<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1998
REGISTRATION NO. 333-42749
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
AMERICAN SAFETY INSURANCE GROUP, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA 6411 NOT APPLICABLE
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
44 CHURCH STREET
HAMILTON HM HX, BERMUDA
(441) 295-5688
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DAVID J. DOYLE, ESQ.
CONYERS DILL & PEARMAN
CLARENDON HOUSE
2 CHURCH STREET
HAMILTON HM CX, BERMUDA
(441) 295-1422
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
BETTY O. DERRICK, ESQ. FRED J. PINCKNEY, ESQ. M. HILL JEFFRIES, ESQ.
WOMBLE CARLYLE AMERICAN SAFETY CASUALTY ALSTON & BIRD LLP
SANDRIDGE & INSURANCE COMPANY ONE ATLANTIC CENTER
RICE PLLC 1845 THE EXCHANGE 1201 WEST PEACHTREE
1275 PEACHTREE STREET, SUITE 200 STREET ATLANTA, GEORGIA
SUITE 700 ATLANTA, GEORGIA 30339 30309
ATLANTA, GEORGIA 30309 (770) 916-1908 (404) 881-7000
(404) 872-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 27, 1998
2,700,000 SHARES
AMERICAN SAFETY INSURANCE GROUP, LTD.
LOGO
COMMON SHARES
----------------------
All 2,700,000 Common Shares, $.01 par value (the "Common Shares"), are being
offered by American Safety Insurance Group, Ltd. ("American Safety" or the
"Company").
Prior to this offering (the "Offering"), there has been no public market for
the Common Shares. It is currently estimated that the initial public offering
price will be between $11.00 and $13.00 per Common Share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price.
The Common Shares have been approved for quotation on the Nasdaq National
Market under the symbol "AMSFF."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE
COMMON SHARES.
----------------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) THE COMPANY(2)
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<S> <C> <C> <C>
Per Share............................... $ $ $
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Total(3).............................. $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
405,000 additional Common Shares on the same terms as set forth above
solely to cover over-allotments, if any. If the Underwriters exercise such
option in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."
----------------------
The Common Shares are offered severally by the Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain other conditions. It is expected that
delivery of the certificates representing the Common Shares will be made to the
Underwriters on or about , 1998.
ADVEST, INC.
J.C. BRADFORD&CO.
HOEFER & ARNETT
INCORPORATED
The date of this Prospectus is , 1998
<PAGE>
[LOGO OF AMERICAN SAFETY INSURANCE GROUP APPEARS HERE]
AMERICAN SAFETY INSURANCE GROUP, LTD.
How to Turn an Opportunity into a Specialty Insurance Program
[CHART DEPICTING INTERNAL BUSINESS FLOW]
CONSENT UNDER THE EXCHANGE CONTROL ACT, 1972 (AND REGULATIONS THEREUNDER)
HAS BEEN OBTAINED FROM THE BERMUDA MONETARY AUTHORITY FOR THE ISSUE AND
TRANSFER OF THE COMMON SHARES BEING OFFERED PURSUANT TO THE OFFERING. IN
ADDITION, A COPY OF THIS DOCUMENT HAS BEEN DELIVERED TO THE REGISTRAR OF
COMPANIES IN BERMUDA FOR FILING PURSUANT TO THE COMPANIES ACT, 1981 OF
BERMUDA. IN GIVING SUCH CONSENT AND IN ACCEPTING THIS PROSPECTUS FOR FILING,
THE BERMUDA MONETARY AUTHORITY AND THE REGISTRAR OF COMPANIES IN BERMUDA,
RESPECTIVELY, ACCEPT NO RESPONSIBILITY FOR THE FINANCIAL SOUNDNESS OF ANY
PROPOSAL OR FOR THE CORRECTNESS OF ANY OF THE STATEMENTS MADE OR OPINIONS
EXPRESSED HEREIN.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING PURCHASES OF THE COMMON SHARES TO STABILIZE THE MARKET PRICE,
PURCHASES OF THE COMMON SHARES TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON SHARES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company intends to furnish its shareholders with annual reports, which
will include consolidated financial statements audited by its independent
certified public accountants, and quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data appearing
elsewhere in this Prospectus. Unless the context indicates otherwise, all
references to the "Company" refer to American Safety Insurance Group, Ltd., a
Bermuda company, and its subsidiaries. All information presented (i) has been
adjusted to give effect to a 1,310-for-1 split of the Common Shares effective
January 29, 1998 and (ii) assumes that the Underwriters' over-allotment option
is not exercised. Certain terms which are specific to the insurance industry
are defined in "Glossary of Selected Insurance Terms," which begins on page 72
of this Prospectus. All references in this Prospectus to "dollar" and "$" are
to United States currency.
THE COMPANY
American Safety Insurance Group, Ltd. ("American Safety" or the "Company") is
a specialty insurance holding company which, through its subsidiaries,
develops, underwrites, manages and markets primary casualty insurance and
reinsurance programs in the alternative insurance market for (i) environmental
remediation risks; (ii) employee leasing and staffing industry risks; and (iii)
other specialty risks. The Company has demonstrated expertise in developing
specialty insurance coverages and custom designed risk management programs not
generally available in the standard insurance market.
The Company's specialty insurance programs include coverages for general
liability, pollution liability, professional liability, workers' compensation
and surety, as well as custom designed risk management programs (including
captive and rent-a-captive programs), for contractors, consultants and other
businesses and property owners who are involved with environmental remediation,
employee leasing and staffing, and other specialty risks. Through its U.S.
brokerage and management services subsidiaries, the Company also provides
specialized insurance program development, underwriting, risk placement,
reinsurance, program management, brokerage, loss control, claims administration
and marketing services.
The Company is able to select its roles as program developer, primary
underwriter, reinsurer, program manager and broker based on its assessment of
each risk profile. After determining its roles, the Company utilizes its
insurance and reinsurance subsidiaries, its insurance brokerage and management
services subsidiaries, and a risk retention group affiliate to generate risk
premium revenues, program management fees, insurance and reinsurance
commissions and investment income, as appropriate.
The Company insures and places risks through its U.S. insurance subsidiary,
as well as its non-subsidiary risk retention group affiliate and substantial
unaffiliated insurance and reinsurance companies. The Company also reinsures
and places, through its Bermuda reinsurance subsidiary and substantial
unaffiliated reinsurers, a portion of the risks underwritten directly by its
U.S. insurance subsidiary, its risk retention group affiliate and other
insurers. Substantially all of the reinsurance business that the Company
currently assumes is for primary insurance programs that the Company has
developed and underwritten.
American Safety was formed in Bermuda as a group captive insurance company in
1986 to provide stable, long term insurance protection for the asbestos
abatement and environmental remediation industry in the United States which had
suffered from disruptive market cycles in the standard insurance market. The
Company now provides insurance coverages and services in all 50 states and
principally markets its insurance programs through approximately 160
independent insurance agency and brokerage firms.
For the nine months ended September 30, 1997, the Company's revenues totaled
$10.4 million, an increase of 64.8% over the same period in 1996. The Company's
revenues for the nine months ended September 30, 1997 were comprised of risk
premium revenues of $6.5 million, program management fees of $0.5 million,
insurance and reinsurance brokerage commissions of $1.6 million, investment
income of $1.2 million and interest on notes receivable of $0.6 million. For
the year ended December 31, 1996, the Company's revenues totaled $8.9 million,
comprised of risk premium revenues of $4.3 million, program management fees of
$0.5 million, insurance and reinsurance brokerage commissions of $1.9 million,
investment income of $1.2 million and interest on notes receivable of $0.9
million.
3
<PAGE>
Industry Rating. A.M. Best Company ("A.M. Best"), an independent nationally
recognized insurance industry rating service and publisher, has assigned a
rating of "A (Excellent)" on a group basis to American Safety, as well as its
U.S. insurance subsidiary, American Safety Casualty Insurance Company
("American Safety Casualty"), and its non-subsidiary risk retention group
affiliate, American Safety Risk Retention Group, Inc. ("American Safety RRG").
A rating of "A (Excellent)" is the third highest of A.M. Best's 16 letter
ratings. A.M. Best's ratings are an independent opinion of an insurer's ability
to meet its obligations to policyholders, which opinion is of concern primarily
to policyholders, insurance agents and brokers and should not be considered an
investment recommendation.
Business Strategy. The Company's business strategy is to develop insurance
programs for the environmental remediation industry and the employee leasing
and staffing industry, as well as other specialty industries and risks. The
Company targets niche insurance markets and opportunities where its expertise
is required and where competition is limited. The Company seeks to generate
underwriting profits, program management fees and brokerage commissions through
such insurance programs. The Company utilizes a flexible approach to accomplish
its strategy by combining (i) intensive underwriting, (ii) value-added
services, including quality coverage enhancements, professional risk
management, dedicated loss control and claims management, and (iii) superior
service to insurance agents, brokers and insureds. Further, the Company
differentiates itself by its ability to select its roles as program developer,
primary underwriter, reinsurer, program manager and broker based on its
assessment of each specialty risk profile.
Since 1986, the Company's capacity for innovation has been demonstrated
through its development of the following specialty insurance coverages and
custom designed programs:
* 1986--an insurance policy to insure the general liability risks of
asbestos abatement contractors, and the establishment of technical loss
control guidelines for performing such work.
* 1987--an insurance policy to provide limited occurrence form coverage
for asbestos abatement contractors, thereby protecting insureds from
claims that might be brought over an extended period of time.
* 1987--coverage for the transportation of asbestos-containing materials
and coverage for specific technical abatement methodologies, such as
encapsulation and enclosure of asbestos-containing materials.
* 1988--the formation of American Safety RRG, one of the first U.S.
insurance companies to provide general liability coverage for asbestos
abatement activities.
* 1990--a non-collateralized surety program for environmental remediation
contractors.
* 1991--a program to provide coverage for lead abatement and a broader
range of environmental remediation efforts.
* 1994--a workers' compensation insurance program for environmental
remediation contractors and consultants, as well as coverage for the
financial responsibility requirements imposed upon owners of municipal
solid waste landfills in connection with the closure of such landfills
and the provision of post-closure care.
* 1995--workers' compensation and general liability insurance programs for
employee leasing companies (also known as professional employer
organizations) and employee staffing companies.
4
<PAGE>
Growth Strategy. The additional capital to the Company from the proceeds of
the Offering is expected to result in a higher financial size rating from A.M.
Best. Management believes that the Company's increased capital base and
financial size rating, when combined with the Company's expertise in specialty
insurance programs, should position the Company to target a broader client base
through the following strategies:
* the continued development of new insurance programs, as well as enhanced
coverages, for clients and industries currently served by the Company.
* the continued development of insurance programs for clients, industries
and risks not currently served by the Company.
* the acquisition or formation of an excess and surplus lines insurance
company to enhance the Company's ability to enter additional classes of
insurance business.
* the acquisition of agencies or insurers specializing in insurance
program business.
Offices. The Company's Bermuda offices are located at 44 Church Street,
Hamilton, Bermuda, and the telephone number is (441) 295-5688. The offices of
the Company's U.S. subsidiaries are located at 1845 The Exchange, Suite 200,
Atlanta, Georgia 30339, and the telephone number is (770) 916-1908.
THE OFFERING
Common Shares Offered by the
Company...................... 2,700,000 shares
Common Shares to be
Outstanding after the
Offering..................... 5,625,230 shares (1)
Use of Proceeds............... To increase the Company's capital and surplus,
which should result in a higher financial size
rating from A.M. Best, to fund the potential
acquisition or formation of an excess and
surplus lines insurance company and other
strategic acquisitions, and for general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National
Market Symbol................ AMSFF
- --------
(1) Excludes 169,463 Common Shares that are subject to options which are
currently exercisable and 340,000 Common Shares that will be subject to
outstanding but unvested stock options and restricted shares upon the
completion of the Offering.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE
MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- ------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- -------- --------
(In thousands, except per share and ratio data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Direct and assumed
premiums earned...... $ 3,509 $ 6,109 $ 5,316 $ 3,820 $ 8,023
Ceded premiums
earned............... (89) (362) (1,044) (958) (1,517)
--------- --------- --------- -------- --------
Net premiums
earned............. 3,420 5,747 4,272 2,862 6,506
Net investment
income............... 663 1,346 1,207 944 1,177
Interest on notes
receivable........... -- 7 885 505 636
Brokerage commission
income............... 1,706 2,145 1,881 1,457 1,565
Management fees from
affiliate............ 464 475 479 356 444
Net realized gains
(losses)............. (118) 200 177 155 14
Other income.......... -- -- 5 4 10
--------- --------- --------- -------- --------
Total revenues...... 6,135 9,920 8,906 6,283 10,352
Expenses:
Losses and loss
adjustment expenses
incurred............. 1,424 2,905 2,056 1,383 3,533
Acquisition expenses.. 517 1,086 646 495 1,769
Other expenses........ 2,247 2,029 3,110 2,172 2,445
--------- --------- --------- -------- --------
Total expenses...... 4,188 6,020 5,812 4,050 7,747
--------- --------- --------- -------- --------
Earnings before
income taxes....... 1,947 3,900 3,094 2,233 2,605
Income taxes............ 329 720 177 178 383
--------- --------- --------- -------- --------
Net earnings........ $ 1,618 $ 3,180 $ 2,917 $ 2,055 $ 2,222
========= ========= ========= ======== ========
Net earnings per share.. $ 0.54 $ 1.07 $ 0.98 $ 0.69 $ 0.75
Common shares and common
share equivalents used
in computing net
earnings per share..... 2,983 2,974 2,974 2,974 2,974
GAAP RATIOS(1):
Loss and loss adjustment
expenses............... 41.6% 50.5% 48.1% 48.3% 54.3%
Expense ratio........... 30.7 23.4 29.3 28.6 36.4
--------- --------- --------- -------- --------
Combined ratio.......... 72.3% 73.9% 77.4% 76.9% 90.7%(2)
========= ========= ========= ======== ========
Net premiums written to
equity................. 0.3x 0.4x 0.3x 0.2x 0.3x
STATUTORY RATIOS(1):
Loss and loss adjustment
expenses............... 41.6% 50.5% 48.1% 48.3% 54.3%
Expense ratio........... 27.9 21.9 27.1 24.8 33.7
--------- --------- --------- -------- --------
Combined ratio.......... 69.5% 72.4% 75.2% 73.1% 88.0%(2)
========= ========= ========= ======== ========
</TABLE>
BALANCE SHEET DATA (AT END OF PERIOD):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED(3)
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<S> <C> <C>
Total investments........................................ $27,549 $57,302
Total assets............................................. 42,173 71,926
Unpaid losses and loss adjustment expenses............... 10,735 10,735
Total liabilities........................................ 21,449 21,449(4)
Total shareholders' equity............................... 20,724 50,477
</TABLE>
- --------
(1) See "Glossary of Selected Insurance Terms."
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."
(3) As adjusted to give effect to the sale of 2.7 million Common Shares offered
by the Company hereby and the application of the estimated net proceeds
therefrom as if such application had occurred on September 30, 1997. See
"Use of Proceeds."
(4) The Company repaid a $1.25 million surplus note on December 11, 1997.
6
<PAGE>
RISK FACTORS
Prospective purchasers should consider carefully the following risk factors
in addition to the information set forth elsewhere in this Prospectus prior to
making an investment in the Common Shares offered hereby.
INDUSTRY CYCLICALITY; POTENTIAL FLUCTUATIONS IN FINANCIAL RESULTS
The financial results of casualty insurance companies historically have been
subject to significant fluctuations and may vary significantly in the future.
Results of operations may fluctuate due to a variety of factors, including
competitive pricing pressures, unpredictable developments in loss trends,
changes in loss reserves, market acceptance of new coverages or enhancements,
competitive conditions in the industry, changes in operating expenses,
fluctuations in interest rates and other changes in investment markets which
affect market prices of investments and income from such investments, and
changes in levels of general business activity and economic conditions. The
Company has experienced increased competitive pricing pressures in its
environmental lines of business during the past three fiscal years. In
addition, insureds are eligible for renewal of their policies on different
anniversary dates, subject to underwriting and loss control criteria applied
by the Company. If a large number of insureds were to decline to renew their
policies or if their policies were not renewed in a given calendar quarter,
the Company's results of operations could be materially adversely affected in
the renewal quarter and subsequent quarters. Due to all of the foregoing
factors, in some future quarter or quarters, the Company's operating results
may be below the expectations of public company analysts and investors. In
such event, the public trading price of the Common Shares could be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."
COMPETITION
The casualty insurance and reinsurance business is highly competitive with
respect to a number of factors, including the overall financial strength of
insurers, ratings by rating agencies, premium rates, policy terms and
conditions, services offered, reputation and commission rates. The Company
faces competition from a number of insurers who have greater financial and
marketing resources and greater name recognition than the Company. Although
the Company's business strategy is to develop insurance programs for the
environmental remediation industry, the employee leasing and staffing industry
and other specialty industries and risks by targeting niche markets where its
expertise is required and where competition is limited, the Company
nevertheless encounters competition from other insurance companies engaged in
insuring risks in broader lines of business which encompass the Company's
niche markets and specialty programs, and such competition is expected to
increase as the Company expands its operations. See "Business--Competition."
SIGNIFICANT INDUSTRY CONCENTRATION; SPECIALTY INDUSTRY RISKS
Due to the Company's focus on insuring specialty industries, such as the
environmental remediation industry and the employee leasing and staffing
industry, its operations could be more exposed than its more diversified
competitors to the effects of changes in economic conditions and regulations
affecting such specialty industries. These changes may include economic
downturns that may adversely impact the building and real estate development
industry, as well as small to medium-size businesses served by employee
leasing and staffing companies; the degree of enactment and enforcement of
federal and state environmental regulations that encourage or require
environmental remediation efforts; and the adoption of state regulations
governing the licensing and operation of employee leasing and staffing
companies. See "Business--Primary Insurance Operations."
The Company insures and places general, pollution and professional liability
coverages for the specialty risks of contractors, consultants and other
businesses and property owners involved with the remediation and removal of
asbestos, lead, underground storage tanks and other hazardous substances and
environmental exposures. These insurance policies are issued for specific
environmental remediation risks, have limited (rather than absolute) pollution
exclusions and contain aggregate limits of liability. The Company also
provides workers' compensation coverage (i) for contractors involved in
environmental remediation, which may include risks such as occupational
diseases from exposure to hazardous substances, as well as (ii) for the
diverse work forces of employee leasing and staffing companies, which involve
risks such as injuries related to the workplace. See "Business--Primary
Insurance Operations."
7
<PAGE>
DEPENDENCE ON CONTINUED AVAILABILITY OF REINSURANCE
The availability, amount and cost of reinsurance are subject to prevailing
market conditions that are beyond the control of the Company and that affect
the Company's business, financial condition and results of operations. The
Company's business depends significantly upon the Company's ability to limit
its risk exposure by ceding (i.e., transferring to others) significant amounts
of the potential liability arising from risks insured or reinsured by the
Company. Although the Company since 1990 has been able to obtain appropriate
reinsurance and anticipates that it will continue to be able to obtain such
reinsurance, there can be no assurance that appropriate reinsurance will be
available. If the Company were unable to maintain or replace its reinsurance
treaties upon their expiration, either its exposures would increase or, if it
were unwilling to bear such increase in exposures, the Company would be
required to reduce the level of its underwriting commitments. Furthermore, the
Company is subject to credit risk with respect to its reinsurers, as the
ceding of risk to its reinsurers does not relieve the Company of its primary
liability to its insureds. Although the Company places its reinsurance with
reinsurers it believes to be financially stable, a significant reinsurer's
inability to make payment under the terms of a reinsurance treaty could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Reinsurance Ceded."
POSSIBLE INADEQUACY OF LOSS RESERVES
The establishment of appropriate loss reserves is an inherently uncertain
process, particularly in the environmental remediation industry where claims
that have occurred may not be reported to an insurance company until future
periods of time, and there can be no assurance that ultimate losses will not
materially exceed the Company's loss reserves. Insurance companies are
required to maintain reserves to cover their estimated ultimate liability for
losses and loss adjustment expenses with respect to reported and unreported
claims incurred. Reserves are estimates at a given time involving actuarial
and statistical projections of what the Company expects to be the cost of the
ultimate settlement and administration of claims. These estimates are based on
facts and circumstances then known, predictions of future events, estimates of
future trends, claims frequency and severity, potential judicial expansion of
liability for environmental claims, legislative activity and other factors,
such as inflation. The Company engages an internationally recognized actuarial
consulting firm to provide reserve studies as well as rate studies. To the
extent that loss reserves prove to be inadequate in the future, the Company
would have to increase its reserves and incur charges to earnings in the
periods such reserves are increased, which would cause fluctuations in
operating results and could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Reserves."
DEPENDENCE UPON MANAGEMENT
The Company's financial success and business development depend
significantly upon the continued services of Lloyd A. Fox, the President of
the Company, and upon the efforts and abilities of Stephen R. Crim, Executive
Vice President, and James G. Leach, Senior Vice President. The loss of the
services of Messrs. Fox, Crim or Leach could have a material adverse effect
upon the Company's operations. Mr. Fox has entered into a new five year
employment agreement with the Company which expires in 2002. In addition, the
Company maintains and is the sole beneficiary of key-man life insurance
policies on the life of Mr. Fox in the aggregate amount of $1 million. The
Company does not have employment agreements with Messrs. Crim or Leach.
The Company's financial success and development of business also depend upon
the Company's ability to hire additional personnel as necessary to meet its
management, marketing and service needs. Although the Company believes that,
to date, it has been successful in attracting and obtaining highly qualified
professionals and other administrative personnel as required by its business,
there can be no assurance that the Company will continue to be successful in
this regard. See "Management."
RELIANCE ON INDEPENDENT INSURANCE AGENCIES AND BROKERS
The failure or inability of independent insurance agencies and brokers to
market the Company's insurance programs successfully could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company principally markets its insurance programs through
approximately 160 independent insurance agencies and insurance brokerage
firms. Independent insurance agencies and brokers
8
<PAGE>
produced approximately 91% of the Company's gross written premium during the
nine months ended September 30, 1997, and three of these agencies accounted
for approximately 31% of such premium, in the aggregate. The remaining 9% of
the Company's gross written premium was produced by the Company. Agencies and
brokers are not obligated to promote the Company's insurance programs and may
sell competitors' insurance programs. As a result, the Company's business
depends in part on the marketing efforts of these agencies and brokers and on
the Company's ability to offer insurance programs and services that meet the
requirements of the clients and customers of these agencies and brokers. See
"Business--Program Development, Management and Administrative Operations."
DEPENDENCE UPON AFFILIATE
The Company's financial success and business development depend, to a
degree, upon the continuation of its management relationship with American
Safety RRG, its non-subsidiary risk retention group affiliate, and the
continued ability of American Safety RRG to write liability insurance in all
50 states. The Company manages the business of and reinsures risks insured by
American Safety RRG, and the Company derived approximately 37.2% of its
revenues in 1996 and approximately 20.9% of its revenues for the nine months
ended September 30, 1997 from this risk retention group. The Company has
entered into a management agreement with American Safety RRG with a three-year
term that expires on December 31, 1999. American Safety RRG is authorized to
write liability insurance in all 50 states as a result of the Federal
Liability Risk Retention Act of 1986 (the "Risk Retention Act"), its license
under the Captive Insurance Company Act of the State of Vermont (the "Vermont
Captive Act") and state filings. Any change in the Risk Retention Act limiting
American Safety RRG's ability to write liability insurance nationwide or any
adverse change in its license as a captive insurer under the applicable
insurance laws of Vermont, where American Safety RRG is domiciled, could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business--American Safety Risk Retention Group,
Inc."
RISKS ASSOCIATED WITH GROWTH STRATEGY
The Company's growth strategy includes potential strategic acquisitions, as
well as continued internal growth, particularly of its specialty insurance
program business, and development of new insurance programs. If the Company is
unable to implement its growth strategy effectively, the Company's business,
financial condition and results of operations could be materially adversely
affected. Although the Company is not engaged in negotiations with respect to
any acquisition, any future acquisition would be accompanied by risks commonly
encountered in acquisitions of companies. Such risks include, among other
things, the difficulty in assimilating the operations and personnel of an
acquired company; potential disruption of the Company's ongoing business;
inability to successfully integrate acquired systems and insurance programs
into the Company's operations; maintenance of uniform standards, controls and
procedures; and possible impairment of relationships with employees and
insureds of an acquired business as a result of changes in management. In
addition, there can be no assurance that the Company will be able to
successfully implement its strategy for continued internal growth. As a result
of the additional capital to the Company from the net proceeds of the
Offering, management believes that the Company qualifies for a higher
financial size rating from A.M. Best. Any failure to receive a higher
financial size rating may inhibit the Company's ability to market its
specialty insurance products and services to potential clients who consider
financial size ratings when purchasing insurance products and services.
Furthermore, the Company has in the past discontinued a specialty insurance
program due to inadequate production of premium in the program. There can be
no assurance that the Company would be successful in making an acquisition,
overcoming the risks or any other problems customarily encountered in
connection with an acquisition, or achieving growth in or development of new
insurance programs. See "Use of Proceeds" and "Business--Business Strategy."
IMPORTANCE OF INDUSTRY RATINGS
Increased public and regulatory scrutiny of the financial stability of
insurance companies have resulted in greater emphasis by policyholders upon
insurance company ratings, with a resultant potential competitive advantage
for insurance companies with higher ratings. A.M. Best, an independent
nationally recognized insurance industry rating service and publisher, has
assigned a rating of "A (Excellent)" on a group basis to American Safety, as
well as its U.S. insurance subsidiary, American Safety Casualty, and its non-
subsidiary risk
9
<PAGE>
retention group affiliate, American Safety RRG. No assurance can be given that
the group will maintain this rating, and any downgrade of such rating could
adversely affect the Company's business, financial condition and results of
operations. A.M. Best's ratings involve an independent opinion of an insurer's
ability to meet its obligations to policyholders which opinion is of concern
primarily to policyholders, insurance agents and brokers and should not be
considered an investment recommendation. See "Business--Industry Rating."
CONTROL BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The directors, officers and founding shareholders of the Company, and their
respective affiliates, collectively will own 2,925,230 Common Shares
(exclusive of stock options), which will equal approximately 52% of the
outstanding Common Shares upon completion of the Offering. Further, the
officers and directors of the Company will own options for the purchase of and
restricted share rights to 501,130 additional Common Shares upon the
completion of the Offering, of which options for the purchase of 161,130
Common Shares will be vested as of the completion of the Offering. These
additional Common Shares subject to vested options, together with the
2,925,230 Common Shares owned by the directors, officers and founding
shareholders, and their respective affiliates, would represent beneficial
ownership of approximately 53.3% of the Common Shares upon completion of the
Offering. If these shareholders were to vote as a group, they would be able to
exercise control over all matters requiring shareholder approval, including
the election of directors and approval of significant corporate transactions,
regardless of how the other shareholders vote. Such concentration of ownership
also may have the effect of delaying or preventing a change in control of the
Company. However, there are no agreements or understandings in effect whereby
these shareholders are bound to vote as a group. See "Management" and
"Principal Shareholders."
REGULATION
Insurance Regulation. The Company's primary insurance and reinsurance
subsidiaries, as well as its non-subsidiary risk retention group affiliate,
are subject to regulation under applicable insurance statutes of the
jurisdictions in which they are domiciled or licensed and write insurance.
Such regulation may limit the ability or the speed of the Company to respond
to market opportunities and may require the Company to incur significant
annual regulatory compliance expenditures. Insurance regulation is intended to
provide safeguards for policyholders rather than to protect shareholders of
insurance companies or insurance holding companies. Such regulation relates to
authorized lines of business, capital and surplus requirements, types and
amounts of investments, underwriting limitations, trade practices, policy
forms, claims practices, mandated participation in shared markets, reserve
adequacy, insurer solvency, transactions with related parties, changes in
control, payment of dividends and a variety of other financial and
nonfinancial components of an insurance company's business. Any changes in
insurance laws and regulations could materially adversely affect the Company's
business, financial conditions and results of operations. The Company is
unable to predict what additional laws and regulations, if any, affecting its
business may be promulgated in the future or how they might be interpreted.
See "Regulatory Matters."
Environmental Regulation. Environmental remediation activities and risks are
highly regulated by both federal and state governments. Environmental
regulation is evolving and changes in the regulatory patterns at federal and
state levels may have a significant effect upon potential claims against the
Company. Such changes may also affect the demand for the types of insurance
offered by and through the Company and the availability or cost of
reinsurance. On one occasion, the Company experienced difficulty in
implementing a new program due to the lack of regulatory enforcement of
certain landfill regulations. The Company is unable to predict what additional
laws and regulations, if any, affecting environmental remediation activities
and risks may be promulgated in the future or how they might be interpreted.
See "Business--Reserves."
NO CURRENT INTENTION TO PAY DIVIDENDS
American Safety does not intend to pay cash dividends on its Common Shares
in the foreseeable future. As an insurance holding company, American Safety's
ability to pay dividends to its shareholders will depend, to a significant
degree, on the ability of the Company's subsidiaries to pay dividends to
American Safety. The jurisdictions in which American Safety and its insurance
and reinsurance subsidiaries are domiciled place limitations on the amount of
dividends or other distributions payable by insurance companies in order to
protect
10
<PAGE>
the solvency of insurers. American Safety's current policy is for its
insurance and reinsurance subsidiaries to retain their capital for growth. See
"Dividend Policy" and "Regulatory Matters."
POTENTIAL RISK OF UNITED STATES TAXATION OF BERMUDA OPERATIONS
Bermuda's tax laws are more favorable to American Safety, a Bermuda company,
and its Bermuda reinsurance subsidiary, American Safety Re, than the United
States' tax laws because these Bermuda companies are not obligated to pay any
taxes in Bermuda based upon income or capital gains. If the Company's Bermuda-
based operations were determined to be subject to United States taxation, the
Company's results of operations could be materially adversely affected. The
United States Internal Revenue Code of 1986, as amended (the "Code"), does not
contain a definitive identification of activities that constitute being
engaged in a United States trade or business, and there can be no assurance
that the Internal Revenue Service (the "Service") will not contend that the
Company's Bermuda-based operations are engaged in a United States trade or
business and therefore are subject to United States income taxation. The
Company, exclusive of its U.S. subsidiaries, does not consider itself to be
engaged in a trade or business in the United States and accordingly does not
expect to be subject to United States income taxation. The Company's U.S.
subsidiaries are subject to United States taxation. See "Certain Tax
Considerations."
ABSENCE OF PRIOR MARKET
Prior to the Offering, there has been no public market for the Company's
securities, and there can be no assurance that the market price of the Common
Shares will not decline below the initial public offering price after the
Offering. The initial public offering price has been determined by
negotiations between the Company and representatives of the Underwriters and
may not be indicative of the market price for the Common Shares after the
Offering. See "Underwriting" for a discussion of the factors to be considered
in determining the initial public offering price for the Common Shares. The
stock market has from time to time experienced significant price and volume
fluctuations, which have affected the market prices of stocks in a particular
business sector (e.g., insurance companies) and which may be unrelated to the
operating performance of a specific company in such business sector. Factors
such as actual or anticipated operating results, growth rates, changes in
estimates by analysts, market conditions in the industry, announcements by
competitors, regulatory actions and general economic conditions may vary from
time to time. As a result of the foregoing, the Company's operating results
and prospects from time to time may be below the expectations of public market
analysts and investors. Any such event could have a material adverse effect on
the market price of the Common Shares.
ANTI-TAKEOVER CONSIDERATIONS
The Company's Bye-Laws contain certain provisions that may make more
difficult the acquisition of control of the Company by means of a tender
offer, open market purchase, proxy fight or otherwise. Pursuant to the
Company's Bye-Laws, the Company's Board of Directors may by resolution
establish one or more series of preferred shares having such number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences and limitations as may be fixed by the Board of Directors
without any further shareholder approval. In addition, the Company's Bye-Laws
restrict certain "business combinations" between the Company and an
"interested shareholder." While these provisions are designed to encourage
persons seeking to acquire control of the Company to negotiate with the Board
of Directors, they could have the effect of impeding or discouraging a
prospective acquiror from making a tender offer or otherwise attempting to
obtain control of the Company. To the extent these provisions discourage
takeover attempts, they could deprive shareholders of opportunities to realize
takeover premiums for their shares or could depress the market price of the
shares. Other provisions of the Company's Bye-Laws will also have the effect
of rendering more difficult or discouraging unsolicited takeover bids from
third parties or the removal of incumbent management. Such provisions include
providing for a classified or "staggered" Board of Directors and limiting any
person owning more than 9.5% of the outstanding capital stock of the Company
to voting power of 9.5%, other than Frederick C. Treadway or Treadway
Associates, L.P., affiliates of a founding shareholder of the Company. See
"Management," "Principal Shareholders," and "Description of Capital Stock."
The insurance laws of Delaware place restrictions on a change of control of
American Safety as a result of its ownership of American Safety Casualty, its
U.S. insurance subsidiary, which is domiciled in Delaware. Under
11
<PAGE>
Delaware law no person may obtain 10% or more of the voting securities of
American Safety without the prior approval of the Delaware Insurance
Department. See "Regulatory Matters."
LIMITATIONS ON SHARE VOTING RIGHTS BASED ON SHARE OWNERSHIP
The Company's Bye-Laws generally provide that if a shareholder is treated as
directly, indirectly or constructively owning shares having more than 9.5% of
the total votes of all the shares of capital stock of the Company, the voting
rights attached to the shares such person owns or is treated as owning will be
reduced to 9.5%, other than the voting rights of Frederick C. Treadway or
Treadway Associates, L.P., affiliates of a founding shareholder of the
Company. See "Description of Capital Stock."
DILUTION
The initial public offering price per Common Share is substantially higher
than the book value per Common Share. As a result, purchasers of the Common
Shares in the Offering will experience an immediate dilution of $3.08 per
share in the pro forma net tangible book value of their Common Shares from the
assumed initial public offering price of $12.00 per share (the mid-point of
the estimated price range set forth on the cover page of this Prospectus).
Additional dilution is likely to occur upon the exercise of outstanding stock
options which entitle certain optionholders to purchase Common Shares at
prices below the initial public offering price. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales, or the availability for future sales, of substantial amounts
of the Common Shares could adversely affect the market price of the Common
Shares. Several of the Company's founders hold a significant portion of the
outstanding Common Shares, and a decision by one or more of these shareholders
to sell their shares could adversely affect the market price of the Common
Shares. All Common Shares offered hereby (including any shares issued upon
exercise of the Underwriters' over-allotment option) will have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), and will
be freely tradable without restriction or further registration under the
Securities Act, except for shares held by "affiliates" of the Company, as that
term is defined in Rule 144 under the Securities Act. Shares beneficially
owned by affiliates of the Company may not be sold except in compliance with
the registration requirements of the Securities Act or pursuant to an
exemption from registration, such as Rule 144. Similarly, all the Common
Shares outstanding prior to the Offering are "restricted securities" as that
term is defined in Rule 144 and may not be sold except in compliance with the
registration requirements of the Securities Act or pursuant to an exemption
from registration, such as Rule 144. All of these restricted securities are
subject to lock-up agreements for a period of 180 days after the date of this
Prospectus, and are then eligible for sale subject to the provisions of Rule
144. See "Underwriting."
ENFORCEMENT OF CERTAIN CIVIL LIABILITIES
American Safety is a specialty insurance holding company organized pursuant
to the laws of Bermuda. A substantial portion of the assets of American Safety
are or may be located in jurisdictions outside the United States. As a result,
it may be difficult for investors to effect service of process within the
United States upon American Safety or to realize against it upon judgments of
courts of the United States predicated upon civil liabilities under the
federal securities laws of the United States.
American Safety has been informed by its Bermuda counsel, Conyers Dill &
Pearman, that the United States and Bermuda do not currently have a treaty
providing for reciprocal recognition and enforcement of judgments of United
States courts in civil and commercial matters and that a final judgment for
the payment of money
12
<PAGE>
rendered by any federal or state court in the United States based on civil
liability, whether or not predicated solely upon the federal securities laws
of the United States, would, therefore, not be automatically enforceable in
Bermuda. The Company has also been advised by Conyers Dill & Pearman that a
final and conclusive judgment obtained in federal or state courts in the
United States under which such a sum of money is payable as compensatory
damages (i.e., not being a sum claimed by a revenue authority for taxes or
other charges of a similar nature by a governmental authority, or in respect
of a fine or penalty or multiple or punitive damages) may be the subject of an
action on a debt in the Supreme Court of Bermuda under the common law doctrine
of obligation. Such an action should be successful upon proof that the sum of
money is due and payable, and without having to prove the facts supporting the
underlying judgment, as long as (i) the court that gave the judgment was
competent to hear the action in accordance with international law principles
as applied by the courts in Bermuda and (ii) the judgment is not contrary to
public policy in Bermuda, was not obtained by fraud or in proceedings contrary
to natural justice of Bermuda and is not based on an error in Bermuda law. A
Bermuda court may impose civil liability on the Company or its directors or
officers in a suit brought in the Supreme Court of Bermuda against the Company
or such persons with respect to a violation of the federal securities laws of
the United States, provided that the facts surrounding such violation would
constitute or give rise to a cause of action under Bermuda law.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements including or
relating to, among other things, (i) the Company's business and growth
strategies; (ii) the Company's having sufficient capital and surplus for its
operations; (iii) the Company's continued ability to provide intensive
underwriting and value-added services to clients and insureds; (iv) the
Company's continued ability to provide superior service to insurance agents,
brokers and insureds; (v) the continued adequacy of the Company's loss and
loss adjustment expense reserves; and (vi) the Company's avoidance of any
material loss on risks insured or on the collection of reinsurance
recoverables.
These and other statements which are not historical facts are based largely
on current expectations and assumptions of management and are subject to a
number of risks and uncertainties which could cause actual results to differ
materially from those contemplated by such forward-looking statements. These
risks and uncertainties include, among others, the risks and uncertainties
described in "Risk Factors" above. Assumptions related to forward-looking
statements include that the Company will continue to price and market its
insurance programs competitively, reserve appropriately for losses and loss
adjustment expenses and maintain its successful handling of claims; that
competitive conditions within the casualty insurance business will not change
materially or adversely; that the demand for the Company's or its affiliate's
insurance programs will remain strong; that the market will accept specialty
insurance programs as developed by the Company; that the Company will maintain
its relationships with agents and brokers; that the Company will retain key
management personnel; that the Company's reinsurers will remain solvent; and
that there will be no material adverse change in the Company's or its risk
retention group affiliate's operations or business.
Assumptions relating to forward-looking statements involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
the Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the results
contemplated in the forward-looking information will be realized. Management
decisions are subjective in many respects and susceptible to interpretations
and periodic revisions based on actual experience and business developments,
the impact of which may cause the Company to alter its business strategy and
capital expenditure plans which may in turn affect the Company's results of
operations. In light of the significant uncertainties inherent in the forward-
looking information included herein, the inclusion of such information should
not be regarded as a representation by the Company or any other person that
the strategy, objectives or other plans of the Company will be achieved. The
forward-looking statements contained herein speak only as of the date hereof,
and the Company undertakes no obligation to publicly update or revise any of
these forward-looking statements.
13
<PAGE>
THE COMPANY
American Safety is a specialty insurance holding company which, through its
subsidiaries, develops, underwrites, manages and markets primary casualty
insurance and reinsurance programs in the alternative insurance market for (i)
environmental remediation risks; (ii) employee leasing and staffing industry
risks; and (iii) other specialty risks. The Company has demonstrated expertise
in developing specialty insurance coverages and custom designed risk
management programs not generally available in the standard insurance market.
American Safety insures and places risks through its U.S. insurance
subsidiary, as well as its non-subsidiary risk retention group affiliate, and
substantial unaffiliated insurance and reinsurance companies. The Company also
reinsures and places, through its Bermuda reinsurance subsidiary and
substantial unaffiliated reinsurers, a portion of the risks underwritten
directly by its U.S. insurance subsidiary, its risk retention group affiliate
and other insurers.
American Safety was formed in Bermuda as a group captive insurance company
in 1986 to provide stable, long term insurance protection for the asbestos
abatement and environmental remediation industry in the United States which
had suffered from disruptive market cycles in the standard insurance market.
American Safety is able to maintain favorable tax status under Bermuda law,
although its U.S. subsidiaries are subject to taxation in the United States.
Following the enactment of the Risk Retention Act, American Safety, in order
to establish a U.S. insurance company to market specialty environmental
coverages, provided financial and technical assistance in connection with the
organization of American Safety RRG in 1988. American Safety RRG is not owned
by the Company, but is managed by Synergy Insurance Services, Inc.
("Synergy"), the Company's principal U.S. program development, underwriting
and administrative services subsidiary, on a fee-for-service basis. American
Safety RRG is a liability insurer authorized to write insurance in all 50
states. In 1988, American Safety RRG replaced American Safety as the policy
issuing carrier insuring general, pollution and professional liability risks
for contractors, consultants and other businesses and property owners who are
involved with environmental remediation. American Safety then became a quota
share reinsurer of the risks transferred and subsequently underwritten by
American Safety RRG. In addition, five of American Safety RRG's directors are
also directors of the Company. See "Business--American Safety Risk Retention
Group, Inc."
Synergy employs all of the Company's employees and manages the Company's
U.S. business operations, while the Company's Bermuda operations are managed
under contract by Mutual Risk Management (Bermuda), Ltd., an unaffiliated
party.
In 1993, the Company acquired its U.S. property and casualty insurer,
American Safety Casualty, in order to provide coverages through a U.S.
admitted insurance company and to expand the Company's insurance program
business. American Safety Casualty is currently licensed as a property and
casualty insurer in 44 states.
14
<PAGE>
In January 1998, American Safety formed a new reinsurance subsidiary,
American Safety Reinsurance, Ltd. ("American Safety Re"), a Bermuda licensed
insurance company, and transferred its reinsurance business on a going forward
basis to the subsidiary. American Safety now serves principally as a holding
company for all of its subsidiaries' operations.
LOGO
[Chart depicting Organization of American Safety and its Subsidiaries and
Affiliate]
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,700,000 Common Shares in
the Offering (after deduction of the underwriting discount and estimated
Offering expenses) are estimated to be approximately $29.8 million, assuming
an initial public offering price of $12.00 per share (the mid-point of the
estimated price range set forth on the cover page of this Prospectus).
The net proceeds from the Offering will increase the Company's capital and
surplus, which the Company believes should result in a higher financial size
rating from A.M. Best. Of these net proceeds, the Company intends to use
approximately $10 to $12 million to acquire and capitalize, or to form and
capitalize, an excess or surplus lines insurance company. Net proceeds that
are not used for such purposes will be used for general corporate purposes,
including other possible strategic acquisitions. The Company is not currently
engaged in any discussions or activities related to the formation of an excess
and surplus lines insurance company or any acquisitions. Management believes
that the Company's increased capital base and financial size rating from A.M.
Best, when combined with the Company's expertise in specialty insurance
programs, should position the Company to target a broader client base.
Pending such uses, the net proceeds from the Offering will be invested in
investment grade, interest bearing securities.
DIVIDEND POLICY
American Safety does not anticipate paying cash dividends on its Common
Shares in the foreseeable future. As an insurance holding company, American
Safety's ability to pay cash dividends to its shareholders will depend, to a
significant degree, on the ability of the Company's subsidiaries to pay cash
dividends to American Safety. The jurisdictions in which American Safety and
its insurance and reinsurance subsidiaries are domiciled place limitations on
the amount of dividends or other distributions payable by insurance companies
in order to protect the solvency of insurers. The Company's current policy is
for its primary insurance and reinsurance subsidiaries to retain their capital
for growth. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources," "Regulatory
Matters" and Note 7 to the Company's Consolidated Financial Statements.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997 and as adjusted to give effect to the sale of 2,700,000
Common Shares by the Company in the Offering at an assumed initial public
offering price of $12.00 per share (after deduction of the underwriting
discount and estimated Offering expenses). The information presented below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-------------------------
ACTUAL AS ADJUSTED
----------- -------------
(Dollars in thousands)
<S> <C> <C>
Short-term debt(1)................................... $ 1,250 $ 1,250
Long-term debt....................................... 0 0
----------- -----------
Total debt....................................... 1,250 1,250
----------- -----------
Shareholders' equity:
Preferred stock, par value $.01 per share;
5,000,000 shares authorized; no shares
outstanding(2).................................... 0 0
Common stock, par value $.01 per share; 15,000,000
shares authorized; 2,925,230 shares
outstanding(3).................................... 29 56
Additional paid-in capital......................... 2,752 32,478
Retained earnings.................................. 17,763 17,763
Unrealized gain relating to investments............ 180 180
----------- -----------
Total shareholders' equity....................... 20,724 50,477
----------- -----------
Total capitalization............................. $ 21,974 $ 51,727
=========== ===========
</TABLE>
- --------
(1) The Company repaid a $1.25 million surplus note on December 11, 1997.
(2) See "Description of Capital Stock."
(3) Excludes 169,463 Common Shares that are subject to options which are
currently exercisable and 340,000 Common Shares that will be subject to
outstanding but unvested stock options and restricted shares upon the
completion of the Offering.
17
<PAGE>
DILUTION
At September 30, 1997, the net tangible book value (defined as total
shareholders' equity less goodwill) of the Company was $20.4 million, or $6.99
per share. Net tangible book value per share represents the amount of total
tangible assets less total liabilities divided by the total number of Common
Shares outstanding. After giving effect to the sale by the Company of
2,700,000 Common Shares in the Offering at an assumed initial public offering
price of $12.00 per share, the pro forma net tangible book value of the
Company at September 30, 1997 would have been approximately $50.2 million or
$8.92 per share (after deducting the underwriting discount and estimated
Offering expenses). This represents an immediate increase in net tangible book
value of $1.93 per share to the existing shareholders and an immediate
dilution in net tangible book value of $3.08 per share to new investors
purchasing Common Shares in the Offering. The following table illustrates this
dilution on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price.................................. $12.00
Net tangible book value before the Offering.................. $6.99
Increase attributable to new investors....................... 1.93
-----
Pro forma net tangible book value after the Offering........... 8.92
------
Dilution in net tangible book value to new investors(1)........ $ 3.08
======
</TABLE>
- --------
(1) Dilution is the difference between the initial public offering price per
share and the pro forma net tangible book value per share after giving
effect to the Offering and the 1,310-for-1 split of the Common Shares
effective January 29, 1998.
The following table sets forth on a pro forma basis as of September 30, 1997
the number and percentage of total outstanding Common Shares purchased, the
total consideration and percentage of total consideration paid, and the
average price paid per share by existing shareholders and by purchasers of the
Common Shares in the Offering (before deducting the underwriting discount and
estimated Offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders........ 2,925,230 52.0% $ 2,781,041 7.9% $ 0.95
New investors................ 2,700,000 48.0 32,400,000 92.1 $12.00
--------- ----- ----------- -----
Total...................... 5,625,230 100.0% $35,181,041 100.0%
</TABLE>
Each of the foregoing tables assumes that outstanding stock options will not
be exercised. As of the date of this Prospectus, 509,463 Common Shares are
reserved for issuance pursuant to outstanding stock options and restricted
shares, of which 169,463 shares are subject to options currently exercisable.
To the extent that such stock options are exercised, there may be further
dilution to new investors.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data with
respect to the Company for the periods indicated. The balance sheet data as of
December 31, 1995, December 31, 1996 and September 30, 1997, and the income
statement data for each of the three fiscal years in the period ended December
31, 1996 and for the nine month periods ended September 30, 1996 and 1997,
have been derived from the audited financial statements of the Company
included elsewhere in this Prospectus. The balance sheet data as of March 31,
1993, December 31, 1993, December 31, 1994, and September 30, 1996 and the
income statement data for the twelve months ended March 31, 1993 and the nine
months ended December 31, 1993, have been derived from audited financial
statements of the Company which are not included in this Prospectus. Operating
results for the nine months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for a full year. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and the Notes thereto contained elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
NINE
TWELVE MONTHS NINE MONTHS MONTHS ENDED
ENDED ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30,
MARCH 31, DECEMBER 31, ------------------------- ----------------
1993(1) 1993 (1) 1994 1995 1996 1996 1997
------------- ------------ ------- ------- ------- ------- -------
(In thousands, except per share and ratio data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Direct and assumed
premiums earned....... $ 2,739 $ 2,053 $ 3,509 $ 6,109 $ 5,316 $ 3,820 $ 8,023
Ceded premiums
earned................ (147) (165) (89) (362) (1,044) (958) (1,517)
------- ------- ------- ------- ------- ------- -------
Net premiums earned.. 2,592 1,888 3,420 5,747 4,272 2,862 6,506
Net investment
income................ 739 559 663 1,346 1,207 944 1,177
Interest on notes
receivable............ -- -- -- 7 885 505 636
Brokerage commission
income(2)............. -- 1,058 1,706 2,145 1,881 1,457 1,565
Management fees from
affiliate(2).......... -- 381 464 475 479 356 444
Net realized gains
(losses).............. 17 63 (118) 200 177 155 14
Other income........... -- 71 -- -- 5 4 10
------- ------- ------- ------- ------- ------- -------
Total revenues....... 3,348 4,020 6,135 9,920 8,906 6,283 10,352
------- ------- ------- ------- ------- ------- -------
Expenses:
Losses and loss
adjustment expenses
incurred.............. (540) 828 1,424 2,905 2,056 1,383 3,533
Acquisition expenses... 1,271 1,096 517 1,086 646 495 1,769
Other expenses......... 266 1,543 2,247 2,029 3,110 2,172 2,445
------- ------- ------- ------- ------- ------- -------
Total expenses....... 997 3,467 4,188 6,020 5,812 4,050 7,747
------- ------- ------- ------- ------- ------- -------
Earnings before
income taxes........ 2,351 553 1,947 3,900 3,094 2,233 2,605
Income taxes............ -- 126 329 720 177 178 383
------- ------- ------- ------- ------- ------- -------
Net earnings......... $ 2,351 $ 427 $ 1,618 $ 3,180 $ 2,917 $ 2,055 $ 2,222
======= ======= ======= ======= ======= ======= =======
Net earnings per
share................. $ 0.79 $ 0.14 $ 0.54 $ 1.07 $ 0.98 $ 0.69 $ 0.75
Common shares and common
share equivalents used
in computing net
earnings per share..... 2,983 2,983 2,983 2,974 2,974 2,974 2,974
GAAP RATIOS(3):
Loss and loss adjustment
expense ratio.......... (20.8)%(4) 43.9% 41.6% 50.5% 48.1% 48.3% 54.3%
Expense ratio........... 59.3 (5) 71.7 (5) 30.7 23.4 29.3 28.6 36.4
------- ------- ------- ------- ------- ------- -------
Combined ratio.......... 38.5 % 115.6% 72.3% 73.9% 77.4% 76.9% 90.7%(6)
======= ======= ======= ======= ======= ======= =======
Net premiums written to
equity................. 0.2x 0.2x 0.3x 0.4x 0.3x 0.2x 0.3x
STATUTORY RATIOS(3):
Loss and loss adjustment
expense ratio.......... (20.8)%(4) 43.9% 41.6% 50.5% 48.1% 48.3% 54.3%
Expense ratio........... 59.3 (5) 71.7 (5) 27.9 21.9 27.1 24.8 33.7
------- ------- ------- ------- ------- ------- -------
Combined ratio.......... 38.5 % 115.6% 69.5% 72.4% 75.2% 73.1% 88.0%(6)
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA (AT
END OF PERIOD):
Total investments....... $13,220 $14,899 $17,393 $20,648 $17,964 $18,717 $27,549
Total assets............ 14,931 16,761 20,344 27,143 31,299 28,889 42,173
Unpaid losses and loss
adjustment expenses.... 4,199 4,798 6,048 8,294 8,914 8,417 10,735
Total liabilities....... 4,418 6,007 8,406 10,529 13,267 11,847 21,449
Total shareholders'
equity................. 10,513 10,754 11,938 16,614 18,032 17,043 20,724
</TABLE>
- -------
(1) American Safety changed its fiscal year end from March 31 to December 31.
(2) Reflects operations of Synergy Insurance Services, Inc. and Sureco Bond
Services, Inc. which were acquired on April 2, 1993.
(3) See "Glossary of Selected Insurance Terms."
(4) Reflects a benefit from a downward adjustment in ultimate loss and loss
adjustment expenses for accident years 1992 and prior.
(5) Reflects expenses incurred in connection with the acquisition of American
Safety Casualty, the Company's U.S. insurance subsidiary.
(6) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The information in this discussion is presented on the basis of generally
accepted accounting principles ("GAAP") and should be read in conjunction with
the Company's consolidated financial statements and notes thereto included
elsewhere in this Prospectus. All amounts and percentages are approximations.
OVERVIEW
American Safety is a specialty insurance holding company which, through its
subsidiaries, develops, underwrites, manages and markets primary casualty
insurance and reinsurance programs in the alternative insurance market for (i)
environmental remediation risks; (ii) employee leasing and staffing industry
risks; and (iii) other specialty risks.
The Company's general, pollution, and professional liability, workers'
compensation, and surety (other than bail bonds) lines of business are written
primarily for environmental remediation contractors, consultants and property
owners involved with environmental risks. Environmental remediation
contractors are involved in the removal or abatement of hazardous materials
and conditions such as asbestos, lead, underground storage tanks and other
environmental risks. Environmental consultants and similar professional firms
engage in the detection and analysis of hazardous materials and the design and
monitoring of remediation projects. The general, pollution, and professional
liability policies written and reinsured by the Company are issued for
specific environmental remediation risks, have limited (rather than absolute)
pollution exclusions and contain aggregate limits of liability. The workers'
compensation coverage for contractors involved in environmental remediation
includes coverage for risks which may include occupational diseases from
exposure to hazardous substances. Surety bonds issued by the Company guarantee
the performance of environmental and other contractors on environmental
remediation and construction projects, and the payment of sums due to
laborers, materialmen and suppliers. See "Risk Factors--Significant Industry
Concentration; Specialty Industry Risks."
The Company's revenues are comprised of risk premium revenues, program
management fees, insurance and reinsurance brokerage commissions, investment
income, interest on notes receivable, net realized gains from the sale of
investment securities, and other income. The Company's primary revenue source
has been reinsurance assumed from its U.S. insurance subsidiary, its risk
retention group affiliate and other insurers, for which the Company has
developed specialty insurance programs. The Company and its risk retention
group affiliate write only casualty coverages and therefore do not participate
in reinsuring first party property coverages.
The Company's development and structuring of programs are focused primarily
on the generation of revenues and earnings, whether attributable to
underwriting profits, fees, commissions, or a combination of these items. For
example, a profitable program may be structured to result in break-even
underwriting results in the Company's insurance subsidiaries, while at the
same time creating revenues and earnings in the Company's program management
or insurance brokerage subsidiaries.
The combined ratio of an insurance company measures only the underwriting
results of insurance operations and not the profitability of the overall
Company. The Company's reported combined ratio for its insurance operations
may not provide an accurate indication of the Company's overall profitability
from insurance and reinsurance programs due to the fee and commission income
generated in related non-insurance subsidiaries.
During the nine months ended September 30, 1997, the Company continued to
increase its workers' compensation business as a proportion of its total
casualty business. Although the Company's workers' compensation business has a
higher loss ratio than the Company's other lines of business, workers'
compensation continues to generate an acceptable level of profit overall.
During the same period, the Company instituted a bail bond program which was
structured to produce a higher expense ratio than the Company's other lines of
business. Although both the workers' compensation and bail bond programs
contributed to a higher combined ratio for the Company's insurance
subsidiaries, the structure of these programs did not affect the Company's
overall profitability. Depending on the Company's mix of business going
forward, the combined ratio may fluctuate from time to time and may not
reflect the overall profitability of insurance programs to the Company.
Certain of the Company's insurance policies and reinsurance assumed,
including general and pollution liability policies covering environmental
remediation risks, as well as workers' compensation policies, may be subject
to claims brought years after an incident has occurred or the policy period
has ended. The Company
20
<PAGE>
maintains reserves to cover its estimated liability for losses and loss
adjustment expenses with respect to reported and unreported claims incurred.
See "Business--Reserves."
In January 1998, American Safety formed a new reinsurance subsidiary,
American Safety Re, a Bermuda licensed insurance company, and transferred its
reinsurance business on a going forward basis to the subsidiary. American
Safety now serves principally as a holding company for all of the
subsidiaries' operations.
The Company, both internally and by consulting outside vendors, has reviewed
its internal business systems and believes that the systems, primarily its
computer system, will process date information accurately and without
interruption when required to process dates in the year 1999 and beyond. The
Company has not been required to expend significant resources to address the
year 2000 issue and does not anticipate any significant expenditures.
RESULTS OF OPERATIONS
The following table sets forth the Company's consolidated revenues:
<TABLE>
<CAPTION>
PERCENT INCREASE
(DECREASE)
-------------------------
NINE MONTHS NINE
ENDED MONTHS
YEAR ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED ENDED
------------------------ -------------- --------------- -------
1994 TO 1995 TO 1996 TO
1994 1995 1996 1996 1997 1995 1996 1997
------- ------- ------- ------ ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net premiums earned:
Reinsurance:
Workers'
compensation......... $ 1,230 $ 3,223 $ 2,620 $1,552 $ 3,794 162.0% (18.7)% 144.5 %
General liability from
affiliate............ 2,190 2,506 1,522 1,238 1,447 14.4 (39.3) 16.9
------- ------- ------- ------ -------
Total reinsurance.... 3,420 5,729 4,142 2,790 5,241 67.5 (27.7) 87.8
Primary insurance:
Surety................ 0 18 130 72 1,265 -- 622.2 1,681.7
------- ------- ------- ------ -------
Total primary
insurance........... 0 18 130 72 1,265 -- 622.2 1,681.7
------- ------- ------- ------ -------
Total net premiums
earned............. 3,420 5,747 4,272 2,862 6,506 68.0 (25.7) 127.4
------- ------- ------- ------ -------
Net investment income... 663 1,346 1,207 944 1,177 103.0 (10.3) 24.7
Interest on notes
receivable 0 7 885 505 636 -- 12,543 25.9
Commission and fee
income:
Brokerage commission
income................ 1,706 2,145 1,881 1,457 1,565 25.7 (12.3) 7.3
Management fees from
affiliate............. 464 475 479 356 444 2.4 0.8 24.7
------- ------- ------- ------ -------
Total commission and
fee income........... 2,170 2,620 2,360 1,813 2,009 20.7 (9.9) 10.7
------- ------- ------- ------ -------
Net realized gains
(losses)............... (118) 200 177 155 14 269.5 (11.5) (91.0)
Other income............ -- -- 5 4 10 -- -- 175.0
------- ------- ------- ------ -------
Total revenues..... $ 6,135 $ 9,920 $ 8,906 $6,283 $10,352 61.7% (10.2)% 64.8 %
======= ======= ======= ====== =======
</TABLE>
The following table sets forth the components of the Company's statutory
combined ratio for the periods indicated:
<TABLE>
<CAPTION>
NINE
YEAR ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- ----------------
1994 1995 1996 1996 1997(1)
---- ---- ---- ------ --------
<S> <C> <C> <C> <C> <C>
Insurance operations:
Loss and loss adjustment expense
ratio................................ 41.6% 50.5% 48.1% 48.3% 54.3%
Expense ratio......................... 27.9 21.9 27.1 24.8 33.7
---- ---- ---- ------ ------
Combined ratio...................... 69.5% 72.4% 75.2% 73.1% 88.0%
==== ==== ==== ====== ======
</TABLE>
- --------
(1) See "--Overview."
21
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Net Premiums Earned. Net premiums earned increased 127.4% from $2.9 million
for the nine months ended September 30, 1996 to $6.5 million for the same
period in 1997. The principal factor accounting for the increase was the
Company's assumption in 1997 of workers' compensation reinsurance business
from an unaffiliated insurance carrier, which increased net premiums earned
from workers' compensation reinsurance by 144.5% from $1.6 million in the 1996
period to $3.8 million in the 1997 period. The magnitude of this increase was
affected by workers' compensation premium refunds of $634,000 in the 1996
period on business that had been recorded in the prior year.
In workers' compensation insurance, annual premium payments are generally
determined on the basis of the insured company's payroll. At the start of a
policy year, the level of payroll is unknown and must be estimated. The
insured then pays workers' compensation premiums based on this estimate of
future payroll. At policy expiration, an audit is performed to determine the
insured's actual payroll for the policy period. Then, the actual payroll is
compared to the original estimate, and either an additional workers'
compensation premium is billed or a return premium is refunded.
The workers' compensation premium refunds of $634,000, which reduced the
Company's 1996 revenues, were a result of changes in the Company's estimate of
the ultimate premium, based upon audits of the insured's 1994 and 1995 payroll
estimates.
General liability reinsurance premiums increased 16.9% from $1.2 million for
the nine months ended September 30, 1996 to $1.4 million for the same period
in 1997 as a result of new accounts written by the Company's risk retention
group affiliate. In the Company's primary insurance business, net premiums
earned from the Company's U.S. insurance subsidiary's surety program increased
from $72,000 for the nine months ended September 30, 1996 to $1.3 million for
the same period in 1997, primarily due to the initiation of a bail bond
program in 1997 which produced $1.0 million in net premiums earned for the
nine months ended September 30, 1997. The Company has discontinued its
participation in the bail bond program due to inadequate premium production.
Net Investment Income. Net investment income increased 24.7% from $944,000
for the nine months ended September 30, 1996 to $1.2 million for the same
period in 1997 as a result of the investment of additional cash flows from
insurance operations. The average annual pre-tax yield on investments was 6.4%
in the 1996 period and 6.9% in the 1997 period. The average annual after-tax
yield on investments was 5.8% for the nine months ended September 30, 1996 and
6.2% for the same period in 1997.
Interest from Notes Receivable. Interest from notes receivable increased
25.9% from $505,000 for the nine months ended September 30, 1996 to $636,000
for the same period in 1997. This increase resulted primarily from an increase
in the outstanding notes receivable.
Brokerage Commission Income. Income from insurance brokerage operations
increased 7.3% from $1.5 million for the nine months ended September 30, 1996
to $1.6 million for the same period in 1997 as a result of increased
commissions derived from insurance business produced through the Company's
risk retention group affiliate and unaffiliated insurance companies.
Management Fees. Management fees increased 24.7% from $356,000 for the nine
months ended September 30, 1996 to $444,000 for the same period in 1997 as a
result of increased service levels provided by the Company to its risk
retention group affiliate.
Net Realized Gains. Net realized gains from the sale of investments
decreased from $155,000 for the nine months ended September 30, 1996 to
$14,000 for the same period in 1997.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
increased 155.4% from $1.4 million for the nine months ended September 30,
1996 to $3.5 million for the same period in 1997 due to the 127.4% increase in
net premiums earned and a corresponding increase in reserves primarily due to
the increase in the workers' compensation line of business.
22
<PAGE>
Acquisition Expenses. Policy acquisition expenses increased from $495,000
for the nine months ended September 30, 1996 to $1.8 million for the same
period in 1997. This increase resulted from the initiation of the bail bond
program which was structured to have an expense ratio of approximately 96%.
Other Expenses. Other expenses increased 12.6% from $2.2 million for the
nine months ended September 30, 1996 to $2.4 million for the same period in
1997 due to salary increases and increased staffing required to handle new and
existing programs.
Income Taxes. Federal and state income taxes increased from $178,000 for the
nine months ended September 30, 1996 to $383,000 for the same period in 1997
due to increased taxable income in the Company's U.S. insurance subsidiary.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Premiums Earned. Net premiums earned decreased 25.7% from $5.7 million
in 1995 to $4.3 million in 1996. Net premiums earned from workers'
compensation reinsurance decreased 18.7% from $3.2 million in 1995 to $2.6
million in 1996. Workers' compensation premium refunds of $782,000, which
reduced the Company's 1996 revenues, were a result of changes in the ultimate
premium, based upon subsequent audits of the insureds' 1994 and 1995 payrolls
as compared to the insureds' payroll estimates. Net premiums earned from
general liability reinsurance decreased 39.3% from $2.5 million in 1995 to
$1.5 million in 1996 due to increased competition and lower premium rates
charged by the Company's risk retention group affiliate. Net premiums earned
from the Company's U.S. insurance subsidiary's surety line of business for
contract performance and payment bonds increased from $18,000 in 1995 to
$130,000 in 1996, as a result of the Company's increased emphasis on its
surety business.
Net Investment Income. Net investment income decreased 10.3% from $1.3
million in 1995 to $1.2 million in 1996 as a result of a decrease in
investment yields and a reduction in average invested assets. Invested assets
declined in 1996, as the Company shifted a portion of its investment
portfolio, as well as current operating cash flow, from invested assets to
notes receivable. The average annual pre-tax yield on investments was 7.1% in
1995 and 6.2% in 1996, and the average annual after-tax yield on investments
was 6.4% in 1995 and 5.6% in 1996.
Interest from Notes Receivable. Interest from notes receivable increased
from $7,000 in 1995 to $885,000 in 1996. This increase resulted primarily from
an increase in the outstanding notes receivable.
Brokerage Commission Income. Income from brokerage operations decreased
12.3% from $2.1 million in 1995 to $1.9 million in 1996 due to lower fees on
workers' compensation accounts, certain refunds of such fees connected with
audit premium refunds, and lower commissions on general liability insurance as
a result of decreased premiums.
Management Fees. Management fees increased 0.8% from $475,000 in 1995 to
$479,000 in 1996.
Net Realized Gains. Net realized gains from the sale of investments
decreased 11.5% from $200,000 in 1995 to $177,000 in 1996.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
decreased 29.2% from $2.9 million in 1995 to $2.1 million in 1996 as a result
of a reduction in the projected losses for the general liability reinsurance
business previously estimated by the Company's independent actuarial
consulting firm.
Acquisition Expenses. Policy acquisition expenses decreased 40.5% from $1.1
million in 1995 to $646,000 in 1996 due to lower premium volumes.
Other Expenses. Other expenses increased 53.3% from $2.0 million in 1995 to
$3.1 million in 1996 due to increased staffing to support growth, salary
increases, licensing efforts, relocation of office space and the development
of an internal insurance agency.
Income Taxes. Federal and state income taxes decreased from $720,000 in 1995
to $177,000 in 1996, due to lower taxable income in the Company's U.S.
insurance subsidiary.
23
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Premiums Earned. Net premiums earned increased 68.0% from $3.4 million
in 1994 to $5.7 million in 1995. Net premiums earned for workers' compensation
reinsurance increased from $1.2 million in 1994 to $3.2 million in 1995 as a
result of the Company's first full year of operating the program. Net premiums
earned from general liability reinsurance increased 14.4% from $2.2 million in
1994 to $2.5 million in 1995 due to the addition of new insureds by the
Company's risk retention group affiliate. The Company's U.S. insurance
subsidiary began writing contract surety bonds for environmental remediation
and construction contractors in 1995.
Net Investment Income. Net investment income increased 103.0% from $663,000
in 1994 to $1.3 million in 1995 as a result of the investment of additional
cash flows from insurance operations. The average annual pre-tax yield on
investments was 4.1% in 1994 and 7.1% in 1995, and the average annual after-
tax yield on investments was 3.5% in 1994 and 6.4% in 1995.
Interest from Notes Receivable. Interest from notes receivable increased
from $0 in 1994 to $7,000 in 1995. This increase resulted from a note
receivable obtained in the last quarter of 1995.
Brokerage Commission Income. Brokerage commission income increased 25.7%
from $1.7 million in 1994 to $2.1 million in 1995 as a result of increased
commissions derived from insurance business produced through the Company's
risk retention group affiliate and unaffiliated insurance companies.
Management Fees. Management fees increased 2.4% from $464,000 in 1994 to
$475,000 in 1995, as a result of increased fees charged by the Company to its
risk retention group affiliate for increased levels of service.
Net Realized Gains (Losses). Net realized gains (losses) from the sale of
investments improved from a net realized loss of $118,000 in 1994 to a net
realized gain of $200,000 in 1995.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
increased 104.1% from $1.4 million in 1994 to $2.9 million in 1995 due to
increases in premiums from the workers' compensation program attributable to
its first full year of operations.
Acquisition Expenses. Policy acquisition expenses increased from $517,000 in
1994 to $1.1 million in 1995 due to higher premium volumes for the general
liability and workers' compensation reinsurance business.
Other Expenses. Other expenses decreased 9.7% from $2.2 million in 1994 to
$2.0 million in 1995.
Income Taxes. Federal and state income taxes increased from $329,000 in 1994
to $720,000 in 1995 due to higher taxable net income in the Company's U.S.
insurance subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has met its cash requirements and financed its
growth principally through cash flows generated from operations. The Company's
primary sources of cash flow are proceeds from the sale or maturity of
invested assets, premiums earned, investment income, commission income and
management fees. The Company's short-term cash requirements are primarily for
claims payments, reinsurance premiums, commissions, salaries, employee
benefits and other operating expenses, and the purchase of investment
securities, which have historically been satisfied from operating cash flows.
Due to the uncertainty regarding settlement of unpaid claims, the long-term
liquidity requirements of the Company may vary, and the Company has attempted
to structure its investment portfolio to take into account the historical
payout patterns. Management believes that the Company's current cash flows are
sufficient for its short-term needs and the Company's invested assets are
sufficient for its long-term needs. See "Business--Investment Portfolio." The
Company also purchases reinsurance to mitigate the effect of large claims and
to help stabilize demands on its liquidity. See "Business--Reinsurance."
On a consolidated basis, net cash provided from operations was $3.6 million
for 1994, $5.3 million for 1995, $3.6 million for 1996 and $6.4 million for
the nine months ended September 30, 1997. The positive cash flows for all four
periods were primarily attributable to net premiums written, net earnings, and
increases in reserves for unpaid losses. Because workers' compensation and
general liability claims may be paid over an extended period of time, the
Company has established relatively large loss reserves for such lines of
business. The assets supporting the Company's reserves continue to earn
investment income until claim payments are made.
24
<PAGE>
Total assets increased from $27.1 million at December 31, 1995 to $31.3
million at December 31, 1996 and to $42.2 million at September 30, 1997,
primarily due to increases in cash, invested assets and notes receivable.
Cash, invested assets and notes receivable increased from $25.2 million at
December 31, 1995 to $27.3 million at December 31, 1996 and to $34.9 million
at September 30, 1997 as a result of increases in net premiums written,
investment income, and premiums held under a rent-a-captive program.
A rent-a-captive program is an insurance program under which the insured
assumes a portion of the risk of loss, generally in the form of a deductible
or self-insured retention. See "Glossary of Selected Insurance Terms." In such
programs, the insurer may agree to pay losses within the deductible or self-
insured retention layer. A premium is charged and held by the insurer to pay
such losses of the insured within such layers of risk. To the extent that the
premium exceeds paid claims and reserves for reported claims and claims
incurred but not reported, the insured generally is entitled to the benefit of
such excess.
The Company has no present plans to make any significant capital
expenditures.
American Safety is an insurance holding company whose principal assets are
its investment portfolio and its investment in the capital stock of its
subsidiaries. As an insurance holding company, American Safety's ability to
pay dividends to its shareholders will depend, to a significant degree, on the
ability of the Company's subsidiaries to pay dividends to American Safety. The
jurisdictions in which American Safety and its insurance and reinsurance
subsidiaries are domiciled place limitations on the amount of dividends or
other distributions payable by insurance companies in order to protect the
solvency of insurers. See Note 7 to the Company's Consolidated Financial
Statements regarding restrictions on the payment of dividends.
In January 1997, the Securities and Exchange Commission approved rule
amendments regarding disclosures concerning derivative financial instruments,
other financial instruments and derivative commodity instruments (the
"Release"). The Release requires inclusion in the footnotes to the financial
statements of extensive detail about the accounting policies followed by a
company in connection with its accounting for derivative financial instruments
and derivative commodity instruments. As of September 30, 1997, the Company
had no investments in derivative instruments.
INCOME TAXES
American Safety is incorporated under the laws of Bermuda and, under current
Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or
capital gains. American Safety has received an undertaking from the Minister
of Finance in Bermuda pursuant to the provisions of The Exempted Undertakings
Tax Protection Act 1966, which exempts American Safety and its shareholders,
other than shareholders ordinarily resident in Bermuda, from any Bermuda taxes
computed on profits, income or any capital asset, gain or appreciation, or any
tax in the nature of estate, duty or inheritance until March 28, 2016. The
Company, exclusive of its United States subsidiaries, does not consider itself
to be engaged in a trade or business in the United States and accordingly does
not expect to be subject to direct United States income taxation. The
Company's U.S. subsidiaries are subject to taxation in the United States. See
"Certain Tax Considerations."
IMPACT OF INFLATION
Property and casualty insurance premiums are established before the amounts
of losses and loss adjustment expenses are known and therefore before the
extent by which inflation may affect such expenses is known. Consequently, the
Company attempts, in establishing its premiums, to anticipate the potential
impact of inflation. However, for competitive and regulatory reasons, the
Company may be limited in raising its premiums consistent with anticipated
inflation, in which event the Company, rather than its insureds, would absorb
inflation costs. Inflation also affects the rate of investment return on the
Company's investment portfolio with a corresponding effect on the Company's
investment income.
25
<PAGE>
BUSINESS
OVERVIEW
American Safety is a specialty insurance holding company which, through its
subsidiaries, develops, underwrites, manages and markets primary casualty
insurance and reinsurance programs in the alternative insurance market for (i)
environmental remediation risks; (ii) employee leasing and staffing industry
risks; and (iii) other specialty risks. The Company has demonstrated expertise
in developing specialty insurance coverages and custom designed risk
management programs not generally available in the standard insurance market.
The Company's specialty insurance programs include coverages for general
liability, pollution liability, professional liability, workers' compensation
and surety, as well as custom designed risk management programs (including
captive and rent-a-captive programs), for contractors, consultants and other
businesses and property owners who are involved with environmental
remediation, employee leasing and staffing, and other specialty risks. Through
its U.S. brokerage and management services subsidiaries, the Company also
provides specialized insurance program development, underwriting, risk
placement, reinsurance, program management, brokerage, loss control, claims
administration and marketing services.
The Company is able to select its roles as program developer, primary
underwriter, reinsurer, program manager and broker based on its assessment of
each risk profile. After determining its roles, the Company utilizes its
insurance and reinsurance subsidiaries, its insurance brokerage and management
services subsidiaries, and its risk retention group affiliate to generate risk
premium revenues, program management fees, insurance and reinsurance
commissions and investment income, as appropriate.
The Company insures and places risks through its U.S. insurance subsidiary,
American Safety Casualty, as well as its non-subsidiary risk retention group
affiliate, American Safety RRG, and substantial unaffiliated insurance and
reinsurance companies. The Company also reinsures and places, through its
Bermuda reinsurance subsidiary, American Safety Re, a portion of the risks
underwritten directly by American Safety Casualty, American Safety RRG and
other insurers.
Substantially all of the reinsurance business that the Company currently
assumes is for primary insurance programs that the Company has developed and
underwritten.
The Company provides insurance coverages and services in all 50 states and
principally markets its insurance programs through approximately 160
independent insurance agency and brokerage firms. For the nine months ended
September 30, 1997, approximately 51% of the gross premiums written for the
Company's principal lines of insurance and reinsurance were produced from
California (14.1%), New York (9.1%), Texas (8.4%), Florida (7.7%), South
Carolina (6.5%) and Georgia (5.2%). In 1996, approximately 49% of the gross
premiums written for the Company's principal lines of insurance and
reinsurance were produced from California (16.0%), New York (9.3%), Florida
(8.3%), Texas (7.3%), New Jersey (4.3%) and Georgia (4.1%). See "--Primary
Insurance Operations--Environmental Programs--Surety" and "Regulatory
Matters--U.S. Regulation."
INDUSTRY RATING
In December 1995, A.M. Best, an independent nationally recognized insurance
industry rating service and publisher, assigned a rating of "A (Excellent)" on
a group basis to American Safety, as well as its U.S. insurance subsidiary,
American Safety Casualty, and its non-subsidiary risk retention group
affiliate, American Safety RRG.
ALTERNATIVE INSURANCE MARKET
The alternative insurance market has developed over the past 15 years to
serve insureds whose insurance needs have not been adequately met by the
standard insurance market. According to A.M. Best, from 1990 to 1995, a period
characterized by excess insurance capacity and declining premium rates, the
alternative insurance market grew from approximately 35% to 44% of the total
U.S. commercial insurance market, and the total annual premium volume of the
alternative insurance market grew from approximately $66 billion to $104
billion.
Alternative insurance programs generally involve (i) the underwriting of
risks which are characterized by the standard insurance market as difficult or
which generate too little premium for standard insurance companies; and/or
(ii) the design of specialized insurance programs, such as deductible or risk
retention programs, and captive or rent-a-captive programs, which enable
insureds to assume a portion of their own risks and share in the
26
<PAGE>
underwriting profitability or losses of the program. Originally developed to
respond to the needs of insureds for adequate insurance coverage and
affordable premium rates, the alternative insurance market also responds to
strategic needs of insureds for better financial management, improved claims
handling, more effective risk management, customized insurance programs,
direct access to the worldwide reinsurance market and greater control over
loss prevention. The benefits of such alternative insurance market techniques
typically include lower and more stable costs, greater control by the client
of its risk management program and an increased emphasis within the client's
organization on loss prevention and loss control.
BUSINESS STRATEGY
The Company's business strategy is to develop insurance programs for the
environmental remediation industry and the employee leasing and staffing
industry, as well as other specialty industries and risks. The Company targets
niche insurance markets and opportunities where its expertise is required and
where competition is limited. The Company utilizes a flexible approach to
accomplish its strategy by combining (i) intensive underwriting, (ii) value-
added services, including quality coverage enhancements, professional risk
management, dedicated loss control and claims management, and (iii) superior
service to insurance agents, brokers and insureds.
The Company differentiates itself by its ability to select its roles as
program developer, primary underwriter, reinsurer, program manager and broker
based on its assessment of each specialty risk profile. Through its ability to
assume a risk bearing role (such as primary insurance, reinsurance or both), a
production role (such as primary or reinsurance brokerage commissions), and a
service role (such as the provision of loss control, claims administration,
management and marketing services) as appropriate, the Company seeks to
generate underwriting profits, brokerage commissions and program management
fees.
The following diagram describes the various services provided by the
Company:
[Diagram listing the various types of services provided by the Company]
27
<PAGE>
Since 1986, the Company's capacity for innovation has been demonstrated
through its development of the following specialty insurance coverages and
custom designed programs:
^ 1986--an insurance policy to insure the general liability risks of
asbestos abatement contractors, and the establishment of technical loss
control guidelines for performing such work.
^ 1987--an insurance policy to provide limited occurrence form coverage
for asbestos abatement contractors, thereby protecting insureds from
claims that might be brought over an extended period of time.
^ 1987--coverage for the transportation of asbestos-containing materials
and coverage for specific technical abatement methodologies, such as
encapsulation and enclosure of asbestos-containing materials.
^ 1988--the formation of American Safety RRG, one of the first U.S.
insurance companies to provide general liability coverage for asbestos
abatement activities.
^ 1990--a non-collateralized surety program for environmental remediation
contractors.
^ 1991--a program to provide coverage for lead abatement and a broader
range of environmental remediation efforts.
^ 1994--a workers' compensation insurance program for environmental
remediation contractors and consultants, as well as coverage for the
financial responsibility requirements imposed upon owners of municipal
solid waste landfills in connection with the closure of such landfills
and the provision of post-closure care.
^ 1995--workers' compensation and general liability insurance programs for
employee leasing companies (also known as professional employer
organizations) and employee staffing companies.
GROWTH STRATEGY
The additional capital to the Company from the proceeds of the Offering is
expected to result in a higher financial size rating from A.M. Best.
Management believes that the Company's increased capital base and financial
size rating, when combined with the Company's expertise in specialty risk
insurance programs, should position the Company to target a broader client
base through the following strategies:
^ the continued development of new insurance programs, as well as enhanced
coverages, for clients and industries currently served by the Company.
^ the continued development of insurance programs for clients, industries
and risks not currently served by the Company.
^ the acquisition or formation of an excess and surplus lines insurance
company to enhance the Company's ability to enter additional classes of
insurance business.
^ the acquisition of agencies or insurers specializing in insurance
program business.
PROGRAM DEVELOPMENT, MANAGEMENT AND ADMINISTRATIVE OPERATIONS
The Company's U.S. brokerage and management subsidiaries, in combination
with the Company's primary insurance and reinsurance companies, provide a
broad range of dedicated services in connection with the development and
implementation of specialty risk insurance programs.
SYNERGY INSURANCE SERVICES. Synergy provides insurance program development,
underwriting, risk placement, reinsurance placement, program management,
brokerage, loss control, claims administration, marketing and administrative
services to the Company's U.S. insurance operations, its risk retention group
28
<PAGE>
affiliate, and unaffiliated insurers and reinsurers. Synergy employs all the
Company's employees and manages the Company's U.S. business operations, while
the Company's Bermuda operations are managed under contract by Mutual Risk
Management (Bermuda), Ltd, an unaffiliated party.
Synergy identifies and evaluates potential new program business and also
receives submissions for new programs from insurance brokers and other
intermediaries throughout the United States. When a submission for a new
program is received, Synergy identifies the resources needed to evaluate and
develop the program. In evaluating and developing a new program, Synergy
considers the following factors: whether the submitting party will bear risk
and the collateral security required therefor; the analysis of historic loss
data; the integrity and experience of the submitting party; the availability
of reinsurance; and the potential profitability of the program to the Company.
If the prospects for a new program appear favorable, Synergy designs the
structure for the new program and determines what additional services, such as
program management, brokerage, reinsurance, loss control, claims
administration, marketing, or other services will be required. Synergy
determines which entities, both affiliated and unaffiliated, are best able to
provide such services in a cost-effective manner and implements the program.
Synergy has been successful in developing many of the Company's primary
insurance and reinsurance programs. Synergy has also served since 1990 as the
program manager for the Company's risk retention group affiliate, providing
it, within administrative guidelines, with program management, underwriting,
loss control, brokerage, marketing and financial services.
MANAGEMENT AND ADMINISTRATIVE SERVICES. In the development and
implementation of programs, Synergy provides a number of fee and commission-
based services. Synergy provides (i) program management services for the
overall management and administration of a program; (ii) underwriting services
for evaluating individual risks or classes of risk; (iii) risk placement
services for determining the most effective means of providing particular
coverages; (iv) brokerage services for placing risks with affiliated or
unaffiliated carriers; (v) reinsurance intermediary services for placing ceded
reinsurance for a program; (vi) loss control services for evaluating the risks
posed by a particular class of risk, as well as the ability of insureds to
control their losses; (vii) claims administration services for the prompt
reporting and handling of claims, and the supervision of claims adjusters and
third party administrators; (viii) marketing services for designing and
placing advertisements and other marketing materials, as well as marketing
insurance programs to independent agents and brokers; and (ix) administrative
services, including for billing, collecting and reporting primary and
reinsurance premiums, producing financial reports on programs and paying
claims.
OTHER INSURANCE SERVICE SUBSIDIARIES. The Company has four other U.S.
subsidiaries engaged, under the direction of Synergy, in various
administrative and insurance agency services. Environmental Claims Services,
Inc. operates as a specialized claims administration facility engaged in the
administration and analysis of environmental and other specialty program
claims. Sureco Bond Services, Inc. and Harbor Insurance Services, Inc. are
surety bond agencies authorized to write contract performance and payment
bonds for unaffiliated insurance carriers. American Safety Purchasing Group,
Inc. was formed to facilitate the provision of certain insurance coverages
through a purchasing group (as defined by the Risk Retention Act) by licensed
insurance companies, including the Company's U.S. insurance subsidiary,
American Safety Casualty.
PRIMARY INSURANCE OPERATIONS
The Company, through its U.S. insurance subsidiary and its risk retention
group affiliate, provides primary casualty insurance in the alternative
insurance market for (i) environmental remediation risks; (ii) employee
leasing and staffing industry risks; and (iii) other specialty risks. The
Company's specialty insurance programs include coverages for general
liability, pollution liability, professional liability, workers' compensation
and surety, as well as custom designed risk management programs (including
captive and rent-a-captive programs), for contractors, consultants and other
businesses and property owners who are involved with environmental
remediation, employee leasing and staffing, and other specialty risks.
29
<PAGE>
ENVIRONMENTAL INSURANCE PROGRAMS. The Company has developed specialty
insurance programs for a broad range of environmental concerns and believes
that its intensive underwriting, dedicated loss control and claims management,
and superior service orientation will enable it to expand its insurance
program base to other environmental coverages not currently being provided.
Since 1986, the Company's insurance programs have helped asbestos abatement
and other environmental remediation contractors and consultants, as well as
property owners, perform remediation work in schools, hospitals, commercial,
industrial and other facilities, thereby protecting school children, factory
workers, and numerous public and private employees from the potential threat
of environmental health hazards.
The Company's in-house underwriting department consists of trained
environmental and other specialty risk underwriters, many of whom have been
with the Company for several years. The underwriting staff analyzes loss
histories of prospective insureds, as well as the insureds' technical
capabilities and experience with similar projects to those for which insurance
is being requested. The underwriting staff may also request references and
financial information. Some of the underwriters have technical backgrounds and
experience in various environmental fields. The Company's in-house loss
control department is also involved in the underwriting process, in reviewing
technical work guidelines provided by insureds, such as safety and health
practices and procedures, as well as inspecting contractor insureds'
environmental remediation project sites and recordkeeping throughout the
United States. The loss control professionals have backgrounds in engineering
or environmental fields.
The Company combines intensive loss control procedures with its expertise in
the underwriting process to currently insure, through its U.S. insurance
subsidiary and its risk retention group affiliate, nearly 1,000 insureds
throughout the United States for a broad range of coverages for asbestos and
lead abatement, hazardous materials and hazardous waste remediation,
underground storage tank removal and replacement, and "brownfields"
remediation. The Company estimates that it has insured through its insurance
and reinsurance subsidiaries and its risk retention group affiliate in excess
of 300,000 environmental remediation projects since 1986. The Environmental
Business Journal's Annual Industry Overview 1997 estimated that the United
States environmental industry, which includes contractors, consultants,
equipment manufacturers and other service firms served by the Company,
generated approximately $181 billion of revenue in 1996.
The Company's general and pollution liability policies for environmental
risks cover bodily injury and property damage to third parties arising out of
the operations of insureds, which may include losses arising from exposure to
specific hazardous substances that are released during a remediation project.
Coverages provided for professional liability protect insureds against claims
arising out of errors and omissions committed in the performance of
professional consulting, testing, laboratory and similar services, such as the
failure to detect hazardous materials in connection with assessments for same,
or the failure to properly design or monitor performance on remediation
projects in accordance with contracts entered into by such insureds. The
Company also provides workers' compensation coverage for contractors involved
in environmental remediation, which may include risks such as occupational
diseases from exposure to hazardous substances.
The Company provides coverage for a broad range of environmental risks,
including:
Asbestos Abatement. Asbestos is a fibrous mineral which has been
commercially produced for, among other things, insulation and reduction of
fire and heat in buildings and products. In spite of the usefulness of
asbestos, health problems have arisen with its use. In response to the need
for detection, abatement and removal of asbestos, the asbestos abatement
industry developed in the mid-1980's and sought insurance for risks
involved with its business. For the past 12 years, the Company has provided
general, pollution and professional liability coverages as well as workers'
compensation coverage for contractors, consultants, other businesses and
property owners involved with asbestos abatement.
Lead Abatement. The Company provides general, pollution and professional
liability coverages and workers' compensation coverage for lead paint
abatement contractors, consultants and property owners in connection with
the abatement of lead paint from both public and private facilities,
including housing authority complexes.
Underground Storage Tank Removal. The Company provides general, pollution
and professional liability coverages as well as workers' compensation
coverage to contractors and consultants for the removal
30
<PAGE>
and replacement of underground storage tanks, including associated soil
remediation activities attributed to leaking underground storage tanks.
Other Hazardous Substances. The Company provides general, pollution and
professional liability coverages, and workers' compensation coverage in
connection with the removal and remediation of other hazardous substances,
including hazardous waste, polychlorinated biphenyls (PCBs) and various
petroleum products.
Other Environmental Risks. The Company provides environmental insurance
coverages that offer protection against environmental exposures arising
from general business operations. Environmental insurance coverage is
offered for varied purposes such as financing real estate transactions,
transferring real estate and protecting against the release of hazardous
substances from disposal sites.
Surety. The Company's U.S. insurance subsidiary, American Safety
Casualty, is licensed to write surety bonds in 42 states (other than
Connecticut, Maine, Massachusetts, Michigan, New Hampshire, North Carolina,
Oregon and Wyoming), primarily providing contract performance and payment
bonds to environmental and construction contractors. American Safety
Casualty is listed as an acceptable surety on federal bonds, commonly known
as a "Treasury Listed" or "T-listed" surety, enabling it to issue surety
bonds for federal projects, as well as state and private projects that
utilize such designation as a reference in determining the acceptability of
surety companies. American Safety Casualty's underwriting limitation, as
determined by the Department of the Treasury as of July 1, 1997, was
$825,000 on a per-bond basis; however, this limitation does not constrain
the amount of a bond that can be written, provided that the excess exposure
is protected with approved reinsurance or other methods prescribed by the
Department of the Treasury. American Safety Casualty maintains reinsurance
with approved reinsurers for the purpose of issuing bonds in excess of its
underwriting limitation.
EMPLOYEE LEASING AND STAFFING INDUSTRY. The Company, through its U.S.
brokerage and management services subsidiaries, places and writes workers'
compensation and general liability insurance for employee leasing companies
(also known as professional employer organizations) and staffing industry
companies through custom designed captive and rent-a-captive programs. These
insurance programs were originally developed to enable employee leasing and
staffing industry companies to obtain environmental services industry clients;
subsequently, these programs have been expanded to cover non-environmental
clients as well.
Employee leasing companies generally focus on small to medium size
businesses and provide their clients with integrated human resource
administration and risk management services. Although the client maintains
control of the activities of the worksite employees, the employee leasing
company legally becomes the employer of record for its client's employees. The
employee leasing company assumes substantial employer responsibilities and
risks, including payment of payroll, filing and remitting of related taxes,
provision for workers' compensation insurance coverage, management of workers'
compensation claims, provision and administration of health and other employee
benefits and offering of various risk management services in compliance with
state and federal guidelines.
Staffing industry companies provide temporary employees to a broad range of
industries and businesses, with the staffing companies directly employing the
workers and remaining responsible for payroll, workers' compensation insurance
coverage and human resource functions.
General liability policies written for employee leasing and staffing
companies protect such companies from claims arising out of bodily injury or
property damage arising from their operations, which may include claims
brought against the employee leasing and staffing company as a result of
performance of activities by their employees, although such employees are
under the direction and control of the employee leasing and staffing company's
clients. Employee leasing and staffing companies generally require their
clients to independently maintain general liability coverage to protect the
client against such claims. Substantially all of the premiums assumed by the
Company from this line of business are attributable to workers' compensation
coverage provided.
31
<PAGE>
As the legal and regulatory environment for employers becomes increasingly
complex, resulting in higher employment costs per employee, the Company
believes that employee leasing and staffing industry companies will continue
to grow. The Company expects that such industry growth will present
significant opportunities to the Company in connection with the development of
workers' compensation and liability insurance programs, not only for the
employee leasing and staffing industry companies themselves, but also for
their clients.
OTHER PROGRAMS. The Company continually evaluates and seeks to develop
insurance programs for other specialty industries and risks. The Company has
developed several other specialty programs, including liability coverage for
persons owning firearms; a prepaid legal expense program for individuals who
receive traffic citations; a bail bond program (which was subsequently
discontinued); and a program to provide coverage for the financial
responsibility requirements imposed upon owners of municipal solid waste
landfills in connection with the closure of such landfills and the provision
of post-closure care.
UNDERWRITING. Synergy's underwriting staff handles all insurance
underwriting functions, with specific underwriting authority related to the
experience and knowledge level of each underwriter. Risks that are perceived
to be more difficult and complex are underwritten by experienced staff and
reviewed by management. Synergy uses management information reports to measure
risk selection and pricing in order to control underwriting performance. The
principal underwriting factors used by Synergy for underwriting liability,
workers' compensation and surety coverages, are a financially stable business,
an established operating history, favorable loss histories and a demonstrated
commitment to loss control practices.
CLAIMS. Claims arising under the policies and treaties issued or reinsured
by the Company are reviewed and managed by Synergy's internal claims
department. When Synergy receives notice of a loss, its claims personnel open
a claim file and establish a reserve with respect to the loss. Synergy retains
claims settlement authority, delegating only limited settlement authority to
certain third party administrators. Synergy emphasizes prompt and fair
settlement of meritorious claims, maintenance of adequate loss reserves and
careful control of claims adjustment and legal expenses.
REINSURANCE ASSUMED
Reinsurance is a contractual arrangement under which one insurer (the ceding
company) transfers to another insurer (the reinsurer) all or a portion of the
risk or risks that the ceding company has assumed under the insurance policy
or policies it has issued. A ceding company may purchase reinsurance for any
number of reasons including to obtain, through the transfer of a portion of
its liabilities, greater underwriting capacity than its own capital resources
would support, to stabilize its underwriting results, to protect against
catastrophic loss, and to enter into or withdraw from a line of business.
Reinsurance can be written on either a quota share or excess of loss basis,
under either a treaty or facultative reinsurance agreement. See "Glossary of
Selected Insurance Terms."
Substantially all of the reinsurance business that the Company currently
assumes is for primary insurance coverages that the Company has developed and
underwritten. The Company, through its reinsurance subsidiary, enters into
treaties with its U.S. insurance subsidiary, its risk retention group
affiliate and unaffiliated carriers with whom the Company has developed
insurance programs. The Company reinsures, generally on an excess of loss
basis, the general liability, pollution liability, professional liability,
workers' compensation and surety risks for contractors, consultants and other
businesses and property owners who are involved with environmental
remediation, as well as programs for the employee leasing and staffing
industry and other specialty risks.
For the year ended December 31, 1996, of the $4.8 million of gross
reinsurance premiums written by the Company, approximately $2.0 million was
assumed from its risk retention group affiliate, with the balance of
approximately $2.8 million assumed from unaffiliated insurers. For the nine
months ended September 30, 1997, of the $5.9 million of gross reinsurance
premiums written by the Company, approximately $1.7 million was assumed from
its risk retention group affiliate, with the balance of approximately $4.2
million assumed from unaffiliated reinsurers.
32
<PAGE>
The Company's assumed reinsurance business for general liability, pollution,
and professional liability is written under excess of loss treaties primarily
with its risk retention group affiliate. In the layer of the first $500,000 of
loss per occurrence, the Company assumes 70% of the losses arising from claims
covered under the policies written after the reinsured pays the first $100,000
of claims in the aggregate on an annual basis; and the reinsured retains 30%
of the risk after payment of the aggregate amount. The Company also assumes
workers' compensation reinsurance from Legion Insurance Company ("Legion").
After a retention of the first 10% of premium by Legion for payment of claims,
the Company reinsures Legion for the next $250,000 per occurrence, subject to
a 70% aggregate stop-loss ratio percentage. The Company assumes a 50% quota
share of loss from Underwriters Reinsurance Company for surety bonds written
by such carrier under the Company's surety program.
The Company's U.S. insurance subsidiary cedes certain risks on a quota share
basis to the Company's reinsurance subsidiary in order to provide for a spread
of risk among the respective companies as well as to increase the capacity of
the Company's U.S. insurance subsidiary to write insurance and reinsurance
business. There is no material effect on the Company's operating results or on
the risk-based capital or other regulatory ratios of the Company's U.S.
insurance subsidiary.
Management's reinsurance underwriting strategy is to utilize the
underwriting expertise of Synergy, the Company's principal U.S. program
development, underwriting and administrative services subsidiary, to practice
discipline in selecting and retaining risks and structuring insurance programs
which the Company reinsures. The Company's reinsurance treaties with its U.S.
insurance subsidiary and risk retention group affiliate automatically cover
primary insurance programs written by such carriers. Authority to bind the
Company is limited to Synergy's senior management. The Company utilizes
Synergy to provide direct contact with reinsureds, either by underwriting or
claim audits or periodic loss control visits to the insureds and the producing
brokers, both to enhance the quality of the underwriting process and to
develop and retain business relationships.
SELECTED OPERATING INFORMATION
GROSS PREMIUMS WRITTEN AND PRODUCED. As a result of the Company's roles in
connection with insurance program development, risk bearing on a primary and
reinsurance basis, insurance and reinsurance brokerage, and production and
administration, the Company is involved in a number of insurance and
reinsurance premium and fee-generating activities. The Company places
insurance and reinsurance with its subsidiaries, and also acts as an agency
and broker with unaffiliated insurers and reinsurers. For the nine months
ended September 30, 1997, the Company was involved with the placement of
approximately $22.1 million of gross premiums through its various programs and
subsidiaries.
The following table sets forth the Company's premiums written and produced
for the year ended December 31, 1996 and the nine months ended September 30,
1997:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
---------------------- ----------------------
GROSS CEDED NET GROSS CEDED NET
------- ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
The Company.................... $ 6,128 $1,511 $4,617 $ 8,783 $1,765 $7,018
====== ====== ====== ======
Affiliate...................... 9,386 6,005
Other.......................... 2,872 9,086
Less: Ceded from Affiliate to
the Company................... (2,042) (1,740)
------- -------
$16,344 $22,134
======= =======
</TABLE>
33
<PAGE>
NET PREMIUMS WRITTEN. The following table sets forth the Company's net
premiums written by principal lines of insurance and reinsurance for the year
ended December 31, 1996 and the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------ -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
General, pollution and
professional liability........... $ 1,610 34.9% $ 1,523 21.7%
Workers' compensation............. 2,810 60.9 4,010 57.1
Surety............................ 197 4.2 1,485 21.2
--------- -------- --------- --------
Total........................... $ 4,617 100.0% $ 7,018 100.0%
========= ======== ========= ========
</TABLE>
The following table sets forth the Company's net premiums written by
specialty industry for the year ended December 31, 1996 and the nine months
ended September 30, 1997:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------ -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Environmental insurance coverages.. $ 4,351 94.2% $ 5,645 80.4%
Employee leasing and staffing
industry.......................... 261 5.7 338 4.8
Other specialty industries......... 5 0.1 1,035 14.8
--------- -------- --------- --------
Total............................ $ 4,617 100.0% $ 7,018 100.0%
========= ======== ========= ========
</TABLE>
COMMISSIONS AND FEES. The Company generates fee and commission income in
connection with the Company's program development and management, insurance
and reinsurance brokerage services, and production and other insurance related
services. Fee and commission income was $2.4 million for the year ended
December 31, 1996, and $2.0 million for the nine months ended September 30,
1997.
COMBINED RATIO. The combined ratio is a standard measure of a property and
casualty insurer's performance in managing its losses and expenses.
Underwriting results are generally considered profitable when the combined
ratio is less than 100%. The following comparison of statutory combined ratios
suggests that the Company has experienced more favorable results than the
property and casualty insurance industry over the past three years.
COMBINED RATIO (STATUTORY BASIS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------- --------------------
1994 1995 1996 1996 1997
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
The Company(1)(2)......... 69.5% 72.4% 75.2% 73.1% 88.0%(3)
Property and casualty
industry(4).............. 108.4 106.4 105.9 106.0 101.1
</TABLE>
- --------
(1)Data have been derived from the consolidated financial statements of the
Company.
(2) Payments by American Safety Casualty to Synergy for management services
are included in the combined ratio.
(3) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."
(4) The statutory industry data are taken from the A.M. Best, Aggregates and
Averages, 1997 Edition and BestWeek.
34
<PAGE>
Although the combined ratio is the generally accepted measure for comparing
results within the property and casualty insurance industry, the combined
ratio does not distinguish between property and casualty companies based upon
their mix of business. The Company focuses primarily on long-tail liability
coverages and writes a very limited amount of short-tail liability coverages.
Long-tail liability insurance coverages often produce greater underwriting
losses than short-tail liability insurance. Long-tail liability coverages also
produce more investable cash flow for an insurance company because the losses
may not be paid out for many years. Therefore, the companies writing long-tail
insurance coverages may be able to mitigate their higher underwriting losses
by deriving investment income. Accordingly, a higher combined ratio (on a
statutory basis) for a company writing long-tail liability insurance does not
necessarily mean lower profitability.
The Company at times writes insurance program business with a higher expense
ratio resulting from significant commission expense (e.g., bail bond program)
and a higher loss ratio resulting from minimum reserves that are established
on new programs (e.g. workers' compensation). As a result, the Company's
combined ratio may fluctuate over time due to the presence or absence of such
program business in any year and the initiation of new programs.
PREMIUM AND LOSS SUMMARY. The Company is engaged in the development of
programs and underwriting of coverages as both a primary casualty insurer and
a reinsurer. The following table provides selected historical information on a
GAAP basis concerning the business written by the Company and the associated
underwriting risks. This data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and the Selected Financial
Data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE
TWELVE NINE MONTHS ENDED
MONTHS ENDED MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30,
MARCH 31, DECEMBER 31, ------------------------- --------------
1993(1) 1993(1) 1994 1995 1996 1996 1997
------------ ------------ ------- ------- ------- ------ ------
(In thousands, except ratio data)
<S> <C> <C> <C> <C> <C> <C> <C>
REINSURANCE:
Gross premiums
written.............. $2,739 $2,053 $ 3,820 $ 6,249 $ 4,936 $3,733 $5,855
Net premiums written.. 2,592 1,888 3,760 6,076 4,417 3,154 5,533
Net premiums earned... 2,592 1,888 3,420 5,729 4,142 2,790 5,241
Loss and loss
adjustment expense
ratio................ (20.8%) 43.9% 41.9% 50.6% 48.9% 48.9% 66.8%
PRIMARY INSURANCE:
Gross premiums
written.............. $ -- $ -- $ 30 $ 98 $ 1,192 $ 812 $2,928
Net premiums written.. -- -- 2 54 200 145 1,485
Net premiums earned... -- -- -- 18 130 72 1,265
Loss and loss
adjustment expense
ratio................ -- -- -- 22.2% 24.6% 27.8% 2.5%
COMBINED:
Gross premiums
written.............. $2,739 $2,053 $ 3,850 $ 6,347 $ 6,128 $4,545 $8,783
Net premiums written.. 2,592 1,888 3,762 6,130 4,617 3,299 7,018
Net premiums earned... 2,592 1,888 3,420 5,747 4,272 2,862 6,506
Loss and loss
adjustment expense
ratio................ (20.8%) 43.9% 41.6% 50.5% 48.1% 48.3% 54.3%
Expense ratio......... 59.3% 71.7% 30.7% 23.4% 29.3% 28.6% 36.4%
Combined ratio........ 38.5% 115.6% 72.3% 73.9% 77.4% 76.9% 90.7%
</TABLE>
- --------
(1) American Safety changed its fiscal year end from March 31 to December 31.
Significant fluctuations in demand for and supply of various casualty
insurance and reinsurance lines of business have led to substantial price
fluctuations over time. The Company's management seeks to expand and contract
various lines of business based on the relative favorability of the pricing
environment for its products. As a writer of both primary insurance and
reinsurance, the Company has additional flexibility to adjust its business mix
in response to price differences in these markets and to utilize its knowledge
of primary insurance markets to guide its assumption of insurance and
reinsurance risks.
35
<PAGE>
REINSURANCE CEDED
The Company obtains reinsurance for its primary insurance and reinsurance
operations from unaffiliated reinsurers to protect and mitigate the exposures
of the Company. The Company's primary reinsurer is Underwriters Reinsurance
Company, which has an A.M. Best rating of "A+ (Superior)". The Company's
reinsurance program for general and pollution liability risks operates on an
excess of loss basis, with the Company's maximum exposure, on a per occurrence
basis, limited to $350,000. For surety business written by American Safety
Casualty, the Company maintains a 50% quota share reinsurance treaty and an
excess of loss treaty on a per principal basis, thereby limiting the Company's
maximum exposure on a per principal basis to $500,000. For workers'
compensation reinsurance business assumed by the Company, the Company's
maximum exposure is $250,000 per loss, and aggregate stop loss reinsurance is
maintained for losses above a 70% loss ratio. Reinsurance treaties maintained
by the Company for its protection generally have no loss ratio restrictions or
aggregate limits of liability.
The Company purchases reinsurance separately for its primary insurance
business lines and its reinsurance business. Gross reinsurance premium ceded
for 1996 was $1.4 million, which constitutes 22.7% of the gross premiums
written, and for the nine months ended September 30, 1997, was $1.8 million,
which constitutes 20.1% of the gross premiums written. The amount of
reinsurance obtained by the Company varies with the line of business insured
or reinsured.
The Company evaluates the credit quality of the U.S. reinsurers and
retrocessionaires to which it cedes business. The following table sets forth
certain information relating to the Company's unaffiliated reinsurers and
retrocessionaires as of September 30, 1997:
<TABLE>
<CAPTION>
PREMIUMS CEDED FOR
NINE MONTHS ENDED A.M. BEST
REINSURERS SEPTEMBER 30, 1997 RATING(1)
---------- ------------------ ---------
(In thousands)
<S> <C> <C>
Underwriters Reinsurance Company................ $468 A+
Signet Star Reinsurance Company................. 56 A
Swiss Re America................................ 15 A
Zurich-American Insurance Group................. 8 A+
Transatlantic Reinsurance Company............... 0 A+
</TABLE>
- --------
(1) A.M. Best rating currently assigned.
RESERVES
The Company is required to maintain reserves to cover its estimated ultimate
liability for losses and loss adjustment expenses with respect to reported and
unreported claims incurred. The Company engages an independent internationally
recognized actuarial consulting firm to provide reserve studies, opinions and
rate studies. Reserves are estimates at a given time, which are established
from actuarial and statistical projections by the Company of the ultimate
settlement and administration costs of claims occurring on or prior to such
time, including claims that have not yet been reported to the insurer. The
establishment of appropriate loss reserves is an inherently uncertain process,
and there can be no assurance that ultimate payments will not materially
exceed the Company's reserves.
With respect to reported claims, reserves are established on a case-by-case
basis. The reserve amounts on each reported claim are determined by taking
into account the circumstances surrounding each claim and policy provisions
relating to the type of loss. Loss reserves are reviewed on a regular basis,
and as new data becomes available, appropriate adjustments are made to
reserves.
Approximately 56% of the Company's net reserves relate to liability
associated with its asbestos abatement and other environmental general
liability insurance programs. Another 42% of net reserves are attributable to
the workers' compensation insurance program. The 2% balance of reserves is
spread among surety and other coverages.
36
<PAGE>
In establishing reserves for its general liability insurance program, the
Company uses paid and reported Bornhuetter-Ferguson methods which are based in
part on developing paid and reported losses and an initial expected loss
level. Initial expected losses reflect an expected loss ratio estimated from
the ten-year experience of the Company and a loss cost model applied to
premium by coverage year. This loss indication and paid/reported losses are
assigned respective weights to obtain estimates of ultimate losses which are
considered in establishing ultimate loss levels.
In establishing reserves for its workers' compensation insurance program,
several methods are employed in determining ultimate losses: a pure premium
method; two Bornhuetter-Ferguson methods -- paid and incurred; and two loss
development methods -- paid and incurred. The first three methods use industry
expected losses adjusted for the Company's experience while the last two
methods rely on industry payment and reporting patterns to develop the
Company's actual losses. The Company reviews all methods each coverage year in
determining ultimate losses.
In establishing reserves for its surety and other coverages, the Company
uses an expected loss ratio method due to the limited amount of exposure
assumed and the lack of historical Company specific information available.
All the methods used are generally accepted actuarial methods and, with the
exception of the pure premium method, rely in part on loss reporting and
payment patterns while considering the long tail nature of the coverages and
inherent variability in projection results from year-to-year. The patterns
used are generally based on industry data with supplemental consideration
given to Company experience as deemed warranted.
The Company's independent actuarial consulting firm also relies on industry
data to provide the basis for reserve analysis on newer lines of business.
Provisions for inflation are implicitly considered in the reserving process.
For GAAP purposes, the Company's reserves are carried at the total estimate
for ultimate expected loss, without any discount to reflect the time value of
money. Reserve calculations are reviewed regularly by management and
periodically by regulators. The Company's independent actuarial consulting
firm annually expresses an opinion on the adequacy of statutory reserves
established by management, which opinion is filed with the various
jurisdictions in which the Company's insurance and reinsurance subsidiaries
and its risk retention group affiliate are licensed. Based upon practices and
procedures employed by the Company, without regard to independent actuarial
opinions, management believes that the Company's reserves are adequate.
37
<PAGE>
The following table provides a reconciliation of beginning and ending
liability balances on a GAAP basis for the years indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Gross losses and loss adjustment expense
reserves at
beginning of year.............................. $ 4,798 $ 6,048 $ 8,294
Reinsurance recoverable at beginning of year.... -- -- 6
------- ------- -------
Net losses and loss adjustment expense reserves
at
beginning of year.............................. 4,798 6,048 8,288
------- ------- -------
Add:
Incurred losses related to:
Current accident years........................ 1,569 3,099 2,862
Prior accident years.......................... (145) (194) (806)
------- ------- -------
Total incurred losses....................... 1,424 2,905 2,056
------- ------- -------
Less:
Claims payments related to:
Current accident years........................ 22 155 543
Prior accident years.......................... 152 510 932
------- ------- -------
Total claims paid........................... 174 665 1,475
------- ------- -------
Net losses and loss adjustment expense reserves
at end of year................................. 6,048 8,288 8,869
Reinsurance recoverable at end of year.......... -- 6 45
------- ------- -------
Gross losses and loss adjustment expense
reserves at end of year........................ $ 6,048 $ 8,294 $ 8,914
======= ======= =======
</TABLE>
38
<PAGE>
The following table shows the development of the reserves for unpaid losses
and loss adjustment expenses from 1988 through 1996 for the Company's primary
insurance and reinsurance subsidiaries on a GAAP basis. The 1988 year includes
information for all years prior (1986 and 1987 only). The top line of the
table shows the liabilities at the balance sheet date for each of the
indicated years. This reflects the estimated amounts for losses and loss
adjustment expenses for claims arising in that year and all prior years that
are unpaid at the balance sheet date, including losses incurred but not yet
reported to the Company. The upper portion of the table shows the re-estimated
amount of previously recorded liability based on experience as of the end of
each succeeding year. The lower portion of the table shows the cumulative
amounts subsequently paid as of successive years with respect to the
liability. The estimates change as more information becomes known about the
frequency and severity of claims for individual years. A redundancy
(deficiency) exists when the re-estimated liability at each December 31 is
less (greater) than the prior liability estimate. The "cumulative redundancy"
depicted in the table, for any particular calendar year, represents the
aggregate change in the initial estimates over all subsequent calendar years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for unpaid
losses and loss
adjustment expense..... $1,724 $2,397 $4,359 $4,552 $4,135 $4,798 $6,048 $8,288 $8,869
Reserves re-estimated at
December 31:
1 year later......... 1,351 2,910 2,786 3,264 4,266 4,653 5,854 7,482
2 years later........ 1,408 1,968 2,327 3,057 4,100 4,584 5,381 --
3 years later........ 1,053 1,533 2,169 2,956 4,148 3,920 -- --
4 years later........ 974 1,391 2,119 2,933 3,644 -- -- --
5 years later........ 776 1,329 1,967 2,607 -- -- -- --
6 years later........ 744 1,130 1,948 -- -- -- -- --
7 years later........ 494 1,187 -- -- -- -- -- --
8 years later........ 669 -- -- -- -- -- -- --
9 years later........ -- -- -- -- -- -- -- --
10 years later........ -- -- -- -- -- -- -- --
Cumulative redundancy... 1,055 1,210 2,411 1,945 491 878 667 806
Cumulative amount of
liability paid through
December 31:
1 year later......... 1 54 319 99 524 152 501 931
2 years later........ 38 88 378 308 651 382 997 --
3 years later........ 38 175 554 380 872 621 -- --
4 years later........ 38 203 611 531 1,095 -- -- --
5 years later........ 38 244 693 697 -- -- -- --
6 years later........ 65 299 757 -- -- -- -- --
7 years later........ 67 325 -- -- -- -- -- --
8 years later........ 93 -- -- -- -- -- -- --
9 years later........ -- -- -- -- -- -- -- --
10 years later........ -- -- -- -- -- -- --
Net reserve December
31..................... 6,048 8,288 8,869
Reinsurance
recoverables........... -- 6 45
------ ------ ------
Gross reserve........... $6,048 $8,294 $8,914
====== ====== ======
</TABLE>
The Company assumes reinsurance for a number of liability risks which could
result in claims relating to environmental remediation and other specialty
risks to the extent that such liabilities are not excluded from the underlying
policies. Although the attachment points in reinsurance treaties between the
Company and the ceding companies relating to these risks are relatively low,
the Company's percentage participation in the layers of reinsurance in which
it participates is low. In addition, the Company cedes reinsurance to
unaffiliated reinsurers which would mitigate the effect of any losses under
these treaties. While there exists a possibility that the Company could suffer
a material loss in the event of a high frequency of losses under assumed
reinsurance treaties, this event is unlikely in management's judgment.
39
<PAGE>
INVESTMENTS
The Company entered into an Investment Services Agreement with Scudder
Insurance Asset Management ("Scudder") in 1995 whereby Scudder provides
investment advisory services to the Company, subject to the investment
policies and guidelines established by the Company's Board of Directors. The
Company has consistently invested primarily in investment grade fixed income
securities, with the objective of providing reasonable returns while limiting
liquidity risk and credit risk. The Company's investment strategy has been to
increase its investments in municipal bonds and other tax-exempt securities,
as opposed to equity securities, in order to avoid investment losses. The
investment portfolio consists primarily of government and governmental agency
securities and high quality marketable corporate securities which are rated at
investment grade level.
At September 30, 1997, the Company's total assets of $42.2 million consisted
of the following: cash, investments and notes receivable, 82.7%; premiums
receivable and agent's balances, 9.9%; and other assets, 7.4%. At September
30, 1997, the Company held investment grade fixed income debt securities
valued at $24.8 million and secured notes receivable valued at $4.9 million.
Of the secured notes receivable, $1.3 million represented shareholder loans
from the Company, at market rates, secured by personal guarantees and Common
Shares in the Company, with the balance of $3.6 million representing secured
loans to unaffiliated parties, at or above market rates, secured by corporate
and personal guarantees, real estate and other collateral.
The Company's cash and investments at September 30, 1997 totaled
approximately $29.7 million, and were classified as follows:
<TABLE>
<CAPTION>
PERCENT OF
TYPE OF INVESTMENT BOOK VALUE PORTFOLIO
------------------ -------------- ----------
(In thousands)
<S> <C> <C>
Cash and short-term investments................... $ 4,022 13.5%
United States government securities............... 11,113 37.4
Mortgage-backed securities, GNMA collateral....... 2,862 9.6
Corporate bonds................................... 5,291 17.8
Foreign investments............................... 803 2.7
Municipal bonds................................... 4,478 15.1
Equity securities................................. 1,170 3.9
------- -----
Total......................................... $29,739 100.0%
======= =====
</TABLE>
The book and market values of the bond portfolio, classified by rating, as
of September 30, 1997 were as follows:
<TABLE>
<CAPTION>
AMOUNT
MARKET REFLECTED ON PERCENT
S&P'S/MOODY'S RATING(1) VALUE BALANCE SHEET OF TOTAL
----------------------- ------- ------------- --------
(Dollars in thousands)
<S> <C> <C> <C>
AAA/Aaa (including United States Treasuries
of $11,193)................................ $19,240 $19,240 77.7%
AA/Aa....................................... 3,751 3,751 15.1
A/A......................................... 1,585 1,585 6.4
BBB/Baa..................................... 195 195 0.8
All other................................... -- -- --
------- ------- -----
Total..................................... $24,771 $24,771 100.0%
======= ======= =====
</TABLE>
- --------
(1) Ratings are assigned by Standard & Poor's ("S&P") or, if no S&P rating is
available, by Moody's Investors Service Inc. ("Moody's").
The National Association of Insurance Commissions ("NAIC") has a bond rating
system by which it assigns securities to classes called "NAIC designations"
that are used by insurers when preparing their annual financial statements.
The NAIC assigns designations to publicly traded as well as privately placed
securities. The designations assigned by the NAIC range from class 1 to class
6, with a rating in class 1 being the highest quality. As of September 30,
1997, all of the Company's bond portfolio, measured on a statutory carrying
value basis, was invested in securities rated in class 1 or class 2 by the
NAIC, which are considered investment grade.
40
<PAGE>
The weighted average maturity of the Company's bond portfolio at September
30, 1997 was 4.6 years. The composition of the Company's bond portfolio,
classified by maturity, as of September 30, 1997, was as follows:
<TABLE>
<CAPTION>
BOOK MARKET
MATURITY(1) VALUE VALUE
----------- ------- -------
(In thousands)
<S> <C> <C>
Due in one year or less..................................... $ 1,149 $ 1,150
Due from one to five years.................................. 10,649 10,722
Due from five to ten years.................................. 7,686 7,810
Due after ten years......................................... 2,201 2,244
Mortgage-backed securities, GNMA's and GNMA collateral...... 2,862 2,845
------- -------
Total..................................................... $24,547 $24,771
======= =======
</TABLE>
- --------
(1)Based on stated maturity dates with no prepayment assumptions.
The Company's investment grade fixed maturity securities included mortgage
backed bonds of $2.8 million, which are subject to risks associated with the
variable prepayments of the underlying mortgage loans. Prepayments cause those
securities to have different actual maturities than expected at the time of
purchase. Securities backed by mortgages that have an amortized cost greater
than par and are prepaid faster than expected will incur a reduction in yield,
or a loss, while other securities that have an amortized cost less than par
and are prepaid faster than expected will generate an increase in yield or a
gain. The degree to which a security is susceptible to either gains or losses
is influenced by the difference between its amortized cost and par, the
relative sensitivity of the underlying mortgages backing the assets to
prepayments and a change in the interest rate environment and the repayment
priority of the securities in the overall securitization structure.
As of January 1, 1994, the Company adopted FASB Statement 115 and classified
all of its securities as "available for sale." Under this classification, the
fixed maturities classified as "available for sale" are carried at fair value
and changes in fair values net of applicable income taxes are charged or
credited directly to shareholders' equity. The Company has continued to
classify all of its fixed income securities as "available for sale."
AMERICAN SAFETY RISK RETENTION GROUP, INC.
ORGANIZATION HISTORY. Following the enactment of the Risk Retention Act,
American Safety, in order to establish a U.S. insurance carrier to market
specialty environmental coverages, provided financial and technical assistance
in connection with the organization of American Safety RRG in 1988. American
Safety RRG is not owned by the Company but is managed by Synergy, the
Company's principal U.S. program development, underwriting and administrative
services subsidiary, on a fee-for-service basis. American Safety RRG is
authorized to write liability insurance in all 50 states as a result of the
Risk Retention Act, its license from the Vermont Department of Banking,
Insurance, Securities and Health Care Administration (the "Vermont
Department") under the Vermont Captive Act as a stock captive insurance
company, and state filings. Presently, five of the directors of American
Safety RRG (Messrs. Treadway, Brueggen, Mauldin, Mueller and Walsh) are also
directors of the Company. The directors of American Safety RRG are elected
annually by the insureds/shareholders of American Safety RRG.
American Safety transferred its book of primary insurance business to
American Safety RRG in 1988 and American Safety RRG replaced American Safety
as the policy issuing carrier insuring general, pollution and professional
liability risks for contractors, consultants and other businesses and property
owners who are involved with environmental remediation. American Safety then
became the quota share reinsurer of the risks transferred and subsequently
underwritten by American Safety RRG. All reinsurers of American Safety RRG are
required to be approved as reinsurers by the Vermont Department, and American
Safety has been an authorized reinsurer of American Safety RRG since 1988. The
Company, through its insurance subsidiaries, participates in the business of
American Safety RRG as its primary reinsurer under an excess of loss/quota
share reinsurance
41
<PAGE>
arrangement. For policies written by American Safety RRG, the Company receives
44.1% of the premium and assumes 70% of the risk in the layer of the first
$500,000 of loss per occurrence, subject to American Safety RRG's retention of
the first $100,000 of loss in the aggregate each year. American Safety RRG
also cedes 100% of the risk in the layer of $500,000 in excess of $500,000 per
occurrence, and 100% of the risk in the layer of $5.0 million in excess of
$1.0 million, to unaffiliated reinsurers. In the event that the unaffiliated
reinsurers fail to pay claims covered by their reinsurance treaties, American
Safety RRG would be obligated to pay such claims without the benefit of
reinsurance recoveries within the specified layers.
The program management agreement between American Safety RRG and Synergy
provides for payment of a monthly program management fee of $45,000 and a
managing general agency commission of 10-25% of premium, depending on the
amount of premium paid by the insured. Synergy is also compensated for direct
production of business, and is reimbursed for marketing expenses actually
incurred, and for loss control expenses actually incurred plus a 20% fee.
The Company's recognized revenues from American Safety RRG during 1996 and
the nine months ended September 30, 1997 are as follows:
<TABLE>
<CAPTION>
TWELEVE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
-------------------- ------------------
<S> <C> <C>
Assumed premiums earned............... $ 1,982,290 $1,773,776
Ceded premiums earned................. 541,129 870,369
------------ ----------
Net premiums earned................... 1,441,161 903,407
------------ ----------
Management fees....................... 478,963 443,950
Brokerage commission income........... 1,341,026 777,400
Loss control fees..................... 49,373 42,091
</TABLE>
REGULATION. The Risk Retention Act facilitates the establishment of risk
retention groups to insure certain liability risks of its members. The statute
applies only to "liability" insurance and does not permit coverage of personal
risk liability or workers' compensation. Membership in a risk retention group
is limited to persons engaged in businesses or activities that are similar or
related with respect to the liability to which the members are exposed by
virtue of any related, similar, or common business, trade, products, services
(including professional services), premises or operations. Ownership in a risk
retention group is limited to persons who are members of the group and who are
provided insurance by the group.
The Risk Retention Act and the Vermont Captive Act require that each insured
of American Safety RRG be a shareholder. Each insured is required to purchase
one share of the American Safety RRG's common stock upon the acceptance of the
applicant as an insured. There is no trading market for the shares of common
stock of American Safety RRG and each share is restricted as to transfer. If
and when a holder of American Safety RRG common stock ceases to be an insured,
whether voluntarily or involuntarily, such person's share of common stock is
automatically canceled and such person is no longer a shareholder of American
Safety RRG. The ownership interests of members in a risk retention group are
considered to be exempt securities for purposes of the registration provisions
of the Securities Act and the Securities and Exchange Act and are likewise not
considered securities for purposes of any state securities registration law.
Congress intended under the Risk Retention Act that the primary
responsibility for regulating the financial condition of a risk retention
group would rest on the state in which the group is licensed or chartered.
American Safety RRG is subject to regulation as a captive insurer under the
insurance laws of Vermont and, to a lesser extent, under the laws of each
state in which it is doing business. The Risk Retention Act requires a risk
retention group to provide a notice on each insurance policy which it issues
to the effect that (i) the policy is issued by a risk retention group;
(ii) the risk retention group may not be subject to all of the insurance laws
and regulations of the state in which the policy is being issued; and (iii) no
state insurance insolvency guaranty fund is available to the policies issued
by the risk retention group.
42
<PAGE>
MANAGEMENT. Since 1990, Synergy has managed the nationwide operations of
American Safety RRG from its offices in Atlanta, Georgia pursuant to a program
management agreement. The program management agreement has a term of three
years from January 1, 1997 through December 31, 1999, provided that the term
continues for successive one year periods thereafter unless the management
agreement is terminated on or before 90 days prior to the end of the initial
term or any renewal term. American Safety RRG has also entered into local
management services agreements since 1988 with captive management companies of
national insurance brokerage or insurance companies with offices located in
Burlington, Vermont to provide local administrative services.
Synergy acts as the program manager for American Safety RRG pursuant to the
program management agreement and is authorized to solicit and accept
applications for insurance and to issue insurance contracts on behalf of
American Safety RRG subject to program administration rules and procedures of
American Safety RRG. In addition, Synergy provides marketing services,
administrative services, underwriting services, insurance brokerage services,
claims administration services, loss control services, financial, accounting,
billing and collection services and consulting services to and on behalf of
American Safety RRG. American Safety RRG pays a monthly administration fee, a
management fee, producing agent commissions, and other fees and reimbursements
to Synergy.
The Company derived approximately 37.2% ($3.3 million) of its revenues in
1996 and 20.9% ($2.2 million) of its revenues for the nine months ended
September 30, 1997 from American Safety RRG for administrative and management
fees, producing agent commissions, a loss control fee, reinsurance
intermediary fees and reinsurance premiums.
COMPETITION
The casualty insurance and reinsurance business is highly competitive with
respect to a number of factors, including overall financial strength of the
insurer or reinsurer, ratings by rating agencies, premium rates, policy terms
and conditions, services offered, reputation and commission rates. The Company
faces competition from a number of insurers who have greater financial and
marketing resources and greater name recognition than the Company. Although
the Company's business strategy is to develop insurance programs for the
environmental remediation industry, the employee leasing and staffing
industry, as well as other specialty industries and risks by targeting niche
markets where its expertise is required and where competition is limited, the
Company nevertheless encounters competition from other insurance companies
engaged in insuring risks in broader lines of business which encompass the
Company's niche markets and specialty programs, and such competition is
expected to increase as the Company expands its operations.
LEGAL PROCEEDINGS
The Company, through its subsidiaries, is routinely a party to pending or
threatened litigation in the normal course of its business. Based upon
information presently available, in view of legal and other defenses available
to the Company's subsidiaries, management does not believe that any pending or
threatened litigation or disputes will have any material adverse effect on the
Company's financial condition.
PROPERTIES
The Company's Bermuda offices are located at 44 Church Street, Hamilton,
Bermuda. The offices of the Company's U.S. subsidiaries are located at 1845
The Exchange, Suite 200, Atlanta, Georgia 30339. See "Management--Compensation
Committee Interlocks and Insider Participation."
EMPLOYEES
As of December 31, 1997, the Company employed 42 persons, none of whom was
represented by a labor union. The Company believes that its relationship with
its employees is good.
43
<PAGE>
REGULATORY MATTERS
INSURANCE REGULATION
The Company's primary insurance and reinsurance operations are subject to
regulation under applicable insurance statutes of the jurisdictions or states
in which each subsidiary is domiciled and writes insurance. Insurance
regulations are intended to provide safeguards for the policyholders rather
than to protect shareholders of insurance companies or their holding
companies.
The nature and extent of state regulation varies from jurisdiction to
jurisdiction, but typically involves prior approval of the acquisition of
control of an insurance company or of any company controlling an insurance
company, regulation of certain transactions entered into by an insurance
company with an affiliate, approval of premium rates for lines of insurance,
standards of solvency and minimum amounts of capital and surplus which must be
maintained, limitations on types and amounts of investments, restrictions on
the size of risks which may be insured by a single company, deposits of
securities for the benefit of policyholders, and reports with respect to
financial condition and other matters. In addition, state regulatory examiners
perform periodic examinations of insurance companies.
Although the federal government does not directly regulate the business of
insurance in the United States, federal initiatives often affect the insurance
business in a variety of ways. The insurance regulatory structure has also
been subject to scrutiny in recent years by the National Association of
Insurance Commissioners ("NAIC"), federal and state legislative bodies and
state regulatory authorities. Various new regulatory standards have been
adopted and proposed in recent years. The development of standards to ensure
the maintenance of appropriate levels of statutory surplus by insurers has
been a matter of particular concern to insurance regulatory authorities.
BERMUDA REGULATION
American Safety, as a licensed Bermuda insurance company, and its Bermuda
insurance subsidiary, American Safety Re, are subject to regulation under The
Insurance Act 1978, as amended, and related regulations (the "Bermuda Act"),
which provides that no person shall conduct insurance business (including
reinsurance) in or from Bermuda unless registered as an insurer under the
Bermuda Act by the Minister of Finance (the "Minister"). In deciding whether
to grant registration, the Minister has discretion to act as he thinks fit in
the public interest. The Minister is required by the Bermuda Act to determine
whether an applicant for registration is a fit and proper body to be engaged
in insurance business and, in particular, whether it has, or has available to
it, adequate knowledge and expertise. In connection with registration, the
Minister may impose conditions relating to the writing of certain types of
insurance business.
The Bermuda Act requires, among other things, Bermuda insurance companies to
meet and maintain certain standards of solvency, to file periodic reports in
accordance with the Bermuda Statutory Accounting Rules, to produce annual
audited financial statements and to maintain a minimum level of statutory
capital and surplus. In general, the regulation of insurers in Bermuda relies
heavily upon the auditors, directors and managers of the Bermuda insurer, each
of which must certify that the insurer meets the solvency capital requirements
of the Bermuda Act. Furthermore, the Minister is granted powers to supervise,
investigate and intervene in the affairs of insurance companies. Neither
American Safety nor American Safety Re has ever failed to meet the minimum
solvency margin or the minimum liquidity ratios. Significant aspects of the
Bermuda insurance regulatory framework are set forth below:
Cancellation of an Insurer's Registration. An insurer's registration may be
canceled by the Minister on certain grounds specified in the Bermuda Act
including the failure of the insurer to comply with the obligations of the
Bermuda Act or if, in the opinion of the Minister after consultation with the
Insurance Advisory Committee, the insurer has not been carrying on business in
accordance with sound insurance principles.
Independent Approved Auditor; Statutory Financial Statements; Statutory
Financial Return. Every registered insurer must appoint an independent auditor
approved by the Minister who will annually audit and
44
<PAGE>
report on the statutory financial statements and the statutory financial
return of the insurer, which are required to be filed annually with the
Registrar of Companies of Bermuda (the "Registrar"), who is the chief
administrative officer under the Bermuda Act. The approved auditor may be the
same person or firm that audits the insurer's financial statements and reports
for presentation to its shareholders.
An insurer must prepare annual statutory financial statements. The statutory
financial statements are not prepared in accordance with GAAP and are distinct
from the financial statements prepared for presentation to the insurer's
shareholders under The Companies Act, 1981 of Bermuda (the "Companies Act").
The insurer is required to submit the annual statutory financial statements as
part of the annual statutory financial return.
An insurer is required to file with the Registrar a statutory financial
return that includes, among other matters, a report of the approved
independent auditor on the statutory financial statements of the insurer, a
declaration of the statutory ratios and a related solvency certificate.
Minimum Solvency Margin. The Bermuda Act provides that the statutory assets
of an insurer must exceed its statutory liabilities by an amount greater than
the prescribed minimum solvency margin.
Pursuant to the Bermuda Act, American Safety and its Bermuda insurance
subsidiary, American Safety Re, are registered as Class 3 insurers and, as
such: (i) are required to maintain a minimum solvency margin equal to the
greatest of: (x) $1,000,000, (y) 20% of net premiums written up to $6,000,000
plus 15% of net premiums written over $6,000,000, and (z) 15% of loss
reserves; (ii) are required to file annually with the Registrar a statutory
financial return together with a copy of their respective statutory financial
statements and an opinion of a loss reserve specialist in respect of their
respective loss and loss expense provisions within four months following the
end of the relevant financial year; (iii) are prohibited from declaring or
paying any dividends during any financial year if either is in breach of their
respective minimum solvency margins or minimum liquidity ratio or if the
declaration or payment of such dividends would cause either of them to fail to
meet such margin or ratio (if it fails to meet its minimum solvency margin or
minimum liquidity ratio on the last day of any financial year, the insurer
will be prohibited, without the approval of the Minister, from declaring or
paying any dividends during the next financial year); (iv) are prohibited,
without the approval of the Ministers, from reducing by 15% or more their
respective total statutory capital, as set out in their previous year's
financial statements; and (v) if it appears to the Minister that there is a
risk of the insurer becoming insolvent or that it is in breach of the Bermuda
Act or any conditions imposed upon its registration, the Minister may, in
addition to the restrictions specified above, direct the insurer not to
declare or pay any dividends or any other distributions or may restrict it
from making such payments to such extent as the Minister may think fit.
Minimum Liquidity Ratio. The Bermuda Act provides a minimum liquidity ratio
for general business. An insurer engaged in general business is required to
maintain the value of its relevant assets at not less than 75% of the amount
of its relevant liabilities. Relevant assets include cash and time deposits,
quoted investments, unquoted bonds and debentures, first liens on real estate,
investment income due and accrued, account and premiums receivable and
reinsurance balances receivable. There are certain categories of assets which,
unless specifically permitted by the Minister, do not automatically qualify as
relevant assets, such as unquoted equity securities, investments in and
advances to affiliates and real estate and collateral loans. The relevant
liabilities are total general business insurance reserves and total other
liabilities less deferred income tax and sundry liabilities (by
interpretation, those not specifically defined).
Supervision, Investigation and Intervention. The Minister may appoint an
inspector with extensive powers to investigate the affairs of an insurer if
the Minister believes that an investigation is required in the interest of the
insurer's policyholders or persons who may become policyholders. In order to
verify or supplement information otherwise provided to him, the Minister may
direct an insurer to produce documents or information in relation to matters
connected with the insurer's business.
If it appears to the Minister that there is a risk of the insurer becoming
insolvent, the Minister may direct the insurer not to take on any new
insurance business; not to vary any insurance contract if the effect would be
45
<PAGE>
to increase the insurer's liabilities; not to make certain investments; to
realize certain investments; to maintain in Bermuda, or transfer to the
custody of a Bermuda bank, certain assets; not to declare or pay any dividends
or other distributions or to restrict the making of such payments; and/or to
limit its premium income.
An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. For the purpose of
the Bermuda Act, the principal office of American Safety and American Safety
Re is located at 44 Church Street, Hamilton, Bermuda. Without a reason
acceptable to the Minister, an insurer may not terminate the appointment of
its principal representative, and the principal representative may not cease
to act as such, unless 30 days' notice in writing to the Minister is given of
the intention to do so. It is the duty of the principal representative, within
30 days of his reaching the view that there is a likelihood of the insurer for
which he acts becoming insolvent or its coming to his knowledge, or his having
reason to believe, that an "event" has occurred, to make a report in writing
to the Minister setting out all the particulars of the case that are available
to him. Examples of such an "event" include failure by the insurer to comply
substantially with a condition imposed upon the insurer by the Minister
relating to a solvency margin or a liquidity or other ratio.
Certain Foreign Issuer Considerations. As "exempted" companies, American
Safety and American Safety Re are exempt from Bermuda laws which restrict the
percentage of share capital that may be held by non-Bermudians, but as
exempted companies, American Safety and American Safety Re may not participate
in certain business transactions including: (i) the acquisition or holding of
land in Bermuda (except that required for its business and held by way of
lease or tenancy agreement for a term not exceeding 21 years) without the
express authorization of the Bermuda legislature; (ii) the taking of mortgages
on land in Bermuda; (iii) the acquisition of securities created or issued by,
or any interest in, any local company or business, other than certain types of
Bermuda government securities or securities of another "exempted" company,
partnership or other corporation resident in Bermuda but incorporated abroad;
or (iv) the carrying on of business of any kind in Bermuda, except in
furtherance of the business of the Company carried on outside Bermuda or under
a license granted by the Minister.
The Bermuda government actively encourages foreign investment in "exempted"
entities like American Safety and American Safety Re that are based in Bermuda
but do not operate in competition with local business. As well as having no
restrictions on the degree of foreign ownership, the Company and American
Safety Re are not subject to taxes on their income or dividends or to any
foreign exchange controls in Bermuda. In addition, there is no capital gains
tax in Bermuda, and profits can be accumulated by American Safety and American
Safety Re, as required, without limitation.
Neither American Safety nor American Safety Re is registered or licensed as
an insurance company in any state or jurisdiction in the United States.
U.S. REGULATION
American Safety, as a specialty insurance holding company, does not itself
do business in the United States. The Company, through its U.S. subsidiaries,
does business in the United States. The Company's U.S. insurance subsidiary's
operations are subject to state regulation where it is domiciled and where it
writes insurance.
American Safety Casualty, the Company's U.S. property and casualty insurer
domiciled in Delaware, was acquired by the Company in 1993. American Safety
Casualty is currently licensed as a property and casualty insurer in 44 states
(other than Connecticut, Maine, Michigan, New Hampshire, North Carolina and
Wyoming). The insurer is subject to regulation by the Delaware Insurance
Department and the other states in which it is an admitted carrier. The
Delaware Insurance Department examines American Safety Casualty on a triennial
basis. As reported in its 1996 Annual Statement, the statutory capital and
surplus of American Safety Casualty was approximately $8,252,000. The maximum
amount of dividends which can be paid, without prior written approval of the
Delaware Insurance Department, is limited to the greater of 10% of surplus as
regard to policyholders or net income, excluding realized gains, of the
preceding year. Accordingly, American Safety Casualty could pay dividends of
approximately $825,200 in 1997 to the Company.
The insurance laws of Delaware place restrictions on a change of control of
American Safety as result of its ownership of American Safety Casualty. Under
Delaware law no person may obtain 10% or more of the voting securities of
American Safety without the prior approval of the Delaware Insurance
Department.
46
<PAGE>
American Safety Casualty, as a licensed carrier, is subject to state
regulation of rates and policy forms in the various states in which direct
premiums are written for its general liability and workers' compensation lines
of business. Under such regulations, a licensed carrier may be required to
file and obtain prior approval of its policy form and the rates that are
charged to insureds. While American Safety Casualty is licensed to write
workers' compensation insurance in a number of states, it presently does not
produce direct premiums from such line of business, and is therefore not
subject to such regulations with respect to this line of business. If American
Safety Casualty, in the future, directly writes workers' compensation
insurance, it would become subject to such regulations. American Safety
Casualty, as a licensed carrier, is also required to participate in state
insolvency funds, or shared markets, which are designed to protect insureds of
insurance carriers which become unable to pay claims due to an insurer's
insolvency. Assessments made against insurers participating in such funds are
based on direct premiums written by participating insurers, as a percentage of
total direct written premiums of all participating insurers. See "Risk
Factors--Regulation."
The NAIC has established risk based capital ("RBC") requirements to help
state regulators monitor the financial strength and stability of property and
casualty insurers by notifying those companies that may be inadequately
capitalized. Under the NAIC's requirements, an insurer must maintain its total
capital above a calculated threshold or take corrective measures to achieve
the threshold. The threshold of adequate capital is based on a formula that
takes into account the amount of risk each company faces on its products and
investments. The RBC formula takes into consideration four major areas of
risk: (i) asset risk which primarily focuses on the quality of investments;
(ii) insurance risks which encompass coverage-related issues and anticipated
frequency and severity of losses when pricing and designing insurance
coverages; (iii) interest rate risk which involves asset/liability matching
issues; and (iv) other business risks. Regulatory compliance is determined by
the ratio of the carrier's regulatory total adjusted capital, as defined by
the NAIC, to its authorized control level RBC, as defined by the NAIC.
Companies below specific trigger points or ratios are classified within
certain levels, each of which requires specific corrective action. The levels
and ratios are as follows:
<TABLE>
<CAPTION>
RATIO OF TOTAL ADJUSTED CAPITAL TO
AUTHORIZED CONTROL LEVEL RBC
REGULATORY EVENT (LESS THAN OR EQUAL TO)
---------------- ----------------------------------
<S> <C>
Company action level 2.0 (or 2.5 with negative trend)
Regulatory action level 1.5
Authorized control level 1.0
Mandatory control level 0.7
</TABLE>
Management has calculated the RBC level of American Safety Casualty and has
determined that its capital and surplus is significantly in excess of
threshold requirements.
Currently, prescribed or permitted statutory accounting principles ("SAP")
may vary between states and between companies. The NAIC is in the process of
recodifying SAP to promote standardization throughout the industry. Completion
of this project will result in changes in statutory accounting practices for
the Company. The impact on the Company's statutory capital and surplus is not
presently determinable.
The Company's non-subsidiary affiliate, American Safety RRG, is domiciled in
Vermont and is authorized to write liability insurance in all 50 states, as
described above. See "Business--American Safety Risk Retention Group, Inc."
Synergy, the program manager of American Safety RRG, has calculated the RBC
level of American Safety RRG and has determined that its capital and surplus
is significantly in excess of threshold requirements.
The NAIC has developed an insurance regulatory information system ("IRIS")
which is primarily intended to assist state insurance departments in
overseeing the financial condition of insurance companies operating in their
respective states. IRIS identifies 12 industry ratios and specifies "usual
values" for each ratio. Departure from the usual values on four or more ratios
generally leads to inquiries from individual state insurance commissioners.
Management has calculated the IRIS ratios for American Safety Casualty and has
determined that as of December 31, 1996 all ratios were within "usual values,"
and currently believes that all ratios are within "usual values." Synergy, the
program manager of American Safety RRG, has calculated the IRIS ratios for
American Safety RRG and has determined that as of December 31, 1996 all ratios
were within "usual values," and currently believes that all ratios are within
"usual values."
47
<PAGE>
MANAGEMENT
OFFICERS AND DIRECTORS
The following table provides information regarding the executive officers
and other significant employees of the Company and the directors of the
Company. Biographical information for each of such persons is set forth
immediately following the table.
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Lloyd A. Fox..................... 52 President and Director
Stephen R. Crim.................. 34 Executive Vice President
James G. Leach................... 49 Senior Vice President
Fred J. Pinckney................. 50 General Counsel and Secretary
Stephen F. Clarke................ 39 Chief Financial Officer
J. Jeffrey Hood.................. 34 Vice President--Claims and Loss Control
Kenneth A. Schneider............. 37 Senior Vice President--Underwriting
Frederick C. Treadway............ 45 Chairman of the Board
Cody W. Birdwell................. 45 Director
David V. Brueggen................ 51 Director
William O. Mauldin, Jr. ......... 57 Director
Thomas W. Mueller................ 43 Director
Timothy E. Walsh................. 47 Director
</TABLE>
Lloyd A. Fox has been a director of the Company since 1996 and is President
of the Company. Since 1990, Mr. Fox has headed the management of the Company's
U.S. subsidiaries. He assisted as general legal counsel in the formation of
American Safety in 1986. Previously, Mr. Fox was an attorney for 16 years in
Atlanta, Georgia, where his practice centered on insurance, the environmental
and construction industries, as well as corporate and taxation matters. He
received a juris doctor degree from the University of Michigan Law School in
1974 and a bachelor of science degree in pharmacy from Brooklyn College of
Pharmacy in 1968. Mr. Fox is a frequent speaker at insurance seminars and
environmental training courses throughout the United States.
Stephen R. Crim is Executive Vice President of the Company and Synergy and
has been responsible for all underwriting functions since joining the Company
in 1990. Previously, Mr. Crim was employed in the underwriting departments of
Aetna Casualty and Surety and The Hartford Insurance Co. between 1986 and
1990. Mr. Crim has 11 years experience in the insurance industry. Mr. Crim
received a bachelors degree in mathematics from the Indiana University in
1986.
James G. Leach is Senior Vice President of the Company and of Synergy and
has been responsible for reinsurance and insurance regulatory matters since
joining the Company in 1993. Previously, Mr. Leach served as an insurance
executive for several national insurance companies and brokers. Mr. Leach has
22 years experience in the insurance industry. Mr. Leach received an associate
in science degree in physics from Gulf Coast College in 1968, a bachelor of
arts degree in economics from Duke University in 1970, a master of business
administration degree in finance and accounting from Georgia State University
in 1974, a masters in insurance degree from Georgia State University in 1976,
and a juris doctor degree from Drake University School of Law in 1989. He
holds the professional designations of Chartered Property and Casualty
Underwriter and Chartered Life Underwriter.
Fred J. Pinckney became General Counsel and Secretary of the Company and of
American Safety Casualty in October 1997. Previously, Mr. Pinckney was an
attorney for 25 years in Atlanta, Georgia, where his practice centered on
securities and corporate matters. Since 1988, Mr. Pinckney was a partner in
the law firm of Parker, Johnson, Cook & Dunlevie, which merged in 1996 with
Womble Carlyle Sandridge & Rice, PLLC, where he was a member until he joined
the Company. He was involved as special legal counsel in the formation of
American Safety in 1986 and acted as outside legal counsel to the Company for
the past 12 years. Mr. Pinckney
48
<PAGE>
received a juris doctor degree from the University of Michigan Law School in
1973 and a bachelor of arts degree in political science from the University of
Pittsburgh in 1969.
Stephen F. Clarke is Chief Financial Officer of American Safety Casualty and
has been responsible for all accounting and treasury functions since joining
the Company in 1992. Previously, Mr. Clarke had 10 years accounting experience
in the insurance industry having held positions of corporate controller and
corporate accounting manager with Johnson & Higgins Willis Faber (U.S.A.) Inc.
and the New York Insurance Exchange. Mr. Clarke received a bachelor of science
degree in accounting from Monmouth College in 1981.
J. Jeffrey Hood is Vice President--Claims and Loss Control of Synergy and of
American Safety Casualty and has been responsible for loss control and safety
matters since joining the Company in 1990. Previously, Mr. Hood had served as
a loss control and safety coordinator and claims administrator for national
technical and insurance organizations for four years. Mr. Hood received a
bachelor of science degree in petroleum engineering from Mississippi State
University in 1985.
Kenneth A. Schneider is Senior Vice President--Underwriting of Synergy.
Prior to joining the Company in 1997, Mr. Schneider was a senior vice
president/managing director of Alexander & Alexander's environmental
underwriting, risk management and consulting division from 1993 to 1997, a
regional manager for marketing and underwriting for The ERIC Group from 1990
to 1993, and an environmental business manager for AIG Consultants from 1989
to 1990. Mr. Schneider has 15 years experience in the insurance and
environmental industry. Mr. Schneider received a masters of business
administration degree from the George Washington University in 1988 and a
bachelor of science degree in geology from Beloit College in 1983.
Frederick C. Treadway has served as the Chairman of the Board of Directors
of the Company since 1986. Mr. Treadway has been president of Specialty
Systems, Inc. in Indianapolis, Indiana since 1977, which is engaged in general
construction and asbestos abatement. Mr. Treadway has 24 years experience in
the construction business. Since 1996, Mr. Treadway, as owner and president of
Treadway Racing LLC, has been a team owner in the Indy Racing League.
Cody W. Birdwell has served as a director of the Company since 1986. Mr.
Birdwell has been president of Houston Sunbelt Communities, L.C. in Houston,
Texas, which is engaged in subdivision and mobile home community development
and sales, since 1993. Previously, Mr. Birdwell had 16 years experience in
general and environmental contracting.
David V. Brueggen has served as a director of the Company since 1986. Mr.
Brueggen is senior vice president of finance of Anson Industries, Inc. in
Melrose Park, Illinois, which is engaged in drywall, acoustical and foam
insulation contracting. Mr. Brueggen has been employed by Anson Industries,
Inc. since 1982. Previously he was an audit manager with Arthur Andersen &
Co., an international public accounting firm, for 10 years. Mr. Brueggen is a
certified public accountant.
William O. Mauldin, Jr. has served as a director of the Company since 1986.
Mr. Mauldin has been president of Midwest Materials Co. in Springfield,
Missouri since 1975, which is engaged in insulation and cold storage. Mr.
Mauldin has 31 years experience in the construction business.
Thomas W. Mueller has served as a director of the Company since 1986. Mr.
Mueller has been vice president of Cardinal Industrial Insulation Co., Inc. in
Louisville, Kentucky since 1975, which is engaged in industrial insulation and
asbestos and sound abatement. Mr. Mueller has 23 years experience in the
construction business.
Timothy E. Walsh has served as a director of the Company since 1986. Mr.
Walsh has been president of Environmental Construction, Inc. in Tallmadge,
Ohio since 1985, which is engaged in the general contracting, demolition,
excavation, asbestos abatement and environmental remediation. Mr. Walsh has 24
years experience in the construction business. Mr. Walsh is a registered civil
engineer.
49
<PAGE>
The Company's Board of Directors consists of the seven persons set forth in
the table above. The Company's Bye-Laws provide for a classified or
"staggered" Board of Directors whereby the term of office of the directors of
the first class (Messrs. Fox and Brueggen) expires at the 1999 annual general
meeting of shareholders, the second class (Messrs. Birdwell, Mueller and
Walsh) expires at the 2000 annual general meeting of shareholders, and the
third class (Messrs. Mauldin and Treadway) expires at the 2001 annual general
meeting of shareholders. The directors elected at subsequent meetings will
have a term that expires at the third annual general meeting held after their
election.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established four standing committees: The audit
committee, the compensation committee, the executive committee and the finance
committee.
The audit committee is composed entirely of non-employee directors and
reviews the scope of the Company's audit, the engagement of independent
accountants and such accountants' reports. The members of the audit committee
are Messrs. Birdwell, Brueggen and Walsh.
The compensation committee is composed entirely of non-employee directors
and has responsibility for determining executive compensation. The members of
the compensation committee are Messrs. Brueggen, Mueller and Treadway.
The executive committee exercises general powers and authorities of the
Board of Directors between meetings of the full Board of Directors. The
executive committee also has responsibility for nominating directors. The
members of the executive committee are Messrs. Brueggen, Fox, Mueller and
Treadway.
The finance committee is responsible for recommending portfolio allocations
to the Board of Directors, approving the Company's guidelines which provide
standards to ensure portfolio liquidity and safety and approving investment
managers and custodians for portfolio assets. The members of the finance
committee are Messrs. Birdwell, Brueggen and Mauldin.
DIRECTOR COMPENSATION
Pursuant to the Company's Directors Stock Plan (the "Directors Plan"), non-
employee directors are awarded an annual "retainer award" in the form of
Common Shares of the Company having a fair market value of $5,000. The
retainer award shares are granted to the directors who are serving as
directors immediately after each annual general meeting and the fair market
value of the Common Shares is determined as of that date. The retainer award
shares vest as of the day immediately preceding the next annual general
meeting following the date of grant. All retainer award shares become fully
vested upon a "change in control" of the Company (as defined in the Directors
Plan) or if the director ceases a service as a director because of death or
disability. If a director ceases service as a director for any other reason,
all unvested retainer award shares are forfeited. A total of 30,000 Common
Shares have been reserved for issuance under the Directors Plan.
Directors are also paid $200 per day for attendance at each meeting of the
Board of Directors and $200 per day for attendance at each meeting of a
committee of the Board of Directors. Directors are also reimbursed for their
reasonable expenses in connection with their Board service.
STOCK OPTION PLAN
The Company has adopted the Incentive Stock Option Plan (the "Incentive
Plan") which is intended to further the interests of the Company and its
shareholders by attracting, retaining and motivating management and other
employees. The Incentive Plan provides for the grant of stock options, which
may be non-qualified options or incentive stock options for tax purposes. A
total of 750,000 Common Shares have been reserved for issuance under the
Incentive Plan.
50
<PAGE>
The administrator of the Incentive Plan is the compensation committee of the
Company's Board of Directors. The compensation committee is authorized to
determine the terms and conditions of all option grants, subject to the
limitations set forth in the Incentive Plan. In accordance with the terms of
the Incentive Plan, the option price per share shall not be less than the fair
market value of the Common Shares on the date of grant and the term of any
option granted thereunder may be no longer than 10 years.
It is anticipated that the executive officers of the Company will be granted
stock options effective as of the date of the completion of the Offering. Such
options will have an exercise price equal to the initial public offering price
of the Common Shares. It is currently expected that such grants will consist
of options to purchase 337,500 Common Shares, including grants to Messrs. Fox,
Crim and Leach of options to purchase 250,000 shares, 25,000 shares and 10,000
shares, respectively. The rights of recipients receiving these stock options,
generally, vest equally over three years, beginning with the first anniversary
date of the Offering and expire 10 years from the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Chief
Executive Officer and the other executive officers of the Company whose salary
and bonus for the 1997 and 1996 fiscal years were in excess of $100,000 (the
"Named Executive Officers") for services rendered in all capacities to the
Company for those years:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND ------------------- ALL OTHER
PRINCIPAL POSITION YEAR SALARY COMPENSATION(1)
------------------ ------------------- ---------------
<S> <C> <C> <C>
Lloyd A. Fox, President............................. 1997 $ 367,485 $4,800
1996 367,485 4,500
Stephen R. Crim, Executive Vice President........... 1997 105,057 3,180
1996 142,111 4,263
James G. Leach, Senior Vice President............... 1997 171,187 4,800
1996 165,449 4,500
</TABLE>
- --------
(1) Represents amounts accrued for contributions by the Company with respect
to its profit sharing plan.
The following table sets forth all grants of stock options during 1997 to
Lloyd A. Fox, the only Named Executive Officer who received option grants
during such year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
ANNUAL RATES
NUMBER OF PERCENT OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS GRANTED TO APPRECIATION
UNDERLYING OPTIONS EMPLOYEES IN EXERCISE OR BASE FOR OPTION
NAME GRANTED(1) FISCAL YEAR PRICE PER SHARE EXPIRATION DATE TERM(2)
---- ------------------ ------------------ ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
5% 10%
----- --------
Lloyd A. Fox(3)......... 44,540 27.6% $5.96 6/30/98 -- --
----- --------
Lloyd A. Fox(3)......... 51,090 31.7% $5.96 3/7/02 -- 30,387
----- --------
</TABLE>
- --------
(1) All options were granted at an exercise price per share equal to 95% of
the book value per share of the Company at December 31, 1996.
(2) Amounts reported represent hypothetical values that may be realized upon
exercise of the options immediately prior to the expiration of their term,
assuming that the stock price on the date of grant appreciates at the
specified annual rates of appreciation, compounded annually over the term
of the option. These numbers are calculated based on rules promulgated by
the Securities and Exchange Commission.
(3) The options were granted to Intersure Reinsurance Company, over which Mr.
Fox exercises sole investment and voting powers.
51
<PAGE>
The following table provides information regarding the year-end value of
stock options held as of December 31, 1997 by Lloyd A. Fox, the only Named
Executive Officer holding options as of that date. No options were exercised
in 1997.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE- MONEY
OPTIONS AT YEAR END OPTIONS AT YEAR-END(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Lloyd A. Fox............... 95,630 0 $577,605 0
</TABLE>
- --------
(1) There was no public trading market for the Common Shares as of December
31, 1997. Accordingly, these values have been calculated by determining
the difference between $12.00 per share (the mid-point of the estimated
price range set forth on the cover page of this Prospectus) and the
exercise price per share payable upon exercise of such options.
EMPLOYMENT AGREEMENT
In March 1997, Lloyd A. Fox, President of the Company, entered into a new
five year employment agreement with the Company which provides for an annual
base salary of $375,000 and other customary executive benefits. Mr. Fox is
also entitled to receive an annual bonus to be determined by the Board of
Directors and stock options under the Incentive Plan, as described above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the compensation committee serves as a member of the
compensation committee of any entity that has one or more executive officers
serving as a member of the Company's Board or compensation committee.
Currently, three of the directors of American Safety RRG (Messrs. Treadway,
Brueggen and Mueller) are also directors of the Company and the sole members
of the compensation committee of the Company. The directors of American Safety
RRG are elected annually by the insureds of American Safety RRG. The Company
derived approximately 65.2% ($4.0 million) of its revenues in 1994, 46.3%
($4.6 million) of its revenues in 1995, and 37.2% ($3.3 million) of its
revenues in 1996 from American Safety RRG. See "Business--American Safety Risk
Retention Group, Inc."
In addition, Messrs. Birdwell, Fox, Mueller, Treadway and Walsh, all of whom
are directors of the Company, are owners of 1845 Tenants-In-Common (formerly
known as Windy Hill Exchange, L.L.C.), the landlord that leases approximately
13,130 square feet of office space in Atlanta, Georgia to Synergy, the
Company's principal U.S. program development, underwriting and administrative
services subsidiary. The lease commenced on March 1, 1996 and expires on
February 28, 2001. The lease provides for a base annual rent of $183,820 plus
an annual increase based on the consumer price index, with such increase not
less than 4% per annum. Synergy is also obligated to pay for an increase in
the landlord's property taxes and fire and extended insurance coverage on a
pro rata rentable floor area basis for the entire building and for any tenant
improvements. During 1996, Synergy paid to the landlord $153,183 for rent,
$30,637 as a security deposit and $57,379 for tenant improvements.
On October 17, 1996, Frederick C. Treadway and Treadway Corporation borrowed
$700,000 (which was increased by $300,000 on August 6, 1997) from the Company
at an interest rate of 9.25% with quarterly interest only payments and a
maturity date of October 17, 1998. The largest outstanding balance on this
loan during 1997 was $1.0 million. The outstanding balance at January 15, 1998
was $580,000. The loan is secured by Mr. Treadway's personal guaranty and a
pledge of Common Shares. See "Certain Transactions."
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INDEMNIFICATION
The Company may exempt and indemnify its directors, officers and auditors in
their capacity as such in respect of any loss arising or liability attaching
to them by virtue of any rule in respect of any negligence, default, breach of
duty or breach of trust of which a director or officer may be guilty in
relation to the Company other than in respect of his own fraud or dishonesty.
The Company has adopted provisions in its Bye-Laws that provide that each
shareholder of the Company and the Company itself agrees to waive any claim or
right of action he or it might have, whether individually or by or in the
right of the Company, against any director on account of any action taken by
such director, or the failure of such director to take any action, in the
performance of his duties, or supposed duties, with or for the Company,
provided that such waiver shall not extend to any matter in respect of any
fraud or dishonesty which may attach to such directors. Further, the Company
has adopted provisions in its Bye-Laws that provide that the Company shall
indemnify its directors and officers to the maximum extent permitted under the
Companies Act.
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CERTAIN TRANSACTIONS
In 1995, the Company entered into a retrocessional excess of loss
reinsurance treaty (for policy limits in excess of reinsurance obtained from
other unaffiliated reinsurers) with Intersure Reinsurance Company ("Intersure
Re"), which is owned by Lloyd A. Fox, the President and a director of the
Company. The treaty covers certain asbestos liability and environmental
remediation liability insurance policies in force, written or renewed by
American Safety RRG or American Safety Casualty for which the Company acts as
a reinsurer. During 1995, 1996 and 1997, the Company paid reinsurance premiums
of $25,000, $451,728 and $318,773, respectively, to Intersure Re. In 1997,
Intersure Re purchased 26,200 Common Shares of the Company for an aggregate
purchase price of $156,597 and received an option to purchase 44,540 Common
Shares of the Company on or before June 30, 1998 for an aggregate purchase
price of $265,458 (both transactions were based on a per share purchase price
equal to 95% of the Company's book value at December 31, 1996).
In 1996, the Company entered into a retrocessional excess of loss
reinsurance treaty (for policy limits in excess of reinsurance obtained from
other unaffiliated reinsurers) with Omega Reinsurance Company ("Omega Re"),
which is owned by Stephen R. Crim, the Executive Vice President of the
Company. The treaty covers certain asbestos liability and environmental
remediation liability insurance policies in force, written or renewed by
American Safety RRG or American Safety Casualty for which the Company acts as
a reinsurer. During 1996 the Company paid no reinsurance premiums to Omega Re,
and during 1997 the Company paid reinsurance premiums of $111,200 to Omega Re.
In 1997, Omega Re purchased 26,200 Common Shares of the Company for an
aggregate purchase price of $156,597 (based on a per share purchase price
equal to 95% of the Company's book value at December 31, 1996).
In 1996, the Company had loans outstanding to Mader Construction Group,
Inc., a shareholder of the Company, and to Timothy E. Walsh, a director and
shareholder of the Company, which loans were secured by personal guarantees
and collateral, including a pledge of Common Shares owned by each borrower. On
November 7, 1995, Mader Construction Group, Inc. borrowed $400,000 from the
Company at an interest rate of 10.75% with monthly principal payments of
$10,000 plus accrued interest and a maturity date of December 29, 1997. The
loan was repaid on December 5, 1997. On July 30, 1996, Timothy E. Walsh
borrowed $250,000 from the Company at an interest rate of 9.25% based on a
five year amortization schedule with a maturity date of December 31, 1997. The
loan was repaid on December 18, 1997. On October 17, 1996, Frederick C.
Treadway, Chairman of the Company, and Treadway Corporation borrowed $700,000
(which was increased by $300,000 on August 6, 1997) from the Company at an
interest rate of 9.25% with quarterly interest only payments and a maturity
date of October 17, 1998. The largest outstanding balance on this loan during
1997 was $1.0 million. The outstanding balance at January 15, 1998 was
$580,000. The loan is secured by Mr. Treadway's personal guaranty and a pledge
of Common Shares.
Management believes the terms of the aforementioned transactions are no less
favorable to the Company than can be obtained from unaffiliated third parties.
Any future transactions between the Company and any director, officer or
principal shareholder of the Company, or any affiliate of such person, will be
on terms no less favorable to the Company than can be obtained from
unaffiliated third parties.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Shares as of December 15, 1997,
and as adjusted to reflect the sale of Common Shares offered by this
Prospectus, by: (i) each person known to the Company to beneficially own more
than 5% of the Common Shares; (ii) each of the Company's directors; (iii) each
of the Company's Named Executive Officers; and (iv) all directors and
executive officers of the Company as a group. Except as otherwise indicated,
each person listed below has sole voting and investment power with respect to
such Common Shares.
<TABLE>
<CAPTION>
SHARES PERCENTAGE PERCENTAGE
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
------------------------ ------------ ---------- ----------
<S> <C> <C> <C>
Treadway Associates, L.P. and Frederick C.
Treadway(2)............................... 603,910 20.64% 10.74%
Lloyd A. Fox(3)............................ 294,750 9.76 5.15
Vertecs Corporation and David V.
Brueggen(4)............................... 284,270 9.72 5.05
Walsh Properties Partnership(5)............ 261,345 8.93 4.65
A.R.I. Incorporated and William O. Mauldin,
Jr.(6).................................... 230,560 7.88 4.10
Cody W. Birdwell and The Cody Birdwell
Family Limited Partnership(7)............. 196,500 6.72 3.49
Mader Construction Group, Inc.(8).......... 196,500 6.72 3.49
Thomas W. Mueller Trust(9)................. 182,745 6.25 3.25
Mark C. Mueller Trust(10).................. 182,745 6.25 3.25
Market Street Realty Trust(11)............. 151,960 5.19 2.70
Timothy E. Walsh(12)....................... 137,550 4.70 2.45
Stephen R. Crim(13)........................ 26,200 * *
James G. Leach............................. 0 * *
All directors and executive officers as a
group (9 persons)......................... 1,956,485 64.77% 34.20%
</TABLE>
- --------
* Less than 1%.
(1) Shares beneficially owned include shares that may be acquired pursuant to
the exercise of outstanding stock options that are exercisable within 60
days of the date set forth above.
(2) Represents shares held of record by Treadway Associates, L.P., over which
Mr. Treadway exercises sole investment and voting power. Mr. Treadway is
Chairman of the Board of Directors of the Company, and his business
address is 9406 Promontory Circle, Indianapolis, Indiana 46236.
(3) Includes 52,400 shares held of record by Intersure Reinsurance Company,
over which shares Mr. Fox exercises sole investment and voting power,
95,630 shares subject to immediately exercisable stock options and 41,920
shares owned by his spouse, as to which Mr. Fox disclaims beneficial
ownership. Mr. Fox is a director and the President of the Company, and his
business address is 1845 The Exchange, Suite 200, Atlanta, Georgia 30339.
(4) Represents shares held of record by Vertecs Corporation. The business
address of Vertecs Corporation is 1959 Anson Drive, Melrose Park, Illinois
60160. David V. Brueggen, a director of the Company, is an officer of
Vertecs Corporation and disclaims beneficial ownership of such shares.
(5) The business address of Walsh Properties Partnership is 1405 Newton St.,
Tallmadge, Ohio 44278.
(6) Represents shares held of record by A.R.I. Incorporated, over which Mr.
Mauldin exercises sole investment and voting power. Mr. Mauldin is a
director of the Company, and his business address is 417 W. Mill,
Springfield, Missouri 65801.
(7) Represents 98,250 shares held of record by Mr. Birdwell and 98,250 shares
of record held by The Cody Birdwell Family Limited Partnership, over which
shares Mr. Birdwell exercises sole investment and voting power. Mr.
Birdwell is a director of the Company, and his business address is 11767
Katy Freeway, Suite 690, Houston, Texas 77079.
(8) The business address of Mader Construction Group, Inc. is 970 Bullis Road,
Elma, New York 14059.
(9) Represents shares held of record by the Mark C. Mueller Trust, over which
Thomas W. Mueller exercises sole investment and voting power as the sole
trustee. Thomas W. Mueller is a director of the Company, and his
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business address is 1300 West Main Street, Louisville, Kentucky 40203.
Thomas W. Mueller disclaims beneficial ownership of the shares owned by
Market Street Realty Trust, for which he is one of three trustees.
(10) Represents shares held of record by the Thomas W. Mueller Trust, over
which Mark E. Mueller exercises sole investment and voting power as the
sole trustee. The business address of Mark C. Mueller is 1300 Main
Street, Louisville, Kentucky 40203. Mark C. Mueller disclaims beneficial
ownership of the shares owned by Market Realty Trust, for which he is one
of three trustees.
(11) The business address of Market Street Realty Trust is 1300 Main Street,
Louisville, Kentucky 40203.
(12) Timothy E. Walsh, a director of the Company, is not affiliated with Walsh
Properties Partnership and disclaims beneficial ownership of the shares
owned by Walsh Properties Partnership.
(13) Represents 26,200 shares held of record by Omega Reinsurance Company,
over which Mr. Crim exercises sole investment and voting power.
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DESCRIPTION OF CAPITAL STOCK
The following summarizes certain provisions of the Memorandum of Association
and Bye-Laws of the Company. Such summaries do not purport to be complete and
are subject to, and are qualified in their entirety by, all of the provisions
of the Memorandum of Association and Bye-Laws. Copies of the Memorandum of
Association and Bye-Laws are filed as exhibits to the Registration Statement
of which this Prospectus is a part.
GENERAL
The authorized share capital of the Company is 20 million shares, consisting
of 15 million common shares, par value $.01 per share ("Common Shares"), and 5
million preferred shares, par value $.01 per share ("Preferred Shares").
COMMON SHARES
The Common Shares offered hereby will be validly issued, fully paid and
nonassessable. There are no provisions of Bermuda law or the Company's Bye-
Laws which impose any limitations on the rights of shareholders to hold or
vote Common Shares by reason of such shareholders not being residents of
Bermuda.
DIVIDEND RIGHTS. The Company is a holding company with no significant
operations or significant assets other than its investment portfolio and
ownership of the capital stock of its reinsurance, insurance, management
services and other subsidiaries. Therefore, the Company will rely primarily on
dividends from its subsidiaries to pay dividends on the Common Shares. The
ability of any subsidiary to pay dividends to the Company in the future is
subject to limitations imposed by the insurance laws or corporate laws and
regulations of the jurisdiction of incorporation and domicile of each entity,
and will depend on, among other things, each subsidiary's statutory surplus,
future earnings and regulatory restrictions. See "Dividend Policy."
Holders of Common Shares will be entitled to receive dividends ratably when
and as declared by the Board of Directors out of funds legally available
therefor.
VOTING RIGHTS. Each holder of Common Shares is entitled to one vote per
share on all matters submitted to a vote of the Company's shareholders,
subject to the 9.5% voting limitation described below. All matters, including
the election of directors, voted upon at any duly held shareholders meeting
shall be authorized by a majority of the votes cast at the meeting by
shareholders represented in person or by proxy, except (i) approval of a
merger, consolidation or amalgamation, (ii) the sale, lease or exchange of all
or substantially all of the assets of the Company, and (iii) amendment of
certain provisions of the Bye-Laws, which each require the approval of at
least 66 2/3% of the outstanding voting shares (in addition to any regulatory
or court approvals).
The Common Shares have non-cumulative voting rights, which means that the
holders of a majority of the Common Shares may elect all of the directors of
the Company and, in such event, the holders of the remaining shares will not
be able to elect any directors.
The Bye-Laws contain certain provisions that limit the voting rights that
may be exercised by certain holders of Common Shares. The Bye-Laws provide
that each holder of Common Shares is entitled to one vote per share on all
matters submitted to a vote of the Company's shareholders, except that if, and
so long as, the Controlled Shares (as defined below) of any person constitute
9.5% or more of the issued and outstanding Common Shares, the voting rights
with respect to the Controlled Shares owned by such person shall be limited,
in the aggregate, to a voting power of 9.5%, other than the voting rights of
Frederick C. Treadway or Treadway Associates, L.P., affiliates of a founding
shareholder of the Company. "Controlled Shares" mean (i) all shares of the
Company directly, indirectly or constructively owned by any person and (ii)
all shares of the Company directly, indirectly or beneficially owned by such
person within the meaning of Section 13(d) of the Exchange Act (including any
shares owned by a group of persons, as so defined and including any shares
that would otherwise be excluded by
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the provisions of Section 13(d)(6) of the Exchange Act). Under these
provisions, if, and so long as, any person directly, indirectly or
constructively owns Controlled Shares having more than 9.5% of the total
number of votes exercisable in respect of all shares of voting stock of the
Company, the voting rights attributable to such shares will be limited, in the
aggregate, to 9.5% of the total number of votes.
PREEMPTIVE RIGHTS. No holder of Common Shares of the Company shall, by
reason only of such holder, have any preemptive right to subscribe to any
additional issue of shares of any class or series nor to any security
convertible into such shares.
PREFERRED SHARES.
Pursuant to the Bye-Laws, the Company's Board of Directors may by resolution
establish one or more series of preferred shares having such number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences and limitations as may be fixed by the Board of Directors
without any further shareholder approval. Such rights, preferences, powers and
limitations as may be established could also have the effect of impeding or
discouraging the acquisition of control of the Company.
ANTI-TAKEOVER EFFECTS OF BYE-LAWS
The Bye-Laws contain certain provisions that may be viewed as making the
acquisition of control of the Company more difficult. These provisions are
designed to encourage persons seeking to acquire control of the Company to
negotiate with the directors. The directors believe that, in general, the
interests of the Company's shareholders would be best served if any change in
control results from negotiations with the directors. The directors would
negotiate based upon careful consideration of the proposed terms, such as the
price to be paid to shareholders, the form of consideration to be paid and the
anticipated tax effects of the transaction. However, these provisions could
have the effect of discouraging a prospective acquiror from making a tender
offer or otherwise attempting to obtain control of the Company. To the extent
these provisions discourage takeover attempts, they could deprive shareholders
of opportunities to realize takeover premiums for their shares or could
depress the market price of the Common Shares.
BYE-LAWS
The Bye-Laws provide for the internal regulation of the Company, including,
among other things, the establishment of share rights, modification of such
rights, issuance of share certificates, the transfer of shares, alterations to
capital, the convening and conduct of general meetings, proxies, the
appointment and removal of directors, conduct and power of directors,
dividends, and the appointment of any auditor.
In addition to the provisions of the Bye-Laws discussed above, set forth
below is a description of other relevant provisions of the Bye-Laws. The
descriptions are intended as a summary only and are qualified in their
entirety by reference to the Bye-Laws which are filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
SHAREHOLDER PROPOSALS. The Bye-Laws provide that shareholders have the right
to submit a proposal for consideration at an annual general meeting or special
general meeting of shareholders or to nominate persons for election as
directors, provided that written notice of such shareholder's intent to make
such a proposal or nomination must be received by the Secretary of the Company
at the registered offices of the Company not later than 60 days prior to such
meeting. The shareholder's request must describe the proposal or nomination in
sufficient detail for it to be summarized on the agenda for the meeting and
must set forth (i) the name and record address of the shareholder proposing
such meeting; (ii) a representation that the shareholder is a holder of record
of the shares of the Company entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to present such proposal or
nomination; (iii) the class and number of shares of the Company which are
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<PAGE>
beneficially owned by the shareholder; (iv) a brief description of the
business desired to be brought before the meeting; (v) the reasons for
conducting such proposed business at the meeting; (vi) any material interest
of the shareholder in such business. In the case of a nomination of any person
for election as a director, the shareholder's request shall set forth: (a) the
name, age, business address and residence address of any person to be
nominated; (b) the principal occupation or employment of the person; (c) the
number of Common Shares which are beneficially owned by such person; (d) such
other information regarding the nominee proposed by such shareholder as would
be required to be included in a proxy statement filed pursuant to Regulation
14A under the Exchange Act, whether or not the Company is then subject to such
Regulation; and (e) the consent of each nominee to serve as a director of the
Company if so elected. The presiding officer of the meeting shall, if the
facts warrant, refuse to acknowledge a proposal or nomination not made in
compliance with the foregoing procedure.
In addition, under the Bye-Laws and the Companies Act, shareholders holding
not less than one tenth of the paid in capital of the Company carrying the
right to vote at a general meeting may require the Board to convene a special
general meeting of the Company. If the Board fails to proceed to convene a
special general meeting within 21 days of receipt by the Company of the
shareholders' request to hold such a meeting, the shareholders may do so
themselves in accordance with the Companies Act.
The advance notice requirements regulating shareholder nominations and
proposals may have the effect of precluding a contest for the election of
directors or the introduction of a shareholder proposal if the procedures
summarized above are not followed and may discourage or deter a third party
from conducting a solicitation of proxies to elect its own slate of directors
or to introduce a proposal.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The Company's Bye-Laws
contain provisions which restrict certain "business combinations." In general,
the Bye-Laws prohibit an "interested shareholder" of the Company from either
directly or indirectly, being a party to or taking any action in connection
with any "business combination" with the Company for a period of five years
following the date such person first became an "interested shareholder,"
unless (a) the "business combination" was approved by a prior resolution of
the "continuing directors" of the Company's Board of Directors; or (b) the
"business combination" was approved by a prior resolution of at least 66 2/3%
of the outstanding voting shares of the Company other than those voting shares
beneficially held by an "interested shareholder."
A "business combination" includes, among other things, (i) any arrangement,
reconstruction or amalgamation involving the Company and an "interested
shareholder," (ii) any transaction or series of transactions involving the
sale, purchase, lease, exchange, mortgage, pledge, transfer or other
disposition or encumbrance of the assets of the Company, (iii) the interest or
transfer to an "interested shareholder" or any affiliate thereof of any
securities by the Company other than an issue or distribution to all
shareholders of the Company entitled to participate therein, (iv) the adoption
of any plan or proposal for the liquidation or dissolution of the Company
unless such plan or proposal is initiated, proposed or adopted independently
of any "interested shareholder" and (v) the reclassification of any securities
or other restructuring of the capital of the Company in such a way as to
confer a benefit on the "interested shareholder."
An "interested shareholder" is any shareholder of the Company who is, or has
publicly disclosed a plan or intention to become, the beneficial owner of
Common Shares representing ten percent or more of the value of the Company.
A "continuing director" includes (i) any member of the Company's Board of
Directors who while a member thereof is not an "interested shareholder" and
was a member of the Company's Board of Directors prior to the time that the
"interested shareholder" became such, and (ii) any person who subsequently
becomes a member of the Company's Board of Directors and, while such person is
a member thereof, is not an "interested shareholder" or an affiliate of an
"interested shareholder," and such person's nomination for election or
election to the Company's Board of Directors is recommended or approved by a
majority of the "continuing directors" then in office.
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As a result of the application of this provision of the Company's Bye-Laws
potential acquirors of the Company may be discouraged from attempting to
effect an acquisition transaction with the Company, thereby possibly depriving
holders of the Company's Common Shares of certain opportunities to sell or
otherwise dispose of such securities at above-market prices pursuant to such
transaction.
The affirmative vote of the holders of at least 66 2/3% of the outstanding
shares entitled to vote shall be required to amend, repeal or adopt any
provision inconsistent with the foregoing provision of the Bye-Laws.
TRANSFER AGENT AND REGISTRAR
SunTrust Bank, Atlanta, Georgia, is the transfer agent and registrar for the
Common Shares.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 5,625,230
Common Shares. The 2,700,000 Common Shares sold in the Offering will be freely
tradable without restriction or further registration under the Securities Act,
except that those shares held by "affiliates" (as defined in Rule 144
promulgated under the Securities Act) of the Company will not be freely
tradable even though they will have been registered under the Securities Act.
The other 2,925,230 Common Shares were outstanding prior to the Offering and
are treated as "restricted securities" for purposes of Rule 144 under the
Securities Act and may not be sold except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act. In addition, all of the Common Shares that were outstanding prior to the
Offering are subject to a lock-up agreement with the representatives of the
Underwriters that prohibits their resale prior to 180 days after the date of
this Prospectus without the prior consent of Advest, Inc. Upon the expiration
of such 180 day period, such holders will be entitled generally to dispose of
their shares, subject to the provisions of Rule 144.
In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated), including any affiliate of the Company, who owns
Common Shares which have not been registered under the Securities Act and as
to which a minimum of one year has elapsed since the later of the date of
acquisition from and full payment to the Company or an affiliate of the
Company, and any affiliate of the Company who owns registered shares, will be
entitled to sell, within any three-month period beginning 90 days after the
date of this Prospectus (but subject to the 180 day lock-up period described
above), a number of Common Shares that does not exceed the greater of: (i) 1%
of the then outstanding Common Shares or (ii) the average weekly trading
volume in the Common Shares in the public market during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales of Common Shares pursuant to Rule
144 are also subject to certain manner of sale provisions, notice requirements
and the availability of current public information about the Company. In
addition, under Rule 144, any person who holds Common Shares which have not
been registered under the Securities Act as to which a minimum of two years
has elapsed since the later of the date of acquisition from and full payment
to the Company or an affiliate of the Company and who is not, and for a period
of three months prior to the sale of such Common Shares has not been, an
affiliate of the Company is free to sell such shares without regard to the
volume, manner of sale, notice and other provisions of Rule 144.
In addition, 750,000 Common Shares are reserved for issuance under the
Incentive Plan and 30,000 Common Shares are reserved for issuance in
connection with the Directors Plan. The Company intends to file a registration
statement on Form S-8 under the Securities Act to register the Common Shares
reserved for issuance under the Incentive Plan and the Directors Plan after
the completion of the Offering. Common Shares issued under the Incentive Plan
and the Directors Plan to non-affiliates of the Company after the effective
date of such registration statement will be freely tradable in the public
market. Common Shares issued under the Incentive Plan and the Directors Plan
to affiliates of the Company after the effective date of such registration
statement will be eligible for sale pursuant to Rule 144.
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Prior to the Offering, there has been no public trading market for the
Company's Common Shares. The Company cannot predict the effect, if any, that
sales of Common Shares following the offering, pursuant to a registration
statement, Rule 144, or otherwise, or the availability of such shares for
sale, will have on the market price prevailing from time to time. Sales, or
the availability for sale, of a substantial amount of Common Shares could
adversely affect prevailing market prices for such shares.
CERTAIN BERMUDA LAW CONSIDERATIONS
The following discussion is based on the advice of Conyers Dill & Pearman,
Bermuda counsel to the Company. American Safety has been designated as a non-
resident for exchange control purposes by the Bermuda Monetary Authority,
Foreign Exchange Control, whose permission for the issue and transfer of
Common Shares has been obtained subject to the Common Shares being listed on
the Nasdaq National Market. This Prospectus has been filed with the Registrar
of Companies in Bermuda in accordance with Bermuda law.
CONSENT UNDER THE EXCHANGE CONTROL ACT, 1972 (AND REGULATIONS THEREUNDER)
HAS BEEN OBTAINED FROM THE BERMUDA MONETARY AUTHORITY FOR THE ISSUE AND
TRANSFER OF THE COMMON SHARES BEING OFFERED PURSUANT TO THE OFFERING. IN
ADDITION, A COPY OF THIS DOCUMENT HAS BEEN DELIVERED TO THE REGISTRAR OF
COMPANIES IN BERMUDA PURSUANT TO THE COMPANIES ACT, 1981 OF BERMUDA.
IN GIVING SUCH CONSENT AND IN ACCEPTING THIS PROSPECTUS FOR FILING, THE
BERMUDA MONETARY AUTHORITY AND THE REGISTRAR OF COMPANIES IN BERMUDA,
RESPECTIVELY, ACCEPT NO RESPONSIBILITY FOR THE FINANCIAL SOUNDNESS OF ANY
PROPOSAL, OR FOR THE CORRECTNESS OF ANY OF THE STATEMENTS MADE OR OPINIONS
EXPRESSED HEREIN.
The transfer of Common Shares between persons regarded as non-resident in
Bermuda for exchange control purposes and the issue of shares after the
completion of the Offering to such persons may be effected without specific
consent under the Exchange Control Act, 1972 and regulations thereunder
subject to the Common Shares being listed on the Nasdaq National Market.
Issues and transfers of shares to any person regarded as resident in Bermuda
for exchange control purposes require specific prior approval under the
Exchange Control Act, 1972.
There are no limitations on the rights of persons regarded as non-residents
of Bermuda for foreign exchange control purposes owning Common Shares to hold
or vote their Common Shares. Because American Safety has been designated as a
non-resident for Bermuda exchange control purposes, there are no restrictions
on its ability to transfer funds in and out of Bermuda or to pay dividends to
United States residents or other non-residents of Bermuda who are holders of
Common Shares, other than in respect of local Bermuda currency. In addition,
because American Safety has been designated as a non-resident for Bermuda
exchange control purposes, it does not intend to maintain Bermuda dollar
deposits and, accordingly, will not pay dividends on the Common Shares in
Bermuda currency.
In accordance with Bermuda law, share certificates are issued only in the
names of corporations or individuals. In the case of an applicant acting in a
special capacity (for example, as an executor or trustee), certificates may,
at the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, American
Safety is not bound to investigate or incur any responsibility in respect of
the proper administration of any such estate or trust. American Safety will
take no notice of any trust applicable to any of its Common Shares whether or
not it had notice of such trust.
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CERTAIN TAX CONSIDERATIONS
The following discussion of the tax treatment of the Company and its
subsidiaries, and of the shareholders of the Company, is for general
information purposes only and does not purport to be a complete analysis of
all tax considerations that may be applicable to them.
For example, except as expressly described below, the following discussion
does not deal with (i) Common Shares acquired by an individual pursuant to the
exercise of employee stock options, pursuant to the terms of a stock option
plan, or otherwise as compensation, (ii) shareholders who are not citizens or
residents of the United States, (iii) Common Shares other than those acquired
by purchasers in the Offering, (iv) shareholders who directly or
constructively own 10 percent or more of the voting power or value of the
capital stock of the Company, (v) other categories of shareholders subject to
special treatment under United States income tax laws, such as dealers in
securities, banks, insurance companies and tax-exempt entities, or (vi) any
state or local taxes, or any taxes other than income taxes.
The following discussion is based upon current law, and could be affected by
legislative, judicial or administrative changes. Statements made below as to
United States law and Bermuda law, respectively, are based upon the opinions
of KPMG Peat Marwick LLP, United States tax advisors to the Company, and
Conyers Dill & Pearman, Bermuda counsel to the Company, as to material tax
consequences of acquisition, ownership and disposal of Common Shares. Such
firms express no opinion as to, and have not independently confirmed, any
factual or accounting matters, determinations or conclusions, such as amounts
and computations of Subpart F Insurance Income or "related person insurance
income" or components thereof (as such terms are defined below), the tax
residence of the Company and its subsidiaries or their eligibility for the
benefits of any income tax treaty with the United States or facts relating to
the conduct of business and activities of the Company and its subsidiaries.
The tax treatment of a shareholder may vary depending on such shareholder's
particular tax situation or status, and therefore, each prospective investor
is urged to consult its own tax advisors as to the particular tax consequences
of the offering for such shareholder, including the effect and applicability
of federal, state, local and foreign income and other tax laws.
TAXATION OF AMERICAN SAFETY AND ITS BERMUDA SUBSIDIARY
BERMUDA
Under current Bermuda law, there is no income or capital gains tax payable
by American Safety or its Bermuda subsidiary, American Safety Re. American
Safety and its Bermuda subsidiary have received from the Minister of Finance
assurances, under The Exempted Undertakings Tax Protection Act 1966 of
Bermuda, to the effect that in the event of there being enacted in Bermuda any
legislation imposing tax computed on profits or income, or computed on any
capital asset, gain or appreciation, or any tax in the nature of estate duty
or inheritance tax, then the imposition of any such tax shall not be
applicable to them or to any of their respective operations or to their
shares, debentures or other obligations until March 28, 2016. These assurances
are subject to the provision that they are not to be construed so as to
prevent the application of any tax or duty to such persons as are ordinarily
resident in Bermuda or to prevent the application of any tax payable in
accordance with the provisions of The Land Tax Act 1967 of Bermuda or
otherwise payable in relation to any property leased to American Safety or its
Bermuda subsidiary.
American Safety and its Bermuda subsidiary are required to pay certain
annual Bermuda government fees. In addition, American Safety and its Bermuda
subsidiary are required to pay certain business fees as insurers under the
Bermuda Act. Currently, there would be no Bermuda withholding or other tax on
dividends paid by the Bermuda subsidiary to American Safety.
UNITED STATES
In general, a foreign corporation is subject to (i) United States federal
income tax at graduated rates on its taxable income that is treated as
effectively connected with its conduct of a trade or business within the
United States and (ii) the 30% United States branch profits tax on its
effectively connected earnings and profits (with
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certain adjustments) deemed repatriated from the United States, unless the
corporation is entitled to relief under the provisions of a tax treaty into
which the United States has entered.
The United States has entered into a tax treaty with Bermuda (the "Bermuda
Treaty"). The Bermuda Treaty provides that business profits derived from
carrying on the business of insurance by a Bermuda company that is
an "enterprise of insurance" may only be taxed in the United States if such
profits are attributable to the conduct of a trade or business in the United
States through a permanent establishment situated therein. In order for a
United States permanent establishment to exist, there generally must be
continuity of business activity conducted through facilities equipped to carry
on such activity. Generally, an insurance company would avoid having a
permanent establishment if it maintains no office and owns no tangible or real
property in the United States and acts in the U.S. only through independent
agents who would be acting in the ordinary course of their business and who
would not be acting in such capacity exclusively for the company and other
companies related to it. A Bermuda company is entitled to the Bermuda Treaty
benefits described above only if (i) more than 50% of its shares are
beneficially owned, directly or indirectly, by individuals who are United
States citizens or residents or Bermuda residents, and (ii) the Company's
income is not used in substantial part to make disproportionate distributions
to, or to meet certain liabilities to, persons who are not United States
citizens or residents or Bermuda residents. The Bermuda Treaty does not
preclude the imposition of the United States branch profits tax.
Whether a foreign corporation is engaged in a United States trade or
business or is carrying on an insurance business in the United States depends
upon the level of activities conducted in the United States. For example, if
the activities of a foreign company are "continuous, regular, and
considerable" the foreign company will be deemed to be engaged in a United
States trade or business. Due to the fact that American Safety will continue
to maintain an office in Bermuda and American Safety and American Safety Re's
sole business is reinsuring contracts via treaty reinsurance agreements, which
are all signed outside of the United States, management believes that American
Safety and its Bermuda subsidiary have been operated and, in the future, will
continue to be operated in a manner that will not cause any of them to be
treated as being engaged in a United States trade or business.
However, because the Internal Revenue Code of 1986, as amended (the "Code"),
the Treasury Regulations and court decisions do not identify definitively
activities that constitute being engaged in a United States trade or business,
and because of the factual nature of the determination, there can be no
assurance that the Internal Revenue Service (the "Service") will not contend
that American Safety or its Bermuda subsidiary is engaged in a United States
trade or business. If American Safety or its Bermuda subsidiary were
considered to be engaged in a United States trade or business, that entity
would be subject to United States federal income tax on income effectively
connected with that trade or business, and would be subject to the branch
profits tax as well, unless it was entitled to relief under the Bermuda
Treaty.
Management believes that American Safety and its Bermuda subsidiary,
American Safety Re, will be entitled to the benefits of the Bermuda Treaty. If
American Safety Re were so entitled and were considered to be engaged in a
United States trade or business, application of United States federal income
tax, but not the United States branch profits tax, would be limited to
business profits attributable to a permanent establishment. As stated above,
management believes that American Safety and American Safety Re will not be
engaged in a United States trade or business. If American Safety or American
Safety Re are not engaged in a United States trade or business, there will be
no need to claim benefits under the Bermuda Treaty.
Foreign corporations not engaged in a trade or business in the United States
(as well as foreign corporations engaged in the conduct of a trade or business
in the United States, but only with respect to their income that is not
effectively connected with such trade or business) are subject to United
States federal withholding tax on certain "fixed or determinable annual or
periodical" income (such as dividends and interest on certain investments)
derived from sources within the United States. Such tax is generally imposed
at a rate of 30% on the gross income subject to tax. The Bermuda Treaty does
not provide for a reduction of the tax rate.
The United States also imposes an excise tax on insurance and reinsurance
premiums paid to foreign insurers or reinsurers with respect to risks located
in the United States. The rates of tax currently applicable are 4% of gross
casualty insurance premiums and 1% of gross reinsurance premiums.
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In general, dividends made by a United States corporation to a foreign
entity are subject to a 30% withholding tax. Accordingly, any dividends paid
to the Company by its U.S. subsidiaries will be subject to a 30% withholding
tax.
TAX TREATMENT OF SHAREHOLDERS
BERMUDA
Under current Bermuda law, there is no Bermuda income tax, withholding tax,
capital gains tax, capital transfer tax, estate duty or inheritance tax
payable by shareholders of American Safety with respect to an investment in
or, subsequent sale of, the Common Shares.
UNITED STATES
Taxation of Dividends
Subject to the discussion below relating to the potential application of the
controlled foreign corporation or passive foreign investment company rules to
the Company, cash distributions made with respect to the Common Shares will
constitute dividends for United States federal income tax purposes to the
extent paid out of the earnings and profits of the Company. Generally, such
dividends will not be eligible for the dividends received deduction.
Shareholders of the Company that are United States persons, including citizens
and residents of the United States and corporations organized under the laws
of any state of the United States, and non-resident aliens and foreign
corporations as to which such distributions are considered effectively
connected with the conduct of a trade or business in the United States, and
any other persons subject to United States federal income tax on a net income
basis (referred to herein as "United States Holders"), will generally be
subject to United States federal income tax on the receipt of such dividends.
Distributions in excess of earnings and profits will not be taxed to the
extent of a United States Holder's basis in its Common Shares, and will reduce
basis. Any amount in excess of basis will be treated as gain from the sale or
exchange of the Common Shares.
Taxation of Capital Gains
Subject to the discussion below relating to disposition of shares and the
potential application of the passive foreign investment company rules to the
foreign corporation, upon the sale or exchange of Common Shares, a United
States Holder will recognize a gain or loss for United States federal income
tax purposes equal to the difference between the amount realized upon such
sale or exchange and the United States Holder's United States federal income
tax basis for the Common Shares disposed of. Gain recognized by a United
States Holder who is a United States resident generally will be United States
source income. If the United States Holder's holding period for the Common
Shares is more than one year and if the Common Shares constitute a capital
asset in the hands of the United States Holder, such gain or loss generally
will be subject to tax at a current maximum marginal tax rate of 20% or 28%
for individuals and 35% for corporations.
Classification as a Controlled Foreign Corporation
If a foreign corporation is a "controlled foreign corporation" (a "CFC") for
an uninterrupted period of 30 days or more during any taxable year, its
"United States shareholders" who own stock in such corporation, directly, or
indirectly through foreign persons, on the last day in such year on which such
corporation is a CFC must include in their gross income their respective pro
rata shares of the CFC's "subpart F Income", even if such income is not
distributed as dividends. Subpart F income includes, among other things,
"insurance income", defined as any income (including underwriting and
investment income) that is attributable to the issuing (or reinsuring) of any
insurance or annuity contract in connection with property in, liability
arising out of activity in, or in connection with the lives or health of
residents of, a country other than the country under the laws of which the CFC
is created or organized, and which would be taxed under subchapter L of the
Code if such income were the income of a U.S. insurance company ("Subpart F
Insurance Income"). However, Subpart F Insurance Income does not include any
income of a CFC from sources within the United States that is effectively
connected with the conduct of a United States trade or business, unless the
CFC is exempt from United States taxation on the income under an income tax
treaty with the United States. Subpart F income also includes, to the extent
not treated as part of Subpart F Insurance Income, passive investment income
such as interest, dividends and certain capital gains.
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In general, a foreign corporation is treated as a CFC if the "United States
shareholders" of such corporation collectively own or are considered to own,
directly or indirectly through foreign persons or by applying the constructive
ownership rules of Section 958(b) of the Code, more than 50% of the total
combined voting power or total value of the corporation's stock. However, for
purposes only of taking into account Subpart F Insurance Income (as defined
above), a foreign corporation will be treated as a CFC if (i) more than 25% of
the total combined voting power or total value of its stock is so owned by
United States shareholders, and (ii) the gross amount of premiums in respect
of reinsurance or the issuing of insurance or annuity contracts with respect
to risks outside its country of organization exceeds 75% of the gross amount
of all premiums or other consideration in respect of all risks. For these
purposes, a "United States shareholder" means any United States person who
owns, or is considered to own, directly or indirectly through foreign entities
or by applying the constructive ownership rules of Section 958(b) of the Code,
10% or more of the total combined voting power of all classes of stock of the
foreign corporation (a "United States 10% shareholder").
Management believes that, because of voting limitations on the stock of the
Company designed to prevent any person other than Frederick C. Treadway or
Treadway Associates, L.P. from becoming a United States 10% voting shareholder
(directly, indirectly or constructively) neither the Company nor any of its
subsidiaries will be considered a CFC under the 25% or 50% ownership tests.
Even if the Company were to become a CFC, none of its shareholders unrelated
to Frederick C. Treadway or Treadway Associates, L.P. would be deemed to be a
United States 10% voting shareholder subject to current United States income
taxation on Subpart F income of the Company or any of its subsidiaries unless
the related person insurance income rules apply. See discussion below
regarding special considerations with respect to "related person insurance
income." See also "Description of Capital Stock."
Related Person Insurance Income
Special rules apply to the "related person insurance income" ("RPII"), if
any, of a foreign corporation. These rules do not apply to a foreign
corporation if (i) less than 20% of the voting power and less than 20% of the
total value of the capital stock of such corporation is owned at any time
during the taxable year (directly or indirectly) by persons who are (directly
or indirectly) insured under any policy of insurance or reinsurance issued by
such corporation, or who are related persons to any such person, (ii) the RPII
of such corporation for the taxable year is less than 20% of its Subpart F
Insurance Income, determined on a gross basis, (as defined above but without
provisions which limit insurance income to income from countries other than
the country in which the corporation was created or organized) (the "De
Minimis Exception"), (iii) such corporation elects to treat its RPII as income
effectively connected with the conduct of a United States trade or business,
or (iv) such corporation elects to be treated as a United States corporation.
If none of the above exceptions applies and if all United States persons, in
the aggregate, own, directly or indirectly through foreign entities or by
applying the constructive ownership rules of Section 958(b) of the Code, 25%
or more of the total combined voting power or total value of such corporation,
its RPII must be included in the gross income of such United States persons,
even though not distributed, under the rules summarized below.
RPII is defined as any insurance income attributable to a policy of
insurance or reinsurance with respect to which the person (directly or
indirectly) insured is a "United States shareholder" in the foreign
corporation, or a "related person" to such shareholder. For the purposes only
of taking into account RPII, and subject to the exceptions described below,
the term "United States shareholder" means with respect to any foreign
corporation, a United States person that owns any stock (rather than 10% or
more), either directly or indirectly through foreign entities, in that
corporation (such a person is hereinafter sometimes referred to as a "RPII
Shareholder"). Hence, for purposes of determining if the Company is a RPII CFC
and allocating RPII, all United States shareholders are included for purposes
of the 25% ownership test and the inclusion of RPII in taxable income; the 10%
threshold for shareholders is not applicable for this determination. The term
"related person" for this purpose generally means an individual, corporation,
partnership, trust or estate which has 50% control of, or is 50% controlled
by, a RPII Shareholder, or which is 50% controlled by the same person or
persons that have 50% control of the foreign corporation. For these purposes
50% control is defined as control of more than 50% of either the voting power
of a corporation or the value of its capital stock.
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Management believes that RPII does not, and in the future will not, equal or
exceed the 20% threshold and, as a result, the De Minimis Exception will
apply. In addition, management believes less than 20% of the total value and
voting power of the stock of American Safety Re is or will be treated as owned
by persons who are (directly or indirectly) insured by such entity or who are
related to such persons. If either such exception applies (the De Minimis
Exception, or the exception from the RPII rules based on less than 20%
ownership by insureds and related persons), then the special rules concerning
RPII of a foreign corporation will be inapplicable. The Company does not
intend to cause American Safety Re to elect to treat its RPII as effectively
connected income or to be treated as a United States corporation.
If the special rules concerning RPII of a foreign corporation were
applicable the RPII Shareholders of American Safety, and therefore of American
Safety Re on the last day of the taxable year might be required to include in
gross income for United States federal income tax purposes all the RPII of
American Safety Re for the entire taxable year, whether or not distributed. In
that case, an inclusion would be required even if the RPII Shareholders owned
shares only on the last day of the taxable year. Conversely, a United States
shareholder that owns shares during the taxable year, but not on the last day,
would not be required to include in gross income any part of such RPII.
Disposition of Shares
Section 1248 of the Code applies special rules to the sale or exchange of
shares of stock of a foreign corporation by a United States person that owned,
directly or indirectly through foreign entities or by applying the
constructive ownership rules of Section 958(b) of the Code, shares possessing
10% or more of the voting power of such foreign corporation at any time during
the five-year period ending on the date of the sale or exchange when the
corporation was a CFC. Any gain recognized by such a shareholder may be
treated as ordinary income to the extent of certain earnings and profits
attributable to the shares sold or exchanged. Such a shareholder generally
will be required to report a disposition of its shares by attaching Form 5471,
Information Return of United States Persons with Respect to Certain Foreign
Corporations, to its United States federal income tax return or information
return that it would normally file for the taxable year in which the
disposition occurs. As explained above, management believes that neither the
Company nor any of its subsidiaries will be a CFC. Accordingly, management
believes that none of the special rules noted in this paragraph will become
applicable to any shareholder of American Safety.
Section 1248 of the Code may also apply to the sale or exchange of capital
stock in the foreign insurance company that earns gross RPII in a taxable year
in which 25% or more of either the voting power or value of the capital stock
of the company is owned by United States persons (directly or indirectly
through foreign persons or by applying the constructive ownership rules of
Section 958(b) of the Code), regardless of whether the United States person is
a 10% shareholder or whether RPII equals or exceeds the 20% threshold or
whether 20% or more of either the voting power or value of the stock of the
corporation is owned directly or indirectly through foreign entities by
persons (directly or indirectly) insured or reinsured by such foreign insurer,
or by persons related to such insureds. Existing Treasury Regulations do not
address whether such rules apply if a foreign corporation (such as American
Safety) is not a CFC, but owns an insurance subsidiary (such as American
Safety Re) that is a CFC for purposes of requiring United States shareholders
to take into account RPII. However, under proposed Treasury Regulations and
seemingly under the wording of the Code, these provisions appear to be
applicable only in the case of a disposition of shares of a corporation
directly engaged in the insurance business. Accordingly, Code Section 1248
(and, except as discussed below in "Information Reporting," related reporting
requirements) should not apply to the disposition of Common Shares. There is
no certainty, however, that the Service will agree with this interpretation or
that the final Treasury Regulations when issued will not provide that Section
1248 of the Code and the respective reporting requirements will apply to the
disposition of Common Shares.
Source of Income
Since it is anticipated that United States persons will own a majority of
American Safety's Common Shares, a portion of the current income inclusions
under the CFC, RPII and passive foreign investment company rules, if any, and
of the dividends paid by American Safety (including any gain from the sale of
Common Shares that is
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treated as a dividend under Section 1248 of the Code) may not be treated as
foreign source income for purposes of computing a shareholder's United States
foreign tax credit limitation. American Safety will consider providing
shareholders with information regarding the portion of such amounts
constituting foreign source income to the extent such information is
reasonably available. It is likely that substantially all of the RPII and
dividends that are foreign source income will constitute either "passive" or
"financial services" income for foreign tax credit limitation purposes. Thus,
it may not be possible for most United States shareholders to utilize excess
foreign tax credits to reduce United States tax on such income.
Information Reporting
A United States shareholder generally will have an independent obligation to
file a copy, for information purposes, of Form 5471 with its tax return for
any taxable year in which such holder (i) acquires 5% or more of the value of
the capital stock of the Company, (ii) acquires additional Common Shares which
cause it to own 5% or more of the value of the capital stock of the Company or
(iii) disposes of a sufficient number of Common Shares to decrease its
interest below 5% of the value of the capital stock of the Company. Form 5471
is an information return on which the holder must provide data concerning
itself, the Company and the acquisition or disposition of Common Shares.
Passive Foreign Investment Company
In general, a foreign corporation will be a passive foreign investment
company (a "PFIC") if 75% or more of its gross income constitutes "passive
income" or 50% or more of its assets produce "passive income" or are held for
the production of "passive income."
The United States shareholders of a PFIC are subject to a special tax and an
interest charge at the time of the sale of (or receipt of an "excess
distribution" with respect to) their capital stock in the PFIC, unless such
shareholders elect to be currently taxed on their pro rata share of the PFIC's
earnings, whether or not distributed. In general, a shareholder is treated as
having received an "excess distribution" if the amount of the distribution was
more than 125% of the average distribution with respect to its capital stock
during the three preceding taxable years (or shorter period during which the
taxpayer held the shares). The special tax is computed by assuming that the
excess distribution or, in the case of a sale, the gain with respect to the
capital stock was earned in equal portions throughout the holder's period of
ownership. The portion allocable to each year prior to the year of sale is
taxed at the maximum marginal tax rate applicable for each such period. The
interest charge is determined based on the applicable rate imposed on
underpayments of United States federal income tax for such period.
For the above purposes, "passive income" is defined to include income of the
kind which would be foreign personal holding company income under Section
954(c) of the Code, and generally includes interest, dividends, annuities and
other investment income. However, passive income does not include interest
income or dividends received from controlled subsidiaries or certain other
related persons, to the extent properly allocable to income of such related
person that is not passive income. In addition, the PFIC provisions
specifically exclude from the definition of "passive income" any income
"derived in the active conduct of an insurance business by a corporation which
is predominantly engaged in an insurance business and which would be subject
to tax under Subchapter L if it were a domestic corporation." This exception
is intended to ensure that income derived by a bona fide insurance company is
not treated as passive income. Thus, to the extent that income is attributable
to financial reserves in excess of the reasonable needs of the insurance
business, it will be treated as passive income. The PFIC provisions also
provide that for purposes of determining whether a foreign corporation is a
PFIC, such foreign corporation is treated as if it "held its proportionate
share of the assets and received directly its proportionate share of the
income" of any corporation of which it owns (directly or indirectly) at least
25% of the value of the capital stock.
Management believes that American Safety and American Safety Re are, and
will be, predominantly engaged in an insurance business and do not, and will
not, have financial reserves in excess of the reasonable needs of their
insurance business. Accordingly, the income and assets of American Safety and
American Safety
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Re should not be passive income and passive assets. As American Safety should
be treated as holding all the assets and receiving all the income of its
subsidiaries, including American Safety Re, and as it is not anticipated that
75% or more of the gross income that American Safety is thereby deemed to
receive or actually receives will be passive income, or that 50% or more of
the assets that American Safety is thereby deemed to hold or actually holds
will be passive assets, the risk of American Safety being classified as a PFIC
should be minimized.
Miscellaneous
Except as discussed below with respect to backup withholding, dividends paid
by American Safety will not be subject to a United States withholding tax.
Information reporting to the Service by paying agents and custodians located
in the United States will be required with respect to payments of dividends to
United States persons. A holder of Common Shares may be subject to backup
withholding at the rate of 31% with respect to dividends paid by such persons
unless the holder (i) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with applicable requirements of the
backup withholding rules. Backup withholding is not an additional tax, and may
be credited against the holder's federal income tax liability.
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UNDERWRITING
Under the terms and subject to the conditions set forth in the underwriting
agreement (the "Underwriting Agreement") among the Company and Advest, Inc.,
J.C. Bradford & Co. and Hoefer & Arnett, Incorporated (the "Underwriters"),
each of the Underwriters has severally agreed to purchase and the Company has
agreed to sell to each of the Underwriters, the respective number of Common
Shares set forth opposite the name of each of the Underwriters below.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
UNDERWRITER ---------
<S> <C>
Advest, Inc. .........................................................
J.C. Bradford & Co. ..................................................
Hoefer & Arnett, Incorporated.........................................
---------
Total............................................................... 2,700,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to approval of certain matters by their counsel and to various
other conditions precedent. The Underwriters are committed to purchase and pay
for all of the Common Shares offered hereby, if any are purchased.
The Underwriters have advised the Company that they propose to offer the
Common Shares initially to the public at the offering price set forth on the
cover page of this Prospectus and to certain selected dealers at such price
less a concession not in excess of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After the public offering of the Common Shares, the
public offering price, concession and reallowance to dealers may be changed by
the Underwriters. The Common Shares are offered subject to receipt and
acceptance by the Underwriters, and to certain other conditions, including the
right to reject orders in whole or in part.
Pursuant to the Underwriting Agreement, the Underwriters have agreed to
reserve up to 135,000 Common Shares for sale to the Company's employees,
officers and directors at the offering price per share set forth on the cover
page of this Prospectus (the "directed sales"). Because no such offers have
yet been solicited by the Underwriters and no contracts for the purchase and
sale of such Common Shares have been executed, the number of Common Shares
that will be sold in directed sales cannot presently be determined. Any of
such shares not orally confirmed for purchase in directed sales by the end of
the first business day after the date of execution of the Underwriting
Agreement will be offered to the public by the Underwriters as set forth in
this Prospectus.
The Company has granted to the Underwriters an option exercisable during the
30-day period beginning on the date of this Prospectus, to purchase up to
405,000 additional Common Shares (the "Option Shares"), solely to cover over-
allotments, if any, at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus. If this option is
exercised in part, the number of Option Shares to be delivered by the Company
will be determined by Advest, Inc. after consultation with the Company. To the
extent that this option to purchase is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of Option Shares as the number set forth next to such Underwriter's
name in the preceding table bears to the sum of the total number of Common
Shares in such table.
The Company, the executive officers and directors of the Company and certain
of the existing shareholders of the Company have agreed that for a period of
180 days after the date of this Prospectus, subject to certain exceptions,
they will not directly or indirectly offer, sell, announce an intention to
sell, contract to sell or otherwise dispose of, or, with respect to the
Company, file with the Commission a registration statement under the
Securities Act relating to, any Common Shares or securities convertible into
or exchangeable or exercisable for any Common Shares without the prior written
consent of Advest, Inc. See "Shares Eligible for Future Sale."
Subject to certain limitations, the Company has agreed to indemnify the
Underwriters against, and to contribute to losses arising out of, certain
liabilities, including liabilities under the Securities Act.
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The Underwriters have advised the Company that they do not intend to confirm
sales to any account over which they exercise discretionary authority.
The Underwriters have advised the Company that, pursuant to Regulation M
promulgated under the Exchange Act, certain persons participating in this
Offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Shares at
a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Shares on behalf
of the Underwriters for the purpose of fixing or maintaining the price of the
Common Shares. A "syndicate covering transaction" is the bid for or the
purchase of the Common Shares on behalf of the Underwriters to reduce a short
position incurred by the Underwriters in connection with this Offering. A
"penalty bid" is an arrangement permitting the Underwriters to reclaim the
selling concession otherwise accruing to a selling group member in connection
with this Offering if the Common Shares originally sold by such selling group
member are purchased by the Underwriters in a syndicate covering transaction
and has therefore not been effectively placed by such selling group member.
The Underwriters have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
Prior to this Offering, there has been no public market for the Common
Shares. The initial public offering price for the Common Shares will be
determined by negotiation between the Company and the Underwriters. In
determining such price, consideration will be given to various factors,
including market conditions for initial public offerings, the history of and
the prospects for the Company's business, the Company's past and present
operations, its past and present earnings and current financial position, an
assessment of the Company's management, the market for securities of companies
in businesses similar to those of the Company, the general condition of the
securities markets and other relevant factors. There can be no assurance that
the initial public offering price will correspond to the price at which the
Common Shares will trade in the public market subsequent to this Offering or
that an active trading market for Common Shares will develop and continue
after this Offering.
LEGAL MATTERS
The validity under Bermuda law of the Common Shares offered hereby will be
passed upon for the Company by Conyers Dill & Pearman, Hamilton, Bermuda.
Certain legal matters with respect to the Offering will be passed upon for the
Company by Womble Carlyle Sandridge & Rice, PLLC, Atlanta, Georgia, and for
the Underwriters by Alston & Bird LLP, Atlanta, Georgia. In connection
therewith, Womble Carlyle Sandridge & Rice, PLLC and Alston & Bird LLP may
rely with respect to certain matters of Bermuda law on the opinion of Conyers
Dill & Pearman.
EXPERTS
The Consolidated Financial Statements and schedules of the Company and its
subsidiaries as of December 31, 1995 and 1996 and September 30, 1997, and for
each of the years in the three-year period ended December 31, 1996 and for the
nine-month periods ended September 30, 1996 and 1997 included herein and
elsewhere in the Registration Statement have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of such firm as experts in accounting and auditing.
70
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington, D.C. 20549, a Registration
Statement on Form S-1 (the "Registration Statement") under the Securities Act.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto, as permitted by the rules and
regulations of the Commission. For further information, reference is made to
the Registration Statement and to the exhibits filed therewith. Statements
contained in this Prospectus as to the contents of any contract or other
document which has been filed as an exhibit to the Registration Statement are
qualified in their entirety by reference to such exhibits for a complete
statement of their terms and conditions. The Registration Statement and the
exhibits thereto may be inspected without charge at the offices of the
Commission, and copies or all or any part thereof may be obtained from the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C.
20549 or at certain of the regional offices of the Commission located at 7
World Trade Center, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, upon payment of the fees
prescribed by the Commission. The Commission also maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Such
reports, proxy and information statements and other information may be found
on the Commission's Internet site address, which is http://www.sec.gov.
The Company is not currently subject to the information reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As a result of the Offering, the Company will become subject to the
information reporting requirements of the Exchange Act. The Company intends to
furnish its shareholders with annual reports, which will include consolidated
financial statements audited by its independent certified public accountants,
and quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.
71
<PAGE>
GLOSSARY OF SELECTED INSURANCE TERMS
The following terms when used in this Prospectus have the following meaning:
Actuarial analysis............. Evaluation of risks in order to attempt to
assure that premiums and loss reserves
adequately reflect expected future loss
experience and claims payments; in evaluating
risks, mathematical models are used to
predict future loss experience and claims
payments based on past loss ratios, loss
development patterns and other relevant data
and assumptions.
Assume......................... To accept from the primary insurer or
reinsurer all or a portion of the liability
underwritten by such primary insurer or
reinsurer.
Alternative insurance market... An insurance market which has developed over
the past 15 years to respond to the needs of
insureds for adequate insurance coverage and
affordable premium rates through (i) the
underwriting of risks which are characterized
by the standard insurance market as difficult
or which generate too little premium for
standard insurance companies; and/or (ii) the
design of specialized insurance programs,
such as deductible or risk retention
programs, and captive or rent-a-captive
programs.
Broker; intermediary........... One who negotiates contracts of insurance or
reinsurance on behalf of an insured party,
receiving a commission from the insurer or
reinsurer for placement and other services
rendered.
Capacity....................... The percentage of surplus, or the dollar
amount of exposure, that an insurer or
reinsurer is willing to place at risk.
Capacity may apply to a single risk, a
program, a line of business or an entire book
of business.
Captive........................ A company formed to insure the risks of a
group of insureds or of a parent company or
affiliated group of companies.
Case reserves.................. Recorded estimates of unpaid liabilities
associated with specific reported claims.
Case reserves may pertain to losses and loss
adjustment expenses.
Casualty insurance............. Insurance which is primarily concerned with
the losses caused by injuries to third
persons or their property (i.e., not the
policyholder) and the legal liability imposed
on the insured resulting therefrom. It
includes, but is not limited to, general
liability, employers' liability, workers'
compensation, professional liability, public
liability and automobile liability insurance.
It excludes certain types of losses that by
law or custom are considered as being
exclusively within the scope of other types
of insurance, such as fire or marine.
Cede; ceding company........... When an insurance company reinsures its risk
with another insurance company in
consideration of a premium, it "cedes" (i.e.
transfers) business and is referred to as the
"ceding company."
72
<PAGE>
Claims-made coverage........... A policy that provides insurance for claims
reported during the policy period.
Combined ratio................. The sum of the loss and loss adjustment
exposure ratio and the underwriting expense
ratio, expressed as a percentage, determined
in accordance with either SAP or GAAP. SAP
calculates the expense ratio as a percentage
of net written premium and GAAP uses net
earned premium. Both methods use earned
premium to calculate the loss and loss
adjustment expense ratio. A combined ratio
below 100% generally indicates profitable
underwriting results. A combined ratio over
100% generally indicates unprofitable
underwriting results.
Commercial lines............... Types of insurance written for businesses
instead of individuals.
Direct premiums written........ Insurance premiums written (less return
premiums) without any allowance for premiums
assumed or ceded reinsurance.
Earned surplus................. The cumulative amount of retained net profits
from insurance operations, including
investment income, as determined under SAP.
Excess and surplus lines....... A term used to describe any risk or part
thereof for which insurance is not available
through a company licensed in the applicant's
state (an "admitted" insurer). The business,
therefore, is placed with insurers not
licensed in the state ("non-admitted"
insurers) in accordance with surplus lines or
excess lines provisions of state insurance
laws. Under these provisions, the non-
admitted insurer is not subject to the same
rate or coverage requirements which apply to
an admitted insurer.
Excess of loss reinsurance..... A form of reinsurance in which the reinsurer
indemnifies the ceding company against all or
a portion of the amount of loss in excess of
a specified dollar amount, called a "layer"
or "retention."
Expense ratio; underwriting The ratio of underwriting expenses to net
expense ratio................. premiums written, if determined in accordance
with SAP, or the ratio of underwriting
expenses (adjusted by deferred policy
acquisition costs) to earned premiums, if
determined in accordance with GAAP.
Facultative reinsurance........ The reinsurance of all or a portion of the
insurance coverage provided by a single
policy. Reinsurance for each policy reinsured
is separately negotiated.
Frequency...................... The number of claims occurring under a given
coverage divided by the number of exposures
for the given coverage.
Generally accepted accounting
principles ("GAAP")...........
Accounting principles as set forth in
opinions of the Accounting Principles Board
of the American Institute of Certified Public
Accountants and/or in statements of the
Financial Accounting Standards Board and/or
their respective successors and which are
applicable in the circumstances as of the
date in question.
73
<PAGE>
Gross premiums written......... Total premiums for primary insurance written
and reinsurance assumed during a given
period.
Incurred but not reported
("IBNR") reserves............. Loss reserves for estimated losses and loss
adjustment expenses which have been incurred
but not yet reported to the insurer
(including future developments on losses that
are known to the insurer).
Insurance regulatory
information system ("IRIS")... A system developed by the NAIC primarily
intended to assist state insurance
departments in executing their statutory
mandates to oversee the financial condition
of insurance companies operating in their
respective states.
Incurred losses................ For a given period, the total losses
sustained by an insurance company under a
policy or policies, whether paid or unpaid.
Incurred losses include a provision for
claims that have occurred but have not yet
been reported to the insurer.
Loss adjustment expenses
("LAE")....................... The expenses of settling claims, including
legal and other fees, and general expenses of
administering the claims adjustment process.
Loss ratio..................... For SAP and GAAP, net losses and loss
adjustment expenses incurred, divided by net
premiums earned, expressed as a percentage.
Loss reserves.................. Liabilities established by insurers and
reinsurers to reflect, as of a given date,
the estimated cost of claims payments that
the insurer or reinsurer will ultimately be
required to pay in respect of insurance or
reinsurance it has written. Reserves are
established for losses and for loss
adjustment expenses, and consist of case
reserves and IBNR reserves.
The National Association of
Insurance Commissioners
("NAIC")...................... An association of state insurance regulatory
officials organized to promote consistency of
regulatory practice and statutory accounting
standards for insurance companies throughout
the United States.
Net premiums earned............ The portion of net premiums written which
applies to the expired portion of the policy
period.
Net premiums written........... Gross premiums written less premiums ceded to
reinsurers.
Premiums....................... Payments and consideration for insurance,
surety bonds or reinsurance coverage under
insurance policies, surety bonds or
reinsurance agreements.
Primary insurance.............. Insurance policies issued to insureds
generally.
Property insurance............. Insurance that provides coverage to a person
with an insurable interest in tangible
property for that person's property loss,
damage or loss of use.
74
<PAGE>
Occurrence coverage............ A policy that provides insurance for events
occurring during the policy period but
without regard to when the claim is reported.
Quota share reinsurance........ A generic term describing all forms of
reinsurance in which the reinsurer shares a
proportional part of both the original
premiums and the losses of the reinsured.
Also known as proportional reinsurance, pro
rata reinsurance and participating
reinsurance.
Reinsurance.................... The practice whereby one party, called the
reinsurer, in consideration of a premium paid
to it, agrees to indemnify another party,
called the ceding party, for part or all of
the liability assumed by the ceding party
under a policy or policies of insurance which
it has issued. The reinsured may be referred
to as the original or primary insurer, the
direct writing company or the ceding company.
Reinsurance does not legally discharge the
primary insurer from its liability to the
insured.
Reinsurer...................... The insurer that assumes all or part of the
insurance or reinsurance liability written by
another insurer. The term includes
retrocessionaires, which are insurers that
assume reinsurance from a reinsurer.
Rent-a-captive................. A program under which a captive insures the
risk of an unrelated insured who bears the
risk of its own loss experience without the
administrative costs and capital commitment
necessary to establish and operate its own
captive insurance company.
Reserves....................... Liabilities established by insurers and
reinsurers to reflect the estimated costs of
claims payments and the related expenses that
the insurer or reinsurer will ultimately be
required to pay in accordance with the
insurance or reinsurance it has written.
Retention...................... The amount or portion of risk which an
insurer or reinsurer retains for its own
account. Losses in excess of the retention
level are paid by the reinsurer or
retrocessionaire. In quota share treaties,
the retention may be a percentage of the
original policy's limit. In excess of loss
reinsurance, the retention is a dollar amount
of loss, a loss ratio or a percentage of
loss.
Retrocession; A transaction whereby a reinsurer cedes to
retrocessionaire.............. another reinsurer (the "retrocessionaire")
all or part of the reinsurance risk it has
assumed. Retrocessions do not legally
discharge the ceding reinsurer from its
liability with respect to its obligations to
the reinsured.
Risk based capital ("RBC").....
A measure adopted by the NAIC for assessing
the minimum statutory capital requirements of
insurers.
Severity.......................
The cost of a claim under an insurance
policy.
75
<PAGE>
The rules and procedures prescribed or
Statutory accounting practices permitted by state insurance regulatory
("SAP").................. authorities for recording transactions and
preparing financial statements. Statutory
accounting principles generally reflect a
liquidating, rather than a going concern,
concept of accounting. The principal
differences between SAP and GAAP are as
follows: (a) under SAP, certain assets
(nonadmitted assets) are eliminated from the
balance sheet; (b) under SAP, policy
acquisition costs are expensed upon policy
inception, while under GAAP they are deferred
and amortized over the term of the policies;
(c) under SAP, no provision is made for
deferred income taxes; and (d) under SAP,
certain reserves are recognized which are not
recognized under GAAP.
Statutory reserves............. Reserves established to provide for future
obligations with respect to all insurance
policies as determined in accordance with
SAP.
Statutory surplus.............. The amount remaining after all liabilities,
including loss reserves, are subtracted from
all admitted assets as determined in
accordance with SAP. Admitted assets of an
insurer are assets permitted by a state to be
taken into account in determining the
insurer's financial condition for statutory
purposes.
Surety bond.................... A contract under which a party guarantees
certain obligations of a second party to a
third party.
Tail........................... The period of time that elapses between the
expiration of the applicable insurance policy
and the loss event (or the insurer's
knowledge of the loss event) or the payment
in respect thereof. A "short-tail" insurance
product is one where ultimate losses are
known comparatively quickly; ultimate losses
under a "long-tail" insurance product are
sometimes not known for years.
Treaty reinsurance............. The reinsurance of a specified type or
category of risks defined in a reinsurance
agreement (a "treaty") between a primary
insurer or other reinsured and a reinsurer.
In treaty reinsurance, the primary insurer or
reinsured may be obligated to offer and the
reinsurer is obligated to accept a specified
portion of all such type or category of risks
originally underwritten by the primary
insurer or reinsured.
Underwriting................... The insurer's or reinsurer's process of
reviewing applications submitted for
insurance coverage, deciding whether to
provide all or part of the coverage requested
and determining the applicable premiums.
Underwriting cycle............. A pattern in which property and casualty
insurance premiums, profits and availability
of coverage rise and fall over time.
Underwriting expense ratio.....
The ratio of operating expenses to net
premiums earned (for purposes of GAAP) or to
net premiums written (for purposes of SAP).
76
<PAGE>
Underwriting expenses.......... The aggregate of policy acquisition costs,
including commissions, and the portion of
administrative, general and other expenses
attributable to underwriting operations.
Underwriting profit (loss)..... The amount of pretax income (loss) from
insurance operations, exclusive of net
investment income and capital gains or
losses.
Unearned premiums.............. The portion of a premium representing the
unexpired portion of the contract term as of
a certain date.
Workers' compensation.......... A system, established under state laws, under
which employers provide insurance for benefit
payments to their employees for work-related
injuries.
Written premiums............... Premiums written, whether or not earned,
during a given period.
77
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September
30, 1997.................................................................. F-3
Consolidated Statements of Earnings for the years ended December 31, 1994,
1995 and 1996 and the nine months ended September 30, 1996 and 1997....... F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1994, 1995 and 1996 and the nine months ended September 30,
1996 and 1997............................................................. F-5
Consolidated Statements of Cash Flow for the years ended December 31, 1994,
1995 and 1996 and the nine months ended September 30, 1996 and 1997....... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
WHEN THE TRANSACTION REFERRED TO IN NOTE 16 OF THE NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDER
THE FOLLOWING REPORT.
The Board of Directors
American Safety Insurance Group, Ltd.:
We have audited the accompanying consolidated balance sheets of American
Safety Insurance Group, Ltd. and subsidiaries as of December 31, 1995 and
1996, and September 30, 1997, and the related consolidated statements of
earnings, shareholders' equity, and cash flow for each of the years in the
three-year period ended December 31, 1996 and for the nine-month periods ended
September 30, 1996 and 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Safety Insurance Group, Ltd. and subsidiaries as of December 31, 1995 and
1996, and September 30, 1997, and the results of their operations and their
cash flow for each of the years in the three-year period ended December 31,
1996 and for the nine-month periods ended September 30, 1996 and 1997, in
conformity with accounting principles generally accepted in the United States.
/s/ KPMG Peat Marwick LLP
Atlanta, Georgia
January , 1998
F-2
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
ASSETS
Investments:
Securities available for sale, at fair
value:
Fixed maturities.......................... $19,851,279 $16,775,657 $24,771,227
Preferred stock........................... 132,000 -- --
Common stock.............................. 314,349 715,590 1,181,023
Short-term investments...................... 350,000 472,417 1,596,682
----------- ----------- -----------
Total investments....................... 20,647,628 17,963,664 27,548,932
Cash.......................................... 3,197,510 3,271,957 2,425,488
Accrued investment and interest income........ 264,783 1,030,037 718,963
Notes receivable:
Related parties............................. 390,000 1,146,841 1,266,264
Other....................................... 988,195 4,912,865 3,620,359
Premiums receivable........................... 657,595 1,242,060 4,129,250
Commissions receivable........................ 72,846 64,216 28,550
Ceded unearned premium........................ 25,986 305,341 552,575
Reinsurance recoverable....................... 6,158 45,475 84,156
Due from affiliate............................ 266,565 356,844 261,637
Income tax recoverable........................ 12,853 121,006 24,714
Deferred income taxes......................... 97,983 179,320 200,419
Goodwill...................................... 316,059 297,698 274,452
Other assets.................................. 199,043 362,048 1,036,799
----------- ----------- -----------
Total assets............................ $27,143,204 $31,299,372 $42,172,558
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses.. $ 8,293,655 $ 8,914,460 $10,734,633
Unearned premiums........................... 753,064 1,364,459 2,124,091
Liability for deductible fees held.......... -- -- 2,764,485
Reinsurance on paid loss and loss adjustment
expenses................................... 86,094 80,139 289,037
Ceded premiums payable...................... 646,010 1,179,467 2,821,178
Due to affiliate:
Ceded premiums payable.................... 75,358 -- 49,400
Reinsurance on paid loss and loss
adjustment expenses...................... 1,932 (1,045) 16,360
Income tax payable.......................... 146,797 17,742 --
Accounts payable and accrued expenses....... 526,262 1,712,043 1,399,726
Surplus note................................ -- -- 1,250,000
----------- ----------- -----------
Total liabilities....................... 10,529,172 13,267,265 21,448,910
----------- ----------- -----------
Shareholders' equity:
Preferred stock, $0.01 par value; authorized
5,000,000 shares; no shares issued and
outstanding................................ -- -- --
Common stock, $0.01 par value; authorized
15,000,000 shares; issued and outstanding
at December 31, 1995 and 1996, 2,872,830
shares, and at September 30, 1997,
2,925,230 shares .......................... 28,728 28,728 29,252
Additional paid-in capital.................. 2,455,034 2,455,034 2,751,789
Retained earnings........................... 13,394,948 15,540,208 17,762,499
Unrealized gain relating to investments..... 735,322 8,137 180,108
----------- ----------- -----------
Total shareholders' equity.............. 16,614,032 18,032,107 20,723,648
----------- ----------- -----------
Total liabilities and shareholders' eq-
uity................................... $27,143,204 $31,299,372 $42,172,558
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------- ---------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Direct premiums
earned............... $ 30,808 $ 51,337 $ 810,921 $ 662,064 $2,419,322
Assumed premiums
earned
Affiliate............ 2,194,136 2,494,765 1,982,290 1,612,775 1,773,776
Non-affiliates....... 1,283,552 3,562,483 2,523,198 1,544,811 3,830,017
---------- ---------- ---------- ---------- ----------
Total assumed
premiums earned.... 3,477,688 6,057,248 4,505,488 3,157,586 5,603,793
Ceded premiums earned
Affiliate............ 16,003 12,097 541,129 488,953 870,369
Non-affiliates....... 73,031 349,716 502,858 469,403 646,840
---------- ---------- ---------- ---------- ----------
Total ceded premiums
earned............. 89,034 361,813 1,043,987 958,356 1,517,209
---------- ---------- ---------- ---------- ----------
Net premiums
earned............. 3,419,462 5,746,772 4,272,422 2,861,294 6,505,906
---------- ---------- ---------- ---------- ----------
Net investment
income............... 663,295 1,346,354 1,206,193 943,544 1,177,217
Interest on notes
receivable........... -- 6,555 885,436 505,692 635,504
Brokerage commission
income............... 1,706,424 2,145,076 1,880,732 1,457,985 1,564,706
Management fees from
affiliate............ 463,512 474,822 478,963 355,844 443,950
Net realized gains
(losses)............. (118,440) 200,625 177,321 155,153 14,243
Other income.......... 228 126 4,800 3,505 10,748
---------- ---------- ---------- ---------- ----------
Total revenues...... 6,134,481 9,920,330 8,905,867 6,283,017 10,352,274
---------- ---------- ---------- ---------- ----------
Expenses:
Losses and loss
adjustment expenses
incurred............. 1,423,867 2,905,477 2,055,558 1,383,476 3,533,048
Acquisition expenses.. 517,252 1,085,929 645,980 494,544 1,768,834
Other expenses........ 2,246,586 2,029,291 3,110,085 2,172,112 2,445,573
---------- ---------- ---------- ---------- ----------
Total expenses...... 4,187,705 6,020,697 5,811,623 4,050,132 7,747,455
---------- ---------- ---------- ---------- ----------
Earnings before
income taxes....... 1,946,776 3,899,633 3,094,244 2,232,885 2,604,819
Income taxes............ 328,988 719,688 176,509 178,121 382,528
---------- ---------- ---------- ---------- ----------
Net earnings........ $1,617,788 $3,179,945 $2,917,735 $2,054,764 $2,222,291
========== ========== ========== ========== ==========
Net earnings per share.. $ 0.54 $ 1.07 $ 0.98 $ 0.69 $ 0.75
========== ========== ========== ========== ==========
Common shares and common
share equivalents used
in computing net
earnings per share..... 2,983,303 2,974,133 2,974,133 2,974,133 2,974,133
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Common stock--number of
shares:
Balance at beginning
of period............ 2,882,000 2,882,000 2,872,830 2,872,830 2,872,830
Shares redeemed and
canceled............. -- (140,170) -- -- --
Shares issued in
connection with
purchase of minority
interest............. -- 131,000 -- -- --
Issuance of common
shares............... -- -- -- -- 52,400
----------- ----------- ----------- ----------- -----------
Balance at end of
period............... 2,882,000 2,872,830 2,872,830 2,872,830 2,925,230
=========== =========== =========== =========== ===========
Common stock:
Balance at beginning
of period............ $ 28,820 $ 28,820 $ 28,728 $ 28,728 $ 28,728
Shares redeemed and
canceled............. -- (1,402) -- -- --
Shares issued in
connection with
purchase of minority
interest............. -- 1,310 -- -- --
Issuance of common
shares............... -- -- -- -- 524
----------- ----------- ----------- ----------- -----------
Balance at end of
period............... 28,820 28,728 28,728 28,728 29,252
----------- ----------- ----------- ----------- -----------
Additional paid-in
capital:
Balance at beginning
of period............ 2,171,180 2,171,180 2,455,034 2,455,034 2,455,034
Shares redeemed and
canceled............. -- (255,398) -- -- --
Shares issued in
connection with
purchase of minority
interest............. -- 539,252 -- -- --
Issuance of common
shares............... -- -- -- -- 296,755
----------- ----------- ----------- ----------- -----------
Balance at end of
period............... 2,171,180 2,455,034 2,455,034 2,455,034 2,751,789
----------- ----------- ----------- ----------- -----------
Retained earnings:
Balance at beginning
of period............ 8,597,215 10,215,003 13,394,948 13,394,948 15,540,208
Net earnings.......... 1,617,788 3,179,945 2,917,735 2,054,764 2,222,291
Dividends declared and
paid................. -- -- (772,475) (772,475) --
----------- ----------- ----------- ----------- -----------
Balance at end of
period............... 10,215,003 13,394,948 15,540,208 14,677,237 17,762,499
----------- ----------- ----------- ----------- -----------
Unrealized gain (loss)
relating to
investments:
Balance at beginning
of period............ (43,265) (476,745) 735,322 735,322 8,137
Unrealized gain (loss)
during the period
(net of deferred tax
benefit (expense) of
$121,938, $(167,365),
$26,759, $48,435, and
$(37,685),
respectively)........ (433,480) 1,212,067 (727,185) (853,623) 171,971
----------- ----------- ----------- ----------- -----------
Balance at end of
period............... (476,745) 735,322 8,137 (118,301) 180,108
----------- ----------- ----------- ----------- -----------
Total shareholders'
equity............. $11,938,258 $16,614,032 $18,032,107 $17,042,698 $20,723,648
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flow from operating
activities:
Net earnings........... $ 1,617,788 $ 3,179,945 $ 2,917,735 $ 2,054,764 $ 2,222,291
Adjustments to
reconcile net earnings
to net cash provided
by operating
activities:
Realized losses
(gains) on sale of
investments.......... 118,440 (200,625) (177,321) (155,153) (14,243)
Amortization of
deferred acquisition
costs................ 150,535 425,159 371,572 240,251 485,871
Change in:
Accrued investment
and interest
income.............. (26,455) (89,100) (765,254) (423,278) 311,074
Premiums receivable.. (57,633) (449,596) (584,465) (895,627) (2,887,190)
Commissions
receivable.......... (75,098) 59,723 8,630 (38,386) 35,666
Reinsurance
recoverable and
ceded unearned
premiums............ -- (32,144) (318,672) (91,048) (285,915)
Due from affiliate... (133,838) 286,390 (90,279) (249,601) 95,207
Income taxes......... (76,830) 151,311 (318,545) (255,819) 57,451
Unpaid losses and
loss adjustment
expenses............ 1,249,841 2,245,922 620,805 123,086 1,820,173
Unearned premiums.... 343,997 409,067 611,395 347,700 759,632
Liability for
deductible fees
held................ -- -- -- -- 2,764,485
Ceded premiums
payable............. 563,402 82,608 533,457 482,341 1,641,711
Due to affiliate..... (76,602) 25,716 (78,335) 86,274 66,805
Accounts payable and
accrued expenses.... 170,811 (255,701) 1,185,781 173,480 (312,317)
Other, net........... (204,608) (544,961) (318,356) (9,956) (368,118)
----------- ----------- ----------- ----------- -----------
Net cash provided by
operating
activities......... $ 3,563,750 $ 5,293,714 $ 3,598,148 $ 1,389,028 $ 6,392,583
----------- ----------- ----------- ----------- -----------
Cash flow from investing
activities:
Purchases of fixed
maturities............ (37,144,055) (22,396,837) (20,967,644) (14,822,233) (12,553,086)
Purchase of common
stocks................ (306,888) (16,061) (968,383) (1,882,100) (1,170,146)
Proceeds from maturity
and redemption of
fixed maturities...... 1,688,952 2,908,241 2,817,810 4,375,331 --
Proceeds from sale of
fixed maturities...... 29,482,382 16,861,879 20,622,008 15,233,477 4,322,883
Proceeds from sale of
common stock.......... -- -- 584,563 308,727 712,955
Proceeds from sale of
preferred stock....... -- -- 132,319 -- --
Decrease (increase) in
short-term
investments........... 3,373,145 1,019,470 (122,417) (2,037,641) (1,124,265)
Increase in notes
receivable--other .... -- (390,000) (756,841) (157,313) (119,423)
(Increase) decrease in
notes receivable--
related parties ...... -- (988,195) (3,924,670) (3,704,005) 1,292,506
Purchase of fixed
assets, net........... (35,445) (67,098) (167,971) (233,989) (147,755)
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities.......... $(2,941,909) $(3,068,601) $(2,751,226) $(2,919,746) $(8,786,331)
----------- ----------- ----------- ----------- -----------
Cash flow from financing
activities:
Proceeds from sale of
common stock.......... -- -- -- -- 297,279
Proceeds from surplus
note.................. -- -- -- -- 1,250,000
Dividends paid......... -- -- (772,475) (772,475) --
Shares redeemed and
canceled.............. -- (256,800) -- -- --
----------- ----------- ----------- ----------- -----------
Net cash used in
financing
activities.......... -- (256,800) (772,475) (772,475) 1,547,279
----------- ----------- ----------- ----------- -----------
Net increase
(decrease) in cash.. 621,841 1,968,313 74,447 (2,303,193) (846,469)
Cash at beginning of
period................. 607,356 1,229,197 3,197,510 3,197,510 3,271,957
----------- ----------- ----------- ----------- -----------
Cash at end of period... $ 1,229,197 $ 3,197,510 $ 3,271,957 $ 894,317 $ 2,425,488
=========== =========== =========== =========== ===========
Supplemental disclosure
of cash flow
information:
Income taxes paid...... $ 223,000 $ 629,000 $ 293,000 $ 200,000 $ 350,000
=========== =========== =========== =========== ===========
Interest paid.......... $ -- $ -- $ -- $ -- $ 27,083
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996, AND SEPTEMBER 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying consolidated financial statements of American Safety
Insurance Group, Ltd. ("American Safety") and its subsidiaries, as described
below (collectively, the "Company") are prepared in accordance with generally
accepted accounting principles in the United States. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates, based on the best
information available, in recording transactions resulting from business
operations. The balance sheet amounts that involve a greater extent of
accounting estimates and actuarial determinations subject to future changes
are the Company's liabilities for unpaid losses and loss adjustment expenses.
As additional information becomes available (or actual amounts are
determinable), the recorded estimates may be revised and reflected in
operating results. While management believes that the liability for unpaid
losses and loss adjustment expenses is adequate to cover the ultimate
liability, such estimates may be more or less than the amounts actually paid
when claims are settled.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of American
Safety Insurance Group, Ltd. a Bermuda corporation, American Safety
Reinsurance, Ltd. ("American Safety Re"--formed January 1998 to serve as the
successor for the reinsurance business of American Safety), a 100%-owned
licensed Bermuda insurance company, and American Safety Casualty Insurance
Company ("American Safety Casualty"), a 100%-owned property and casualty
insurance company. American Safety Casualty in turn wholly owns Synergy
Insurance Services, Inc. ("Synergy"), an insurance management and brokerage
company. Synergy wholly owns the following subsidiaries: Sureco Bond Services,
Inc. ("Sureco"), a bonding agency; Environmental Claims Services, Inc.
("ECSI"), a claims consulting firm; Harbor Insurance Services, Inc., a bonding
agency; and American Safety Purchasing Group, Inc., which acts as a purchasing
group for the placement of business with American Safety Casualty. All
significant intercompany balances have been eliminated in consolidation.
(c) Nature of Operations
The following is a description of certain risks facing property and casualty
insurers:
Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will create additional expenses
not anticipated by the insurer in pricing its products and beyond those
recorded in the financial statements. That is, regulatory initiatives
designed to reduce insurer profits or otherwise affecting the industry in
which the insurer operates, new legal theories or insurance company
insolvencies through guaranty fund assessments, may create costs for the
insurer beyond those recorded in the financial statements. The Company also
mitigates this risk because it is licensed and actively writes insurance
business in several states, thereby spreading this risk over a large
geographic area.
Credit Risk is the risk that issuers of securities owned by the insurer
or secured notes receivable will default or that other parties, including
reinsurers that have obligations to the insurer, will not pay or perform.
The Company attempts to mitigate this risk by adhering to a conservative
investment strategy, by obtaining sufficient collateral for secured note
obligations and by maintaining sound reinsurance, credit and collection
policies.
Interest Rate Risk is the risk that interest rates will change and cause
a decrease in the value of an insurer's investments. The Company attempts
to mitigate this risk by attempting to match the maturities of its assets
with the expected payouts of its liabilities.
F-7
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(d) Investments
Under Statement of Financial Accounting Standards ("SFAS") No. 115, fixed
maturity securities for which a company has the positive intent and ability to
hold to maturity are classified as "held to maturity" and are reported at
amortized cost. Fixed maturity and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
"trading" and are reported at fair value, with unrealized gains and losses
included in earnings. Fixed maturity and equity securities not classified as
either held to maturity or trading are classified as "available for sale" and
are reported at fair value, with unrealized gains and losses (net of deferred
taxes) charged or credited as a separate component of shareholders' equity.
While it is the Company's intent to hold fixed maturity securities until the
foreseeable future or until maturity, it may sell such securities in response
to, among other things, market conditions, liquidity needs, or interest rate
fluctuations. At December 31, 1995 and 1996, and September 30, 1997, the
Company considered all of its fixed maturity and equity securities as
available for sale.
Investment income is recorded as earned on the accrual basis and includes
amortization of premiums and accretion of discounts relating to investments
acquired at other than par value. Realized gains or losses on disposal of
investments are determined on a specific identification basis and are included
in revenues.
The Company owns no on-balance sheet or off-balance sheet derivative
instruments.
(e) Notes Receivable
Notes receivable represent indebtedness under various secured lending
arrangements with related and unrelated parties. Interest income is recognized
on an effective yield basis over the life of the loan giving consideration to
loan fees and expenses under the provisions of SFAS No. 91. The allowance for
possible loan losses has been determined giving consideration to the
provisions of SFAS No. 114. At December 31, 1995 and 1996, and September 30,
1997, no allowance was deemed necessary by Company management. Additionally,
no loan losses were recognized for the periods then ended.
(f) Recognition of Premium Income
General liability premiums are primarily assumed from American Safety Risk
Retention Group, Inc. ("American Safety RRG"), a non-subsidiary affiliate. Due
to the unique class of business (environmental remediation), minimum initial
estimates of general liability insurance premiums are recorded as earned at
the policy inception date. Premium adjustments above the minimum initial
estimates of premium are billed and earned as additional contract revenues are
reported by policyholders. Workers' compensation premiums are recorded ratably
over the policy period with unearned premium calculated on a daily pro rata
basis. Surety premiums are recorded ratably over a twelve month period with
unearned premium calculated using a half-month convention.
(g) Brokerage Commission Income
Brokerage commissions on business produced by Sureco are recognized as
income when the related insurance policies are underwritten. Commissions on
business produced by Synergy are recognized as the related insurance premiums
are written. For Synergy-produced business which remains in the consolidated
group, any commissions recognized are eliminated in consolidation or otherwise
recognized in revenue consistent with the recognition of premiums earned.
(h) Management Fees from Affiliate
The program management agreement between American Safety RRG and Synergy
provides for payment of a monthly program management fee, a managing general
agency commission, producing agent commissions, reimbursement for marketing
expenses actually incurred, and reimbursement for loss control expenses
actually incurred plus a 20% fee. The level of program management fees are
designed to reimburse the Company for the allocable share of expenses incurred
in managing the American Safety RRG program.
(i) Deferred Policy Acquisition Costs
The costs of acquiring business, primarily commissions and underwriting
expenses, are deferred (to the extent they are recoverable from future premium
income) and amortized to earnings in relation to the amount of
F-8
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
premiums earned. If necessary, investment income is considered in the
determination of the recoverability of deferred policy acquisition costs. The
deferred acquisition costs are included in the caption Other Assets in the
accompanying Consolidated Balance Sheets due to their immateriality in
relation to Total Assets.
An analysis of deferred policy acquisition costs follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period................. $ 247 $ 48,292 $ 91,340 $ 91,340 $ 121,671
Acquisition costs
deferred............... 198,580 468,207 401,903 276,664 510,589
Amortized to expense
during the period...... (150,535) (425,159) (371,572) (240,251) (485,871)
--------- --------- --------- --------- ---------
Balance, end of period.. $ 48,292 $ 91,340 $ 121,671 $ 127,753 $ 146,389
========= ========= ========= ========= =========
</TABLE>
(j) Unpaid Losses and Loss Adjustment Expenses
The Company provides a liability for unpaid losses and loss adjustment
expenses based upon aggregate case estimates for reported claims and estimates
for incurred but not reported losses. Because of the length of time required
for the ultimate liability for losses and loss adjustment expenses to be
determined for certain lines of business underwritten, the Company has limited
experience upon which to base an estimate of the ultimate liability. For this
business, management has established loss and loss adjustment expense reserves
based on an independent actuarial valuation that it believes is reasonable and
representative of anticipated ultimate experience. Prior to 1996, the
Company's independent actuarial consultant determined the estimate of ultimate
loss and loss expense primarily upon industry loss data without explicit
consideration of the Company's loss reporting and settlement patterns.
Beginning in 1996, the Company's consultant refined the estimation process for
the determination of ultimate loss and loss adjustment expense to begin to
recognize differences between the Company's reporting and settlement patterns
and industry patterns as sufficient Company specific data (10 years of Company
specific actuarial data) was then available. This method (Bornhuetter-
Ferguson) entails developing an initial expected loss ratio based upon gross
ultimate losses from prior accident years, estimating the portion of ultimate
losses expected to be reported and unreported, and adding the actual reported
losses to the expected unreported losses to derive the indicated ultimate
losses. However, the net amounts that will ultimately be paid to settle the
liability may be more or less than the estimated amounts provided.
(k) Liability for Deductible Fees Held
Deductible fees held represent deposits held by the Company in its capacity
as administrator for self-insured programs. Such deposits will be extinguished
by the payment of claims on behalf of the self-insured or by refund of excess
deposits to the self-insured.
(l) Income Taxes
For subsidiaries subject to taxation, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(m) Reinsurance
Reinsurance contracts do not relieve the Company from its obligation to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentration of credit risk to minimize its exposure
to significant losses from reinsurer insolvencies.
F-9
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(n) Goodwill
On April 2, 1993, American Safety Casualty exchanged 8% of its common shares
for 100% of the common stock of Synergy. The goodwill created in this
transaction is being amortized ratably over 20 years. Accumulated amortization
was $51,448 at December 31, 1995; $69,809 at December 31, 1996; and $83,580 at
September 30, 1997.
(o) Net Earnings Per Share
Net earnings per share have been calculated using the weighted average
number of common shares outstanding during each reporting period adjusted as
appropriate to reflect the dilutive effects of option and share issuances
since September 30, 1996 for a per share consideration of less than the
assumed offering price of $12.00 (Note 14).
(p) Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings per Share. Effective December 31, 1997, SFAS No. 128
will require the presentation of two earnings per share ("EPS") numbers, basic
EPS and diluted EPS, in the statements of earnings. Basic EPS and diluted EPS
are computed by dividing net earnings by the weighted average number of shares
outstanding for the period plus shares subject to stock options and other
common stock equivalents. Net EPS calculated under the new statement would be
as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -----------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Basic EPS.......................... $ 0.54 $ 1.07 $ 0.98 $ 0.69 $ 0.75
Diluted EPS........................ 0.54 1.07 0.98 0.69 0.75
</TABLE>
As all options were issued within a one-year period of the offering
described in Note 16, in accordance with Staff Accounting Bulletin Topic 4D,
the option shares have been treated as being outstanding for all reported
periods using the treasury stock method for basic and diluted EPS shown above.
Diluted EPS as presented above and as reflected on the accompanying
Consolidated Statements of Earnings did not differ as a result of the
application of SFAS No. 128 for any period presented.
SFAS No. 129, Disclosures of Information about Capital Structure, was also
issued in February 1997 and is also effective December 31, 1997. This
statement establishes standards for disclosing information about an entity's
capital structure.
On June 30, 1997, the FASB released SFAS No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and displaying
comprehensive income and its components in a full set of financial statements.
SFAS No. 130 requires that all components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements. An example of an item that will be included in the
Company's presentation of comprehensive income, in addition to net earnings,
is unrealized gains and losses on securities available for sale. This
statement is effective beginning in 1998.
F-10
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Management believes that there will be no significant impact on the
Company's financial reporting or disclosures as a result of these
pronouncements.
(q) Reclassifications
Certain items in the prior periods' financial statements have been
reclassified to conform with the 1997 presentation.
(2) Investments
Net investment income is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Fixed maturities........... $560,880 $1,253,201 $1,113,876 $870,454 $1,038,915
Equity securities.......... 23,340 25,002 31,128 11,898 30,876
Short-term investments and
cash...................... 132,158 111,399 124,285 110,589 159,804
-------- ---------- ---------- -------- ----------
716,378 1,389,602 1,269,289 992,941 1,229,595
Less investment expenses... 53,083 43,248 63,096 49,397 52,378
-------- ---------- ---------- -------- ----------
Net investment income.. $663,295 $1,346,354 $1,206,193 $943,544 $1,177,217
======== ========== ========== ======== ==========
</TABLE>
Realized and unrealized investment gains and losses were as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------------- -------------------
1994 1995 1996 1996 1997
--------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Realized gains:
Fixed maturities...... $ -- $ 300,596 $ 340,811 $ 320,938 $ 18,692
Equity securities..... -- -- 20,454 -- --
--------- ---------- --------- --------- --------
Total gains......... -- 300,596 361,265 320,938 18,692
--------- ---------- --------- --------- --------
Realized losses:
Fixed maturities...... (84,518) (99,971) (153,215) (149,518) (4,449)
Equity securities..... (33,922) -- (30,729) (16,267) --
--------- ---------- --------- --------- --------
Total losses........ (118,440) (99,971) (183,944) (165,785) (4,449)
--------- ---------- --------- --------- --------
Net realized gains
(losses)........... $(118,440) 200,625 177,321 155,153 14,243
--------- ---------- --------- --------- --------
Changes in unrealized
gains (losses):
Fixed maturities...... $(513,636) 1,363,624 (779,918) (925,223) 198,779
Equity securities..... (41,782) 15,808 25,974 23,165 10,877
--------- ---------- --------- --------- --------
Net unrealized gains
(losses)........... $(555,418) $1,379,432 $(753,944) $(902,058) $209,656
========= ========== ========= ========= ========
</TABLE>
At December 31, 1995 and 1996 and September 30, 1997, the Company did not
hold fixed-maturity securities which individually exceeded 10% of
shareholders' equity except U.S. government and government agency securities.
F-11
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and estimated fair values of investments at December 31,
1995 and 1996 and September 30, 1997 are as follows:
<TABLE>
<CAPTION>
AMOUNT
GROSS GROSS ESTIMATED AT WHICH
AMORTIZED UNREALIZED UNREALIZED FAIR SHOWN IN THE
COST GAINS LOSSES VALUE BALANCE SHEET
----------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
December 31, 1995:
Securities available
for sale:
Fixed maturities:
U.S. Treasury
securities and
obligations of U.S.
Government
corporations and
agencies............ $ 9,707,093 $659,177 $ 592 $10,365,678 $10,365,678
Obligations of states
and political
subdivisions........ 3,730,535 94,953 -- 3,825,488 3,825,488
Corporate securi-
ties................ 3,407,620 61,904 1,037 3,468,487 3,468,487
Mortgage-backed secu-
rities.............. 2,200,699 22,568 31,641 2,191,626 2,191,626
----------- -------- ------- ----------- -----------
Total fixed maturi-
ties.............. 19,045,947 838,602 33,270 19,851,279 19,851,279
Equity investments:
Preferred stocks...... 147,375 -- 15,375 132,000 132,000
Common stocks......... 324,948 -- 10,599 314,349 314,349
----------- -------- ------- ----------- -----------
Total.............. $19,518,270 $838,602 $59,244 $20,297,628 $20,297,628
=========== ======== ======= =========== ===========
December 31, 1996:
Securities available
for sale:
Fixed maturities:
U.S. Treasury
securities and
obligations of U.S.
Government
corporations and
agencies............ $ 6,591,470 $ 33,120 $ 1,456 $ 6,623,134 $ 6,623,134
Obligations of states
and political
subdivisions........ 3,414,859 60,191 5,385 3,469,665 3,469,665
Corporate securi-
ties................ 3,982,763 14,278 25,131 3,971,910 3,971,910
Mortgage-backed secu-
rities.............. 2,761,151 838 51,041 2,710,948 2,710,948
----------- -------- ------- ----------- -----------
Total fixed maturi-
ties.............. 16,750,243 108,427 83,013 16,775,657 16,775,657
Equity investments--
common stocks......... 715,590 -- -- 715,590 715,590
----------- -------- ------- ----------- -----------
Total.............. $17,465,833 $108,427 $83,013 $17,491,247 $17,491,247
=========== ======== ======= =========== ===========
September 30, 1997:
Securities available
for sale:
Fixed maturities:
U.S. Treasury
securities and
obligations of U.S.
Government
corporations and
agencies............ $11,112,998 $102,990 $21,817 $11,194,171 $11,194,171
Obligations of states
and political
subdivisions........ 4,477,687 140,883 -- 4,618,570 4,618,570
Corporate securi-
ties................ 6,093,909 40,704 21,207 6,113,406 6,113,406
Mortgage-backed secu-
rities.............. 2,862,440 9,496 26,856 2,845,080 2,845,080
----------- -------- ------- ----------- -----------
Total fixed maturi-
ties.............. 24,547,034 294,073 69,880 24,771,227 24,771,227
Equity investments--
common stocks......... 1,170,146 10,877 -- 1,181,023 1,181,023
----------- -------- ------- ----------- -----------
Total................ $25,717,180 $304,950 $69,880 $25,952,250 $25,952,250
=========== ======== ======= =========== ===========
</TABLE>
F-12
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and estimated fair values of fixed maturities at
September 30, 1997, by contractual maturity are shown below. Expected
maturities may differ from contractual maturities as certain borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalty.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less.............................. $ 1,148,781 $ 1,150,496
Due after one year through five years................ 10,649,508 10,722,151
Due after five years through ten years............... 7,685,670 7,809,753
Due after ten years.................................. 2,200,635 2,243,747
Mortgage-backed securities........................... 2,862,440 2,845,080
----------- -----------
$24,547,034 $24,771,227
=========== ===========
</TABLE>
Bonds with an amortized cost of $3,355,061, $4,198,368 and $4,300,052 were
on deposit with insurance regulatory authorities at December 31, 1995 and 1996
and September 30, 1997, respectively, in accordance with statutory
requirements.
(3) NOTES RECEIVABLE
As of September 30, 1997, the notes receivable from related parties consists
of three notes which are secured by common shares of the Company with a book
value of approximately $6,600,000. The notes bear interest rates ranging from
9.25% to 10.25% and are payable in 1997 and 1998.
The other notes receivable consists of six notes which are fully secured by
real and personal property and various corporate and personal guarantees.
These notes bear interest rates ranging from 9.00% to 25.0% and are payable on
various dates.
The Company recognized $6,555 and $885,436 of interest income on the notes
receivable in 1995 and 1996, respectively, and $505,692 and $635,504 for the
nine month periods ended September 30, 1996 and 1997, respectively.
As of September 30, 1997, there are no delinquent note payments and no
losses have been incurred on the Company's notes receivable for any period
presented herein.
(4) FINANCIAL INSTRUMENTS
The carrying amounts for short-term investments, cash, premiums receivable,
commissions receivable, accrued investment income, and accounts payable and
accrued expenses approximate their fair values due to the short-term nature of
these instruments.
Estimated fair values for fixed maturities were provided by outside
consultants using market quotations, prices provided by market makers or
estimates of fair values obtained from yield data relating to investment
securities with similar characteristics.
The estimated fair values for equity securities were determined by using
market quotations as of December 31, 1995 and 1996 and September 30, 1997,
respectively, on the principal public exchange markets for which such
securities are traded.
Notes receivable are with affiliated individuals and unaffiliated entities.
Of the nine notes receivable at September 30, 1997, eight have fair values
which approximate market values. These notes have maturity dates late in 1997
or in 1998 or have minimal outstanding principal balances at September 30,
1997. The carrying value and approximate fair value of the remaining loan at
September 30, 1997, assuming a fair market interest rate of prime plus 1% (9
1/2%), are $1,526,579 and $1,695,936, respectively.
F-13
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) REINSURANCE
General Liability
Effective January 1, 1997, the Company entered into two Excess of Loss
Reinsurance treaties with Signet Star Reinsurance Company, Underwriters
Reinsurance Company, Swiss Re America Corp. and Zurich-American Insurance
Group (the "Reinsurers") for the Company's general liability lines of
business. The treaties provide $500,000 excess $500,000 and $5 million excess
$1 million of coverage to the Company on a 100% basis. The treaties also
provide reinsurance coverage beginning at $100,000 for occupational disease,
cumulative trauma, employers' liability and "action over" claims.
<TABLE>
<S> <C>
COVERAGE LAYER--$5,000,000 X $1,000,000
Signet Star Reinsurance Company......................................... 40%
Swiss Re America Corp................................................... 25
Underwriters Reinsurance Company........................................ 10
Zurich-American Insurance Group......................................... 25
---
100%
===
COVERAGE LAYER--$500,000 X $500,000
Signet Star Reinsurance Company......................................... 55%
Swiss Re America Corp................................................... 10
Underwriters Reinsurance Company........................................ 35
---
100%
===
COVERAGE LAYER--$0--$500,000 (1)
American Safety......................................................... 42%
American Safety Casualty................................................ 28
American Safety RRG..................................................... 30
---
100%
===
</TABLE>
(1)The above percentages are after American Safety RRG retains the first
$100,000 in the aggregate.
Workers' Compensation
The Company assumes workers' compensation business from Legion Insurance
Company. This business is produced by Synergy, which bills and collects the
premiums on behalf of Legion and remits net of its agent's commissions. Legion
then deducts its expenses for the program as well as 10% of the premium to
deposit in its loss fund. The balance of the premium is ceded to American
Safety. Legion uses the 10% loss fund to pay claims, and when this fund is
extinguished, Legion cedes to American Safety. American Safety has a 50% quota
share arrangement between itself and American Safety Casualty. Pursuant to the
arrangement with Legion Insurance Company, the Company's exposure is limited
to $250,000 per occurrence and a 70% aggregate stop-loss ratio percentage. As
discussed above in "General Liability", the general liability treaties also
provide occupational disease, cumulative trauma, and employers' liability
coverage up to $100,000 for this program as well.
Surety
For surety business written by the Company's insurance subsidiary, American
Safety Casualty, the Company has in place a 50% quota share arrangement with
Underwriters Reinsurance Company. American Safety Casualty cedes 50% of all
premiums collected less a 55% ceding commission on the first $500,000 of
reinsurance premium and 25% commission thereafter, as well as ceding 50% of
all losses to Underwriters Re. The ceding commission percentage is based on
the recovery of 50% of the commissions, premium taxes and other expenses. The
rate adjusts down after fixed expenses are recovered. American Safety Casualty
also has an arrangement with American Safety Re to cede 25% of all premiums
and all losses to them. To date, the Company has no reported claims for the
surety line of business.
F-14
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The approximate effect of reinsurance on the financial statement accounts
listed below is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------
1994 1995 1996 1996 1997
------- ------ ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Written premiums:
Direct.................... $ 30 $ 98 $1,192 $ 812 $ 2,928
Assumed................... 3,820 6,249 4,936 3,733 5,855
Ceded..................... (88) (217) (1,511) (1,246) (1,765)
------- ------ ------ -------- ---------
Net..................... $ 3,762 $6,130 $4,617 $ 3,299 $ 7,018
======= ====== ====== ======== =========
Earned premiums:
Direct.................... $ 31 $ 51 $ 811 $ 662 $ 2,419
Assumed................... 3,477 6,058 4,505 3,157 5,604
Ceded..................... (89) (362) (1,044) (958) (1,517)
------- ------ ------ -------- ---------
Net..................... $ 3,419 $5,747 $4,272 $ 2,861 $ 6,506
======= ====== ====== ======== =========
Losses and loss adjustment
expenses incurred:
Direct.................... $ (10) $ 10 $ 227 $ 129 $ 429
Assumed................... 1,434 2,901 2,024 1,363 3,501
Ceded..................... -- (6) (195) (109) (397)
------- ------ ------ -------- ---------
Net..................... $ 1,424 $2,905 $2,056 $ 1,383 $ 3,533
======= ====== ====== ======== ========= ===
Unpaid loss and loss
adjustment expenses:
Direct.................... $ 10 $ 10 $ 237 $ 139 $ 303
Assumed................... 6,038 8,284 8,833 8,361 10,588
Ceded..................... -- (6) (201) (114) (240)
------- ------ ------ -------- ---------
Net..................... $ 6,048 $8,288 $8,869 $ 8,386 $ 10,651
======= ====== ====== ======== =========
</TABLE>
(6) INCOME TAXES
Under current Bermuda law, American Safety is not required to pay any taxes
in Bermuda on either income or capital gains. American Safety has received an
undertaking from the Minister of Finance in Bermuda that will exempt American
Safety from taxation until the year 2016 in the event of any such taxes being
imposed.
Whether a foreign corporation is engaged in a United States trade or
business or is carrying on an insurance business in the United States depends
upon the level of activities conducted in the United States. If the activities
of a foreign company are "continuous, regular, and considerable" the foreign
company will be deemed to be engaged in a United States trade or business. Due
to the fact that American Safety will continue to maintain an office in
Bermuda and American Safety and American Safety Re's sole business is
reinsuring contracts via treaty reinsurance agreements, which are all signed
outside of the United States, American Safety does not consider itself to be
engaged in a trade or business in the United States and, accordingly, does not
expect to be subject to United States income taxes. This position is
consistent with the position taken by various other entities that have the
same operational structure as American Safety.
However, because the Internal Revenue Code of 1986, as amended, the Treasury
Regulations and court decisions do not definitively identify activities that
constitute being engaged in a United States trade or business, and because of
the factual nature of the determination, there can be no assurance that the
Internal Revenue Service will not contend that American Safety or its Bermuda
subsidiary is engaged in a United States trade or business. In general, if
American Safety or its Bermuda subsidiary are considered to be engaged in a
United
F-15
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
States trade or business, it would be subject to (i) United States Federal
income tax on its taxable income that is effectively connected with a United
States trade or business at graduated rates and (ii) the 30 percent branch
profits tax on its effectively connected earnings and profits deemed
repatriated from the United States. However, certain subsidiaries of American
Safety are subject to U.S. Federal and state income tax.
U.S. Federal and state income tax expense consists of the following
components:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- --------
<S> <C> <C> <C>
December 31, 1994................................ $368,466 $(39,478) $328,988
December 31, 1995................................ 792,060 (72,372) 719,688
December 31, 1996................................ 232,221 (55,712) 176,509
September 30, 1996............................... 204,843 (26,722) 178,121
September 30, 1997............................... 441,313 (58,785) 382,528
</TABLE>
State income tax aggregated $19,410, $52,663 and $(6,595) for the years
ended December 31, 1994, 1995 and 1996, respectively, and $(567) and $19,918
for the nine months ended September 30, 1996 and 1997, respectively.
Income tax expense for the years ended December 31, 1994, 1995 and 1996, and
the nine months ended September 30, 1996 and 1997 differed from the amount
computed by applying the U.S. Federal income tax rate of 34% to earnings
before Federal income taxes as a result of the following:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------- ------------------
1994 1995 1996 1996 1997
--------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Expected income tax
expense................ $ 661,904 $1,325,875 $1,052,043 $759,181 $885,639
Foreign earned income
not subject to direct
taxation............... (346,475) (590,470) (798,094) (525,230) (520,837)
Tax-exempt interest..... (13,602) (36,555) (52,632) (48,518) (43,789)
Other, net.............. 27,161 20,838 (24,808) (7,312) 61,515
--------- ---------- ---------- -------- --------
$ 328,988 $ 719,688 $ 176,509 $178,121 $382,528
========= ========== ========== ======== ========
</TABLE>
Deferred income taxes are based upon temporary differences between the
financial statement and tax bases of assets and liabilities. The following
deferred taxes are recorded:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Loss reserve discounting...................... $132,767 $174,130 $220,459
Unearned premium reserves..................... 24,524 35,521 54,054
Unrealized losses............................. -- -- --
Capital loss carryforward..................... -- 8,764 --
Other, net.................................... 256 -- 8,265
-------- -------- --------
Gross deferred tax assets................... 157,547 218,415 282,778
-------- -------- --------
Deferred tax liabilities:
Deferred acquisition costs.................... 15,528 20,684 26,761
Unrealized gains.............................. 44,036 17,277 54,962
Other......................................... -- 1,134 636
-------- -------- --------
Gross deferred tax liabilities.............. 59,564 39,095 82,359
-------- -------- --------
Net deferred tax asset........................ $ 97,983 $179,320 $200,419
======== ======== ========
</TABLE>
F-16
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A valuation allowance has not been established as the Company believes it is
more likely than not that the deferred tax asset will be realized.
(7) INSURANCE ACCOUNTING
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles which vary in certain respects, for
the Company and American Safety Casualty, from statutory accounting practices
prescribed or permitted by regulatory authorities.
The Bermuda Insurance Act of 1978 and related regulations (the "Act")
requires the Company to meet a minimum solvency margin. Statutory capital and
surplus as of December 31, 1995 and 1996, and September 30, 1997 were
$16,614,032, $18,032,107 and $20,723,648, respectively, and the amounts
required to be maintained by the Company were $1,149,354, $886,899 and
$1,250,591, respectively. In addition, a minimum liquidity ratio must be
maintained whereby relevant assets, as defined by the Act, must exceed 75% of
relevant liabilities. Once these requirements have been met, there is no
restriction on the retained earnings available for distribution. At September
30, 1997, the Company was in compliance with this requirement.
As reported in American Safety Casualty's 1996 annual statement, the
statutory capital and surplus of American Safety Casualty approximated
$8,252,000. The maximum amount of dividends which can be paid, without prior
written approval of the Commissioner of Insurance of the State of Delaware, is
limited to the greater of 10% of surplus as regards policyholders or net
income, excluding realized capital gains, of the preceding year. Accordingly,
American Safety Casualty can pay dividends in 1997 of approximately $825,200.
The National Association of Insurance Commissioners (the "NAIC") has
established risk-based capital ("RBC") requirements to help state regulators
monitor the financial strength and stability of property and casualty insurers
by identifying those companies that may be inadequately capitalized. Under the
NAIC's requirements, each insurer must maintain its total capital above a
calculated threshold or take corrective measures to achieve the threshold. The
threshold of adequate capital is based on a formula that takes into account
the amount of risk each company faces on its products and investments. The RBC
formula takes into consideration four major areas of risk: (i) asset risk
which primarily focuses on the quality of investments; (ii) insurance risk
which encompasses coverage-related issues and anticipated frequency and
severity of losses when pricing and designing insurance coverages; (iii)
interest rate risk which involves asset/liability matching issues; and (iv)
other business risks.
American Safety Casualty has calculated its RBC level and has determined
that its capital and surplus is significantly in excess of threshold
requirements.
(8) RELATED PARTY AND AFFILIATE TRANSACTIONS
As of September 30, 1997, the Company had three separate loans to
shareholders outstanding, which totaled $1.27 million. These loans bear
effective interest rates from 9.25% to 10.25% and are payable in 1997 and
1998. See Note 3.
The Company has entered into reinsurance agreements with two companies,
Intersure Reinsurance Company ("Intersure Re") and Omega Reinsurance Company
("Omega Re"), both of which are owned and controlled by certain officers of
the Company in order to provide limits of coverage not readily available in
the commercial marketplace. Reinsurance premiums ceded and earned aggregated
$25,000, $451,728, and $322,480, for the years ended December 31, 1995, and
1996 and for the nine month period ended September 30, 1997, respectively.
Additionally, Intersure was granted an option to purchase common shares of
American Safety at an option price approximating fair value at the date of the
grants. See Note 14.
F-17
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Synergy, American Safety's underwriting and administrative services
subsidiary, leases office space from an entity which is owned by certain
directors and shareholders of the Company. The lease commenced on March 1,
1996 and expires on February 28, 2001. The Company pays base annual rent of
$183,820 plus an annual increase based on the consumer price index of at least
4%.
The following table depicts the income statement effects to the Company from
American Safety RRG:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------------- ---------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Assumed premiums
earned................. $2,194,136 $2,494,765 $1,982,290 $1,612,775 $1,773,776
Ceded premiums earned... 16,003 12,097 541,129 488,953 870,369
---------- ---------- ---------- ---------- ----------
Net premiums earned..... 2,178,133 2,482,668 1,441,161 1,123,822 903,407
Management fee.......... 463,512 474,822 478,963 355,844 443,950
Loss control............ 35,997 33,229 49,373 37,033 42,091
Brokerage commission
income................. 1,189,501 1,534,952 1,341,026 1,070,851 777,400
---------- ---------- ---------- ---------- ----------
Total revenues.......... $3,867,143 $4,525,671 $3,310,523 $2,587,550 $2,166,848
========== ========== ========== ========== ==========
Loss and LAE incurred... $ 637,611 $ 851,228 $ 165,670 $ 876,829 $ 697,719
========== ========== ========== ========== ==========
</TABLE>
For the years ended December 31, 1994, 1995 and 1996 and for the nine month
periods ended September 30, 1996 and 1997, Synergy and ECSI received fees from
American Safety RRG for risk management, claims administration and other
management services. Synergy also recognized brokerage commission income from
American Safety RRG.
The following table depicts the balance sheet effects to the Company from
American Safety RRG:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Due from affiliate.................. $ 266,565 $ 356,844 $ 261,637
LIABILITIES
Unpaid loss and LAE................. 5,964,237 5,737,373 5,854,972
Unearned premium.................... -- 91,997 118,126
Ceded premiums payable.............. 75,358 -- 49,400
Reinsurance payable on paid loss and
LAE................................ 1,932 -- 16,360
</TABLE>
(9) SEGMENT INFORMATION
a) Factors used to identify the Company's reportable segments:
The Company's United States and Bermuda operating segments were identified
by management as separate operating segments based upon the unique regulatory
environments each of these countries exhibit. Significant differences exist
under United States and Bermuda law concerning the regulation of insurance
entities including differences in: types of permissible investments, minimum
capital requirements, solvency monitoring, pricing, corporate taxation, etc.
b) Products and services from each reportable segment:
The Company is a specialty insurance holding company which, through its
United States and Bermuda operating segments, develops, underwrites, manages
and markets primary casualty insurance and reinsurance programs in the
alternative insurance market for (i) environmental remediation risks; (ii)
employee leasing and staffing industry risks; and (iii) other specialty risks.
The Company has demonstrated expertise in developing specialty insurance
coverages and custom designed risk management programs not generally available
in the standard insurance market.
F-18
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The United States operating segment's specialty insurance programs provide
insurance and reinsurance for general, pollution and professional liability
exposures, for workers' compensation and surety, as well as custom designed
risk management programs for contractors, consultants and other business and
property owners who are involved with environmental remediation, employee
leasing and staffing, and other specialty risks.
Through its United States brokerage and management services subsidiaries,
the Company also provides specialized insurance program development,
underwriting, risk and reinsurance placement, program management, brokerage,
loss control, claims administration and marketing services. The Company also
insures and places risks through its United States insurance subsidiary, as
well as its non-subsidiary risk retention group affiliate and other
unaffiliated insurance and reinsurance companies.
Through its Bermuda operating segment, the Company places and reinsures a
portion of the risks underwritten directly by its United States segment, its
risk retention group affiliate and other insurers.
c) Information about segment profit or loss and assets:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------- --------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
UNITED STATES
Net premiums earned--All Other........ $2,147 $3,977 $ 88 $ 22 $1,600
Net premiums earned--Intersegment..... (655) (1,347) 2,101 1,461 2,145
Net investment income and interest on
notes receivable..................... 422 497 587 442 530
Other revenues........................ 2,083 2,924 2,471 1,908 2,232
Total revenues........................ 3,997 6,051 5,247 3,833 6,507
Interest expense...................... -- -- -- -- --
Depreciation and amortization
expense.............................. 59 69 85 66 78
Equity in net earnings of subsidiaries
..................................... -- -- -- -- --
Income taxes.......................... 329 720 177 178 383
Significant noncash items other than
depreciation and amortization........ -- -- -- -- --
Property, plant and equipment......... 68 86 187 197 159
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------- --------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BERMUDA
Net premiums earned--All Other........ $1,272 $1,770 $4,184 $2,839 $4,906
Net premiums earned--Intersegment..... 655 1,347 (2,101) (1,461) (2,145)
Net investment income and interest on
notes receivable..................... 241 856 1,505 1,007 1,283
Other revenues........................ -- 141 203 170 15
Total revenues........................ 2,168 4,114 3,791 2,555 4,059
Interest expense...................... -- -- -- -- 27
Depreciation and amortization
expense.............................. -- -- -- -- --
Equity in net earnings of
subsidiaries......................... 569 1,443 570 510 690
Income taxes.......................... -- -- -- -- --
Significant noncash items other than
depreciation and amortization........ -- -- -- -- --
Property, plant and equipment......... -- -- -- -- --
</TABLE>
F-19
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------- --------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTERSEGMENT ELIMINATIONS
Net premiums earned--All Other........ $ -- $ -- $ -- $ -- $ --
Net premiums earned--Intersegment..... -- -- -- -- --
Net investment income and interest on
notes receivable..................... -- -- -- -- --
Other revenues........................ (31) (245) (132) (105) (214)
Total revenues........................ (31) (245) (132) (105) (214)
Interest expense...................... -- -- -- -- --
Depreciation and amortization ex-
pense................................ -- -- -- -- --
Equity in net earnings of subsidiar-
ies.................................. (569) (1,443) (570) (510) (690)
Income taxes.......................... -- -- -- -- --
Significant noncash items other than
depreciation and
amortization......................... -- -- -- -- --
Property, plant and equipment......... -- -- -- -- --
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------- --------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
TOTAL
Net premiums earned--All Other........ $3,419 $5,747 $4,272 $2,861 $6,506
Net premiums earned--Intersegment..... -- -- -- -- --
Net investment income and interest on
notes receivable..................... 663 1,353 2,092 1,449 1,813
Other revenues........................ 2,052 2,820 2,542 1,973 2,033
Total revenues........................ 6,134 9,920 8,906 6,283 10,352
Interest expense...................... -- -- -- -- 27
Depreciation and amortization ex-
pense................................ 59 69 85 66 78
Equity in net earnings of subsidiar-
ies.................................. -- -- -- -- --
Income taxes.......................... 329 720 177 178 383
Significant noncash items other than
depreciation and
amortization......................... -- -- -- -- --
Property, plant and equipment......... 68 86 187 197 159
</TABLE>
(10) ACQUISITION
On January 1, 1995, pursuant to a share purchase agreement, the Company
purchased the minority interest in American Safety Casualty for 131,000 shares
of the Company's common shares. The fair value of the minority interest as of
the acquisition date approximated the value of the exchanged common shares. No
goodwill or other identifiable intangible assets were created in this
transaction as the Company and minority interest holder mutually agreed that
book value of each respective entity approximated fair values as of the
acquisition date.
(11) COMMITMENTS AND CONTINGENCIES
At December 31, 1995 and 1996 and September 30, 1997, the Company had
aggregate outstanding irrevocable letters of credit which had not been drawn
amounting to $1,000,000 in favor of the Vermont Commissioner of Banking,
Insurance and Securities. Investments in the amount of $1,000,000 have been
pledged as collateral to the issuing bank. Additionally, Legion Insurance
Company had $2,000,000 of aggregate outstanding letters of credit which had
not been drawn in favor of the Company at December 31, 1995 and 1996 and
September 30, 1997.
F-20
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) SURPLUS NOTE
On May 30, 1997, the Company issued a $1,250,000 surplus note. The note
bears interest at a rate of 6.5% and matures on December 31, 1997. Given the
short maturity of the note, fair value approximates book value. The Company
repaid the surplus note on December 11, 1997.
(13) LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid claims and claim adjustment expenses is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- -------------------
1994 1995 1996 1996 1997
------ ------ ------ -------- ---------
<S> <C> <C> <C> <C> <C>
Unpaid loss and loss adjustment
expenses, January 1............... $4,798 $6,048 $8,294 $ 8,294 $ 8,914
Reinsurance recoverable on unpaid
losses and loss adjustment expense
reserves at end of period......... -- -- 6 6 45
------ ------ ------ -------- ---------
Net unpaid loss and loss
adjustment expenses, January
1............................. 4,798 6,048 8,288 8,288 8,869
------ ------ ------ -------- ---------
Incurred related to:
Current year accident losses..... 1,569 3,099 2,862 1,925 3,342
Prior year accident losses....... (145) (194) (806) (542) 191
------ ------ ------ -------- ---------
Total incurred................. 1,424 2,905 2,056 1,383 3,533
------ ------ ------ -------- ---------
Paid related to:
Current year accident losses..... 22 155 543 473 386
Prior year accident losses....... 152 510 932 812 1,365
------ ------ ------ -------- ---------
Total paid..................... 174 665 1,475 1,285 1,751
------ ------ ------ -------- ---------
Net unpaid losses and loss
adjustment expenses at end of
period........................ 6,048 8,288 8,869 8,386 10,651
Reinsurance recoverable on unpaid
losses and loss adjustment
expenses at end of period......... -- 6 45 31 84
------ ------ ------ -------- ---------
Unpaid loss and loss adjustment
expenses at end of period..... $6,048 $8,294 $8,914 $ 8,417 $ 10,735
====== ====== ====== ======== =========
</TABLE>
(14) STOCK OPTIONS
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
OPTION WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------- ----------------
<S> <C> <C>
1997 Activity:
Granted.............................................. 169,463 $6.69
Exercised............................................ -- --
------- -----
Outstanding at September 30, 1997...................... 169,463 $6.69
======= =====
</TABLE>
All of the 169,463 outstanding options at September 30, 1997 were
exercisable. The Company had no options outstanding prior to 1997.
F-21
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 5.96 44,540 0.75 $ 5.96 44,540 $ 5.96
5.96 51,090 4.43 5.96 51,090 5.96
7.08 65,500 5.0 7.08 65,500 7.08
12.00 8,333 2.5 12.00 8,333 12.00
------- -------
$5.96-12.00 169,463 3.59 $ 6.69 169,463 $ 6.69
=========== ======= ==== ====== ======= ======
</TABLE>
Had compensation cost for the Company's stock options granted in 1997 been
determined using the fair-value-based method as described in SFAS No. 123, the
Company's net earnings and earnings per share would approximate the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------
(In thousands, except
per share amounts)
<S> <C>
Net earnings:
As reported............................................. $2,222
Effect of stock options................................. 41
------
Pro forma net earnings................................ $2,181
======
Net earnings per share:
As reported............................................. $ 0.75
Effect of stock options................................. 0.01
------
Pro forma net earnings per share...................... $ 0.74
======
</TABLE>
The fair value of each option granted during 1997 was estimated on the date
of grant using the Black-Scholes multiple option approach with the following
assumptions: dividend yield of 0.0%; expected volatility of 0.0%; risk-free
interest rate of 5.44%; and expected life from the vesting dates ranging from
0.75 years to 5.0 years.
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. The provisions of SFAS No. 123 are applicable
prospectively. The Company expects to grant additional awards in future years.
The Company granted options in 1997 at an amount deemed to be fair market
value at the date of grant.
(15) LITIGATION
The Company is a defendant in various litigation matters considered to be in
the normal course of business. While the outcome of these matters cannot be
estimated with certainty, it is the opinion of management (after consultation
with legal counsel) that the resolution of such litigation will not have a
material adverse effect on the Company's financial statements.
(16) SHAREHOLDER MATTERS
On January 29, 1998, the Company effectuated a 1,310-for-one share split and
increased its authorized capital to 15,000,000 common shares and 5,000,000
preferred shares. All share and per share amounts have been retroactively
adjusted to effect this split. The Company has filed a registration statement
on Form S-1 with the Securities and Exchange Commission for an initial public
offering of 2.7 million common shares. Such registration is anticipated to
become effective in the first calendar quarter of 1998.
F-22
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CON-
NECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON SHARES IN
ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, 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 AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 13
The Company.............................................................. 14
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 26
Regulatory Matters....................................................... 44
Management............................................................... 48
Certain Transactions..................................................... 54
Principal Shareholders................................................... 55
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 60
Certain Bermuda Law Considerations....................................... 61
Certain Tax Considerations............................................... 62
Underwriting............................................................. 69
Legal Matters............................................................ 70
Experts.................................................................. 70
Additional Information................................................... 71
Glossary of Selected Insurance Terms..................................... 72
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACATIONS IN THE COMMON SHARES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,700,000 SHARES
[LOGO OF AMERICAN SAFETY INSURANCE GROUP, LTD. APPEARS HERE]
AMERICAN SAFETY
INSURANCE GROUP, LTD.
COMMON SHARES
---------------
PROSPECTUS
---------------
ADVEST, INC.
J.C. BRADFORD&CO.
HOEFER & ARNETT
INCORPORATED
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission ("SEC") Registration Fee....... $ 11,908
National Association of Securities Dealers, Inc. ("NASD") Filing
Fee.............................................................. 4,537
National Association of Securities Dealers Automated Quotation
("Nasdaq") National Market System Listing Fee.................... 25,000
Accountants' Fees and Expenses.................................... 157,000
Legal Fees........................................................ 30,000
Blue Sky Fees and Expenses........................................ 3,000
Transfer Agent's and Registrar's Fees............................. 5,500
Printing and Engraving Fees and Expenses.......................... 105,000
Miscellaneous..................................................... 37,000
--------
Total........................................................... $378,945
</TABLE>
The foregoing items, except for the SEC registration fee, the NASD filing
fee and the Nasdaq listing fee, are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 98 of the Companies Act, 1981 of Bermuda (the "Companies Act")
provides generally that a Bermuda company may indemnify its directors,
officers and auditors against any liability which by virtue of Bermuda law
otherwise would be imposed on them, except in cases where such liability
arises from the fraud or dishonesty of which such director, officer or auditor
may be guilty in relation to the company. Section 98 further provides that a
Bermudian company may indemnify its directors, officers and auditors against
liability incurred by them in defending any proceedings, whether civil or
criminal, in which judgment is awarded in their favor or they are acquitted or
in which they are acquitted or granted relief by the Supreme Court of Bermuda
in certain proceedings arising under Section 281 of the Companies Act.
The Company has adopted provisions in its Bye-Laws that provide that the
Company shall indemnify its officers and directors to the maximum extent
permitted under the Companies Act. The Company has also adopted provisions in
its Bye-Laws that provide that each shareholder of the Company and the Company
itself agrees to waive any claim or right of action he or it might have,
whether individually or by or in the right of the Company, against any
director on account of any action taken by such director, or the failure of
such director to take any action, in the performance of his duties, or
supposed duties, with or for the Company, provided that such waiver shall not
extend to any matter in respect of any fraud or dishonesty which may attach to
such director.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection
with the Offering, including liabilities under the Securities Act of 1933.
Reference is made to the form Underwriting Agreement filed herewith as Exhibit
1.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On April 2, 1997, the Company sold 26,200 Common Shares to Intersure
Reinsurance Company (which is owned by Lloyd A. Fox, the President and a
director of the Company) at an aggregate price of $156,597.20 as a private
sale of securities not involving a public offering under applicable Bermuda
law and under Section 4(2) of the Securities Act of 1933.
On, April 2, 1997, the Company sold 26,200 Common Shares to Omega
Reinsurance Company (which is owned by Stephen R. Crim, the Executive Vice
President of the Company) at an aggregate price of $156,597.20 as a private
sale of securities not involving a public offering under applicable Bermuda
law and under Section 4(2) of the Securities Act of 1933.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits filed pursuant to Item 601 of Regulation S-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
3.1 -- Memorandum of Association of the Registrant
3.2 -- Form of Bye-Laws of the Registrant
4.1 -- Common Share Certificate
5.1 -- Opinion of Conyers Dill & Pearman regarding legality of the Common
Shares offered and Bermuda tax matters
8.1 -- Opinion of KPMG Peat Marwick LLP regarding United States tax
matters
10.1 -- Employment Contract between the Registrant and Lloyd A. Fox
10.2 -- Incentive Stock Option Plan
10.3 -- Directors Stock Award Plan
10.4* -- Lease Agreement between 1845 Tenants-In-Common (formerly known as
Windy Hill Exchange, L.L.C.) and Synergy Insurance Services, Inc.
(formerly known as Environmental Management Services, Inc.) for
office space in Atlanta, Georgia
10.5 -- Program Management Agreement between Synergy Insurance Services,
Inc. (formerly known as Environmental Management Services, Inc.)
and American Safety Risk Retention Group, Inc.
11.1* -- Statement Re Computation of per Share Earnings
21.1 -- List of Subsidiaries
23.1 -- Consent of KPMG Peat Marwick LLP regarding independent auditors'
report and United States tax matters
23.2 -- Consent of Conyers Dill & Pearman (included in opinion filed as
Exhibit 5.1)
24.1* -- Power of Attorney (see signature page to the Registration
Statement as originally filed)
27.1 -- Financial Data Schedule
</TABLE>
- --------
*Previously filed
(b) Financial Statement Schedules
The following financial statement schedules of the Registrant are included
hereafter beginning on page S-1:
Schedule II--Condensed Financial Information of Registrant
Schedule IV--Reinsurance
Schedule VI--Supplemental Information
Schedules not listed above have been omitted because they are not applicable
or the required information is included in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
The Registrant undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement stock certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
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 Securities Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
The Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Securities
Act, the information omitted from the form of Prospectus and filed as a
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 a
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, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE
26TH DAY OF JANUARY 1998.
American Safety Insurance Group,
Ltd.
By: /s/ Lloyd A. Fox
----------------------------------
LLOYD A. FOX PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 1 TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THE 26TH DAY OF JANUARY 1998.
SIGNATURE TITLE
/s/ Lloyd A. Fox President and Director (Principal
- ------------------------------------- Executive Officer)
LLOYD A. FOX
Chief Financial Officer (Principal
/s/ Stephen F. Clarke Financial Officer and Principal
- ------------------------------------- Accounting Officer)
STEPHEN F. CLARKE
Chairman of the Board of Directors
Frederick C. Treadway*
- -------------------------------------
FREDERICK C. TREADWAY
Director
David V. Brueggan*
- -------------------------------------
DAVID V. BRUEGGAN
Director
Cody W. Birdwell*
- -------------------------------------
CODY W. BIRDWELL
II-4
<PAGE>
SIGNATURE TITLE
Director
William O. Mauldin, Jr.*
- -------------------------------------
WILLIAM O. MAULDIN, JR.
Director
Thomas W. Mueller*
- -------------------------------------
THOMAS W. MUELLER
Director
Timothy E. Walsh*
- -------------------------------------
TIMOTHY E. WALSH
/s/ Lloyd A. Fox
- -------------------------------------
*By Lloyd A. Fox, attorney-in-fact
II-5
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
WHEN THE TRANSACTION REFERRED TO IN NOTE 16 OF THE NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDER
THE FOLLOWING REPORT.
The Board of Directors
American Safety Insurance Group, Ltd.:
The audits referred to in our report dated January , 1998 included the
related financial statement schedules as of December 31, 1995 and 1996 and
September 30, 1997, and for each of the years in the three-year period ended
December 31, 1996 and for the nine-month periods ended September 30, 1996 and
1997, included in the Registration Statement. These financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits. In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
We consent to the use of our reports included herein and to the reference of
our firm under the headings "Certain Tax Considerations" and "Experts" in the
prospectus.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
January 26, 1998
S-1
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II--CONDENSED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
ASSETS
Investments:
Investment in subsidiaries............. $ 8,522,771 $ 9,038,875 $ 9,801,453
Other investments:
Fixed maturities..................... 12,098,904 7,056,342 13,412,998
Common stock......................... -- -- 360,877
Short-term investments............... 300,000 -- --
----------- ----------- -----------
Total investments.................. 20,921,675 16,095,217 23,575,328
Cash..................................... 909,835 1,358,557 2,010,456
Accrued investment and interest income... 163,669 895,452 549,921
Notes receivable:
Related parties........................ 390,000 1,146,841 1,266,264
Other.................................. 988,195 4,912,865 3,620,359
Premiums receivable...................... 166,232 398,381 1,150,432
Ceded unearned premium--American Safety
Casualty................................ 343,844 438,949 554,163
Ceded loss reserves...................... 300,519 905,562 2,255,539
Other assets............................. 51,350 71,811 719,465
----------- ----------- -----------
Total assets....................... $24,235,319 $26,223,635 $35,701,927
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment
expenses.............................. $ 6,551,825 $ 6,990,870 $ 9,076,851
Unearned premiums...................... 708,724 975,706 1,330,769
Liability for deductible fees held..... -- -- 2,764,485
Ceded premium payable.................. 268,811 184,768 236,977
Accounts payable and accrued expenses.. 91,927 40,184 319,196
Surplus note........................... -- -- 1,250,000
----------- ----------- -----------
Total liabilities.................. 7,621,287 8,191,528 14,978,278
----------- ----------- -----------
Shareholders' equity:
Common stock, $0.01 par value;
authorized 15,000,000 shares; issued
and outstanding at December 31, 1995
and 1996, 2,872,830 shares, and at
September 30, 1997, 2,925,230 shares.. 28,728 28,728 29,252
Additional paid-in capital............. 2,455,034 2,455,034 2,751,789
Retained earnings...................... 13,394,948 15,540,208 17,762,500
Unrealized gain relating to
investments........................... 735,322 8,137 180,108
----------- ----------- -----------
Total shareholders' equity......... 16,614,032 18,032,107 20,723,649
----------- ----------- -----------
Total liabilities and shareholders'
equity............................ $24,235,319 $26,223,635 $35,701,927
=========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
S-2
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II--CONDENSED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Direct premiums
earned............... $ -- $ -- $ -- $ -- $ --
Assumed premiums
earned...............
Affiliate............ 1,316,482 1,496,859 1,192,919 967,665 1,097,730
Subsidiary........... 654,562 1,737,411 (63,335) (91,743) 92,872
Non-affiliates....... -- 272,696 2,990,965 1,871,167 3,807,976
---------- ---------- ---------- ---------- ----------
Total assumed
premiums earned.... 1,971,044 3,506,966 4,120,549 2,747,089 4,998,578
Ceded premiums earned
Affiliate............ -- -- -- -- --
Non-affiliates....... 44,608 390,429 2,037,942 1,369,233 2,237,870
---------- ---------- ---------- ---------- ----------
Total ceded premiums
earned............. 44,608 390,429 2,037,942 1,369,233 2,237,870
---------- ---------- ---------- ---------- ----------
Net premiums
earned............. 1,926,436 3,116,537 2,082,607 1,377,856 2,760,708
---------- ---------- ---------- ---------- ----------
Net investment
income............... 241,216 849,589 619,918 501,744 647,768
Interest on notes
receivable........... -- 6,555 885,436 505,692 635,504
Net realized gains.... -- 139,382 203,097 168,498 14,979
Other income.......... -- 1,770 -- 1,005 --
---------- ---------- ---------- ---------- ----------
Total revenues...... 2,167,652 4,113,833 3,791,058 2,554,795 4,058,959
---------- ---------- ---------- ---------- ----------
Expenses:
Losses and loss
adjustment expenses
incurred............. 724,751 1,658,690 683,253 566,990 1,707,439
Acquisition expenses.. 203,119 544,849 358,256 264,879 531,483
Other expenses........ 190,812 173,617 402,216 178,132 288,164
---------- ---------- ---------- ---------- ----------
Total expenses...... 1,118,682 2,377,156 1,443,725 1,010,001 2,527,086
---------- ---------- ---------- ---------- ----------
Earnings before
income taxes....... 1,048,970 1,736,677 2,347,333 1,544,794 1,531,873
Income taxes............ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Earnings before
equity in earnings
of subsidiaries.... 1,048,970 1,736,677 2,347,333 1,544,794 1,531,873
Equity in net earnings
of subsidiaries........ 568,818 1,443,268 570,402 509,970 690,418
---------- ---------- ---------- ---------- ----------
Net earnings........ $1,617,788 $3,179,945 $2,917,735 $2,054,764 $2,222,291
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
S-3
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II--CONDENSED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash flow from operating
activities:
Earnings before equity
in earnings of
subsidiaries.......... $1,048,970 $1,736,677 $2,347,333 $1,544,794 $1,531,873
Adjustments to
reconcile net earnings
to net cash provided
from operating
activities:
Change in:
Accrued investment
and interest
income............. (41,079) (73,283) (731,783) (400,200) 345,531
Premiums
receivable......... (53,814) (49,815) (232,149) (559,537) (752,051)
Other assets........ -- (51,350) (20,461) 45,795 (647,654)
Unpaid losses and
loss adjustment
expenses........... 571,815 1,212,274 (165,998) (199,342) 736,004
Unearned premiums... 174,617 190,263 171,877 84,405 239,849
Liability for
deductible fees
held............... -- -- -- -- 2,764,485
Accounts payable and
accrued expenses... 13,711 58,267 (51,743) (56,277) 279,012
Other, net.......... 36,085 157,607 (29,745) 92,896 (19,950)
---------- ---------- ---------- ---------- ----------
Net cash provided by
operating
activities......... 1,750,305 3,180,640 1,287,331 552,534 4,477,099
---------- ---------- ---------- ---------- ----------
Cash flow from investing
activities--decrease
(increase) in invested
cash................... (1,751,857) (2,014,711) (66,134) (687,299) (5,372,479)
---------- ---------- ---------- ---------- ----------
Cash flow from financing
activities:
Proceeds from surplus
note................. -- -- -- -- 1,250,000
Proceeds from sale of
common stock......... -- -- -- -- 297,279
Dividends paid........ -- -- (772,475) (772,475) --
Shares redeemed and
canceled............. -- (256,800) -- -- --
---------- ---------- ---------- ---------- ----------
Net cash provided by
financing
activities......... -- (256,800) (772,475) (772,475) 1,547,279
---------- ---------- ---------- ---------- ----------
Net increase (de-
crease) in cash...... (1,552) 909,129 448,722 (907,240) 651,899
Cash at beginning of
year................. 2,258 706 909,835 909,835 1,358,557
---------- ---------- ---------- ---------- ----------
Cash at end of year... $ 706 $ 909,835 $1,358,557 $ 2,595 $2,010,456
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
S-4
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II--NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND
SEPTEMBER 30, 1997
In January 1998, American Safety Insurance Group, Ltd. ("American Safety")
formed a new reinsurance subsidiary, American Safety Reinsurance, Ltd.
("American Safety Re"), a Bermuda licensed insurance company, and intends to
transfer its reinsurance business on a going forward basis to this subsidiary.
American Safety will in the future principally serve as a holding company for
all of American Safety's subsidiaries' operations.
S-5
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
PROPERTY--
LIABILITY CEDED TO PERCENTAGE OF
ISURANCE PREMIUMSN GROSS OTHER ASSUMED FROM NET AMOUNT ASSUMED
EARNED AMOUNT COMPANIES OTHER COMPANIES AMOUNT TO NET
- ------------------ --------- --------- --------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
December 31, 1994....... $ 31,000 $ 89,000 $3,477,000 $3,419,000 101.7%
December 31, 1995....... 51,000 362,000 6,058,000 5,747,000 105.4%
December 31, 1996....... 811,000 1,044,000 4,505,000 4,272,000 105.5%
September 30, 1996...... 662,000 958,000 3,157,000 2,861,000 110.3%
September 30, 1997...... 2,419,000 1,517,000 5,604,000 6,506,000 86.1%
</TABLE>
S-6
<PAGE>
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE
OPERATIONS
(IN THOUSANDS)
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J
- -------------------------------------------------------------------------------------------------------------------------------
RESERVES
FOR UNPAID AMORTIZATION
DEFERRED CLAIMS AND DISCOUNT, CLAIMS AND OF DEFERRED PAID CLAIMS
POLICY CLAIM IF ANY, NET CLAIM ADJUSTMENT POLICY AND CLAIM
ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED INVESTMENT EXPENSES INCURRED ACQUISITION ADJUSTMENT
COSTS EXPENSES COLUMN C/4/ PREMIUMS PREMIUMS INCOME RELATED TO COSTS EXPENSES
(1) CURRENT (2) PRIOR
YEAR YEARS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31,
1994 * * * * $3,419 $ 663 $1,569 $(145) $151 $ 174
December 31,
1995 $ 91 $8,294 -- $ 753 5,747 1,346 3,099 (194) 425 665
December 31,
1996 122 8,914 -- 1,364 4,272 1,206 2,862 (806) 372 1,475
September 30,
1996 * * * * 2,861 944 1,925 (542) 240 1,285
September 30,
1997 146 10,735 -- 2,124 6,506 1,177 3,342 191 486 1,751
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
COLUMN K
- -------------------------------------------------------------------------------------------------------------------------------
PREMIUMS
WRITTEN
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
December 31,
1994 $3,762
December 31,
1995 6,130
December 31,
1996 4,617
September 30,
1996 3,299
September 30,
1997 7,018
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Information is related to the consolidated balance sheet. Information for
these periods are not presented in the accompanying financial statements.
- -------------------------------------------------------------------------------
S-7
<PAGE>
EXHIBIT 1.1
2,700,000 SHARES
(PLUS 405,000 SHARES TO COVER OVER-ALLOTMENTS, IF ANY)
AMERICAN SAFETY INSURANCE GROUP, LTD.
COMMON SHARES, PAR VALUE $0.01 PER SHARE
UNDERWRITING AGREEMENT
----------------------
__________________ , 1998
ADVEST, INC.
J.C. BRADFORD & CO.
HOEFER & ARNETT INCORPORATED
As Representatives (the "Representatives")
of the Several Underwriters
Named in Schedule I hereto
----------
c/o Advest, Inc.
90 State House Square
Hartford, CT 06103
Dear Sirs and Mesdames:
American Safety Insurance Group, Ltd., a Bermuda corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to sell
to the several Underwriters named in Schedule I hereto (the "Underwriters") an
----------
aggregate of 2,700,000 shares (the "Firm Shares") of the Company's common
shares, par value $0.01 per share (the "Common Shares"). In addition, in order
to cover over-allotments in the sale of the Firm Shares, the Underwriters may,
at the Underwriters' election and subject to the terms and conditions stated
herein, purchase ratably in proportion to the amounts set forth opposite their
respective names in Schedule I hereto, up to 405,000 additional Common Shares
----------
from the Company (such additional Common Shares, the "Optional Shares"). The
Firm Shares and the Optional Shares are referred to collectively as the
"Shares."
As part of the offering of the 2,700,000 Firm Shares contemplated by this
Agreement, Advest, Inc. ("Advest") has agreed to reserve, out of the Firm Shares
set forth opposite its name on Schedule I hereto, up to 135,000 Shares for sale
----------
to the Company's employees, officers and directors (collectively, the
"Participants"), as set forth in the Prospectus in the section entitled
"Underwriting" (the "Directed Share Program"). The Shares to be sold by Advest
pursuant to the Directed Share Program (the "Directed Shares") will be sold by
Advest pursuant to this Agreement at the public offering price. Any Directed
Shares not orally confirmed for purchase
<PAGE>
by any Participants by the end of the first business day after the date on which
this Agreement is executed will be offered to the public by Advest as set forth
in the Prospectus.
The Company, intending to be legally bound, hereby confirms its agreement
with the Underwriters as follows:
1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, each of the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-42749) with respect
to the Shares, including a prospectus subject to completion, has been filed by
the Company with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Act"), and one or more amendments
to such registration statement may have been so filed. After the execution of
this Agreement, the Company will file with the Commission either (i) if such
registration statement, as it may have been amended, has become effective under
the Act and information has been omitted therefrom in accordance with Rule 430A
under the Act, a prospectus in the form most recently included in an amendment
to such registration statement (or, if no such amendment shall have been filed,
in such registration statement) with such changes or insertions as are required
by Rule 430A or permitted by Rule 424(b) under the Act and as have been provided
to and approved by the Representatives, or (ii) if such registration statement,
as it may have been amended, has not become effective under the Act, an
amendment to such registration statement, including a form of prospectus, a copy
of which amendment has been provided to and approved by the Representatives
prior to the execution of this Agreement. As used in this Agreement, the term
"Registration Statement" means such registration statement, as amended at the
time when it was or is declared effective, together with any registration
statement filed by the Company pursuant to Rule 462(b) under the Act, including
(A) all financial statements, schedules and exhibits thereto, (B) all documents
(or portions thereof) incorporated by reference therein and (C) any information
omitted therefrom pursuant to Rule 430A under the Act and included in the
Prospectus (as hereinafter defined); the term "Preliminary Prospectus" means
each prospectus subject to completion included in such registration statement or
any amendment or post-effective amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement at the
time it was or is declared effective), including all documents (or portions
thereof) incorporated by reference therein; and the term "Prospectus" means the
prospectus first filed with the Commission pursuant to Rule 424(b) under the Act
or, if no prospectus is required to be so filed, such term means the prospectus
included in the Registration Statement, in either case, including all documents
(or portions thereof) incorporated by reference therein. As used herein, any
reference to any statement or information as being "made," "included,"
"contained," "disclosed" or "set forth" in any Preliminary Prospectus, a
Prospectus or any amendment or supplement thereto, or the Registration Statement
or any amendment thereto (or other similar references) shall refer both to
information and statements actually appearing in such document as well as
information and statements incorporated by reference therein.
(b) No order preventing or suspending the use of any Preliminary Prospectus
has been issued and no proceeding for that purpose has been instituted or
threatened
-2-
<PAGE>
by the Commission or the securities authority of any state or other
jurisdiction. If the Registration Statement has become effective under the Act,
no stop order suspending the effectiveness of the Registration Statement or any
part thereof has been issued and no proceeding for that purpose has been
instituted or threatened or, to the knowledge of the Company, contemplated by
the Commission or the securities authority of any state or other jurisdiction.
(c) When any Preliminary Prospectus was filed with the Commission it
contained all statements required to be stated therein in accordance with, and
complied in all material respects with the requirements of, the Act and the
rules and regulations of the Commission thereunder. When the Registration
Statement or any amendment thereto was or is declared effective, and at each
Time of Delivery (as hereinafter defined), it (i) contained and will contain all
statements required to be stated therein in accordance with, and complied or
will comply in all material respects with the requirements of, the Act and the
rules and regulations of the Commission thereunder and (ii) did not and will not
include any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading. When the
Prospectus or any amendment or supplement thereto is filed with the Commission
pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement
is not required to be so filed, when the Registration Statement or the amendment
thereto containing such amendment or supplement to the Prospectus was or is
declared effective) and at each Time of Delivery, the Prospectus, as amended or
supplemented at any such time, (i) contained and will contain all statements
required to be stated therein in accordance with, and complied or will comply in
all material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not and will not include
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (c) do not apply to statements or omissions made in
the Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through you specifically
for use therein. It is understood that the statements set forth in the
Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto (X) in the last paragraph of the cover page of
the Prospectus, (Y) on the inside cover page with respect to stabilization and
passive market making practices, and (Z) in the third, seventh and eighth
paragraphs and the list of Underwriters under the section entitled
"Underwriting," constitute the only written information furnished to the Company
by or on behalf of any Underwriter through you specifically for use in the
Registration Statement or any amendment thereto or the Prospectus and any
amendment or supplement thereto, as the case may be.
(d) There are no legal or governmental proceedings pending or threatened to
which the Company or any of its subsidiaries listed on Exhibit A hereto is a
party or to which any of the properties of the Company or any subsidiary is
subject that are required to be described in the Registration Statement or the
Prospectus and are not so described or any statutes, regulations, contracts or
other documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement that
are not described or filed as required.
-3-
<PAGE>
(e) Each of the Company and its subsidiaries has been duly incorporated, is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has full power and authority (corporate and
other) to own or lease its properties and conduct its business as described in
the Prospectus. The Company has full power and authority (corporate and other)
to enter into this Agreement and to perform its obligations hereunder. Each of
the Company and its subsidiaries is duly qualified to transact business as a
foreign corporation and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or conducts any business, so
as to require such qualification, except where the failure to so qualify would
not have a material adverse effect on the financial position, results of
operations or business of the Company and its subsidiaries taken as a whole.
(f) The Company's authorized, issued and outstanding capital stock is as
disclosed in the Prospectus. All of the issued shares of capital stock of the
Company have been duly authorized and validly issued, are fully paid and
nonassessable and conform to the descriptions of the Common Shares contained in
the Prospectus. None of the issued shares of capital stock of the Company or
any of its subsidiaries has been issued or is owned or held in violation of any
statutory (or to the knowledge of the Company, any other) preemptive rights of
shareholders, and no person or entity (including any holder of outstanding
shares of capital stock of the Company or its subsidiaries) has any statutory
(or to the knowledge of the Company, any other) preemptive or other rights to
subscribe for any of the Shares. None of the capital stock of the Company has
been issued in violation of applicable federal or state securities laws.
(g) All of the issued shares of capital stock of each subsidiary have been
duly authorized and validly issued, are fully paid and nonassessable and are
owned beneficially by the Company or one of its subsidiaries, free and clear of
all liens, security interests, pledges, charges, encumbrances, defects,
shareholders' agreements, voting agreements, proxies, voting trusts, equities or
claims of any nature whatsoever. Other than the subsidiaries listed on Exhibit
21 to the Registration Statement and on Exhibit A hereto and the equity
securities held in the investment portfolios of the Company and such
subsidiaries (the composition of which is not materially different than the
disclosures in the Prospectus as of specific dates), the Company does not own,
directly or indirectly, any capital stock or other equity securities of any
other corporation or any ownership interest in any partnership, joint venture or
other association.
(h) Except as disclosed in the Prospectus, there are no outstanding (i)
securities or obligations of the Company or any of its subsidiaries convertible
into or exchangeable for any capital stock of the Company or any of its
subsidiaries, (ii) warrants, rights or options to subscribe for or purchase from
the Company or any of its subsidiaries any such capital stock or any such
convertible or exchangeable securities or obligations or (iii) obligations of
the Company or any of its subsidiaries to issue any shares of capital stock, any
such convertible or exchangeable securities or obligations, or any such
warrants, rights or options.
(i) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) neither the Company nor any of
its subsidiaries has incurred any liabilities or obligations, direct or
contingent, or entered into any transactions, not in the ordinary course of
-4-
<PAGE>
business, that are material to the Company and its subsidiaries, (ii) the
Company has not purchased any of its outstanding capital stock or declared, paid
or otherwise made any dividend or distribution of any kind on its capital stock,
(iii) there has not been any change in the capital stock, long-term debt or
short-term debt of the Company or any of its subsidiaries and (iv) there has not
been any material adverse change, or any development involving a prospective
material adverse change, in or affecting the financial position, results of
operations or business of the Company and its subsidiaries, in each case other
than as disclosed in or contemplated by the Prospectus.
(j) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person, requiring the Company to
include such securities in the securities registered pursuant to the
Registration Statement (or any such right has been effectively waived) or
requiring the registration of any securities pursuant to any other registration
statement filed by the Company under the Act. Neither the filing of the
Registration Statement nor the offering or sale of Shares as contemplated by
this Agreement gives any security holder of the Company any rights for or
relating to the registration of any Common Shares or any other capital stock of
the Company, except such as have been satisfied or waived.
(k) Neither the Company nor any of its subsidiaries is, or with the giving
of notice or passage of time or both would be, in violation of its charter or
bylaws or in default under any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which the Company or any of
its subsidiaries is a party or to which any of their respective properties or
assets are subject.
(l) The Company and its subsidiaries have good and marketable title in fee
simple to all real property, if any, and good title to all personal property
owned by them, in each case free and clear of all liens, security interests,
pledges, charges, encumbrances, mortgages and defects, except such as are
disclosed in the Prospectus or such as would not have a material adverse effect
on the financial position, results of operations or business of the Company and
its subsidiaries taken as a whole and do not interfere with the use made or
proposed to be made of such property by the Company and its subsidiaries; and
any real property and buildings held under lease by the Company or any of its
subsidiaries are held under valid, subsisting and enforceable leases, with such
exceptions as are disclosed in the Prospectus or are not material and do not
interfere with the use made or proposed to be made of such property and
buildings by the Company or any subsidiary.
(m) The Company does not require any consent, approval, authorization,
order or declaration of or from, or registration, qualification or filing with,
any court or governmental or regulatory agency or body in connection with the
sale of the Shares or the consummation of the transactions contemplated by this
Agreement, except the registration of
-5-
<PAGE>
the Shares under the Act (which, if the Registration Statement is not effective
as of the time of execution hereof, shall be obtained as provided in this
Agreement) and of the Common Shares under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and such as may be required by the National
Association of Securities Dealers, Inc. (the "NASD") or under state securities
or blue sky laws in connection with the offer, sale and distribution of the
Shares by the Underwriters.
(n) Other than as disclosed in the Prospectus, there is no litigation,
arbitration, claim, proceeding (formal or informal) or investigation (including
without limitation, any insurance regulatory proceeding) pending or, to the
Company's knowledge, threatened in which the Company or any of its subsidiaries
is a party or of which any of their respective properties or assets are the
subject which, if determined adversely to the Company or any subsidiary, would
individually or in the aggregate have a material adverse effect on the financial
position, results of operations or business of the Company and its subsidiaries
taken as a whole. Neither the Company nor any subsidiary is in violation of, or
in default with respect to, any law, statute, rule, regulation, order, judgment
or decree, except as described in the Prospectus or such as do not and will not
individually or in the aggregate have a material adverse effect on the financial
position, results of operations or business of the Company and its subsidiaries
taken as a whole, and neither the Company nor any subsidiary is required to take
any action in order to avoid any such violation or default.
(o) KPMG Peat Marwick LLP, which has certified certain financial statements
of the Company and its consolidated subsidiaries included in the Registration
Statement and the Prospectus, are independent certified public accountants as
required by the Act, the Exchange Act and the respective rules and regulations
of the Commission thereunder.
(p) The consolidated financial statements and schedules (including the
related notes) of the Company and its consolidated subsidiaries included or
incorporated by reference in the Registration Statement, the Prospectus and/or
any Preliminary Prospectus were prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved and
fairly present the financial position and results of operations of the Company
and its subsidiaries, on a consolidated basis, at the dates and for the periods
presented. The selected financial data set forth under the captions "Summary
Consolidated Financial Data," "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Prospectus fairly present, on the basis stated in the
Prospectus, the information included therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement. The supporting notes and schedules included in the
Registration Statement, the Prospectus and any Preliminary Prospectus fairly
state in all material respects the information required to be stated therein in
relation to the financial statements taken as a whole. Any unaudited interim
consolidated financial statements included or incorporated by reference in the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of Rule 10-01 of Regulation S-X under the
Act.
-6-
<PAGE>
(q) This Agreement has been duly authorized, executed and delivered by the
Company and, assuming due execution by the Representatives, constitutes the
valid and binding agreement of the Company, enforceable against the Company in
accordance with its terms, subject, as to enforcement, to applicable bankruptcy,
insolvency, reorganization and moratorium laws and other laws relating to or
affecting the enforcement of creditors' rights generally and to general
equitable principles and except as the enforceability of rights to indemnity and
contribution under this Agreement may be limited under applicable securities
laws or the public policy underlying such laws.
(r) The sale of the Shares and the performance of this Agreement and the
consummation of the transactions herein contemplated will not (with or without
the giving of notice or the passage of time or both) (i) conflict with or
violate any term or provision of the charter or bylaws or other organizational
documents of the Company or any subsidiary, (ii) result in a breach or violation
of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement, lease or other agreement or
instrument to which the Company or any subsidiary is a party or to which any of
their respective properties or assets is subject, (iii) conflict with or violate
any law, statute, rule or regulation or any order, judgment or decree of any
court or governmental agency or body having jurisdiction over the Company or any
subsidiary or any of their respective properties or assets or (iv) result in a
breach, termination or lapse of the corporate power and authority of the Company
or any subsidiary to own or lease and operate their respective assets and
properties and conduct their respective business as described in the Prospectus.
(s) When the Shares to be sold by the Company hereunder have been duly
delivered against payment therefor as contemplated by this Agreement, the Shares
will be validly issued, fully paid and nonassessable, and the holders thereof
will not be subject to personal liability solely by reason of being such
holders. The certificates representing the Shares are in proper legal form
under, and conform in all respects to the requirements of, the country of
Bermuda and the requirements of the Nasdaq National Market.
(t) The Company has not distributed and will not distribute any offering
material in connection with the offering and sale of the Shares other than the
Registration Statement, a Preliminary Prospectus, the Prospectus and other
material, if any, permitted by the Act.
(u) Neither the Company nor any of its officers, directors or affiliates
has (i) taken, directly or indirectly, any action designed to cause or result
in, or that has constituted or might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares or (ii) since the filing of the
Registration Statement (A) sold, bid for, purchased or paid anyone any
compensation for soliciting purchases of, the Shares or (B) paid or agreed to
pay to any person any compensation for soliciting another to purchase any other
securities of the Company.
(v) The operations of the Company and its subsidiaries with respect to any
real property currently leased or owned or by any means controlled by the
Company or any
-7-
<PAGE>
subsidiary (the "Real Property") are in compliance in all material respects with
all federal, state, and local laws, ordinances, rules, and regulations relating
to occupational health and safety and the environment (collectively, "Laws"),
and the Company and its subsidiaries have not violated any Laws in a way which
would have a material adverse effect on the financial position, results of
operations or business of the Company and its subsidiaries taken as a whole.
Except as disclosed in the Prospectus, there is no pending or, to the Company's
knowledge, threatened claim, litigation or any administrative agency proceeding,
nor has the Company or any subsidiary received any written or oral notice from
any governmental entity or third party, that: (i) alleges a violation of any
Laws by the Company or any subsidiary or (ii) alleges the Company or any
subsidiary is a liable party under the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. (S) 9601 et seq. or any state
------
superfund law.
(w) Neither the Company nor any subsidiary owns or has the right to use
patents, patent applications, trademarks, trademark applications, trade names,
service marks, copyrights, franchises, trade secrets, proprietary or other
confidential information and intangible properties and assets (collectively,
"Intangibles"), the loss of any of which would have a material adverse effect on
the financial position, results of operations or business of the Company and its
subsidiaries taken as a whole; and, to the best knowledge of the Company,
neither the Company nor any subsidiary has infringed or is infringing, and
neither the Company nor any subsidiary has received notice of infringement with
respect to, asserted Intangibles of others.
(x) Each of the Company and its subsidiaries makes and keeps accurate books
and records reflecting its assets and maintains internal accounting controls
which provide reasonable assurance that (i) transactions are executed in
accordance with management's authorization, (ii) transactions are recorded as
necessary to permit preparation of the Company's consolidated financial
statements in accordance with generally accepted accounting principles and to
maintain accountability for the assets of the Company, (iii) access to the
assets of the Company and each of its subsidiaries is permitted only in
accordance with management's authorization, and (iv) the recorded accountability
for assets of the Company and each of its subsidiaries is compared with existing
assets at reasonable intervals and appropriate action is taken with respect to
any differences.
(y) The Company and its subsidiaries have filed all foreign, federal, state
and local tax returns that are required to be filed by them and have paid all
taxes shown as due on such returns as well as all other taxes, assessments and
governmental charges that are due and payable; and no material deficiency with
respect to any such return has been assessed or proposed.
(z) Except for such plans that are expressly disclosed in the Prospectus,
the Company and its subsidiaries do not maintain, contribute to or have any
material liability with respect to any employee benefit plan, profit sharing
plan, employee pension benefit plan, employee welfare benefit plan, equity-based
plan or deferred compensation plan or arrangement ("Plans") that are subject to
the provisions of the Employee Retirement Income Security Act of 1974, as
amended, or the rules and regulations thereunder ("ERISA"). All Plans are in
compliance in all material respects with all applicable laws, including but not
limited to
-8-
<PAGE>
ERISA and the Internal Revenue Code of 1986, as amended (the "Code"), and have
been operated and administered in all material respects in accordance with their
terms. No Plan is a defined benefit plan or multi-employer plan. The Company
does not provide retiree life and/or retiree health benefits or coverage for any
employee or any beneficiary of any employee after such employee's termination of
employment, except as required by Section 4980B of the Code or under a Plan
which is intended to be "qualified" under Section 401(a) of the Code. No
material liability has been, or could reasonably be expected to be, incurred
under Title IV of ERISA or Section 412 of the Code by any entity required to be
aggregated with the Company or any of the Subsidiaries pursuant to Section
4001(b) of ERISA and/or Section 414(b) or (c) of the Code (and the regulations
promulgated thereunder) with respect to any "employee pension benefit plan"
which is not a Plan. As used in this subsection, the terms "defined benefit
plan," "employee benefit plan," "employee pension benefit plan," "employee
welfare benefit plan" and "multiemployer plan" shall have the respective
meanings assigned to such terms in Section 3 of ERISA.
(aa) No labor dispute exists with the Company's or any subsidiary's
employees, and no such labor dispute is threatened. The Company has no
knowledge of any existing or threatened labor disturbance by the employees of
any of its principal agents, suppliers, contractors or customers that would have
a material adverse effect on the financial position, results of operations or
business of the Company and its subsidiaries taken as a whole.
(bb) The Company and its subsidiaries have received all permits, licenses,
franchises, authorizations, registrations, qualifications and approvals
(collectively, "Permits") of governmental or regulatory authorities (including,
without limitation, state and other insurance regulatory authorities) as may be
required of them to own their properties and conduct their businesses in the
manner described in the Prospectus, subject to such qualifications as may be set
forth in the Prospectus; and the Company and its subsidiaries have fulfilled and
performed all of their material obligations with respect to such Permits, and no
event has occurred which allows or, after notice or lapse of time or both, would
allow revocation or termination thereof or result in any other material
impairment of the rights of the holder of any such Permit, subject in each case
to such qualification as may be set forth in the Prospectus; and, except as
described in the Prospectus, such Permits contain no restrictions that
materially affect the ability of the Company and its subsidiaries to conduct
their businesses. No insurance regulatory agency or body has issued any order
or decree impairing, restricting or prohibiting the payment of dividends by any
of the Company's subsidiaries to the Company.
(cc) The Company and each of its subsidiaries has filed, or has had filed
on its behalf, on a timely basis, all materials, reports, documents and
information, including but not limited to annual reports and reports of
examination with each applicable insurance regulatory authority, board or
agency, which are required to be filed by it, except where the failure to have
timely filed such materials, reports, documents and information would not have a
material adverse effect on the financial position, results of operations or
business of the Company and its subsidiaries taken as a whole.
-9-
<PAGE>
(dd) Neither the Company, nor any subsidiary is an "investment company" or
a company "controlled" by an investment company as such terms are defined in
Sections 3(a) and 2(a)(9), respectively, of the Investment Company Act of 1940,
as amended (the "Investment Company Act"), and, if the Company or any subsidiary
conducts its business as set forth in the Registration Statement and the
Prospectus (including the application of the net proceeds of the public offering
as described under the section entitled "Underwriting" in the Registration
Statement and the Prospectus), will not become an "investment company" and will
not be required to register under the Investment Company Act.
(ee) The Registration Statement, the Prospectus, the Preliminary Prospectus
and any amendment or supplement thereto comply with any applicable laws or
regulations of foreign jurisdictions in which the Prospectus or Preliminary
Prospectus, as amended or supplemented, are distributed in connection with the
Directed Share Program; and no authorization, approval, consent, license, order,
registration or qualification of or with any government, governmental
instrumentality or court, other than such as have been obtained, is necessary
under the securities laws and regulations of foreign jurisdictions in which the
Directed Shares are offered outside the United States.
(ff) The Company has not offered, or caused the Underwriters to offer,
Shares to any person pursuant to the Directed Share Program with the specific
intent to unlawfully influence (i) a customer or supplier of the Company to
alter the customer's or supplier's level or type of business with the Company,
or (ii) a trade journalist or publication to write or publish favorable
information about the Company or its products.
(gg) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as management
of the Company deems prudent and in the best interests of the Company and its
shareholders; and the Company has no reason to believe that it will not be able
to renew its existing coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a comparable cost.
(hh) Each of the Company and its subsidiaries hold all licenses,
certificates and permits from insurance departments and all other governmental
authorities (collectively, the "Insurance Licenses") necessary or desirable to
conduct its business as presently conducted or as the Company presently
contemplates it will conduct its business in the future. Each of the Company
and its subsidiaries has fulfilled and performed all material obligations
necessary to maintain its Insurance Licenses, and no event or events have
occurred which would result in the impairment, modification, termination or
revocation of such Insurance Licenses. Each of the Company and its subsidiaries
has filed all material reports, registrations and statements, together with any
amendments required to be made with respect thereto, that they were required to
file with any insurance commission, agency or authority. As of their respective
dates, such reports, registration and statements complied in all material
respects with all the laws, statutes, rules and regulations of each such
jurisdiction, including, without limitation, those rules and regulations
promulgated by the applicable insurance commission, agency or authority in any
such state.
(ii) Except as set forth in the Prospectus, no loss experience has occurred
that would require or make it necessary or appropriate for the Company or its
subsidiaries to change, alter, modify or amend the Company's or its
subsidiaries' methodology or assumptions relating to losses.
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(jj) All reinsurance treaties, contracts, agreements, and arrangements to
which the Company or any of its subsidiaries is a party and as to which any of
them reported recoverables, premiums due or other amounts in its financial
statements are in full force and effect, and neither the Company nor any of its
subsidiaries is in violation of, or in default in the performance, observance or
fulfillment of, any material obligation, agreement, covenant or condition
contained therein, which violation or default would, singularly or in the
aggregate, have a material adverse effect on the financial condition, results of
operations or business of the Company and its subsidiaries taken as a whole.
Neither the Company nor any of its subsidiaries has any reason to believe that
any other party to such treaties, contracts, agreements or arrangements will not
or cannot perform in any material respect its duties or obligations under such
treaty, contract, agreement, or arrangement, except where the failure to perform
would not have a material adverse effect on the financial condition, results of
operations or business of the Company and its subsidiaries taken as a whole.
2. Purchase and Sale of Shares.
---------------------------
(a) Subject to the terms and conditions herein set forth, the Company
agrees to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at a purchase price of
________ Dollars and ________ Cents ($_____) per share (the "Per Share Price"),
the number of Firm Shares (to be adjusted by you so as to eliminate fractional
shares) determined by multiplying the aggregate number of Firm Shares to be sold
by the Company as set forth in the first paragraph of this Agreement by a
fraction, the numerator of which is the aggregate number of Firm Shares to be
purchased by such Underwriter as set forth opposite the name of such Underwriter
in Schedule I hereto, and the denominator of which is the aggregate number of
----------
Firm Shares to be purchased by the several Underwriters hereunder.
(b) The Company hereby grants to the Underwriters the right to purchase at
their election in whole or in part from time to time up to 405,000 Optional
Shares, at the Per Share Price, for the sole purpose of covering over-allotments
in the sale of the Firm Shares. Any such election to purchase Optional Shares
may be exercised by written notice from the Representatives to the Company,
given from time to time within a period of 30 calendar days after the date of
this Agreement and setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
hereinafter defined) or, unless the Representatives otherwise agree in writing,
earlier than two or later than ten business days after the date of such notice.
In the event the Underwriters elect to purchase all or a portion of the Optional
Shares, the Company agrees to furnish or cause to be furnished to the
Representatives the certificates, letters and opinions, and to satisfy all
conditions, set forth in Section 7 hereof at each Subsequent Time of Delivery
(as hereinafter defined).
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(c) In making this Agreement, each Underwriter is contracting severally and
not jointly, and except as provided in Sections 2(b) and 9 hereof, the agreement
of each Underwriter is to purchase only that number of shares specified with
respect to that Underwriter in Schedule I hereto. No Underwriter shall be under
----------
any obligation to purchase any Optional Shares prior to an exercise of the
option with respect to such Shares granted pursuant to Section 2(b) hereof.
3. Offering by the Underwriters. Upon the authorization by the
----------------------------
Representatives of the release of the Shares, the several Underwriters propose
to offer the Shares for sale upon the terms and conditions disclosed in the
Prospectus.
4. Delivery of Shares; Closing. Certificates in definitive form for the
---------------------------
Shares to be purchased by each Underwriter hereunder, and in such denominations
and registered in such names as the Representatives may request upon at least 48
hours' prior notice to the Company, shall be delivered by or on behalf of the
Company to the Representatives for the account of such Underwriter, against
payment by such Underwriter on its behalf of the purchase price therefor by wire
transfer of immediately available funds to such accounts as the Company shall
designate in writing. The closing of the sale and purchase of the Shares shall
be held at the offices of Alston & Bird LLP, One Atlantic Center, 1201 West
Peachtree Street, Atlanta, Georgia, except that physical delivery of such
certificates shall be made at the office of The Depository Trust Company, 55
North Water Street, New York, New York 10041. The time and date of such
delivery and payment shall be, with respect to the Firm Shares, at 10:00 a.m.,
New York, New York time, on the third (or if the Firm Shares are priced, as
contemplated by Rule 15c6-1(c) of the Commission, after 4:30 p.m., Washington,
D.C. time, the fourth) full business day after this Agreement is executed or at
such other time and date as the Representatives and the Company may agree upon
in writing, and, with respect to the Optional Shares, at 10:00 a.m., New York,
New York time, on the date specified by the Representatives in the written
notice given by the Representatives of the Underwriters' election to purchase
all or part of such Optional Shares, or at such other time and date as the
Representatives and the Company may agree upon in writing. Such time and date
for delivery of the Firm Shares is herein called the "First Time of Delivery,"
such time and date for delivery of any Optional Shares, if not the First Time of
Delivery, is herein called a "Subsequent Time of Delivery," and each such time
and date for delivery is herein called a "Time of Delivery." The Company will
make such certificates available for checking and packaging at least 24 hours
prior to each Time of Delivery at the office of The Depository Trust Company, 55
North Water Street, New York, New York 10041 or at such other location specified
by you in writing at least 48 hours prior to such Time of Delivery.
5. Covenants of the Company. The Company covenants and agrees with each
------------------------
of the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective prior to the execution and delivery of this
Agreement, to become
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effective. The Company will comply with the provisions of and make all
requisite filings with the Commission pursuant to Rules 424, 430A, 434 and
462(b), if relied upon by the Company, and will notify you promptly in writing
of all such filings. The Company will file timely all reports and any
definitive proxy or information statements required to be filed by the Company
with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act.
(b) The Company will not file with the Commission the Prospectus or the
amendment referred to in Section 1(a) hereof, any amendment or supplement to the
Prospectus or any amendment to the Registration Statement unless you have
received a reasonable period of time to review any such proposed amendment or
supplement and consented to the filing thereof and will use its best efforts to
cause any such amendment to the Registration Statement to be declared effective
as promptly as possible. Upon the request of the Representatives or counsel for
the Underwriters, the Company will promptly prepare and file with the
Commission, in accordance with the rules and regulations of the Commission, any
amendments to the Registration Statement or amendments or supplements to the
Prospectus that may be necessary or advisable in connection with the
distribution of the Shares by the several Underwriters and will use its best
efforts to cause any such amendment to the Registration Statement to be declared
effective as promptly as possible. If required, the Company will file any
amendment or supplement to the Prospectus with the Commission in the manner and
within the time period required by Rule 424(b) under the Act. The Company will
advise the Representatives, promptly after receiving notice thereof, of the time
when the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectus or any amendment or supplement thereto has
been filed and will provide evidence to the Representatives of each such filing
or effectiveness.
(c) The Company will advise the Representatives promptly after receiving
notice or obtaining knowledge of (i) when any post-effective amendment to the
Registration Statement is filed with the Commission, (ii) the receipt of any
comments from the Commission concerning the Registration Statement, (iii) when
any post-effective amendment to the Registration Statement becomes effective, or
when any supplement to the Prospectus or any amended Prospectus has been filed,
(iv) the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any part thereof or any order
preventing or suspending the use of any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, (v) the suspension of the qualification
of the Shares for offer or sale in any jurisdiction or of the initiation or
threatening of any proceeding for any such purpose or (vi) any request made by
the Commission or any securities authority of any other jurisdiction for
amending the Registration Statement, for amending or supplementing the
Prospectus or for additional information. The Company will use its best efforts
to prevent the issuance of any such stop order or suspension and, if any such
stop order or suspension is issued, to obtain the withdrawal thereof as promptly
as possible.
(d) If the delivery of a prospectus relating to the Shares is required
under the Act at any time prior to the expiration of nine months after the date
of the Prospectus and if at such time any events have occurred as a result of
which the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any
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<PAGE>
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, or if for any
reason it is necessary during such same period to amend or supplement the
Prospectus, the Company will promptly notify the Representatives and upon their
request (but at the Company's expense) prepare and file with the Commission an
amendment or supplement to the Prospectus that corrects such statement or
omission or effects such compliance and will furnish without charge to each
Underwriter and to any dealer in securities as many copies of such amended or
supplemented Prospectus as the Representatives may from time to time reasonably
request.
(e) The Company promptly from time to time will take such action as the
Representatives may reasonably request to qualify the Shares for offering and
sale under the securities or blue sky laws of such jurisdictions as the
Representatives may request and will continue such qualifications in effect for
as long as may be necessary to complete the distribution of the Shares, provided
that in connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process in any
jurisdiction. The Company will file such statements and reports as may be
required by the laws of each jurisdiction in which the Shares have been
qualified as above provided.
(f) The Company will promptly provide the Representatives, without charge,
(i) four manually executed copies of the Registration Statement as originally
filed with the Commission and of each amendment thereto, including all exhibits
and all documents or information incorporated by reference therein, (ii) for
each other Underwriter, a conformed copy of the Registration Statement as
originally filed and of each amendment thereto, without exhibits but including
all documents or information incorporated by reference therein and (iii) so long
as a prospectus relating to the Shares is required to be delivered under the
Act, as many copies of each Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto as the Representatives may reasonably request.
(g) As soon as practicable, but not later than the Availability Date (as
defined below), the Company will make generally available to its security
holders an earnings statement of the Company and its subsidiaries, if any,
covering a period of at least 12 months beginning after the effective date of
the Registration Statement (which need not be audited) complying with Section
11(a) of the Act and the rules and regulations thereunder. "Availability Date"
means the 45th day after the end of the fourth fiscal quarter following the
fiscal quarter in which the Registration Statement went effective, except that
if such fourth fiscal quarter is the last quarter of the Company's fiscal year,
"Availability Date" means the 90th day after the end of such fourth fiscal
quarter.
(h) During the period beginning on the date hereof and continuing to and
including the date 180 days after the date of the Prospectus, the Company will
not, and will cause its officers and directors not to, without the prior written
consent of the Representatives (which consent shall not be unreasonably
withheld), (i) sell, offer to sell, solicit an offer to buy, contract to sell,
encumber, distribute, pledge, grant any option for the sale of, or otherwise
transfer or dispose of, directly or indirectly, in one or a series of
transactions, any Common Shares or any securities that are substantially similar
to, convertible or exercisable into or
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<PAGE>
exchangeable for Common Shares or (ii) enter into any swap or other agreement or
any transaction that transfers, in whole or in part, the economic consequences
of ownership of Common Shares whether any such swap or other agreement is to be
settled by delivery of Common Shares, other securities, cash or otherwise;
except for the sale of the Shares hereunder and except for the grant to
employees, in the ordinary course of business, of stock options to purchase
Common Shares which are not exercisable within such 180 days.
(i) During the period of three years after the effective date of the
Registration Statement, the Company will furnish to the Representatives and,
upon request, to each of the other Underwriters, without charge, (i) copies of
all reports or other communications (financial or other) furnished to
shareholders and (ii) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission, the NASD or any
national securities exchange.
(j) Prior to the termination of the underwriting syndicate contemplated by
this Agreement, neither the Company nor any of its officers, directors or
affiliates will (i) take, directly or indirectly, any action designed to cause
or to result in, or that might reasonably be expected to cause or result in, the
stabilization or manipulation of the price of any security of the Company or
(ii) sell, bid for, purchase or pay anyone any compensation for soliciting
purchases of, the Shares.
(k) In case of any event, at any time within the period during which a
prospectus is required to be delivered under the Act, as a result of which any
Preliminary Prospectus or the Prospectus, as then amended or supplemented, would
contain an untrue statement of a material fact, or omit to state any material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, or, if it is necessary
at any time to amend any Preliminary Prospectus or the Prospectus to comply with
the Act or any applicable securities or blue sky laws, the Company promptly will
prepare and file with the Commission, and any applicable state securities
commission, an amendment, supplement or document that will correct such
statement or omission or effect such compliance and will furnish to the several
Underwriters such number of copies of such amendment(s), supplement(s) or
document(s) as the Representatives may reasonably request. For purposes of this
subsection (k), the Company will provide such information to the
Representatives, the Underwriters' counsel and counsel to the Company as shall
be necessary to enable such persons to consult with the Company with respect to
the need to amend or supplement the Registration Statement, any Preliminary
Prospectus or the Prospectus or file any document, and shall furnish to the
Representatives and the Underwriters' counsel such further information as each
may from time to time reasonably request.
(l) The Company will use its best efforts to obtain, and thereafter
maintain, the listing of the Common Shares (including, without limitation, the
Shares) on the Nasdaq National Market.
(m) The Company will apply the net proceeds of the offering in the manner
set forth under "Use of Proceeds" in the Prospectus.
(n) In connection with the Directed Share Program, the Company will ensure
that the Directed Shares will be restricted, to the extent required by the NASD
or the NASD rules and regulations, including but not limited to the "Free-Riding
and Withholding" Interpretation, from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. Advest will notify the Company as
to which Participants will need to be so restricted. At the request of Advest,
the Company will direct the transfer agent to place stop transfer restrictions
upon such securities for such period of time.
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<PAGE>
6. Expenses.
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The Company will pay all costs and expenses incident to the performance of
the obligations of the Company under this Agreement, whether or not the
transactions contemplated hereby are consummated or this Agreement is terminated
pursuant to Section 10 hereof, including, without limitation, all costs and
expenses incident to (i) the printing of and mailing expenses associated with
the Registration Statement, the Preliminary Prospectus and the Prospectus and
any amendments or supplements thereto, this Agreement, the Agreement among
Underwriters, the Underwriters' Questionnaire submitted to each of the
Underwriters by the Representatives in connection herewith, the power of
attorney executed by each of the Underwriters in favor of Advest, Inc. in
connection herewith, the Dealer Agreement and related documents (collectively,
the "Underwriting Documents") and the preliminary Blue Sky memorandum relating
to the offering prepared by Alston & Bird LLP, counsel to the Underwriters
(collectively with any supplement thereto, the "Preliminary Blue Sky
Memorandum"); (ii) the fees, disbursements and expenses of the Company's counsel
and accountants in connection with the registration of the Shares under the Act
and all other expenses in connection with the preparation and, if applicable,
filing of the Registration Statement (including all amendments thereto), any
Preliminary Prospectus, the Prospectus and any amendments and supplements
thereto, the Underwriting Documents and the Preliminary Blue Sky Memorandum;
(iii) the delivery of copies of the foregoing documents to the Underwriters;
(iv) the filing fees of the Commission and the NASD relating to the Shares and
the fees and disbursements of counsel for the Underwriters in connection with
filings with the NASD; (v) the qualification of the Shares for offering and sale
under state securities and blue sky laws, including the fees and disbursements
of counsel for the Underwriters (and local counsel therefor) relating thereto;
provided, however, that the aggregate fees of counsel for the Underwriters with
regard to the matters set forth in clause (iv) and this clause (v) shall not
exceed $7,500; (vi) the preparation, issuance and delivery to the Underwriters
of any certificates evidencing the Shares, including transfer agent's and
registrar's fees; (vii) any listing of the Shares on Nasdaq National Market;
(viii) any expenses for travel, lodging and meals incurred by the Company and
any of its officers, directors and employees in connection with any meetings
with prospective investors in the Shares; (ix) the costs of advertising the
offering, including, without limitation, with respect to the placement of
"tombstone" advertisements in publications selected by the Representatives; (x)
all other costs and expenses reasonably incident to the performance of the
Company's obligations hereunder that are not otherwise specifically provided for
in this Section 6; and (xi) any fees and disbursements incurred by counsel for
the Underwriters and all stamp duties, similar taxes or duties or
other taxes, if any, incurred by the Underwriters in connection with the
Directed Share Program.
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7. Conditions of the Underwriters' Obligations. The obligations of the
-------------------------------------------
Underwriters hereunder to purchase and pay for the Shares to be delivered at
each Time of Delivery shall be subject, in their discretion, to the accuracy of
the representations and warranties of the Company contained herein as of the
date hereof and as of such Time of Delivery, to the accuracy of the statements
of the Company's officers made pursuant to the provisions hereof, to the
performance by the Company of its covenants and agreements hereunder, and to the
following additional conditions precedent:
(a) If the registration statement as amended to date has not become
effective prior to the execution of this Agreement, such registration statement
shall have been declared effective not later than 11:00 a.m., Hartford,
Connecticut time, on the date of this Agreement or such later date and/or time
as shall have been consented to by you in writing. All filings required by
Rules 424, 430A, 434 and 462(b), if relied upon by the Company, shall have been
made; no stop order suspending the effectiveness of the Registration Statement
or any part thereof shall have been issued and no proceedings for that purpose
shall have been instituted, threatened or, to the knowledge of the Company and
the Representatives, contemplated by the Commission; the NASD, upon review of
the terms of the public offering of the Shares, shall not have objected thereto
or to the Underwriters' participation in the public offering; and all requests
for additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction.
(b) The Representatives shall have received a copy of an executed lock-up
agreement from each of the Company's officers, directors and holders of Common
Shares.
(c) You shall have received an opinion, dated such Time of Delivery, of
[Fred J. Pinckney, Executive Vice President and General Counsel of the Company],
in form and substance satisfactory to you and your counsel, to the effect that:
(i) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of Bermuda and has the corporate
power and authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and to enter into
this Agreement and perform its obligations hereunder. The Company is duly
qualified to transact business as a foreign corporation and is in good standing
under the laws of each other jurisdiction in which it owns or leases property,
or conducts any business, so as to require such qualification, except where the
failure to so qualify would not have a material adverse effect on the financial
position, results of operations or business of the Company and its subsidiaries
taken as a whole.
(ii) Each of the Company's subsidiaries is validly existing as a
corporation in good standing under the laws of its jurisdiction of incorporation
and has the corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement and the
Prospectus. Each subsidiary is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of each other jurisdiction in
which it owns or leases property, or conducts any business, so as to require
such qualification, except where the failure to so qualify would not have a
material adverse effect on the financial position, results of operations or
business of the Company and its subsidiaries taken as a whole.
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(iii) The Company's authorized, issued and outstanding capital stock is as
disclosed in the Prospectus. All of the issued shares of capital stock of the
Company have been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description of the Common Shares contained in
the Prospectus. None of the issued Common Shares of the Company or capital
stock of any of its subsidiaries has been issued or is owned or held in
violation of any statutory (or any other) preemptive rights of shareholders, and
no person or entity (including any holder of outstanding Common Shares of the
Company or capital stock of its subsidiaries) has any statutory (or any other)
preemptive or other rights to subscribe for any of the Shares.
(iv) All of the issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable, and are owned beneficially by the Company or its subsidiaries,
free and clear of all liens, security interests, pledges, charges, encumbrances,
shareholders' agreements, voting agreements, proxies, voting trusts, defects,
equities or claims of any nature whatsoever (collectively, "Encumbrances"),
including, without limitation, any Encumbrance arising or resulting from any
indenture, mortgage, deed of trust, loan agreement, lease or other agreement of
or entered into by the Company or its subsidiaries. Other than the subsidiaries
listed on Exhibit 21 to the Registration Statement and on Exhibit A hereto and
the equity securities held in the investment portfolios of the Company and such
subsidiaries, the Company does not own, directly or indirectly, any capital
stock or other equity securities of any other corporation or any ownership
interest in any partnership, joint venture or other association.
(v) Except as disclosed in the Prospectus, there are no outstanding (A)
securities or obligations of the Company or any of its subsidiaries convertible
into or exchangeable for any capital stock of the Company or any subsidiary, (B)
warrants, rights or options to subscribe for or purchase from the Company or any
of its subsidiaries any such capital stock or any such convertible or
exchangeable securities or obligations or (C) obligations of the Company or any
of its subsidiaries to issue any shares of capital stock, any such convertible
or exchangeable securities or obligations, or any such warrants, rights or
options.
(vi) When the Shares to be sold by the Company have been duly delivered
against payment therefor as contemplated by this Agreement, the Shares will be
duly authorized, validly issued and fully paid and nonassessable, the holders
thereof will not be subject to personal liability solely by reason of being such
holders and the Shares will conform to the description of the Common Shares
contained in the Prospectus; the certificates evidencing the Shares will comply
with all applicable requirements of Bermuda law.
(vii) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person, requiring the Company to
include such securities in the securities registered pursuant to the
Registration Statement (or any such right has been effectively waived) or
requiring the registration of any securities pursuant to any other registration
statement filed by the Company under the Act.
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(viii) Neither the Company nor any of its subsidiaries is, or with the
giving of notice or passage of time or both, would be, in violation of its
charter or bylaws, in each case as amended to date, or in default in any
material respect under any indenture, mortgage, deed of trust, loan agreement,
lease or other agreement or instrument to which the Company or any of its
subsidiaries is a party or to which any of their respective properties or assets
is subject.
(ix) The sale of the Shares being sold at such Time of Delivery and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not conflict with or violate any provision of the charter or
bylaws of the Company or any of its subsidiaries, in each case as amended to
date, or any existing law, statute, rule or regulation, or conflict with or
(with or without the giving of notice or the passage of time or both) result in
a breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which the Company or any of its subsidiaries is
a party or to which any of their respective properties or assets is subject, or
conflict with or violate any order, judgment or decree of any court or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their respective properties or assets.
(x) No consent, approval, authorization, order or declaration of or from,
or registration, qualification or filing with, any court or governmental or
regulatory agency or body is required for the sale of the Shares or the
consummation of the transactions contemplated by this Agreement, except such as
have been or will have been obtained and are or will be in effect.
(xi) Other than as disclosed in or contemplated by the Prospectus, there is
no litigation, arbitration, claim, proceeding (formal or informal) or
investigation pending or threatened, in which the Company or any of its
subsidiaries is a party or of which any of their respective properties or assets
is the subject which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material adverse
effect on the financial position, results of operations or business of the
Company and its subsidiaries taken as a whole; and neither the Company nor any
of its subsidiaries is in violation of, or in default with respect to, any law,
statute, rule, regulation, order, judgment or decree, except as described in the
Prospectus or such as do not and will not individually or in the aggregate have
a material adverse effect on the financial position, results of operations or
business of the Company and its subsidiaries taken as a whole, nor is the
Company or any of its subsidiaries required to take any action in order to avoid
any such violation or default.
(xii) The statements in the Prospectus under "Business -- American Safety
Risk Retention Group, Inc. -- Regulation," "Business -- Legal Proceedings,"
"Regulatory Matters," "Description of Capital Stock," "Shares Eligible for
Future Sale," "Certain Bermuda Law Considerations" and "Certain Tax
Considerations--Taxation of American Safety and its Bermuda Subsidiary--Bermuda"
and "--Tax Treatment of Shareholders--Bermuda" have been reviewed by such
counsel, and insofar as they refer to statements of law, descriptions of
statutes, licenses, rules or regulations, or legal conclusions, are correct in
all material respects.
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<PAGE>
(xiii) This Agreement has been duly authorized, executed and delivered by
the Company and, assuming due execution by the Representatives, constitutes the
valid and binding agreement of the Company enforceable against the Company in
accordance with its terms, subject, as to enforcement, to applicable bankruptcy,
insolvency, reorganization and moratorium laws and other laws relating to or
affecting the enforcement of creditors' rights generally and to general
equitable principles and except as the enforceability of rights to indemnity and
contribution under this Agreement may be limited under applicable securities
laws or the public policy underlying such laws.
(xiv) Neither the Company nor any of its subsidiaries is an "investment
company" or a company "controlled" by an investment company as such terms are
defined in Sections 3(a) and 2(a)(9), respectively, of the Investment Company
Act and, if the Company or any subsidiary conducts its business as set forth in
the Registration Statement and the Prospectus (including the application of the
net proceeds of the public offering as described under the section entitled
"Underwriting" in the Registration Statement and the Prospectus), will not
become an "investment company" and will not be required to register under the
Investment Company Act.
(xv) The Company and its subsidiaries have received all permits, licenses,
franchises, authorizations, registrations, qualifications and approvals
(collectively, "permits") of governmental or regulatory authorities (including,
without limitation, state and other insurance regulatory authorities) as may be
required of them to own their properties and to conduct their businesses in the
manner described in the Prospectus, subject to such qualifications as may be set
forth in the Prospectus; the Company and its subsidiaries have fulfilled and
performed all of their material obligations with respect to such permits and no
event has occurred which allows, or after notice or lapse of time or both would
allow, revocation or termination thereof or result in any other material
impairment of the rights of the holder of any such permits, subject in each case
to such qualifications as may be set forth in the Prospectus; and other than as
described in the Prospectus, such permits contain no restrictions that
materially affect the ability of the Company and its subsidiaries to conduct
their businesses.
(xvi) All reinsurance treaties, contracts, agreements, and arrangements to
which the Company or any of its subsidiaries is a party and as to which any of
them reported recoverables, premiums due or other amounts in its financial
statements are in full force and effect, and neither the Company nor any of its
subsidiaries is in violation of, or in default in the performance, observance or
fulfillment of, any material obligation, agreement,
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covenant or condition contained therein, which violation or default would,
singularly or in the aggregate, have a material adverse effect on the financial
condition, results of operations or business of the Company and its subsidiaries
taken as a whole.
(xvii) The Registration Statement and the Prospectus and each amendment or
supplement thereto (other than the financial statements, the notes and schedules
thereto and other financial data included therein, to which such counsel need
express no opinion), as of their respective effective or issue dates, complied
as to form in all material respects with the requirements of the Act and the
respective rules and regulations thereunder. The descriptions in the
Registration Statement and the Prospectus of contracts and other documents are
accurate and fairly present the information required to be shown; and there are
no contracts or documents of a character required to be described in the
Registration Statement or Prospectus or to be filed as exhibits to the
Registration Statement which are not described and filed as required.
Such counsel shall also state that he has participated in the preparation
of the Registration Statement and the Prospectus and in conferences with
officers and other representatives of the Company, outside counsel to the
Company, representatives of the independent certified public accountants for the
Company, and representatives of and counsel to the Underwriters at which the
contents of the Registration Statement, the Prospectus and related matters were
discussed and, although such counsel has not passed upon or assumed any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus, and although such
counsel has not undertaken to verify independently the accuracy or completeness
of the statements in the Registration Statement or the Prospectus, nothing has
come to such counsel's attention to lead him to believe that the Registration
Statement, or any further amendment thereto made prior to such Time of Delivery,
on its effective date and as of such Time of Delivery, contained or contains any
untrue statement of a material fact or omitted or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
not misleading, or that the Prospectus, or any amendment or supplement thereto
made prior to such Time of Delivery, as of its issue date and as of such Time of
Delivery, contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (provided that such counsel need express no belief
regarding the financial statements, the notes and schedules thereto and other
financial data contained in the Registration Statement, any amendment thereto,
or the Prospectus, or any amendment or supplement thereto).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of officers of the
Company, public officials and letters from officials of the NASD and such
counsel may rely as to matters governed by the laws of Bermuda and the laws of
Vermont on the opinions of Conyers, Dill & Pearman, special Bermuda counsel to
the Company, and Paul, Frank & Collins, Inc., special Vermont counsel to the
Company. Copies of such certificates of officers of the Company and other
opinions shall be addressed and furnished to the Underwriters and furnished to
counsel for the Underwriters.
(d) Alston & Bird LLP, counsel for the Underwriters, shall have furnished
to you such opinion or opinions, dated such Time of Delivery, with respect to
the incorporation of the Company, the validity of the Shares being delivered at
such Time of Delivery, the Registration Statement, the Prospectus, and other
related matters as you may reasonably request, and the Company shall have
furnished to such counsel such documents as they request for the purpose of
enabling them to pass upon such matters. Such opinion or opinions may be
rendered in reliance upon the opinion of Conyers, Dill & Pearman as to matters
governed by the laws of Bermuda.
-21-
<PAGE>
(e) The Representatives shall have received from KPMG Peat Marwick LLP,
independent certified public accountants, (i) on each of the date hereof and the
Closing Date, as the case may be, a letter or letters, as the case may be, in
form and substance satisfactory to the Representatives, containing statements
and information of the type ordinarily included in accountants' "comfort
letters" to Underwriters with respect to the financial statements and certain
financial information contained in the Registration Statement and Prospectus;
provided that the letter or letters, as the case may be, delivered on the
Closing Date shall use a "cut-off date" not earlier than the date hereof, and
(ii) at each Time of Delivery, an opinion or opinions, in form and substance
satisfactory to the Representatives, that the statements in the Prospectus under
"Certain Tax Considerations--Taxation of American Safety and its Bermuda
Subsidiary--United States" and "--Tax Treatment of Shareholders--United States"
have been reviewed by them and are correct in all material respects.
(f) Since the date of the latest audited financial statements included in
the Prospectus, neither the Company nor any of the Subsidiaries shall have
sustained any change, or any development involving a prospective change
(including, without limitation, a change in management or control of the
Company), in or affecting the position (financial or otherwise), results of
operations, net worth or business prospects of the Company and its subsidiaries,
otherwise than as disclosed in or contemplated by the Prospectus, the effect of
which, in either such case, in your sole judgment makes it impracticable or
inadvisable to proceed with the purchase, sale and delivery of the Shares being
delivered at such Time of Delivery as contemplated by the Registration
Statement, as amended as of the date hereof.
(g) Subsequent to the date hereof, there shall not have occurred any of the
following: (i) any suspension or limitation in trading in securities generally
on the New York Stock Exchange or the American Stock Exchange or any setting of
minimum prices for trading on such exchange, or in the Common Shares of the
Company by the Commission or the Nasdaq National Market; (ii) a moratorium on
commercial banking activities in New York, Connecticut, Georgia or Bermuda
declared by either federal or state authorities; or (iii) any outbreak or
escalation of hostilities involving the United States or Bermuda, declaration by
the United States or Bermuda of a national emergency or war or any other
national or international calamity or emergency if the effect of any such event
specified in this clause (iii) in your sole judgment makes it impracticable or
inadvisable to proceed with the purchase, sale and delivery of the Shares being
delivered at such Time of Delivery as contemplated by the Registration
Statement, as amended as of the date hereof.
(h) The Company shall have furnished to you at such Time of Delivery
certificates of the chief executive and chief financial officers of the Company
satisfactory to you, as to the accuracy of the respective representations and
warranties of the Company herein at and as of such Time of Delivery with the
same effect as if made at such Time of Delivery, as to the performance by the
Company of all of its respective obligations hereunder to be performed at or
prior to such Time of Delivery, and as to such other matters as you may
reasonably request, and the Company shall have furnished or caused to be
furnished certificates of such officers as to such matters as you may reasonably
request.
-22-
<PAGE>
(i) The representations and warranties of the Company in this Agreement and
in the certificates delivered by the Company pursuant to this Agreement shall be
true and correct in all material respects when made and on and as of each Time
of Delivery as if made at such time, and the Company shall have performed all
covenants and agreements and satisfied all conditions contained in this
Agreement required to be performed or satisfied by the Company at or before such
Time of Delivery.
(j) The Shares shall continue to be listed on the Nasdaq National Market.
8. Indemnification and Contribution.
--------------------------------
(a) The Company, on behalf of itself and each of its subsidiaries, agrees
to indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement made by the Company in Section
1 of this Agreement; (ii) any untrue statement or alleged untrue statement of
any material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or (B) any application or other document, or amendment or
supplement thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify the Shares under the securities or blue sky laws thereof or filed with
the Commission or any securities association or securities exchange (each an
"Application"); or (iii) the omission of or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or any Application of a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating, defending against or appearing as a third-party witness in
connection with any such loss, claim, damage, liability or action; provided,
--------
however, that the Company shall not be liable in any such case to the extent
- -------
that any such loss, claim, damage, liability or action arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or
any Application in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through you expressly for use
therein (which information is solely as set forth in Section 1(c) hereof). The
Company will not, without the prior written consent of the Representatives of
the Underwriters, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding (or related cause
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<PAGE>
of action or portion thereof) in respect of which indemnification may be sought
hereunder (whether or not any Underwriter is a party to such claim, action, suit
or proceeding), unless such settlement, compromise or consent includes an
unconditional release of each Underwriter from all liability arising out of such
claim, action, suit or proceeding (or related cause of action or portion
thereof).
(b) The Company, on behalf of itself and each of its subsidiaries, agrees
to indemnify and hold harmless Advest and each person, if any, who controls
Advest within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act ("Advest Entities"), against any and all losses, claims,
damages or liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim): (i) that arises out of or is based upon any untrue
statement or alleged untrue statement of any material fact contained in the
prospectus wrapper material prepared by or with the consent of the Company for
distribution in foreign jurisdictions in connection with the Directed Share
Program attached to the Prospectus or Preliminary Prospectus or any amendment or
supplement thereto or caused by any omission of or alleged omission to state in
the Prospectus or Preliminary Prospectus or any amendment or supplement thereto,
a material fact required to be stated therein or necessary to make the
statements therein not misleading; (ii) caused by the failure of any Participant
to pay for and accept delivery of the Shares which, immediately following the
effectiveness of the Registration Statement, were subject to a properly
confirmed agreement to purchase; or (iii) related to, arising out of, or in
connection with the Directed Share Program, provided that the Company shall not
be responsible under this subsection 8(b) for any losses, claims, damages or
liabilities (or expenses relating thereto) that are finally judicially
determined to have resulted from the bad faith or gross negligence of Advest
Entities.
(c) Each Underwriter, severally but not jointly, agrees to indemnify and
hold harmless the Company against any losses, claims, damages or liabilities to
which the Company may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment thereto,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, or any Application or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through you expressly for use therein (which information is solely as set forth
in Section 1(c) hereof); and will reimburse the Company for any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending any such loss, claim, damage, liability or action.
(d) Promptly after receipt by an indemnified party under subsections (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve the indemnifying party from any liability
which it may have to any indemnified party otherwise than under such subsections
(a), (b) or (c). In case any such action shall be brought against any
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<PAGE>
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein and, to
the extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel satisfactory to
such indemnified party (who shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party); provided, however,
-------- -------
that if the defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnifying party shall not have the right to
assume the defense of such action on behalf of such indemnified party and such
indemnified party shall have the right to select separate counsel to defend such
action on behalf of such indemnified party. After such notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and approval by such indemnified party of counsel appointed to
defend such action, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses, other
than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof. Nothing in this
Section 8(d) shall preclude an indemnified party from participating at its own
expense in the defense of any such action so assumed by the indemnifying party.
Notwithstanding anything contained herein to the contrary, if indemnity may be
sought pursuant to section 8(b) hereof in respect of such action or proceeding,
then in addition to such separate firm for the indemnified parties, the
indemnifying party shall be liable for the reasonable fees and expenses of
counsel for Advest for the defense of any losses, claims, damages and
liabilities arising out of the Directed Share Program, and all persons, if any,
who control Advest within the meaning of either Section 15 of the Act or Section
20 of the Exchange Act.
(e) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under subsections (a), (b)
or (c) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other hand
from the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (d) above,
then each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company on the one
hand and the Underwriters on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other hand shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
the Underwriters on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
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<PAGE>
omission. The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (e) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (e) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(f) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each officer, director and employee of
the Underwriters and to each person, if any, who controls any Underwriter within
the meaning of the Act or the Exchange Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer, trustee and director of the Company and
to each person, if any, who controls the Company within the meaning of the Act
or the Exchange Act.
9. Default of Underwriters.
-----------------------
(a) If any Underwriter defaults in its obligation to purchase Shares at a
Time of Delivery, you may in your discretion arrange for you or another party or
other parties to purchase such Shares on the terms contained herein within 36
hours after such default by any Underwriter. In the event that, within the
respective prescribed period, you notify the Company that you have so arranged
for the purchase of such Shares, you shall have the right to postpone a Time of
Delivery for a period of not more than seven days in order to effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees to
file promptly any amendments to the Registration Statement or the Prospectus
that in your opinion may thereby be made necessary. The cost of preparing,
printing and filing any such amendments shall be paid for by the Underwriters.
The term "Underwriter" as used in this Agreement shall include any person
substituted under this Section with like effect as if such person had originally
been a party to this Agreement with respect to such Shares.
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<PAGE>
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you as provided in
subsection (a) above, if any, the aggregate number of such Shares which remains
unpurchased does not exceed one-eleventh (1/11) of the aggregate number of
Shares to be purchased at such Time of Delivery, then the Company shall have the
right to require each non-defaulting Underwriter to purchase the number of
Shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made.
10. Termination.
-----------
(a) This Agreement may be terminated in the sole discretion of the
Representatives by notice to the Company given prior to the First Time of
Delivery or any Subsequent Time of Delivery, respectively, in the event that (i)
any condition to the obligations of the Underwriters set forth in Section 7
hereof has not been satisfied, or (ii) the Company shall have failed, refused or
been unable to deliver the Shares or the Company shall have failed, refused or
been unable to perform all obligations and satisfy all conditions on its part to
be performed or satisfied hereunder at or prior to such Time of Delivery, in
either case other than by reason of a default by any of the Underwriters. If
this Agreement is terminated pursuant to this Section 10(a), the Company will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including counsel fees and disbursements) that shall have been incurred by them
in connection with the proposed purchase and sale of the Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you as provided in Section
9(a), the aggregate number of such Shares which remains unpurchased exceeds one-
eleventh (1/11) of the aggregate number of Shares to be purchased at such Time
of Delivery, then this Agreement (or, with respect to a Subsequent Time of
Delivery, the obligations of the Underwriters to purchase and of the Company to
sell the Optional Shares) shall thereupon terminate, without liability on the
part of any non-defaulting Underwriter or the Company, except for the expenses
to be borne by the Company and the Underwriters as provided in Section 6 hereof
and the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
11. Survival. The respective indemnities, agreements, representations,
--------
warranties and other statements of the Company, its officers and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person referred to in
Section 8(e) or the Company or any officer, trustee or director or controlling
person of the Company referred to in Section 8(e), and shall survive delivery of
and payment for the Shares. The respective agreements, covenants, indemnities
and other statements set forth in Sections 6 and 8 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
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<PAGE>
12. Notices. All communications hereunder shall be in writing and, if
-------
sent to any of the Underwriters, shall be mailed, delivered or telecopied and
confirmed in writing to you in care of Advest, Inc., 90 State House Square,
Hartford, CT 06103, Attention: David Minot (with a copy to Alston & Bird, LLP,
One Atlantic Center, 1201 West Peachtree Street, Atlanta, Georgia 30309,
Attention: M. Hill Jeffries, Esq.); if to the Company shall be sufficient in all
respects if mailed, delivered or telecopied and confirmed in writing to American
Safety Insurance Company, Ltd., 44 Church Street, Hamilton HM HX, Bermuda,
Attention: Lloyd A. Fox (with copies to American Safety Casualty Insurance
Company, 1845 The Exchange, Suite 200, Atlanta, Georgia 30339, Attention: Fred
J. Pinckney, Esq., and Womble Carlyle Sandridge & Rice PLLC, 1275 Peachtree
Street, Suite 700, Atlanta, Georgia 30309, Attention: Betty O. Derrick, Esq.).
13. Binding Effect. This Agreement shall be binding upon, and inure
--------------
solely to the benefit of, the Underwriters, the Company and to the extent
provided in Sections 8 and 10 hereof, the officers, trustees, directors and
employees and controlling persons referred to therein and their respective
heirs, executors, administrators, successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. No
purchaser of any of the Shares from any Underwriter shall be deemed a successor
or assign by reason merely of such purchase.
14. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York without giving effect to any
provisions regarding conflicts of laws.
15. Counterparts. This Agreement may be executed by any one or more of
------------
the parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall together constitute one and
the same instrument.
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<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us one of the counterparts hereof, and upon the
acceptance hereof by Advest, Inc., on behalf of each of the Underwriters, this
letter will constitute a binding agreement among the Underwriters and the
Company. It is understood that your acceptance of this letter on behalf of each
of the Underwriters is pursuant to the authority set forth in the Agreement
Among Underwriters, a copy of which shall be submitted to the Company for
examination, upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
AMERICAN SAFETY INSURANCE GROUP, LTD.
By:
-----------------------------
Lloyd A. Fox
President
The foregoing Agreement is hereby
confirmed and accepted as of the
date first written above at
Hartford, Connecticut.
ADVEST, INC.
J.C. BRADFORD & CO.
HOEFER & ARNETT INCORPORATED
By: ADVEST, INC.
By:__________________________________
______________________
Managing Director
On behalf of each of the Underwriters
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<PAGE>
EXHIBIT A
SUBSIDIARIES
------------
-30-
<PAGE>
Exhibit 3.1
BERMUDA
THE COMPANIES ACT 1981
MEMORANDUM OF ASSOCIATION OF
COMPANY LIMITED BY SHARES
(Section 7(1) and (2))
ALTERED MEMORANDUM OF ASSOCIATION
-------
OF
AMERICAN SAFETY INSURANCE GROUP, LTD.
(hereinafter referred to as "the Company")
1. The liability of the members of the Company is limited to the amount (if
any) for the time being unpaid on the shares respectively held by them.
2. We, the undersigned, namely,
<TABLE>
<CAPTION>
NUMBER OF
BERMUDIAN SHARES
NAME ADDRESS STATUS NATIONALITY SUBSCRIBED
------ ----------- ----------
<S> <C> <C> <C>
F. Timothy Parker
Thirty Cedar Avenue
Hamilton, Bermuda No Canadian 1
Ruby L. Rawlins
Thirty Cedar Avenue
Hamilton, Bermuda Yes British 1
Toni Wheatley
Thirty Cedar Avenue
Hamilton, Bermuda Yes British 1
Andrea Hodson
Thirty Cedar Avenue
Hamilton, Bermuda No U.S. Citizen 1
</TABLE>
do hereby respectively agree to take such number of shares of the Company as
may be allotted to us respectively by the provisional directors of the
Company, not exceeding the number of shares for which we have respectively
subscribed, and to satisfy such calls as may be made by the directors,
provisional directors or promoters of the Company in respect of the shares
allotted to us respectively.
3. The Company is to be an exempted Company as defined by the Companies Act
1981.
4. The Company has power to hold land situated in Bermuda not exceeding in all,
including the following parcels--
1
<PAGE>
Not Applicable.
5. The Company does not propose to carry on business in Bermuda.
6. The authorised share capital of the Company is U.S. $200,000 divided into
shares of U.S. $0.01 each. The minimum subscribed share capital of the
Company is $120,000.00 in United States currency.
7. The objects for which the Company is formed and incorporated are--
(i) to act and perform all the functions of a holding company in all its
branches and coordinate the policy and administration of any subsidiary
company or companies wherever incorporated or carrying on business or of
any group of companies of which the Company or any subsidiary company is
a member or which are in any manner controlled directly or indirectly by
the Company; and
(ii) as set forth in paragraphs (a) to (n) and (p) to (u) inclusive of the
Second Schedule to the Companies Act 1981.
8. The Company has the powers set out in the First Schedule to the Companies Act
1981 (excluding the power set out in paragraph 1 thereof) and the additional
powers set out in the Schedule annexed hereto.
Signed by each subscriber in the presence of at least one witness attesting the
signature thereof--
/s/ F. Timothy Parker
- ------------------------------ -----------------------------
/s/ Ruby L. Rawlins
- ------------------------------ -----------------------------
/s/ Toni Wheatley
- ------------------------------ -----------------------------
/s/ Andrea Hodson
- ------------------------------ -----------------------------
(Subscribers) (Witnesses)
STAMP DUTY (To be affixed)
2
<PAGE>
The Schedule
(referred to in Clause 8 of the Memorandum of Association)
----------------------------------------------------------
(a) To borrow and raise money in any currency or currencies and to secure
or discharge any debt or obligation in any matter and in particular
(without prejudice to the generality of the foregoing) by mortgages of
or charges upon all or any part of the undertaking, property and assets
(present and future) and uncalled capital of the Company or by the
creation and issue of securities.
(b) To enter into any guarantee, contract of indemnity or suretyship and in
particular (without prejudice to the generality of the foregoing) to
guarantee, support or secure, with or without consideration, whether by
personal obligation or by mortgaging or charging all or any part of the
undertaking, property and assets (present and future) and uncalled
capital of the Company or both such methods or in any other manner, the
performance of any obligations or commitments, of, and the repayment or
payment of the principal amounts of and any premiums, interest,
dividends and other moneys payable on or in respect of any securities
or liabilities of, any person including (without prejudice to the
generality of the foregoing) any company which is for the time being a
subsidiary or a holding company of the Company or another subsidiary of
a holding company of the Company or otherwise associated with the
Company.
(c) To accept, draw, make, create, issue, execute, discount, endorse,
negotiate bills of exchange, promissory notes, and other instruments
and securities, whether negotiable or otherwise.
(d) to sell, exchange, mortgage, charge, let on rent, share of profit,
royalty or otherwise, grant licenses, easements, options, servitudes
and other rights over, and in any other manner deal with or dispose of,
all or any part of the undertaking, property and assets (present and
future) of the Company for any consideration and in particular (without
prejudice to the generality of the foregoing) for any securities.
(e) To issue and allot securities of the Company for cash or in payment or
part payment for any real or personal property purchased or otherwise
acquired by the Company or any services rendered to the Company or as
security for any obligation or amount (even if less than the nominal
amount of such securities) or for any other purpose.
(f) To grant pensions, annuities, or other allowances, including allowances
on death, to any directors, officers or employees or former directors,
officers or employees of the Company or any company which at any time
is or was a subsidiary or a holding company or another subsidiary of a
holding company of the Company or otherwise associated with the Company
or of any predecessor in business of any of them, and to the relations,
connections or dependants of any such persons, and to other persons
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whose service or services have directly or indirectly been of benefit
to the Company or whom the Company considers have any moral claim on
the Company or to their relations, connections or dependants, and to
establish or support any associations, institutions, clubs, schools,
building and housing schemes, funds and trusts, and to make payments
toward insurance or other arrangements likely to benefit any such
persons or otherwise advance the interests of the Company or of its
Members, and to subscribe, guarantee or pay money for any purpose
likely, directly or indirectly to further the interests of the Company
or of its Members or for any national, charitable, benevolent,
educational, social, public, general or useful object.
(g) To purchase its own shares in accordance with the provisions of Section
42A of The Companies Act 1981 and subject also to the Company
conforming with the requirements of The Insurance Act 1978 and with
conditions imposed or directions given thereunder.
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THE COMPANIES ACT 1981
FIRST SCHEDULE
(Section 11(1))
A company limited by shares may exercise all or any of the following
powers subject to any provision of the law or its memorandum -
1. to carry on any other business capable of being conveniently carried on in
connection with its business or likely to enhance the value of or making
profitable any of its property or rights;
2. to acquire or undertake the whole or any part of the business, property and
liabilities of any person carrying on any business that the company is
authorized to carry on;
3. to apply for register, purchase, lease, acquire, hold, use, control,
license, sell, assign or dispose of patents, patent rights, copyrights,
trade marks, formulae, licenses, inventions, processes, distinctive marks
and similar rights;
4. to enter into partnership or into any arrangement for sharing of profits,
union of interest, co-operation, joint venture, reciprocal concession or
otherwise with any person carrying on or engaged in or about to carry on or
engage in any business or transaction that the company is authorized to
carry on or engage in or any business or transaction capable of being
conducted so as to benefit the company;
5. to take or otherwise acquire and hold securities in any other body corporate
having objects altogether or in part similar to those of the company or
carrying on any business capable of being conducted so as to benefit the
company;
6. subject to section 96 to lend money to any employee or to any person having
dealings with the company or with whom the company proposes to have dealings
or to any other body corporate any of whose shares are held by the company;
7. to apply for, secure or acquire by grant, legislative enactment, assignment,
transfer, purchase or otherwise and to exercise, carry out and enjoy any
charter, license, power authority, franchise, concession, right or
privilege, that any government or authority or any body corporate or other
public body may be empowered to grant, and pay for, aid in and contribute
toward carrying it into effect and to assume any liabilities or obligations
incidental thereto;
8. to establish and support or aid in the establishment and support of
associations, institutions, funds or trusts for the benefit of employees or
former employees of the company or its predecessors, or the dependents or
connections of such employees or former employees, and grant pensions and
allowances, and make payments towards insurance or for any object similar to
those set forth in this paragraph, and to subscribe or guarantee money for
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charitable, benevolent, educational or religious objects or for any
exhibition or for any public, general or useful objects;
9. to promote any company for the purpose of acquiring or taking over any of
the property and liabilities of the company or for any other purpose that
may benefit the company' to purchase, lease, take in exchange, hire or
otherwise acquire any personal property and any rights or privileges that
the company considers necessary or convenient for the purposes of its
business;
10. to purchase, lease, take in exchange, hire or otherwise acquire any personal
property and any rights or privileges that the company considers necessary
or convenient for the purposes of its business;
11. to construct, maintain, alter, renovate and demolish any buildings or works
necessary or convenient for its objects;
12. to take land in Bermuda by way of lease or letting agreement for a term not
exceeding twenty-one years, being land "bonafide" required for the purposes
of the business of the company and with the consent of the Minister granted
in his discretion to take land in Bermuda by lay of lease or letting
agreement for a similar period in order to provide accommodation or
recreational facilities for its officers and employees and when no longer
necessary for any of the above purposes to terminate or transfer the lease
or letting agreement;
13. except to the extent, if any, as may be otherwise expressly provided in its
incorporating Act or memorandum and subject to the provisions of this Act
every company shall have power to invest the moneys of the Company by way of
mortgage of real or personal property of every description in Bermuda or
elsewhere and to sell, exchange, vary, or dispose of such mortgage as the
company shall from time to time determine;
14. to construct improve, maintain, work, manage, carry out or control any
roads, ways, tramways, branches or signings, bridges, reservoirs,
watercourses, wharves, factories, warehouses, electric works, shops, stores
and other works and conveniences that may advance the interests of the
company and contribute to, subsidize or otherwise assist or take part in the
construction, improvement, maintenance, working, management, carrying out or
control thereof;
15. to raise and assist in raising money for, and aid by way of bonus, loan,
promise, endorsement, guarantee or otherwise , any person and guarantee the
performance or fulfillment of any contracts or obligations of any person,
and in particular guarantee the payment of the principal of and interest on
the debt obligations of any such person;
16. to borrow or raise or secure the payment of money in such manner as the
company may think fit;
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17. to draw, make, accept, endorse, discount, execute and issue bills of
exchange, promissory notes, bills of lading, warrants and other negotiable
or transferable instruments;
18. when properly authorized to do so, to sell, lease, exchange or otherwise
dispose of the undertaking of the company or any part thereof as an entirety
or substantially as an entirety for such consideration as the company thinks
fit;
19. to sell, improve, manage, develop, exchange, lease, dispose of, turn to
account or otherwise deal with the property of the company in the ordinary
course of its business;
20. to adopt such means of making known the products of the company as may seem
expedient, and in particular by advertising, by purchase and exhibition of
works of art or interest, by publication of books and periodicals and by
granting prize and rewards and making donations;
21. to cause the company to be registered and recognized in any foreign
jurisdiction, and designate persons therein according to the laws of that
foreign jurisdiction or to represent the company and to accept service for
and on behalf of the company of any process or suit;
22. to allot and issue fully-paid shares of the company in payment or part
payment of any property purchased or otherwise acquired by the company or
for any past services performed for the company;
23. to distribute among the members of the company in cash, kind, specie or
otherwise as may be resolved, by way of dividend, bonus or any other manner
considered advisable, any property of the company, but not so as to decrease
the capital of the company unless the distribution is made for the purpose
of enabling the company to be dissolved or the distribution, apart from this
paragraph, would be otherwise lawful;
24. to establish agencies and branches;
25. to take or hold mortgages, hypothecs, liens and charges to secure payment of
the purchase price, or of any unpaid balance of the purchase price, of any
part of the property of the company of whatsoever kind sold by the company,
or for any money due to the company from purchasers and others and to sell
or otherwise dispose of any such mortgage, hypothec, lien or charge;
26. to pay all costs and expenses of or incidental to the incorporation and
organization of the company;
27. to invest and deal with the moneys of the company not immediately required
for the objects of the company in such manner as may be determined;
28. to do any of the things authorized by this subsection and all things
authorized by its memorandum as principals, agents, contractors, trustees or
otherwise, and either alone or in conjunction with others;
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29. to do all such other things as are incidental or conducive to the attainment
of the objects and the exercise of the powers of the company.
Every company may exercise its powers beyond the boundaries of Bermuda to
the extent to which the laws in force where the powers are sought to be
exercised permit.
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THE COMPANIES ACT 1981
SECOND SCHEDULE
(Schedule 11(2))
A company may be reference include in its memorandum any of the following
objects that is to say the business of -
a) insurance and re-insurance of all kinds;
b) packaging of goods of all kinds;
c) buying, selling and dealing in goods of all kinds;
d) designing and manufacturing of goods of all kinds;
e) mining and quarrying and exploration for metals, minerals, fossil fuels and
precious stones of all kinds and their preparation for sale or use;
f) exploring for, the drilling for, the moving, transporting and refining
petroleum and hydro carbon products including oil and oil products;
g) scientific research including the improvement, discovery and development of
processes, inventions, patents and designs and the construction, maintenance
and operation of laboratories and research centres;
h) land, sea and air undertakings including the land, ship and air carriage of
passengers, mails and goods of all kinds;
i) ships and aircraft owners, managers, operator, agents, builders and
repairers;
j) acquiring, owning, selling, chartering, repairing or dealing in ships and
aircraft;
k) travel agents, freight contractors and forwarding agents;
l) dock owners, wharfingers, warehousemen;
m) ship chandlers and dealing in rope, canvas oil and ship stores of all kinds;
n) all forms of engineering;
o) developing, operating, advising or acting as technical consultants to any
other enterprise or business;
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p) farmers, livestock breeders and keepers, graziers, butchers, tanners and
processors of and dealers in all kinds of live and dead stock, wool, hides,
tallow, grain, vegetables and other produce;
q) acquiring by purchase or otherwise and holding as an investment inventions,
patents, trade marks, trade names, trade secrets, designs and the like;
r) buying, selling, hiring, letting and dealing in conveyances of any sort;
s) employing, providing, hiring out and acting as agent for artist, actors,
entertainers of all sorts, authors, composers, producers, directors,
engineers and experts or specialists of any kind; and
t) to acquire by purchase or otherwise hold, sell, dispose of and deal in real
property situated outside Bermuda and in personal property of all kids
wheresoever situated.
u) to enter into any guarantee, contract of indemnity or suretyship and to
assure, support or secure with or without consideration or benefit the
performance of any obligations of any person or persons and to guarantee the
fidelity of individuals filling or about to fill situations of trust or
confidence.
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EXHIBIT 3.2
BYE-LAWS
OF
AMERICAN SAFETY INSURANCE GROUP, LTD.
<PAGE>
BYE-LAWS
OF
AMERICAN SAFETY INSURANCE GROUP LTD.
Bye-Law Page
- ------- ----
1 INTERPRETATION 1
2 SHARE CAPITAL 6
3 COMMON SHARES 6
4 AUTHORITY OF BOARD TO ISSUE AND DIVIDE
PREFERRED SHARES INTO DIFFERENT CLASSES 7
5 RESTRICTIONS ON CERTAIN "BUSINESS COMBINATIONS" 8
6 EMPLOYEE SHARE PURCHASE
AND COMPANY SHARE REPURCHASE 13
7 ALTERATION OF CAPITAL 14
8 WARRANTS 16
9 SHARE CERTIFICATES 17
10 REGISTER OF MEMBERS 18
11 INSPECTION OF REGISTER OF MEMBERS 19
12 RECORD DATES 19
13 TRANSFER OF SHARES 19
14 TRANSMISSION OF SHARES 21
15 UNTRACEABLE MEMBERS 22
16 GENERAL MEETINGS 23
17 NOTICE OF GENERAL MEETINGS 23
18 PROCEEDINGS AT GENERAL MEETINGS 25
19 INSPECTORS 26
20 VOTING AT GENERAL MEETINGS 26
21 PROXIES AND CORPORATE REPRESENTATION 30
22 NOMINATION AND REMOVAL OF DIRECTORS 32
23 ALTERNATE DIRECTORS 35
24 DIRECTORS' COMPENSATION 36
25 DIRECTORS' AND OFFICERS' INTERESTS 36
26 GENERAL POWERS OF THE DIRECTORS 38
<PAGE>
Bye-Law Page
- ------- ----
27 PROCEEDINGS OF THE DIRECTORS 40
28 OFFICERS 42
29 REGISTER OF DIRECTORS AND OFFICERS 44
30 MINUTES 44
31 SEAL 44
32 DESTRUCTION OF DOCUMENTS 45
33 DIVIDENDS AND OTHER DISTRIBUTIONS 46
34 CAPITALIZATION 51
35 SUBSCRIPTION RIGHTS RESERVE 52
36 ACCOUNTING RECORDS 54
37 AUDIT 54
38 NOTICES 56
39 WINDING UP 57
40 INDEMNITY 58
41 ALTERATION OF BYE-LAWS & AMENDMENT
TO MEMORANDUM OF ASSOCIATION 59
<PAGE>
INTERPRETATION
1. (1) In these Bye-Laws, unless the context otherwise requires, the words
standing in the first column of the following table shall bear the meaning set
opposite them respectively in the second column.
WORD MEANING
"Act" The Companies Act 1981 of Bermuda, as
amended from time to time.
"Affiliate" a Person that directly, or indirectly
through one or more intermediaries,
controls, or is controlled by, or is
under common control with, a specified
Person.
"Associate" a relationship with a Person in which (1)
any corporation or organization (other
than the Company or a majority-owned
Subsidiary of the Company) of which such
Person is an officer or a partner or he
is, directly or indirectly, the
beneficial owner of 10% or more of any
class of equity securities; (2) any trust
or other estate in which such Person has
a substantial beneficial interest or as
to which such Person serves as trustee or
in a similar fiduciary capacity; and (3)
any relative or spouse of such Person, or
any relative of such spouse, who has the
same home as such Person or who is a
Director or Officer of the Company or any
parent company or Subsidiary.
"Auditor" the Auditor of the Company for the time
being and may include any individual or
partnership.
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"Bye-Laws" these Bye-Laws in their present form or
as supplemented or amended from time to
time.
"Board" or the the Board of Directors of the Company or
"Directors" or the the Directors (including Alternate
"Board of Directors" Directors) present at a meeting of
Directors at which a quorum is present.
"capital" the share capital from time to time of
the Company.
"clear days" in relation to the period of a Notice
that period excluding the day when the
Notice is given or deemed to be given and
the day for which it is given or on which
it is to take effect.
"Code" means the Internal Revenue Code of 1986,
as amended, of the United States.
"Company" American Safety Insurance Group, Ltd.
"competent" a competent regulatory authority in the
regulatory jurisdiction or place where the shares of
authority" the Company are listed or quoted on a
stock exchange.
"Controlled Shares" in reference to any Person means (i) all
shares of the Company that such Person is
deemed to own directly, indirectly or by
attribution (within the meaning of
Section 958 of the Code) and (ii) all
shares of the Company directly,
indirectly or beneficially owned by such
Person within the meaning of Section
13(d) of the Exchange Act (including any
shares owned by a group of Persons as so
defined and including any shares that
would otherwise be excluded by
Section13(d) of the Exchange Act).
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"Designated Stock a stock exchange which is an appointed
Exchange" stock exchange for the purposes of the
Act in respect of which the shares of the
Company are listed or quoted.
"dollars" and "$" dollars, the legal currency of the United
States.
"Exchange Act" the Securities Exchange Act of 1934, as
amended, of the United States.
"General Meeting" means, other than an Annual General
Meeting, a Special General Meeting
"Maximum Percentage" means, with respect to any Person other
than Frederick C. Treadway or Treadway
Associates, L.P. (including their
respective successors and assigns), nine
and one-half percent (9.5%) or, if
applicable, such other percentage as the
Board shall have previously approved for
any Person.
"Member" a duly registered holder from time to
time of the shares in the capital of the
Company.
"month" a calendar month.
"Notice" written notice unless otherwise
specifically stated and as further
defined in these Bye-Laws.
"Office" the registered office of the Company for
the time being.
"Officer" any individual appointed by the Board to
hold an office of the Company.
"paid up" paid up or credited as paid up.
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"Person" means any individual, partnership,
corporation, association, trust, limited
liability company or other entity or
organization, including a government, a
political subdivision or agency or
instrumentality thereof;
"Register" the principal register and where
applicable, any branch register of
Members of the Company to be kept
pursuant to the provisions of the Act.
"Registration Office" in respect of any class of share capital
such place as the Board may from time to
time determine to keep a branch register
of Members in respect of that class of
share capital and where (except in cases
where the Board otherwise directs) the
transfers or other documents of title for
such class of share capital are to be
delivered for registration.
"Seal" common seal or any one or more duplicate
seals of the Company (including a
securities seal) for use in Bermuda or in
any place outside Bermuda.
"Secretary" any Person, firm or corporation appointed
by the Board to perform any of the duties
of secretary of the Company and includes
any assistant, deputy, temporary or
acting secretary.
"Securities Act" the Securities Act of 1933, as amended,
of the United States.
"shares" the Common Shares or Preferred Shares of
the Company, as the case may be.
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"Subsidiary" means any company in which the Company
owns, directly or indirectly, shares
representing at least fifty percent (50%)
of the voting power or fifty percent
(50%) of the value of such company.
"year" a calendar year.
(2) In these Bye-Laws, where not inconsistent with the context:
(a) words denoting the singular include the plural and vice versa;
(b) words denoting a gender include every gender;
(c) words importing Persons include companies, associations and bodies
of Persons whether corporate or not;
(d) the word:
(i) "may" shall be construed as permissive;
(ii) "shall" or "will" shall be construed as imperative;
(e) expressions referring to writing shall, unless the contrary
intention appears, be construed as including printing,
lithography, photography, facsimile, computer generated and other
modes of representing words or figures in a visible form;
(f) references to any act, ordinance, statute or statutory provision
shall be interpreted as relating to any statutory modification or
re-enactment thereof for the time being in force;
(g) unless otherwise provided herein words and expressions defined in
the Act shall bear the same meanings in these Bye-Laws if not
inconsistent with the context;
(h) a resolution shall be a special resolution when it has been passed
by a majority of not less than sixty-six and two-thirds percent
(66 2/3%) of votes cast by such Members in person or, in the case
of such Members as are corporations, by their respective duly
authorized representative or, where proxies are allowed, by proxy
at a General Meeting of which not less than twenty-one (21) clear
days' Notice, specifying (without prejudice to the power contained
in these Bye-Laws to amend the same) the intention to propose the
resolution as a special resolution, has been duly
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given. Provided that, except in the case of an Annual General
Meeting, if it is so agreed by a majority in number of the Members
having the right to attend and vote at any such General Meeting,
being a majority together holding not less than ninety-five
percent (95%) in nominal value of the shares giving that right, a
resolution may be proposed and passed as a special resolution at a
General Meeting of which less than twenty-one (21) clear days'
Notice has been given;
(i) a resolution shall be an ordinary resolution when it has been
passed by a simple majority of votes cast by such Members as,
being entitled so to do, vote in person or, in the case of any
Member being a corporation, by its duly authorized representative
or, where proxies are allowed, by proxy at a General Meeting of
which not less than twenty-one (21) clear days' Notice has been
duly given;
(j) a special resolution shall be effective for any purpose for which
an ordinary resolution is expressed to be required under any
provision of these Bye-Law or the Act.
(k) headings used in these Bye-Laws are for convenience only and are
not to be used or relied upon in the construction of these Bye-
Laws.
(3) Any right or power of the Company under the Act or the Company's
Memorandum of Association or these Bye-Laws which is not expressly subject to
approval by the Members in a General Meeting shall be exercisable by the Board.
SHARE CAPITAL
2. The authorized share capital of the Company is $200,000 divided into the
following classes of shares:
(i) 15,000,000 common shares, par value $0.01 per share ("Common
Shares"); and
(ii) 5,000,000 preferred shares, par value $0.01 per share
("Preferred Shares").
COMMON SHARES
3. (1) Subject to these Bye-Laws, (i) at a General Meeting of the Company
every holder of Common Shares shall be entitled to one vote for every share held
by him on all matters
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submitted to a vote of the Company's shareholders and (ii) at a General Meeting
of a Subsidiary every holder of Common Shares shall be entitled to such number
of votes on all matters submitted to a vote of the Subsidiary's shareholders as
shall be allocated to such Common Shares.
(2) The Board may in its discretion, at any time, and from time to time,
issue or cause to be issued all or any part of the authorized but unissued
Common Shares of the Company for consideration of such character and value as
the Board shall in its absolute discretion from time to time fix or determine.
AUTHORITY OF BOARD TO ISSUE AND DIVIDE
PREFERRED SHARES INTO DIFFERENT CLASSES
4. (1) The Board may in its discretion at any time, and from time to time,
issue or cause to be issued all or any part of the authorized but unissued
Preferred Shares of the Company for consideration of such character and value as
the Board shall in its absolute discretion from time to time fix or determine.
(2) Without prejudice to the generality of paragraph (1) of this Bye-Law,
the Board is hereby further expressly authorized at any time, and from time to
time, to divide any or all of the authorized but unissued Preferred Shares of
the Company into several classes, to consolidate or sub-divide and to set the
par value of any of the unissued Preferred Shares, and in the resolution or
resolutions establishing a particular series, before issuance of any of the
shares thereof, to fix and determine the number of shares and the designation of
such series, so as to distinguish it from the shares of all other series and
classes, and to fix and determine the voting rights, preferences,
qualifications, privileges, limitations, options, conversion rights, redemption
features, restrictions, and other special or relative rights of such series.
Each of such series may differ from every other series previously authorized, as
may be determined by the Board in any or all respects, to the fullest extent
now, or hereafter permitted by the laws of Bermuda including, but not limited
to, the variations between different series in the following respects:
(a) the distinctive designation of such series and the number of shares
which shall constitute such series, which number may be increased or
decreased (but not below the number of shares thereof then outstanding)
from time to time by the Board;
(b) the annual dividend or dividend rate for such series, and the date or
dates from which dividends shall commence to accrue;
(c) the par value of the shares prior to issue, provided however, that the
par value shall in no case be set at less than $0.01 per share;
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(d) the price or prices at which, and the terms and conditions on which, if
any, the shares of such series may be redeemed or made redeemable;
(e) the purchase or sinking fund provisions, if any, for the purchase or
redemption of shares of such series;
(f) the preferential amount or amounts, if any, payable upon shares of such
series in the event of the liquidation, dissolution, or winding up of
the Company;
(g) the terms and conditions, if any, upon which shares of such series may
be converted and the class or series of shares of the Company or other
securities into which such shares may be converted;
(h) the relative seniority, priority or junior rank of such series as to
dividends or assets in relation to any other classes or series of
capital shares then or thereafter to be issued;
(i) such other terms, preferences, qualifications, privileges, limitations,
options, restrictions, and other special rights, if any, of shares of
such series as the Board may, at the time of such resolution or
resolutions, lawfully fix or determine;
(j) cancel shares which, at the date of the passing of the resolution in
that behalf, have not been taken or agreed to be taken by any Person;
(k) where any difficulty arises in regard to any division, consolidation,
or sub-division under this Bye-Law, the Board may settle the same as it
thinks expedient and, in particular, may arrange for the sale of the
shares representing fractions and the distribution of the net proceeds
of sale in due proportion amongst the Members who would have been
entitled to the fractions, and for this purpose the Board may authorize
some Person to transfer the shares representing fractions to the
purchaser thereof, who shall not be bound to see to the application of
the purchase money nor shall his title to the shares be affected by any
irregularity or invalidity in the proceedings relating to the sale.
RESTRICTIONS ON CERTAIN "BUSINESS COMBINATIONS"
5. (1) Except as permitted by paragraph (2) of this Bye-Law, no Interested
Shareholder (as hereinafter defined) shall, whether directly or indirectly, be a
party to or take any action in connection with any Business Combination (as
hereinafter defined) with the Company or any
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Subsidiary for a period of five years commencing on the date such Person first
became an Interested Shareholder.
(2) The restrictions contained in paragraph (1) of this Bye-Law shall not
apply to a Business Combination: (i) if the Business Combination is approved by
prior resolution of the Continuing Directors (as hereinafter defined) of the
Board (whether such approval is made prior to or subsequent to the acquisition
of, or announcement of public disclosure of the intention to acquire, beneficial
ownership of voting shares that caused the Interested Shareholder to become an
Interested Shareholder); or (ii) if the Business Combination is approved by
prior resolution of at least sixty-six and two-thirds percent (66 2/3%) of
outstanding voting shares of the Company other than those beneficially held by
an Interested Shareholder.
(3) For the purposes of this Bye-Law:
(a) "beneficial owner" when used with respect to any share means a
Person:
(i) who individually or with or through any Subsidiary or
Affiliate beneficially owns such share, directly or
indirectly; or
(ii) who individually or with or through any Subsidiary or
Affiliate (i) beneficially owns such share, directly or
indirectly; or (ii) who individually or with or through any
Subsidiary or Affiliate has:
(a) the right to acquire such share (whether such right is
exercisable immediately or only after the passage of
time) pursuant to any agreement, arrangement or
understanding (whether or not in writing), or upon the
exercise of conversion rights, exchange rights, warrants
or options or otherwise; provided however, that a Person
shall not be deemed the beneficial owner of any share
tendered pursuant to a tender or exchange offer until
such offer is accepted; or
(b) the right to vote such share pursuant to any agreement,
arrangement or understanding (whether or not in
writing); provided however, that a Person shall not be
deemed the beneficial owner of any share under this sub-
paragraph (ii) if the right to vote such share arises:
(x) solely from a revocable proxy or consent given
in response to a proxy or consent solicitation made
to shareholders or any class of shareholders
generally; or
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(y) solely under a nominee or trustee agreement where
the nominee or trustee has no economic interest in
the share (other than the right to be paid normal
nominee or trustee fees or remuneration);
(iii) who has any agreement, arrangement or understanding (whether
or not in writing) for the purpose of acquiring, holding,
voting (except where the right to vote is within the
exclusion of clauses (i) or (ii) of paragraph (2) of this
Bye-Law or disposing of such share with any other Person who
beneficially owns, or whose subsidiaries or affiliates
directly or indirectly beneficially own such share or any
interest therein; but does not include an underwriter,
acting in the ordinary course of his business as an
underwriter, who acquires shares pursuant to any issue or
offer of shares underwritten by him.
(b) "Business Combination" means:
(i) any plan of arrangement, reconstruction or amalgamation
involving the Company or any of its Subsidiaries and an
Interested Shareholder;
(ii) any transaction or series of transactions involving the
sale, purchase, lease, exchange, mortgage, pledge, transfer
or other disposition or encumbrance of assets between the
Company or any of its Subsidiaries and any Interested
Shareholder having an aggregate market value in excess of 5%
of the consolidated value in the Company and its
Subsidiaries prior to the relevant transaction or series of
transactions;
(iii) the issue or transfer to an Interested Shareholder or any
Affiliate thereof of any securities by the Company or any of
its Subsidiaries other than an issue or distribution to all
shareholders of the Company entitled to participate therein
(such entitlement not being dependent upon or affected by
any plan or proposed by an Interested Shareholder) pro rata
to their respective entitlements;
(iv) the adoption of any plan or proposal for the liquidation or
dissolution of the Company or any of its Subsidiaries unless
such plan or proposal is initiated, proposed or adopted
independently of, and not by agreement or arrangement with,
any Interested Shareholder or any Affiliate thereof;
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(v) the reclassification of any securities or other
restructuring of the capital of the Company or any of its
Subsidiary in such a way as to confer a benefit on an
Interested Shareholder or any Affiliate thereof which is not
conferred on the Members generally; or
(vi) the making by the Company or any of its Subsidiaries of any
loans, advances, guarantees, pledges or financial assistance
to an Interested Shareholder;
(c) The term "Continuing Director" means (i) any member of the Board,
while such Person is a member of the Board who is not an
Interested Shareholder or an Affiliate or Associate or
representative of the Interested Shareholder and was a member of
the Board prior to the time that the Interested Shareholder became
an Interested Shareholder, and (ii) any Person who subsequently
becomes a member of the Board, while such Person is a member of
the Board, who is not an Interested Shareholder or an Affiliate or
Associate or representative of the Interested Shareholder, if such
Person's nomination for election or election to the Board is
recommended or approved by a majority of the Continuing Directors
then in office;
(d) "Interested Shareholder" means a Member of the Company other than
(i) Frederick C. Treadway or Treadway Associates, L.P. (including
their respective heirs successors and assigns) or (ii) any other
Person beneficially owned (as hereinabove defined) by the Company
or any Subsidiary, any profit-sharing employee share ownership or
other employee benefit plan of the Company or any Subsidiary or
any trustee of or fiduciary with respect to any such plan when
acting in such capacity) who is, or has announced or publicly
disclosed a plan or intention to become, the beneficial owner of
Common Shares representing ten percent (10%) or more of the value
of the Company. For the purposes of determining whether a Person
is an Interested Shareholder for the purposes hereof, the number
of shares deemed to be outstanding shall include shares deemed
beneficially owned by such Person through application of paragraph
(3) of this Bye-Law, but shall not include any other shares that
may be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or
options, or otherwise;
(e) "Person" includes: any Person acting in concert with him or any
nominee for him or Person acting on his behalf; (ii) any company
in which such Person holds or beneficially owns 10% or more of the
shares carrying
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voting rights or rights over shares; or (iii) any Person or entity
over which the Person acquiring the shares has, directly or
indirectly, the power to direct or cause the direction of
management or policies;
(f) "persons acting in concert" include:
(i) persons who, pursuant to any agreement, arrangement or
understanding (whether formal or informal), actively co-
operate either in the acquisition by any of them of any
holding of shares or of the beneficial ownership of shares
or right over shares in the Company or in the exercise of
voting rights with respect to shares in the Company;
(ii) a company with any of its directors (or their close
relatives, nominees, related trusts or companies in which
any director holds or beneficially owns 10% or more of the
shares carrying voting rights or rights over shares);
(iii) a company with the trustees or managers of any of its
pension, provident or employee benefit funds or any employee
stock option plan which involves the issue of shares in the
company to such trustees for the benefit of employees;
(iv) a Person who is a fund manager with any investment company,
unit trust or other Person whose investments such Person
manages on a discretionary basis, in respect of the relevant
investment accounts;
(v) a company with its parent company or any subsidiary;
(vi) a company, in which 10% or more of the shares carrying
voting rights or rights over shares are held or beneficially
owned by a Person, with any other company in which 10% or
more of the shares carrying voting rights or rights over
shares are held or beneficially owned by the same Person;
and
(vii) notwithstanding the preceding subparagraphs (i) through
(vi), the term "persons acting in concert" shall not include
the formation of a group or syndicate of underwriters/
broker-dealers in connection with any public offering of
share capital of or in the Company and the documentation and
agreements relating thereto.
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(g) "rights over shares" includes any rights acquired by a Person or
an agreement to acquire shares or an option to acquire shares or
an irrevocable commitment to accept an offer to acquire shares and
includes warrants or options to subscribe for shares in a company
if immediately exercisable, as if such warrants or option had at
the relevant time been exercised;
(h) "securities" includes shares, debentures, and options or warrants
to subscribe for or purchase any shares or debentures, and any
rights in respect thereof or any other right which if exercised
would enable a Person not otherwise able so to do, to exercise
voting rights in excess of the threshold or, where relevant to
acquire equity in excess of the threshold;
(i) "threshold" means 10% or more of the voting rights or 10% or more
value of the equity, as the case may be;
(j) "voting rights" means all the voting rights attributable to the
share capital of the Company which are currently exercisable, or,
in the case of options and warrants to subscribe for shares, would
be exercisable if those options and warrants were themselves
exercised, at a General Meeting of the Company;
(k) a Person shall be deemed not to acquire or hold any share if he
acquires or holds such share solely as nominee or bare trustee
thereof and has no beneficial or economic interest therein other
than the right to be paid normal nominee or trustee fees or
remuneration.
EMPLOYEE SHARE PURCHASE
AND COMPANY SHARE REPURCHASE
6. (1) The Board may from time to time:
(a) establish a plan or plans whereby the Company provides money for
the purchase of, or subscription for, fully-paid shares or share
options or in relation to share bonus plans for Common Shares in
the Company being a purchase or subscription by trustees of or for
shares to be held by or for the benefit of employees of the
Company or any of its Subsidiaries;
(b) provide for the making by the Company of loans to Persons, other
than Directors, bona fide in the employment of the Company or any
of its Subsidiaries, with a view to enabling those Persons to
purchase or
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subscribe for fully-paid shares in the Company, to be held by
themselves by way of beneficial ownership; and
(c) provide for the giving by the Company, directly or indirectly, of
financial assistance, whether by means of a loan, guarantee, the
provision of security or otherwise, to its bona fide employees, or
the bona fide employees of any of its Subsidiaries, whether or not
they shall also be Directors, in order that they may buy shares in
the Company and the Board may, in its discretion, from time to
time require, as one of the terms of issue of any such shares or
by contract, that any such employee shall be required or allowed
to sell such shares to the Company, upon such terms and at such
price as the Board may by such terms of issue or contract
establish, when such employee ceases to be employed by the Company
or its associated company.
(2) Subject to the Act, the Company's Memorandum of Association and these
Bye-Laws and, where applicable, the rules of any Designated Stock Exchange
and/or any competent regulatory authority, the Company may purchase or otherwise
acquire its own shares upon such terms and conditions as the Board shall
determine.
ALTERATION OF CAPITAL
7. (1) The Company may from time to time by ordinary resolution in accordance
with the Act:
(a) increase its capital by such sum, to be divided into shares of
such amounts, as the resolution shall prescribe;
(b) consolidate and divide all or any of its capital into shares of
larger amount than its existing shares;
(c) divide its shares into several classes, and without prejudice to
any special rights previously conferred on the holders of existing
shares, attach thereto respectively any preferential, deferred,
qualified or special rights, privileges, conditions or such
restrictions, which, in the absence of any such determination by
the Company in a General Meeting, as the Directors may determine,
provided always that where the Company issues shares which do not
carry voting rights, the words "non-voting" shall appear in the
designation of such shares and where the equity capital includes
shares with different voting rights, the designation of each class
of shares, other
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than those with the most favorable voting rights, must include the
words "restricted voting" or "limited voting";
(d) sub-divide its shares, or any of them, into shares of smaller
amount than is fixed by the Memorandum of Association (subject,
nevertheless, to the Act), and may by such resolution determine
that, as between the holders of the shares resulting from such
sub-division, one or more of the shares may have any such
preferred rights or be subject to any such restrictions as
compared with the other or others as the Company has power to
attach to unissued or new shares;
(e) change the currency denomination of its share capital; and
(f) cancel any shares which, at the date of the passing of the
resolution, have not been taken, or agreed to be taken, by any
Person, and diminish the amount of its capital by the amount of
the shares so cancelled.
(2) The Board may settle as it considers expedient any difficulty which
arises in relation to any consolidation and division under this Bye-Law and in
particular but without prejudice to the generality of the foregoing may issue
certificates in respect of fractions of shares or arrange for the sale of the
shares representing fractions and the distribution of the net proceeds of sale
(after deduction of the expenses of such sale) in due proportion among the
Members who would have been entitled to the fractions, and for this purpose the
Board may authorize some Person to transfer the shares representing fractions to
their purchaser or resolve that such net proceeds be paid to the Company for the
Company's benefit. Such purchaser will not be bound to see to the application of
the purchase money nor will his title to the shares be affected by any
irregularity or invalidity in the proceedings relating to the sale.
(3) The Company may from time to time by ordinary resolution in accordance
with the Act reduce its authorized or issued share capital or any share premium
account or other undistributable reserve in any manner permitted by applicable
law.
(4) Except so far as otherwise provided by the conditions of issue, or by
these Bye-Laws, any capital raised by the creation of new shares shall be
treated as if it formed part of the original capital of the Company, and such
shares shall be subject to the provisions contained in these Bye-Laws with
reference to the payment of calls and installments, transfer and transmission,
forfeiture, lien, cancellation, surrender, voting and otherwise.
(5) Subject to the Act, all or any of the special rights for the time
being attached to the shares or any class of shares may, unless otherwise
provided by the terms of issue of the shares of that class, from time to time
(whether or not the Company is being wound up) be varied, modified or abrogated
either with the consent in writing of the holders of not less than sixty-six and
two-thirds percent (66 2/3%) of the issued shares of that class or with the
sanction
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of a special resolution passed at a separate General Meeting of the holders of
the shares of that class. To every such separate General Meeting all the
provisions of these Bye-Laws relating to General Meetings of the Company shall,
mutatis mutandis, apply, but so that:
(a) the necessary quorum (other than at an adjourned meeting) shall be
two Persons holding or representing by proxy not less than one-
third in nominal value of the issued shares of that class and at
any adjourned meeting of such holders, two holders present in
person or by proxy (whatever the number of shares held by them)
shall be a quorum;
(b) every holder of shares of the class shall be entitled on a vote to
one vote for every such share held by him; and
(c) any holder of shares of the class present in person or by proxy
may demand a vote.
(6) The special rights conferred upon the holders of any shares or class of
shares shall not, unless otherwise expressly provided in the rights attaching to
or the terms of issue of such shares, be deemed to be varied, modified or
abrogated by the creation or issue of further shares ranking pari passu
therewith.
WARRANTS
8. (1) The Board may issue warrants conferring the right upon the holders
thereof to subscribe for any class of shares or securities in the capital of the
Company on such terms as it may from time to time determine.
(2) The Company may in connection with the issue of any shares exercise all
powers of paying commission and brokerage conferred or permitted by the
Act. Subject to the Act, the commission may be satisfied by the payment of
cash or by the allotment of fully or partly paid shares or partly in one
and partly in the other.
(3) Neither the Company nor any of its Subsidiaries shall directly or
indirectly give financial assistance to a Person who is acquiring or proposing
to acquire shares in the Company for the purpose of that acquisition whether
before or at the same time as the acquisition takes place or afterwards provided
that nothing in this Bye-Law shall prohibit transactions permitted by the Act.
(4) Except as required by applicable law, no Person shall be recognized by
the Company as holding any share upon any trust and the Company shall not be
bound by or required in any way to recognize (even when having Notice thereof)
any equitable, contingent, future or partial interest in any share or any
fractional part of a share or (except only as otherwise
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provided by these Bye-Laws or by applicable law) any other rights in respect of
any share except an absolute right to the entirety thereof in the registered
holder.
(5) Subject to the Act and these Bye-Laws, the Board may at any time after
the allotment of shares but before any Person has been entered in the Register
as the holder, recognize a renunciation thereof by such recipient in favor of
some other Person and may accord to any such recipient of a share a right to
effect such renunciation upon and subject to such terms and conditions as the
Board determines to impose.
SHARE CERTIFICATES
9. (1) Every share certificate shall be issued under the Seal or a facsimile
thereof and shall specify the number and class and distinguishing numbers of the
shares to which it relates, and the amount paid up thereon and may otherwise be
in such form as the Directors may from time to time determine. No certificate
shall be issued representing shares of more than one class. The Board may by
resolution determine, either generally or in any particular case or cases, that
any signatures on any such certificates (or certificates in respect of other
securities) need not be autographic but may be affixed to such certificates by
some mechanical means or may be printed thereon or that such certificates need
not be signed by any Person. Every share certificate shall recite that the
voting rights relating to such shares are subject to the limitations contained
in the Company's Bye-Laws and that the ownership of Common Shares of the Company
shall entitle the holder to voting rights in any Subsidiary as defined in the
Bye-Laws.
(2) In the case of a share held jointly by several Persons, the Company
shall not be bound to issue more than one certificate therefor and delivery of a
certificate to one of several joint holders shall be sufficient delivery to all
such holders.
(3) Where a share stands in the names of two or more Persons, the Person
first named in the Register shall as regards service of Notices and, subject to
the provisions of these Bye-Laws, all or any other matters connected with the
Company, except the transfer of the shares, be deemed the sole holder thereof.
(4) Every Person whose name is entered, upon an allotment of shares, as a
Member in the Register shall be entitled, without payment, to receive one
certificate for all such shares of any one class or several certificates each
for one or more of such shares of such class upon payment for every certificate
after the first of such reasonable out-of-pocket expenses as the Board from time
to time determines.
(5) Subject to paragraph (2) hereof, share certificates shall be issued, in
the case of an issue of shares within twenty-one (21) days (or such longer
period as the terms of the issue provide) after allotment, or in the case of a
transfer of fully or partly paid shares within twenty-one
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(21) days after delivery of a transfer to the Company, not being a transfer
which the Company is for the time being entitled to refuse to register and does
not register.
(6) Notwithstanding any provision in these Bye-Laws to the contrary, a
Person may by Notice to the Company elect that no certificate be issued in
respect of shares registered or to be registered in his name and on receipt of
such election the Company shall not be required to issue a certificate for such
shares or may cancel an existing certificate without issuing another certificate
in lieu thereof.
(7) Upon every transfer of shares, the certificate held by the transferor
shall be given up to be cancelled, and shall forthwith be cancelled accordingly,
and a new certificate shall be issued to the transferee in respect of the shares
transferred to him. If any of the shares included in the certificate so given up
shall be retained by the transferor a new certificate for the balance shall be
issued to him.
(8) If a share certificate shall be damaged or defaced or alleged to have
been lost, stolen or destroyed a new certificate representing the same shares
may be issued to the relevant Member upon request and on payment of such fee as
the Designated Stock Exchange may determine to be the maximum payable, or such
lesser sum as the Board may determine and, subject to compliance with such terms
(if any) as to evidence and indemnity and to payment of the costs and reasonable
out-of-pocket expenses of the Company in investigating such evidence and
preparing such indemnity as the Board shall determine and, in case of damage or
defacement, on delivery of the old certificate to the Company, provided always
that where share warrants have been issued, no new share warrant shall be issued
to replace one that has been lost unless the Directors are satisfied beyond
reasonable doubt that the original has been destroyed.
REGISTER OF MEMBERS
10. (1) The Company shall keep in one or more books a Register of its Members
and shall enter therein the following particulars:
(a) the name and address of each Member, the number and, where
appropriate, the class of shares held by such Member and the
amount paid or agreed to be considered as paid on such shares;
(b) the date on which each Person was entered in the Register; and
(c) the date on which any Person ceased to be a Member for one year
after such Person so ceased.
(2) Subject to the Act, the Company may keep an overseas or local or other
branch register of Members resident in any place, and the Board may make and
vary such regulations as
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it determines in respect of the keeping of any such register and maintaining a
Registration Office in connection therewith.
INSPECTION OF REGISTER OF MEMBERS
11. The Register and branch register of Members, as the case may be, shall be
open to inspection on every business day by Members without charge or by any
other Person, upon the maximum payment permitted under the Act, subject to such
reasonable restrictions as the Board may impose, so that not less then two (2)
hours in each business day be allowed for inspections, at the Office or such
other place in Bermuda at which the Register is kept in accordance with the Act
or, if appropriate, upon the maximum payment permitted under the Act at the
Registration Office. The Register, including any overseas or local or other
branch register of Members may, after Notice has been given by advertisement in
an appointed newspaper and, where applicable, any other newspapers in accordance
with the requirements of any Designated Stock Exchange to that effect, be closed
at such times or for such periods not exceeding in the aggregate thirty (30)
days in each year as the Board may determine and either generally or in respect
of any class of shares.
RECORD DATES
12. Notwithstanding any provision of these Bye-Laws to the contrary, the
Company or the Directors may fix any date as the record date for:
(a) determining the Members entitled to receive any dividend,
distribution, allotment or issue; and
(b) determining the Members entitled to receive Notice of and to vote
at any General Meeting of the Company.
TRANSFER OF SHARES
13. (1) Subject to these Bye-Laws, any Member may transfer all or any of his
shares by an instrument of transfer in the usual or common form or in any other
form approved by the Board.
(2) The instrument of transfer shall be executed by or on behalf of the
transferor and the transferee provided that the Board may dispense with the
execution of the instrument of transfer by the transferee in any case which it
may determine in its discretion to do so. The Board may also resolve, either
generally or in any particular case, upon request by either the transferor or
transferee, to accept mechanically executed transfers. The transferor shall be
deemed to
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remain the holder of the share until the name of the transferee is entered in
the Register in respect thereof. Nothing in these Bye-Laws shall preclude the
Board from recognizing a renunciation of the allotment or provisional allotment
of any share by the allottee in favor of some other Person.
(3) The Board may, in its absolute discretion, and without giving any
reason therefor, refuse to register a transfer of any share issued under any
share plan for employees upon which a restriction on transfer imposed thereby
still subsists, and it may also refuse to register a transfer of any share to
more than four (4) joint holders. Nothing in these Bye-Laws shall impair the
settlement of transactions entered into through the facilities of a Designated
Stock Exchange except as provided by such exchange.
(4) No transfer shall be made to an infant or to a Person of unsound mind
or under other legal disability.
(5) The Board, in so far as permitted by applicable law may, in its
absolute discretion, at any time and from time to time transfer any share upon
the Register to any branch register or any share on any branch register to the
Register or any other branch register. In the event of any such transfer, the
shareholder requesting such transfer shall bear the cost of effecting the
transfer unless the Board otherwise determines.
(6) Unless the Board otherwise agrees (which agreement may be on such
terms and subject to such conditions as the Board in its absolute discretion may
from time to time determine, and which agreement it shall, without giving any
reason therefor, be entitled in its absolute discretion to give or withhold), no
shares upon the Register shall be transferred to any branch register nor shall
shares on any branch register be transferred to the Register or any other branch
register and all transfers and other documents of title shall be delivered for
registration, and registered, in the case of any shares on a branch register, at
the relevant Registration Office, and, in the case of any shares on the
Register, at the Office or such other place in Bermuda at which the Register is
kept in accordance with the Act.
(7) Without limiting the generality of the preceding paragraph, the Board
may decline to recognize any instrument of transfer unless:
(a) the instrument of transfer is in respect of only one class of
share;
(b) the instrument of transfer is delivered to the Office or such
other place in Bermuda at which the Register is kept in
accordance with the Act or the Registration Office (as the case
may be) accompanied by the relevant share certificate(s) and such
other evidence as the Board may reasonably require to show the
right of the transferor to make the transfer (and, if the
instrument of transfer is executed by some other Person on his
behalf, the authority of that Person so to do); and
(c) if applicable, it shall be satisfied to the Board that the
proposed transfer complies with the federal and state securities
laws of the United States.
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(8) If the Board refuses to register a transfer of any share in accordance
with these Bye-Laws, it shall, within one hundred twenty (120) days after the
date on which the transfer was delivered to the Company, send to each of the
transferor and transferee Notice of the refusal.
(9) The registration of transfers of shares or of any class of shares may,
after Notice has been given by advertisement in an appointed newspaper and,
where applicable, any other newspapers in accordance with the requirements of
any Designated Stock Exchange to that effect, be suspended at such times and for
such periods (not exceeding thirty (30) days in any year) as the Board may
determine.
TRANSMISSION OF SHARES
14. (1) If a Member dies, the survivor or survivors where the deceased was a
joint holder, and his legal representatives where he was a sole or only
surviving holder, will be the only Persons recognized by the Company as having
any title to his interest in the shares; but nothing in this Bye-Law will
release the estate of a deceased Member (whether sole or joint) from any
liability in respect of any share which had been solely or jointly held by him.
(2) Subject to the Act, any Person becoming entitled to a share in
consequence of the death or bankruptcy or winding-up of a Member may, upon such
evidence as to his title being produced as may be required by the Board, elect
either to become the holder of the share or to have some Person nominated by him
registered as the transferee thereof. If he elects to become the holder he shall
notify the Company in writing either at the Registration Office or Office, as
the case may be, to that effect. If he elects to have another Person registered
he shall execute a transfer of the share in favor of that Person. The provisions
of these Bye-Laws relating to the transfer and registration of transfers of
shares shall apply to such Notice or transfer as aforesaid as if the death or
bankruptcy of the Member had not occurred and the Notice or transfer were a
transfer signed by such Member.
(3) A Person becoming entitled to a share by reason of the death or
bankruptcy or winding-up of a Member shall be entitled to the same dividends and
other advantages to which he would be entitled if he were the registered holder
of the share. However, the Board may determine to withhold the payment of any
dividend payable or other advantages in respect of such share until such Person
shall become the registered holder of the share or shall have effectually
transferred such share, but, subject to the requirements of these Bye-Laws being
met, such a Person may vote at meetings.
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UNTRACEABLE MEMBERS
15. (1) Without prejudice to the rights of the Company under paragraph
(2) of this Bye-Law, the Company may cease sending a check for dividend
entitlements or dividend warrants by mail if such check or warrants have been
left uncashed on two consecutive occasions. However, the Company may exercise
the power to cease sending a check for dividend entitlements or dividend warrant
after the first occasion on which such a check or warrant is returned
undelivered.
(2) The Company shall have the power to sell, in such manner as the
Board shall determine, any shares of a Member who is untraceable, but no such
sale shall be made unless:
(a) all checks or warrants in respect of dividends of the shares
in question, being not less than three in total number, for
any sum payable in cash to the holder of such shares in
respect of them sent during the relevant period in the manner
authorized by the Bye-Laws of the Company have remained
uncashed;
(b) so far as it is aware at the end of the relevant period, the
Company has not at any time during the relevant period
received any indication of the existence of the Member who is
the holder of such shares or of a Person entitled to such
shares by death, bankruptcy or operation of law; and
(c) the Company, if so required by the rules governing the
listing of shares on the Designated Stock Exchange, has given
Notice to, and caused advertisement in newspapers in
accordance with the requirements of, the Designated Stock
Exchange to be made of its intention to sell such shares in
the manner required by the Designated Stock Exchange, and a
period of ninety (90) days or such shorter period as may be
allowed by the Designated Stock Exchange has elapsed since
the date of such advertisement.
For the purpose of the foregoing, the "relevant period" means the period
commencing twelve years before the date of publication of the advertisement
referred to in sub-paragraph (2)(c) of this Bye-Law and ending at the expiration
of the period referred to in that paragraph.
(3) To give effect to any such sale the Board may authorize some
Person to transfer the said shares and an instrument of transfer signed or
otherwise executed by or on behalf of such Person shall be as effective as if it
had been executed by the registered holder or the Person entitled by
transmission to such shares, and the purchaser shall not be bound to see to the
application of the purchase money nor shall his title to the shares be affected
by any irregularity or invalidity in the proceedings relating to the sale. The
net proceeds of the sale will belong to the Company and upon receipt by the
Company of such net proceeds it shall become indebted to the
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former Member for an amount equal to such net proceeds. No trust shall be
created in respect of such debt and no interest shall be payable in respect of
it and the Company shall not be required to account for any money earned from
the net proceeds which may be employed in the business of the Company or as the
Board shall determine. Any sale under this Bye-Law shall be valid and effective
notwithstanding that the Member holding the shares sold is dead, bankrupt or
otherwise under any legal disability or incapacity.
GENERAL MEETINGS
16. (1) The Board shall convene and the Company shall hold General
Meetings as Annual General Meetings in accordance with the requirements of the
Act. The Board may, whenever it shall determine, and shall, when required by
the Act, convene General Meetings other than Annual General Meetings which shall
be called Special General Meetings. Except with the unanimous approval of the
Board, all Annual and Special General Meetings of the Company shall be held in
Bermuda.
(2) Each General Meeting, other than an Annual General Meeting, shall
be called a Special General Meeting.
(3) The Board may determine to call Special General Meetings, and
Members holding at the date of delivery of the written Notice not less than one-
tenth of the paid up capital of the Company carrying the right of voting at
General Meetings of the Company shall at all times have the right, by written
Notice to the Board or the Secretary of the Company, to require a Special
General Meeting to be called by the Board for the transaction of any business
specified in such Notice; and such meeting shall be held within sixty (60) days
after the deposit of such Notice. If within twenty-one (21) days of such
delivery the Board fails to proceed to convene such meeting such Members may do
so in accordance with the provisions of the Act.
NOTICE OF GENERAL MEETINGS
17. (1) An Annual General Meeting and any Special General Meeting of the
Members shall be called by not less than twenty-one (21) clear days' Notice.
(2) Notice of every General Meeting shall be given in any manner
permitted by these Bye-Laws to all Members other than those who, under the
provisions of these Bye-Laws or the terms of issue of the shares they hold, are
not entitled to receive such Notice from the Company.
(3) Notwithstanding that a General Meeting of the Company is called by
shorter Notice than that specified in this Bye-Law, it shall be deemed to have
been duly called if it is so agreed:
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(a) in the case of a meeting called as an Annual General
Meeting, by all the Members entitled to attend and vote
thereat;
(b) in the case of any other General Meeting, by a majority in
number of the Members having the right to attend and vote at
the meeting, being a majority together holding not less than
ninety-five percent (95%) in nominal value of the shares
giving that right.
(4) At any Annual or Special General Meeting of the Members, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an Annual or Special General Meeting,
business must be specified in the Notice of meeting (or any supplement thereto)
given by or at the direction of the Board, otherwise properly brought before the
meeting by or at the direction of the Board, or otherwise properly brought
before the meeting by a Member. In addition to any other applicable
requirements, for business to be properly brought before an Annual or Special
General Meeting by a Member, the Member must have given timely Notice thereof in
writing to the Secretary of the Company. To be timely, a Member's Notice must be
delivered to or mailed and received at the Registration Office of the Company,
not less than sixty (60) days prior to such meeting. A Member's Notice to the
Secretary shall set forth as to each matter the Member proposes to bring before
the meeting and any material interest of the Member in such business (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and record
address of the Member proposing such business, (iii) a representation that the
Member is a holder of record of shares of the Company entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to present
such proposal or nomination, (iv) the class and number of shares of the Company
which are beneficially owned by the Member, and (v) any material interest of the
Member in such business. Provided at all times that Members may only give Notice
to the Secretary of matters to be brought before an Annual or Special General
Meeting for the purposes of this Bye-Law that are matters that are suitable and
appropriate for submission to General Meetings of the Members of a publicly-
quoted company as determined by the Board.
(5) Notwithstanding anything in the Bye-Laws to the contrary, no
business shall be conducted at an Annual or Special General Meeting except in
accordance with the procedures set forth in this Bye-Law. Provided however, that
nothing in this Bye-Law shall be deemed to preclude discussion by any Member of
any business properly brought before the Annual or Special General Meeting in
accordance with the procedures herein detailed.
(6) The Chairman of an Annual or Special General Meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Bye-Law, and if he should so determine, he shall so declare to the meeting and
any such business not properly brought before the meeting shall not be
transacted.
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(7) Any nomination or nominations of Persons for election to the Board
of the Company made in accordance with the provisions of these Bye-Laws shall be
deemed for the purposes of this Bye-Law to constitute business properly brought
before an Annual or Special General Meeting, as the case may be.
(8) The accidental omission to give Notice of a meeting or (in cases
where instruments of proxy are sent out with the Notice) to send such instrument
of proxy to, or the non-receipt of such Notice or such instrument of proxy by,
any Person entitled to receive such Notice shall not invalidate any resolution
passed or the proceedings at that meeting.
PROCEEDINGS AT GENERAL MEETINGS
18. (1) No business shall be transacted at any General Meeting unless it
shall have been properly brought before the Annual or Special General Meeting in
accordance with these Bye-Laws and a quorum is present when the meeting proceeds
to business, but the absence of a quorum shall not preclude the appointment,
choice or election of a Chairman which shall not be treated as part of the
business of the meeting. Save as otherwise provided in these Bye-Laws, at least
two Members representing not less than thirty percent (30%) of the outstanding
shares carrying the right to vote in the Company, represented in person or by
proxy, shall constitute a quorum for all purposes.
(2) If within five (5) minutes (or such longer time as the Chairman of
the meeting may determine to wait) after the time appointed for the meeting, a
quorum is not present, the meeting, if convened on the requisition of Members,
shall be dissolved. In any other case, it shall stand adjourned to such other
day and such other time and place as the Chairman of the meeting may determine
and at such adjourned meeting two Members present in person (whatever the number
of shares held by them) shall be a quorum. The Company shall give not less than
seven (7) days' Notice of any meeting adjourned through want of a quorum and
such Notice shall state that two Members present in person (whatever the number
of shares held by them) shall be a quorum.
(3) Each Director shall be entitled to attend and speak at any General
Meeting of the Company.
(4) The Chairman of the Board shall preside as Chairman at every
General Meeting. In his absence, the following shall preside in the order
stated: the Deputy Chairman, any other Director appointed by the Board, the
President, any Executive Vice President or any other Officer of the Company. If
none of the foregoing is present within five (5) minutes after the time
appointed for holding the meeting, or if none of them is willing to act as
Chairman, the Directors present shall choose one of their number to act or if
one Director only is present he shall preside as Chairman if willing to act. If
no Director is present or if each of the Directors present declines to take the
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chair, the Persons present and entitled to vote shall elect one of their number
to be Chairman.
(5) The Chairman may, with the consent of any meeting at which a
quorum is present (and shall if so directed by the meeting), adjourn the meeting
from time to time and from place to place but no business shall be transacted at
any adjourned meeting except business which might lawfully have been transacted
at the meeting from which the adjournment took place. When a meeting is
adjourned for three (3) months or more, Notice of the adjourned meeting shall be
given as in the case of an original meeting.
(6) Except as expressly provided by these Bye-Laws, it shall not be
necessary to give any Notice of an adjournment or of the business to be
transacted at an adjourned meeting.
INSPECTORS
19. The Board may, in advance of any meeting of Members, appoint one or
more inspectors to act at such meeting or any adjournment thereof. If the
inspectors shall not be so appointed or if any of them shall fail to appear or
act, the Chairman of the meeting may and on the request of any Member entitled
to vote thereat shall, appoint inspectors. Each inspector, before entering upon
the discharge of his duties, shall take and sign an oath faithfully to exercise
the duties of inspector at such meeting with strict impartiality and according
to the best of his ability. The inspectors shall determine the number of shares
outstanding and the voting power of each, the number of shares represented at
the meeting, the existence of a quorum, the validity and effect of proxies, and
shall receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, and do such acts as are proper
to conduct the election or vote with fairness to all Members. On the request of
the Chairman of the meeting or any Member entitled to vote thereat, the
inspectors shall make a report in writing of any challenge, request or matter
determined by them and shall execute a certificate of any fact found by them.
No Director or candidate for the office of Director shall act as inspector.
Inspectors need not be Members.
VOTING AT GENERAL MEETINGS
20. (1) Subject to these Bye-Laws and to any special rights or other
restrictions as to voting for the time being attached to any shares by or in
accordance with these Bye-Laws, at any General Meeting on a show of hands every
Member present in person or, in the case of a Member being a corporation, by a
duly authorized representative, or by proxy, shall have one vote and on a vote
every Member present in person or by proxy shall have one vote for every fully
paid share of which he is the holder. A resolution put to the vote of a meeting
shall be decided on a show of hands unless (before or on the declaration of the
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result of the show of hands or on the withdrawal of any other demand for a vote)
a vote is demanded by:
(a) the Chairman of such meeting; or
(b) at least three (3) Members present in person or, in the case
of a Member being a corporation, by its duly authorized
representative, by proxy for the time being entitled to vote
at the meeting; or
(c) a Member or Members present in person or, in the case of a
Member being a corporation, by proxy and representing not less
than one-tenth of the total voting rights of all Members
having the right to vote at the meeting; or
(d) a Member or Members present in person or, in the case of a
Member being a corporation by its duly authorized
representative, or by proxy and holding shares in the Company
conferring a right to vote at the meeting being shares on
which an aggregate sum has been paid up equal to not less than
one-tenth of the total sum paid up on all shares conferring
that right.
A demand by a Person as proxy for a Member, or in the case of a Member being a
corporation by its duly authorized representative, shall be deemed to be the
same as a demand by a Member.
(2) Subject to this Bye-Law, at any meeting of Members each Member
holding shares of the Company, in the case of a meeting, present in person or by
proxy, shall be entitled to such number of votes as otherwise indicated in this
Bye-Law with respect to such shares, on a non-cumulative basis, for each such
share registered in such Member's name in the Register of Members, provided
that, if and for so long as the votes conferred by the Controlled Shares of any
Person shall exceed the Maximum Percentage applicable to such Person of the
votes conferred by all of the issued and outstanding shares of the Company
(adjusted for any votes represented by Controlled Shares that are not entitled
to vote due to the terms of this Bye-Law), each share comprised in such
Controlled Shares shall confer only such fraction of a vote, such that the total
combined voting rights of such Controlled Shares shall be equal to the Maximum
Percentage, which percentage shall be calculated by reducing such combined
voting power of the Company's Members by a number of votes equal to any votes
represented by the Controlled Shares of such Person or any other Person that are
not entitled to vote due to the terms of these Bye-Laws and calculated as of any
date and, with respect to any record date for determining the Members entitled
to vote, calculated as of such record date, including, without limitation, for
any election of directors. Notwithstanding anything in these Bye-Laws to the
contrary, the Maximum Percentage voting limitation shall not apply to Frederick
C. Treadway or Treadway Associates, L.P. (including their respective heirs,
successors and assigns).
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(3) If, as a result of giving effect to the provisions of this Bye-Law
or otherwise, the votes conferred by the Controlled Shares of a Person would
otherwise represent an amount greater than the Maximum Percentage applicable to
such Person, the votes conferred by the Controlled Shares of such Person shall
be reduced in accordance with the foregoing provisions of this Bye-Law. Such
process shall be repeated until the votes conferred by the Controlled Shares of
each Person are less than or equal to the Maximum Percentage applicable to such
Person.
(4) Notwithstanding any other provisions of these Bye-Laws to the
contrary, with respect to any matter required to be submitted to a vote of the
Members (either at a General Meeting or by way of written resolution) of a
Subsidiary, the Company shall be required to submit a proposal relating to such
matters to the Members who shall vote at a meeting in accordance with these Bye-
Laws and such Members shall hold and be entitled to all of the voting rights
with respect to the shares of the Subsidiary held by the Company in accordance
with and proportional to such vote of the Members and subject to the voting
limitation set forth in this Bye-Law; provided that the Board shall not be
required to submit such a proposal contemplated by this Bye-Law to the Members
at such time as the Subsidiary shall no longer be a Subsidiary of the Company.
(5) Unless a vote is duly demanded and the demand is not withdrawn, a
declaration by the Chairman that a resolution has been carried, or carried
unanimously, or by a particular majority, or not carried by a particular
majority, or lost, and an entry to that effect made in the minute book of the
Company, shall be conclusive evidence of the fact without proof of the number or
proportion of the votes recorded for or against the resolution.
(6) If a vote is duly demanded, the result of the vote shall be deemed
to be the resolution of the meeting at which the vote was demanded. There shall
be no requirement for the Chairman to disclose the voting figures on a vote.
(7) A vote demanded on the election of a Chairman, or on a question of
adjournment, shall be taken forthwith. A vote demanded on any other question
shall be taken in such manner (including the use of ballot or voting papers) and
either forthwith or at such time (being not later than thirty (30) days after
the date of the demand) and place as the Chairman directs. It shall not be
necessary (unless the Chairman otherwise directs) for Notice to be given of a
vote not taken immediately.
(8) The demand for a vote shall not prevent the continuance of a
meeting or the transaction of any business other than the question on which the
vote has been demanded, and, with the consent of the Chairman, it may be
withdrawn at any time before the close of the meeting or the taking of the vote,
whichever is the earlier.
(9) Where a vote is taken, votes may be given either personally or by
proxy.
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(10) A Person entitled to more than one vote on a vote need not use
all his votes or cast all the votes he uses in the same way. Notwithstanding the
preceding sentence, nothing herein is intended to allow for cumulative voting in
the election of Directors and cumulative voting in the election of Directors is
expressly prohibited.
(11) In the case of an equality of votes, whether on a show of hands
or on a vote, the Chairman of such meeting shall be entitled to a second or
casting vote in addition to any other vote he may have.
(12) Where there are joint holders of any share any one of such joint
holder may vote, either in person or by proxy, in respect of such share as if he
were solely entitled thereto, but if more than one of such joint holders be
present at any meeting the vote of the senior who tenders a vote, whether in
person or by proxy, shall be accepted to the exclusion of the votes of the other
joint holders, and for this purpose seniority shall be determined by the order
in which the names stand in the Register in respect of the joint holding.
Several executors or administrators of a deceased Member in whose name any share
stands shall for the purposes of this Bye-Law be deemed joint holders thereof.
(13) A Member who is a patient for any purpose relating to mental
health or in respect of whom an order has been made by any court having
jurisdiction for the protection or management of the affairs of Persons
incapable of managing their own affairs may vote, whether on a show of hands or
on a vote, by his receiver, committee, curator bonis or other Person in the
nature of a receiver, committee or curator bonis appointed by such court, and
such receiver, committee, curator bonis or other Person may vote by proxy, and
may otherwise act and be treated as if he were the registered holder of such
shares for the purposes of General Meetings, provided that such evidence as the
Board may require of the authority of the Person claiming to vote shall have
been deposited at the Office, Registration Office or such other place as the
Board may designate, as appropriate, not less than forty-eight (48) hours before
the time appointed for holding the meeting, or adjourned meeting or vote, as the
case may be.
(14) Any Person entitled under these Bye-Laws to be registered as the
holder of any shares may vote at any General Meeting in respect thereof in the
same manner as if he were the registered holder of such shares, provided that
forty-eight (48) hours at least before the time of the holding of the meeting or
adjourned meeting, as the case may be, at which he proposes to vote, he shall
satisfy the Board of his entitlement to such shares, or the Board shall have
previously admitted his right to vote at such meeting in respect thereof.
(15) No Member shall, unless the Board otherwise determines, be
entitled to attend and vote and to be reckoned in a quorum at any General
Meeting unless he is duly registered and all calls or other sums presently
payable by him in respect of shares in the Company have been paid.
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(16) If: (a) any objection shall be raised to the qualification of any
voter; or (b) any votes have been counted which ought not to have been counted
or which might have been rejected; or (c) any votes are not counted which ought
to have been counted; the objection or error shall not vitiate the decision of
the meeting or adjourned meeting on any resolution unless the same is raised or
pointed out at the meeting or, as the case may be, the adjourned meeting at
which the vote objected to is given or tendered or at which the error occurs.
Any objection or error shall be referred to the Chairman of the meeting and
shall only vitiate the decision of the meeting on any resolution if the Chairman
decides that the same may have affected the decision of the meeting. The
decision of the Chairman on such matters shall be final and conclusive.
(17) Subject to the Act, a resolution in writing signed (in such
manner as to indicate, expressly or implied, unconditional approval) by or on
behalf of all Persons for the time being entitled to receive Notice of and to
attend and vote at General Meetings of the Company shall, for the purposes of
these Bye-Laws, be treated as a resolution duly passed at a General Meeting of
the Company and, where relevant, as a special resolution so passed. Any such
resolution shall be deemed to have been passed at a meeting held on the date on
which it was signed by the last Member to sign, and where the resolution states
a date as being the date of his signature thereof by any Member the statement
shall be prima facie evidence that it was signed by him on that date. Such a
resolution may consist of several documents in the like form, each signed by one
or more relevant Members.
(18) Notwithstanding anything in these Bye-Laws to the contrary, a
resolution in writing shall not be passed for the purpose of removing a Director
before the expiration of his term of office or for the purpose of removing the
Auditor.
PROXIES AND CORPORATE REPRESENTATION
21. (1) Any Member entitled to attend and vote at a meeting of the
Company shall be entitled to appoint another Person as his proxy to attend and
vote instead of him. A Member may appoint a proxy in respect of part only of
his holding of shares in the Company. A proxy need not be a Member of the
Company.
(2) The instrument appointing a proxy shall be in writing under the
hand of the appointor or of his attorney duly authorized in writing or, if the
appointor is a corporation, either under its seal or under the hand of an
Officer, attorney or other Person authorized to sign the same. In the case of an
instrument of proxy purporting to be signed on behalf of a corporation by an
Officer thereof it shall be assumed, unless the contrary appears, that such
Officer was duly authorized to sign such instrument of proxy on behalf of the
corporation without further evidence of the fact.
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(3) The instrument appointing a proxy and (if required by the Board)
the power of attorney or other authority (if any) under which it is signed, or a
certified copy of such power or authority, shall be delivered to such place or
one of such places (if any) as may be specified for that purpose in or by way of
Notice to or in any document accompanying the Notice convening the meeting (or,
if no place is so specified at the Registration Office or the Office, as may be
appropriate) not less than forty-eight (48) hours before the time appointed for
holding the meeting or adjourned meeting at which the Person named in the
instrument proposes to vote or, in the case of a vote taken subsequently to the
date of a meeting or adjourned meeting, not less than twenty-four (24) hours
before the time appointed for the taking of the vote and in default the
instrument of proxy shall not be treated as valid. No instrument appointing a
proxy shall be valid after the expiration of one (1) year from the date named in
it as the date of its execution, except at an adjourned meeting or on a vote
demanded at a meeting or an adjourned meeting in cases where the meeting was
originally held within one (1) year from such date. Delivery of an instrument
appointing a proxy shall not preclude a Member from attending and voting in
person at the meeting convened and in such event, the instrument appointing a
proxy shall be deemed to be revoked.
(4) Instruments of proxy shall be in any common form or in such other
form as the Board may approve (provided that this shall not preclude the use of
the two-way form) and the Board may send out with the Notice of any meeting,
forms of instrument of proxy for use at the meeting. The instrument of proxy
shall be deemed to confer authority to demand or join in demanding a vote and to
vote on any amendment of a resolution put to the meeting for which it is given
as the proxy may determine. The instrument of proxy shall, unless the contrary
is stated therein, be valid as well for any adjournment of the meeting as for
the meeting to which it relates.
(5) A vote given in accordance with the terms of an instrument of
proxy shall be valid notwithstanding the previous death or insanity of the
principal, or revocation of the instrument of proxy or of the authority under
which it was executed, provided that no intimation in writing of such death,
insanity or revocation shall have been received by the Company at the Office or
the Registration Office (or such other place as may be specified for the
delivery of instruments of proxy in the Notice convening the meeting or other
document sent therewith) two (2) hours at least before the commencement of the
meeting or adjourned meeting, or the taking of the vote, at which the instrument
of proxy is used.
(6) Anything which under these Bye-Laws a Member may do by proxy he
may likewise do by his duly appointed attorney and the provisions of these Bye-
Laws relating to proxies and instruments appointing proxies shall apply mutatis
mutandis in relation to any such attorney and the instrument under which such
attorney is appointed.
(7) Any corporation which is a Member of the Company may by any
authorized Officer authorize such Person as it may determine to act as its
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representative at any meeting of the Company or any class of Members of the
Company. The Person so authorized shall be entitled to exercise the same powers
on behalf of such corporation as the corporation could exercise if it were an
individual Member of the Company and such corporation shall for the purposes of
these Bye-Laws be deemed to be present in person at any such meeting if a Person
so authorized is present thereat. Any reference in these Bye-Laws to a duly
authorized representative of a Member being a corporation shall mean a
representative authorized under the provisions of this Bye-Law.
(8) If a clearing house is a Member, it may authorize such Person or
Persons as it determines to act as its representative or representatives at any
meeting of the Company or at any meeting of any class of Members provided that,
if more than one Person is so authorized, the authorization shall specify the
number and class of shares in respect of which each such Person is so
authorized. A Person so authorized under the provisions of this Bye-Law shall be
entitled to exercise the same powers on behalf of the clearing house (or its
nominee) which he represents as that clearing house (or its nominee) could
exercise if it were an individual Member. For the purposes of this Bye-Law,
"clearing house" means any clearing house or other similar body recognized by
the laws of the jurisdiction in which the shares of the Company are listed or
quoted on a Designated Stock Exchange.
NOMINATION AND REMOVAL OF DIRECTORS
22. (1) The number of Directors which shall constitute the whole Board
of Directors of the Company shall not be more than fifteen (15). The Board is
divided into three classes, Class I, Class II and Class III. The number of
Directors in each class shall be the whole number contained in the quotient
arrived at by dividing the authorized number of Directors by three and if a
fraction is also contained in such quotient, then if such fraction is one-third
(1/3) the extra Director shall be a member of Class III and if the fraction is
two-thirds (2/3) one of the Directors shall be member of Class III and the other
shall be a member of Class II. Each Director shall serve for a term ending on
the third Annual General Meeting following the annual meeting at which such
Director was elected; provided however, that the Directors first elected to
Class I shall serve for a term ending on the annual meeting next ensuing, the
Directors first elected to Class II shall serve for a term ending on the second
annual meeting following the meeting at which such Directors were first elected,
and the Directors first elected to Class III shall serve a full term as
hereinbefore provided. The foregoing notwithstanding, each Director shall serve
until his successor shall have been duly elected and qualified, unless he shall
resign, become disqualified, disabled or shall otherwise be removed.
(2) For the purpose of the preceding paragraph, reference to the first
election of Directors is to the election at the 1998 Annual General Meeting of
the Company. At each annual election held thereafter, the Directors chosen to
succeed those whose terms then expire shall be identified as being of the same
class as the Directors they succeed. If for any reason the number of Directors
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in the various classes shall not conform with the formula set forth in the
preceding paragraph, the Board may redesignate any Director to a different class
in order that the balance of Directors in such classes shall conform thereto.
(3) A Director need not be a Member.
(4) Only Persons who are nominated in accordance with the following
procedures shall be eligible for election as Directors. Nominations of Persons
for election to the Board of the Company may be made at a meeting of Members, or
at the discretion of the Board, by any nominating committee or Person appointed
by the Board, by any Member of the Company entitled to vote for the election of
Director at the meeting who complies with the Notice procedures set forth in
this Bye-Law. Such nominations, other than those made by or at the direction of
the Board, shall be made pursuant to timely Notice to the Secretary of the
Company. To be timely, a Member's Notice shall be delivered to or mailed and
received at the registered office of the Company not less than sixty (60) days
prior to such meeting. Such Member's Notice to the Secretary shall set forth (a)
as to each Person whom the Member proposes to nominate for election or re-
election as a Director, (i) the name, age, business address and residence
address of the Person, (ii) the principal occupation or employment of the
Person, (iii) the class and number of shares of Common Shares of the Company
which are beneficially owned by the Person, (iv) any other information relating
to the Person that is required to be disclosed in solicitations for proxies for
election of Directors pursuant to Schedule 14A under the Securities Exchange
Act, and (v) the consent of each nominee to serve as a Director, if so elected;
and (b) as to the Member giving the Notice (i) the name and record address of
the Member and (ii) the class and number of shares of capital stock of the
Company which are beneficially owned by the Member. The Company may require any
proposed nominee to furnish such other information as may reasonably be required
by the Company to determine the eligibility of such proposed nominee to serve as
a Director of the Company. No Persons shall be eligible for election as a
Director of the Company unless nominated in accordance with the procedures set
forth herein.
(5) The Chairman of the meeting shall, if the facts warrant, determine
and declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
(6) The Directors shall (subject to any resolution of the Members to
the contrary) have the power from time to time and at any time to appoint any
Person as a Director either to fill a casual vacancy on the Board but so that
the number of Directors so appointed shall not exceed any maximum number
determined from time to time by the Members in a General Meeting. Any Director
so appointed by the Board shall hold office only until the next following Annual
General Meeting of the Company and shall then be eligible for re-election at
that meeting.
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(7) Neither a Director nor an Alternate Director (as the case may be)
shall be required to hold any shares of the Company by way of qualification and
a Director or an Alternate Director (as the case may be) who is not a Member
shall be entitled to receive Notice of and to attend and speak at any General
Meeting of the Company and of all classes of shares of the Company.
(8) Notwithstanding anything in these Bye-Laws to the contrary, the
Members may, at a General Meeting convened and held in accordance with these
Bye-Laws, by special resolution remove a Director without cause, and by ordinary
resolution with cause, at any time before the expiration of such Director's
period of office or in any agreement between the Company and such Director (but
without prejudice to any claim for damages under any such agreement) provided
that the Notice of any such meeting convened for the purpose of removing a
Director shall contain a statement of the intention so to do and be served on
such Director fourteen (14) days before the meeting and at such meeting such
Director shall be entitled to be heard on the motion for his removal.
(9) A vacancy on the Board created by the removal of a Director under
paragraph (8) of this Bye-Law may be filled by the election or appointment by
the Members at the meeting at which such Director is removed to hold office
until the next appointment of Directors or until their successors are elected or
appointed or, in the absence of such election or appointment, but subject to any
resolution of the Members to the contrary, the Board may fill any vacancy in the
number left unfilled.
(10) A retiring Director shall be eligible for re-election.
(11) The office of a Director shall be vacated if the Director:
(a) resigns his office by Notice delivered to the Company at the
Office or tendered at a meeting of the Board whereupon the
Board resolves to accept such resignation; or
(b) becomes of unsound mind (as determined by the Board in its
sole discretion) or dies; or
(c) without special leave of absence from the Board, is absent
from meetings of the Board for two consecutive meetings, and
the Board resolves that his office be vacated; or
(d) becomes bankrupt or has a receiving order made against him or
suspends payment or comprises with his creditors; or
(e) is prohibited by law from being a Director; or
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(f) ceases to be a Director by virtue of any provision of the
Act or is removed from office pursuant to this Bye-Law.
ALTERNATE DIRECTORS
23. (1) Any Director may at any time by Notice delivered to the Office or
at a meeting of the Directors appoint any Person to be his Alternate Director.
Any Person so appointed shall have all the rights and powers of the Director or
Directors for whom such Person is appointed in the alternative provided that
such Person shall not be counted more than once in determining whether or not a
quorum is present. An Alternate Director may be removed at any time by the
Director who appointed him and, subject thereto, the office of Alternate
Director shall continue until the next annual election of Directors or, if
earlier, the date on which the relevant Director ceases to be a Director. Any
appointment or removal of an Alternate Director shall be effected by Notice
signed by the appointor and delivered to the Office or tendered at a meeting of
the Board. An Alternate Director may also be a Director in his own right and may
act as alternate to more than one other Director. An Alternate Director shall,
if his appointor so requests, be entitled to receive Notices of meetings of the
Board or of committees of the Board to the same extent as, but in lieu of, the
Director appointing him and shall be entitled to such extent to attend and vote
as a Director at any such meeting at which the Director appointing him is not
personally present and generally at such meeting to exercise and discharge all
the functions, powers and duties of his appointor as a Director and for the
purposes of the proceedings at such meeting the provisions of these Bye-Laws
shall apply as if he were a Director save that as an alternate for more than one
Director his voting rights shall be cumulative.
(2) An Alternate Director shall only be a Director for the purposes of
the Act and shall only be subject to the provisions of the Act insofar as they
relate to the duties and obligations of a Director when performing the functions
of the Director for whom he is appointed in the alternative and shall alone be
responsible to the Company for his acts and defaults and shall not be deemed to
be the agent of or for the Director appointing him. An Alternate Director shall
be entitled to contract and be interested in and benefit from contracts or
arrangements or transactions and to be repaid expenses and to be indemnified by
the Company to the same extent mutatis mutandis as if he were a Director but he
shall not be entitled to receive from the Company any fee in his capacity as an
Alternate Director except only such part, if any, of the remuneration otherwise
payable to his appointor as such appointor may by Notice to the Company from
time to time direct.
(3) Every Person acting as an Alternate Director shall have one vote
for each Director for whom he acts as alternate (in addition to his own vote if
he is also a Director). If his appointor is for the time being unavailable or
unable to act, the signature of an Alternate Director to any resolution in
writing of the Board or a committee of the Board of which his appointor is a
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member shall, unless the Notice of his appointment provides to the contrary, be
as effective as the signature of his appointor.
(4) An Alternate Director shall ipso facto cease to be an Alternate
Director if his appointor ceases for any reason to be a Director, however, such
Alternate Director or any other Person may be re-appointed by the Directors to
serve as an Alternate Director provided always that, if at any meeting any
Director retires but is re-elected at the same meeting, any appointment of such
Alternate Director pursuant to these Bye-Laws which was in force immediately
before his retirement shall remain in force as though he had not retired.
DIRECTORS' COMPENSATION
24. The amount, if any, of Directors' fees, retainers, awards of shares,
or other remuneration shall from time to time be determined by the Executive
Committee of the Board. In addition, each Director shall be paid his reasonable
traveling, hotel and incidental expenses in attending and returning from
meetings of the Board or committees appointed by the Board, or any Annual
General Meetings or Special General Meetings of the Members, and shall be paid
all expenses properly and reasonably incurred by him in the conduct of the
Company's business or in the discharge of his duties as a Director. Any
question as to the reasonableness of expenses as provided herein shall be a
matter to be determined by the Executive Committee of the Board. Any Director
who by request, goes or resides abroad for any purposes of the Company or who
performs services which in the opinion of the Executive Committee of the Board
go beyond the ordinary duties of a Director may be paid such extra remuneration
(whether by way of salary or otherwise) as the Executive Committee of the Board
may determine, and such extra remuneration shall be in addition to any
remuneration provided for by or pursuant to any other Bye-Law.
DIRECTORS' AND OFFICERS' INTERESTS
25. (1) A Director may:
(a) hold any other office or place of profit with the Company
(except that of Auditor) in conjunction with his office of
Director for such period and, subject to the relevant
provisions of the Act, upon such terms as the Executive
Committee of the Board may determine. Any remuneration
(whether by way of salary or otherwise) paid to any Director
in respect of any such other office or place of profit shall
be in addition to any remuneration provided for by or
pursuant to any other Bye-Law;
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(b) act by himself or his firm in a professional capacity for the
Company (otherwise than as Auditor) and he or his firm may be
remunerated for professional services as if he were not a
Director;
(c) continue to be or become a director, manager or other officer
or member of any other company promoted by the Company or in
which the Company may be interested as a vendor, shareholder
or otherwise and (unless otherwise agreed) no such Director
shall be accountable for any remuneration or other benefits
received by him as a director, manager or other officer or
member of or from his interests in any such other company.
Notwithstanding anything contained in these Bye-Laws to the
contrary, any Director may exercise or cause to be exercised
the voting powers conferred by the shares in any other
company held or owned by the Company, or exercisable by him
as director of such other company in such manner in all
respects as he may determine (including the exercise thereof
in favor of any resolution appointing himself as a director,
manager or other officer of such company), or voting or
providing for the payment of remuneration to the director,
managing director, joint managing director, deputy managing
director, executive director, manager or other officers of
such other company and any Director may vote in favor of the
exercise of such voting rights in manner aforesaid
notwithstanding that he may be, or about to be, appointed a
director, manager or other officer of such a company, and
that as such he is or may become interested in the exercise
of such voting rights in manner aforesaid.
(2) Subject to the Act and to these Bye-Laws, no Director or Officer
or proposed or intending Director or Officer shall be disqualified by his office
from contracting with the Company, either with regard to his tenure of any
office or place of profit or as vendor, purchaser or in any other manner
whatever, nor shall any such contract or any other contract or arrangement in
which any Director or Officer is in any way interested be liable to be avoided,
nor shall any Director or Officer so contracting or being so interested be
liable to account to the Company or the Members for any remuneration, profit or
other benefits realized by any such contract or arrangement by reason of such
Director or Officer holding that office or of the fiduciary relationship thereby
established, provided that such Director or Officer shall disclose the nature of
his interest in any contract or arrangement in which he is interested in
accordance with these Bye-Laws.
(3) A Director or Officer who to his knowledge is in any way, whether
directly or indirectly, interested in a contract or arrangement or proposed
contract or arrangement with the Company shall declare the nature of his
interest at the meeting of the Board at which the question of entering into the
contract or arrangement is first considered, if he knows his interest
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then exists, or in any other case at the first meeting of the Board after he
knows that he is or has become so interested.
(4) For the purposes of the preceding paragraph, a Director shall
furnish Notice to the Board to the effect that: (a) he is a member or officer of
a specified company or firm and is to be regarded as interested in any contract
or arrangement which may after the date of the Notice be made with that company
or firm; or (b) he is to be regarded as interested in any contract or
arrangement which may after the date of the Notice be made with a specified
Person who is connected with him; shall be deemed to be a sufficient declaration
of interest under these Bye-Laws in relation to any such contract or
arrangement, provided that no such Notice shall be effective unless either it is
given at a meeting of the Board or the Director or Officer takes reasonable
steps to secure that it is brought up and read at the next Board meeting after
it is given.
GENERAL POWERS OF THE DIRECTORS
26. (1) The business of the Company shall be managed and conducted by
the Board, which may exercise all powers of the Company (whether relating to the
management of the business of the Company or otherwise) which are not by the Act
or by these Bye-Laws required to be exercised by the Company in a General
Meeting, subject nevertheless to the provisions of the Act and of these Bye-Laws
and to such regulations being not inconsistent with such provisions as may be
prescribed by the Company in a General Meeting. No regulations made by the
Company in a General Meeting shall invalidate any prior act of the Board which
would have been valid if such regulations had not been made. The general powers
given by this Bye-Law shall not be limited or restricted by any special
authority or power given to the Board by any other Bye-Law.
(2) Any Person contracting or dealing with the Company in the ordinary
course of business shall be entitled to rely on any written or oral contract or
agreement or deed, document or instrument entered into or executed as the case
may be by any Officer or any two of the Directors acting jointly on behalf of
the Company and the same shall be deemed to be validly entered into or executed
by the Company as the case may be and shall, subject to applicable law, be
binding on the Company.
(3) Without prejudice to the general powers conferred by these Bye-
Laws it is hereby expressly declared that the Board shall have the following
powers, namely:
(a) to give to any Person (including, without limitation, any
Director, Officer, or employee) the right or option of
requiring at a future date that an allotment shall be made
to him of any share at par or at such premium as may be
agreed;
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(b) to give to any Director, Officer or employee of the Company
an interest in any particular business or transaction or
participation in the profits thereof or in the general
profits of the Company either in addition to or in
substitution for a salary or other remuneration.
(4) The Board may by power of attorney appoint under the Seal any
company, firm or Person or body of Persons, whether nominated directly or
indirectly by the Board, to be the attorney or attorneys of the Company for such
purposes and with such powers, authorities and discretions (not exceeding those
vested in or exercisable by the Board under these Bye-Laws) and for such period
and subject to such conditions as it may determine, and any such power of
attorney may contain such provisions for the protection and convenience of
Persons dealing with any such attorney as the Board may determine, and may also
authorize any such attorney to sub-delegate all or any of the powers,
authorities and discretions vested in him. Such attorney or attorneys may, if so
authorized under the Seal of the Company, execute any deed or instrument under
their personal seal with the same effect as the affixation of the Company's
Seal.
(5) The Board may entrust to and confer upon any Director any of the
powers exercisable by it upon such terms and conditions and with such
restrictions as it may determine, and either collaterally with, or to the
exclusion of, its own powers, and may from time to time revoke or vary all or
any of such powers but no Person dealing in good faith and without Notice of
such revocation or variation shall be affected thereby.
(6) All checks, promissory notes, drafts, bills of exchange and other
instruments, whether negotiable or transferable or not, and all receipts for
monies paid to the Company shall be signed, drawn, accepted, endorsed or
otherwise executed, as the case may be, in such manner as the Board shall from
time to time by resolution determine. The Company's banking accounts shall be
kept with such banks or other financial institutions as the Board shall from
time to time determine.
(7) The Board may establish or join with other companies (including
any of its Subsidiaries or other affiliated companies) in establishing and
making contributions out of the Company's monies to any plans or funds for
providing pensions, life insurance or other benefits for employees (which
expression as used in this and the following paragraph shall include any
Director or ex-Director who may hold or have held any executive office or any
office of profit under the Company or any of its Subsidiaries) and ex-employees
of the Company or any of its Subsidiaries and their dependents or any class or
classes of such Person.
(8) The Board may pay, enter into agreements to pay or make grants of
revocable or irrevocable, and either subject or not subject to any terms or
conditions, pensions or other benefits to employees and ex-employees of the
Company or any of its Subsidiaries and their dependents, or to any of such
Persons, including pensions or benefits additional to those, if any, to which
such employees or ex-employees or their dependents are or may become entitled
under
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any such plan or fund as mentioned in the preceding paragraph. Any such pension
or benefit may, as the Board considers desirable, be granted to an employee
either before and in anticipation of or upon or at any time after his actual
retirement.
(9) The Board may exercise all the powers of the Company to raise or
borrow money and to mortgage or charge all or any part of the undertaking,
property and assets (present and future) and uncalled capital of the Company
and, subject to the Act, to issue debentures, bonds and other securities,
whether outright or as collateral security for any debt, liability or obligation
of the Company or of any third party.
(10) Debentures, bonds and other securities may be made assignable
free from any equities between the Company and the Person to whom the same may
be issued.
(11) Any debentures, bonds or other securities may be issued at a
discount (other than shares), premium or otherwise and with any special
privileges as to redemption, surrender, drawings, allotment of shares, attending
and voting at General Meetings of the Company, appointment of Directors and
otherwise.
PROCEEDINGS OF THE DIRECTORS
27. (1) The Board may meet for the dispatch of business, adjourn and
otherwise regulate its meetings as it considers appropriate. Actions to be
taken at any meeting shall be determined by a majority of votes cast, provided a
quorum is present. The meetings of the Board of Directors of the Company shall
be held outside the United States.
(2) A meeting of the Board may be convened by the Secretary on request
of the President or by any two (2) Directors, provided that no business shall be
transacted at a Board meeting unless not less than seven (7) clear days' Notice
of the meeting shall be given to each Director with reasonable details of the
business to be transacted and provided further that any Director may by Notice
to the Company agree that no Notice needs or any shorter Notice specified in a
Notice may be given to him. The Secretary shall convene a meeting of the Board
of which Notice may be given in writing or by telephone or in such other manner
as the Board may from time to time determine whenever he shall be required so
hereunder. Any Director may waive Notice of any meeting either prospectively or
retrospectively.
(3) The quorum necessary for the transaction of the business of the
Board may be fixed by the Board and, unless so fixed at any other number, shall
be three (3). An Alternate Director shall be counted in a quorum in the case of
the absence of a Director for whom he is the alternate provided that he shall
not be counted more than once for the purpose of determining whether or not a
quorum is present.
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(4) Directors may participate in any meeting of the Board by means of
a conference telephone or other communications equipment through which all
Persons participating in the meeting can communicate with each other
simultaneously and instantaneously and, for the purpose of counting a quorum,
such participation shall constitute presence at a Meeting as if those
participating were present in person.
(5) Any Director who ceases to be a Director at a Board meeting may
continue to be present and to act as a Director and be counted in the quorum
until the termination of such Board meeting if no other Director objects and if
otherwise a quorum of Directors would not be present.
(6) The continuing Directors or a sole continuing Director may act
notwithstanding any vacancy in the Board but, if and so long as the number of
Directors is reduced below the minimum number fixed by or in accordance with
these Bye-Laws, the continuing Directors or Director, notwithstanding that the
number of Directors is below the number fixed by or in accordance with these
Bye-Laws as the quorum or that there is only one continuing Director, may act
for the purpose of filling vacancies in the Board or of summoning General
Meetings of the Company but not for any other purpose.
(7) The Board may elect a Chairman and a Deputy Chairman of its
meetings and determine the period for which they are respectively to hold such
office. If no Chairman or Deputy Chairman is elected, or if at any meeting
neither the Chairman nor any Deputy Chairman is present within five (5) minutes
after the time appointed for holding the same, the Directors present may choose
one of their number to be Acting Chairman of the meeting.
(8) A meeting of the Board at which a quorum is present shall be
competent to exercise all the powers, authorities and discretions for the time
being vested in or exercisable by the Board.
(9) The Board may delegate any of its powers, authorities and
discretions to committees (lincluding but not limited to an Executive Committee,
a Compensation Committee, and an Audit/Finance Committee), consisting of
Directors or Officers as it may determine, and they may, from time to time,
revoke such delegation or revoke the appointment of and discharge any such
committees either wholly or in part, and either as to Persons or purposes. Any
committee so formed shall, in the exercise of the powers, authorities and
discretions so delegated, conform to any regulations which may be imposed on it
by the Board.
(10) All acts done by any such committee in conformity with such
regulations, and in fulfillment of the purposes for which it was appointed, but
not otherwise, shall have like force and effect as if done by the Board, and the
Board shall have power, with the consent of the Company in a General Meeting, to
remunerate the members of any such committee, and charge such remuneration to
the current expenses of the Company.
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(11) The meetings and proceedings of any committee consisting of two
(2) or more members shall be governed by the provisions contained in these Bye-
Laws for regulating the meetings and proceedings of the Board so far as the same
are applicable and are not superseded by any regulations imposed by the Board
under the preceding paragraph.
(12) A resolution in writing signed by all the Directors (except such
as are temporarily unable to act through ill-health or disability), (provided
that such number is sufficient to constitute a quorum and further provided that
a copy of such resolution has been given or the contents thereof communicated to
all the Directors for the time being entitled to receive Notices of Board
meetings in the same manner as Notices of meetings are required to be given by
these Bye-Laws) be as valid and effectual as if a resolution had been passed at
a meeting of the Board duly convened and held. Such resolution may be contained
in one document or in several documents in like form each signed by one or more
of the Directors and for this purpose a facsimile signature of a Director shall
be treated as valid.
(13) All acts bona fide done by the Board or by any committee or by
any Person acting as a Director or members of a committee, shall,
notwithstanding that it is afterwards discovered that there was some defect in
the appointment of any member or the Board or such committee or Person acting as
aforesaid or that they or any of them were disqualified or had vacated office,
be as valid as if every such Person had been duly appointed and was qualified
and had continued to be a Director or member of such committee.
OFFICERS
28. (1) The Officers of the Company shall consist of the Chairman,
President, Chief Executive Officer, Executive Vice-President, Senior Vice
President, Vice President, Chief Financial Officer and Secretary and such
additional Officers (who may or may not be Directors) as the Board may from time
to time determine, all of whom shall be deemed to be Officers for the purposes
of the Act and these Bye-Laws.
(2) The Officers shall have such powers and perform such duties in the
management, business and affairs of the Company as may be delegated to them by
the Board from time to time.
(3) The authority of any Officer of the Company so long as such
Officer shall be resident in the United States, shall be limited to maintaining
an oversight and review of and providing recommendations and information to the
Board, but not to any third party, regarding the affairs of the Company
pertaining to any of its Subsidiaries incorporated in the United States and
otherwise to enable the Company to fulfill its role as the holder of shares of
such Subsidiaries. Such Officer shall have no authority (i) to negotiate or
conclude contracts in the name of the Company (or any of its Subsidiaries not
incorporated in the United States) or
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otherwise bind the Company (or any of its Subsidiaries not incorporated in the
United States) within the United States, or (ii) to conduct or manage any
activities of the Company (or any of its Subsidiaries not incorporated in the
United States) within or outside of the United States, or (iii) to act in any
way which might result in the Company (or any of its subsidiaries not
incorporated in the United States) being considered to be engaged in a trade or
business in the United States within the meaning of the Code. Any purported
action or contract done or made by such Officer or any other duly appointed
Officer of the Company in violation of the provisions hereof shall be null and
void ab initio and the Company or any of its Subsidiaries shall in no way be
bound or affected by any such action or contract done or made on violation
hereof.
(4) The Directors shall, as soon as may be after each appointment or
election of Directors, elect the Officers of the Company, and a Chairman and a
Deputy Chairman of the Board of Directors.
(5) The Officers shall receive such remuneration as the Directors may
from time to time determine.
(6) The Company may in accordance with the Act appoint a resident
representative ordinarily resident in Bermuda and the resident representative
shall maintain an office in Bermuda and comply with the provisions of the Act.
The Company shall provide the resident representative with such documents and
information as the resident representative may require in order to be able to
comply with the provisions of the Act. The resident representative shall be
entitled to have Notice of, attend and be heard at all meetings of the Board or
meetings of the Members.
(7) The Secretary, or an Assistant Secretary, shall attend all
meetings of the Members and shall keep correct minutes of such meetings and
enter the same in the proper books provided for the purpose. The Secretary shall
perform such other duties as are prescribed by the Act or these Bye-Laws or as
may be prescribed by the Board.
(8) The Chairman or the Deputy Chairman of the Board of Directors, as
the case may be, shall act as chairman at all meetings of the Members and of the
Directors at which he is present. In the absence of both the Chairman and the
Deputy Chairman, a chairman shall be appointed or elected by those present at
the meeting.
(9) The Officers of the Company shall have such powers and perform
such duties in the management, business and affairs of the Company as may be
delegated to them by the Directors from time to time.
(10) A provision of the Act or of these Bye-Laws requiring or
authorizing a thing to be done by or to a Director and the Secretary shall not
be satisfied by its being done by or to the same Person acting both as Director
and as or in place of the Secretary.
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REGISTER OF DIRECTORS AND OFFICERS
29. (1) The Board shall cause to be kept in one or more books at its
Office a Register of Directors and Officers and shall enter therein the
particulars required by the Act.
(2) The Register of Directors and Officers shall be open to inspection
at the Office of the Company on every business day, subject to such reasonable
restrictions as the Board may impose, so that not less than two (2) hours in
each business day be allowed for inspection.
MINUTES
30. The Board shall cause Minutes to be duly entered in books provided for
the purpose: (i) of all elections and appointments of Officers; (ii) of the
names of the Directors present at each meeting of the Directors and of any
committee appointed by the Board; and (iii) of all resolutions and proceedings
of each General Meeting of the Members, meetings of the Board and meetings of
committees of the Board.
SEAL
31. (1) The Company shall have one or more Seals, as the Board may
determine. For the purpose of sealing documents creating or evidencing
securities issued by the Company, the Company may have a securities seal which
is a facsimile of the Seal of the Company with the addition of the words
"Corporate Seal" on its face or in such other form as the Board may approve. The
Board shall provide for the custody of each Seal and no Seal shall be used
without the authority of the Board or of a committee of the Board authorized by
the Board in that behalf. Subject as otherwise provided in these Bye-Laws, any
instrument to which a Seal is affixed shall be signed autographically by one
Director or Officer and the Secretary or by two Directors or by such other
Person (including a Director) or Persons as the Board may appoint, either
generally or in any particular case, save that as regards any certificates for
shares or debentures or other securities of the Company the Board may by
resolution determine that such signatures or either of them shall be dispensed
with or affixed by some method or system of mechanical signature. Every
instrument executed in manner provided by this Bye-Law shall be deemed to be
sealed and executed with the authority of the Board previously given.
(2) Where the Company has a Seal for use abroad, the Board may by
writing under the Seal appoint any agent or committee abroad to be the duly
authorized agent of the Company for the purpose of affixing and using such Seal
and the Board may impose restrictions on the use thereof as it may determine.
Wherever in these Bye-Laws reference is made to the Seal, the
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reference shall, when and so far as may be applicable, be deemed to include any
such other Seal as aforesaid.
(3) Any Director or the Secretary or any Person appointed by the Board
for the purpose may authenticate (by affixing the seal or otherwise) any
documents affecting the constitution of the Company and any resolution passed by
the Company or the Board or any committee, and any books, records, documents and
accounts relating to the business of the Company, and to certify copies thereof
or extracts therefrom as true copies or extracts, and if any books, records,
documents or accounts are elsewhere than at the Office, or other Officer of the
Company having the custody thereof shall be deemed to be a Person so appointed
by the Board. A document purporting to be a copy of a resolution, or an extract
from the minutes of a meeting, of the Company or of the Board or any committee
which is so certified shall be conclusive evidence in favor of all Persons
dealing with the Company upon the faith thereof that such resolution has been
duly passed or, as the case may be, that such minutes or extract is a true and
accurate record of proceedings at a duly constituted meeting.
DESTRUCTION OF DOCUMENTS
32. The Company shall be entitled to destroy the following documents at
the following times:
(a) any share certificate which has been cancelled at any time after
the expiration of one (1) year from the date of such
cancellation;
(b) any dividend mandate or any variation or cancellation thereof or
any notification of change of name or address at any time after
the expiration of two (2) years from the date such mandate,
variation, cancellation or notification was recorded by the
Company;
(c) any instrument of transfer of shares which has been registered at
any time after the expiration of seven (7) years from the date of
registration;
(d) any allotment letters after the expiration of seven (7) years
from the date of issue thereof; and
(e) copies of powers of attorney, grants of probate and letters of
administration at any time after the expiration of seven (7)
years after the account to which the relevant power of attorney,
grant of probate or letters of administration related has been
closed;
and it shall conclusively be presumed in favor of the Company that every entry
in the Register purporting to be made on the basis of any such documents so
destroyed was duly and properly made and every share certificate so destroyed
was a valid certificate duly and properly cancelled
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and that every instrument of transfer so destroyed was a valid and effective
instrument duly and properly registered and that every other document destroyed
hereunder was a valid and effective document in accordance with the recorded
particulars thereof in the books or records of the Company. Provided always
that: (1) the foregoing provisions of this Bye-Law shall apply only to the
destruction of a document in good faith and without Notice to the Company that
the preservation of such document was relevant to a claim; (2) nothing contained
in this Bye-Law shall be construed as imposing upon the Company any liability in
respect of the destruction of any such document earlier than as aforesaid or in
any case where the conditions of proviso (1) above are not fulfilled; and (3)
references in this Bye-Law to the destruction of any document include references
to its disposal in any manner.
DIVIDENDS AND OTHER DISTRIBUTIONS
33. (1) Subject to the Act, the Board may from time to time declare cash
dividends in any currency to be paid to the Members. The Board may also make a
distribution to the Members out of any contributed surplus (as ascertained in
accordance with the Act).
(2) No cash dividend shall be paid or other distribution made out of
contributed surplus if to do so would render the Company unable to pay its
liabilities as they become due or the realizable value of its assets would
thereby become less than the aggregate of its liabilities and its issued share
capital and share premium accounts.
(3) Except in so far as the rights attaching to, or the terms of issue
of, any share otherwise provide:
(a) all cash dividends shall be declared and paid according to
the amounts paid; and
(b) all cash dividends shall be apportioned and paid pro rata
according to the amounts paid up on the shares during any
portion or portions of the period in respect of which the
dividend is paid.
(4) The Board may from time to time pay to the Members such interim
cash dividends as appear to the Board to be justified by the profits of the
Company and in particular (but without prejudice to the generality of the
foregoing) if at any time the share capital of the Company is divided into
different classes, the Board may pay such interim cash dividends in respect of
those shares in the capital of the Company which confer on the holders thereof
deferred or non-preferential rights as well as in respect of those shares which
confer on the holders thereof preferential rights with regard to dividend and
provided that the Board acts bona fide the Board shall not incur any
responsibility to the holders of shares conferring any preference for any damage
that they may suffer by reason of the payment of an interim cash
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dividend on any shares having deferred or non-preferential rights and may also
pay any fixed dividend which is payable on any shares of the Company half-yearly
or on any other dates, whenever such profits, in the opinion of the Board,
justifies such payment.
(5) The Board may deduct from any cash dividend or other monies
payable to a Member by the Company on or in respect of any shares all sums of
money (if any) presently payable by him to the Company on account of calls or
otherwise.
(6) No cash dividend or other monies payable by the Company on or in
respect of any share shall bear interest against the Company.
(7) Any cash dividend, interest or other sum payable in cash to the
holder of shares may be paid by check or warrant sent through the mail addressed
to the holder at his registered address or, in the case of joint holders,
addressed to the holder whose name stands first in the Register in respect of
the shares at his address as appearing in the Register or addressed to such
Person and at such address as the holder or joint holders may in writing direct.
Every such check or warrant shall, unless the holder or joint holders otherwise
direct, be made payable to the order of the holder or, in the case of joint
holders, to the order of the holder whose name stands first on the Register in
respect of such shares, and shall be sent at his or their risk and payment of
the check or warrant by the bank on which it is drawn shall constitute a good
discharge to the Company notwithstanding that it may subsequently appear that
the same has been stolen or that any endorsement thereon has been forged. Any
one of two or more joint holders may give effectual receipts for any cash
dividends or other monies payable or property distributable in respect of the
shares held by such joint holders.
(8) All cash dividends or bonuses unclaimed for one (1) year after
having been declared may be invested or otherwise made use of by the Board for
the benefit of the Company until claimed. Any cash dividend or bonuses unclaimed
after a period of six (6) years from the date of declaration shall be forfeited
and shall revert to the Company. The payment by the Board of any unclaimed cash
dividend or other sums payable on or in respect of a share into a separate
account shall not constitute the Company a trustee in respect thereof.
(9) Whenever the Board has resolved that a cash dividend be declared
or paid, the Board may further resolve that such dividend be satisfied wholly or
in part by the distribution of specific assets of any kind and in particular of
paid up shares, debentures or warrants to subscribe securities of the Company or
any other company, or in any one or more of such ways, and where any difficulty
arises in regard to the distribution the Board may settle the same as it thinks
expedient, and in particular may issue certificates in respect of fractions of
shares, disregard fractional entitlements or round the same up or down, and may
fix the value for distribution of such specific assets, or any part thereof, and
may determine that cash payments shall be made to any Members upon the footing
of the value so fixed in order to adjust the rights of all parties, and may vest
any such specific assets in trustees as may seem expedient to the
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Board and may appoint any Person to sign any requisite instruments of transfer
and other documents on behalf of the Persons entitled to the dividend, and such
appointment shall be effective and binding on the Members. The Board may resolve
that no such assets shall be made available to Members with registered addresses
in any particular territory or territories where, in the absence of a
registration statement or other special formalities, such distribution of assets
would or might, in the opinion of the Board, be unlawful or impracticable and in
such event the only entitlement of the Members aforesaid shall be to receive
cash payments as aforesaid. Members affected as a result of the foregoing
sentence shall not be or be deemed to be a separate class of Members for any
purpose whatsoever.
(10) Whenever the Board has resolved that a cash dividend be declared
or paid on any class of the share capital of the Company, the Board may further
resolve either:
(a) that such dividend be satisfied wholly or in part in the
form of an allotment of shares credited as fully paid up,
provided that the shareholders entitled thereto will be
entitled to elect to receive such dividend (or part thereof
if the Board so determines) in cash in lieu of such
allotment. In such case, the following provisions shall
apply:
(i) the basis of any such allotment shall be determined
by the Board;
(ii) the Board, after determining the basis of allotment,
shall give not less than two (2) weeks' Notice to the
holders of the relevant shares of the right of
election accorded to them, and shall send with such
Notice, forms of election and specify the procedure to
be followed and the place at which and the latest date
and time by which duly completed forms of election
must be delivered in order to be effective;
(iii) the right of election may be exercised in respect of
the whole or part of that portion of the dividend in
respect of which the right of election has been
accorded; and
(iv) the dividend (or that part of the dividend to be
satisfied by the allotment of shares as aforesaid)
shall not be payable in cash on shares in respect
whereof the cash election has not been duly exercised
("the non-elected shares") and in satisfaction thereof
shares of the relevant class shall be allotted
credited as fully paid up to the holders of the non-
elected shares on the basis of allotment determined as
aforesaid and for such purpose the Board shall
capitalize and apply out of any part of the undivided
profits of the Company (including profits carried and
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<PAGE>
standing to the credit of any reserves or other
special account other than the Subscription Rights
Reserve) as the Board may determine, such sum as may
be required to pay up in full the appropriate number
of shares of the relevant class for allotment and
distribution to and amongst the holders of the non-
elected shares on such basis; or
--
(b) that the shareholders entitled to such dividend shall be
entitled to elect to receive an allotment of shares
credited as fully paid up in lieu of the whole or such
part of the dividend as the Board may determine. In such
case, the following provisions shall apply:
(i) the basis of any such allotment shall be
determined by the Board;
(ii) the Board, after determining the basis of
allotment, shall give not less than fourteen (14)
days' Notice to the holders of the relevant shares
of the right of election accorded to them and
shall send with such Notice forms of election and
specify the procedure to be followed and the place
at which and the latest date and time by which
duly completed forms of election must be delivered
in order to be effective;
(iii) the right of election may be exercised in respect
of the whole or part of that portion of the
dividend in respect of which the right of election
has been accorded; and
(iv) the dividend (or that part of the dividend in
respect of which a right of election has been
accorded) shall not be payable in cash on shares
in respect whereof the share election has been
duly exercised ("the elected shares") and in lieu
thereof shares of the relevant class shall be
allotted credited as fully paid up to the holders
of the elected shares on the basis of allotment
determined as aforesaid and for such purpose the
Board shall capitalize and apply out of any part
of the undivided profits of the Company (including
profits carried and standing to the credit of any
reserves or other special account other than the
Subscription Rights Reserve) as the Board may
determine, such sum as may be required to pay up
in full the appropriate number of shares of the
relevant class for allotment and distribution to
and amongst the holders of the elected shares on
such basis.
(11) (a) The shares allotted under paragraph (10) of this Bye-Law
shall rank pari passu in all respects with shares of the
same class (if any) then in issue
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save only as regards participation in the relevant dividend
or in any other distributions, bonuses or rights paid,
made, declared or announced prior to or contemporaneously
with the payment or declaration of the relevant dividend
unless, contemporaneously with the announcement by the
Board of their proposal under paragraph (10) of this Bye-
Law in relation to the relevant dividend or
contemporaneously with their announcement of the
distribution, bonus or rights in question, the Board shall
specify that the shares to be allotted under paragraph (10)
of this Bye-Law shall rank for participation in such
distribution, bonus or rights.
(b) The Board may do all acts and things considered necessary
or expedient to give effect to any capitalization under
paragraph (10) of this Bye-Law, with full power to the
Board to make such provisions as it determines in the case
of shares becoming distributable in fractions (including
provisions whereby, in whole or in part, fractional
entitlements are aggregated and sold and the net proceeds
distributed to those entitled, or are disregarded or
rounded up or down or whereby the benefit of fractional
entitlements accrues to the Company rather than to the
Members concerned). The Board may authorize any Person to
enter into on behalf of all Members interested, an
agreement with the Company providing for such
capitalization and matters incidental thereto and any
agreement made pursuant to such authority shall be
effective and binding on all concerned.
(12) The Board may resolve in respect of any particular dividend of
the Company that notwithstanding the provisions of paragraph (10) of this Bye-
Law such dividend may be satisfied wholly in the form of an allotment of shares
credited as fully paid up without offering any right to shareholders to elect to
receive such dividend in cash in lieu of such allotment.
(13) The Board may on any occasion determine that rights of election
and the allotment of shares under paragraph (10) of this Bye-Law shall not be
made available or made to any shareholders with registered addresses in any
territory where, in the absence of a registration statement or other special
formalities, the circulation of an offer of such rights of election or the
allotment of shares would or might, in the opinion of the Board, be unlawful or
impracticable, and in such event the provisions aforesaid shall be read and
construed subject to such determination. Members affected as a result of the
foregoing sentence shall not be or be deemed to be a separate class of Members
for any purpose whatsoever.
(14) Any resolution declaring a dividend on shares of any class may
specify that the same shall be payable or distributable to the Persons
registered as the holders of such shares at the close of business on a
particular date, notwithstanding that it may be a date prior to that on which
the resolution is passed, and thereupon the dividend shall be payable or
distributable to them in accordance with their respective holdings so
registered, but without prejudice to the
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rights inter se in respect of such dividend of transferors and transferees of
any such shares. The provisions of this Bye-Law shall mutatis mutandis apply to
bonuses, capitalization issues, distributions of realized capital profits or
offers or grants made by the Company to the Members.
(15) Before declaring any dividend, the Board may set aside out of the
profits of the Company such sums as it determines as reserves which shall, at
the discretion of the Board, be applicable for any purpose to which the profits
of the Company may be properly applied and pending such application may, also at
such discretion, either be employed in the business of the Company or be
invested in such investments as the Board may from time to time determine and so
that it shall not be necessary to keep any investments constituting the reserve
or reserves separate or distinct from any other investments of the Company. The
Board may also, without placing the same to reserve, carry forward any profits
which it may think prudent not to distribute.
CAPITALIZATION
34. (1) The Board may resolve to capitalize any part of the amount for
the time being standing to the credit of any reserve account or to the credit of
the profit and loss account or otherwise available for distribution by applying
such sum in paying up (i) unissued shares, debentures or other obligations to be
allotted or distributed fully paid pro rata to the Members or any class of
Members or (ii) in full or partly paid shares of those Members who would have
been entitled to such sums if they were distributed by way of cash dividend or
other distribution. In addition, the Board may, subject to the Act, resolve to
capitalize any part of the amount for the time being standing to the credit of
the Company's share premium account by applying such sum in paying up unissued
shares to be issued to the Members, or class of Members, as fully paid bonus
shares.
(2) The Board may settle, as it considers appropriate, any difficulty
arising in regard to any distribution under the preceding paragraph and in
particular may issue certificates in respect of fractions of shares or authorize
any Person to sell and transfer any fractions or may resolve that the
distribution should be as nearly as may be practicable in the correct proportion
but not exactly so or may ignore fractions altogether, and may determine that
cash payments shall be made to any Members in order to adjust the rights of all
parties, as may seem expedient to the Board. The Board may appoint any Person to
sign on behalf of the Persons entitled to participate in the distribution any
contract necessary or desirable for giving effect thereto and such appointment
shall be effective and binding upon the Members.
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SUBSCRIPTION RIGHTS RESERVE
35. The following provisions shall have effect to the extent that they
are not prohibited by and are in compliance with the Act:
(1) If, so long as any of the rights attached to any warrants issued
by the Company to subscribe for shares of the Company shall remain exercisable,
the Company does any act or engages in any transaction which, as a result of any
adjustments to the subscription price in accordance with the provisions of the
conditions of the warrants, would reduce the subscription price to below the par
value of a share, then the following provisions shall apply:
(a) as from the date of such act or transaction the Company shall
establish and thereafter maintain, subject to this Bye-Law, a
reserve (the "Subscription Rights Reserve") in the amount not
less than the sum which for the time being would be required
to be capitalized and applied in paying up in full the
nominal amount of the additional shares required to be issued
and allotted credited as fully paid, pursuant to sub-
paragraph (c) of this Bye-Law, on the exercise in full of all
the subscription rights outstanding and shall apply the
Subscription Rights Reserve in paying up such additional
shares in full as and when the same are allotted;
(b) the Subscription Rights Reserve shall not be used for any
purpose other than that specified above unless all other
reserves of the Company (other than share premium account)
have been extinguished and will then only be used to make
good losses of the Company if and so far as is required by
law;
and immediately upon such exercise so much of the sum standing to the
credit of the Subscription Rights Reserve as is required to pay up in
full such additional nominal amount of shares shall be capitalized and
applied in paying up in full such additional nominal amount of shares
which shall forthwith be allotted credited as fully paid to the
exercising warrantholders; and
(c) upon the exercise of all or any of the subscription rights
represented by any warrant, the relevant subscription rights
shall be exercisable in respect of a nominal amount of shares
equal to the amount in cash which the holder of such warrant
is required to pay on exercise of the subscription rights
represented thereby (or, as the case may be, the relevant
portion thereof in the event of a partial exercise of the
subscription rights), and, in addition, there shall be
allotted in respect of such subscription rights to the
exercising warrantholder, credited as fully paid, such
additional nominal amount of shares as is equal to the
difference between:
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(i) the said amount in cash which the holder of such warrant
is required to pay on exercise of the subscription
rights represented thereby (or, as the case may be, the
relevant portion thereof in the event of a partial
exercise of the subscription rights); and
(ii) the nominal amount of shares in respect of which such
subscription rights would have been exercisable having
regard to the provisions of the conditions of the
warrants, had it been possible for such subscription
rights to represent the right to subscribe for shares at
less than par
(d) if, upon the exercise of the subscription rights represented
by any warrant, the amount standing to the credit of the
Subscription Rights Reserve is not sufficient to pay up in
full such additional nominal amount of shares equal to such
difference as aforesaid to which the exercising warrantholder
is entitled, the Board shall apply any profits or reserves
then or thereafter becoming available (including, to the
extent permitted by law, share premium account) for such
purpose until such additional nominal amount of shares is paid
up and allotted as aforesaid and until then no dividend or
other distribution shall be paid or made on the fully paid
shares of the Company then in issue. Pending such payment and
allotment, the exercising warrantholder shall be issued by the
Company with a certificate evidencing his right to the
allotment of such additional nominal amount of shares. The
rights represented by any such certificate shall be in
registered form and shall be transferable in whole or in part
in units of one share in the like manner as the shares for the
time being are transferable, and the Company shall make such
arrangements in relation to the maintenance of a register
therefor and other matters in relation thereto as the Board
may determine and adequate particulars thereof shall be made
known to each relevant exercising warrantholder upon the issue
of such certificate.
(2) Shares allotted under this Bye-Law shall rank pari passu in all
respects with the other shares allotted on the relevant exercise of the
subscription rights represented by the warrant concerned. Notwithstanding
anything contained under paragraph (1) of this Bye-Law, no fraction of any share
shall be allotted on exercise of the subscription rights.
(3) The provisions of this Bye-Law as to the establishment and
maintenance of the Subscription Rights Reserve shall not be altered or added to
in any way which would vary or abrogate, or which would have the effect of
varying or abrogating the provisions for the benefit of any warrantholder or
class of warrantholders under this Bye-Law without the sanction of a special
resolution of such warrantholders or class of warrantholders.
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(4) A certificate or report by the Auditors for the time being of the
Company as to whether or not the Subscription Rights Reserve is required to be
established and maintained and if so the amount thereof so required to be
established and maintained, as to the purposes for which the Subscription Rights
Reserve has been used, as to the extent to which it has been used to make good
losses of the Company, as to the additional nominal amount of shares required to
be allotted to exercising warrantholders credited as fully paid, and as to any
other matter concerning the Subscription Rights Reserve shall (in the absence of
manifest error) be conclusive and binding upon the Company and all
warrantholders and shareholders.
ACCOUNTING RECORDS
36. (1) The Board shall cause true accounts to be kept of the sums of
money received and expended by the Company, and the matters in respect of which
such receipt and expenditure take place, and of the property, assets, credits
and liabilities of the Company and of all other matters required by the Act or
necessary to give a true and fair view of the Company's affairs and to explain
its transactions.
(2) The accounting records shall be kept at the Office or, subject to
the Act, at such other place or places as the Board decides and shall always be
open to inspection by the Directors of the Company. No Member (other than a
Director of the Company) shall have any right of inspecting any accounting
record or book or document of the Company except as conferred by law or
authorized by the Board or the Company in a General Meeting.
(3) Subject to the Act, a printed copy of the balance sheet and profit
and loss account, including every document required by law to be annexed
thereto, made up to the end of the applicable financial year and containing a
summary of the assets and liabilities of the Company under convenient heads and
a statement of income and expenditure, together with a copy of the Auditors'
report, shall be sent to each Person entitled thereto at least twenty-one (21)
days before the date of the Annual General Meeting and laid before the Company
at such meeting in accordance with the requirements of the Act provided that
this Bye-Law shall not require a copy of those documents to be sent to any
Person whose address the Company is not aware or to more than one of the joint
holders of any shares or debentures.
AUDIT
37. (1) Subject to the Act, at the Annual General Meeting or at a
subsequent Special General Meeting in each year, the Members shall appoint an
Auditor to audit the accounts of the Company and such Auditor shall hold office
until the Members appoint another Auditor. Such Auditor may be a Member but no
Director or Officer or employee of the Company shall, during his continuance in
office, be eligible to act as an Auditor of the Company.
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(2) Subject to the Act, a Person, other than a retiring Auditor, shall
not be capable of being appointed Auditor at an Annual General Meeting unless
Notice of an intention to nominate that Person to the office of Auditor has been
given not less than fourteen (14) days before the Annual General Meeting and
furthermore, the Company shall send a copy of any such Notice to the retiring
Auditor.
(3) The Members may, at any General Meeting convened and held in
accordance with these Bye-Laws, by special resolution remove the Auditor at any
time before the expiration of his term of office and shall by ordinary
resolution at that meeting appoint another Auditor in his stead for the
remainder of his term.
(4) Subject to the Act, the accounts of the Company shall be audited
at least once in every year.
(5) The remuneration of the Auditor shall be fixed by the Company in a
General Meeting or in such manner as the Members may determine.
(6) If the office of Auditor becomes vacant by the resignation or
death of the Auditor, or by his becoming incapable of acting by reason of
illness or other disability at a time when his services are required, the
Directors shall as soon as practicable convene a Special General Meeting to fill
the vacancy.
(7) The statement of income and expenditure and the balance sheet
provided for by these Bye-Laws shall be examined by the Auditor and compared by
him with the books, accounts and vouchers relating thereto; and he shall make a
written report thereon stating whether such statement and balance sheet are
drawn up so as to present fairly the financial position of the Company and the
results of its operations for the period under review and, in case information
shall have been called for from Directors or Officers of the Company, whether
the same has been furnished and has been satisfactory. The financial statements
of the Company shall be audited by the Auditor in accordance with generally
accepted auditing standards. The Auditor shall make a written report thereon in
accordance with generally accepted auditing standards and the report of the
Auditor shall be submitted to the Members in a General Meeting. The generally
accepted auditing standards referred to herein may be those of a country or
jurisdiction other than Bermuda. If so, the financial statements and the report
of the Auditor should disclose this fact and name such country or jurisdiction.
(8) The Auditor shall at all reasonable times have access to all books
kept by the Company and to all accounts and vouchers relating thereto; and he
may call on the Directors or Officers of the Company for any information in
their possession relating to the books or affairs of the Company.
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NOTICES
38. (1) Any Notice from the Company to a Member shall be given in
writing or by cable, telex or facsimile transmission message and any such Notice
and (where appropriate) any other document may be served or delivered by the
Company on or to any Member either personally or by sending it through the mail
or other courier service in a prepaid envelope addressed to such Member at his
registered address as appearing in the Register or at any other address supplied
by him to the Company for the purpose or, as the case may be, by transmitting it
to any such address or transmitting it to any telex or facsimile transmission
number supplied by him to the Company for the giving of Notice to him or which
the Person transmitting the Notice reasonably and bona fide believes at the
relevant time will result in the Notice being duly received by the Member or may
also be served by advertisement in appointed newspapers (as defined in the Act)
or in accordance with the requirements of any Designated Stock Exchange. In the
case of joint holders of a share all Notices shall be given to that one of the
joint holders whose name stands first in the Register and Notice so given shall
be deemed a sufficient service on or delivery to all the joint holders.
(2) Any Notice or other document:
(a) if served or delivered by mail, shall be sent airmail
where appropriate and shall be deemed to have been served
or delivered on the day following that on which the
envelope containing the same, properly prepaid and
addressed, is put into the mail; in proving such service
or delivery it shall be sufficient to prove that the
envelope or wrapper containing the Notice or document was
properly addressed and put into the mail and a certificate
in writing signed by the Secretary or other Officer of the
Company or other Person appointed by the Board that the
envelope or wrapper containing the Notice or other
document was so addressed and put into the mail shall be
conclusive evidence thereof; and
(b) if served or delivered in any other manner contemplated by
these Bye-Laws, shall be deemed to have been served or
delivered at the time of personal service or delivery or,
as the case may be, at the time of the relevant dispatch
or transmission; and in proving such service or delivery a
certificate in writing signed by the Secretary or other
Officer of the Company or other Person appointed by the
Board as to the fact and time of such service, delivery,
dispatch or transmission shall be conclusive evidence
thereof.
(3) Any Notice or other document delivered or sent by mail to or left
at the registered address of any Member in pursuance of these Bye-Laws shall,
notwithstanding that such Member is then dead or bankrupt or that any other
event has occurred, and whether or not the
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Company has Notice of the death or bankruptcy or other event, be deemed to have
been duly served or delivered in respect of any share registered in the name of
such Member as sole or joint holder unless his name shall, at the time of the
service or delivery of the Notice or document, have been removed from the
Register as the holder of the share, and such service or delivery shall for all
purposes be deemed a sufficient service or delivery of such Notice or document
on all Persons interested (whether jointly with or as claiming through or under
him) in the share.
(4) A Notice may be given by the Company to the Person entitled to a
share in consequence of the death, mental disorder or bankruptcy of a Member by
sending it through the mail in a prepaid letter, envelope or wrapper addressed
to him by name, or by the title of representative of the deceased, or trustee of
the bankrupt, or by any like description, at the address, if any, supplied for
the purpose by the Person claiming to be so entitled, or (until such an address
has been so supplied) by giving the Notice in any manner in which the same might
have been given if the death, mental disorder or bankruptcy had not occurred.
(5) Any Person who by operation of law, transfer or other means
whatsoever shall become entitled to any share shall be bound by every Notice in
respect of such share which prior to his name and address being entered on the
Register shall have been duly given to the Person from whom he derives his title
to such share.
(6) For the purposes of these Bye-Laws, a cable or telex or facsimile
transmission message purporting to come from a holder of shares or, as the case
may be, a Director or Alternate Director, or, in the case of a corporation which
is a holder of shares from a director or the secretary thereof or a duly
appointed attorney or duly authorized representative thereof for it and on its
behalf, shall in the absence of express evidence to the contrary available to
the Person relying thereon at the relevant time be deemed to be a document or
instrument in writing signed by such holder or Director or Alternate Director or
in the terms in which it is received.
WINDING UP
39. (1) The Board shall have power in the name and on behalf of the
Company to present a petition to the court for the Company to be wound up.
(2) A resolution that the Company be wound up by the court or be wound
up voluntarily shall be a special resolution.
(3) If the Company shall be wound up (whether the liquidation is
voluntary or by the court) the liquidator may, with the authority of a special
resolution and any other sanction required by the Act, divide among the Members
in specie or kind the whole or any part of the assets of the Company and whether
or not the assets shall consist of properties of one kind or shall consist of
properties to be divided as aforesaid of different kinds, and may for such
purpose
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set such value as he deems fair upon any one or more class or classes of
property and may determine how such division shall be carried out as between the
Members or different classes of Members. The liquidator may, with the like
authority, vest any part of the assets in trustees upon such trusts for the
benefit of the Members as the liquidator with the like authority shall
determine, and the liquidation of the Company may be closed and the Company
dissolved, but so that no contributory shall be compelled to accept any shares
or other property in respect of which there is a liability.
INDEMNITY
40. Indemnification of Directors and Officers of the Company
--------------------------------------------------------
(1) The Directors and Officers (such term to include, for the purposes
of this Bye-Law, any individual appointed to any committee by the Board) for
the time being acting in relation to any of the affairs of the Company and the
liquidator or trustees (if any) for the time being acting in relation to any of
the affairs of the Company and every one of them, and their heirs, executors and
administrators, shall be indemnified and held harmless out of the assets of the
Company from and against all actions, costs, charges, losses, damages and
expenses which they or any of them, their heirs, executors or administrators,
shall or may incur or sustain by or by reason of any act done, concurred in or
omitted in or about the execution of their duty, or supposed duty, or in their
respective offices or trusts, and none of them shall be answerable for the acts,
receipts, neglects or defaults of the others of them or for joining in any
receipts for the sake of conformity, or for any bankers or other Persons with
whom any monies or effects belonging to the Company shall or may be delivered or
deposited for safe custody, or for insufficiency or deficiency of any security
upon which any monies of or belonging to the Company shall be deposited or
invested, or for any other loss, misfortune or damage which may happen in the
execution of their respective offices or trusts, or in relation thereto,
provided that this indemnity shall not extend to any matter in respect of any
fraud or dishonesty which may attach to any of said individuals.
(2) Each Member and the Company agree to waive any claim or right of
action he or it might have, whether individually or by or in the right of the
Company, against any Director or Officer on account of any action taken by such
Director or Officer, or the failure of such Director or Officer to take any
action, in the performance of his duties, or supposed duties, with or for the
Company; provided that such waiver shall not extend to any matter in respect of
any fraud or dishonesty which may attach to such Director or Officer. Any repeal
or modification of this Bye-Law shall not adversely affect any right or
protection of a Director or Officer of the Company existing immediately prior to
such repeal or modification.
(3) Expenses incurred in defending a civil or criminal action, suit or
proceeding shall be paid by the Company in advance of the final disposition of
such action, suit or proceeding as
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authorized by the Board in the specific case upon receipt of an undertaking by
or on behalf of the Director, Officer, liquidator or trustee to repay such
amount unless it shall ultimately be determined that the individual is entitled
to be indemnified by the Company as authorized in these Bye-Laws or otherwise
pursuant to the laws of Bermuda.
ALTERATION OF BYE-LAWS & AMENDMENT
TO MEMORANDUM OF ASSOCIATION
41. Any amendment to these Bye-Laws or to the Company's Memorandum of
Association shall be approved by the Board and decided on by an ordinary
resolution of the Members; provided however, that any proposed amendment to Bye-
Laws 2, 3, 4, 5, 17, 20, 22, 40 and 41 shall be approved by the Board and by a
special resolution of the Members.
*****
***
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Exhibit 4.1
AMERICAN SAFETY INSURANCE GROUP, LTD.
Incorporated under the laws of Bermuda
NUMBER SHARES
CUSIP
This is to certify that _________________________ is the owner of
_________________ fully paid and non-assessable Common Shares of par value of
$0.01 each of American Safety Insurance Group, Ltd. transferable on the books of
the Company by the holder hereof in person or duly authorized attorney upon
surrender of this Certificate properly endorsed.
Witness the facsimile seal of the Company and the facsimile signatures of
its duly authorized officers.
Dated____________________
__________________________________________
President and Chief Executive Officer
__________________________________________
Secretary
SunTrust Bank, Atlanta
as Transfer Agent and Registrar
By______________________
Authorized Signature
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The Bye-Laws of the Company contain provisions that limit the voting rights that
may be exercised by certain holders of Common Shares. The Bye-Laws provide
that, so long as the Controlled Shares (as such term is defined in the Bye-Laws)
of any person constitute 9.5% or more of the issued and outstanding Common
Shares, the combined voting rights with respect to the Controlled Shares owned
by such person shall be limited, in the aggregate, to a voting power of 9.5%.
The Company will furnish without charge to each shareholder who so requests, the
powers, designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT________ Custodian_________
(Cust) (Minor)
TEN ENT--as tenants by the entireties Under Uniform Gifts to Minors
Act (State)___________________
JT TEN--as joint tenants with right
of survivorship and not as
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received_____________ hereby sell, assign and transfer unto
Please insert social security or other identifying number of assignee
+---------------------------------------+
| |
+---------------------------------------+
________________________________________________________________________________
Please print or typewrite name and address including postal zip code of assignee
________________________________________________________________________________
________________________________________________________________________________
of the Common Shares represented by the within Certificate, and do hereby
irrevocably constitute and appoint______
________________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named Company
with full power of substitution in the premises.
Dated____________________
________________
NOTICE: The signature(s) to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement, of any change whatever.
Signature(s) Guaranteed:
___________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17AD-15.
2
<PAGE>
EXHIBIT 5.1
CONYERS DILL & PEARMAN
CLARENDON HOUSE
2 CHURCH STREET
HAMILTON HM CX, BERMUDA
January 26, 1998
American Safety Insurance Group Ltd.
44 Church Street
Hamilton
Bermuda
Dear Sirs:
We have acted as Bermuda counsel for American Safety Insurance Group Ltd. (the
"Company"), a Bermuda exempted company, in connection with the proposed issue
and sale of Common Shares of the Company.
In our capacity as Bermuda counsel to the Company, we participated in the
preparation of the registration statement ("Registration Statement") on Form S-1
(Registration No. 333-42749) which was filed with the Securities and Exchange
Commission ("Commission") under the Securities Act of 1933 as amended ("Act") of
the United States of America and the forms of prospectus (the "Prospectus") also
filed with the Commission together with all amendments thereto filed in
accordance with the Act.
For the purposes of giving this opinion, we have examined and relied upon the
Registration Statement. We have also reviewed a copies of the Memorandum of
Association and Bye-Laws of the Company certified as a true copy thereof by the
Secretary of the Company, minutes of meetings of the Company's Board of
Directors, and minutes of shareholders' meetings and such other documents, and
have made such enquiries as to questions of law as we have deemed necessary in
order to render the opinion set forth below.
We have assumed:
(i) the genuineness and authenticity of all signatures and the conformity to
the originals of all copies (whether or not certified) of all documents
examined by us and the authenticity and completeness of the originals from
which such copies were taken;
(ii) the correctness, accuracy and completeness of all factual representations
made in the Registration Statement and in the other documents which we have
reviewed; and
<PAGE>
(iii) that there is no provision of the law of any jurisdiction, other than
Bermuda, which would have any implication in relation to the opinions
expressed herein.
We have made no investigation of and express no opinion in relation to the laws
of any jurisdiction other than Bermuda. This opinion is to be governed by and
construed in accordance with the laws of Bermuda and is limited to and is given
on the basis of the current law and practice in Bermuda.
On the basis of and subject to the foregoing, we are of the opinion that:
1. The Company has been duly incorporated and is an existing limited liability
exempted company under the laws of Bermuda, with corporate power and
corporate authority to own, lease and operate its properties and conduct
its business as described in the Prospectus.
2. The Common Shares to be sold by the Company have been duly authorised, and,
when duly paid for, will be legally issued, fully paid and non-assessable;
such Common Shares are not subject to the pre-emptive rights of any
shareholder of the Company; all corporate action required to be taken for
the authorisation, issue and the sale of the Common Shares has been validly
taken and, when such Common Shares have been duly paid for, no personal
liability will attach to a holder thereof solely by reason of the
ownership thereof.
3. The statements relating to certain Bermuda tax matters set forth under the
caption "CERTAIN TAX CONSIDERATIONS" of the Registration Statement, insofar
as such statements constitute summaries of Bermuda law, are accurate.
We hereby consent to the filing of this opinion with the Commission and as an
exhibit to the Registration Statement and to the reference to this Firm under
the captions "RISK FACTORS-Enforceability of Certain Civil Liabilities",
"CERTAIN BERMUDA LAW CONSIDERATIONS," "CERTAIN TAX CONSIDERATIONS" and "LEGAL
MATTERS".
Yours faithfully,
CONYERS DILL & PEARMAN
<PAGE>
EXHIBIT 8.1
January 26, 1998
The Board of Directors
American Safety Insurance Group, Ltd
44 Church Street
Hamilton, Bermuda HM HX
Dear Sirs,
We have acted as United States tax advisors to the Company in connection with a
public offering by the Company of Common Shares, par value US$0.01 per share of
the Company.
We hereby confirm that the tax discussions regarding United States tax matters
set forth under the caption "Certain Tax Considerations" included in the
Registration Statement on Form S-1 filed by the Company with the United States
Securities and Exchange Commission ("Commission") on January 26, 1998, in our
opinion, are true and accurate. Our opinions are based upon the representations
made by management and the authorities existing as of the date of this letter.
It should be further noted that our opinions are based upon existing provisions
of the Internal Revenue Code of 1986, as amended, existing and proposed Treasury
regulations thereunder and current administrative rulings and court decisions.
All of the foregoing are subject to change, which may be retroactive, and any
such changes could affect the continuing validity of our opinions.
We hereby consent to the filing of this opinion with the Commission and as an
exhibit to the Registration Statement.
Very truly yours,
KPMG Peat Marwick LLP
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of the date
below first written by and between Synergy Insurance Services, Inc., a Georgia
corporation (the "Company") and Lloyd A. Fox, a resident of the State of Georgia
(the "Employee").
W I T N E S S E T H:
Whereas, the Company desires to retain the services of the Employee and the
Employee desires to continue to provide his services as President and Chief
Executive Officer of the Company according to the provisions set forth
hereinbelow;
Whereas, the Company and the Employee agree that their mutual best
interests can be best served by entering into this Agreement;
Now, Therefore, in consideration of these premises and the mutual
agreements hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Employment. The Company hereby employs the Employee as its President and
Chief Executive Officer and the Employee hereby accepts such employment under
and subject to the terms and conditions of this Agreement. The Employee
represents and warrants that he has the right, power and authority to enter into
this Agreement and that he is under no prohibition regarding his performance
hereunder. The Company represents and warrants that it has the right, power and
authority to enter into this Agreement.
2. Duties.
(a) The Employee shall competently and diligently manage the daily
operations and perform the normal duties and responsibilities of a President and
Chief Executive Officer of the Company (including, without limitation, those
matters set forth in Exhibit A attached hereto) which is engaged in providing
insurance management, insurance and reinsurance underwriting services, loss
control services, marketing services, bond underwriting and agency services, and
such other related duties and responsibilities consistent with the foregoing as
may be reasonably assigned to him from time to time by the board of directors of
the Company (the "Board of Directors").
(b) The Employee shall timely report to the Board of Directors as may be
reasonably requested of the Employee.
(c) The Employee shall devote his full time, skills and best efforts to
the performance of his duties hereunder, to the exclusion of all other
<PAGE>
employment activities, except as otherwise provided in this Agreement; provided,
however, that the Employee may manage his own passive investments so long as
such management does not interfere materially with the performance of his duties
hereunder.
(d) The Employee shall generally perform his duties from the offices of
the Company which are located in the metropolitan area of Atlanta, Georgia, and
the Employee shall not be required to relocate his office unless mutually
approved by the Board of Directors and the Employee.
(e) During the term of this Agreement, the Company acknowledges that the
Employee shall also serve as president and chief executive officer, director and
a member of the executive committee of (i) American Safety Casualty Insurance
Company ("ASCIC"), the corporate parent of the Company, and its corporate
parent, American Safety Insurance Group, Ltd. ("ASIG"); and (ii) such other
insurance, reinsurance and/or bonding companies managed or owned by the Company
or its corporate parent(s) or affiliates as the parties may mutually agree. The
Employee shall receive no additional cash or equity compensation for acting as
president and chief executive officer, a director and a member of the executive
committee of ASCIC, ASIG, or such other companies as aforesaid, but shall
otherwise be entitled to any other benefits that may accrue to each office.
(f) The Company (and all other companies or corporate affiliates
pursuant to Paragraph 2(e) hereof) shall indemnify and hold harmless the
Employee from and against all claims, suits, judgments and damages asserted or
claimed by affiliated or unaffiliated third persons or entities, arising out of
the Employee's good faith efforts to implement the policies and procedures of
the Company (and any other companies or corporate affiliates pursuant to
Paragraph 2(e) hereof). However, such indemnification shall not arise as a
result of any action or failure to act by the Employee through his gross
negligence, willful misconduct or breach of duty of loyalty in connection with
performance of his duties under this Agreement. The Employee shall not be held
responsible or liable to the Company (and any other companies or corporate
affiliates pursuant to Paragraph 2(e) hereof) for any losses or errors or
omissions arising out of the performance of his duties in accordance with the
policies and procedures of the Company (and any other companies or corporate
affiliates pursuant to Paragraph 2(e) hereof) as communicated to the Employee
from time to time in writing, except as a result of any action or failure to act
by the Employee through his gross negligence, willful misconduct or breach of
duty of loyalty in connection with the performance of his duties under this
Agreement.
3. Compensation. In consideration of the services rendered by the Employee
under this Agreement, the Company shall pay the Employee a salary of $350,000
per year until January 1, 1998 and thereafter $375,000 per annum during the term
of this Agreement, which salary shall be paid in equal installments in arrears
-2-
<PAGE>
on a twice-monthly basis. In addition, the Employee shall be entitled to receive
a discretionary bonus, subject to Executive Committee approval, based on the
profitability of ASIG and its subsidiaries and affiliated companies on a group
basis.
4. Other Benefits. The Employee shall be entitled to the following fringe
benefits and any other such benefits which may be approved by the board of
directors of the Company from time to time during the term of this Agreement:
(a) Insurance Benefits. Employee shall be entitled to participate in
such major medical health insurance, accident and long term disability
insurance, and life insurance programs as the Company may from time to time make
available to its senior executive employees. In addition, the Company shall
purchase and maintain during the term of this Agreement at least a $2,000,000
key-man life insurance policy on the Employee for the benefit of the Company.
The Employee agrees to submit to medical examinations for such insurance and
supply such information as may be required in connection therewith.
(b) Stock Option Programs. The Employee shall participate in all stock
option plans which ASIG may from time to time make available to the senior
executive employees of the Company. The Employee shall also make recommendations
to the Executive Committee of ASIG regarding the grant of stock options to
senior executive employees of the Company.
In addition to the foregoing, the Employee shall have the option to
purchase up to 39 shares of common stock of ASIG at a purchase price equal to
95% of the book value per share of ASIG common stock as of December 31, 1996.
This option may be exercised, in whole or in part, by written notice to ASIG by
the Employee with corresponding payment of the purchase price, at any time, and
from time to time, until not later then March 7, 2002. The determination of the
book value of ASIG and shall be made in accordance with generally accepted
accounting principles for the insurance business consistently applied by the
independent certified public accountants customarily used by ASIG and with the
most recent actuarial reports from the independent actuarial consulting firm
customarily used by ASIG. This option may be assigned by the Employee to an
affiliated company or entity owned or controlled by the Employee.
(c) Vacation. The Employee shall be entitled to six weeks of vacation
during each fiscal year period of employment hereunder. The Employee agrees that
he shall schedule such vacation time so as not to materially impair the
performance of the Employee's duties hereunder. Any unused vacation time during
the term hereof must be used within six months from the end of each fiscal year
period hereunder and if not used such unused vacation time shall not accrue for
use in any subsequent period. Subject to the foregoing sentence, payment shall
be made for accrued and unused vacation time through the date of termination of
this Agreement.
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<PAGE>
(d) Business Expenses. The Company shall reimburse the Employee within
fifteen days of submission of expense statements for all reasonable and
necessary business expenses (including club dues) incurred by the Employee in
connection with the performance of his duties hereunder and the business affairs
of the Company (and any other companies or corporate affiliates pursuant to
Paragraph 2(e) hereof). The Employee will present such expense reports in
compliance with the procedures established by the Company from time to time.
(e) Automobile Allowance. The Company shall provide the Employee with an
automobile allowance of $1,485 per month during the term of this Agreement from
which the Employee shall be responsible for the cost of the automobile and
related maintenance, repairs, gasoline and insurance.
(f) Retirement Plan. The Company shall make the maximum dollar annual
contribution on behalf of the Employee to its tax exempt profit sharing plan
qualified under Internal Revenue Code Section 401(a) (the "Plan") or in such
other manner as the parties may mutually agree; provided, however, that no such
contribution shall exceed any applicable contribution limitations imposed by the
Internal Revenue Code or the Plan, which currently provide, among other
requirements, that annual contribution allocations to a single participant may
not exceed $30,000.
5. Term. The term of employment under this Agreement shall commence March
6, 1997 and shall continue through December 31, 2002, unless sooner terminated
as provided in this Agreement. Upon said expiration date of this Agreement,
unless either party notifies the other at least 180 days prior to said
expiration date, this Agreement shall automatically extend for an additional
five year term.
6. Termination
(a) With Cause. This Agreement may be terminated by either party for
cause upon 60 days prior written notice to the other party in the event there is
a material breach of the obligations hereunder. The party asserting such
material breach shall provide written notice thereof in detail to the other
party who shall have 60 days from the receipt of such notice to cure such
material breach.
(b) Change of Control. This Agreement may be terminated by the Employee
within 365 days of the occurrence of an event of a "Change of Control" of either
the Company, ASCIC or ASIG, upon ninety (90) days prior written notice to the
Company. In any such event, upon receipt of notice of termination, the Company
shall pay Employee two times his then annual salary. For purposes of this
Paragraph 6(b), "Change of Control" shall be deemed to have occurred on the
earliest of the following dates:
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<PAGE>
(i) The date any entity or person shall have become the
beneficial owner of, or shall have obtained voting control over, thirty
percent (30%) or more of the outstanding Common Shares of the Company.
For the purposes hereof, the term "person" shall mean any individual,
corporation, partnership, group, association or other person, as such
term is defined in Section 13(d)(3) or Section 14(d)(2) of the Exchange
Act, other than the Company, any subsidiaries of the Company or any
employee benefit plan(s) sponsored or maintained by the Company or any
subsidiary thereof, and the term "beneficial owner" shall have the
meaning given the term in Rule 13d-3 under the Exchange Act;
(ii) The date the shareholders of the Company approve a
definitive agreement (A) to merge or consolidate the Company with or
into another corporation, in which the Company is not the continuing or
surviving corporation or pursuant to which any Common Shares of the
Company would be converted into cash, securities or other property of
another corporation, other than a merger of the Company in which holders
of Common Shares immediately prior to the merger have the same
proportionate ownership of Common Shares of the surviving corporation
immediately after the merger as immediately before, or (B) to sell or
otherwise dispose of all or substantially all the assets of the Company;
or
(iii) The date there shall have been a change in a majority of
the Board of Directors of the Company within a twenty four-month period
unless the nomination for election by the Company's shareholders of each
new director was approved by the vote of two-thirds of the directors
then still in office who were in office at the beginning of the twenty
four-month period.
(c) Effective Date. For purposes of Paragraphs 6(a) and (b), termination
shall be deemed to have occurred upon the expiration of the applicable notice
period. Termination of this Agreement shall not relieve or release the parties
from their respective obligations hereunder through such date and as otherwise
specifically provided in this Agreement.
(d) Death. In the event of the death of the Employee, his employment by
the Company shall be deemed terminated at the end of the calendar month in which
his death occurs, and all subsequent compensation and other benefits under this
Agreement shall cease, except as otherwise specifically provided in this
Agreement to the contrary. In such event, the Employee's salary and other
-5-
<PAGE>
benefits shall be continued for a period of six months following the end of the
month in which the Employee's death occurs. Nothing herein shall restrict the
Employee's estate or heirs from any benefits under applicable law.
(e) Disability. In the event of the disability of the Employee for a
period in excess of 180 days, such that the Employee is unable to substantially
perform his services hereunder, his employment by the Company shall be deemed to
terminate at the end of the calendar month which includes the last day of said
period, and all subsequent compensation and other benefits under this Agreement
shall cease, except as otherwise specifically provided in this Agreement to the
contrary. For purposes of this Agreement, "disability" shall mean an illness,
injury, or other physical or mental condition of the Employee occurring for a
period of 180 consecutive days from commencement or occurrence after the date of
this Agreement, which results in the Employee's inability to perform during such
period substantially all of the full-time duties he performed in his capacity as
the senior executive employee of the Company and to the extent he was performing
such duties immediately prior to the commencement or occurrence of such
condition, as certified in writing by a medical doctor, selected by the Company,
who is competent in the field of medicine to which such condition is related.
7. Specific Performance. In the event of a breach of this Agreement, any
non-breaching party hereto may maintain an action for a specific performance
against the other party hereto who is alleged to have breached any of the terms,
conditions, representations, warranties or agreements herein contained and it is
hereby further agreed that no objection to the form of action in any proceeding
for specific performance of this Agreement shall be raised by any party hereto
so that such specific performance of this Agreement may not be obtained by the
aggrieved party. Notwithstanding anything contained in this Agreement to the
contrary, the foregoing sentence shall not be construed to limit in any manner
whatsoever any of the rights and remedies an aggrieved party may have by virtue
of any breach of this Agreement.
8. Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be delivered in
person, in which event the notice shall be deemed effective when delivered, or
by overnight delivery service providing documentation of receipt, or telexed or
telecopied, in which event the notice shall be deemed to have been received on
the next business day following delivery to such service or acknowledgment of
receipt by recipient's telex or telecopy machine. All notices and other
communications under this Agreement shall be given to the parties hereto at the
following addresses:
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<PAGE>
(i) If to the Company:
Synergy Insurance Services, Inc.
Attn: General Counsel
1845 The Exchange, Suite 200
Atlanta, Georgia 30339
(ii) If to Employee:
Lloyd A. Fox
6695 Riverside Drive, N.W.
Atlanta, Georgia 30328
Any party hereto may change its address specified for notices herein by
designating a new address by notice in accordance with this Section.
9. Arbitration. Upon agreement of the parties hereto, any dispute or
disagreement between the parties arising out of this Agreement may be submitted
to and determined in binding arbitration in accordance with the Rules for
Commercial Arbitration of the American Arbitration Association. All arbitration
proceedings shall be conducted in Atlanta, Georgia.
The arbitration tribunal shall consist of three arbitrators, one
each selected by Company and Employee, and the third selected by the two
selected arbitrators. If either Company or Employee fails to select an
arbitrator within 30 days of receipt of a request for selection from the other
party or from the American Arbitration Association, or if the arbitrators
selected by Company and Employee shall be unable to agree on the selection of
the third arbitrator within 30 days of their selection, such arbitrator shall be
appointed in accordance with the Rules for Commercial Arbitration of the
American Arbitration Association. If any arbitrator shall fail to serve or shall
be unable to discharge his or her duties, such arbitrator shall be replaced by
the party appointing such arbitrator in the same manner of selection, or if the
third arbitrator, in accordance with the above procedure, within 30 days after
request from either Company or Employee.
-7-
<PAGE>
The decision rendered by a majority of the members of the arbitration
tribunal shall be final and binding upon the parties and may be entered as a
judgment in, and enforced by, any court of competent jurisdiction. The
prevailing party shall be entitled to recover from the other party all the costs
and expenses of the prevailing party incurred in connection with the
arbitration, including arbitration fees, reasonable out-of-pocket expenses,
reasonable attorneys fees for services before and during the arbitration and any
appeal or enforcement thereof. This arbitration provision shall survive the
termination or expiration of this Agreement and shall not be extinguished
thereby.
10. Miscellaneous.
(a) Entire Agreement. This Agreement constitutes the entire
understanding and agreement between the parties hereto with regard to the
subject matter hereof, and supersedes all prior promises, representations,
inducements, understandings and agreements between the parties, whether written
or oral. This Agreement may not be amended or revised except by a writing signed
by the parties.
(b) Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns,
including any corporation with which or into which any corporate party or any
successor or subsidiary may be merged or which may succeed to its assets or
business, although the obligations of the Employee are personal and may be
performed only by such person.
(c) Headings. The headings or captions of this Agreement are inserted
only as a matter of convenience and for reference and in no way define, limit or
describe the scope of this Agreement or the intent of any provision hereof.
(d) Severability. The provisions of this Agreement are severable, and
invalidity of any provision shall not affect the validity of any other
provision.
(e) Governing Law and Venue. This Agreement shall be construed and
enforced in accordance with, and the rights of the parties shall be governed by,
the laws of the State of Georgia, notwithstanding any state's choice of law
rules to the contrary. Further, the parties hereto express and agree that any
and all action concerning any dispute arising under this Agreement shall be
filed and maintained only in a state or federal court sitting in the State of
Georgia, and each party hereby consents and submits to the jurisdiction and
venue of such state or federal court.
(f) Waiver. The waiver by a party of any breach of this Agreement by the
other party shall not be effective unless in writing, and no such waiver shall
operate or be construed as the waiver of the same or another breach on a
subsequent occasion.
-8-
<PAGE>
(g) Attorney Fees. In the event litigation shall be necessary to
enforce, interpret, or rescind the provisions of this Agreement or relating to
matters set forth herein, the prevailing party shall be entitled to recover from
the adverse party, in addition to such other relief, the prevailing party's
reasonable attorney's fees for services before trial, on trial, and on any
appeal therefrom.
(h) Construction. This Agreement is the product of negotiation of and
preparation by and among each party. Therefore, the parties acknowledge and
agree that this Agreement shall not be deemed prepared or drafted by one party
or the other and should be construed accordingly.
(i) Singular; Gender. Unless the content otherwise requires, whatever
used in this Agreement, the singular shall also include the plural, the plural
shall include the singular, and the masculine gender shall include the neuter
and feminine gender, and vice versa.
(j) Counterparts. This Agreement may be executed in counterparts, all of
which when taken together shall together constitute one and the same document.
Recitals. The recitals set forth at the beginning of this Agreement are
incorporated by reference in, and made part of, this Agreement.
In Witness Whereof, the parties hereto have duly executed this Agreement
as a sealed instrument as of March 6, 1997.
Company: Employee:
SYNERGY INSURANCE /s/ Lloyd A. Fox
SERVICES, INC. ----------------------------
LLOYD A. FOX
By: /s/ Frederick C. Treadway
-----------------------------------
Title: Chairman
---------------------------------
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<PAGE>
EXHIBIT A
POSITION DESCRIPTION
PRESIDENT/CHIEF EXECUTIVE OFFICER
REPORTING: Executive Committee and Board of Directors of Synergy Is Services,
Inc. (the "Company")
RESPONSIBILITIES:
Responsible for overall management and control of operations of general
liability and related bond agencies, and of related insurance company clients of
the Company.
Oversee and manage underwriting, loss control, claims, marketing,
administrative and bookkeeping/financial departments and staff personnel of the
Company and related bond agency.
Manage hiring and termination of all staff and set staff compensation
levels for the Company and related bond agency.
Liaison with outside management and professional firms retained by the
Company or related bond agency or insurance company clients.
Preparation of annual budgets for the Company and related bond agency and
insurance company clients, subject to approval by Treasurer of the Company and
boards of the Company, bond agency and insurance company clients.
Periodically report to Executive Committee and Board of Directors of the
Company and related bond agency and insurance company clients as directed by
Executive Committee and Board of Directors.
Oversee the negotiation of relationships between the Company, and related
bond agency and insurance company clients and producing brokers.
Oversee the negotiation of relationships between the Company, and related
bond agency and insurance company clients and producing brokers.
Oversee the negotiation of reinsurance agreements between related insurance
company clients and reinsurers, subject to approval by Boards of such clients.
Manage the Company and related bond agency operations and performance
pursuant to agreements between the Company and related insurance company
clients.
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<PAGE>
Recommend to Executive Committee and Board of Directors areas of new
business development.
Plan Executive Committee and Board meetings per schedule adopted by Board
of Directors.
In general be responsible for managing operations of the Company and
related bond agency in accordance with directions of Executive Committee and
Board of Directors.
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<PAGE>
Exhibit 10.2
AMERICAN SAFETY INSURANCE GROUP, LTD.
1998 INCENTIVE STOCK OPTION PLAN
1. Purpose
The purpose of the 1998 Incentive Stock Option Plan (the "Plan") is to
enable American Safety Insurance Group, Ltd. (the "Company") to attract and
retain officers, employees, consultants and advisors to contribute to the
Company's growth and enhancement of shareholder value, and to encourage such
persons to participate in the long-term development of the Company through
ownership of common shares ("Common Shares") of the Company. Unless otherwise
indicated by the context herein, references to the "Company" includes the
Company and its subsidiaries.
The purpose of the Plan is to be carried out through the granting of
incentive stock options ("Incentive Options") intended to qualify under Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
nonqualified stock options ("Nonqualified Options"). Incentive Options and
Nonqualified Options shall be referred to herein collectively as "Options."
2. Administration of the Plan
(a) Appointment of Committee. The Plan shall be administered by a
compensation committee (the "Committee") appointed by the Board of Directors of
the Company (the "Board of Directors") and comprised solely of members of the
Board of Directors. The Committee shall include only "non-employee directors,"
as such term is defined in Rule 16b-3 promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") or any successor rule. The Board of
Directors shall designate a member of the Committee to act as Chairman of the
Committee, and the Board of Directors may remove any member of the Committee at
any time and appoint any director to fill any vacancy on the Committee.
(b) Committee Meetings. The Committee shall hold its meetings at such
times and places as specified by the Chairman of the Committee. A majority of
the Committee shall constitute a quorum. All actions of the Committee shall be
taken by vote of a majority of the members of the Committee at a meeting duly
called by its Chairman; provided, however, any action taken by written consent,
signed by a majority of the members of the Committee, shall be as effective as
an action taken by the Committee at a meeting duly called and held.
<PAGE>
(c) Committee Powers. Subject to the provisions of the Plan, the
Committee shall have full and final authority, in its discretion, to take any
action with respect to the Plan including, without limitation, the following:
(i) to determine the individuals to receive Options, the nature of each Option
as an Incentive Option or a Nonqualified Option, the times when Options shall be
granted, the number of shares to be subject to each Option, the Option price,
the Option period, the time or times when each Option shall be exercisable and
the other terms, conditions, restrictions and limitations of an Option; (ii) to
prescribe the form or forms of the agreements evidencing any Options granted
under the Plan; (iii) to establish, amend and rescind rules and regulations for
the administration of the Plan; and (iv) to construe and interpret the Plan, the
rules and regulations, and the agreements evidencing Options granted under the
Plan, and to make all other determinations deemed necessary or advisable for
administering the Plan. In addition, the Committee shall have complete
authority, in its discretion, to accelerate the date that any Option which is
not otherwise exercisable shall become exercisable in whole or in part, without
any obligation to accelerate such date with respect to any other Option granted
to any person.
(d) Other Matters. Notwithstanding Section 2(c) hereof, and subject to
the terms of the Plan, the Committee may delegate to the Chief Executive Officer
of the Company the authority to grant Options, and to make any or all of the
determinations reserved for the Committee in the Plan and summarized in Section
2(c) hereof with respect to Options that have been granted, to any individual
who, at the time of such grant or other determination, (i) is not an officer or
director of the Company subject to Section 16 of the Exchange Act and (ii) is
otherwise eligible to participate in the Plan under Section 5 hereof.
3. Effective Date
Subject to the approval of the Plan by a majority of the outstanding Common
Shares of the Company voted at the 1998 Annual Meeting of Shareholders, the Plan
shall be effective as of January 29, 1998. Options may be granted under the
Plan on and after the effective date, but not after January 29, 2008.
4. Options; Shares of Stock Subject to the Plan
Both Incentive Options and Nonqualified Options, as designated by the
Committee, may be granted under the Plan. Subject to adjustment as provided in
Section 10 hereof, the total number of Common Shares that may be issued and sold
pursuant to Options shall not exceed in the aggregate 750,000 Common Shares of
authorized but unissued or reacquired Common Shares of the Company. The Company
hereby
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reserves sufficient authorized Common Shares to provide for the exercise of
Options granted hereunder. Any Common Shares subject to an Option which, for
any reason, expires or is terminated unexercised may again be subject to an
Option granted under the Plan.
5. Eligibility
An Option may be granted by the Committee only to an individual (an
"Optionee") who on the date the Option is granted is either (i) an officer or
employee (collectively referred to as "employee") of the Company or a subsidiary
or (ii) a consultant or advisor providing services to the Company or a
subsidiary. Directors of the Company or a subsidiary who are otherwise eligible
to participate in the Plan may be granted Options under the Plan. Furthermore,
the Committee shall determine the eligibility of an individual based on the
nature and extent of such individual's duties, responsibilities, personal
capabilities, performance and potential, or any combination of such factors.
6. Grant of Options; Option Price
(a) Subject to the limitations of the Plan, the Committee may in its
sole and absolute discretion grant Options to such eligible persons in such
numbers, upon such terms and at such times as the Committee shall determine.
Both Incentive Options and Nonqualified Options may be granted under the Plan.
To the extent that a Option is designated as an Incentive Option but does not
qualify as such, the Option (or portion thereof) shall be treated as a
Nonqualified Option.
(b) The price per Common Share at which an Option may be exercised (the
"Option price") shall be established by the Committee at the time the Option is
granted and shall be set forth in the terms of the agreement evidencing the
grant of the Option; provided, that in the case of an Incentive Option, the
Option price shall be equal to or greater than the fair market value per Common
Share on the date the Option is granted. In addition, the following rules shall
apply:
(i) An Incentive Option shall be considered to be granted on the
date that the Committee acts to grant the Option, or on any later date
specified by the Committee as the date of grant of the Option. A
Nonqualified Option shall be considered to be granted on the date the
Committee acts to grant the Option, or any other date specified by the
Committee as the date of grant of the Option.
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(ii) For purposes of the Plan, the fair market value of the Common
Shares shall be determined in good faith by the Committee in accordance
with the following provisions: (i) if the Common Shares are included in
The Nasdaq National Market or listed for trading on the New York Stock
Exchange or the American Stock Exchange, the fair market value shall be
the closing sales price of the Common Shares as reported in The Nasdaq
National Market or the New York Stock Exchange or the American Stock
Exchange (as applicable) on the date immediately preceding the date the
Option is granted, or, if there is no transaction on such date, then on
the trading date nearest preceding the date the Option is granted for
which closing price information is available; or (ii) if the shares of
Common Shares are not listed or reported in any of the foregoing, then
fair market value shall be determined by the Committee.
(iii) In no event shall there first become exercisable by the
Optionee in any one calendar year Incentive Options granted by the
Company with respect to Common Shares having an aggregate fair market
value (determined at the time an Option is granted) greater than
$100,000.
7. Option Period and Limitations on the Right to Exercise Options
(a) The period during which an Option may be exercised (the "Option
period") shall be determined by the Committee when the Option is granted and
shall not extend more than ten years from the date on which the Option is
granted. An Option shall be exercisable on such date or dates, during such
period, for such number of shares, and subject to such conditions as shall be
determined by the Committee and set forth in a Stock Option Agreement evidencing
such Option, subject to the right of the Committee to accelerate the time an
Options may be exercised or extend the period when an Option may be exercised,
or both. Any Option or portion thereof not exercised before the expiration of
the Option period shall terminate.
(b) The Optionee, subject to the terms of the Option, may exercise in
whole or in part the Option by giving written notice of at least ten days to the
Secretary of the Company. Such notice shall specify the number of Common Shares
to be purchased pursuant to the Option and the aggregate purchase price to be
paid therefor, and shall be accompanied by the payment of such purchase price.
Such payment may be made (a) in cash, (b) with the approval of the Committee, by
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delivery to the Company of Common Shares having an aggregate fair market value
on the date of exercise, as determined by the Committee, equal to the Option
price, or (c) a combination of (a) and (b). An Optionee is under no obligation
to exercise an Option or any part thereof.
(c) The Company shall undertake and follow all necessary procedures to
make prompt delivery of the number of Common Shares which the Optionee elects to
purchase upon exercise of an Option granted under the Plan. Such delivery,
however, may be postponed, in the sole discretion of the Company, to enable the
Company to comply with any applicable laws, regulations, procedures or listing
requirements of any governmental agency, regulatory authority or stock exchange.
(d) No Option granted to an Optionee who was an employee at the time of
grant shall be exercised unless the Optionee is, at the time of exercise, an
employee, and has been an employee continuously since the date the Option was
granted, subject to the following:
(i) An Option shall not be affected by any change in the terms,
conditions or status of the Optionee's employment, provided that the
Optionee continues to be an employee of the Company or a subsidiary.
(ii) The employment relationship of an Optionee shall be treated as
continuing intact for any period that the Optionee is on military or
sick leave or other bona fide leave of absence, provided that the period
of such leave does not exceed ninety days, or, if longer, as long as the
Optionee's right to reemployment is determined either by statute or by
contract. The employment relationship of an Optionee shall also be
treated as continuing intact while the Optionee is not in active
employment status because of disability. For purposes of the Plan,
"disability" shall mean the inability of the Optionee to engage in any
substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death,
or which has lasted or can be expected to last for a continuous period
of not less than twelve months. Determination of whether an Optionee has
suffered a "disability" shall be made by the Committee and its
determination shall be final and conclusive.
(iii) If the employment of an Optionee is terminated because of
disability, or if the Optionee dies while he is an employee or dies
after the termination of his employment because of disability, the
Option may be exercised only to the extent exercisable on the date of
the Optionee's termination of employment or death while employed (the
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"termination date"), except that the Committee may in its discretion
accelerate the date for exercising all or any part of the Option which
was not otherwise exercisable on the termination date. The Option must
be exercised, if at all, prior to the first to occur of the following,
whichever shall be applicable: (A) the close of the period of twelve
months following the termination date; or (B) the close of the
Option period. In the event of the Optionee's death, such Option shall
be exercisable by such person or persons as shall have acquired the
right to exercise the Option by will or by the laws of intestate
succession.
(iv) If the employment of the Optionee is terminated for any reason
other than disability, death or for "cause," the Option may be exercised
to the extent exercisable on the date of such termination of employment,
except that the Committee may in its discretion accelerate the date for
exercising all or any part of the Option which was not otherwise
exercisable on the date of such termination of employment. The Option
must be exercised, if at all, prior to the first to occur of the
following, whichever shall be applicable: (A) the close of the period of
90 days following the termination date; or (B) the close of the
Option period. If the Optionee dies following such termination of
employment and prior to the earlier of the dates specified in (A) or (B)
of this subparagraph, the Optionee shall be treated as having died while
employed under subparagraph (iii) immediately preceding (treating for
this purpose the Optionee's date of termination of employment as the
termination date). In the event of the Optionee's death, such Option
shall be exercisable by such person or persons as shall have acquired
the right to exercise the Option by will or by the laws of intestate
succession.
(v) If the employment of the Optionee is terminated for "cause,"
the Option (whether or not vested) shall lapse and no longer be
exercisable as of the effective time of his termination of employment,
as determined by the Committee. For purposes of the Plan, the Optionee's
termination shall be for "cause" if such termination results from the
Optionee's (A) dishonesty; (B) refusal to perform his duties for the
Company; (C) engaging in conduct that could be materially damaging to
the Company without a reasonable good faith belief that such conduct was
in the best interest of the Company; or (D) any action or failure to act
constitutes a violation of the Company's standing corporate policies (as
in effect from time to time) and/or a violation of the federal, state or
local statutes or regulations. The determination of "cause" shall be
made by the Committee and its determination shall be final and
conclusive.
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(vi) Notwithstanding the foregoing, the Committee shall have
authority, in its discretion, to extend the period during which an
Option may be exercised; provided that, in the event that any such
extension shall cause an Incentive Option to be designated as a
Nonqualified Option, no such extension shall be made without the prior
written request and consent of the Optionee.
(e) An Option granted to an Optionee who was a consultant or advisor to
the Company or a subsidiary at the time of grant (and who does not thereafter
become an employee, in which case he shall be subject to the provisions of
Section 7(d) hereof) may be exercised only to the extent exercisable on the date
of the Optionee's termination of service to the Company or a subsidiary (unless
the termination was for cause), and must be exercised, if at all, prior to the
first to occur of the following, as applicable: (A) the close of the period of
90 days following the termination date; or (B) the close of the Option period.
If the services of such an Optionee are terminated for cause, his Option shall
lapse and no longer be exercisable as of the effective time of his termination
of services, as determined by the Committee. Notwithstanding the foregoing, the
Committee may in its discretion accelerate the date for exercising all or any
part of an Option which was not otherwise exercisable on the termination date.
(f) An Optionee or his legal representative, legatees or distributees
shall not be deemed to be the holder of any shares subject to an Option unless
and until certificates for such shares are issued to such person or persons
under the Plan.
8. Change of Control
(a) In the event of a "Change of Control", all Options which are not yet
vested and exercisable shall become fully vested and exercisable as of the date
of such Change of Control.
(b) For purposes of the Plan, a "Change of Control" shall be deemed to
have occurred on the earliest of the following dates:
(i) The date any entity or person shall have become the beneficial
owner of, or shall have obtained voting control over, thirty percent
(30%) or more of the outstanding Common Shares of the Company. For the
purposes hereof, the term "person" shall mean any individual,
corporation, partnership, group, association or other person, as such
term is defined in Section 13(d)(3) or Section 14(d)(2) of the Exchange
Act, other than the Company, any subsidiary of the Company or any
employee benefit plan(s) sponsored or maintained by the Company or any
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subsidiary thereof, and the term "beneficial owner" shall have the
meaning given the term in Rule 13d-3 under the Exchange Act;
(ii) The date the shareholders of the Company approve a definitive
agreement (A) to merge or consolidate the Company with or into another
corporation, in which the Company is not the continuing or surviving
corporation or pursuant to which any shares of Common Shares of the
Company would be converted into cash, securities or other property of
another corporation, other than a merger of the Company in which holders
of Common Shares immediately prior to the merger have the same
proportionate ownership of Common Shares of the surviving corporation
immediately after the merger as immediately before, or (B) to sell or
otherwise dispose of all or substantially all the assets of the Company;
or
(iii) The date there shall have been a change in a majority of the
Board of Directors of the Company within a twenty four-month period
unless the nomination for election by the Company's shareholders of each
new director was approved by the vote of two-thirds of the directors
then still in office who were in office at the beginning of the twenty
four-month period.
9. Nontransferability of Options and Shares
(a) Incentive Options granted pursuant to the Plan shall not be
transferable (including by pledge or hypothecation) other than by will or the
laws of intestate succession. Nonqualified Options granted pursuant to the Plan
shall not be transferable (including by pledge or hypothecation) other than by
will or the laws of intestate succession, except as may be permitted by the
Committee in a manner consistent with the registration provisions of the
Securities Act of 1933, as amended (the "Securities Act"). To the extent
required by Section 16 of the Exchange Act, Common Shares acquired upon the
exercise of an Option shall not, without the consent of the Committee, be
transferable (including by pledge or hypothecation) until the expiration of six
months after the date the Option was granted.
(b) Unless a Registration Statement under the Securities Act is then in
effect with respect to the Common Shares an Optionee receives upon exercise of
an Option, an Optionee shall purchase the Common Shares he receives upon
exercise of an Option for investment purposes only and not for resale or
distribution and shall
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furnish the Company with a written statement to that effect when he exercises an
Option and a reference to such investment undertaking shall be placed on the
certificate for the Common Shares.
10. Dilution or Other Adjustments
If there is any change in the outstanding Common Shares of the Company as a
result of a merger, consolidation, reorganization, stock dividend, stock split
distributable in shares, or other change in the capital stock structure of the
Company, the Committee, as it deems necessary, shall make such adjustments to
Options to reflect such change so as to prevent the diminution or enlargement of
a participant's rights, including but not limited to, adjustments in the
aggregate number of Common Shares reserved for issuance under the Plan, and
adjustments in the Option price, provided that the number of Common Shares
subject to an Option shall always be a whole number.
11. Withholding Taxes
A recipient of Common Shares pursuant to the exercise of an Option shall be
required to pay to the Company, or make arrangements satisfactory to the
Company, regarding the payment of, the amount of any foreign, federal, state or
local taxes of any kind required by law to be withheld with respect to the
exercise of an Option.
12. Stock Option Agreement
The grant of any Option under the Plan shall be evidenced by the execution
of an agreement (the "Stock Option Agreement") between the Company and the
Optionee. The Stock Option Agreement shall set forth the date of grant of the
Option, the Option price, the Option period, the designation of the Option as an
Incentive Option or a Nonqualified Option, and the time or times when and the
conditions upon the happening of which the Option shall become exercisable. The
Stock Option Agreement shall also set forth the restrictions, if any, with
respect to which the Common Shares to be purchased thereunder shall be subject,
and such other terms and conditions as the Committee shall determine which are
consistent with the provisions of the Plan and applicable law and regulations.
13. Restrictions on Shares
The Company may impose such restrictions on the Common Shares acquired upon
exercise of Options granted under the Plan as it may deem advisable, including
but not limited to, restrictions necessary to ensure compliance with the
Securities Act, under the requirements of any applicable self-regulatory
organization and under any blue sky or state securities laws applicable to such
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Common Shares. The Company may cause a restrictive legend to be placed on any
certificate issued pursuant to the exercise of an Option in such form as may be
prescribed from time to time by applicable laws and regulations or as may be
advised by legal counsel to the Company.
14. Amendment or Termination
The Plan may be amended or terminated at any time by action of the Board of
Directors, provided, that:
(a) Any amendment which would (i) materially increase the aggregate
number of Common Shares which may be issued under the Plan (other than changes
as described in Section 10 hereof), or (ii) materially change the requirements
for eligibility to receive Options under the Plan, shall be made only with the
approval of the shareholders of the Company.
(b) No outstanding Option shall be amended or otherwise modified (i)
without the consent of the Optionee if such amendment would adversely affect the
Optionee's rights with respect to such Option; and (ii) if the Option is an
Incentive Option, without the opinion of legal counsel to the Company that such
amendment will not constitute a "modification" within the meaning of Section 424
of the Code if the Committee determines such an opinion is necessary.
15. Rights of Participants
Nothing in the Plan or any Option granted hereunder shall confer upon any
participant or his executors, administrators or legal representatives any of the
rights of a shareholder of the Company with respect to the Common Shares subject
to an Option until certificates for such Common Shares have been issued by the
Company to such person upon the exercise of such Option. Nothing in the Plan or
an Option granted hereunder shall confer upon any participant any right to
continued employment with the Company or interfere in any way with the right of
the Company to terminate the employment of any participant at any time.
16. Section 16(b) Compliance
To the extent that participants in the Plan are subject to Section 16(b) of
the Exchange Act, it is the intention of the Company that transactions under the
Plan shall comply with Rule 16b-3 under the Exchange Act and, if any Plan
provision is later found not to be in compliance with Section 16 of the Exchange
Act, the provision shall be deemed null and void, and in all events the Plan
shall be construed in favor of Plan transactions meeting the requirements of
Rule 16b-3 or successor rules applicable to the Plan. No Option shall be
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exercisable prior to six months from the date of the granting of the Option
under the Plan.
17. Severability
In the event any provision of the Plan shall be held invalid or illegal for
any reason, the invalidity or legality shall not affect the remaining parts of
the Plan, and the Plan shall be construed and enforced as if the invalid or
illegal provision had not been included.
IN WITNESS WHEREOF, the 1998 Incentive Stock Option Plan is, by the
authority of the Board of Directors of the Company, executed in behalf of the
Company, on January 29, 1998.
AMERICAN SAFETY INSURANCE GROUP, LTD.
By: /s/ Frederick C. Treadway
-------------------------------------
Frederick C. Treadway,
Chairman of the Board of Directors
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EXHIBIT 10.3
AMERICAN SAFETY INSURANCE GROUP, LTD.
1998 DIRECTOR STOCK AWARD PLAN
1. Purpose
The purpose of the 1998 Director Stock Award Plan (the "Plan") is to enable
American Safety Insurance Group, Ltd. (the "Company") to attract and retain non-
employee directors to contribute to the Company's growth and enhancement of
shareholder value, and to encourage such directors to participate in the long-
term development of the Company through ownership of common shares ("Common
Shares") of the Company.
The purpose of the Plan is to be carried out through the granting of
restricted Common Shares (the "Award") to non-employee directors. For purposes
of the Plan, a non-employee director means a member of the Board of Directors of
the Company who is not an employee of the Company or a subsidiary. Unless
otherwise indicated by the context herein, references to the "Company" includes
the Company and its subsidiaries.
2. Administration of the Plan
(a) Appointment of Committee. The Plan shall be administered by a
compensation committee (the "Committee") appointed by the Board of Directors of
the Company (the "Board of Directors") and comprised solely of members of the
Board of Directors. The Committee shall include only "non-employee directors,"
as such term is defined in Rule 16b-3 promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") or any successor rule. The Board of
Directors shall designate a member of the Committee to act as Chairman of the
Committee, and the Board of Directors may remove any member of the Committee at
any time and appoint any director to fill any vacancy on the Committee.
(b) Committee Meetings. The Committee shall hold its meetings at such
times and places as specified by the Chairman of the Committee. A majority of
the members of the Committee shall constitute a quorum. All actions of the
Committee shall be taken by the vote of a majority of the members of the
Committee at a meeting duly called by its Chairman; provided, however, any
action taken by written consent, signed by a majority of the members of the
Committee, shall be as effective as an action taken by the Committee at a
meeting duly called and held.
<PAGE>
(c) Committee Powers. Subject to the provisions of the Plan, the
Committee shall have full and final authority, in its discretion, to take any
action with respect to the Plan including, without limitation, the following:
(i) to determine the individuals to receive Awards, the number of Common Shares
to be subject to each Award, and the other terms, conditions, restrictions and
limitations of an Award; (ii) to prescribe the form of the agreements evidencing
an Award granted under the Plan; (iii) to establish, amend and rescind rules and
regulations for the administration of the Plan; and (iv) to construe and
interpret the Plan, the rules and regulations, and the agreements evidencing
Awards granted under the Plan, and to make all other determinations deemed
necessary or advisable for administering the Plan.
3. Effective Date
Subject to the approval of the Plan by a majority of the outstanding Common
Shares of the Company voted at the 1998 Annual Meeting of Shareholders, the Plan
shall be effective as of January 29, 1998. Awards may be granted under the Plan
on and after the effective date.
4. Grant of Awards; Shares of Stock Subject to the Plan
(a) Compensation in Common Shares. Effective immediately upon the
approval of the Plan pursuant to Section 3 hereof, each non-employee director,
upon election as a director shall, in addition to any meeting attendance or per
diem fees, be granted an annual Award in the form of Common Shares, subject to
the restrictions of the Plan, having a fair market value on the date of grant of
$5,000 (or a pro rata portion thereof for less than a full year's service). The
Awards are granted to the non-employee directors who are serving as directors
immediately after each Annual General Meeting and the fair market value of the
restricted Common Shares is determined as of the date of grant. The Awards shall
vest as of the day immediately preceding the next Annual General Meeting
following the date of grant. If the computation of Common Shares subject to an
Award results in a fractional Common Share, such computation shall be rounded to
the nearest whole Common Share.
(b) For purposes of the Plan, the fair market value of the Common Shares
shall be determined in good faith by the Committee in accordance with the
following provisions: (i) if the Common Shares are included in the Nasdaq
National Market or listed for trading on the New York Stock Exchange or the
American Stock Exchange, the fair market value shall be the closing sales price
of the Common Shares as reported in the Nasdaq National Market or the New York
Stock Exchange or the American Stock Exchange (as applicable) on the date
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immediately preceding the date the Award is granted, or, if there is no
transaction on such date, then on the trading date nearest preceding the date
the Award is granted for which closing price information is available; or (ii)
if the Common Shares are not listed or reported in any of the foregoing, then
the fair market value shall be determined by the Committee.
(c) Reserved Shares. Subject to adjustment as provided in Section 10
hereof, the total number of Common Shares that may be awarded under the Plan
shall not exceed 30,000 Common Shares of authorized but unissued or reacquired
Common Shares of the Company. The total number of Common Shares authorized under
the Plan may be increased from time to time by the approval of the Board and, if
required pursuant to Rule 16-3 of the Securities and Exchange Commission or its
successor or rules of any stock exchange, by the shareholders of the Company.
The Company shall reserves sufficient authorized Common Shares to provide for
the Awards granted hereunder. To the extent that an Award lapses or the rights
of any participant to whom it was granted terminate, expire or are canceled for
any other reason, in whole or in part, the Common Shares subject to such Award
shall again be available for grant of an Award of the Plan.
5. Eligibility
An Award may be granted by the Committee only to an individual who on the
date the Award is granted is a non-employee director of the Company. Each Award
granted under the Plan shall be evidenced by an agreement in such form as the
Committee shall prescribe pursuant to the terms and conditions of the Plan.
6. Restrictions on Awards
(a) Custodial Account. The Common Shares granted under the Plan shall be
held by the Company in a custodial account on behalf of each participant until
such time as the Common Shares are vested pursuant to the terms of the Plan.
(b) Vesting. The Common Shares held by the Company shall remain in the
custodial account until vesting, which shall occur as of the date immediately
preceding the next Annual General Meeting following the date of grant. Upon
vesting, the Common Shares shall be distributed to the non-employee director
within a reasonable time, not to exceed 30 days from the date of vesting and the
custodial account shall be deemed terminated as to such Common Shares.
(c) Forfeiture. If a participant ceases to be a non-employee director for
any reason prior to vesting, the participant shall forfeit his right to the
Common
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Shares and the custodial account shall be terminated as to such Common Shares.
Any forfeited Common Shares shall under such circumstances revert back to the
Company. In addition, notwithstanding anything in this Plan to the contrary,
any Award under this Plan may be reduced by the Committee (including a reduction
to zero) in the event that the Committee determines, in its sole discretion,
that any action or failure to act by a participant constitutes a violation of
the Company's standing corporate policies (as in effect from time to time)
and/or a violation of the federal, state or local statutes or regulations.
(d) No Assignment. The Common Shares held in the custodial account shall
not be transferred, assigned, pledged or hypothecated in any way (whether by
operation of law or otherwise), and shall not be subject to execution,
attachment or similar process.
(e) Death and Disability of a Participant. A participant who ceases to
serve on the Board by reason of (i) death or (ii) disability, shall be vested in
his entire Award upon such occurrence notwithstanding anything in this Plan to
the contrary.
7. Rights as a Participant
(a) A participant shall not be entitled to any rights as a shareholder
with respect to any Common Shares granted under the Plan, including but not
limited to, voting rights, until such Common Shares have vested to the custodial
account.
(b) A participant agrees to assume all risks in connection with any
decrease in the value of the Common Shares granted to a participant pursuant to
the terms of this Plan.
(c) A participant shall notify the Company immediately if he elects to
make an election under Section 83(b) of the Internal Revenue Code or upon the
occurrence of any other event resulting in the value of the Common Shares being
includable in a participant's income prior to vesting.
(d) The Company shall undertake and follow the necessary procedures to
make prompt delivery of the number of Common Shares held in the custodial
account upon the vesting of such Common Shares. Such delivery, however, may be
postponed, in the sole discretion of the Company, to enable to the Company to
comply with any applicable laws, regulations, procedures or listing requirements
of any governmental agency, regulatory authority or stock exchange.
(e) A participant or his legal representative, legatees or distributees
shall not be deemed to be the holder of any Common Shares subject to an Award
unless and until certificates for such Common Shares are issued to such person
or persons under the Plan.
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8. Change of Control
(a) In the event of a "Change of Control", all Awards which are not yet
vested shall become fully vested as of the date of such Change of Control.
(b) For purposes of the Plan, a "Change of Control" shall be deemed to
have occurred on the earliest of the following dates:
(i) The date any entity or person shall have become the beneficial
owner of, or shall have obtained voting control over, thirty percent
(30%) or more of the outstanding Common Shares of the Company. For the
purposes hereof, the term "person" shall mean any individual,
corporation, partnership, group, association or other person, as such
term is defined in Section 13(d)(3) or Section 14(d)(2) of the
Exchange Act, other than the Company, any subsidiary of the Company or
any employee benefit plan(s) sponsored or maintained by the Company or
any subsidiary thereof, and the term "beneficial owner" shall have the
meaning given the term in Rule 13d-3 under the Exchange Act;
(ii) The date the shareholders of the Company approve a definitive
agreement (A) to merge or consolidate the Company with or into another
corporation, in which the Company is not the continuing or surviving
corporation or pursuant to which any shares of Common Shares of the
Company would be converted into cash, securities or other property of
another corporation, other than a merger of the Company in which
holders of Common Shares immediately prior to the merger have the same
proportionate ownership of Common Shares of the surviving corporation
immediately after the merger as immediately before, or (B) to sell or
otherwise dispose of all or substantially all the assets of the
Company; or
(iii) The date there shall have been a change in a majority of the
Board of Directors of the Company within a twenty four-month period
unless the nomination for election by the Company's shareholders of
each new director was approved by the vote of two-thirds of the
directors then still in office who were in office at the beginning of
the twenty four-month period.
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9. Nontransferability of Awards and Shares
(a) Awards granted pursuant to the Plan shall not be transferable
(including by pledge or hypothecation) other than by will or the laws of
intestate succession. To the extent required by Section 16 of the Exchange Act,
Common Shares acquired under the terms of the Plan shall not, without the
consent of the Committee, be transferable (including by pledge or hypothecation)
until the expiration of six months after the date the Award becomes vested.
(b) Unless a Registration Statement under the Securities Act of 1933, as
amended (the "Securities Act") is then in effect with respect to the Common
Shares received by a participant under the Plan, the recipient shall hold such
Common Shares for investment purposes only and not for resale or distribution
and shall furnish the Company with a written statement to that effect when he
receives an Award and a reference to such investment undertaking shall be placed
on the certificate for the Common Shares.
10. Dilution or Other Adjustments
If there is any change in the outstanding Common Shares of the Company as a
result of a merger, consolidation, reorganization, stock dividend, stock split
distributable in Common Shares, or other change in the capital stock structure
of the Company, the Committee, as it deems necessary, shall make such
adjustments to Awards to reflect such change so as to prevent the diminution or
enlargement of a participant's rights, including but not limited to, adjustments
in the aggregate number of Common Shares reserved for issuance under the Plan,
and adjustments to the number of Common Shares subject to an Award shall always
be a whole number.
11. Withholding Taxes
A recipient of Common Shares pursuant to an Award shall be required to pay
to the Company, or make arrangements satisfactory to the Company, regarding the
payment of, the amount of any foreign, federal, state or local taxes of any kind
required by law to be withheld with respect to the received under an Award.
12. Stock Award Agreement
The grant of an Award under the Plan shall be evidenced by the execution of
an agreement (the "Award Agreement") between the Company and each participant.
The Award Agreement shall set forth the date of grant of the Award, the number
of Common Shares, and such other terms and conditions as the Committee shall
determine which are consistent with the provisions of the Plan and applicable
law and regulations.
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13. Restrictions on Shares
The Company may impose such restrictions on the Common Shares received
under an Award granted under the Plan as it may deem advisable, including but
not limited to, restrictions necessary to ensure compliance with the Securities
Act, under the requirements of any applicable self-regulatory organization and
under any blue sky or state securities laws applicable to such Common Shares.
The Company may cause a restrictive legend to be placed on any certificate
issued pursuant to the grant of an Award in such form as may be prescribed from
time to time by applicable laws and regulations or as may be advised by legal
counsel to the Company.
14. Amendment or Termination
The Plan may be amended or terminated at any time by action of the Board of
Directors, provided, that:
(a) Any amendment which would (i) materially increase the aggregate number
of Common Shares which may be issued under the Plan (other than changes as
described in Section 10 hereof), or (ii) materially change the requirements for
eligibility to receive Awards under the Plan, shall be made only with the
approval of the shareholders of the Company.
(b) No outstanding Award shall be amended or otherwise modified without
the consent of a participant if such action would adversely affect such
participant's rights with respect to such Award.
15. Rights of Participants
Nothing in the Plan or any Award granted hereunder shall confer upon any
participant or his executors, administrators or legal representatives any of the
rights of any shareholder of the Company with respect to the Common Shares
subject to an Award until certificates for such Common Shares have been issued
by the Company to such person pursuant to the terms of the Plan. Nothing in the
Plan or an Award granted hereunder shall confer upon any participant any right
to be a director or remain as a director of the Company.
16. Section 16(b) Compliance
To the extent that participants in the Plan are subject to Section 16(b) of
the Exchange Act, it is the intention of the Company that transactions under the
Plan shall comply with Rule 16b-3 under the Exchange Act and, if any Plan
provision is later found not to be in compliance with Section 16 of the Exchange
Act, the
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provision shall be deemed null and void, and in all events the Plan shall be
construed in favor of Plan transactions meeting the requirements of Rule 16b-3
or successor rules applicable to the Plan.
17. Severability
In the event any provision of the Plan shall be held invalid or illegal for
any reason, the invalidity or legality shall not affect the remaining parts of
the Plan, and the Plan shall be construed and enforced as if the invalid or
illegal provision had not been included.
IN WITNESS WHEREOF, the 1998 Director Stock Award Plan is, by the authority
of the Board of Directors of the Company, executed in behalf of the Company, on
January 29, 1998.
AMERICAN SAFETY INSURANCE GROUP, LTD.
By: /s/ Frederick C. Treadway
------------------------------------
Frederick C. Treadway,
Chairman of the Board of Directors
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EXHIBIT 10.5
PROGRAM MANAGEMENT AGREEMENT
THIS AGREEMENT, made effective as of the 1st day of January, 1997 by and
between Environmental Management Insurance Services, Inc., a Georgia corporation
(hereinafter referred to as the "Program Manager"), having its principal office
in Atlanta, Georgia, and American Safety Risk Retention Group, Inc., a Vermont
corporation (hereinafter referred to as the "Company"), having its principal
office in Burlington, Vermont.
W I T N E S S E T H:
WHEREAS, the Program Manager is currently providing insurance program
management and administrative services to the Company, as well as insurance and
other companies; and
WHEREAS, the term of the current agreement between the Company and Program
Manager expired December 31, 1996; and
WHEREAS, the Company desires to continue to retain the Program Manager to
provide insurance program management and administrative services in accordance
with the terms hereof;
NOW THEREFORE, in consideration of their respective promises and covenants
hereinafter contained, the Program Manager and the Company renew and restate
their agreement and agree as follows:
A. Program Management Authority Granted
The Program Manager is authorized to solicit and accept applications for
insurance (as well as Company stock subscriptions) and to bind, execute and
administer direct contracts of
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insurance on behalf of the Company, subject to the program administration
rules and procedures of the Company as they exist and may in the future be
prescribed and communicated in writing from time to time by the Company to
the Program Manager. The Program Manager shall not be held responsible or
liable for any losses or errors or omissions arising out of insurance
binders, contracts or certificates issued or bound in accordance with such
rules and procedures of the Company.
If the Company fails to deliver to the Program Manager written program
administration rules and procedures sufficient for the Program Manager to
carry out its duties under this Agreement, the Program Manager may take its
own prudent actions, consistent with the Company's prior instructions to the
Program Manager, in administering the affairs of the Company, and the
Program Manager shall not be held liable for any losses, errors or omissions
arising out of such prudent actions.
B. Duties of the Program Manager
The Program Manager shall provide the following services:
1. Marketing Services, including:
(a) solicitation of applications of insurance (including transmittal of
stock subscriptions), in accordance with the rules and procedures of
the Company and in compliance with the federal Liability Risk
Retention Act of 1986 and any applicable state insurance laws and
regulations; and
(b) development and implementation, in cooperation with the Company, of
appropriate sales promotional materials and activities, including
brochures and advertising;
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(c) participation in trade association conventions and presentation of
speeches to appropriate audiences;
(d) providing marketing and advertising materials to insureds, brokers
and the media;
(e) promoting the Company's products and services by telephone and
personal visits with insureds and brokers and by exhibiting and/or
attending trade and/or industry shows; and
(f) developing and conducting marketing and promotional meetings of
insureds and brokers.
2. Program Administration Services, including:
(a) acceptance and processing of applications for insurance (as well as
stock subscriptions);
(b) issuance in the name of the Company, and countersigning where
required, of insurance binders, contracts and certificates;
(c) issuance in the name of the Company of notices of cancellation of
insurance binders, contracts and certificates;
(d) liaison with Company's Vermont Manager, the Vermont Department of
Banking, Insurance and Securities, and other state insurance
departments including necessary filings and regulatory compliance;
and
(e) maintenance of Company's records and computer software, and revision
of same as needed.
all in accordance with the written program administration rules and
procedures of the Company and the terms of this Agreement.
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All premiums received by the Program Manager on behalf of the Company,
net of fees, commissions or other deductions authorized hereunder, shall
be remitted to the Company along with a written statement summarizing
such premiums and deductions within thirty days of the end of each
month.
In addition, the Program Manager shall provide to the Company monthly
reports summarizing its activities on behalf of the Company under this
Agreement.
3. Underwriting Related Services, including:
(a) reviewing on behalf of the Company the risk profiles of all entities
applying for insurance coverage and ownership;
(b) advising the Company regarding acceptability of risks and
appropriate terms and conditions under which coverage shall be
offered;
(c) reviewing on behalf of the Company all insureds on an annual basis
and providing on behalf of the Company appropriate renewal terms and
conditions for each insured;
(d) advising the Company regarding its policy forms, terms, conditions
of coverage and premium rates and assisting in the implementation of
same; and
(e) advise the Company on new programs and coverages.
4. Claims Administration Services, including:
(a) receiving first reports of all claims and transmitting such reports
to the persons and organizations designated by the Company to manage
and adjust claims on behalf of the Company; and
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(b) reviewing all claims with such designated persons and organizations
on a periodic basis and assisting in the preparation of an annual
report to the Company summarizing recommended provisions for loss
reserves in the Company's financial statements.
5. Loss Control Services, including:
(a) technical review of submissions of insureds for insurance coverage;
(b) implement inspection program of prospective and existing insureds'
offices, operations and projects, in accordance with instructions
provided by the Company;
(c) preparation of quarterly reports on loss control activities;
(d) attending meetings of the Loss Control Committee, at the Company's
request; and
(e) advising the Company on loss control issues, and assist in
developing loss control technical guidelines/standards for review by
the Company.
6. Financial Services, including:
(a) billing and collection (exclusive of legal action) of all premiums
due to the Company on insurance binders, contracts and certificates,
and of other accounts receivable;
(b) payment of Producing Agent Commissions to licensed insurance agents
and brokers;
(c) payment of reinsurance premiums, and obtaining letters of credit
from reinsurers where required by contract or regulatory
authorities;
(d) prepare the Company's general ledger, income statement, balance
sheet and summary of investments;
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(e) maintain accounting data needed to prepare federal income tax
return, state premium tax returns and other business related returns
(excluding preparation of income tax returns), and liaison with the
Company's outside auditors and actuaries;
(f) review of invoices received by the Company, and payment of accounts
payable of the Company, whether for goods or services;
(g) transfer funds to the Company's investment manager in accordance
with guidelines established by the Company and/or liaison with the
Company's outside investment managers;
(h) performing premium audits of the Company's insureds in accordance
with standards developed or approved by the Company; and
(i) prepare operating budgets and reconcile bank accounts.
7. Consulting Services, including:
(a) advising on a periodic basis regarding insurance industry customs
and practices and conveying results or summaries of insurance
surveys, research and computations, as may be requested by the
Company;
(b) periodically evaluating and reporting on the potential adoption by
the Company of additional lines of insurance;
(c) periodically evaluating and reporting on the possible uses of other
reinsurance arrangements by the Company; and
(d) assisting in the preparation for and attending the meetings of the
Company's shareholders, directors, officers and committees.
8. The Program Manager will not provide any claims adjusting, actuarial,
legal, financial audit, or reinsurance intermediary services, or
investment advice under this
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<PAGE>
Agreement, and the Company shall have sole responsibility for obtaining
these services and advice at its own expense as it deems advisable.
However, the Program Manager shall timely advise the Company of the need
for the foregoing services, and the Program Manager may provide such
services pursuant to Section D.2. hereof, and/or shall monitor the
status and results of such services provided by others.
9. The Program Manager shall have no power to enter into any contract,
including any insurance contract, on behalf of the Company unless
specifically authorized by the Company to do so.
10. The Program Manager represents and warrants that during the term of
the Agreement, Lloyd A. Fox, its President, shall be primarily
responsible for the administration and oversight of the performance of
the Program Manager under this Agreement. In the event of any
substantive change, voluntarily or involuntarily, in Mr. Fox's role in
connection with the Program Manager's services under this Agreement, the
Company may terminate this Agreement pursuant to the provisions of
Section E.1. hereof.
11. The Program Manager shall not be required to obtain errors and
omissions insurance covering the Program Manager's employees who perform
services for the Company while acting on behalf of the Company,
including, but not limited to, as signatories on any insurance contract
or certificate. If available, the Company shall have the right to
require that such coverages be purchased, at the Company's expense.
Program Manager shall obtain fidelity insurance or similar coverage with
respect to its financial services for the Company in connection with the
collection of premium and handling of the Company's funds.
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<PAGE>
C. Duties of the Company
The Company shall:
1. pay to the Program Manager the compensation set forth in Section D of
this Agreement;
2. comply with any reasonable request for instructions which the Program
Manager may make in order for the Program Manager to perform its duties
efficiently under this Agreement;
3. deliver to the Program Manager the written rules and procedures
specified in Sections A., B.1.(a), B.2. and B.7. of this Agreement,
subject to the provisions of Section A above;
4. provide or arrange to provide the services specified in this Agreement
as being provided by entities other than Program Manager.
D. Compensation
1. The Company agrees to pay compensation and reimbursement to the Program
Manager as follows:
(a) an Administrative Fee for services to be provided, including
expenses (except as otherwise specified), equal to $45,000 per
month, payable in monthly installments by not later than the tenth
(10th) of each month. The Administrative Fee may be calculated and
deducted by the Program Manager
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<PAGE>
on a monthly basis from the premiums received by the Program Manager
on behalf of the Company. At each anniversary of this Agreement,
Program Manager agrees to discuss with Company's Executive Committee
of the Board of Directors whether an adjustment or another basis for
compensation as described in this Section D is appropriate based on
Program Manager's operating budget. Notwithstanding the provisions
of Section E hereof, if Program Manager and Company cannot reach
agreement at such time, this Agreement shall continue in effect, and
at Program Manager's or Company's option, the issue may be referred
to arbitration, in accordance with Section I of this Agreement.
(b) during the term of this Agreement, a Producing Agent Commission
equal to ten percent (10%) of all gross written premiums (net of
cancellations and return premiums) received by the Company on any
insurance binders, contracts and certificates, issued by the Company
on which the insured, under such binders, contracts and
certificates, has designated in writing the Program Manager, or any
other related company, subsidiary or affiliate of Program Manager as
its insurance agent or broker of record, or has notified the Company
that no broker exists on such account, or elects to have its
coverage written directly by the Company, and for the small (and/or
"special") contractors program and any environmental automobile
program. The Producing Agent Commission shall be calculated and
payable on a monthly basis on the tenth (10th) day of the following
month and may be deducted by Program Manager from premiums received
on behalf of the Company;
(c) a Management Fee equal to (i) ten percent (10%) of all gross written
premium (as determined in the same manner described in Paragraph (b)
above)
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<PAGE>
received by the Company for the Company's Standard Contractor/Owner
Program and (ii) fifteen percent (15%) of all gross written premiums
received by the Company (as determined in the same manner described
in Paragraph (b) above) for the Company's Special Contractor
Program, small contractors program, and any environmental automobile
program, and (iii) fifteen percent (15%) of all gross written
premiums received by the Company (as determined in the same manner
described in Paragraph (b) above) for insureds purchasing coverage
with the Company who are also insured by the Workers' Compensation
Insurance Program developed by Program Manager through other
companies for insureds of the Company. The Management Fee shall be
calculated and payable on a monthly basis on the tenth (10th) day of
the following month and may be deducted by Program Manager from
premiums received on behalf of the Company;
(d) with respect to the Company's professional liability insurance
program, a fee equal to thirty-five percent (35%) of the first Two
Hundred Thousand dollars ($200,000) of net written premium and
capital contributions collected by the Company, and twenty percent
(20%) of the net written premium and capital contributions collected
by the Company in excess of Two Hundred Thousand dollars ($200,000);
(e) reimbursement of the Program Manager's documented costs and expenses
of providing Loss Control Services as described in Section B.5.
hereof, including salaries, bonus or commissions, taxes, fringe
benefits, travel expenses, clerical support, office space,
equipment, telephone and related items plus a twenty percent (20%)
overhead allowance; and
(f) reimbursement of the Program Manager's documented costs and expenses
of providing Marketing Services as described in Section B.1. hereof,
including
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salaries, bonus or commissions, taxes, fringe benefits, travel
expenses, clerical support, office space, equipment, telephone,
advertising expense and related items and the Program Manager's
documented cost and expense for premium audit services, including
travel expenses
2. In the event the Program Manager or any other parent or related
company, subsidiary or affiliate of Program Manager negotiates and is
directed by the Company to bind reinsurance on behalf of the Company or
if Program Manager effects a bonding program or similar transaction or
additional lines of business at the request of or approved by the
Company, the Program Manager or such parent or related company,
subsidiary or affiliate shall be allowed to receive a reinsurance
commission or similar commission from the reinsurers, carriers, or
surety in an amount customarily paid by such reinsurers, carriers or
surety.
3. Except as otherwise provided herein, all expenses (including overhead
expenditures) incurred by the Program Manager in the performance of its
services under this Agreement shall be the responsibility of Program
Manager, and the Company shall have no obligation to reimburse the
Program Manager for any such expenses. However, any expenses incurred by
the Program Manager at the direction of or on behalf of the Company,
including, but not limited to attendance at meetings of the Company or
its reinsurers, attendance at regulatory and association meetings, and
extraordinary printing or operational expenses (e.g., policies; the
Company Guidelines; meeting materials; brochures; annual reports, etc.),
shall be promptly paid or reimbursed by the Company upon its receipt of
documentation evidencing such expenses.
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E. Termination
1. The Company may, at its option, terminate this Agreement without
liability in the event the Program Manager shall fail or refuse to
perform a material obligation imposed upon it under the terms of this
Agreement or shall, through negligence, willful misconduct or breach of
duty, do any act or thing in connection with the performance of its
duties under this Agreement which results in loss or liability to the
Company. In such event, the Company shall furnish written notice of
default to the Program Manager, specifying in such notice the default
giving rise to the right to terminate, and, upon the failure or refusal
of the Program Manager to cure such default or reimburse the Company for
such loss on or before 45 days after such notice, this Agreement may be
terminated by the Company. This provision shall in no way limit the
remedies of the non-defaulting party to seek any and all appropriate
legal or equitable relief.
2. The Program Manager may, at its option, terminate this Agreement
without liability in the event the Company shall fail or refuse to
perform a material obligation imposed on it under the terms of this
Agreement or shall, through negligence, willful misconduct or breach of
duty, do any act or thing on connection with the performance of its
duties under this Agreement which results in loss to or liability of the
Program Manager. In such event, the Program Manager shall furnish
written notice of default to the Company, specifying in such notice the
breach giving rise to the right to terminate, and, upon the failure or
refusal of the Company to cure such default or reimburse the Program
Manager for such loss on or before 45 days after such notice, this
Agreement may be terminated by the Program Manager. This
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provision shall in no way limit the remedies of the non-defaulting party
to seek any and all appropriate legal or equitable relief.
3. Either the Company or Program Manager may, at its option, terminate this
Agreement at any time without liability, if the Program Manager or
Company, as the case may be, becomes insolvent or bankrupt or admits, in
writing, its inability to pay its debts as they become due or makes an
assignment for the benefit of creditors or applies for or consents to
the appointment of a trustee or receiver for the major part of its
property or if bankruptcy, reorganization, rearrangement, insolvency or
liquidation proceedings or other proceedings for relief under any law of
debtors are instituted by or against the Program Manager, or the
Company, as the case may be, and if so instituted, are consented to or
not contested within 60 days after the commencement of such proceedings.
4. Termination of this Agreement shall not relieve any party hereto of its
liability for the performance of obligations imposed upon such party
during the effective period of this Agreement if such obligations have
not been performed or completed at the time of termination.
F. Term
1. The Initial Term ("Initial Term") of this Agreement shall be from
January 1, 1997 through December 31, 1999. Following the Initial Term,
this Agreement shall continue thereafter for successive period(s) of one
year each, as hereinafter provided, unless terminated under the
provisions of Section E hereof or Section F.2. below.
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2. Anything herein to the contrary notwithstanding, this Agreement in its
entirety shall continue in full force and effect for a one-year period
after the termination of the Initial Term hereof, and for successive
one-year periods thereafter, unless either party shall give written
notice to the other on or before 90 days prior to the end of the Initial
Term, or 90 days prior to the end of each successive renewal term, that
it elects to terminate this Agreement.
3. If neither party exercises its right to terminate under Section E or
Section F.2. above, the compensation payable to the Program Manager for
successive one-year periods beyond the Initial Term shall be subject to
renegotiation and mutual agreement by the parties prior to the first day
of each successive one-year period. In the event of the parties' failure
to reach agreement, either party may request arbitration, as provided in
Section I of this Agreement, or the then existing compensation structure
shall remain in effect if arbitration is not requested within thirty
(30) days after the beginning of the successive one-year period.
G. Books and Records
The Program Manager shall prepare, keep and maintain, for the duration of
this Agreement and for such period thereafter as the parties shall agree,
all books, records, reports, and statistics produced by it in rendering
services to the Company under this Agreement. The Company shall retain the
right of access to all such books, records, reports and statistics at such
times during the term of this Agreement, and any renewals thereof, as
reasonably requested, and after the termination of this Agreement, as the
parties shall determine. All books, records, reports, statistics, data,
computer programs, and information pertaining to the business and affairs of
the Company is confidential information, and the ownership
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<PAGE>
thereof shall at all times be and remain in the Company. The Program Manager
shall not disclose any data or information developed or acquired by it in
the performance of its duties hereunder or the contents of any books,
records, reports or other material pertaining to the business and affairs of
the Company to any person not a party to this Agreement without the prior
written consent of the Company, unless such disclosure is in the ordinary
course of the Company's business (e.g., financial information to insurance,
corporate or securities regulators, brokers, insureds and prospects). In the
event of termination of this Agreement, the Program Manager shall be
permitted to retain copies of all such information for its records.
H. General
1. The Company shall indemnify the Program Manager, its directors,
officers and employees, for all claims, suits, judgments and damages
arising out of the Program Manager's good faith efforts to implement the
policies and procedures of the Company. However, such indemnification
shall not arise as a result of any action or failure to act by the
Program Manager through its negligence, willful misconduct or breach of
duty in connection with the performance of its duties under this
Agreement.
2. The Program Manager shall not be held responsible or liable for, and
shall be indemnified against, any losses or errors or omissions arising
out of insurance contracts, binders or certificates issued in accordance
with the rules and procedures of the Company as communicated to the
Program Manager from time to time in writing by the Company, except as a
result of any action or failure to act by the
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Program Manager through its negligence, willful misconduct or breach of
duty in connection with the performance of its duties under this
Agreement.
3. The Program Manager shall indemnify the Company, its directors,
officers and employees for all losses, claims, suits, judgments,
damages, liabilities or expenses incurred by the Company, or such
directors, officers and employees, as a result of the Program Manager's
failure or refusal to perform any material obligation imposed by it
under the terms of this Agreement or as a result of any action or
failure to act by the Program Manager through its negligence, willful
misconduct or breach of duty in connection with the performance of its
duties under this Agreement.
4. In performing the services pursuant to this Agreement, the Program
Manager shall be acting as an independent contractor and shall not be
deemed to be an agent or employee of the Company for any purposes.
5. It is expressly understood that all premiums collected by the Program
Manager are trust funds and that such premiums shall be held for the
Company by the Program Manager in accordance with applicable provisions
of Georgia law and, if applicable, the laws of other states until
delivered to the Company in accordance with rules and procedures from
time to time agreed to by the Company and the Program Manager. The
Program Manager shall not be held liable by the Company for any premiums
which it is unable to collect, after reasonable effort to do so under
this Agreement, on any binders, contracts or certificates of insurance
issued by the Program Manager in accordance with the rules and
procedures of the Company.
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6. This Agreement may not be assigned in whole or in part by either party
hereto without the prior written consent of the other party; provided,
however, that the Program Manager may fulfill its obligations under this
Agreement by assigning responsibilities to affiliated or commonly
controlled entities; or, by subcontracting for various services with
third parties to the extent the Program Manager deems advisable and
prudent upon prior written approval of the Company, which approval shall
not be unreasonably withheld.
7. This Agreement constitutes the entire agreement between the Program
Manager and the Company, and it cannot be altered or amended except in
writing, signed by an authorized representative of each of the parties.
8. This Agreement shall be governed by and construed in accordance with
the laws of the State of Vermont.
9. This Agreement is binding upon and shall inure to the benefit of the
parties hereto, their respective successors and assigns.
10. The recitals set forth at the beginning of this Agreement are
incorporated by reference in, and made a part of, this Agreement.
I. Arbitration
1. In the event that the Company and the Program Manager cannot reach
agreement with respect to compensation as described in Sections D.1.(a)
or F.3. of this
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Agreement, either party may refer such matter to arbitration as outlined
below in Section I.3.
2. As a precedent to any right of action hereunder, if any dispute shall
arise between the Company and the Program Manager with reference to the
interpretation of this Agreement or their rights with respect to any
transaction involved, whether such dispute arises before or after
termination of this Agreement, such dispute, upon the written request of
either party, shall be submitted to arbitration as outlined below in
Section I.3.
3. The arbitration shall be commenced upon the written notice of either
party and shall be submitted to two arbitrators, one to be chosen by
each party, and such arbitrators shall choose an umpire before entering
upon arbitration. If either party fails to appoint an arbitrator within
thirty days after the receipt of written notice from the other party
requesting them to do so, the requesting party may appoint two
arbitrators. If the two arbitrators fail to agree in the selection of an
umpire within thirty days of their appointment, each of them shall name
two, of whom the other shall decline one and the decision shall be made
by drawing lots. The arbitrators and umpire shall be active or former
executive officers of insurance or reinsurance companies not under the
control of either party to this Agreement.
The arbitrators and umpire shall interpret this Agreement as an
honorable engagement and not as merely a legal obligation, and they are
relieved of all judicial formalities and may abstain from following the
strict rules of the law, and they shall make their award with a view to
effecting the general purpose of this Agreement in a reasonable manner
rather than in accordance with a literal interpretation of the
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language. Each party shall submit their case to the arbitrators within
thirty days of the appointment of the umpire.
The decision in writing of the arbitrators, when filed with the parties
hereto, shall be final and binding on both parties. Should the
arbitrators fail to agree, the decision of the umpire shall be final and
binding on both parties. Judgment may be entered upon the final decision
of the arbitration in any court having jurisdiction. Each party shall
bear the expense of their own arbitrator and shall jointly and equally
bear with the other party the expense of the umpire and of the
arbitration. Said arbitration shall take place in Atlanta, Georgia
unless some other place is mutually agreed upon by the Company and the
Program Manager.
J. Notice
Any notice or communication required or permitted to be given between the
parties hereto pursuant to this Agreement shall be in writing and shall be
personally delivered or mailed by first-class or certified mail, postage
prepaid, or by any other reasonable method of delivery. Notices shall be
addressed as follows:
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<PAGE>
To the Program Manager:
Environmental Management Insurance Services, Inc.
1845 The Exchange, Suite 200
Atlanta, GA 30339
Attention: Lloyd A. Fox
To the Company:
American Safety Risk Retention Group, Inc.
c/o Mutual Risk Management (Vermont), Ltd.
One Lawson Lane
Burlington, VT 05401
With a copy to:
Fred J. Pinckney, Esq.
Womble, Carlyle, Sandridge & Rice
1275 Peachtree Street, NE
Suite 700
Atlanta, GA 30309
or to such other address as the parties may designate in writing.
IN WITNESS WHEREOF, the parties have executed this Agreement.
"Program Manager"
Environmental Management Insurance Services, Inc.
By: ________________________________________
Title: ______________________________________
Date: ______________________________________
"Company"
American Safety Risk Retention Group, Inc.
By: ________________________________________
Title: ______________________________________
Date: ______________________________________ January 15, 1997
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<PAGE>
EXHIBIT 21.1
The Company's Subsidiaries are:
AMERICAN SAFETY CASUALTY INSURANCE COMPANY, A DELAWARE CORPORATION
AMERICAN SAFETY REINSURANCE, LTD., A BERMUDA COMPANY
SYNERGY INSURANCE SERVICES, INC., A GEORGIA CORPORATION
SURECO BOND SERVICES, INC., A GEORGIA CORPORATION
HARBOR INSURANCE SERVICES, INC., A GEORGIA CORPORATION
ENVIRONMENTAL CLAIMS SERVICES, INC., A GEORGIA CORPORATION
AMERICAN SAFETY PURCHASING GROUP, INC., A GEORGIA CORPORATION
HARBOUR CONSULTING, LTD., A BERMUDA CORPORATION
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
American Safety Insurance Group, Ltd.:
The audits referred to in our report dated January , 1998 included the
related financial statement schedules as of December 31, 1995 and 1996 and
September 30, 1997, and for each of the years in the three-year period ended
December 31, 1996 and for the nine-month periods ended September 30, 1996 and
1997, included in the Registration Statement. These financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits. In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
We consent to the use of our reports included herein and to the reference of
our firm under the headings "Certain Tax Considerations" and "Experts" in the
prospectus.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
January , 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM 12-31-1996 AND
9-30-1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<DEBT-HELD-FOR-SALE> 16,776 24,771
<DEBT-CARRYING-VALUE> 16,776 24,771
<DEBT-MARKET-VALUE> 16,776 24,771
<EQUITIES> 716 1,181
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 17,964 27,549
<CASH> 3,272 2,425
<RECOVER-REINSURE> 45 84
<DEFERRED-ACQUISITION> 122 146
<TOTAL-ASSETS> 31,299 42,173
<POLICY-LOSSES> 8,914 10,735
<UNEARNED-PREMIUMS> 1,364 2,124
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 0 1,250
0 0
0 0
<COMMON> 29 29
<OTHER-SE> 18,003 20,694
<TOTAL-LIABILITY-AND-EQUITY> 31,299 42,173
4,272 6,506
<INVESTMENT-INCOME> 1,206 1,177
<INVESTMENT-GAINS> 177 14
<OTHER-INCOME> 5 11
<BENEFITS> 2,056 3,533
<UNDERWRITING-AMORTIZATION> 372 486
<UNDERWRITING-OTHER> 3,384 3,729
<INCOME-PRETAX> 3,094 2,605
<INCOME-TAX> 177 383
<INCOME-CONTINUING> 2,918 2,222
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,918 2,222
<EPS-PRIMARY> 1.02 .76
<EPS-DILUTED> .98 .75
<RESERVE-OPEN> 8,294 8,914
<PROVISION-CURRENT> 2,862 3,342
<PROVISION-PRIOR> (806) 191
<PAYMENTS-CURRENT> 543 386
<PAYMENTS-PRIOR> 932 1,365
<RESERVE-CLOSE> 8,914 10,735
<CUMULATIVE-DEFICIENCY> (806) 191
</TABLE>
