two or more persons
of the amounts signified by such term for all such persons determined on a
consolidated basis in accordance with generally accepted accounting principles.
"Consolidated Net Worth" shall mean, as of any date, the total assets
of the Company and its Subsidiaries, determined on a consolidated basis in
accordance with Generally Accepted Accounting Principles, minus the total
liabilities of the Company and its Subsidiaries determined on a consolidated
basis in accordance with Generally Accepted Accounting Principles.
"Contingent Liabilities" of any person shall mean, as of any date, all
obligations of others for which such person is contingently liable, as
guarantor, surety, accommodation party, partner or in any other capacity, or in
respect of which obligations such person assures a creditor against loss or
agrees to take any action to prevent any such loss (other than endorsements of
negotiable instruments for collection in the ordinary course of business),
including without limitation all reimbursement obligations of such person in
respect of any letters of credit, surety bonds or similar obligations and all
obligations of such person to advance , funds to, or to purchase assets,
property or services from, any other person in order to maintain the financial
condition of such other person.
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<PAGE> 12
"Corporate Base Rate" shall mean a rate per annum equal to the
corporate base rate of interest announced by First Chicago from time to time,
changing when and as said corporate base rate changes.
"Cumulative Net Income" of any person shall mean, as of any date, the
net income (after deduction for income and other taxes of such person, or its
shareholders in the case of a corporation that has elected to be taxed as a
Subchapter S corporation under the Code, determined by reference to income or
profits of such person) for the period commencing January 1, 1997 through the
end of the most recently completed fiscal quarter of such person (but without
reduction for any net loss incurred for any fiscal quarter during such period),
all as determined in accordance with Generally Accepted Accounting Principles
"Default" shall mean any event or condition which might become an
Event of Default with notice or lapse of time or both.
"Distributions on Trust Preferred Securities" shall mean, for any
period (without duplication with respect to any other period), scheduled
distributions paid, payable or accrued during such period by any Subsidiary
Business Trust in respect of its Trust Preferred Securities.
"Dividends Received or Receivable" shall mean, for any period, all
cash dividends and other cash payments and distributions in respect of the
capital stock of the Guarantors and any other direct Subsidiary of the Company
from time to time, that were paid, or were authorized and otherwise available to
be paid, to the Company during such period.
"Dollars" and "$" shall mean the lawful money of the United States of
America.
"Effective Date" shall mean the effective date specified in the final
paragraph of this Agreement.
"Environmental Laws" at any date shall mean all provisions of law,
statutes, ordinances, rules, regulations, judgments, writs, injunctions,
decrees, orders, awards and standards promulgated by the government of the
United States of America or any foreign government or by any state, province,
municipality or other political subdivision thereof or therein, or by any court,
agency, instrumentality, regulatory authority or commission of any of the
foregoing concerning the protection of, or regulating the discharge of
substances into, the environment.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations thereunder.
"ERISA Affiliate"" shall mean, with respect to any person, any trade
or business (whether or not incorporated) which, together with such person or
any Subsidiary of such person, would be treated as a single employer under
Section 414 of the Code.
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<PAGE> 13
"Eurodollar Business Day" shall mean, with respect to any Eurodollar
Rate Loan, a day which is both a Business Day and a day on which dealings in
Dollar deposits are carried out in the London interbank market.
"Eurodollar Interest Period" shall mean, with respect to any
Eurodollar Rate Loan, the period commencing on the day such Eurodollar Rate Loan
is made or converted to a Eurodollar Rate Loan and ending on the day which is
one, two, three, six or twelve months thereafter, as the Company may elect under
Section 2.7, and each subsequent period commencing on the last day of the
immediately preceding Eurodollar Interest Period and ending on the day which is
one, two, three, six or twelve months thereafter, as the Company may elect under
Section 2.7, provided, however, that (a) any Eurodollar Interest Period which
commences on the last Eurodollar Business Day of a calendar month (or on any day
for which there is no numerically corresponding day in the appropriate
subsequent calendar month) shall end on the last Eurodollar Business Day of the
appropriate subsequent calendar month, (b) each Eurodollar Interest Period which
would otherwise end on a day which is not a Eurodollar Business Day shall end on
the next succeeding Eurodollar Business Day or, if such next succeeding
Eurodollar Business Day falls in the next succeeding calendar month, on the next
preceding Eurodollar Business Day, and (c) no Eurodollar Interest Period which
would end after the Termination Date shall be permitted.
"Eurodollar Rate" shall mean, with respect to any Eurodollar Rate Loan
and the related Eurodollar Interest Period, the per annum rate that is equal to
the sum of:
(a) the Applicable Margin, plus
(b) the rate per annum obtained by dividing (i) the per annum rate of
interest at which First Chicago offers to place deposits in Dollars,
for such Eurodollar Interest Period and in an aggregate amount
comparable to the amount of such Eurodollar Rate Loan to be made by
First Chicago in its capacity as a Bank hereunder, with other prime
banks in the London interbank market at approximately 11:00 a.m.
London time on the second Eurodollar Business Day prior to the first
day of such Eurodollar Interest Period by (ii) an amount equal to one
minus the stated maximum rate (expressed as a decimal) of all reserve
requirements (including, without limitation, any marginal, emergency,
supplemental, special or other reserves) that are specified on the
first day of such Eurodollar Interest Period by the Board of Governors
of the Federal Reserve System (or any successor agency thereto) for
determining the maximum reserve requirement with respect to
eurocurrency funding (currently referred to as "Eurocurrency
liabilities" in Regulation D of such Board) maintained by a member
bank of such System;
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<PAGE> 14
all as conclusively determined by the Agent, such sum to be rounded
up, if necessary, to the nearest whole multiple of one one-hundredth of one
percent (1/100 of 1%).
"Eurodollar Rate Loan" shall mean any Loan which bears interest at the
Eurodollar Rate.
"Event of Default" shall mean any of the events or conditions
described in Section 6.1.
"Federal Funds Effective Rate" shall mean, for any day, an interest
rate per annum equal to the weighted average of the rates on overnight Federal
funds transactions with members of the Federal Reserve System arranged by
Federal funds broker on such day, as published for such day (or, if such day is
not a Business Day, for the immediately preceding Business Day) by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day which
is a Business Day, the average of the quotations at approximately 10:00 a.m.
Chicago time on such day on such transactions received by the Agent from three
Federal funds brokers of recognized standing selected by the Agent in its sole
discretion.
"First Chicago" shall mean The First National Bank of Chicago, in its
individual capacity, and its successors.
"Floating Rate" shall mean the per annum rate equal to the greater of
(a) the Corporate Base Rate in effect from time to time, and (b) the sum of one
percent (1%) per annum plus the Federal Funds Effective Rate in effect from time
to time; which Floating Rate shall change simultaneously with any change in such
Corporate Base Rate or Federal Funds Effective Rate, as the case may be.
"Floating Rate Loan" shall mean any Loan which bears interest at the
Floating Rate.
"Funded Debt" shall mean, as of any date, the sum of (a) all
Indebtedness of the Company and its Subsidiaries, determined on a consolidated
basis in accordance with Generally Accepted Accounting Principles, including,
without limitation, the aggregate outstanding principal amount of the Loans and
the obligations of the Company and its Subsidiaries under Capital Leases, but
excluding Subordinated Debt, plus (b) 50% of the aggregate outstanding principal
amount of all Indebtedness of APFC as of such date with respect to which the
Company has any Contingent Liability; provided, however, that for purposes of
determining the Applicable Commitment Fee Rate and the Applicable Margin from
time to time, and only such purposes, the Indebtedness of APFC described in the
foregoing clause (b) shall be excluded from Funded Debt.
"Generally Accepted Accounting Principles" shall mean generally
accepted accounting principles applied on a basis consistent with that reflected
in the financial statements referred to in Section 4.6.
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<PAGE> 15
"Guarantors" shall mean AIH and TRG; and "Guarantor" shall mean any
one of such Guarantors.
"Guaranty" shall mean the Guaranty Agreement entered into by the
Guarantors for the benefit of the Agent and the Banks in substantially the form
of Exhibit D hereto, as amended or modified from time to time.
"Indebtedness" of any person shall mean, as of any date, (a) all
obligations of such person for borrowed money, (b) all obligations of such
person as lessee under any Capital Lease, (c) all obligations which are secured
by any Lien existing on any asset or property of such person whether or not the
obligation secured thereby shall have been assumed by such person, (d) all
obligations of such person for the unpaid purchase price for goods, property or
services acquired by such person, except for trade accounts payable arising in
the ordinary course of business that are not past due, (e) all obligations of
such person to purchase goods, property or services where payment therefor is
required regardless of whether delivery of such goods or property or the
performance of such services is ever made or tendered (generally referred to as
"take or pay contracts"), (f) all liabilities of such person in respect of
Unfunded Benefit Liabilities under any Plan of such person or of any ERISA
Affiliate, (g) Rate Hedging Obligations, (h) all obligations of such person
evidenced by notes, acceptances, or other instruments, and (i) all obligations
of others similar in character to those described in clauses (a) through (h) of
this definition for which such person is contingently liable, as guarantor,
surety, accommodation party, partner or in any other capacity, or in respect of
which obligations such person assures a creditor against loss or agrees to take
any action to prevent any such loss (other than endorsements of negotiable
instruments for collection in the ordinary course of business), including
without limitation all reimbursement obligations of such person in respect of
letters of credit, surety bonds or similar obligations and all obligations of
such person to advance funds to, or to purchase assets, property or services
from, any other person in order to maintain the financial condition of such
other person.
"Insurance Subsidiaries" shall mean AIC, RIC, Acceptance Indemnity
Insurance Company, a Nebraska corporation, Phoenix Indemnity Insurance Company,
an Arizona corporation, American Growers Insurance Company, a Nebraska
corporation, Acceptance Casualty Insurance Company, a Texas Corporation, and any
other direct or indirect Subsidiary of the Company now owned or hereafter
acquired that writes insurance; and "Insurance Subsidiary" shall mean any one of
the Insurance Subsidiaries.
"Interest Expense" shall mean, for any period (without duplication
with respect to any other period), all interest paid, payable or accrued during
such period by the Company and its Subsidiaries on Indebtedness of the Company
and its Subsidiaries, including, without limitation, all Indebtedness under this
Agreement and the Notes, determined on a consolidated basis in accordance with
Generally Accepted Accounting Principles.
"Interest Payment Date" shall mean (a) with respect to any Eurodollar
Rate Loan, the last day of each Interest Period with respect to such Eurodollar
Rate Loan and, in the case of any Interest Period exceeding three months, those
days that occur during such Interest Period at
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<PAGE> 16
intervals of three months after the first day of such Interest Period, and (b)
in all other cases, the last Business Day of each March, June, September and
December occurring after the date hereof, commencing with the first such
Business Day occurring after the date of this Agreement.
"Interest Period" shall mean any Eurodollar Interest Period.
"Investment" of a Person shall mean any loan, advance (other than
commission, travel and similar advances to officers and employees made in the
ordinary course of business), extension of credit (other than accounts
receivable arising in the ordinary course of business on terms customary in the
trade), deposit account or contribution of capital by such Person to any other
Person or any investment in, or purchase or other acquisition of, the stock,
partnership or other ownership interests, notes, debentures or other securities
of any other Person made by such Person.
"Lien" shall mean any pledge, assignment, hypothecation, mortgage,
security interest, deposit arrangement, option, conditional sale or title
retaining contract, sale and leaseback transaction, financing statement filing,
lessor's or lessee's interest under any lease, subordination of any claim or
right, or any other type of lien, charge, encumbrance, preferential arrangement
or other claim or right.
"Loan" shall mean any loan under Section 2.4 evidenced by a Note and
made pursuant to Section 2.1. Any such Loan or portion thereof may also be
denominated as a Floating Rate Loan or a Eurodollar Rate Loan and such Loans are
referred to herein as "types" of Loans.
"Material Adverse Effect" shall mean a material adverse effect on (i)
the business, Property, condition (financial or otherwise), results of
operations, or prospects of the Company and its Subsidiaries taken as a whole,
(ii) the ability of the Company or any Guarantor to perform its obligations
under this Agreement, the Notes and the Security Documents, or (iii) the
legality, validity or enforceability of this Agreement, any Note or any Security
Document or the rights or remedies of the Agent or the Banks thereunder.
"Maturity Date" shall mean May 31, 2002.
"Multiemployer Plan" shall mean any "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA or Section 414(f) of the Code.
"NAIC" shall mean the National Association of Insurance Commissioners
and any successor thereto.
"Net Tax Sharing Payments" shall mean, with respect to any period, the
excess, if any, of the aggregate amount of payments received by the Company from
its Subsidiaries under the Tax Sharing Agreement during such period over the
aggregate amount of payments made by the Company to the Internal Revenue Service
during such period.
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<PAGE> 17
"Net Worth" of any person shall mean, as of any date, the amount of
any capital stock, paid in capital and similar equity accounts plus (or minus in
the case of a deficit) the capital surplus and retained earnings of such person
and the amount of any foreign currency translation adjustment account shown as a
capital account of such person.
"Net Written Premiums" shall mean, with respect to any Subsidiary of
the Company, such Subsidiary's gross written premiums less (a) returned premiums
and (b) ceded reinsurance costs.
"Non-Material Subsidiaries" shall mean The Major Group, Inc., a
Florida corporation, and its subsidiaries formerly engaged in the real estate
development business, so long as The Major Group, Inc. and each of such
subsidiaries is not operating, has no assets and has no liabilities.
"Note" shall mean any promissory note of the Company evidencing the
Loans, in substantially the form annexed hereto as Exhibit A, as amended or
modified from time to time and together with any promissory note or notes issued
in exchange or replacement therefor.
"Note Pledge Agreement" shall mean the Note Pledge Agreement entered
into by the Company for the benefit of the Banks and the Agent pursuant to this
Agreement in substantially the form of Exhibit F hereto, as amended or modified
from time to time.
"Overdue Rate" shall mean (a) in respect of principal of Floating Rate
Loans, a rate per annum that is equal to the sum of three percent (3%) per annum
plus the Floating Rate, (b) in respect of principal of Eurodollar Rate Loans, a
rate per annum that is equal to the sum of three percent (3%) per annum plus the
per annum rate in effect thereon until the end of the then current Interest
Period for such Loan and, thereafter, a rate per annum that is equal to the sum
of three percent (3%) per annum plus the Floating Rate, and (c) in respect of
other amounts payable by the Company hereunder (other than interest), a per
annum rate that is equal to the sum of three percent (3%) per annum plus the
Floating Rate.
"PBGC" shall mean the Pension Benefit Guaranty Corporation and any
entity succeeding to any or all of its functions under ERISA.
"Permitted Liens" shall mean Liens permitted by Section 5.2(m) hereof
"Person" or "person" shall include an individual, a corporation, an
association, a partnership, a business trust or other trust or estate, a joint
stock company, an unincorporated organization, a joint venture, a trade or
business (whether or not incorporated), a government (foreign or domestic) and
any agency or political subdivision thereof, or any other entity.
"Plan" shall mean, with respect to any person, any pension plan
(including a Multiemployer Plan) subject to Title IV of ERISA or to the minimum
funding standards of Section 412 of the Code which has been established or
maintained by such person, any Subsidiary of such person or any ERISA Affiliate,
or by any other person if such person, any
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<PAGE> 18
Subsidiary of such person or any ERISA Affiliate could have liability with
respect to such pension plan.
"Pledge Agreements" shall mean the Pledge Agreements entered into by
the Company and each of the Guarantors for the benefit of the Banks and the
Agent pursuant to this Agreement in substantially the form of Exhibit E-1, E-2
and E-3 hereto, respectively, as amended or modified from time to time; and
"Pledge Agreement" shall mean any one of such Pledge Agreements.
"Pledged Subsidiaries" shall mean the Guarantors, AIC and RIC, and any
other Subsidiaries of the Company from time to time the capital stock of which
is required to be pledged to the Agent for the benefit of the Banks pursuant to
Section 5.1(f).
"Pledgors" shall mean each of the Company and the Guarantors; and
"Pledgor" shall mean any one of the Pledgors.
"Prohibited Transaction" shall mean any transaction involving any Plan
which is proscribed by Section 406 of ERISA or Section 4975 of the Code.
"Property" of a person shall mean any and all property, whether real,
personal, tangible, intangible, or mixed, of such person, or other assets owned,
leased or operated by such person.
"Rate Hedging Agreement" shall mean any agreement, device or
arrangement providing for payments which are related to fluctuations of interest
rates, exchange rates or forward rates, including, but not limited to,
dollar-denominated or cross-currency interest rate exchange or swap agreements,
forward currency exchange agreements, interest rate cap or collar protection
agreements, forward rate currency or interest rate options, puts and warrants.
"Rate Hedging Obligations" of a Person shall mean any and all
obligations of such Person, whether absolute or contingent and howsoever and
whensoever created, arising, evidenced or acquired (including all renewals,
extensions and modifications thereof and substitutions therefor), under (i) any
and all Rate Hedging Agreements, and (ii) any and all cancellations, buy backs,
reversals, terminations or assignments of any Rate Hedging Agreements.
"Reportable Event" shall mean a reportable event as described in
Section 4043(b) of ERISA including those events as to which the thirty (30) day
notice period is waived under Part 2615 of the regulations promulgated by the
PBGC under ERISA.
"Required Banks" shall mean, at any time, Banks holding not less than
(i) 66 2/3% of the aggregate principal amount of the Loans then outstanding or
(ii) 66 2/3% of the Commitments if no Loans are then outstanding.
"RIC" shall mean Redland Insurance Company, an Iowa corporation.
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<PAGE> 19
"SAP" shall mean statutory accounting principles formulated by the
NAIC and permitted under the laws of Nebraska or, with respect to any Insurance
Subsidiary not incorporated under the laws of Nebraska, under the laws of such
Subsidiary's place of incorporation.
"Security Documents" shall mean, collectively, the Guaranty, the
Pledge Agreements, the Note Pledge Agreement and all other related agreements
and documents, including assignments separate from certificates, stock powers
and similar documents, delivered pursuant to this Agreement or otherwise entered
into by any person to secure the Loans.
"Statutory Surplus" of any person shall mean the statutory surplus of
such person computed in the manner required for page 3, column 1, line 25 of its
annual statement of condition and affairs prepared in accordance with SAP.
"Subordinated Debt" of any-person shall mean, as of any date, that
Indebtedness of such person for borrowed money which is expressly subordinate
and junior in right and priority of payment to the Loans and other Indebtedness
of such person to the Banks and the Agent in manner and by agreement
satisfactory in form and substance to the Required Banks.
"Subsidiary" of any person shall mean any other person (whether now
existing or hereafter organized or acquired) in which (other than directors
qualifying shares required by law) at least a majority of the securities or
other ownership interests of each class having ordinary voting power or
analogous right (other than securities or other ownership interests which have
such power or right only by reason of the happening of a contingency), at the
time as of which any determination is being made, are owned, beneficially and of
record, by such person or by one or more of the other Subsidiaries of such
person or by any combination thereof; provided that the terms "Subsidiary" and
"Subsidiaries" shall not include the Non-Material Subsidiaries.
"Subsidiary Business Trust" shall mean any statutory business trust,
all the common beneficial interests in the assets of which are owned by the
Company, and which is organized solely for the purpose of issuing Trust
Preferred Securities the proceeds of which are borrowed by the Company from such
trust in the form of Subordinated Debt with respect to which the interest rate
and payment schedule matches the rate and schedule applicable to distributions
on such Trust Preferred Securities.
"Surplus Note" shall mean any instrument evidencing Indebtedness of
any Insurance Subsidiary to the Company, the form, amount and issuance of which,
the payment of and rate of interest on which, and any other aspects of which,
have been approved, to the extent required or otherwise provided in the
applicable statutes and regulations, at the time of issuance thereof by such
Insurance Subsidiary's domiciliary state insurance commissioner or other
applicable authority, and with respect to which all other then applicable
required regulatory approvals have been obtained, including, without limitation,
any such instrument designated as a "surplus note", "certificate of
contribution", "surplus debenture" or "capital note", as prescribed by such
jurisdiction.
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<PAGE> 20
"Tax Sharing Agreement" shall mean the agreement dated April 12, 1990
among the Company and its Subsidiaries relating to the allocation of income
taxes among them, as such agreement is in effect on the Effective Date, a copy
of which is attached hereto as Exhibit G.
"Termination Date" shall mean the earlier to occur of (a) the Maturity
Date and (b) the date on which the Commitments shall be terminated pursuant to
Section 2.2 or 6.2.
"Total Capitalization" shall mean, as of any date, the sum of (a)
Consolidated Net Worth, plus (b) Subordinated Debt of the Company (other than
Subordinated Debt owing to any Subsidiary Business Trust), plus (c) Funded Debt.
"TRG" shall mean The Redland Group, Inc., an Iowa corporation.
"Trust Preferred Securities" shall mean securities representing
preferred beneficial interests in the assets of any Subsidiary Business Trust.
"Unfunded Benefit Liabilities" shall mean, with respect to any Plan as
of any date, the amount of the unfunded benefit liabilities determined in
accordance with Section 4001(a)(18) of ERISA.
1.2 Other Definitions; Rules of Construction. As used herein, the
terms "Agent", "Bank", "Banks", "Company", "Original Agent", "Original Bank",
"Original Banks", "Original Credit Agreement" and "this Agreement" shall have
the respective meanings ascribed thereto in the introductory paragraph of this
Agreement. Such terms, together with the other terms defined in Section 1.1,
shall include both the singular and the plural forms thereof and shall be
construed accordingly. All computations required hereunder and all financial
terms used herein shall be made or construed in accordance with Generally
Accepted Accounting Principles unless such principles are inconsistent with the
express requirements of this Agreement; provided that, if the Company notifies
the Agent that the Company wishes to amend any covenant in Article V to
eliminate the effect of any change in Generally Accepted Accounting Principles
in the operation of such covenant (or if the Agent notifies the Company that the
Required Banks wish to amend Article V for such purpose), then the Company's
compliance with such covenant shall be determined on the basis of Generally
Accepted Accounting Principles in effect immediately before the relevant change
in Generally Accepted Accounting Principles became effective, until either such
notice is withdrawn or such covenant is amended in a manner satisfactory to the
Company and the Required Banks. Use of the terms "herein", "hereof", and
"hereunder" shall be deemed references to this Agreement in its entirety and not
to the Section or clause in which such term appears. References to "Sections"
and "subsections" shall be to Sections and subsections, respectively, of this
Agreement unless otherwise specifically provided.
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<PAGE> 21
ARTICLE II.
THE COMMITMENTS AND THE LOANS
2.1 Commitments of the Banks. Each Bank agrees, for itself only,
subject to the terms and conditions of this Agreement, to make Loans to the
Company, from time to time from and including the Effective Date to but
excluding the Termination Date, not to exceed in aggregate principal amount at
any time outstanding the amount of the Commitment of such Bank as of the date
any such Loan is made.
2.2 Termination and Reduction of Commitments.
(a) Optional Termination or Reduction. The Company shall have the
right to terminate or reduce the amount of the aggregate Commitments at any time
and from time to time at its option, provided that (i) the Company shall give
notice of such termination or reduction to the Agent (with sufficient executed
copies for each Bank) specifying the amount and effective date thereof, (ii)
each partial reduction of the aggregate Commitments shall be in a minimum amount
of $500,000 and in an integral multiple of $100,000, (iii) no such termination
or reduction shall be permitted with respect to any portion of the Commitments
as to which a request for a Loan pursuant to Section 2.4 is then pending and
(iv) the Commitments may not be terminated if any Loans are then outstanding and
may not be reduced below the principal amount of Loans then outstanding.
(b) Scheduled Commitment Reductions. The aggregate amount of the
Commitments shall automatically reduce on the dates, and in the respective
amount for each such date, in accordance with the following chart:
<TABLE>
<CAPTION>
Date of Automatic Reduction Amount
--------------------------- ------
<S> <C>
March 31, 1999 $2,500,000
June 30, 1999 $2,500,000
September 30, 1999 $2,500,000
December 31, 1999 $2,500,000
March 31, 2000 $2,500,000
June 30,2000 $2,500,000
September 30, 2000 $2,500,000
December 31, 2000 $2,500,000
March 31, 2001 $3,750,000
June 30, 2001 $3,750,000
September 30,2001 $3,750,000
December 31, 2001 $3,750,000
March 31, 2002 $3,750,000
Maturity Date Remaining amount
of Commitments
</TABLE>
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<PAGE> 22
Each such reduction of the Commitments shall automatically occur in accordance
with this Section 2.2(c) on each such date, regardless of the aggregate amount
of the Commitments on each such date immediately prior to such reduction.
Notwithstanding anything herein to the contrary, each mandatory reduction of the
Commitments under Section 2.2(c) below shall decrease the amount of the
scheduled reductions of the Commitments under this Section 2.2(b) as follows:
(i) 50% of each such mandatory reduction will decrease the amount of each of the
scheduled quarterly reductions (including the final scheduled reduction on the
Maturity Date) in inverse order of maturity and (b) 50% of each such mandatory
reduction will decrease the amount of each of the remaining scheduled reductions
(excluding the final scheduled reduction on the Maturity Date) on a ratable
basis.
(c) Mandatory Commitment Reductions. Immediately upon the sale or
issuance by the Company or any of its Subsidiaries of any debt security or
capital stock, securities exchangeable for or convertible into capital stock,
other equity securities, warrants, rights or other options to purchase or
otherwise acquire capital stock or other securities, the aggregate amount of the
Commitments shall automatically reduce by the amount equal to 40% of the net
proceeds thereof received by the Company or any of its Subsidiaries; provided
that the requirements of this Section 2.2(e) shall not apply to the net proceeds
in an aggregate amount up to $1,000,000 received by the Company from time to
time after the Effective Date from the issuance and sale of stock pursuant to
its employee stock purchase plan.
(d) Proportionate Reductions; No Reinstatement. Each reduction of
the aggregate amount of the Commitments pursuant to this Section 2.2 shall
reduce the Commitments of all of the Banks proportionately in accordance with
the respective Commitment Amount for each such Bank set forth in the signature
pages hereof next of the name of each such Bank (or as set forth in such Bank's
Assignment and Acceptance, as applicable). The Commitments or any portion
thereof terminated or reduced pursuant to this Section 2.2 may not be
reinstated.
2.3 Fees.
(a) Commitment Fee. The Company agrees to pay to each Bank a
commitment fee on the daily average unused amount of such Bank's Commitment, for
each calendar quarter during the period from the Effective Date to but excluding
the Termination Date, at a rate per annum equal to the Applicable Commitment Fee
Rate for such calendar quarter. Accrued commitment fees shall be payable
quarterly in arrears on the last Business Day of each June, September, December
and March, commencing on the first such day occurring after the date hereof, and
on the Termination Date.
(b) Closing Fee. The Company further agrees to pay to each Bank a
closing fee for this Agreement in the amount equal to .05% of the amount of each
such Bank's Commitment. Such closing fees shall be payable on or prior to the
Effective Date.
(c) Agent's Fees. The Company further agrees to pay to the Agent
such fees for arranging this Agreement and agency fees for its services as Agent
under this Agreement
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<PAGE> 23
in such amounts and on such schedule as may from time to time be agreed upon by
the Company and the Agent.
2.4 Disbursement of Loans.
(a) The Company shall give the Agent notice of each requested
Borrowing in substantially the form of Exhibit B hereto (with sufficient
executed copies for each Bank) not later than 10:00 a.m. Chicago time (i) three
Eurodollar Business Days prior to the date such Borrowing is requested to be
made if such Borrowing is to be made as a Eurodollar Rate Borrowing, and (ii) on
the date such Borrowing is requested to be made if such Borrowing is to be made
as a Floating Rate Borrowing, which notice shall specify whether a Eurodollar
Rate Borrowing or Floating Rate Borrowing is requested and, in the case of each
requested Eurodollar Rate Borrowing, the Interest Period to be initially
applicable to such Borrowing. The Agent shall as soon as practicable provide
notice of such requested Borrowing to each Bank. The Company hereby directs and
authorizes the Agent to disburse the proceeds of the initial Borrowing hereunder
to the original Banks in amounts sufficient to repay all then existing
Indebtedness of the Company and its Subsidiaries to the Original Banks under the
Original Credit Agreement. The initial Borrowing hereunder shall be in an amount
at least sufficient to make such repayment to the Original Banks. Subject to the
terms and conditions of this Agreement, the remaining proceeds of the initial
Borrowing and the proceeds of each subsequent Borrowing shall be made available
to the Company by depositing the proceeds thereof, in immediately available
funds, in an account maintained and designated by the Company at the principal
office of the Agent.
(b) Each Bank, on the date any Borrowing is requested to be made,
shall make its pro rata share of such Borrowing available in immediately
available funds at the principal office of the Agent for disbursement to the
Company. Unless the Agent shall have received notice from any Bank prior to the
date such Borrowing is requested to be made under this Section 2.4 that such
Bank will not make available to the Agent such Bank's pro rata portion of such
Borrowing, the Agent may assume that such Bank has made such portion available
to the Agent on the date such Borrowing is requested to be made in accordance
with this Section 2.4. If and to the extent such Bank shall not have so made
such pro rata portion available to the Agent, the Agent may (but shall not be
obligated to) make such amount available to the Company, and such Bank and the
Company severally agree to pay to the Agent forthwith on demand such amount
together with interest thereon, for each day from the date such amount is made
available to the Company by the Agent until the date such amount is repaid to
the Agent, at a rate per annum equal to the interest rate applicable to such
Borrowing during such period. If such Bank shall pay such amount to the Agent
together with interest, such amount so paid shall constitute a Loan by such Bank
as a part of the related Borrowing for purposes of this Agreement. The failure
of any Bank to make its pro rata portion of any such Borrowing available to the
Agent shall not relieve any other Bank of its obligation to make available its
pro rata portion of such Borrowing on the date such Borrowing is requested to be
made, but no Bank shall be responsible for failure of any other Bank to make
such pro rata portion available to the Agent on the date of any such Borrowing.
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<PAGE> 24
(c) All Loans made under this Section 2.4 shall be evidenced by
the Notes. All such Loans shall be due and payable and bear interest as provided
in Article III. Each Bank is hereby authorized by the Company to record on the
schedule attached to its Notes, or in its books and records, the date, and
amount and type of each Loan and the duration of the related Interest Period (if
applicable), the amount of each payment or prepayment of principal thereon, and
the other information provided for on such schedule, which schedule or books and
records, as the case may be, shall constitute prima facie evidence of the
information so recorded, provided, however, that failure of any Bank to record,
or any error in recording, any such information shall not relieve the Company of
its obligation to repay the outstanding principal amount of the Loans, all
accrued interest thereon and other amounts payable with respect thereto in
accordance with the terms of the Notes and this Agreement. Subject to the terms
and conditions of this Agreement, the Company may borrow Loans under this
Section 2.4, prepay Loans pursuant to Section 3.1 and reborrow Loans under this
Section 2.4.
2.5 Conditions for First Disbursement. The obligation of the Banks to
make Loans for the first Borrowing hereunder is subject to receipt by the Agent
of the following documents (in a sufficient quantity of originals for
distribution to all the Banks, which distribution the Agent or its counsel shall
make promptly after the Effective Date), and completion of the following
matters, in form and substance satisfactory to the Agent:
(a) Charter Documents. Certificates of recent date of the
appropriate authority or official of the Company's and each Guarantor's state of
incorporation (listing all charter documents of each such person on file in that
office if such listing is available) and certifying as to the good standing and
corporate existence of each such person together with copies of such charter
documents of each such person, certified as of a recent date by such authority
or of official and certified as true and correct as of the Effective Date by a
duly authorized of fleer of each such person;
(b) By-Laws and Corporate Authorizations. Copies of the by-laws
of each of the Company and the Guarantors, together with all authorizing
resolutions and evidence of other corporate action taken by each such person to
authorize the execution, delivery and performance by it of this Agreement, the
Notes and the Security Documents to which it is a party and the consummation by
it of the transactions contemplated hereby, certified as true and correct as of
the Effective Date by a duly authorized officer of each such person;
(c) Incumbency Certificate. A certificate of incumbency of each
of the Company and the Guarantors, containing, and attesting to the genuineness
of, the signatures of those officers authorized to act on behalf of each such
person in connection with this Agreement, the Notes and the Security Documents
to which it is a party and the consummation by it of the transactions
contemplated hereby, certified as true and correct as of the Effective Date by a
duly authorized officer of each such person;
(d) Notes. The Notes duly executed on behalf of the Company for
all the Banks;
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(e) Security Documents. The Guaranty duly executed on behalf of
the Guarantors, the Pledge Agreements duly executed on behalf of the Pledgors
and the Note Pledge Agreement duly executed on behalf of the Company, granting
to the Banks and the Agent the collateral intended to be provided pursuant to
Section 2. 10, together with the original certificates representing all shares
of stock subject to the Pledge Agreements and an equal number of assignments
separate from certificates executed in blank, and all original Surplus Notes
existing on the Effective Date, endorsed in blank;
(f) Legal Opinion. The favorable written opinion of Crosby,
Guenzel, Davis, Kessner & Kuester, general counsel for the Company and the
Guarantors, with respect to each of the matters set forth in Article IV (other
than Sections 4.6, 4.7, 4.9, 4.10, 4.12, 4.13, 4.14 and 4.15), with respect to
all existing Surplus Notes as described in Section 2.6(c), and as to such other
matters as the Banks and the Agent may reasonably request;
(g) Consents. Approvals. Etc. Copies of all governmental and
nongovernmental consents, approvals, authorizations, declarations, registrations
or filings, if any, required on the part of the Company or any Guarantor in
connection with the execution, delivery and performance of this Agreement, the
Notes, the Security Documents or the transactions contemplated hereby or as a
condition to the legality, validity or enforceability of this Agreement, the
Notes or any of the Security Documents, certified as true and correct and in
full force and effect as of the Effective Date by a duly authorized officer of
the Company, or, if none is required, a certificate of such officer to that
effect;
(h) Fees. The payment in full, in immediately available funds, of
all fees required to be paid by the Company under this Agreement on or before
the Effective Date;
(i) Termination of Original Credit Agreement. The Original Credit
Agreement shall be terminated;
(j) Subrogation and Contribution Agreement. A subrogation and
contribution agreement substantially in the form of Exhibit H hereto by and
among, and duly executed on behalf of, the Company and the Guarantors;
(k) Pledged Subsidiary Good-Standing Certificates. Certificates
of recent date of the appropriate authority or official of each Pledged
Subsidiary's state of incorporation certifying as to the good standing and
corporate existence of each such Pledged Subsidiary;
(l) Adequacy of Reserves for 1996. A copy of an independent
actuarial report, in form and substance satisfactory to the Agent, as to the
adequacy of the reserves of the Insurance Subsidiaries for the 1996 calendar
year;
(m) Approval of American Agrisurance/AGIC Agreement. Evidence
satisfactory to the Agent of all necessary regulatory approval for the American
Agrisurance/AGIC Agreement; and
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<PAGE> 26
(n) Other Documents and Matters. Such other documents, and the
completion of such other matters, as the Agent may reasonably request.
2.6 Further Conditions for Disbursement. The obligation of the Banks
to make Loans for any Borrowing (including the first Borrowing), or any
continuation or conversion under Section 2.7, is further subject to the
satisfaction of the following conditions precedent:
(a) The representations and warranties contained in Article IV
hereof and in the Security Documents shall be true and correct on and as of the
date such Borrowing is made (both before and after such Borrowing is made) as if
such representations and warranties were made on and as of such date;
(b) No Default or Event of Default shall exist or shall have
occurred and be continuing on the date such Borrowing is made (whether before or
after such Borrowing is made); and
(c) If any of the proceeds of such Borrowing will be used by the
Company to make any loan or other advance of any nature to any Insurance
Subsidiary, then, unless the Company shall have requested and received from the
Required Banks, in writing, a waiver of such conditions precedent, the Company
shall have caused such Insurance Subsidiary to issue to the Company one or more
Surplus Notes in an aggregate principal amount not less than the amount of such
loan or advance, and the Company shall have delivered to the Agent, in pledge
under the Note Pledge Agreement, such Surplus Note(s) endorsed in blank,
together with an opinion, rendered by counsel, and in form and substance,
satisfactory to the Agent, to the effect that each such instrument is a "Surplus
Note" as such term is defined in this Agreement and that each such Surplus Note
constitutes a legal, valid and binding obligation of such Insurance Subsidiary,
enforceable against such Insurance Subsidiary in accordance with its terms, and
with respect to such other matters in connection therewith as the Agent may
reasonably request.
The Company shall be deemed to have made a representation and warranty to the
Banks at the time of each Borrowing to the effects set forth in clauses (a) and
(b) of this Section 2.6. For purposes of this Section 2.6, the representations
and warranties contained in Section 4.6 shall be deemed made with respect to
both the financial statements referred to therein and the most recent financial
statements delivered pursuant to Section 5. l(d).
2.7 Subsequent Elections as to Borrowings. The Company may elect (a)
to continue a Eurodollar Rate Borrowing, or a portion thereof, as a Eurodollar
Rate Borrowing, or (b) to convert a Floating Rate Borrowing, or a portion
thereof, to a Eurodollar Rate Borrowing, or (c) to convert a Eurodollar Rate
Borrowing, or a portion thereof, to a Floating Rate Borrowing, in each case by
giving notice thereof to the Agent (with sufficient executed copies for each
Bank) in substantially the form of Exhibit C hereto not later than 12:00 noon
Chicago time three Eurodollar Business Days prior to the date any such
continuation of or conversion to a
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<PAGE> 27
Eurodollar Rate Borrowing is to be effective and not later than 12:00 noon
Chicago time on the date such continuation or conversion is to be effective in
all other cases, provided that, if a continuation of a Borrowing as, or a
conversion of a Borrowing to, a Eurodollar Rate Borrowing is requested, such
notice shall also specify the Interest Period to be applicable thereto upon such
continuation or conversion. The Agent shall as soon as practicable provide
notice of such election to the Banks. If the Company shall not timely deliver
such a notice with respect to any outstanding Eurodollar Rate Borrowing, the
Company shall be deemed to have elected to convert such Borrowing to a Floating
Rate Borrowing on the last day of the then current Interest Period with respect
to such Borrowing.
2.8 Limitation of Requests and Elections. Notwithstanding any other
provision of this Agreement to the contrary, if, upon receiving a request for a
continuation of a Eurodollar Rate Borrowing as a Eurodollar Rate Borrowing, or a
request for conversion of a Floating Rate Borrowing to a Eurodollar Rate
Borrowing, (a) deposits in Dollars for periods comparable to the Interest Period
elected by the Company are not available to one or more of the Banks in the
London interbank market, (b) the Eurodollar Rate will not adequately and fairly
reflect the cost to any Bank of making, funding or maintaining the related
Eurodollar Rate Borrowing or (c) by reason of national or international
financial, political or economic conditions or by reason of any applicable law,
treaty or other international agreement, rule or regulation (whether domestic or
foreign) now or hereafter in effect, or the interpretation or administration
thereof by any governmental authority charged with the interpretation or
administration thereof, or compliance by any Bank with any guideline, request or
directive of such authority (whether or not having the force of law), including
without limitation exchange controls, it is impracticable, unlawful or
impossible for, or shall limit or impair the ability of, any Bank to make or
fund the relevant Borrowing or to continue such Borrowing as a Borrowing of the
then existing type or to convert a Borrowing to such a Borrowing, then the
Company shall not be entitled, so long as such circumstances continue, to
request a Borrowing of the affected type pursuant to Section 2.4 or a
continuation of or conversion to a Borrowing of the affected type pursuant to
Section 2.7. In the event that such circumstances no longer exist, the Banks
shall again consider requests for Borrowings of the affected type pursuant to
Section 2.4, and requests for continuations of and conversions to Borrowings of
the affected type pursuant to Section 2.7.
2.9 Minimum Amounts; Limitation on Number of Borrowings, Etc. Except
for (a) Borrowings which exhaust the entire remaining amount of the Commitments,
and (b) payments required pursuant to Section 3.1(c) or 3.7, each Borrowing and
each continuation or conversion pursuant to Section 2.7 and each prepayment
thereof shall be in a minimum amount of $2,500,000 and in an integral multiple
of $100,000.
2.10 Security and Collateral. To secure the payment when due of the
Notes and all other obligations of the Company under this Agreement to the Banks
and the Agent, the Guarantors shall execute and deliver to the Banks and the
Agent the Guaranty, the Pledgors shall execute and deliver to the Banks and the
Agent the Pledge Agreements pledging all capital stock of the Pledged
Subsidiaries, and the Company shall execute and deliver to the Banks and the
Agent the Note Pledge Agreement pledging all Surplus Notes.
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<PAGE> 28
ARTICLE III.
PAYMENTS AND PREPAYMENTS OF BORROWINGS
3.1 Principal Payments and Prepayments.
(a) Unless earlier payment is required under this Agreement, the
Company shall pay to the Banks on the Termination Date the entire outstanding
principal amount of the Loans.
(b) The Company may at any time and from time to time prepay all
or a portion of the Borrowings, without premium or penalty, provided that (i)
the Company shall have given not less than two Business Days' notice thereof to
the Agent specifying the Loans or portion thereof to be so prepaid, and (ii)
prepayment of any Eurodollar Rate Loan, or any Loan as to which an election for
a continuation of or a conversion to a Eurodollar Rate Loan is pending pursuant
to Section 2.7, shall only be permitted if the Company shall have paid to the
Banks, together with such prepayment of principal, all accrued interest to the
date of payment on the Loans or portion thereof so prepaid and all amounts owing
to the Banks under Section 3.8 in connection with such prepayment. Upon the
giving of such notice, the aggregate principal amount of such Loans or portion
thereof so specified in such notice, together with such accrued interest and
other amounts, shall become due and payable on the specified prepayment date.
(c) Notwithstanding any other provision of this Agreement or the
Notes, immediately upon any reduction of the Commitments under Section 2.2, the
Company shall prepay the Loans in an amount sufficient that, after giving effect
to such prepayment, the aggregate outstanding principal amount of the Loans
shall not be greater than the aggregate amount of the Commitments as so reduced.
3.2 Interest Payments. The Company shall pay interest to the Banks on
the unpaid principal amount of each Loan, for the period commencing on the date
such Loan is made until such Loan is paid in full, on each Interest Payment Date
and at maturity (whether at stated maturity, by acceleration or otherwise), and
thereafter on demand, at the following rates per annum:
(a) During such periods that such Loan is a Floating Rate Loan,
the Floating Rate.
(b) During such periods that such Loan is a Eurodollar Rate Loan,
the Eurodollar Rate applicable to such Loan for each related Eurodollar Interest
Period.
Notwithstanding the foregoing paragraphs (a) and (b), if the Required Banks
shall so require at any time, the Company shall pay interest on demand by the
Agent at the Overdue Rate on the outstanding principal amount of any Loan and
any other amount payable by the Company hereunder (other than interest) which
is not paid in full when due (whether at stated maturity, by
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<PAGE> 29
acceleration or otherwise) for the period commencing on the due date thereof
until the same is paid in full.
3.3 Payment Method.
(a) All payments to be made by the Company hereunder will be
made in Dollars and in immediately available funds to the Agent for the account
of the Banks at its address set forth next to its name in the signature pages
hereof not later than 2:00 p.m. Chicago time on the date on which such payment
shall become due. Payments received after 2:00 p.m. Chicago time shall be deemed
to be payments made prior to 2:00 p.m. on the next succeeding Business Day (or
Eurodollar Business Day with respect to payments in respect of Eurodollar Rate
Loans).
(b) At the time of making each such payment, the Company shall,
subject to the other terms and conditions of this Agreement, specify to the
Agent that Borrowing or other obligation of the Company hereunder to which such
payment is to be applied. In the event that the Company fails to so specify the
relevant obligation or if an Event of Default shall have occurred and be
continuing, the Agent may apply such payments as it may determine in its sole
discretion to obligations of the Company to the Banks arising under this
Agreement or otherwise.
(c) On the day such payments are deemed received, the Agent shall
remit to the Banks their pro rata shares of such payments in immediately
available funds. In the event the Agent fails to so remit to the Banks their pro
rata shares of such payments on the day such payments are deemed received, the
Agent shall pay to the Banks interest on such amounts until paid at the Federal
Funds Effective Rate. In the case of payments of principal and interest on any
Borrowing, such pro rata shares shall be determined with respect to each such
Bank by the ratio which the outstanding principal balance of its Loan included
in such Borrowing bears to the outstanding principal balance of the Loans of all
of the Banks included in such Borrowing, and in the case of fees paid pursuant
to Section 2.3 and other amounts payable hereunder (other than the Agent's fees
payable pursuant to Section 2.3(c) and amounts payable to any Bank under Section
3.6, 3.7 or 3.8), such pro rata shares shall be determined with respect to each
such Bank by the ratio which the Commitment of such Bank bears to the aggregate
Commitments of all the Banks.
3.4 No Setoff or Deduction. All payments of principal of and interest
on the Loans and other amounts payable by the Company hereunder shall be made
by the Company without setoff or counterclaim, and, subject to the next
succeeding sentence, free and clear of, and without deduction or withholding
for, or on account of, any present or future taxes, levies, imposts, duties,
fees, assessments, or other charges of whatever nature, imposed by any
governmental authority, or by any department, agency or other political
subdivision or taxing authority. If any such taxes levies, imposts, duties,
fees, assessments or other charges are imposed, the Company will pay such
additional amounts as may be necessary so that payment of principal of and
interest on the Loans and other amounts payable hereunder, after withholding or
deduction for or on account thereof, will not be less than any amount provided
to be paid
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<PAGE> 30
hereunder and, in any such case, the Company will furnish to the Banks certified
copies of all tax receipts evidencing the payment of such amounts within 45 days
after the date any such payment is due pursuant to applicable law.
3.5 Payment on Non-Business Day: Payment Computations. Except as
otherwise provided in this Agreement to the contrary, whenever any installment
of principal of, or interest on, any Loan or any other amount due hereunder
becomes due and payable on a day which is not a Business Day, the maturity
thereof shall be extended to the next succeeding Business Day and, in the case
of any installment of principal, interest shall be payable thereon at the rate
per annum determined in accordance with this Agreement during such extension.
Computations of interest and other amounts due under this Agreement, including,
without limitation, the commitment fees payable under Section 2.3(a) shall be
made on the basis of a year of 365 or 366 days, as the case may be (or 360 days
when determining the Eurodollar Rate), for the actual number of days elapsed,
including the first day but excluding the last day of the relevant period.
3.6 Additional Costs. (a) In the event that any applicable law, rule
or regulation (whether domestic or foreign) or treaty or other international
agreement now or hereafter in effect and whether or not presently applicable to
any Bank or the Agent, or any interpretation or administration thereof by any
governmental authority charged with the interpretation or administration
thereof, or compliance by any Bank or the Agent with any guideline, request or
directive of any such authority (whether or not having the force of law), shall
(i) affect the basis of taxation of payments to any Bank or the Agent of any
amounts payable by the Company under this Agreement (other than taxes imposed on
the overall net income of any Bank or the Agent by the jurisdiction, or by any
political subdivision or taxing authority of any such jurisdiction, in which
such Bank or the Agent, as the case may be, has its principal office), or (ii)
shall impose, modify or deem applicable any reserve, special deposit or similar
requirement against assets of, deposits with or for the account of, or credit
extended by any Bank or the Agent, or (iii) shall impose any other condition
with respect to this Agreement, the Commitments, the Notes or the Loans, and the
result of any of the foregoing is to increase the cost to any Bank of making,
funding or maintaining any Eurodollar Rate Loan or to reduce the amount of any
sum receivable by any Bank or the Agent, as the case may be, thereon, then the
Company shall pay to such Bank or the Agent, as the case may be, from time to
time, upon request by such Bank (with a copy of such request to be provided to
the Agent) or the Agent, additional amounts sufficient to compensate such Bank
or the Agent, as the case may be, for such increased cost or reduced sum
receivable to the extent such Bank or the Agent is not compensated therefor in
the computation of the interest rate applicable to such Eurodollar Rate Loan. A
statement as to the amount of such increased cost or reduced sum receivable,
prepared in good faith and in reasonable detail by such Bank or the Agent, as
the case may be, and submitted by such Bank or the Agent, as the case may be, to
the Company, shall be conclusive and binding for all purposes absent
demonstrable error in computation.
(b) In the event that any applicable law, rule or regulation
(whether domestic or foreign) or treaty or other international agreement now or
hereafter in effect and whether or not presently applicable to any Bank or the
Agent, or any interpretation or administration thereof
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<PAGE> 31
by any governmental authority charged with the interpretation or administration
thereof, or compliance by any Bank or the Agent with any guideline, request or
directive of any such authority (whether or not having the force of law),
including any risk-based capital guidelines, affects or would affect the amount
of capital required or expected to be maintained by such Bank or the Agent (or
any corporation controlling such Bank or the Agent) and such Bank or the Agent,
as the case may be, determines that the amount of such capital is increased by
or based upon the existence of such Bank's or the Agent's obligations hereunder
and such increase has the effect of reducing the rate of return on such Bank's
or the Agent's (or such controlling corporation's) capital as a consequence of
such obligations hereunder to a level below that which such Bank or the Agent
(or such controlling corporation) could have achieved but for such circumstances
(taking into consideration its policies with respect to capital adequacy) by an
amount deemed by such Bank or the Agent to be material, then the Company shall
pay to such Bank or the Agent, as the case may be, from time to time, upon
request by such Bank (with a copy of such request to be provided to the Agent)
or the Agent, additional amounts sufficient to compensate such Bank or the Agent
(or such controlling corporation) for any increase in the amount of capital and
reduced rate of return which such Bank or the Agent reasonably determines to be
applicable to the existence of such Bank's or the Agent's obligations
hereunder. A statement as to the amount of such compensation, prepared in good
faith and in reasonable detail by such Bank or the Agent, as the case may be,
and submitted by such Bank or the Agent to the Company, shall be conclusive and
binding for all purposes absent demonstrable error in computation.
3.7 Illegality and Impossibility. In the event that any applicable
law, rule or regulation (whether domestic or foreign) or treaty or other
international agreement now or hereafter in effect and whether or not presently
applicable to any Bank, or any interpretation or administration thereof by any
governmental authority charged with the interpretation or administration
thereof, or compliance by any Bank with any guideline, request or directive of
such authority (whether or not having the force of law), including without
limitation exchange controls, shall make it unlawful or impossible for any Bank
to maintain any Loan under this Agreement, the Company shall, upon receipt of
notice thereof from such Bank, repay in full the then outstanding principal
amount of each Loan so affected, together with all accrued interest thereon to
the date of payment and all amounts owing to such Bank under Section 3.8, (a) on
the last day of the then current Interest Period applicable to such Loan if such
Bank may lawfully continue to maintain such Loan to such day, or (b) immediately
if such Bank may not continue to maintain such Loan to such day. Nothing in this
Section 3.7 shall prohibit the Company from, subject to the other terms and
conditions of this Agreement, using the proceeds of any Borrowing of a type not
then effected as contemplated by this Section 3.7 to make any repayment of any
Borrowing of a type so effected as required under this Section 3.7.
3.8 Indemnification.
(a) If the Company makes any payment of principal with respect to
any Eurodollar Rate Borrowing on any other date than the last day of an Interest
Period applicable thereto (whether pursuant to Section 3.1 (b), 3.1 (c), 3.7,
6.2 or otherwise), or if the Company fails to borrow any Eurodollar Rate
Borrowing after notice has been given to the Banks in accordance
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<PAGE> 32
with Section 2.4, or if the Company fails to make any payment of principal or
interest in respect of a Eurodollar Rate Borrowing when due, the Company shall
reimburse each Bank on demand for any resulting loss or expense incurred by each
such Bank, including without limitation any loss incurred in obtaining,
liquidating or employing deposits from third parties. A statement as to the
amount of such loss or expense, prepared in good faith and in reasonable detail
by such Bank and submitted by such Bank to the Company, shall be conclusive and
binding for all purposes absent demonstrable error in computation. Calculation
of all amounts payable to any Bank under this Section 3.8 shall be made as
though such Bank shall have actually funded or committed to fund the relevant
Eurodollar Rate Borrowing through the purchase of an underlying deposit in an
amount equal to the amount of the Loan to be made by such Bank as part of such
Borrowing in the relevant market and having a maturity comparable to the related
Interest Period and through the transfer of such deposit to a domestic office of
such Bank in the United States; provided, however, that each Bank may fund any
Eurodollar Rate Loan in any manner it sees fit and the foregoing assumption
shall be utilized only for the purpose of calculation of amounts payable under
this Section 3.8.
(b) Notwithstanding anything herein to the contrary, if, in
connection with any mandatory reduction of the Commitments under Section 2.2(c),
a prepayment of Eurodollar Rate Loans would otherwise be required under Section
3.1(c) (after prepayment of all Floating-Rate Loans) and the Company would
otherwise be required to reimburse any of the Banks for any resulting losses or
expenses under Section 3.8(a), the Company may elect to defer such prepayment of
Eurodollar Rate Loans and deposit an amount equal to the amount of such required
prepayment of Eurodollar Rate Loans into a special segregated cash collateral
account to be held by the Agent for the benefit of the Banks as collateral
security for the Company's obligations under this Agreement and the Notes, until
the end of the relevant Interest Period(s) applicable thereto (but not longer
than six months), at which time such cash collateral shall be applied to repay
such Eurodollar Rate Loans, and the Company hereby authorizes and directs the
Agent to apply such cash collateral to such repayment at such time.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Banks and the Agent that:
4.1 Corporate Existence and Power. Each of the Company and the
Guarantors is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation, and is duly
qualified to do business, and is in good standing, in all additional
jurisdictions where such qualification is necessary under applicable law. Each
of the Company and the Guarantors has all requisite corporate power to own or
lease the properties used in its business and to carry on its business as now
being conducted and as proposed to be conducted, and to execute and deliver this
Agreement, the Notes and the Security Documents to which it is a party and to
engage in the transactions contemplated by this Agreement.
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<PAGE> 33
4.2 Corporate Authority. The execution, delivery and performance by
the Company of this Agreement and the Notes, and the execution, delivery and
performance by each of the Company and the Guarantors of the Security Documents
to which it is a party, have been duly authorized by all necessary corporate
action and are not in contravention of arty law, rule or regulation, or any
judgment, decree, writ, injunction, order or award of any arbitrator, court or
governmental authority, or of the terms of any such person's charter or
by-laws, or of any contract or undertaking to which any such person is a party
or by which any such person or any of its property may be bound or affected.
4.3 Binding Effect. This Agreement is, and the Notes and the Security
Documents to which the Company or either Guarantor is a party when delivered
thereunder will be, legal, valid and binding obligations of the Company or such
Guarantor, as the case may be, enforceable against each such person in
accordance with their respective terms.
4.4 Subsidiaries. Schedule 4.4 hereto correctly sets forth the
corporate name, jurisdiction of incorporation and ownership of each Subsidiary
of the Company. Each such Subsidiary and each corporation becoming a Subsidiary
of the Company after the date hereof is and will be a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and is and will be duly qualified to do business
in each additional jurisdiction where such qualification is or may be necessary
under applicable law. Each Subsidiary of the Company has and will have all
requisite corporate power to own or lease the properties used in its business
and to carry on its business as now being conducted and as proposed to be
conducted, and to execute and deliver the Security Documents to which it is a
party and to engage in the transactions contemplated thereby. All outstanding
shares of capital stock of each class of each Subsidiary of the Company have
been and will be validly issued and are and will be fully paid and nonassessable
and, except as otherwise indicated in Schedule 4.4 hereto or disclosed in
writing to the Agent and the Banks from time to time, are and will be owned,
beneficially and of record, by the Company or another Subsidiary of the Company
free and clear of any Liens.
4.5 Litigation. Except as set forth in Schedule 4.5 hereto, there is
no action, suit or proceeding pending or, to the best of the Company's
knowledge, threatened against or affecting the Company or any of its
Subsidiaries before or by any court, governmental authority or arbitrator, which
if adversely decided might result, either individually or collectively, in any
material adverse change in the business, properties, operations or condition,
financial or otherwise, of the Company or any of its Subsidiaries or in any
Material Adverse Effect and, to the best of the Company's knowledge, there is no
basis for any such action, suit or proceeding.
4.6 Financial Condition. The consolidated and consolidating balance
sheets of the Company and its Subsidiaries and the consolidated and
consolidating statements of income, retained earnings and cash flows of the
Company and its Subsidiaries for the fiscal year ended December 31, 1996 and
(except for such consolidating statements) reported on by Deloitte & Touche,
independent certified public accountants, and the interim consolidated balance
sheet and interim consolidated statements of income, retained earnings and cash
flows of the Company and its Subsidiaries, as of or for the three-month period
ended on March 31, 1997, copies of which
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have been furnished to the Banks, fairly present, and the financial statements
of the Company and its Subsidiaries delivered pursuant to Section 5.1(d) will
fairly present, the consolidated financial position of the Company and its
Subsidiaries as at the respective dates thereof, and the consolidated results of
operations of the Company and its Subsidiaries for the respective periods
indicated, all in accordance with Generally Accepted Accounting Principles
consistently applied (subject, in the case of said interim statements, to
year-end audit adjustments). There is no material Contingent Liability of the
Company or any of its Subsidiaries that is not reflected in such financial
statements or in the notes thereto.
4.7 Use of Loans. The Company will use the proceeds of the Loans to
refinance all existing Indebtedness of the Company and its Subsidiaries to the
Banks and for the Company's general corporate purposes. Neither the Company nor
any of its Subsidiaries extends or maintains, in the ordinary course of
business, credit for the purpose, whether immediate, incidental, or ultimate, of
buying or carrying margin stock (within the meaning of Regulation U of the Board
of Governors of the Federal Reserve System), and no part of the proceeds of any
Loan will be used for the purpose, whether immediate, incidental, or ultimate,
of buying or carrying any such margin stock or maintaining or extending credit
to others for such purpose. After applying the proceeds of each Loan, such
margin stock will not constitute more than 25% of the value of the assets
(either of the Company alone or of the Company and its Subsidiaries on a
consolidated basis) that are subject to any provisions of this Agreement or any
Security Document that may cause the Loans to be deemed secured, directly or
indirectly, by margin stock.
4.8 Consents. Etc. Except for such consents, approvals,
authorizations, declarations, registrations or filings delivered by the Company
pursuant to Section 2.5(g), if any, each of which is in full force and effect,
no consent, approval or authorization of or declaration, registration or filing
with any governmental authority or any nongovernmental person or entity,
including, without limitation, any creditor, lessor or stockholder of the
Company or any of its Subsidiaries, is required on the part of the Company or
any Guarantor in connection with the execution, delivery and performance of this
Agreement, the Notes, the Security Documents or the transactions contemplated
hereby or as a condition to the legality, validity or enforceability of this
Agreement, the Notes or any of the Security Documents.
4.9 Taxes. The Company and its Subsidiaries have filed all tax returns
(federal, state and local) required to be filed and have paid all taxes shown
thereon to be due, including interest and penalties, or have established
adequate financial reserves on their respective books and records for payment
thereof. Neither the Company nor any of its Subsidiaries knows of any actual or
proposed tax assessment or any basis therefor, and no extension of time for the
assessment of deficiencies in any federal or state tax has been granted by the
Company or any such Subsidiary.
4.10 Title to Properties. Except as otherwise disclosed in the latest
balance sheet referenced in Section 4.6 or delivered pursuant to 5.1(d) of this
Agreement, the Company or one or more of its Subsidiaries have good and
marketable fee simple title to all of the real property, and a valid and
indefeasible ownership interest in all of the other properties and assets
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(including, without limitation, the collateral subject to the Security Documents
to which any of them is a party) reflected in said balance sheet or subsequently
acquired by the Company or any such Subsidiary. All of such properties and
assets are free and clear of any Lien, except for Permitted Liens.
4.11 ERISA. The Company, its Subsidiaries, their ERISA Affiliates and
their respective Plans are in compliance in all material respects with those
provisions of ERISA and of the Code which are applicable with respect to any
Plan. No Prohibited Transaction and no Reportable Event has occurred with
respect to any such Plan. None of the Company, any of its Subsidiaries or any of
their ERISA Affiliates is an employer with respect to any Multiemployer Plan.
The Company, its Subsidiaries and their ERISA Affiliates have met the minimum
funding requirements under ERISA and the Code with respect to each of their
respective Plans, if any, and have not incurred any liability to the PBGC or any
Plan. The execution, delivery and performance of this Agreement, the Notes and
the Security Documents does not constitute a Prohibited Transaction. There is no
material Unfunded Benefit Liability with respect to any Plan of the Company, its
Subsidiaries or their ERISA Affiliates.
4.12 Disclosure. No report or other information furnished in writing
by or on behalf of the Company or any of its Subsidiaries to any Bank or the
Agent in connection with the negotiation or administration of this Agreement
contains any material misstatement of fact or omits to state any material fact
or any fact necessary to make the statements contained therein not misleading in
light of the circumstances in which they were made. Neither this Agreement, the
Notes, the Security Documents nor any other document, certificate, or report or
statement or other information furnished to any Bank or the Agent by or on
behalf of the Company or any of its Subsidiaries in connection with the
transactions contemplated hereby contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
contained herein and therein not misleading in light of the circumstances in
which they were made. There is no fact known to the Company or any of its
Subsidiaries which materially and adversely affects, or which in the future may
(so far as the Company can now foresee) materially and adversely affect, the
business, properties, operations or condition, financial or otherwise, of the
Company or any of its Subsidiaries, which has not been set forth in this
Agreement or in the other documents, certificates, statements, reports and other
information furnished in writing to the Banks by or on behalf of the Company in
connection with the transactions contemplated hereby.
4.13 Environmental Matters. The Company and each of its Subsidiaries
is in compliance with all Environmental Laws in jurisdictions in which the
Company or any such Subsidiary owns or operates, or has owned or operated, a
facility or site, or arranges or has arranged for disposal or treatment of
hazardous substances, solid waste, or other wastes, accepts or has accepted for
transport any hazardous substances, solid wastes or other wastes or holds or has
held any interest in real property or otherwise. No demand, claim, notice,
action, administrative proceeding investigation or inquiry whether brought by
any governmental authority, private person or entity or otherwise, arising
under, relating to or in connection with any Environmental Laws is pending or
threatened against the Company or any of its Subsidiaries, any real property in
which the Company or any such Subsidiary holds or has held
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an interest or any past or present operation of the Company or any such
Subsidiary. Neither the Company nor any of its Subsidiaries (a) is the subject
of any federal or state investigation evaluating whether any remedial action is
needed to respond to a release of any toxic substances, radioactive materials,
hazardous wastes or related materials into the environment, (b) has received any
notice of any toxic substances, radioactive materials, hazardous waste or
related materials in, or upon any of its properties in violation of any
Environmental Laws, (c) knows of any basis for any such investigation, notice or
violation, or (d) owns or operates, or has owned or operated, property which
appears on the United States National Priority List or any other governmental
listing which identifies sites for remedial clean-up or investigator actions.
No release, threatened release or disposal of hazardous waste, solid waste or
other wastes is occurring or has occurred on, under or to any real property in
which the Company or any of its Subsidiaries holds any interest or performs any
of its operations, in violation of any Environmental Law.
4.14 Integrated Operation. The Company, the Guarantors and the other
Subsidiaries of the Company are engaged as an integrated group in the insurance
business. The integrated operation requires financing on such a basis that
credit is supplied to the Company for the continued successful operation of the
integrated group as a whole, and each of the Guarantors has requested the Banks
to make credit available to the Company for the purpose of financing the
integrated operations of the Company, the Guarantors and the other Subsidiaries
of the Company, with each of such entities expecting to derive benefit, directly
or indirectly, from the credit extended by the Banks to the Company, both in
each entity's separate capacity and as a member of the integrated group, in as
much as the successful operation and condition of each such entity is dependent
upon the continued successful performance of the functions of the integrated
group as a whole.
4.15 American Agrisurance/AGIC Agreement. All necessary regulatory
approvals for the execution, delivery and performance of the American
Agrisurance/AGIC Agreement by the parties thereto have been obtained and are in
full force and effect.
4.16 Material Adverse Change. Since December 31, 1996, there has been
no change in the business, Property, prospects, condition (financial or
otherwise) or results of operations of the Company and its Subsidiaries which
could have a Material Adverse Effect.
4.17 Material Agreements. Neither the Company nor any of its
Subsidiaries is a party to any agreement or instrument or subject to any charter
or other corporate restriction which could have a Material Adverse Effect.
Neither the Company nor any of its Subsidiaries is in default in the
performance, observance or fulfillment of any of the obligations, covenants or
conditions contained in (a) any agreement to which it is a party, which default
could have a Material Adverse Effect or (b) any agreement or instrument
evidencing or governing Indebtedness.
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ARTICLE V.
COVENANTS
5.1 Affirmative Covenants. The Company covenants and agree that, until
the Termination Date and thereafter until the payment in full of the principal
of and accrued interest on the Notes and the performance of all other
obligations of the Company under this Agreement, unless the Required Banks shall
otherwise consent in writing, it shall, and shall cause each of its Subsidiaries
to:
(a) Preservation of Corporate Existence. Etc. Do or cause to be
done all things necessary to preserve, renew and keep in full force and effect
its legal existence and its qualification as a foreign corporation in good
standing in each jurisdiction in which such qualification is necessary under
applicable law, and the rights, licenses, permits (including those required
under Environmental Laws), franchises, patents, copyrights, trademarks and trade
names material to the conduct of its businesses; and defend all of the foregoing
against all claims, actions, demands, suits or proceedings at law or in equity
or by or before any governmental instrumentality or other agency or regulatory
authority.
(b) Compliance with Laws. Etc. Comply in all material respects
with all applicable laws, rules, regulations and orders of any governmental
authority, whether federal, state, local or foreign (including without
limitation ERISA, the Code and Environmental Laws), in effect from time to time;
and pay and discharge promptly when due all taxes, assessments and governmental
charges or levies imposed upon it or upon its income, revenues or property,
before the same shall become delinquent or in default, as well as all lawful
claims for labor, materials and supplies or otherwise, which, if unpaid, might
give rise to Liens upon such properties or any portion thereof, except to the
extent that payment of any of the foregoing is then being contested in good
faith by appropriate legal proceedings and with respect to which adequate
financial reserves have been established on the books and records of the Company
or any of its Subsidiaries.
(c) Maintenance of Properties; Insurance. Maintain, preserve and
protect all property that is material to the conduct of the business of the
Company or any of its Subsidiaries and keep such property in good repair,
working order and condition and from time to time make, or cause to be made, all
needful and proper repairs, renewals, additions, improvements and replacements
thereto necessary in order that the business carried on in connection therewith
may be properly conducted at all times in accordance with customary and prudent
business practices for similar businesses; and to maintain in full force and
effect insurance with responsible and reputable insurance companies or
associations in such amounts, on such terms and covering such risks, including
fire and other risks insured against by extended coverage, as is usually carried
by companies engaged in similar businesses and owning similar properties
similarly situated and maintain in full force and effect public liability
insurance, insurance against claims for personal injury or death or property
damage occurring in connection with any of its activities or any properties
owned, occupied or controlled by it, in such amount as it shall reasonably deem
necessary, and maintain such other insurance as may be required by law
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or as may be reasonably requested by the Agent for purposes of assuring
compliance with this Section 5.1 (c).
(d) Reporting Requirements. Furnish to the Agent (with a copy
for each of the Banks) the following:
(i) Promptly and in any event within three calendar days
after becoming aware of the occurrence of (A) any Default or Event of Default,
(B) the commencement of any material litigation against, by or affecting the
Company, or any of its Subsidiaries, and any material developments therein, (C)
entering into any material contract or undertaking that is not entered into in
the ordinary course of business or (D) any development in the business or
affairs of the Company or any of its Subsidiaries which has resulted in or which
is likely, in the reasonable judgment of the Company, to result in a material
adverse change in the business, properties, operations or condition, financial
or otherwise of the Company or any of its Subsidiaries, a statement of the chief
financial officer of the Company setting forth details of each such Default or
Event of Default or such litigation, material contract or undertaking or
development and the action which the Company or such Subsidiary, as the case may
be, has taken and proposes to take with respect thereto;
(ii) As soon as available and in any event within 45 days
after the end of each of the first three fiscal quarters of each fiscal year of
the Company, the consolidated balance sheet of the Company and its Subsidiaries
as of the end of such quarter, and the related consolidated statements of
income, retained earnings and cash flows of the Company and its Subsidiaries for
the period commencing at the end of the previous fiscal year and ending with the
end of such quarter, setting forth in each case in comparative form the
corresponding figures for the corresponding date or period of the preceding
fiscal year, all in reasonable detail and duly certified (subject to year-end
audit adjustments) by the chief financial officer of the Company as having been
prepared in accordance with Generally Accepted Accounting Principles, together
with a certificate of the chief financial officer of the Company stating (A)
that no Default or Event of Default has occurred and is continuing or, if a
Default or Event of Default has occurred and is continuing, a statement setting
forth the details thereof and the action which the Company has taken and
proposes to take with respect thereto, and (B) that a computation (which
computation shall accompany such certificate and shall be in reasonable detail)
showing compliance with Sections 5.2(a), (b), (c), (d), (e), (f) and (g) is in
conformity with the terms of this Agreement;
(iii) As soon as available and in any event within 120 days
after the end of each fiscal year of the Company, a copy of the consolidating
and consolidated balance sheets of the Company and its Subsidiaries as of the
end of such fiscal year and the related consolidating and consolidated
statements of income, retained earnings and cash flows of the Company and its
Subsidiaries for such fiscal year, with a customary audit report of Deloitte &
Touche, or other independent certified public accountants of comparable standing
selected by the Company, with respect to such consolidated statements, which
report shall be without qualifications unacceptable to the Required Banks, and
which audit report shall be directed to the Banks, and shall provide that the
client representation of such accountants extends to the Banks,
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together with a certificate of the chief financial officer of the Company
stating (A) that no Default or Event of Default has occurred and is continuing
or, if a Default or Event of Default has occurred and is continuing, a statement
setting forth the details thereof and the action which the Company has taken and
proposes to take with respect thereto, and (B) that a computation (which
computation shall accompany such certificate and shall be in reasonable detail)
showing compliance with Sections 5.2(a), (b), (c), (d), (e), (f) and (g) is in
conformity with the terms of this Agreement;
(iv) As soon as available and in any event within 45 days
after the end of each of the first three fiscal quarters of each fiscal year of
AIC and RIC, the quarterly statement of the condition and affairs of each such
company, including all schedules of investments, all in reasonable detail and
duly certified by the chief financial officer of the Company as having been
prepared in accordance with SAP;
(v) As soon as available and in any event within 90 days
after the end of each Insurance Subsidiary's fiscal year, the annual statement
of the condition and affairs of each such Insurance Subsidiary, including all
schedules of investments, all in reasonable detail and duly certified by the
chief financial officer of the Company as having been prepared in accordance
with SAP;
(vi) Promptly after the sending, filing or receipt
thereof, copies of all reports, proxy statements and financial statements which
the Company or any of its Subsidiaries sends to or files with any of their
respective security holders or any securities exchange or the Securities and
Exchange Commission or any successor agency thereof, or with the NAIC or other
regulators, and all reports, notices, inquiries and other material documents
received by the Company or any of its Subsidiaries from the NAIC or other
regulators;
(vii) Promptly and in any event within 10 calendar days
after receiving or becoming aware thereof (A) a copy of any notice of intent to
terminate any Plan of the Company, its Subsidiaries or any ERISA Affiliate filed
with the PBGC, (B) a statement of the chief financial officer of the Company
setting forth the details of the occurrence of any Reportable Event with respect
to any such Plan, (C) a copy of any notice that the Company, any of its
Subsidiaries or any ERISA Affiliate may receive from the PBGC relating to the
intention of the PBGC to terminate any such Plan or to appoint a trustee to
administer any such Plan, or (D) a copy of any notice of failure to make a
required installment or other payment within the meaning of Section 412(n) of
the Code or Section 302(f) of ERISA with respect to any such Plan;
(viii) Promptly and in any event within 10 days after
receipt, a copy of any management letter or comparable analysis prepared by the
auditors of the Company or any of its Subsidiaries;
(ix) As soon as available and in any event not later than
June 30th of each year, the annual certification for such year as to the
adequacy of loss reserves for each Insurance Subsidiary; and
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(x) Promptly such other information respecting the business,
properties, operations, or condition, financial or otherwise, of the Company or
any of its Subsidiaries as the Agent (whether on behalf of itself or any Bank)
may from time to time request.
(e) Accounting; Access to Records, Books, Etc. Maintain a system
of accounting established and administered in accordance with sound business
practices to permit preparation of financial statements in accordance with
Generally Accepted Accounting Principles and SAP and to comply with the
requirements of this Agreement and, at any reasonable time and from time to
time, permit any Bank or the Agent or any agents or representatives thereof to
examine and make copies of and abstracts from the records and books of account
of, and visit the properties of, the Company and its Subsidiaries, and to
discuss the affairs, finances and accounts of the Company and its Subsidiaries
with its directors, officers, employees and independent auditors, and by this
provision the Company hereby authorizes such persons to discuss such affairs,
finances and accounts with any Bank or the Agent.
(f) Additional Collateral. Promptly execute and deliver, or
cause to be executed and delivered, additional Security Documents, within 30
days after request therefor by the Agent, sufficient to pledge to the Agent for
the benefit of the Banks and the Agent any and all direct equity interests of
the Company or either Guarantor in any Insurance Subsidiaries acquired after the
Effective Date, including, without limitation, those acquired by the Company
pursuant to a merger permitted under Section 5.2(h), and promptly deliver to the
Agent, in pledge under the Note Pledge Agreement, all Surplus Notes acquired by
the Company after the Effective Date, endorsed in blank, together with an
opinion of counsel with respect thereto as described in SECTION 2.6(c). The
Company shall notify the Agent in writing (with sufficient copies for the
Banks), within 10 days after the occurrence thereof, of any event or condition
that may require additional action of any nature in order to comply with this
Section 5.1 (f) or to create or preserve the effectiveness and perfected status
of the liens and security interests of the Banks and the Agent with respect to
the collateral described in Section 2.10, including, without limitation, any
after-acquired collateral of such type. This Section 5.l(f) shall not affect
the obligations of the Company or rights of the Banks under Section 5.2(h).
(g) Further Assurances. Execute and deliver, or cause to be
executed and delivered, within 30 days after request therefor by the Agent all
further instruments and documents and take all further action that may be
necessary or desirable, or that the Agent may request, in order to give effect
to, and to aid in the exercise and enforcement of the rights and remedies of the
Banks and the Agent under, this Agreement, the Notes and the Security Documents.
5.2 Negative Covenants. Until the Termination Date and thereafter
until the payment in full of the principal of and accrued interest on the Notes
and the performance of all other obligations of the Company under this
Agreement, the Company agrees that, unless the Required Banks shall otherwise
consent in writing, it shall not, and shall not permit any of its Subsidiaries
to:
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(a) Augmented Cash Flow Coverage Ratio. Permit or suffer the
ratio of Augmented Cash Flow, determined as of the last day of any fiscal
quarter of the Company for the period of four fiscal quarters then ended, to
Adjusted Debt Service, determined as of the last day of such fiscal quarter, to
be less than 1.50 to 1.00.
(b) Funded Debt to Total Capitalization. Permit or suffer the
ratio of Funded Debt to Total Capitalization to be (i) greater than 0.35 to 1.00
at any time on or after the Effective Date to but excluding December 31, 2001 or
(ii) equal to or greater than 0.25 to 1.00 on December 31, 2001 or at any time
thereafter.
(c) Maximum Operating Leverage. Permit or suffer the ratio of (i)
the Net Written Premiums of any Insurance Subsidiary to (ii) the Statutory
Surplus of such Subsidiary, as of the end of any fiscal quarter of such
Subsidiary, to be greater than 3.00 to 1.00, in each case determined for the
period of four fiscal quarters of such Insurance Subsidiary then ended.
(d) Net Worth. Permit or suffer the consolidated Net Worth of the
Company and its Subsidiaries at any time to be less than the sum of (i)
$190,000,000 plus (ii) 50% of the consolidated Cumulative Net Income of the
Company and its Subsidiaries for the period commencing January 1, 1997.
(e) Investments. Loans and Advances. Make or suffer to exist any
Investments or commitments therefor (including, without limitation, Investments
in Subsidiaries of the Company), other than Investments that (i) are in
accordance with the investment policies of the Company and its Subsidiaries as
set forth in Exhibit I to this Agreement, including any nonmaterial amendments
and modifications thereof from time to time (the "Investment Policies"), and are
in accordance with all provisions of law, statutes, rules and regulations,
including, without limitation, state insurance regulations, applicable to the
Company or any of its Subsidiaries, and (ii) with respect to the Company and its
Subsidiaries other than Insurance Subsidiaries, without limiting the
requirements of the foregoing clause (i), also meet the following requirements:
no Investments or commitments therefor shall be made or suffered to exist,
except (1) Cash and Cash Equivalents, (2) Investments in Subsidiaries of the
Company, excluding Non-Material Subsidiaries, (3) Investments in existence on
the Effective Date as described in Schedule 5.2(e) hereto and (4) other
Investments in an aggregate amount not exceeding $5,000,000 at any time;
provided that no such Investment allowed under the foregoing clauses (1)-(4)
may be made or committed for at any time that any Default or Event of Default
shall have occurred and be continuing or if any Default or Event of Default or
Material Adverse Effect would result therefrom.
(f) Quality of Reinsurers. Permit or suffer (i) with respect to
all reinsurance other than crop reinsurance referred to in clause (ii) below, at
any time greater than 10% (based upon the then Dollar amount of ceded risk) of
all contracts for reinsurance purchased by the Company and its Subsidiaries to
be with reinsurers having a rating of less than A- as determined by A.M. Best
Company (or the ISI equivalent for European reinsurers), or (ii) with
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respect to crop reinsurance (both hail and multi-peril) owned by the Company
and its Subsidiaries, any material change in the quality of such reinsurance.
(g) NAIC Ratio Requirements. Permit or suffer any of the
Subsidiaries of the Company to at any time be outside the recommended range for
more than four of the NAIC ratio tests (other than excess capital
contributions).
(h) Merger; Acquisitions; Etc. Purchase or otherwise acquire,
whether in one or a series of transactions, all or a substantial portion of the
business, assets, rights, revenues or property, real, personal or mixed,
tangible or intangible, of any person, or all or a substantial portion of the
capital stock or other ownership interest in any other person; nor merge or
consolidate or amalgamate with any other person or take any action having a
similar effect, nor enter into any joint venture or similar arrangement with any
other person; provided that, subject to the provisions of Section 5.1(f), so
long as no Default or Event of Default shall have occurred and be continuing and
no Default or Event of Default under any other provision of this Agreement or
Material Adverse Effect would result therefrom, this Section 5.2(h) shall not
prohibit (i) any such purchases or acquisitions (A) in which the total
consideration paid or exchanged therefor is capital stock of the Company or
capital stock of any Subsidiaries of the Company not subject to a Pledge
Agreement or (B) with respect to which the aggregate Indebtedness incurred or
assumed by the Company and its Subsidiaries does not exceed $5,000,000 or (C) by
AIH and TRG (or, following a merger of the Guarantors into the Company, by the
Company) from AIC and RIC of the capital stock of Phoenix Indemnity Insurance
Company and American Growers Insurance Company, respectively, or (ii) the merger
of one or both of the Guarantors into the Company.
(i) Disposition of Assets. Sell, lease, license, transfer,
assign or otherwise dispose of all or a material portion of its business,
assets, rights, revenues or property, real, personal or mixed, tangible or
intangible, whether in one or a series of transactions, other than sales in the
ordinary course of business of securities owned by the Company or any of its
Subsidiaries for investment purposes, provided that this Section 5.2(i) shall
not prohibit the sale by AIC or RIC to AIH and TRG, respectively (or to the
Company), of the capital stock of Phoenix Indemnity Insurance Company and
American Growers Insurance Company as contemplated under Section 5.2(h).
(j) Nature of Business. Make any substantial change in the
nature of its business from that engaged in on the date of this Agreement or
engage in any other businesses other than those in which it is engaged on the
date of this Agreement.
(k) Stock of Subsidiaries. Sell, pledge (other than pursuant to
the Pledge Agreements), create a security interest in or otherwise encumber,
dispose of or transfer any shares of capital stock of any of its Subsidiaries;
nor issue any additional shares of capital stock.
(l) Indebtedness. Create, incur, assume or in any manner become
liable in respect of, or suffer to exist, any Indebtedness other than:
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(i) The Loans and other Indebtedness to the Banks
hereunder;
(ii) Indebtedness in aggregate outstanding principal
amount not exceeding $500,000 which is secured by one or more Liens permitted by
Section 5.2(m)(vi);
(iii) Indebtedness of any Subsidiary of the Company owing
to the Company or to any Guarantor;
(iv) Unsecured current Indebtedness constituting
obligations for the unpaid purchase price of goods, property or services in
aggregate outstanding principal amount not exceeding $500,000 incurred in the
ordinary course of business (A) to a seller of inventory purchased for sale in
the ordinary course of business of the Company or any of its Subsidiaries, (B)
to a seller of other property used in the business of the Company or any of its
Subsidiaries or (C) to a provider of services to the Company or any of its
Subsidiaries;
(v) Subordinated Debt of the Company or any of its
Subsidiaries, provided that (A) no such Subordinated Debt shall be created if
any Default or Event of Default shall have occurred and be continuing or any
Default or Event of Default under any other provision of this Agreement or
Material Adverse Effect would result therefrom, (B) no Subordinated Debt of the
Company shall be owing to any Subsidiary of the Company other than a Subsidiary
Business Trust, and (C) any such Subordinated Debt of the Company owing to any
Subsidiary Business Trust shall (1) be for borrowed money in an aggregate
principal amount not in excess of the proceeds of Trust Preferred Securities
issued by such Subsidiary Business Trust, (2) bear interest at a rate and
subject to a payment schedule that matches the rate and payment schedule
applicable to distributions on such Trust Preferred Securities and (3) have a
scheduled maturity date after the Maturity Date;
(vi) Contingent Liabilities of the Company and its
Subsidiaries in respect of standby letters of credit in an aggregate amount not
greater than $5,000,000 at any time issued for the account of the Company in the
ordinary course of the Company's business;
(vii) The other Indebtedness described in Schedule 5.2(1)
hereto, having the same terms as those existing on the date of this Agreement,
but no extension or renewal thereof shall be permitted; and
(viii) Rate Hedging Obligations of the Company under any
Rate Hedging Agreement with a Bank party to this Agreement pursuant to which the
Company swaps its floating interest rate exposure with respect to the Loans for
a fixed rate; provided that such Rate Hedging Agreement takes into account all
scheduled reductions of the Commitments under Section 2.2(b).
(m) Liens. Create, incur or suffer to exist any Lien on any of
the assets, rights, revenues or property, real, personal or mixed, tangible or
intangible, whether now owned or hereafter acquired, of the Company or any of
its Subsidiaries, other than:
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(i) Liens for taxes not delinquent or for taxes being
contested in good faith by appropriate proceedings and as to which adequate
financial reserves have been established on its books and records;
(ii) Liens (other than any Lien imposed by ERISA or any
Environmental Law) created and maintained in the ordinary course of business
which are not material in the aggregate, and which would not have a material
adverse effect on the business or operations of the Company or any of its
Subsidiaries and which constitute (A) pledges or deposits under worker's
compensation laws, unemployment insurance laws or similar legislation, (B) good
faith deposits in connection with bids, tenders, contracts or leases to which
the Company or any of its Subsidiaries is a party for a purpose other than
borrowing money or obtaining credit, including rent security deposits, (C) liens
imposed by law, such as those of carriers, warehousemen and mechanics, if
payment of the obligation secured thereby is not yet due, (D) Liens securing
taxes, assessments or other governmental charges or levies not yet subject to
penalties for nonpayment, and (E) pledges or deposits to secure public or
statutory obligations of the Company or any of its Subsidiaries, or surety,
customs or appeal bonds to which the Company or any of its Subsidiaries is a
party;
(iii) Liens affecting real property which constitute minor
survey exceptions or defects or irregularities in title, minor encumbrances,
easements or reservations of, or rights of others for, rights of way, sewers,
electric lines, telegraph and telephone lines and other similar purposes, or
zoning or other restrictions as to the use of such real property, provided that
all of the foregoing, in the aggregate, do not at any time materially detract
from the value of said properties or materially impair their use in the
operation of the businesses of the Company or any of its Subsidiaries;
(iv) Liens created pursuant to the Security Documents and
Liens expressly permitted by the Security Documents;
(v) Each Lien described in Schedule 5.2(m) hereto may be
suffered to exist upon the same terms as those existing on the date hereof, but
no extension or renewal thereof shall be permitted;
(vi) Any Lien created to secure payment of a portion of the
purchase price of any tangible fixed asset acquired by the Company or any of its
Subsidiaries, or payments under any Capital Lease for the lease of any tangible
fixed asset leased by the Company or any of its Subsidiaries, may be created or
suffered to exist upon such fixed asset if the outstanding principal amount of
the Indebtedness secured by such Lien does not at any time exceed the purchase
price of such fixed asset and the aggregate principal amount of all Indebtedness
secured by such Liens, plus the capitalized amount of all such Capital Leases
does not exceed $500,000, provided that such Lien does not encumber any other
asset at any time owned by the Company or such Subsidiary;
(vii) Liens in favor of the Company or any of the Guarantors
as security for Indebtedness permitted by Section 5.2(l)(iii); and
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(viii) The interest or title of a lessor under any lease
otherwise permitted under this Agreement with respect to the property subject to
such lease to the extent performance of the obligations of the Company or its
Subsidiary thereunder are not delinquent.
(n) Contingent Liabilities. Create, incur, assume, or in any
manner become liable in respect of, or suffer to exist, any Contingent
Liabilities, other than (i) Contingent Liabilities permitted under Section
5.2(l)(vi) and 5.2(l)(viii), (ii) Contingent Liabilities under the APFC Debt
Guaranty; provided that the principal indebtedness guaranteed by the Company
under the APFC Debt Guaranty shall not exceed $25,000,000, and (iii) Contingent
Liabilities of the Company in respect of Distributions on Trust Preferred
Securities.
(o) Inconsistent Agreements. Enter into any agreement containing
any provision which would be violated or breached by this Agreement or any of
the transactions contemplated hereby or by performance by the Company or any of
its subsidiaries of its obligations in connection therewith.
(p) Dividends and Other Restricted Payments. Make, pay, declare
or authorize any dividend, payment or other distribution in respect of any class
of its capital stock or any dividend, payment or distribution in connection with
the redemption, purchase, retirement or other acquisition, directly or
indirectly, of any shares of it capital stock other than (i) such dividends,
payments or other distributions to the extent payable solely in shares of the
capital stock of the Company or to the extent payable to the Company by a
Subsidiary of the Company, and (ii) provided that no Default or Event of Default
shall have occurred and be continuing and no Default or Event of Default under
any other provision of this Agreement or Material Adverse Effect would result
therefrom, (A) repurchases of small odd lots of the Company's stock, provided
that the aggregate amount of the payments made after the Effective Date in
connection with such odd lot repurchases does not exceed $2,000,000, and (B)
Distributions on Trust Preferred Securities.
(q) Transactions with Affiliates. Enter into, become a party to,
or become liable in respect of, any contract or undertaking with any Affiliate
except in the ordinary course of business and on terms not less favorable to the
Company or such Subsidiary than those which could be obtained if such contract
or undertaking were an arms length transaction with a person other than an
Affiliate.
(r) Payments and Modification of Subordinated Debt. Make any
optional payment, prepayment or redemption of any Subordinated Debt, nor amend
or modify, or consent or agree to any amendment or modification, which would
shorten any maturity or increase the amount of any payment of principal or
increase the rate (or require earlier payment) of interest on any such
Subordinated Debt, nor amend any agreement under which any Subordinated Debt is
issued or created or otherwise related thereto, nor enter into any agreement or
arrangement providing for the defeasance of any Subordinated Debt.
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(s) Tax Sharing Agreement. Permit or suffer the Tax Sharing
Agreement to be amended or modified or any provision thereof to be waived, or
permit or suffer any Subsidiary of the Company to enter into any other tax
sharing arrangement.
(t) Negative Pledge Prohibition. Enter into any agreement with
any person (other than pursuant to this Agreement) that prohibits the Company or
any of its Subsidiaries from acting to, or in any way limits the ability of the
Company or any of its Subsidiaries to, create, incur, assume or suffer to exist
any Lien upon any capital stock of any Insurance Subsidiary.
ARTICLE VI.
DEFAULT
6.1 Events of Default. The occurrence of any one of the following
events or conditions shall be deemed an "Event of Default" hereunder unless
waived pursuant to Section 8.1:
(a) Nonpayment. The Company shall fail to pay when due any
principal of or interest on the Notes or any fees or any other amount payable
hereunder; or
(b) Misrepresentation. Any representation or warranty made by the
Company in Article IV hereof or in any Security Document or any other
certificate, report, financial statement or other document furnished by or on
behalf of the Company in connection with this Agreement, shall prove to have
been incorrect in any material respect when made or deemed made; or
(c) Certain Covenants. The Company shall fail to perform or
observe any term, covenant or agreement contained in Article V hereof; or
(d) Other Defaults. The Company shall fail to perform or observe
any other term, covenant or agreement contained in this Agreement or in the
Security Documents, and any such failure shall remain unremedied for 15 calendar
days after notice thereof shall have been given to the Company by the Agent (or
such longer period of time as may be specified in such Security Document); or
(e) Cross Default. The Company or any of its Subsidiaries shall
fail to pay any part of the principal of, the premium, if any, or the interest
on, or any other payment of money due under any of its Indebtedness (other than
Indebtedness hereunder), beyond any period of grace provided with respect
thereto, which individually or together with other such Indebtedness as to which
any such failure exists has an aggregate outstanding principal amount in excess
of $500,000; or if the Company or any of its Subsidiaries fails to perform or
observe any other term, covenant or agreement contained in, or if any other
event or condition occurs or exists under, any agreement, document or instrument
evidencing or securing any such Indebtedness having such aggregate outstanding
principal amount, or under which any such
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Indebtedness was incurred, issued or created, beyond any period of grace, if
any, provided with respect thereto if the effect of such failure is either (i)
to cause, or permit the holders of such Indebtedness (or a trustee on behalf of
such holders) to cause, any payment in respect of such Indebtedness to become
due prior to its due date or (ii) to permit the holders of such Indebtedness
(or a trustee on behalf of such holders) to accelerate the maturity of such
indebtedness, whether or not such failure to perform shall be waived by the
holders (or a trustee) of such Indebtedness; or
(f) Judgments. One or more judgments or orders for the payment of
money in an aggregate amount of $2,000,000 shall be rendered against the Company
or any of its Subsidiaries, or any other judgment or order (whether or not for
the payment of money) shall be rendered against or shall affect the Company or
any of its Subsidiaries which causes or could cause a material adverse change in
the business, properties, operations or condition, financial or otherwise, of
the Company or any of its Subsidiaries or which does or could have a material
adverse effect on the legality, validity or enforceability of this Agreement,
the Notes or any Security Document, and either (i) such judgment or order shall
have remained unsatisfied and the Company or such Subsidiary shall not have
taken action necessary to stay enforcement thereof by reason of pending appeal
or otherwise, prior to the expiration of the applicable period of limitations
for taking such action or, if such action shall have been taken, a final order
denying such stay shall have been rendered, or (ii) enforcement proceedings
shall have been commenced by any creditor upon any such judgment or order; or
(g) ERISA. The occurrence of a Reportable Event that results in
or could result in liability of the Company, or any of its Subsidiaries or their
ERISA Affiliates to the PBGC or to any Plan and such Reportable Event is not
corrected within thirty (30) days after the occurrence thereof; or the
occurrence of any Reportable Event which could constitute grounds for
termination of any Plan of the Company, or any of its Subsidiaries or their
ERISA Affiliates by the PBGC or for the appointment by the appropriate United
States District Court of a trustee to administer any such Plan and such
Reportable Event is not corrected within thirty (30) days after the occurrence
thereof; or the filing by the Company, any of its Subsidiaries or any of their
ERISA Affiliates of a notice of intent to terminate a Plan or the institution of
other proceedings to terminate a Plan; or the Company, any of its Subsidiaries
or any of their ERISA Affiliates shall fail to pay when due any liability to the
PBGC or to a Plan; or the PBGC shall have instituted proceedings to terminate,
or to cause a trustee to be appointed to administer, any Plan of the Company,
any of its Subsidiaries or any of their ERISA Affiliates; or any person engages
in a Prohibited Transaction with respect to any Plan which results in or could
result in liability of the Company, any of its Subsidiaries or any of their
ERISA Affiliates, or any Plan of the Company, any of its Subsidiaries or their
ERISA Affiliates or fiduciary of any such Plan; or failure by the Company, any
of its Subsidiaries or any of their ERISA Affiliates to make a required
installment or other payment to any Plan within the meaning of Section 302(f) of
ERISA or Section 412(n) of the Code that results in or could result in liability
of the Company, any of its Subsidiaries or any of their ERISA Affiliates to the
PBGC or any Plan; or the withdrawal of the Company, any of its Subsidiaries or
any of their ERISA Affiliates from a Plan during a plan year in which it was a
"substantial employer" as defined in Section 4001(9a)(2) of ERISA; or the
Company, any of its Subsidiaries or any of their ERISA Affiliates becomes an
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<PAGE> 48
employer with respect to any Multiemployer Plan without the prior written
consent of the Required Banks; or
(h) Insolvency, Etc. The Company or any of its Subsidiaries shall
be dissolved or liquidated (or any judgment, order or decree therefor shall be
entered), or shall generally not pay its debts as they become due, or shall
admit in writing its inability to pay its debts generally, or shall make a
general assignment for the benefit of creditors, or shall institute, or there
shall be instituted against the Company or any of its Subsidiaries, any
proceeding or case seeking to adjudicate it a bankrupt or insolvent or seeking
liquidation, winding up, reorganization, arrangement, adjustment, protection,
relief or composition of it or its debts under any law relating to bankruptcy,
insolvency or reorganization or relief or protection of debtors or seeking the
entry of an order for relief, or the appointment of a receiver, trustee,
custodian or other similar official for it or for any substantial part of its
assets, rights, revenues or property, and, if such proceeding is instituted
against the Company or such Subsidiary and is being contested by the Company or
such Subsidiary, as the case may be, in good faith by appropriate proceedings,
such proceeding shall remain undismissed or unstayed for a period of 60 days; or
the Company or such Subsidiary shall take any action (corporate or other) to
authorize or further any of the actions described above in this subsection; or
any of the Insurance Subsidiaries shall become subject to (A) any delinquency,
receivership, conservation, supervisory, seizure, rehabilitation or liquidation
proceedings or order, directive or mandate issued by any governmental authority
or (B) any other order, directive or mandate issued by any governmental
authority, which in either case shall remain undismissed or unstayed for a
period of 10 days; or
(i) Security Documents. Any event of default described in any
Security Document shall have occurred and be continuing, or any material
provision of any Security Document shall at any time for any reason cease to be
valid and binding and enforceable against any obliger thereunder, or the
validity, binding effect or enforceability thereof shall be contested by any
person, or any obligor shall deny that it has any or further liability or
obligation thereunder, or any material provision thereof shall be terminated,
invalidated or set aside, or be declared ineffective or inoperative or in any
way cease to give or provide to the Banks and the Agent the benefits purported
to be created thereby; or
(j) Key Management. The Chief Executive Officer of the Company as
of the date hereof shall cease for any reason to serve actively in such
position, whether by reason of death, disability, resignation, action of the
Company's Board of Directors or shareholders or otherwise; or
(k) Regulatory Action. The Company or any of the Insurance
Subsidiaries shall be prohibited by any state board, commission, department,
agency, authority or other regulatory body from issuing insurance policies in
any jurisdiction; or
(l) Maintenance of Catastrophic Reinsurance. The Company or any
of the Insurance Subsidiaries shall fail to maintain such catastrophic
reinsurance as a prudent insurance company would deem necessary; or
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<PAGE> 49
(m) Chance in Control. Any Change in Control shall occur; or
(n) Distributions on Trust Preferred Securities. Any Subsidiary
Business Trust shall fail to make any Distributions on Trust Preferred
Securities when due.
6.2 Remedies.
(a) Upon the occurrence and during the continuance of any Event
of Default, the Agent may and, upon being directed to do so by the Required
Banks, shall by notice to the Company terminate the Commitments or declare the
outstanding principal of, and accrued interest on, the Notes and all other
amounts owing under this Agreement to be immediately due and payable, or both,
whereupon the Commitments shall terminate forthwith and all such amounts shall
become immediately due and payable, or both, as the case may be, provided that
in the case of any event or condition described in Section 6.1(h) with respect
to the Company, the Commitments shall automatically terminate forthwith and all
such amounts shall automatically become immediately due and payable without
notice; in all cases without demand, presentment, protest, diligence, notice of
dishonor or other formality, all of which are hereby expressly waived.
(b) The Agent may and, upon being directed to do so by the
Required Banks, shall, in addition to the remedies provided in Section 6.2(a),
exercise and enforce any and all other rights and remedies available to it or
the Banks, whether arising under this Agreement, the Notes or any Security
Document or under applicable law, in any manner deemed appropriate by the Agent,
including suit in equity, action at law, or other appropriate proceedings,
whether for the specific performance (to the extent permitted by law) of any
covenant or agreement contained in this Agreement or in the Notes or any
Security Document or in aid of the exercise of any power granted in this
Agreement, the Notes or any Security Document.
(c) Upon the occurrence and during the continuance of any Event
of Default, each Bank may at any time and from time to time, without notice to
the Company (any requirement for such notice being expressly waived by the
Company) set off and apply against any and all of the obligations of the Company
now or hereafter existing under this Agreement any and all deposits (general or
special, time or demand, provisional or final) at any time held and other
indebtedness at any time owing by such Bank to or for the credit or the account
of the Company and any property of the Company from time to time in possession
of such Bank, irrespective of whether or not such Bank shall have made any
demand hereunder and although such obligations may be contingent and unmatured.
The Company hereby grants to the Banks and the Agent a lien on and security
interest in all such deposits, indebtedness and property as collateral security
for the payment and performance of the obligations of the Company under this
Agreement. The rights of such Bank under this Section 6.2(c) are in addition to
other rights and remedies (including, without limitation, other rights of
setoff) which the Banks may have.
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ARTICLE VII.
THE AGENT AND THE BANKS
7.1 Appointment and Authorization. Each Bank hereby irrevocably
appoints and authorizes the Agent to take such action as agent on its behalf and
to exercise such powers under this Agreement, the Notes and the Security
Documents as are delegated to the Agent by the terms hereof or thereof, together
with all such powers as are reasonably incidental thereto. The provisions of
this Article VII are solely for the benefit of the Agent and the Banks, and the
Company shall not have any rights as a third party beneficiary of any of the
provisions hereof. In performing its functions and duties under this Agreement,
the Agent shall act solely as agent of the Banks and does not assume and shall
not be deemed to have assumed any obligation towards or relationship of agency
or trust with or for the Company.
7.2 Agent and Affiliates. First Chicago in its capacity as a Bank
hereunder shall have the same rights and powers hereunder as any other Bank and
may exercise or refrain from exercising the same as though it were not the
Agent. First Chicago and its affiliates may (without having to account therefor
to any Bank) accept deposits from, lend money to, and generally engage in any
kind of banking, trust, financial advisory or other business with the Company or
any of its Subsidiaries as if it were not acting as Agent hereunder, and may
accept fees and other consideration therefor without having to account for the
same to the Banks.
7.3 Scope of Agent's Duties. The Agent shall have no duties or
responsibilities except those expressly set forth herein, and shall not, by
reason of this Agreement, have a fiduciary relationship with any Bank, and no
implied covenants, responsibilities, duties, obligations or liabilities shall be
read into this Agreement or shall otherwise exist against the Agent. As to any
matters not expressly provided for by this Agreement (including, without
limitation, collection and enforcement actions under the Notes and the Security
Documents), the Agent shall not be required to exercise any discretion or take
any action, but the Agent shall take such action or omit to take any action
pursuant to the reasonable written instructions of the Required Banks and may
request instructions from the Required Banks. The Agent shall in all cases be
fully protected in acting, or in refraining from acting, pursuant to the written
instructions of the Required Banks (or all of the Banks, as the case may be, in
accordance with the requirements of this Agreement), which instructions and any
action or omission pursuant thereto shall be binding upon all of the Banks;
provided, however, that the Agent shall not be required to act or omit to act
if, in the judgment of the Agent, such action or omission may expose the Agent
to personal liability or is contrary to this Agreement, the Notes, the Security
Documents or applicable law.
7.4 Reliance bv Agent. The Agent shall be entitled to rely upon
any certificate, notice, document or other communication (including any cable,
telegram, telex, facsimile transmission or oral communication) believed by it to
be genuine and correct and to have been sent or given by or on behalf of a
proper person. The Agent may treat the payee of any Note as the holder thereof
unless and until the Agent receives written notice of the assignment thereof
pursuant to the terms of this Agreement signed by such payee and the Agent
receives the written agreement of the assignee that such assignee is bound
hereby to the same
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<PAGE> 51
extent as if it had been an original party hereto. The Agent may employ agents
(including without limitation collateral agents) and may consult with legal
counsel (who may be counsel for the Company), independent public accountants
and other experts selected by it and shall not be liable to the Banks, except
as to money or property received by it or its authorized agents, for the
negligence or misconduct of any such agent selected by it with reasonable care
or for any action taken or omitted to be taken by it in good faith in
accordance with the advice of such counsel, accountants or experts.
7.5 Default. The Agent shall not be deemed to have knowledge of
the occurrence of any Default or Event of Default, unless the Agent has received
written notice from a Bank or the Company specifying such Default or Event of
Default and stating that such notice is a "Notice of Default". In the event that
the Agent receives such a notice, the Agent shall give written notice thereof to
the Banks.
7.6 Liability of Agent. Neither the Agent nor any of its
directors, officers, agents, or employees shall be liable to the Banks for any
action taken or not taken by it or them in connection herewith with the consent
or at the request of the Required Banks or in the absence of its or their own
gross negligence or willful misconduct. Neither the Agent nor any of its
directors, officers, agents or employees shall be responsible for or have any
duty to ascertain, inquire into or verify (i) any recital, statement, warranty
or representation contained in this Agreement, any Note or any Security
Document, or in any certificate, report, financial statement or other document
furnished in connection with this Agreement, (ii) the performance or observance
of any of the covenants or agreements of the Company, (iii) the satisfaction of
any condition specified in Article II hereof, or (iv) the validity,
effectiveness, legal enforceability, value or genuineness of this Agreement, the
Notes, any Security Document or any other instrument or document furnished in
connection herewith.
7.7 Nonreliance on Agent and Other Banks. Each Bank acknowledges
and agrees that it has, independently and without reliance on the Agent or any
other Bank, and based on such documents and information as it has deemed
appropriate, made its own credit analysis of the Company and decision to enter
into this Agreement and that it will, independently and without reliance upon
the Agent or any other Bank, and based on such documents and information as it
shall deem appropriate at the time, continue to make its own analysis and
decision in taking or not taking action under this Agreement. The Agent shall
not be required to keep itself informed as to the performance or observance by
the Company of this Agreement, the Notes or the Security Documents or any other
documents referred to or provided for herein or to inspect the properties or
books of the Company and, except for notices, reports and other documents and
information expressly required to be furnished to the Banks by the Agent
hereunder, the Agent shall not have any duty or responsibility to provide any
Bank with any information concerning the affairs, financial condition or
business of the Company or any of its Subsidiaries which may come into the
possession of the Agent or any of its affiliates.
7.8 Indemnification. The Banks agree to indemnify the Agent (to
the extent not reimbursed by the Company, but without limiting any obligation of
the Company to make such reimbursement), ratably according to the respective
principal amounts of the Loans then
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outstanding made by each of them (or if no Loans are at the time outstanding,
ratably according to the respective amounts of their Commitments), from and
against any and all claims, damages, losses, liabilities, costs or expenses of
any kind or nature whatsoever (including, without limitation, fees and
disbursements of counsel) which may be imposed on, incurred by, or asserted
against the Agent in any way relating to or arising out of this Agreement or
the transactions contemplated hereby or any action taken or omitted by the
Agent under this Agreement, provided, however' that no Bank shall be liable for
any portion of such claims, damages, losses, liabilities, costs or expenses
resulting from the Agent's gross negligence or willful misconduct. Without
limitation of the foregoing, each Bank agrees to reimburse the Agent promptly
upon demand for its ratable share of any out-of-pocket expenses (including
without limitation fees and expenses of counsel) incurred by the Agent in
connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, to the extent that the Agent is not
reimbursed for such expenses by the Company, but without limiting the
obligation of the Company to make such reimbursement. Each Bank agrees to
reimburse the Agent promptly upon demand for its ratable share of any amounts
owing to the Agent by the Banks pursuant to this Section. If the indemnity
furnished to the Agent under this Section shall, in the judgment of the Agent,
be insufficient or become impaired, the Agent may call for additional indemnity
from the Banks and cease, or not commence, to take any action until such
additional indemnity is furnished.
7.9 Successor Agent. The Agent may resign as such at any time upon
ten days' prior written notice to the Company and the Banks. In the event of any
such resignation, the Banks shall, by an instrument in writing delivered to the
Company and the Agent, appoint a successor, which shall be a commercial bank
organized under the laws of the United States or any State thereof and having a
combined capital and surplus of at least $500,000,000. If a successor is not so
appointed or does not accept such appointment before the Agent's resignation
becomes effective, the retiring Agent may appoint a temporary successor to act
until such appointment by the Banks is made and accepted or if no such temporary
successor is appointed as provided above by the retiring Agent, the Banks shall
thereafter perform all the duties of the Agent hereunder until such appointment
by the Banks is made and accepted. Any successor to the Agent shall execute and
deliver to the Company and the Banks an instrument accepting such appointment
and thereupon such successor Agent, without further act, deed, conveyance or
transfer shall become vested with all of the properties, rights, interests,
powers, authorities and obligations of its predecessor hereunder with like
effect as if originally named as Agent hereunder. Upon request of such successor
Agent, the Company and the retiring Agent shall execute and deliver such
instruments of conveyance, assignment and further assurance and do such other
things as may reasonably be required for more fully and certainly vesting and
confirming in such successor Agent all such properties, rights, interests,
powers, authorities and obligations. The provisions of this Article VII shall
thereafter remain effective for such retiring Agent with respect to any actions
taken or omitted to be taken by such Agent while acting as the Agent hereunder.
7.10 Sharing of Pavments. The Banks agree among themselves that, in
the event that any Bank shall obtain payment in respect of any Loan or any other
obligation owing to
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the Banks under this Agreement through the exercise of a right of set-off,
banker's lien, counterclaim or otherwise in excess of its ratable share of
payments received by all of the Banks on account of the Loans and other
obligations (or if no Loans are outstanding, ratably according to the
respective amounts of the Commitments), such Bank shall promptly purchase from
the other Banks participations in such Loans and other obligations in such
amounts, and make such other adjustments from time to time, as shall be
equitable to the end that all of the Banks share such payment in accordance
with such ratable shares. The Banks further agree among themselves that if
payment to a Bank obtained by such Bank through the exercise of a right of
set-off, banker's lien, counterclaim or otherwise aforesaid shall be rescinded
or must otherwise be restored, each Bank which shall have shared the benefit of
such payment shall, by repurchase of participations theretofore sold, return
its share of that benefit to each Bank whose payment shall have been rescinded
or otherwise restored. The Company agrees that any Bank so purchasing such a
participation may, to the fullest extent permitted by law, exercise all rights
of payment, including set-off, banker's lien or counterclaim, with respect to
such participation as fully as if such Bank were a holder of such Loan or other
obligation in the amount of such participation. The Banks further agree among
themselves that, in the event that amounts received by the Banks and the Agent
hereunder are insufficient to pay all such obligations or insufficient to pay
all such obligations when due, the fees and other amounts owing to the Agent in
such capacity shall be paid therefrom before payment of obligations owing to
the Banks under this Agreement. Except as otherwise expressly provided in this
Agreement, if any Bank or the Agent shall fail to remit to the Agent or any
other Bank an amount payable by such Bank or the Agent to the Agent or such
other Bank pursuant to this Agreement on the date when such amount is due, such
payments shall be made together with interest thereon for each date from the
date such amount is due until the date such amount is paid to the Agent or such
other Bank at a rate per annum equal to the rate at which borrowings are
available to the payee in its overnight federal funds market. It is further
understood and agreed among the Banks and the Agent that if the Agent shall
engage in any other transactions with the Company and shall have the benefit of
any collateral or security therefor which does not expressly secure the
obligations arising under this Agreement except by virtue of a so-called
dragnet clause or comparable provision, the Agent shall be entitled to apply
any proceeds of such collateral or security first in respect of the obligations
arising in connection with such other transaction before application to the
obligations arising under this Agreement.
7.11 The Co-Agents. Notwithstanding anything in this Agreement to
the contrary, none of the Co-Agents, in such capacity, shall have any rights,
powers, duties, responsibilities or obligations, provided that each of Comerica
Bank, First National Bank of Omaha and First Bank, N.A., in its capacity as a
Bank, shall have the same rights and powers hereunder as any other Bank and may
exercise or refrain from exercising the same as though it were not a Co-Agent.
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ARTICLE VIII.
MISCELLANEOUS
8.1 Amendments, Etc.
(a) This Agreement may be amended from time to time and any
provision hereof may be waived by the parties hereto. No such amendment,
modification, termination or waiver of any provision of this Agreement nor any
consent to any departure therefrom shall be effective unless the same shall be
in writing and signed by the Company and the Required Banks and, to the extent
any rights or duties of the Agent may be affected thereby, the Agent, provided,
however, that no such amendment, modification, termination, waiver or consent
shall, without the consent of the Agent and all of the Banks, (i) authorize or
permit the extension of time for, or any reduction of the amount of, any payment
of the principal of, or interest on, the Notes, or any fees or other amount
payable hereunder, (ii) amend, extend or terminate the Termination Date or the
respective Commitment of any Bank or modify the provisions of this Section
regarding the taking of any action under this Section or the provisions of
Section 7.10 or the definition of Required Banks or any provision of this
Agreement requiring the consent of all of the Banks, (iii) provide for the
release of any guaranty or discharge of any collateral subject to any Security
Document, or (iv) modify any other provision of this Agreement which by its
terms requires the consent of all of the Banks.
(b) Any such amendment, waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.
(c) Notwithstanding anything herein to the contrary, no Bank that
is in default of any of its obligations, covenants or agreements under this
Agreement shall be entitled to vote (whether to consent or to withhold its
consent) with respect to any amendment, modification, termination or waiver of
any provision of this Agreement or any departure therefrom or any direction from
the Banks to the Agent, and, for purposes of determining the Required Banks at
any time when any of the Banks are in default under this Agreement, the
Commitments and Loans of such defaulting Banks shall be disregarded.
8.2 Notices. (a) Except as otherwise provided in Section 8.2(c)
hereof, all notices and other communications hereunder shall be in writing and
shall be delivered or sent to the Company at Suite 600 North, 222 S. 15th
Street, Omaha, Nebraska, 68102, Attention: William J. Gerber, Facsimile No.
(402) 345-9190, Telephone No. (402) 344-8800, and to the Agent and the Banks at
the respective addresses for notices set forth on the signatures pages hereof,
or to such other address as may be designated by the Company, the Agent or any
Bank by notice to the other parties hereto. All notices and other communications
shall be deemed to have been given at the time of actual delivery thereof to
such address, or, unless sooner delivered, (i) if sent by certified or
registered mail, postage prepaid, to such address, on the third day after the
date of mailing, (ii) if sent by telex, upon receipt of the appropriate
answerback, or (iii) if sent by facsimile transmission, upon condonation of
receipt by telephone at the number specified for confirmation, provided,
however, that notices to the Agent shall not be effective until received.
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(b) Notices by the Company to the Agent with respect to
terminations or reductions of the Commitments pursuant to Section 2.2, requests
for Borrowings pursuant to Section 2.4, and requests for continuations or
conversions of Borrowings pursuant to Section 2.7 shall be irrevocable and
binding on the Company.
(c) Any notice to be given by the Company to the Agent pursuant
to Sections 2.2, 2.4 or 2.7 and any notice to be given by the Agent or any Bank
hereunder, may be given by telephone, and all such notices given by the Company
must be immediately confirmed in writing in the manner provided in Section
8.2(a). Any such notice given by telephone shall be deemed effective upon
receipt thereof by the party to whom such notice is to be given.
8.3 No Waiver By Conduct; Remedies Cumulative. No course of
dealing on the part of the Agent or any Bank, nor any delay or failure on the
part of the Agent or any Bank in exercising any right, power or privilege
hereunder shall operate as a waiver of such right, power or privilege or
otherwise prejudice the Agent's or such Bank's rights and remedies hereunder;
nor shall any single or partial exercise thereof preclude any further exercise
thereof or the exercise of any other right, power or privilege. No right or
remedy conferred upon or reserved to the Agent or any Bank under this Agreement,
the Notes or any Security Document is intended to be exclusive of any other
right or remedy, and every right and remedy shall be cumulative and in addition
to every other right or remedy granted thereunder or now or hereafter existing
under any applicable law. Every right and remedy granted by this Agreement, the
Notes or any Security Document or by applicable law to the Agent or any Bank may
be exercised from time to time and as often as may be deemed expedient by the
Agent or any Bank and, unless contrary to the express provisions of this
Agreement, any Security Document, irrespective of the occurrence or continuance
of any Default or Event of Default.
8.4 Reliance on and Survival of Various Provisions. All terms,
covenants, agreements, representations and warranties of the Company made herein
or in any Security Document or in any certificate, report, financial statement
or other document furnished by or on behalf of the Company in connection with
this Agreement shall be deemed to be material and to have been relied upon by
the Banks, notwithstanding any investigation heretofore or hereafter made by any
Bank or on such Bank's behalf, and those covenants and agreements of the Company
set forth in Sections 3.6, 3.8 and 8.5 hereof shall survive the repayment in
full of the Notes and the termination of the Commitments.
8.5 Expenses; Indemnification.
(a) The Company agrees to pay, or reimburse the Agent for the
payment of, on demand, (i) the reasonable fees and expenses of counsel to the
Agent, including without limitation the fees and expenses of Messrs. Dickinson,
Wright, Moon, Van Dusen & Freeman, in connection with the preparation,
execution, delivery and administration of this Agreement, the Notes and the
Security Documents and in connection with advising the Agent as to its rights
and responsibilities with respect thereto, (ii) the reasonable fees of counsel
to the Agent in connection with any amendments, waivers or consents in
connection therewith, (iii) all stamp and other taxes and fees payable or
determined to be payable in connection with the execution, delivery,
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filing or recording of this Agreement, the Notes or the Security Documents (or
the verification of filing, recording, perfection or priority thereof) or the
consummation of the transactions contemplated hereby, and any and all
liabilities with respect to or resulting from any delay in paying or omitting
to pay such taxes or fees, and (iv) all reasonable costs and expenses of the
Agent and the Banks (including reasonable fees and expenses of counsel and
whether incurred through negotiations, legal proceedings or otherwise) in
connection with any Default or Event of Default or the enforcement of, or the
exercise or preservation of any rights under, this Agreement, the Notes or any
Security Document or in connection with any refinancing or restructuring of the
credit arrangements provided under this Agreement.
(b) The Company hereby indemnifies and agrees to hold harmless
the Banks and the Agent, and their respective officers, directors, employees and
agents, from and against any and all claims, damages, losses, liabilities, costs
or expenses of any kind or nature whatsoever (including reasonable attorneys
fees and disbursements incurred in connection with any investigative,
administrative or judicial proceeding whether or not such person shall be
designated as a party thereto) which the Banks or the Agent or any such person
may incur or which may be claimed against any of them by reason of or in
connection with entering into this Agreement or the transactions contemplated
hereby, including without limitation those arising under Environmental Laws;
provided, however, that the Company shall not be required to indemnify any such
Bank and the Agent or such other person, to the extent, but only to the extent,
that such claim, damage, loss, liability, cost or expense is attributable to the
gross negligence or willful misconduct of such Bank or the Agent, as the case
may be.
8.6 Successors and Assigns.
(a) This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns, provided that
the Company may not, without the prior written consent of the Banks, assign its
rights or obligations hereunder or under the Notes or any Security Document and
the Banks shall not be obligated to make any Loan hereunder to any entity other
than the Company.
(b) Any Bank may, with the prior written consent (which shall not
be unreasonably withheld) of the Company, sell to any financial institution or
institutions, and such financial institution or institutions may further sell, a
participation interest (undivided or divided) in, the Loans and such Bank's
rights and benefits under this Agreement, the Notes and the Security Documents,
and to the extent of that participation interest such participant or
participants shall have the same rights and benefits against the Company under
Section 3.6, 3.8 and 6.2(c) as it or they would have had if such participant or
participants were such Bank making the Loans to the Company hereunder, provided,
however, that (i) such Bank's obligations under this Agreement shall remain
unmodified and fully effective and enforceable against such Bank, (ii) such Bank
shall remain solely responsible to the other parties hereto for the performance
of such obligations, (iii) such Bank shall remain the holder of its Notes for
all purposes of this Agreement, (iv) the Company, the Agent and the other Banks
shall continue to deal solely and directly with such Bank in connection with
such Bank's rights and obligations under this Agreement, and (v) such Bank shall
not grant to its participant any rights to consent or withhold
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consent to any action taken by such Bank, or the Agent under this Agreement
other than action requiring the consent of all of the Banks hereunder.
(c) The Agent from time to time in its sole discretion may
appoint agents for the purpose of servicing and administering this Agreement and
the transactions contemplated hereby and enforcing or exercising any rights or
remedies of the Agent provided under this Agreement, the Notes, any Security
Documents or otherwise. In furtherance of such agency, the Agent may from time
to time direct that the Company and the Guarantors provide notices, reports and
other documents contemplated by this Agreement (or duplicates thereof) to such
agent. The Company hereby consents to the appointment of such agent and agrees
to provide all such notices, reports and other documents and to otherwise deal
with such agent acting on behalf of the Agent in the same manner as would be
required if dealing with the Agent itself.
(d) Each Bank may, with the prior written consent (which shall
not be unreasonably withheld) of the Agent and the Company, assign to one or
more banks or other entities all or a portion of its rights and obligations
under this Agreement (including, without limitation, all or a portion of its
Commitment, the Loans owing to it and the Notes held by it); provided, however,
that (i) each such assignment shall be of a uniform, and not a varying,
percentage of all rights and obligations of such Bank under this Agreement with
respect to its Commitment and Loans and otherwise, (ii) except in the case of an
assignment of all of a Bank's rights and obligations under this Agreement, the
amount of the Commitments of the assigning Bank being assigned pursuant to each
such assignment (determined as of the date of the Assignment and Acceptance with
respect to such assignment) shall in no event be less than $5,000,000, and in
integral multiples of $1,000,000 thereafter, or such lesser amount as to which
the Company and the Agent may consent, (iii) the parties to each such assignment
shall execute and deliver to the Agent, for its acceptance and recording in the
Register, an Assignment and Acceptance in the form of Exhibit J hereto (an
"Assignment and Acceptance"), together with the Note subject to such assignment
and a processing and recordation fee of $3,500, and (iv) any Bank may without
the consent of the Company or the Agent, and without paying any fee, assign to
any Affiliate of such Bank that is a bank or financial institution all of its
rights and obligations under this Agreement. Upon such execution, delivery,
acceptance and recording, from and after the effective date specified in such
Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto
and, to the extent that rights and obligations hereunder have been assigned to
it pursuant to such Assignment and Acceptance, have the rights and obligations
of a Bank hereunder and (y) the Bank assignor thereunder shall, to the extent
that rights and obligations hereunder have been assigned by it pursuant to such
Assignment and Acceptance, relinquish its rights and be released from its
obligations under this Agreement (and, in the case of an Assignment and
Acceptance covering all of the remaining portion of an assigning Bank's rights
and obligations under this Agreement, such Bank shall cease to be a party
hereto).
(e) BY executing and delivering an Assignment and Acceptance, the
Bank assignor thereunder and the assignee thereunder confirm to and agree with
each other and the other parties hereto as follows: (i) other than as provided
in such Assignment and Acceptance, such assigning Bank makes no representation
or warranty and assumes no
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responsibility with respect to any statements, warranties or representations
made in or in connection with this Agreement or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement
or any other instrument or document furnished pursuant hereto; (ii) such
assigning Bank makes no representation or warranty and assumes no
responsibility with respect to the financial condition of the Company or the
performance or observance by the Company of any of its obligations under this
Agreement or any other instrument or document furnished pursuant hereto; (iii)
such assignee confirms that it has received a copy of this Agreement, together
with copies of the financial statements referred to in Section 4.6 and such
other documents and information as it has deemed appropriate to make its own
credit analysis and decision to enter into such Assignment and Acceptance; (iv)
such assignee will, independently and without reliance upon the Agent, such
assigning Bank or any other Bank and based on such documents and information as
it shall deem appropriate at the time, continue to make its own credit
decisions in taking or not taking action under this Agreement; (v) such
assignee appoints and authorizes the Agent to take such action as agent on its
behalf and to exercise such powers and discretion under this Agreement as are
delegated to the Agent by the terms hereof, together with such powers and
discretion as are reasonably incidental thereto; and (vi) such assignee agrees
that it will perform in accordance with their terms all of the obligations that
by the terms of this Agreement are required to be performed by it as a Bank.
(f) The Agent shall maintain at its address designated on the
signature pages hereof a copy of each Assignment and Acceptance delivered to and
accepted by it and a register for the recordation of the names and addresses of
the Banks and the Commitment of, and principal amount of the Loans owing to,
each Bank from time to time (the "Register"). The entries in the Register shall
be conclusive and binding for all purposes, absent manifest error, and the
Company, the Agent and the Banks may treat each person whose name is recorded in
the Register as a Bank hereunder for all purposes of this Agreement. The
Register shall be available for inspection by the Company or any Bank at any
reasonable time and from time to time upon reasonable prior notice.
(g) Upon its receipt of an Assignment and Acceptance executed by
an assigning Bank and an assignee, and consented to by the Agent and the
Company, if applicable, together with the Note subject to such assignment, the
Agent shall, if such Assignment and Acceptance has been completed, (i) accept
such Assignment and Acceptance, (ii) record the information contained therein in
the Register and (iii) give prompt notice thereof to the Company. Within five
Business Days after its receipt of such notice, the Company, at its own expense,
shall execute and deliver to the Agent in exchange for the surrendered Note a
new Note to the order of such assignee in an amount equal to the Commitment
assumed by it pursuant to such Assignment and Acceptance and, if the assigning
Bank has retained a Commitment hereunder, a new Note to the order of the
assigning Bank in an amount equal to the aggregate Commitment retained by it
hereunder. Such new Note(s) shall be in an aggregate principal amount equal to
the aggregate principal amount of such surrendered Note, shall be dated the
effective date of such Assignment and Acceptance and shall otherwise be in
substantially the form of Exhibit A hereto.
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(h) The Company shall not be liable for any costs or expenses of
any Bank in effectuating any participation or assignment under this Section 8.6.
(i) The Banks may, in connection with any participation or
assignment or proposed participation or assignment pursuant to this Section 8.6,
disclose to the participant or assignee or proposed participant or assignee any
information relating to the Company and its Subsidiaries.
(j) Notwithstanding any other provision set forth in this
Agreement, (i) if any Event of Default shall have occurred and be continuing,
the consent of the Company shall not be required for any sale of a participation
interest under Section 8.6(b) or assignment under 8.6(d), and (ii) any Bank may
at any time create a security interest in, or assign, all or any portion of its
rights under this Agreement (including, without limitation, the Loans owing to
it and the Note held by it) in favor of any Federal Reserve Bank in accordance
with Regulation A of the Board of Governors of the Federal Reserve System;
provided that such creation of a security interest or assignment shall not
release such Bank from its obligations under this Agreement.
8.7 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
8.8 Governing Law. This Agreement is a contract made under, and
shall be governed by and construed in accordance with, the law of the
State of Illinois applicable to contracts made and to be performed entirely
within such State and without giving effect to choice of law principles of such
State. The Company and the Banks further agree that any legal or equitable
action or proceeding with respect to this Agreement, the Notes or any Security
Document or the transactions contemplated hereby may be brought in any court of
the State of Illinois, or in any court of the United States of America sitting
in Illinois, and the Company and the Banks hereby submit to and accept generally
and unconditionally the jurisdiction of those courts with respect to its person
and property, and, in the case of the Company, irrevocably consents to the
service of process in connection with any such action or proceeding by personal
delivery to such agent or to the Company, as the case may be, or by the mailing
thereof by registered or certified mail, postage prepaid to the Company at its
address for notices pursuant to Section 8.2. Nothing in this paragraph shall
affect the right of the Banks and the Agent to serve process in any other manner
permitted by law or limit the right of the Banks or the Agent to bring any such
action or proceeding against the Company or property in the courts of any other
jurisdiction. The Company and the Banks hereby irrevocably waive any objection
to the laying of venue of any such action or proceeding in the above described
courts.
8.9 Table of Contents and Headings. The table of contents and the
headings of the various subdivisions hereof are for the convenience of reference
only and shall in no way modify any of the terms or provisions hereof.
8.10 Construction of Certain Provisions. If any provision of this
Agreement refers to any action to be taken by any person, or which such person
is prohibited from taking,
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<PAGE> 60
such provision shall be applicable whether such action is taken directly or
indirectly by such person, whether or not expressly specified in such
provision.
8.11 Integration and Severability. This Agreement embodies the entire
agreement and understanding between the Company and the Agent and the Banks, and
supersedes all prior agreements and understandings, relating to the subject
matter hereof. In case any one or more of the obligations of the Company under
this Agreement, the Notes or any Security Document shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and enforceability of
the remaining obligations of the Company shall not in any way be affected or
impaired thereby, and such invalidity, illegality or unenforceability in one
jurisdiction shall not affect the validity, legality or enforceability of the
obligations of the Company under this Agreement, the Notes or any Security
Document in any other jurisdiction.
8.12 Independence of Covenants. All covenants hereunder shall be given
independent effect so that if a particular action or condition is not permitted
by any such covenant, the fact that it would be permitted by an exception to, or
would be otherwise within the limitations of, another covenant shall not avoid
the occurrence of a Default or an Event of Default if such action is taken or
such condition exists.
8.13 Interest Rate Limitation. Notwithstanding any provisions of this
Agreement, the Notes or any Security Document, in no event shall the amount of
interest paid or agreed to be paid by the Company exceed an amount computed at
the highest rate of interest permissible under applicable law. If, from any
circumstances whatsoever, fulfillment of any provision of this Agreement, the
Notes or any Security Document at the time performance of such provision shall
be due, shall involve exceeding the interest rate limitation validly prescribed
by law which a court of competent jurisdiction may deem applicable hereto, then,
ipso facto, the obligations to be fulfilled shall be reduced to an amount
computed at the highest rate of interest permissible under applicable law, and
if for any reason whatsoever any Bank shall ever receive as interest an amount
which would be deemed unlawful under such applicable law such interest shall be
automatically applied to the payment of principal of the Loans outstanding
hereunder (whether or not then due and payable) and not to the payment of
interest, or shall be refunded to the Company if such principal and all other
obligations of the Company to the Banks and the Agent have been paid in full.
8.14 WAIVER OF JURY TRIAL. THE BANKS AND THE AGENT AND THE COMPANY,
AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL,
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT ANY OF THEM MAY HAVE TO
A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR
ANY RELATED INSTRUMENT OR AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY
THIS AGREEMENT OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR
WRITTEN) OR ACTIONS OF ANY OF THEM. NEITHER ANY BANK OR THE AGENT NOR THE
COMPANY SHALL SEEK TO CONSOLIDATE, BY COUNTERCLAIM OR OTHERWISE, ANY SUCH ACTION
IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A
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JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THESE PROVISIONS SHALL NOT BE
DEEMED TO HAVE BEEN MODIFIED IN ANY RESPECT OR RELINQUISHED BY ANY PARTY HERETO
EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY SUCH PARTY.
[This rest of this page intentionally left blank. Signature blocks begin on
next page.]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and delivered on the 6th day of June, 1997, which shall be
the Effective Date of this Agreement, notwithstanding the day and year first
above written.
ACCEPTANCE INSURANCE COMPANIES INC.
By: [SIG]
-------------------------------
Its: VP
-----------------------------
Commitment Amount: $25,000,000 THE FIRST NATIONAL BANK OF
CHICAGO, as a Bank and as Agent
By:
--------------------------------
Its: Vice President
Address for Notices:
One First National Plaza
Mail Suite 0085
Chicago, Illinois 60670-0085
Attention: Cynthia W. Priest
Facsimile No.: (312) 732-4033
Facsimile Confirmation No.:(312) 732-9565
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<PAGE> 63
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered on the 6th day of June, 1997, which shall be the
Effective Date of this Agreement, notwithstanding the day and year first above
written.
ACCEPTANCE INSURANCE
COMPANIES INC.
By:
---------------------------
Its:
-----------------------
Commitment Amount: $25,000,000 THE FIRST NATIONAL BANK OF
CHICAGO, as a Bank and as Agent
By: /s/ Cynthia W. Priest
---------------------------
Its: Vice President
Address for Notices:
One First National Plaza
Mail Suite 0085
Chicago, Illinois 60670-0085
Attention: Cynthia W. Priest
Facsimile No.: (312) 732-4033
Facsimile Confirmation No.:
(312) 732-9565
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<PAGE> 64
Commitment Amount: $22,000,000 COMERICA BANK
By: [sig]
-------------------------
Its: Vice President
Address for Notices:
Comerica Bank
One Detroit Center
500 Woodward Avenue
P.O. Box 75000
Detroit, Michigan 48226
Attention: Jeffrey M. Schuman
Facsimile No.: (313) 222-5759
Facsimile Confirmation No.:
(313) 222-9167
Commitment Amount: $16,000,000 FIRST NATIONAL BANK OF OMAHA
By:
-------------------------
Its: Vice President
Address for Notices:
First National Bank of Omaha
One First National Center
Omaha, Nebraska 68102
Attention: James P. Bonham
Telex No.: 484410
Answerback: FIRSTNATBK-OMA
Facsimile No.: (402) 633-3519
Facsimile Confirmation No.:
(402) 341-0500
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<PAGE> 65
Commitment Amount: $22,000,000 COMERICA BANK
By:
-------------------------
Its: Vice President
Address for Notices:
Comerica Bank
One Detroit Center
500 Woodward Avenue
P.O. Box 75000
Detroit, Michigan 48226
Attention: Jeffrey M. Schuman
Facsimile No.: (313) 222-5759
Facsimile Confirmation No.: (313) 222-9167
Commitment Amount: $16,000,000 FIRST NATIONAL BANK OF OMAHA
By: /s/ J. P. Bonham
---------------------------------
Its: Vice President
Address for Notices:
First National Bank of Omaha
One First National Center
Omaha, Nebraska 68102
Attention: James P. Bonham
Telex No.: 484410
Answerback: FIRSTNATBK-OMA
Facsimile No.: (402) 633-3519
Facsimile Confirmation No.: (402) 341-0500
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<PAGE> 66
Commitment Amount: $ 15,000,000 FIRST BANK, N.A.
By: [SIG]
-----------------------
Its: Sr. Vice President
Address for Notices:
First Bank, N.A.
1700 Farnam
Omaha, Nebraska 68102
Attention: Lawrence F. Uebner
Facsimile No.: (402) 348-6841
Facsimile Confirmation No.: (402) 348-6294
Commitment Amount:$12,000,000 WELLS FARGO BANK, NATIONAL
ASSOCIATION
By:
------------------------
Its: Vice President
Address for Notices:
Wells Fargo Bank, National Association
Corporate Lending Division
100 W. Washington Boulevard
Phoenix, Arizona 85003
Attention: John Helms
Facsimile No.: (602) 229-4409
Facsimile Confirmation No.: (602) 528-6633
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<PAGE> 67
Commitment Amount: $15,000,000 FIRST- BANK, N.A.
By:
-------------------------
Its: Vice President
Address for Notices:
First Bank, N.A.
1700 Farnam
Omaha, Nebraska 68102
Attention: Lawrence M. Uebner
Facsimile No.: (402) 348-6841
Facsimile Confumation No.: (402) 348-6294
Commitment Amount: $12,000,000 WELLS FARGO BANK,NATIONAL
ASSOCIATION
By: [SIG]
---------------------
Its: Vice President
Address for Notices:
Wells Fargo Bank, National Association
Corporate Lending Division
100 W. Washington Boulevard
Phoenix, Arizona 85003
Attention: John Helms
Facsimile No.: (602) 229-4409
Facsimile Confirmation No.: (602) 528-6633
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<PAGE> 68
Commitment Amount: $10,000,000 MERCANTILE BANK, N.A.
By: [SIG]
-------------------------------------
Its: Vice President
Address for Notices:
Mercantile Bank N.A.
One Mercantile Center
7th & Washington, Tram 12-3
St. Louis, Missouri 63101
Attention: Joseph L. Sooter, Jr.
Facsimile No.: (314) 425-3859
Facsimile Confirmation No.: (314) 425-2462
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<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-28749 of Acceptance Insurance Companies Inc. on
Form S-3 of our reports dated March 12, 1997 (which express an unqualified
opinion and include an explanatory paragraph relating to the adoption of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities"), appearing in and incorporated by reference in the Annual Report
on Form 10-K of Acceptance Insurance Companies Inc. for the year ended
December 31, 1996 and to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
July 18, 1997
