UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _________________________
Commission File Number: 0-22016
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HOME STATE HOLDINGS, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 13-3429087
- --------------------------------- -------------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Three South Revmont Drive, Shrewsbury, New Jersey 07702
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(Address of principal executive offices)
(Zip Code)
(908) 935-2600
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant: The aggregate market value, computed by reference to the closing
price of such stock on April 10, 1997, was $17,648,864.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: On April 14, 1997, there were
outstanding 5,660,000 shares of Common Stock, $.01 par value, of the Registrant.
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report on Form 10-K is
incorporated by reference to the definitive Proxy Statement with respect to the
1997 Annual Meeting of Stockholders, which the Registrant intends to file with
the Securities and Exchange Commission no later than 120 days after the end of
the fiscal year covered by this report. The portions of the Proxy Statement
under the headings "Report of the Compensation Committee" and the "Stock
Performance Graph" are not incorporated by reference and are not a part of this
Form 10-K Report.
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HOME STATE HOLDINGS, INC.
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business...................................................... 4
Item 2. Properties.................................................... 26
Item 3. Legal Proceedings............................................. 26
Item 4. Submission of Matters to a Vote of Security Holders........... 26
Item 4A. Executive Officers of the Registrant.......................... 27
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 31
Item 6. Selected Financial Data....................................... 33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 34
Item 8. Financial Statements and Supplementary Data................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 41
PART III
Information required by Items 10 (Directors and Executive Officers of
the Registrant) (except as set forth in Item 4A), 11 (Executive
Compensation), 12 (Security Ownership of Certain Beneficial Owners
and Management) and 13 (Certain Relationships and Related
Transactions) are to be set forth in proxy materials ................... 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 43
CAUTIONARY STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-K, the Annual Report to
Stockholders, any Form 10-Q or any Form 8-K of the Company (as hereinafter
defined) or any other written or oral statements made by or on behalf of the
Company may include forward-looking statements which reflect the Company's
current views with respect to future events and financial performance. These
forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors (which are described in more
detail under the caption "Safe Harbor Disclosure" in Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this Form 10-K and in other documents filed with the Securities and
Exchange Commission) include, but are not limited to, uncertainties relating to
general economic conditions and cyclical industry conditions, uncertainties
relating to government and regulatory policies, volatile and unpredictable
developments (including catastrophes), the legal environment, the uncertainties
of the reserving process and the competitive environment in which the Company
operates. The words "believe," "expect," "anticipate," "project" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
their dates. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
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PART I
ITEM 1. BUSINESS
Introduction
Home State Holdings, Inc. ("the Company") is a property and casualty
insurance holding company primarily engaged through its subsidiaries in
providing personal and commercial auto insurance in New Jersey, New York,
Pennsylvania, Delaware, West Virginia, Georgia, Florida and Connecticut. Through
its subsidiaries, the Company specializes in writing personal and commercial
automobile insurance products through independent agents.
The Company has historically employed a three-tiered strategy to pursue
growth opportunities in its markets. First, the Company generated significant
volume as its "preferred agencies" write standard and preferred auto risks
formerly written by assigned risk plans or abandoned by companies exiting the
Company's markets; second, the Company selectively acquired renewal rights to
books of business from companies exiting these markets; and third, the Company
has, through strategic investments, gained entry into new markets, particularly
along the Atlantic seaboard. During 1996, the Company re-evaluated its prior
growth strategy and has implemented measures to slow the historical rates of
expansion within the Company's markets.
The Company writes standard and preferred personal auto insurance in
accordance with its own strict underwriting guidelines; the Company does not
write non-standard personal auto insurance. See "- Insurance Underwriting and
Pricing." The Company's commercial auto business is focused on providing
coverage for public transportation, including school buses, luxury limousines,
local charter buses and other non-fleet risks. It does not insure long-haul
trucking operations.
The Company has historically used excess of loss reinsurance in order to
achieve its growth objectives. Management has negotiated reinsurance treaties
that enabled the Company to leverage its resources in order to write additional
risks while maintaining premium to surplus ratios recommended by regulatory
authorities and rating agencies. Although a majority of the profits on the ceded
premium is retained by reinsurers, the Company receives ceding commissions and
profit sharing revenues which provide a means of participating in the
profitability of the reinsurance programs. The Company continually evaluates the
opportunity to retain a greater portion of ceded premium to reduce reinsurance
costs and/or further enhance profitability. The Company has made certain changes
in the combined reinsurance program during 1996 for 1997, moving certain classes
of liability insurance business from excess of loss to quota share agreements.
The historical loss ratio and/or policy limits for these classes are expected to
make quota share reinsurance rather than excess of loss reinsurance the most
effective means to provide the Company with reinsurance protection. The Company
will continue to evaluate the ability to retain additional premiums as its
surplus position and access to appropriate reinsurance capacity allow. See
"Reinsurance".
During the second quarter of 1996, the Company noted a significant increase
in the volume of reported claims falling below the reinsurance attachment
points, over and above the frequency anticipated in its calculation of loss
reserves. At the same time, the Company conducted a thorough overall
re-evaluation of its business plan and the profitability of the underlying
business. As a result, management increased reserves by $12 million in the
second quarter, predominantly within IBNR.
In the remainder of 1996, the Company continued to reassess its current and
prior year loss experience. As a result of the reassessment, the Company made
significant additional reserve increases in the fourth quarter of 1996, leading
to a 1996 loss ratio of 113% and total adverse development of $23 million on
1995 and prior accident year reserves.
Due to the increase in loss reserves in 1996 and the impact of the loss
ratio on reinsurance profit sharing income, the Company incurred a substantial
loss in 1996. This loss, and recent actions by the Company, are explained
below.
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History
Insurance Companies
The Company was incorporated in the State of Delaware in 1987 to form, own
and operate Home State Insurance Company ("Home State"), which commenced writing
auto physical damage insurance (comprehensive and collision) in New Jersey in
1988 and auto liability insurance in 1989. In September 1990 the Company formed
Quaker City Holdings, Inc. ("Quaker City Holdings"), which in January 1991
acquired Quaker City Insurance Company ("Quaker City"), at that time a dormant
Pennsylvania licensed insurance company. Quaker City re-commenced writing
Pennsylvania personal auto insurance in 1991 and, in March 1993, was authorized
to write insurance in Delaware. In 1994, Quaker City was authorized to write
insurance in Maryland, West Virginia, the District of Columbia and Virginia.
On December 28, 1992, the Company, Home State and Quaker City loaned $2.0
million to New York Merchant Bakers Insurance Company ("Merchant Bakers"), then
a New York mutual property and casualty insurance company. Since that time,
directors and officers of the Company or its subsidiaries, who were also
policyholders of Merchant Bakers, have constituted seven of thirteen directors
of Merchant Bakers. On October 4, 1994, the Company loaned an additional $4.0
million to Merchant Bakers. On March 2, 1995, the New York State Department of
Insurance (the "Superintendent") approved the acquisition of control of Merchant
Bakers by the Company pursuant to a Plan of Conversion of Merchant Bakers,
converting Merchant Bakers from a mutual to a stock insurance company
wholly-owned by the Company. During the first six months of 1996, the Company
contributed $3.0 million of capital and surplus to Merchant Bakers. In October
1996, the Company contributed an additional $10 million of capital and surplus
to Merchant Bakers with funds provided from the private placement of preferred
stock and warrants with certain reinsurers of the Company. See "Item 5 - Market
for the Registrant's Common Stock and Related Stockholder Matters - Recent Sales
of Unregistered Securities." The additional capital was required in order to
maintain regulatory prescribed surplus and leverage ratios as a result of the
strengthening of Merchant Bakers' loss reserves.
On August 19, 1993, the Company completed its initial public offering of
1,610,000 shares of common stock. Also, on the closing date of the offering, the
Company effected a recapitalization plan whereby all previously outstanding
Class A common stock, Class B common stock and 5% cumulative preferred stock
were converted to 4,050,000 shares of common stock.
On November 12, 1993 the Company assumed from New York Central Mutual Fire
Insurance Company ("New York Central") the administration of Home Mutual
Insurance Company of Binghamton, NY ("Home Mutual") and closed certain other
transactions in connection therewith.
Pursuant to the terms of a Sale, Lease and License Agreement and subsequent
related Letter of Agreement, the Company assumed all of New York Central's
obligations under an Administrative Services Agreement, leased from New York
Central certain computer hardware and received a non-exclusive license to use
certain software and systems, for an aggregate consideration of approximately
$35,000. In addition, pursuant to the terms of a Note Purchase Agreement, the
Company purchased $3 million of Home Mutual's surplus notes held by New York
Central. The Company also loaned $1.5 million to Home Mutual, which loan was
evidenced by a subordinated promissory note from Home Mutual in the principal
amount of $1.5 million. In the second quarter of 1996, the Company purchased an
additional $470,000 of surplus notes from Home Mutual to further support its
insurance operations. In connection with operating difficulties and recent
losses at Home Mutual during 1996, the Company has established a valuation
allowance of $2.6 million against the cost of the surplus notes of $4.97
million. At December 31, 1996, Home Mutual's statutory surplus was $1.55
million. The repayment of these notes and interest is subject to approval by the
Superintendent of the New York Insurance Department. In addition to the purchase
of the notes and assumptions of certain executory contracts by the Company, Home
Mutual executed a Loss Assumption Agreement with New York Central. Under the
terms of this agreement, Home Mutual transferred responsibility for all of the
claims and loss adjustment expense obligations with respect to losses incurred
by it on or prior to September 30, 1993 under policies, contracts, binders and
riders issued by Home Mutual on or prior to such date. See Note 5 to the
"Consolidated Financial Statements" included in this report.
On October 3, 1994, the Company completed the private placement of $17.0
million of ten-year subordinated notes which bear interest at a rate of 11.5%
per annum and have detachable common stock warrants entitling the
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holders of the warrants to purchase an aggregate of 265,000 shares of common
stock at $13.80 per share which was reduced to $9.52 in 1996 in consideration
for certain modifications to the terms of the notes.
On October 6, 1994, the Company invested $4.0 million in Westbrook
Insurance Company ("Westbrook"), a wholly-owned property and casualty insurer
domiciled in Connecticut. During 1996, the Company contributed an additional
$1.2 million of capital and surplus to Westbrook to support its operations.
On November 9, 1994, the Company completed the acquisition of all of the
outstanding common stock of Pinnacle Insurance Company ("Pinnacle"), a Georgia
domiciled property and casualty insurer for approximately $1.1 million in cash.
During 1994 and 1995, the Company infused an additional $4.8 million of capital
and surplus in Pinnacle to enhance its capital base to support the expansion of
its underwriting operations and, during 1995, appointed several agents to write
personal and commercial auto insurance. During 1996, an additional $1.5 million
of capital and surplus was contributed to Pinnacle by the Company. Pinnacle is
licensed in 28 states.
Unless the context otherwise requires, the term "Company" means Home State
Holdings, Inc. and its direct and indirect subsidiaries, including, as of the
end of the first quarter of 1995, Merchant Bakers. Home Mutual is not a
subsidiary of the Company and its financial results are not consolidated with
the Company's financial results.
Certain insurance terms used in this report are defined in the Glossary at
the end of this Item 1.
Pooling Arrangements
In 1995 and prior years, the Company's subsidiaries, Home State, Quaker
City, Merchant Bakers, Pinnacle and Westbrook operated as separate entities for
statutory and regulatory reporting purposes. In 1996, two insurance pooling
arrangements were created to facilitate the financial support of the Company's
growth and maximize utilization of its capital and surplus. The first pool, the
Home State National Pool (the "National Pool"), consists of Home State, Quaker
City, Pinnacle and Westbrook. The second pool, the Home State New York Pool (the
"New York Pool"), consists of Merchant Bakers and Home Mutual. Under the pooling
arrangements, the participants share premiums, losses and underwriting expenses
on a pro-rata basis relative to their respective interests. Under the terms of
the New York Pool, Merchant Bakers assumes 85% of the combined underwriting
results of the two companies, with Home Mutual retaining the remaining 15%.
Non-Insurance Companies
In order to enhance its profitability and as a means of providing and
financing additional growth opportunities, during 1994 the Company established
Home State Financial Services, Inc., a Delaware corporation ("Home State
Financial"). Home State Financial owned non-insurance subsidiaries specializing
in premium finance, reinsurance brokerage and general management services. In
1996, the Company reorganized these subsidiaries. As part of such
reorganization, Home State Financial and Home State Insurance Management, Inc.
were merged into the Company. Two of the subsidiaries were or are being
converted to limited liability companies, Aspen Intermediaries L.L.C. and HSIM
L.L.C. See "-Financial Services and Insurance Related Business." The results of
operations for the financial services group are presented separately in Note 17
to the Consolidated Financial Statements.
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Premiums and Underwriting
The following table shows direct and assumed premiums written by line of
business for Home State, Quaker City, Pinnacle, Westbrook, Merchant Bakers and
the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
Amount % Amount % Amount %
-------- --- -------- --- -------- ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Home State:
Personal Auto $ 62,083 77% $ 39,847 59% $ 17,068 41%
Commercial Auto 18,834 23 27,035 41 24,790 59
-------- --- -------- --- -------- ---
Total $ 80,917 100% $ 66,882 100% $ 41,858 100%
======== === ======== === ======== ===
Quaker City:
Personal Auto $ 19,382 80% $ 19,157 68% $ 10,640 66%
Commercial Auto 4,851 20 8,643 32 5,511 34
-------- --- -------- --- -------- ---
Total $ 24,233 100% $ 27,800 100% $ 16,151 100%
======== === ======== === ======== ===
Pinnacle:
(since date of acquisition)
Personal Auto $ 3,062 25% $ 178 4% N/A N/A%
Commercial Auto 9,173 75 4,073 92 $ 204 89
Non-Auto 39 -- 154 4 24 11
-------- --- -------- --- -------- ---
Total $ 12,274 100% $ 4,405 100% $ 228 100%
======== === ======== === ======== ===
Westbrook:
Personal Auto $ 5,354 57% $ 907 31% N/A N/A%
Commercial Auto 4,120 43 2,006 69 N/A N/A
-------- --- -------- --- -------- ---
Total $ 9,474 100% $ 2,913 100% N/A N/A%
======== === ======== === ======== ===
Merchant Bakers:
(since date of acquisition)
Personal Auto $ 25,044 31% $ 188 --% N/A N/A%
Commercial Auto 52,458 65 22,018 96 N/A N/A
Non-Auto 2,967 4 590 4 N/A N/A
-------- --- -------- --- -------- ---
Total $ 80,469 100% $ 22,796 100% N/A N/A%
======== === ======== === ======== ===
The Company (aggregate):
Personal Auto $114,925 55% $ 60,277 48% $ 27,708 48%
Commercial Auto 89,436 43 63,775 51 30,505 52
Non-Auto 3,006 2 744 1 24 --
-------- --- -------- --- -------- ---
Total $207,367 100% $124,796 100% $ 58,237 100%
======== === ======== === ======== ===
</TABLE>
The Company has grown its markets from two (New Jersey and Pennsylvania) at
the outset of 1993 to thirty-four at the end of 1996. During the last half of
1996, the Company focused on slowing its growth rate through agency management
actions and changes in product mix, with increased emphasis placed on personal
auto business in order to reduce leverage on surplus and improve operating
efficiencies.
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Personal Auto Insurance
The Company writes standard and preferred personal auto insurance primarily
in New Jersey, New York, Pennsylvania, Delaware, Connecticut, West Virginia,
Florida and Georgia. Standard and preferred risks consist of those individuals
in the driving public generally thought to represent less exposure due to age,
driving experience, vehicle type and use factors. The Company's personal auto
underwriting guidelines generally require that all drivers have at least five
years of driving experience, that no driver have an at-fault accident and that
no driver has more than one motor vehicle violation. The Company does not insure
high-powered sports cars, off-road vehicles or motorcycles and issues one year
policies on a direct bill basis to its insureds.
The Company's personal auto marketing strategy has been to select preferred
agencies who had sizable books of standard and preferred risks written either in
assigned risk plans or by insurers exiting the Company's markets. The Company
has sought to offer these agencies better service and standard voluntary market
commissions to induce them to renew these risks with the Company rather than
with their prior carrier. In certain states, the Company has selected smaller
agencies having access to good quality business but limited availability of
alternative standard or preferred carriers. The Company's focus is on standard
and preferred risks which are typically written by large, nationally recognized
insurers. However, a number of these national carriers have either left the
Company's markets or have limited their participation in these markets.
In January 1995, the Company was informed by the New Jersey Insurance
Department that it could no longer remain exempt from the state's
Take-All-Comers ("TAC") laws regarding personal auto insurance as provided under
the Fair Automobile Insurance Reform Act of 1990. In general, TAC requires that
automobile insurers provide coverage to any licensed person having fewer than
nine (9) eligibility points. The Company's underwriting guidelines had
previously specified that the maximum eligibility points allowed for any one
driver to offer insurance was four (4) points.
Since the loss of the exemption from TAC, the Company has accepted personal
auto insurance risks with up to a maximum of eight (8) points under its
underwriting guidelines. With the implementation of TAC, the Company has
experienced an increase in the percentage of its New Jersey personal auto
business with eligibility points of five (5) or more from 1.4% of the total New
Jersey personal auto book in January 1995 to 7.0% at December 1996. In addition,
the number of youthful operators (those drivers under 25 years of age) increased
from 2.1% to 8.0%. Although the actual impact of the loss of the TAC exemption
on the 1996 results for the New Jersey personal auto business was not material,
the loss of the exemption may adversely impact the Company's experience in the
future.
During 1996, Quaker City was admitted to write personal automobile
insurance in New Jersey in order to implement the Company's two-company strategy
for dealing with TAC. Quaker City will assume the Company's TAC obligations at
rates that are substantially higher than Home State's. Home State will resume
its prior role as an insurer of preferred business. Home State's underwriting
guidelines will permit the transfer of certain insured drivers to Quaker City at
renewal. The implementation of the two-company strategy will reduce the
Company's exposure to higher-risk drivers while increasing average vehicle
premiums.
Commercial Auto Insurance
Within the commercial auto insurance market, the Company focuses on
providing auto insurance to public transportation risks, including school buses,
luxury limousines, car services and charter buses. The Company also writes other
classes of commercial auto insurance including local delivery fleets and
artisan's vehicles. The Company does not insure long haul trucking operations or
urban taxi cabs. The Company provides its insureds with physical damage
insurance (comprehensive and collision) as well as liability insurance.
The Company has developed specialty marketing programs for public
transportation risks. These programs include safety programs, driver training
sessions and vehicle maintenance reviews. Participation in these programs is
required of the insured, and adherence to these safety measures may further
benefit the insured through reduced premiums and the Company through reduced
losses. Management believes that it has gained significant market recognition
through these public transportation programs as evidenced by its success in
attracting numerous private
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school bus accounts. The Company plans to continue to pursue this opportunity as
school districts increasingly replace direct school bus service with private
contract service.
The Company has also penetrated the market for limousine services and
charter bus operations which had historically been written by commercial
assigned risk plans. The Company believes that it has been able to offer more
complete coverage to those risks which meet the Company's qualifications with
regard to loss history, continuity of ownership and low driver turnover.
The Company also writes local service and retail commercial auto risks on a
fleet and non-fleet basis. These risks are generally produced by personal auto
agencies and are underwritten and serviced by the Company in a manner similar to
personal auto insurance.
Insurance Underwriting and Pricing
Personal Auto
The Company controls the underwriting process. The risk must comply with
the Company's own underwriting guidelines. Outside of New Jersey, most agents
have binding authority within the guidelines. Generally, the agency submitting
the risk must have previously insured that risk with another insurer and have a
history of submitting high-quality risks. Careful attention is given to proper
risk classification so as to enable the Company to apply the proper rate for the
Company's exposure.
The Company has developed several methods to ensure compliance with
underwriting guidelines and enforce proper rate classification. First, on a
regular basis, the Company obtains a motor vehicle abstract for each operator of
an insured vehicle. Second, the Company requires verification on insureds who
ask for credits for vehicle alarms, driver training or good student status.
Third, photographs of all insured vehicles eight years or older are required to
prove driveability and photographs of all vehicles valued at $25,000 or higher
are required to obtain physical damage coverage. Fourth, the Company utilizes
industry-wide databases to verify accident histories, household residents and
driving distances. Finally, the Company has established an in-house
investigations unit to check and confirm underwriting and pricing information
directly with applicants and policyholders.
Due to the limited number of insurers actively writing personal auto
insurance in the majority of the Company's key states, price competition, while
a factor, is less acute for personal auto insurance than for commercial auto
insurance.
Commercial Auto
The Company establishes rates for commercial auto policies based on
individual risk loss experience, utilizing advisory rates or prospective loss
costs suggested by the Insurance Services Office Inc., an industry advisory
group. In most instances, the Company's rates, rules and policy forms must be
pre-approved by regulators in all states in which the Company does business.
Management is not aware of any proposed initiatives or regulations to limit or
reduce commercial auto insurance rates in any of the states in which the Company
operates.
In order for the Company to consider underwriting public transportation
commercial auto risks, the agency must submit a minimum of three years of
historical premium and loss data for review. Company safety experts visit all
large accounts either prior to binding or during the sixty day review process
after binding to assess the quality of the risk. If risks are deemed
unacceptable for any reason, they are canceled. Traditionally, the Company has
competed on the basis of price for its commercial auto business by taking
advantage of lower than industry expense ratios. However, due to increased
competition, the Company has chosen not to engage in active price competition as
its sole means of attracting and retaining quality risks.
The Company has centralized its commercial auto underwriting, accounting,
processing and claims administration functions. In contrast, the personal auto
underwriting review process remains predominantly a local function. Management
believes that the effectiveness of its underwriting staff is enhanced with
familiarity with the territories which it serves.
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Marketing and Production
Personal Auto
The Company markets its personal auto insurance products through
approximately 1,000 independent insurance agencies, approximately 600 of which
have met special qualifying standards and are designated "preferred agencies."
Preferred agencies may submit new business to the Company and are often paid a
higher commission than "non-preferred" agencies. The remaining agencies can only
renew existing policies.
These preferred agencies were selected based upon their historic
profitability, their geographic location and the Company's belief in its ability
to become that agency's primary auto insurer. Management believes that the
Company achieves more profitable results where the Company is the insurer of
choice and receives the agency's best risks.
"Limited agencies" enter into contracts with the Company enabling them to
receive commissions on rollover business only. These limited agencies are
reviewed by the Company's marketing staff and, if they meet the Company's
selection criteria, may be offered preferred agency status.
Commercial Auto
Six independent agencies submitted an aggregate of $70 million of
commercial auto insurance premium in 1996, an amount representing approximately
83% of the Company's total commercial auto premiums. Within this amount, one
general agency submitted approximately $35 million or 41% of commercial auto
premium, while another accounted for $14 million or 17% of total commercial
premium in 1996. Management believes it has a good working relationship with all
of these significant agencies. These agencies also represent other insurance
companies that write public transportation commercial auto insurance.
Reinsurance
The use of reinsurance allows an insurance company to transfer (cede) a
portion of its exposure to a reinsurer which assumes the risk in exchange for a
portion of the premium. This enables the insurer to write additional risks while
maintaining premium to surplus ratios recommended by regulatory authorities and
rating agencies. However, the ceding of reinsurance does not legally discharge
the insurer from its primary liability for the full exposure, and the ceding
company must pay the loss if the assuming company fails to meet its obligations
under the reinsurance agreement. Therefore, a ceding company is subject to
credit risk with respect to its reinsurers. All of the Company's current
reinsurers are rated A- (Excellent) or better by A.M. Best.
The Company historically has ceded a substantial portion of its gross
premiums to enable it to reduce its net premium to surplus ratios to normalized
industry levels. Reinsurers have paid to the Company ceding commissions and
profit sharing in the form of recoveries on the ceded premiums, thereby reducing
the Company's net loss and expense ratios. The volume of reinsurance profit
sharing income is impacted by the amount of premiums ceded to reinsurers as well
as the reinsurers' historical cumulative loss experience on such premiums.
Although adverse loss development retroactively reduces profit sharing income,
such retroactive adjustments cannot exceed the amount of the profit sharing
income previously recognized by the Company on reinsurance premiums.
During 1996, for its physical damage insurance, the Company had in place
quota share treaties under which 40% of both its personal and commercial auto
physical damage risk was ceded to a reinsurer for a like percentage of the
premium. The quota share treaties reinsure the Company's private passenger and
commercial automobile physical damage policies to a maximum of $85,000 and
$125,000, respectively, on any one vehicle. In addition, the Company had in
place a catastrophe reinsurance contract, under which it ceded all liability for
physical damage and property exposures under its policies above a $500,000
attachment point, in addition to a 5% retention on the $19.5 million reinsured
limit. This treaty allows Home State the ability to reinstate such coverage once
during the treaty year for an additional premium. For 1997, these contracts have
been renewed with the Company's reinsurers on substantially similar terms to
those in effect for 1996.
For liability insurance, the Company's 1996 reinsurance program consisted
of excess of loss reinsurance treaties under which it ceded all exposure in
excess of $50,000 per both personal and commercial auto liability
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occurrence in exchange for a fixed portion of the premium which reflected the
percentage of exposure ceded as well as the reinsurer's experience. The excess
of loss treaties reinsure the Company's private passenger and commercial
automobile liability policies to their maximum written policy limits ($1,200,000
and $5,000,000, respectively, per loss occurrence). In October 1996, the Company
issued $10,000,000 in Preferred Stock to two reinsurance companies. In
connection with the issuance of the Preferred Stock, the Company undertook to
place substantially all of its excess of loss reinsurance with the two companies
at commercially reasonable and actuarially sound rates. See - "Liquidity -
Capital Resources".
In 1996, the Company instituted a quota share reinsurance agreement
covering certain commercial auto liability risks written through Merchant
Bakers, as well as certain personal auto risks carrying lower policy limits.
Management believes that due to lower than average policy limits and a higher
relative frequency of lower losses for the book of business, a quota share
agreement is likely to allow direct and net loss ratios to more closely
approximate each other. As in 1996, the 1997 excess of loss reinsurance treaties
provide the Company reinsurance at a maximum cost which is fixed, with
profitable reinsurance reducing the Company's costs through profit-sharing
payments.
The Company considers numerous factors in choosing reinsurers, the most
important of which is the financial stability of the reinsurer. The Company's
reinsurance intermediary provides the Company with financial profiles of its
reinsurers on a semiannual basis which enables management to continually
evaluate the financial strength of its reinsurers. The evaluation process takes
into consideration the ratings of each reinsurance company as developed by the
major insurance company rating agencies, including A.M. Best, Duff & Phelps,
Moody's and Standard & Poor's. The Company's intermediary also reviews the
annual statutory statements, NAIC IRIS test results, audited financial reports,
insurance department examination reports, loss reserve certifications and
federal securities filings (where applicable) of potential reinsurers. The
Company has not experienced collectibility problems with its reinsurance
recoverables.
In an effort to increase the available statutory surplus in the National
Pool and manage surplus to written premium ratios, the Company effected an
Unearned Premium Reserve ("UPR") Quota Share reinsurance treaty at December 31,
1996. Under the terms of the treaty, the Company ceded $21.9 million of UPR,
which when adjusted for ceding commissions earned by the Company, increased
available statutory surplus in the National Pool by $7.1 million.
Management of Exposure to Catastrophe Losses
The Company is exposed to multiple insured losses arising out of a single
occurrence, such as a natural or man-made catastrophe. Such an event may
generate insured losses in the Company's personal and/or commercial operations.
As with all property and casualty insurers, the Company expects to incur
some losses related to catastrophes and seeks to price its products accordingly.
The Company's exposure to catastrophe losses arises principally out of
hurricanes, windstorms, floods, fires, snow storms and explosions. The Company
manages its exposure to such losses from an underwriting perspective by limiting
the accumulation of known risks in exposed geographic areas and from a
reinsurance perspective by purchase of catastrophe reinsurance.
Losses from coverage other than property insurance may also occur from an
event giving rise to catastrophe losses. For example, an ice storm could cause
liability losses to occur. As is common in the industry, the Company estimates
its "probable maximum loss" from any one act and coordinates its underwriting
guidelines and reinsurance covers to limit its "probable maximum loss" exposure.
No assurance can be given that the probable maximum loss estimated by the
Company will not materially either understate or overstate the possible losses
to the Company which could be generated by such events.
Claims
Claims Management
During 1996, claims volume increased steadily throughout the year requiring
a continuous expansion of space and staff. In order to manage the increase in
volume and improve customer service, management modified the physical plant for
claims processing to include three specialized service centers. Claims relating
to Merchant Bakers are
11
<PAGE>
processed in the Company's New York City claims center, where its staff of
adjusters are experienced in the handling of commercial auto claims which make
up the significant portion of Merchant Bakers book of business. Home State and
Quaker City claims are managed in the Shrewsbury, New Jersey claims center where
its adjusters are building an increased specialization in personal auto claims.
There is also a full service claims center in Carrollton, Georgia which handles
claims for policyholders located in the Company's southeastern markets.
During 1996, the Company effected an 80% increase in the claims staff to
provide the infra-structure to support the historical rapid growth. Issues
relating to proper infra-structure, claims management and claims information
systems continue to receive management's attention in continuing efforts to
enhance quality, upgrade customer service and increase efficiency.
In August 1996, the company hired a Senior Vice President of Claims, who
immediately focused on stabilizing the claims staff and improving the quality
and efficiency of the department. To support the need to attract and retain
quality personnel, the Company has initiated a comprehensive claims training
program, including a "career path" program for trainees, which focuses on
providing claims personnel with the foundation to build successful careers. The
program has proven to be successful in retaining quality employees.
The Company has significantly reduced its reliance on independent vendors
to appraise vehicle damage. The Company's own staff of appraisers now handle 70%
of all vehicle inspections, under an automated process, as well as policing the
work product of independent appraisers and automobile body shops. The Company is
piloting a "drive-in" appraisal location which, if successful, is expected to be
expanded to other areas. A network of approved automobile repair facilities has
been established to help customers obtain quality repairs more quickly as an
enhancement to the streamlined inspection and appraisal process.
The Company has sought to improve the effectiveness of the claims process.
This will allow the Company to focus the correct resources on the appropriate
types of claims to maximize results. The Company believes that litigated claims
need to be properly managed. To help control allocated loss adjustment expenses,
the Company has upgraded its litigation management guidelines to provide
stringent litigation management performance standards for all claims personnel
as well as outside defense counsel. It is expected that by increasing
accountability, costs will be reduced and results improved. In addition, the
Company continues to resist fraud by emphasizing fraud awareness training,
maintaining a properly staffed Special Investigations Unit ("SIU") and by
providing policyholder education. In 1996, these efforts are estimated to have
resulted in the denial of approximately $750,000 in fraudulent or inflated
claims.
Loss Reserves
Loss reserves include provision for the cost of settling reported claims
and the related loss adjustment expenses, as well as a provision for claims
incurred but not reported.
In establishing reserves for reported claims and LAE, the Company's claim
adjusters, on a case by case basis, consider the severity of the injury or
property damage.
Due to the rapid premium growth and limited historical claims experience,
in establishing reserves for IBNR, the Company has relied predominantly on
industry average loss experience on a state by state basis. This industry
experience has been adjusted for the anticipated impact of the Company's
underwriting standards, rate classification methodology standards and claims
controls, and, where appropriate, on its own experience. The Company's total
reserves were estimated using both paid and incurred loss development methods
given the significant changes in the level of case basis reserves at December
31, 1996.
12
<PAGE>
The following table sets forth a reconciliation of beginning and ending
reserves, net of reinsurance recoverable, as shown on the Company's consolidated
financial statements.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1996 1995 1994 1993
-------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Reserves for losses and LAE at beginning of year $ 45,209 $18,410 $13,735 $ 8,480
Reserves for losses and LAE assumed in respect of
Pinnacle acquisition -- -- 3,068 --
Reserves for losses and LAE assumed in respect of
Merchant Bakers acquisition -- 9,545 -- --
-------- ------- ------- -------
45,209 27,955 16,803 8,480
-------- ------- ------- -------
Incurred losses and LAE:
Provision for insured events of the current year 89,038 45,065 21,559 14,970
Increase in provision for insured events of
prior years 23,357 4,241 1,134 1,185
-------- ------- ------- -------
Total incurred losses and LAE 112,395 49,306 22,693 16,155
-------- ------- ------- -------
Payments:
Losses and LAE attributable to insured events of
the current year 39,286 16,466 10,365 5,927
Losses and LAE attributable to insured events of
prior years 35,554 15,586 10,721 4,973
-------- ------- ------- -------
Total payments 74,840 32,052 21,086 10,900
-------- ------- ------- -------
Reserves for losses and LAE at end of year $ 82,764 $45,209 $18,410 $13,735
======== ======= ======= =======
</TABLE>
"Reserve for losses and LAE" sets forth the estimated liability for unpaid
losses and loss adjustment expenses recorded at the balance sheet date for each
of the indicated years. This liability represents the estimated amount of losses
and loss adjustment expenses for claims arising in the current and all prior
years that are unpaid at the balance sheet date, including losses incurred but
not reported, net of reinsurance.
13
<PAGE>
Loss Development in 1996
The following table discloses the cumulative development of the
liability for net losses and LAE of the Company from 1988 through 1996.
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net reserve for losses and LAE $156 $334 $1,203 $3,574 $8,480 $13,735 $18,410 $ 45,209 $82,764
Paid (cumulative) as of:
One year later 160 323 825 1,470 3,984 4,012 15,460 35,554
Two years later 160 323 1,125 2,635 6,726 10,446 18,564
Three years later 160 323 1,246 3,664 9,217 14,248
Four years later 160 323 1,446 4,391 10,578
Five years later 160 323 1,631 4,545
Six years later 160 323 1,518
Seven years later 160 321
Eight years later 160
Net liability re-estimated as of:
One year later 160 356 1,289 3,223 8,828 14,048 21,609 68,566
Two years later 160 324 1,292 3,513 9,753 14,994 25,659
Three years later 160 329 1,377 4,262 10,547 17,266
Four years later 160 329 1,533 4,601 11,607
Five years later 160 334 1,742 4,954
Six years later 160 334 1,777
Seven years later 160 333
Eight years later 160
Net cumulative redundancy
(deficiency)
Dollar ($4) $1 ($574) ($330) ($3,127) ($3,531) $(7,249) ($ 23,357)
Percentage (0.03) 0.00 (0.48) (0.48) (0.37) (0.26) (0.39) (0.52)
Gross estimated liability-end of year $44,957 $ 95,790 $179,955
Estimated reinsurance recoverable (26,547) (50,581) (97,191)
------- -------- --------
Estimated net liability - end of year $18,410 $ 45,209 $ 82,764
======= ======== ========
One year later
Gross re-estimated liability $53,489 $127,652
Re-estimated recoverable (31,880) (59,086)
======= ========
Net re-estimated liability $21,609 $ 68,566
======= ========
Two years later
Gross re-estimated liability $55,513
Re-estimated recoverable (29,854)
-------
Net re-estimated liability $25,659
=======
Gross cumulative deficiency - latest (10,556) (31,862)
======= ========
</TABLE>
14
<PAGE>
The "Paid (cumulative) as of" portion of the table shows the cumulative
losses and loss adjustment expenses made in succeeding years for losses incurred
prior to the balance sheet date.
The "liability re-estimated as of" portion of the table shows the
re-estimated amount of the previously recorded liability based on experience for
each succeeding year. The estimate is increased or decreased as payment are made
and as more information becomes known about the severity of remaining unpaid
claims.
"Cumulative deficiency" shows the cumulative deficiency for each year at
December 31, 1996 of the reserve estimate shown in the top line of the table. A
redundancy means that the reserves established in prior years exceeded actual
losses and loss adjustment expenses were re-evaluated at less than the
originally reserved amount. A deficiency means that the reserves established in
prior years were less than the actual losses and loss adjustment expenses or
were re-evaluated at more than the originally reserved amount.
Certain prior year amounts in the table above have been revised to reflect
certain immaterial changes in presentation.
The process of estimating the ultimate liability for losses and LAE has
been a particular challenge for the Company due to the significant growth in
business, which has resulted in a substantial increase in claims reported. As
discussed above, while the Company's loss experience continues to develop, the
IBNR provision has been calculated by reference to industry loss development
factors, adjusted for the company experience where appropriate.
As can be noted from the table above, there have been significant
differences between the actual losses and the Company's reserve estimates, with
adverse loss reserve development in 1996 related to 1995 and prior accident
years of approximately $23 million.
During the second quarter of 1996, the Company noted a significant increase
in the volume of reported claims falling below the reinsurance attachment
points, over and above the frequency anticipated in its calculation of loss
reserves. At the same time, the Company conducted a thorough overall
re-evaluation of its business plan and the profitability of the underlying
business. As a result, management increased reserves by $12 million in the
second quarter, predominantly within IBNR. This reserve increase was primarily
related to the 1995 and 1994 accident years, although an element was
attributable to the winter storms of 1996.
In the remainder of 1996, the Company continued to reassess its current and
prior year loss experience. In addition to addressing loss reserving and growth
issues, the Company also strengthened senior management and supervisory
personnel in claims administration, as well as employing an internal actuary to
assist with loss reserving estimates and pricing of risks (see Item 4A -
"Executive Officers of the Registrant"). As a result of the reassessment, the
Company made significant additional reserve increases in the fourth quarter of
1996, relating mainly to 1995 and 1996 accident year claims.
As part of this reassessment, in the fourth quarter of 1996 the Company
undertook a comprehensive review of its case reserves. The review of open case
reserves was concurrent with the hiring of a Senior Vice President of Claims and
the initiation of a new case reserving philosophy. The new case reserving
philosophy is based on earlier recognition of the ultimate settlement value for
a given claim. For example, while information concerning the comparative
negligence of the persons involved in the loss is still utilized in establishing
reserves, it receives less emphasis than before. The Company still evaluates all
provisions of the policy, anticipated net effect of salvage and subrogation, the
ultimate settlement value and, where appropriate, the opinion of outside counsel
and claims consultants.
Management's emphasis in the fourth quarter of 1996 was to ensure that the
new case reserving philosophy was fully implemented in all open claim files.
During this process, the Company also implemented a formula reserve program for
its new claims as well as more aggressive practices in managing pending claims
file count per adjuster. These actions have resulted in greater case reserves
being established quicker than in the past. The changes in case reserving were
taken into account in setting the assumptions used in calculating the Company's
total loss reserve requirement at December 31, 1996.
15
<PAGE>
Of the total $23 million adverse development on 1995 and prior accident
years, approximately $10.2 million is due to losses in Merchant Bakers. This
adverse development includes 85% of the adverse development of Home Mutual under
the pooling arrangement which commenced on January 1, 1996 and losses relating
to the period prior to the acquisition of Merchant Bakers by the Company in
1995.
Certain Actions To Improve Profitability
New case reserving philosophies provide the Company with a more timely
assessment of the loss characteristics of the Company's book of business. The
change in claim reserving has assisted the Company in managing its policy
renewal and growth efforts, particularly in the more competitive commercial
lines business. It is continuing to identify and non-renew commercial accounts
which have exhibited poor loss characteristics, in addition to holding prices
where possible in a highly competitive environment.
Other recent initiatives include a comprehensive claims management program,
designed with the assistance of the Company's reinsurers to assist in reducing
the pending file counts, thereby providing company staff adjusters the ability
to focus on more recent accident year claims. The Company's goal is to reduce
the period of time between when a claim is reported and when it is settled. One
focus of claims management in 1997 will continue to be enhancement of operating
practices to improve efficiency.
Future Loss Experience
The Company is committed to maintaining adequate loss reserves and has
continued in 1996 to take actions necessary to ensure the strength of its
balance sheet. However, the process of estimating the ultimate liability for
losses and LAE is imprecise and is subject to many variables beyond the
Company's control. Furthermore, factors such as future inflation, claim
settlement patterns, legislative activity and litigation trends may have a
substantial impact on the Company's future loss experience.
Investments
The Company's investment policies are set by the Board of Directors. The
investment portfolio is managed by Woodhaven Investors Inc., an investment
management firm owned by two of the Company's stockholder/Directors.
The Company has structured and maintained its investment portfolio in order
to service current operational and liquidity requirements, while considering the
Company's increase in premium writings and statutory surplus. The Company
maintains a significant portion of its assets in high quality, fixed income
investments with short maturities and generally does not invest in commercial
real estate, mortgages or illiquid securities. The primary objectives of the
Company's investment strategies are to generate income, preserve capital and
maintain adequate liquidity. The Company continually evaluates the purchase of
tax-advantaged investments as a means to enhance after-tax portfolio yields
based on the varying tax positions of the purchasing entity. Management believes
that the investment portfolio has and will continue to provide sufficient
capital resources to meet ongoing operational and liquidity requirements.
In structuring the investment portfolio, the Company attempts to match
average maturities with the anticipated payments relative to the development of
losses as well as other general operating requirements. Management believes that
average maturities have been and continue to be suited to the actual and
anticipated liquidity needs of the Company. At December 31, 1996, the Company
maintained approximately 83% of its fixed maturity securities in instruments
with maturities of five years or less. Management believes that the current
maturity schedule offers sufficient protection of portfolio values in the event
of a significant change in interest rates when considering the factors of
market, credit and reinvestment risk as well as anticipated corporate liquidity
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
The guidelines established by the Company's Board of Directors provide for
investments in those fixed income instruments which appear to be most fairly
valued based on rated quality, maturity and yield spread relationships. The
Company policy guidelines and concern for quality has produced an investment
portfolio with an average Standard and Poor's ("S & P") rating of AA. At
December 31, 1996, substantially all securities in the Company's portfolio
carried an S & P rating of A or better. With the operating losses generated in
1996, the Company is purchasing an increased percentage of taxable securities to
increase the overall yield on the investment portfolio and take advantage of
available loss carry-forward benefits. The Company does not invest in derivative
securities.
16
<PAGE>
The following table shows the components of the Company's fixed maturity
investment portfolio at the dates shown on the basis of their carrying value
(cost for held-to-maturity securities and market value for available for sale
securities) and short term investments, which are carried at cost approximating
market and common stocks which are carried at quoted market prices.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
--------------------- -------------------
Amount Percent Amount Percent
------- ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities:
States, municipalities and political $53,669 58.7% $55,017 69.8%
subdivisions
Government obligations 4,301 4.7 14,352 18.2
Corporate securities 21,638 23.7 6,269 8.0
------- ----- ------- -----
Total fixed maturity securities 79,608 87.1 75,638 96.0
Common stock 407 0.4 -- --
Short term investments 11,359 12.5 3,157 4.0
------- ----- ------- -----
Total investments $91,374 100.0% $78,795 100.0%
======= ===== ======= =====
</TABLE>
The following table sets forth contractual maturities for the fixed
maturity securities at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
--------------------- -------------------
Amount Percent Amount Percent
------- ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Maturity:
One year or less $ 9,988 12.5% $18,897 25.0%
Over 1 year through 5 years 56,260 70.7 42,142 55.7
Over 5 years through 10 years 12,719 16.0 13,960 18.5
Over 10 years 641 .8 639 0.8
------- ----- ------- -----
Total $79,608 100.0% $75,638 100.0%
------- ----- ------- -----
</TABLE>
As of December 31, 1996, fixed maturity securities, short term investments
and cash together accounted for 98% of the Company's investment portfolio. The
effective net yield decreased from 5.8% for 1995 to 5.5% for 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 2 to the Consolidated Financial Statements.
Systems and Operations
In order to meet the growing requirements posed by the Company's geographic
expansion, a significant investment in information systems was undertaken in
1994. The Company has put into place a processing system on a common platform
that management believes will allow for decreasing marginal processing costs.
For its commercial auto systems requirements, the Company operates the WINS
system from Wheatly Systems Group, Inc. The WINS system, which runs on the IBM
A/S 400, provides the Company with an integrated underwriting, claims management
and reinsurance information system which management believes will support
projected premium levels for the foreseeable future. The implementation of WINS
was undertaken in the third quarter of 1994, with the first lines of business
becoming operational in January 1995. During 1995, the Company transferred
substantially all remaining commercial auto business to the WINS System and
initiated the transition of its personal auto business. Because of the
integrated approach to system-wide data processing offered by WINS and the
movement of the Company's personal auto business to the WINS platform,
management believes that a cost advantage will be maintained as operations
migrate to the WINS system.
17
<PAGE>
In 1993, for its personal auto insurance data processing needs, the Company
contracted with CIGNA Information Systems, a division of CIGNA Corporation. The
system performs policy issuance, premium billing, commissions and claims
information management functions as well as full management information
capabilities. During 1996, the Company initiated the transition of the personal
lines processing from the CIGNA system to the WINS system on a renewal basis
which will decrease processing costs from those incurred under the CIGNA
contract. Effective October 1, 1997, all personal auto will be processed by
WINS.
The Company's accounting, processing and claims administration functions
are substantially centralized. Management believes that centralization of these
functions creates and maintains economies of scale, with a favorable impact on
the Company's fixed underwriting costs. Reducing fixed underwriting costs has a
positive impact on the Company's expense ratios and enables it to compete more
effectively in its core lines of business. Moreover, management believes that
centralization enables the Company's subsidiaries to have access to the
Company's core of competent and qualified staff.
Financial Services and Insurance-Related Business
In order to enhance its profitability and as a means of providing
additional growth opportunities in the future, the Company engages in
insurance-related financial services through three direct subsidiaries.
Tower Hill, Inc., a Delaware corporation ("Tower Hill"), was organized in
1993 to provide premium finance services to insureds of the Company's insurance
affiliates. Tower Hill is currently licensed in New York, New Jersey,
Pennsylvania and Delaware and is actively seeking admittance in certain other
states in which the Company has insurance operations to conduct premium finance
activities. Tower Hill collects a down payment from the borrower/insured and
will generally finance up to 80% of the insurance directly collateralized by the
unearned premium held by the insurance carrier. The Company has established a
policy to ensure that at all times the unearned premium on policies financed by
Tower Hill will exceed the unpaid principal on the finance contract relating
thereto, thereby minimizing Tower Hill's credit risk associated with such
activities. During 1996, Tower Hill earned approximately $1.5 million in
financing and late charges revenue and had pre-tax income of $536,000.
Tower Hill has a service agreement with Premium Payment Plan, Inc., of
Hudson, New York ("PPP"), whereby PPP provides all back office and
administrative services for a variable fee based on the total income from
premium finance contracts in force, with such fees declining as income
increases. The Company believes that this arrangement provides greater
flexibility and servicing capability for Tower Hill's scope of operations, while
avoiding the need for separate computer systems and staffing.
In March 1997, the Company was informed by the banks that financing to
Tower Hill would be discontinued given certain defaults under existing credit
agreements. The Company had been notified of such discontinuance in available
financing after the completion of the February renewal cycle for "for hire"
livery vehicles in the state of New York. These premiums accounted for
approximately $15 million in face value of contracts, net of down payments
collected from insureds of approximately 30% of the face amount of the subject
policy. Tower Hill has approached the New York Insurance Department to approve
the assignment of contracts currently held by Tower Hill to Merchant Bakers in
satisfaction of the obligation owing to Merchant Bakers for the advancement of
the remaining policy premium, net of amounts collected at the inception of the
finance agreement. This assignment would transfer all rights, title and interest
in the premium finance agreements to Merchant Bakers to the extent that such
contracts were initiated for insureds of Merchant Bakers. Merchant Bakers would
retain the right to cancel policies covered under the assigned agreements, as
well as earn additional income from the collection of financing fees and
late/reinstatement charges. Tower Hill has instituted a moratorium on the
submission of any new premium finance business until such time as adequate
financing is obtained. While management intends to seek additional financing, no
assurances can be given that such financing will be secured. All policies will
continue to be serviced by Premium Payment Plan under substantially the same
agreement as existed in 1996.
Aspen Intermediaries, a New Jersey company ("Aspen"), provides reinsurance
brokerage and intermediary services to the Company's insurance affiliates, and
may, in the future provide such services to non-affiliated insurance companies.
Aspen has been granted authority to provide reinsurance brokerage and
18
<PAGE>
intermediary services in New Jersey. During 1996, Aspen earned approximately
$2.1 million in brokerage fee revenue for assisting in the placement of the
Company's reinsurance programs and those of Home Mutual and had pre-tax income
of $2.1 million.
HSIM, L.L.C., ("HSIM") a New Jersey limited liability company, was
organized as a vehicle to provide certain administrative services to insurance
companies. The Company has assigned to HSIM the Administrative Services
Agreement between the Company and Home Mutual. During 1994, the Company conveyed
certain furniture, fixtures, computer equipment and software licensing
agreements to HSIM, as well as assigning certain leases and other executory
contracts to facilitate HSIM's services to the insurance subsidiaries of the
Company and Home Mutual.
Regulation
Insurance Company Regulation
The Company's insurance subsidiaries are subject to extensive regulation
and supervision by the insurance departments of the states in which they do
business. Although the scope varies from state to state, insurance laws in
general grant broad powers to supervisory agencies or officials to examine
companies and to enforce rules or exercise discretion affecting almost every
significant aspect of the insurance business. This regulatory oversight
includes, by way of example, matters relating to licensing and examination, rate
setting, trade practices, policy forms, limitations on the nature and amount of
certain investments, claims practices, mandated participation in involuntary
insurance programs and guaranty funds, reserve adequacy, insurer solvency,
transactions between affiliates, the amount of dividends that may be paid and
restrictions on underwriting standards. At present, all of the Company's
subsidiaries are subject to insurance regulation within their respective states
of domicile.
All of the states in which the Company does business have guaranty fund
laws under which insurers doing business in such states can be assessed a
percentage of annual premiums written by the insurer in that state in order to
fund policyholder liabilities of insolvent property and casualty insurance
companies. Under these laws, in general, an insurer is subject to assessment,
depending upon its market share of a given line of business, to assist in the
payment of policyholder and third party claims against insolvent insurers.
Insurance companies are required to file detailed annual reports with state
insurance regulators in each of the states in which they do business, and their
business and accounts are subject to examination by such agencies at any time.
In addition, these insurance regulators periodically (typically, every three
years) examine the insurer's financial condition, adherence to statutory
accounting principles, and compliance with insurance department rules and
regulations. The most recent examination of Home State contained no
recommendations. Quaker City is presently undergoing examination of its 1995
year by the Pennsylvania Insurance Department. Quaker City's most recent
completed examination covering its 1991 year contained one recommendation with
which the Company has since complied. Pinnacle, Merchant Bakers and Home Mutual
are presently undergoing examinations of their 1995 and 1996 years by the
Georgia Insurance Department and the New York Insurance Department,
respectively. Westbrook has not yet undergone such an examination since its
ownership by the Company.
The insurance subsidiaries of the Company are required by the applicable
insurance codes of the states in which they operate to file rates and policy
forms in connection with their insurance products with the relevant insurance
department. In all of these states and in most instances, such rates and/or
policy forms must be approved prior to use. Rates vary by class of business,
hazard assumed and size of risk and are not necessarily uniform for all
insurers. Many state insurance codes require the inclusion of specified
provisions in policies issued or delivered in the state and restrict the ability
of an insurer to cancel or non-renew policies, particularly with respect to
personal auto insurance. During 1994, Merchant Bakers was informed by the New
York Insurance Department of violations regarding commercial rate filings on
certain of Merchant Bakers' lines of business. Upon being informed of such,
Merchant Bakers took all corrective actions necessary to address such issues. In
approving Merchant Bakers' rate filings, the New York Insurance Department
required the payment of a one-time penalty in the amount of $117,000. This
amount was paid during 1994.
The payment of dividends by the Company is primarily dependent on any
dividends it may receive as the stockholder of its subsidiaries. The payment of
dividends by these subsidiaries is subject to, among other things, the statutory
and regulatory restrictions of the states in which these subsidiaries are
domiciled and conduct business.
19
<PAGE>
Generally, these states limit dividends in any year to an amount not exceeding
the greater of (i) 10% of statutory surplus as of the end of the preceding year
or (ii) net investment income for the preceding year, with larger dividends
payable only upon prior regulatory approval. In addition, insurance regulatory
authorities have broad discretion to limit the payment of dividends by insurance
companies. See Note 14 to Consolidated Financial Statements. The Company
currently intends to retain any funds otherwise available for the payment of
common stock dividends for use in the operation of its business. Accordingly, it
does not anticipate paying cash dividends on the shares of Common Stock in the
foreseeable future. See "Item 5 - Market for the Registrant's Common Equity and
Related Stockholder Matters."
Insurance Holding Company Regulation
Most states have enacted legislation that regulates insurance holding
company systems. Each insurance company in the holding company system is
required to register with the insurance supervisory agency of its state of
domicile and furnish information concerning the operations of the companies
within the holding company system that may materially affect the operations,
management or financial condition of the insurers within the system. Pursuant to
these laws, the respective insurance departments may examine the Company and its
insurance subsidiaries at any time, require disclosure of material transactions
by the holding company and require prior approval of certain transactions, such
as "extraordinary dividends" from the insurance subsidiaries to the Company.
20
<PAGE>
The acquisition or change of "control" of an insurer, or of any person who
directly or indirectly controls an insurer, cannot be consummated without the
prior approval of the applicable insurance regulator. In general, a presumption
of "control" arises from the ownership or other control of 10% or more of the
voting securities of an insurer or a person that controls an insurer, although
"control" may be found to exist where a person owns or controls a lesser amount
of securities. No person, therefore, may acquire, directly or indirectly, 10% or
more of the Common Stock of the Company without regulatory approval. All
transactions within the holding company system affecting the Company and its
insurance subsidiaries must be fair and equitable. These insurance laws also
require notice to the applicable insurance commissioner of certain other
material transactions between an insurer and any person in its holding company
system and, in some states, certain of such transactions cannot be consummated
without prior approval.
NAIC Regulation
In addition to state-imposed insurance laws and regulations, the Company's
insurance subsidiaries are subject to the general statutory accounting practices
and reporting formats established by the NAIC. The NAIC also promulgates model
insurance laws and regulations relating to the financial and operational
regulation of insurance companies. These rules and regulations generally are not
directly applicable to an insurance company until they are adopted by applicable
state legislatures and departments of insurance. The NAIC has developed
risk-based capital formulas to be applied to all insurance companies, which
formulas calculate a minimum required statutory net worth, based on the
underwriting, investment and other business risks inherent in an individual
company's operations. Risk-based capital standards for property and casualty
insurers were finalized by the NAIC in principle in December 1993 and were
effective with regard to 1994 statutory financial statement filings. The capital
of each of the Company's insurance subsidiaries exceeded the risk-based capital
requirements of the NAIC at December 31, 1996.
Personal Auto Insurance Regulation
In recent years, the automobile insurance industry has been under pressure
from certain state regulators, legislators and special interest groups to
reduce, freeze or set rates at levels that do not, in management's view,
correspond with underlying costs for the provision of such services, including
initiatives to roll back automobile insurance rates. Initiatives designed to
increase the availability of personal auto insurance coverage have also been
enacted or considered which might, in the future, adversely affect the
profitability of the Company's personal auto insurance line of business. The
impact of the automobile insurance regulatory environment on the Company's
results of operations in the future is not predictable.
The New Jersey State and General Assembly approved the enactment of the
Fair Automobile Insurance Reform Act of 1990 ("FAIRA"). FAIRA limited benefits,
reduced premiums, forced insurers who wrote auto insurance in New Jersey between
1982 and 1986 to depopulate the JUA and adopted modified TAC provisions limiting
the range of permissible underwriting criteria. The Company was exempt from
these actions. FAIRA also abolished the JUA, replacing it initially with a
Market Transition Facility ("MTF") and in 1993 with an assigned risk plan. FAIRA
established a series of assessments and surtaxes on auto insurers to reduce the
JUA deficit. Surtaxes ceased in 1992 and assessments will expire in 1997, unless
otherwise revised by the New Jersey Insurance Department.
In January 1995, the Company was informed by the New Jersey Insurance
Department that it could no longer remain exempt from the state's Take All
Comers laws ("TAC") regarding personal auto insurance as provided under the Fair
Automobile Insurance Act of 1990. In general, TAC requires that automobile
insurers provide coverage to any licensed person having fewer than nine (9)
eligibility points. The Company's underwriting guidelines had previously
specified that the maximum eligibility points allowed for any one driver to
offer insurance was four (4) points.
As part of its strategy to manage the anticipated changes in the size and
make-up of its New Jersey personal auto insurance book, the Company has secured
the admission of its Quaker City subsidiary to the State of New Jersey as a
"second-tier" market. Quaker City's base pricing is substantially higher than
Home State's base pricing. The Company's newly-approved underwriting guidelines
in the State of New Jersey will allow the Company to comply with the TAC
requirements by referring this business to its higher-priced Quaker City
subsidiary.
Regulation of Premium Finance Companies
Tower Hill's operation is subject to regulation by each state in which it
operates. State regulation governs the licensing, administration and supervision
of premium finance companies. State statutes and regulations generally limit
service and other charges a premium finance company may charge, govern the form
and content of finance contracts
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with customers, limit the interest rate charged and govern down payment,
delinquency, collection, cancellation and late charges, including the collection
of attorneys' fees and require approval of management and ownership changes.
Regulation of Reinsurance Brokers and Intermediaries
Aspen and its successor are subject to regulation by each state in which it
operates. In addition, Aspen is subject to model laws and regulations
promulgated by the NAIC which have been adopted by most state legislatures and
departments of insurance. Generally, such regulations govern the licensing,
administration and supervision of brokers and intermediaries, including their
fiduciary obligations with respect to funds received or collected by them. Aspen
has entered into a contract with its co-broker for the provision of certain
administrative services by such co-broker to ensure the continued high level of
services that the Company and its subsidiaries receive.
Competition
The Company's market focus is to provide auto insurance to individuals,
small businesses and corporate transportation risks. There are many property and
casualty insurance companies in the United States writing auto insurance.
Companies which write auto insurance generally compete on the basis of price,
service and ratings. There are a number of companies in the auto insurance
industry which have more capital than the Company which may allow them to
sustain lower prices for a longer period of time. Increased competition from
other insurance companies may adversely affect the Company's ability to do
business in a profitable manner.
A.M. Best Rating
The ratings of the Company's National and New York Pools by A.M. Best, an
insurance company rating service, were recently reduced to "C", which could have
an adverse effect on the Company's competitive position. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview and - Safe Harbor Disclosure."
Employees
The Company and its subsidiaries employed 334 persons on December 31,
1996.
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GLOSSARY OF SELECTED INSURANCE TERMS
Book rollovers............. The acquisition of renewal rights, upon regulatory
approval, to personal auto risks previously
written by other insurers in connection with their
withdrawal from particular markets.
Cash reserve............... The estimated liability of an insurer, at a given
point in time, with respect to losses that have
been incurred and reported to the insurer.
Cede....................... To transfer to an insurer or a reinsurer all or
a part of the insurance or reinsurance written by
an insurance or reinsurance entity.
Combined ratio............. The sum of the expense ratio and the loss ratio,
determined in accordance with generally accepted
accounting principles or statutory accounting
principles. A combined ratio under 100% generally
indicates an underwriting profit and a combined
ratio over 100% generally indicates an
underwriting loss. The extent by which the
combined ratio deviates from 100% indicates
relative underwriting profit or loss.
Commercial multi-peril
insurance................ Insurance policies that provide comprehensive
protection to businesses, including coverage for
property damage from fire, lightning, windstorm
and certain other perils, for losses from crime,
and for liability for personal injury to others.
Direct premiums
written.................. Total premiums written by an insurer other than
premiums for reinsurance assumed by an insurer.
Dividend ratio............. Under statutory accounting, the ratio of dividends
to policyholders to net earned premium.
Earned premiums............ The portion of net premiums written applicable to
the expired period of policies.
Expense ratio (GAAP)....... The ratio of underwriting expenses (including
general operating expenses and any reinsurance
ceding commissions but excluding the amortization
of excess of costs over the fair value of net
assets acquired) to net premiums earned (including
recoveries on reinsurance premiums).
FAIRA...................... The New Jersey Fair Auto Insurance Reform Act,
passed in 1990.
Generally accepted
accounting principles
(GAAP)..................... Accounting practices and principles as defined by
the American Institute of Certified Public
Accountants and the Financial Accounting Standards
Board. GAAP is the method of accounting typically
used for reporting to persons or entities other
than insurance regulatory authorities.
Gross written
premiums................. The total premiums on all policies written by an
insurer during a specified period of time without
any reduction for acquisition costs, reinsurance
costs or other deductions.
Incurred losses............ The sum of losses paid plus the change in the
estimated liability for claims which have been
reported but which have not been settled and
claims which have occurred but have not yet been
reported to the insurer.
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Incurred but not reported
(IBNR) loss reserves..... The estimated liability of an insurer, at a given
point in time, with respect to losses that have
been incurred but not yet reported to the insurer
and for potential future developments on reported
claims.
Industry combined
ratio.................... This is a broad measure of the property and
casualty insurance industry's performance for a
particular period as compiled by the A.M. Best
Company, Inc. A comparison of a company's combined
ratio with the industry combined ratio does not
necessarily indicate that a company has performed
well or poorly as compared to its peers.
Insurance Regulatory
Information System
(IRIS)................... The rating system developed by NAIC to assist
state insurance departments in overseeing the
financial condition of insurance companies.
Insurance risks:
preferred, standard,
non-standard............. Categories of underwriting classifications for
risk selection and pricing. The classifications
consider the loss experience, the degree of hazard
and loss frequency potential. Preferred risks have
an absence of prior losses, low degrees of hazard,
and/or low loss frequency potential. Standard
risks have average loss experience, moderate
degree of hazard and/or moderate loss frequency
potential. Non-standard risks have above average
loss experience, a higher degree of hazard and/or
higher loss frequency potential.
Insurance underwriting..... The process whereby an insurer reviews
applications submitted for insurance coverage and
determines whether it will accept all or part of
the coverage being requested and what the
applicable premiums should be. Underwriting also
includes an ongoing review of existing policies
and their pricing.
Insurance underwriting
expenses................. The aggregate of policy acquisition costs and the
portion of administrative, general and other
expenses attributable to underwriting operations.
Insurance underwriting
profit (loss)............ The excess (deficiency), determined under
statutory accounting practices, resulting from the
difference between earned premiums and the sum of
incurred losses, loss expenses and underwriting
expenses.
Loss adjustment
expenses (LAE)........... The expenses of investigating and settling claims,
including legal fees, outside adjustment expenses
and other general expenses of administering the
claims adjustment process.
Loss ratio (GAAP).......... The ratio of incurred losses and loss adjustment
expenses to net premiums earned (including
recoveries on reinsurance premiums).
Loss reserves.............. The estimated liability of an insurer, at a given
point in time, with respect to unpaid incurred
losses, including losses which are incurred but
not yet reported (IBNR), and related loss
adjustment expenses.
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National Association of
Insurance Commissioners
(NAIC)................... A voluntary organization of state insurance
officials that promulgates model laws regulating
the insurance industry, values securities owned by
insurers, develops and modifies insurer financial
reporting statements and insurer performance
criteria, and performs other services with respect
to the insurance industry.
Net premiums written....... The portion of direct premiums written retained by
an insurer after adding assumed reinsurance
premiums and deducting premiums on business ceded.
Net underwriting gain...... Earned premium less net losses (including loss
adjustment expenses) incurred and policy
acquisition costs and other underwriting expenses.
Personal and commercial
automobile............... Insurance policies that provide protection against
liability for bodily injury and property damage
arising from automobile accidents, and provide
protection against loss from damage to automobiles
owned by the insured.
Policyholders' (or
statutory) surplus....... Total admitted assets less total liabilities, as
determined in accordance with statutory accounting
practices.
Preferred agencies......... Those of the Company's independent agencies which
meet special qualifying standards and are
designated "preferred agencies." Preferred
agencies may submit new business and are paid a
higher commission.
Reinsurance................ A procedure whereby an insurer remits or cedes a
portion of the premium to another insurer or
reinsurer as payment to that insurer or reinsurer
for assuming a portion of the related risk.
Statutory accounting
and Statutory
Accounting Principles
(SAP).................... Recording transactions and preparing financial
statements in accordance with the rules and
procedures prescribed or permitted by statute or
regulatory authorities, generally reflecting a
liquidating, rather than a going concern, concept
of accounting. The principal differences between
statutory accounting practice SAP and GAAP, the
method by which the Company generally reports its
financial results are: (a) under SAP, certain
assets that are not admitted assets are eliminated
from the balance sheet; (b) under SAP, policy
acquisition costs are expensed as incurred, 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;
(d) under SAP, certain reserves are recognized
which may not be recognized under GAAP; and (e)
under SAP, the reinsurance profit sharing is
credited to underwriting expenses. All SAP data
presented herein are filed with the departments of
insurance in the states where the Company does
business.
Statutory capital and
surplus.................. The sum remaining after all liabilities are
subtracted from all assets, applying statutory
accounting principles. This sum is regarded as
financial protection to policyholders in the event
an insurance company suffers unexpected or
catastrophic losses.
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Take All Comers ("TAC").... A provision under New Jersey state law requiring
insurance carriers offering private passenger auto
insurance to accept any driver for coverage as
long as such driver possess fewer than nine
eligibility points and otherwise complies with the
carrier's filed rates and underwriting guidelines.
Item 2. PROPERTIES
Neither the Company nor any of its subsidiaries owns real property. Home
State leases 29,615 square feet at 3 South Revmont Drive, Shrewsbury, New Jersey
and 22,784 square feet at 1030 Broad Street, also in Shrewsbury, New Jersey.
Both leases extend until March 31, 2005 and provide for annual lease payments of
$554,106 escalating to a maximum of $874,039 by the end of the lease term.
Home State is currently obligated on an existing lease for 20,833 square
feet at One Harding Road, Red Bank, New Jersey, which lease extends until April
1, 2000 and provides for annual lease payments of $291,592 in 1996, escalating
to $312,420 by the end of the term. Home State has sub-leased approximately
17,660 square feet for varying rates and terms. In recognition of the liability
of the Red Bank lease and the reduced market rates attainable in the immediate
vicinity for such sub-leasing activities, the Company recognized a non-recurring
charge of approximately $380,000 during 1994. No additional charge was required
during 1995 or 1996.
Westbrook currently sub-leases 1,600 square feet at 1062 Barnes Road,
Wallingford, Connecticut. The sub-lease extends until October 14, 1998 and
provides for annual lease payments of $21,300.
Pinnacle leases 7,808 square feet at 116 Wedgewood Drive, Carrollton,
Georgia. The lease extends until December 31, 1998 and provides for annual lease
payments of $99,000.
Quaker City leases 3,128 square feet at Eight Neshaminy Interplex, Trevose,
Pennsylvania. The lease extends until December 31, 1997 and provides for annual
lease payments of $59,901.
Merchant Bakers leases 1,780 square feet at 1400 Old Country Road,
Westbury, New York. The lease extends until January 31, 1998 and provides for
annual lease payments of $49,082, which space has been fully sub-leased through
the end of the lease. In addition, Merchant Bakers leases 21,800 square feet at
116 John Street, New York, New York. The lease extends until October 31, 2004
and provides for annual lease payments of $190,750.
Item 3. LEGAL PROCEEDINGS
In the normal course of business, the Company is a defendant in various
lawsuits. The Company is not engaged in any litigation which management believes
would, if resolved adversely to the Company, have a material impact on the
financial position or result of operations of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows the names and ages of all executive officers of
the Company, the positions and offices held by such person and the period during
which each person served as an officer. The term of office of each person is
generally not fixed since each person serves at the discretion of the Board of
Directors of the Company.
<TABLE>
<CAPTION>
Officer
Name Age Position Since
- ---- --- -------- -------
<S> <C> <C> <C>
Mark S. Vaughn (1).................... 49 President, Chief Executive Officer, 1994
Vice Chairman of the Board of Directors
and Treasurer
Michael H. Monier (2)................. 56 Chairman of the Board of Directors and Secretary 1987
Eric A. Reehl (3) 33 Executive Vice President, Chief Financial Officer, 1993
Asst. Treasurer, Asst. Secretary
Kenneth E. Edwards (4)................ 38 Senior Vice President - Finance 1993
William G. Hurlman (5)................ 44 Senior Vice President - Underwriting/Marketing 1995
R. Scott Conant (6)................... 46 Senior Vice President - Claims 1996
James M. Tennyson, Jr. (7) 43 Senior Vice President -
Management Information Services 1994
Richard W. Bird (8)................... 48 Vice President - Marketing 1996
Vicki F. Blaich (9)................... 38 Vice President - Claims 1993
James A. Byrne Jr. (10)............... 53 Vice President - Marketing 1992
Mark Fradkin (11)..................... 52 Vice President - Personal Lines Underwriting 1994
Scott A. Morgan (12).................. 37 Vice President - GAAP Accounting 1996
Mary Jane Poverstein (13)............. 50 Vice President - Human Resources 1995
Benn Prybutok (14).................... 48 Vice President - Government Affairs 1993
George E. Roberts, Jr. (15)........... 49 Vice President - Marketing 1996
Francesco Stancati, Jr. (16).......... 42 Vice President - Commercial Underwriting 1994
Richard D. Thomas (17)................ 39 Vice President - Actuary 1996
Pauline L. Tuano (18)................. 61 Vice President - Statutory Accounting 1995
</TABLE>
- ----------------------
(1) Mark S. Vaughn has served as President, Chief Executive Officer, Vice
Chairman of the Board of Directors and Treasurer of the Company since June
of 1996. Mr. Vaughn also currently serves as a Director of the Company as
well as each of its insurance and non-insurance related subsidiaries. He is
President and Chief Executive Officer of Aspen Intermediaries, Inc., Home
State Insurance Company, Home State Investment, Inc. and Quaker City
Holdings, Inc. He is Chairman and Chief Executive Officer of Home Mutual
Insurance Company, New York Merchant Bakers, Pinnacle Insurance Company,
Quaker City Insurance Company, Transportation Insurance Network, Inc.,
Transportation Insurance Agency Network, Inc. and Westbrook Insurance
Company. He also serves as President of Aspen Intermediaries, LLC and Home
State Insurance Management, LLC. From June 1994 through June of 1996, Mr.
Vaughn served as Senior Vice President, Marketing and Underwriting. Mr.
Vaughn began his insurance career in 1971 as a commercial underwriting and
marketing representative for The Travelers Insurance Company. In 1973 he
joined an insurance agency, where he became a managing partner. In 1981,
Mr. Vaughn joined Transamerica Insurance Group, and assumed increased
levels of responsibility during his 13-year career. In 1990, Mr. Vaughn was
promoted to Senior Vice President, and became responsible for nationwide
personal lines operations for all Transamerica companies.
(2) Michael H. Monier has served as Chairman of the Board of Directors of the
Company since its formation in 1987 and as Secretary since 1993. Mr. Monier
is a member of the Executive and Compensation Committees of the Board of
Directors. Mr. Monier has served as a Director or Manager of each of the
Company's subsidiaries and Home Mutual since the commencement of their
respective affiliations with the Company and as Treasurer of Quaker City
Holdings since 1990. He is also Vice President of Tower Hill. Since 1986
Mr. Monier has been Vice President and Secretary of Woodhaven Investors
Inc., which serves as investment advisor to Home State and Quaker City. In
addition, Mr. Monier has served as President of Michael Monier
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and Associates, an investment firm since 1985, and has served as Vice
President and Treasurer of Landmark Management, Inc., a real estate
investment firm, since 1974. From 1972 until 1991 Mr. Monier served as
Managing Director of the investment firm of Samson & Monier Associates. Mr.
Monier has also been a principal of the general partners of several single
asset real estate limited partnerships.
(3) Eric A. Reehl has served as Executive Vice President, Chief Financial
Officer, Assistant Secretary and Assistant Treasurer of the Company since
June of 1996. Mr. Reehl also currently serves as Director, Executive Vice
President and Chief Operating Officer of Aspen Intermediaries, Inc.
Director, Executive Vice President and Treasurer of Aspen, LLC. Director,
Chief Financial Officer and Treasurer of Home Mutual. Director, Executive
Vice President, Chief Financial Officer, Treasurer and Assistant Secretary
of Home State Insurance. Director, Secretary and Chief Operating Officer of
Home State Investment. Director, Executive Vice President and Treasurer of
HSIM LLC. Director, Executive Vice President and Chief Financial Officer of
New York Merchant Bakers. Director, Executive Vice President and Chief
Financial Officer of Pinnacle. Executive Vice President, Chief Financial
Officer, Assistant Treasurer and Secretary of Quaker City Holdings.
Executive Vice President, Chief Financial Officer, Treasurer and Secretary
of Quaker City Insurance. Director, Chief Operating Officer, Secretary and
Treasurer of Tower Hill. Director, Executive Vice President, Secretary and
Treasurer of Transportation Insurance Network and Transportation Insurance
Agency Network and Director, Executive Vice President, Chief Financial
Officer and Secretary of Westbrook. From 1990 to 1993, Mr. Reehl was
affiliated in various capacities with Woodhaven Investors, Inc.
("Woodhaven"), an investment firm. From 1989 to 1990, Mr. Reehl served as
Secretary, Treasurer and Director of Corporate and Portfolio Development
for Consolidated Capital Equities Corporation, a real estate concern in
which certain general partnership interests were purchased by Woodhaven
pursuant to a plan of reorganization filed under Chapter 11 of the
Bankruptcy Reform Act of 1978. Prior to 1989, Mr. Reehl was a bankruptcy
and reorganization consultant with Arthur Young & Company, a public
accounting firm.
(4) Kenneth E. Edwards has served as Senior Vice President - Finance since
March of 1996, prior to which he served as Vice President and Controller of
the Company from August 1993 to February 1996. Mr. Edwards is also Senior
Vice President - Finance of Home Mutual, Home State Insurance, New York
Merchant Bakers, Pinnacle, Quaker City and Westbrook. He also serves as
Director for New York Merchant Bakers and is Vice President and Controller
for Quaker City Holdings. From 1986 to 1993, Mr. Edwards was at the
certified public accounting firm of BDO Seidman, most recently as Director
of Financial Institutions, Audit. From 1981 to 1986, Mr. Edwards was an
Audit Supervisor at the certified public accounting firm of Coopers &
Lybrand. Mr. Edwards is a certified public accountant.
(5) William G. Hurlman currently serves as Senior Vice President and Chief
Underwriting Officer of the Company. He also has responsibility for all
field operations and the ceded reinsurance department. Mr. Hurlman came to
the Company from Reliance Reinsurance Corporation where he held the
position of Vice President for Treaty and Alternative Risk Underwriting.
Prior to joining Reliance Re, he served as the Director of Continental
Retention & Specialty Managers, a profit center at Continental Insurance
which underwrote Risk Retention Groups and other alternative risk programs.
Mr. Hurlman received his underwriting and marketing training at Crum &
Forster Underwriters Group, where he held several technical and managerial
positions.
(6) R. Scott Conant has served as Senior Vice President, Claims for the Company
since August, 1996. He also serves in the same capacity for Home State
Insurance Company, Quaker City Insurance Company, Pinnacle Insurance
Company, New York Merchant Bakers Insurance Company, Home Mutual Insurance
Company and Westbrook Insurance Company. From 1995 through 1996, Mr. Conant
served as a manager and claims/litigation consultant for KPMG Peat Marwick
LLP. From 1977 to 1994, Mr. Conant was affiliated with Crum & Forster
Insurance Company, a wholly owned subsidiary of Talagen Holdings, Inc.,
where he served in various management positions, including Vice President -
Claim/Legal. Prior to 1977, Mr. Conant was a claims adjuster and supervisor
with Liberty Mutual Insurance Company.
(7) James M. Tennyson, Jr. was promoted to Senior Vice President, Management
Information Systems of the Company in February, 1996. Prior to which he
served as Vice President, Management Information Systems from March, 1994.
From 1990 until he joined the Company, Mr. Tennyson was a consultant for
XCEL Systems and Programming. From 1989 through 1991 he served as Corporate
Director, Information Systems at
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Universal Health Services of King of Prussia, PA, which owns 33 for-profit
hospitals in the United States. Prior thereto he held a similar position at
the Trump Organization's Gaming Division in Atlantic City, New Jersey. Mr.
Tennyson was also a consultant for Provident and Greentree Mutuals of
Philadelphia and Colonial Indemnity Insurance Company before joining the
Company.
(8) Richard W. Bird has served as Vice President, Marketing of the Company
since May 1996. He also serves as the Regional Vice President, Southeast
Region for the Home State Insurance Group. Director, President and Chief
Operating Officer of Pinnacle and Vice President of Quaker City Insurance
Company. From 1974 to 1987, Mr. Bird was at Classified Insurance
Corporation, a regional company, where he was the officer in charge of the
Marketing, Underwriting, Operations, Claims, Administration and finally
Regional Vice President of all functional departments. From 1987 to 1992,
Mr. Bird was with the Viking Insurance Company as first a Regional Vice
President and after three years, promoted to corporate Vice President of
Underwriting. From July 1993 to May 1996, Mr. Bird was with the Superior
Insurance Company of Atlanta as Vice President, Underwriting/Operations
where prior to leaving he had assumed the additional role of Vice President
- Product Management. Mr. Bird has over 22 years experience in the property
and casualty insurance industry.
(9) Vicki F. Blaich has served as Vice President, Claims of the Company since
1993. Ms. Blaich is also Vice President, Claims of Home State Insurance,
New York Merchant Bakers, Pinnacle, Quaker City and Westbrook. Prior to
joining the Company, Ms. Blaich served as Claims Manager for Amgro, a
division of Hanover Insurance Company, from 1984 to 1993. Ms. Blaich has
worked in the insurance industry for twelve years.
(10) James A. Byrne, Jr. has served as Vice President, Marketing of the Company
since December 1992. Mr. Byrne served as President of Merchant Bakers from
1979 through 1992 and has served as President and Chief Operating Officer
of Merchant Bakers since June 1994. From 1992 through June 1994, he served
as its Executive Vice President. He is also a Director of Merchant Bakers.
In addition, Mr. Byrne is a Director and Vice President of Home Mutual.
Vice President and Treasurer of Pinnacle. Director and Vice President of
both Transportation Insurance Network and Transportation Insurance Agency
Network and as Director, President and Chief Operating Officer of
Westbrook. Mr. Byrne has worked in the insurance industry since 1965.
(11) Mark R. Fradkin, CPCU, has served as the Company's Vice President for
Personal Line Underwriting since April 1994. Prior to June 1996, he was
also directly responsible for underwriting and marketing management of the
Home State Insurance Company's personal automobile business in New Jersey.
His responsibilities are now focused on personal lines underwriting
management at the corporate level of all insurance company subsidiaries.
Mr. Fradkin has 30 years experience in the property and casualty insurance
industry. He was a Commercial Casualty Underwriter for CNA Insurance and
Aetna Casualty & Surety Company in New York, later becoming Assistant
Director of Research for the Independent Insurance Agents of America
(1971-1977) and Senior Research Associate for the American Insurance
Association (1978-1985). Immediately prior to joining Home State, Mr.
Fradkin was the senior underwriting executive of the New Jersey Automobile
Full Insurance Underwriting Association and the Market Transition Facility
of New Jersey (1985-1994).
(12) Scott A. Morgan has served as Vice President, GAAP Reporting of the Company
and each of the Company's subsidiaries since joining the Company in June,
1996. From 1987 to May 1996, Mr. Morgan was at the certified public
accounting firm of Coopers & Lybrand, L.L.P., most recently as Manager,
Business Assurance, serving clients in the insurance and banking
industries. From 1985 to 1987, Mr. Morgan was Supervisor, GAAP Accounting
for Bankers National Life Insurance Company and from 1981 to 1985, was
Senior Accountant for the Beneficial Corporation insurance group of
subsidiaries. Mr. Morgan is a certified public accountant.
(13) Mary Jane Poverstein joined Home State Holdings, Inc. in October 1995 as
Vice President, Human Resources. Prior to joining the Company, Ms.
Poverstein was employed by The Continental Insurance Companies where she
assumed increasing levels of responsibilities in her 14 year career. She
served on the Board of Directors from 1983 to 1987 of the Loyalty Life
Insurance Company, a wholly-owned subsidiary of the Continental
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<PAGE>
organization. Prior to joining Continental, Ms. Poverstein worked at the
Bendix Corporation for 10 years. She has over 20 years experience in Human
Resources management.
(14) Benn Prybutok joined the Company in 1992 and became Vice President,
Governmental Affairs in 1993. He has served as a Director of Quaker City
since May, 1992, and since June 1994 has served as its President and Chief
Operating Officer. He is also a Director of Home Mutual and Pinnacle,
Secretary of Home Mutual and Vice President of Westbrook. Mr. Prybutok
served as legislative liaison to the Pennsylvania Insurance Department from
1974 to 1979. He served in various management capacities with Allianz
Insurance Group from 1979 to 1984, Pacific Compensation Insurance Company
from 1985 to 1989, United National Insurance Company from 1989 to 1990 and
The Resource Intermediary Group, Ltd. from 1990 to 1992.
(15) George E. Roberts joined the Company in June of 1996 as Vice President of
Marketing and serves as Regional Vice President - Mid Atlantic Region of
the Home State Insurance Group. He is also a Director and Vice President of
Marketing for Quaker City Insurance Company. Mr. Roberts served as Vice
President - Underwriting for Warner Insurance Services of Fairlawn, New
Jersey from 1991 until 1995. Mr. Roberts was employed with Hanover
Insurance Company of Piscataway, New Jersey from 1983 until 1991, first as
a Personal Lines Manager and then as Director of Operations and Director of
Underwriting and Marketing. From 1971 through 1983, Mr. Roberts was with
Seaboard Underwriters, Inc. of Burlington, North Carolina, serving as
Assistant Branch Manager in their Augusta, Georgia office, then Branch
Manager of their Saginaw, Michigan office. Mr. Roberts was also Personal
Lines Underwriting and Marketing Manager of the national office in North
Carolina.
(16) Francesco Stancati, Jr. has served as Vice President, Commercial Lines
Underwriting of the Company since August, 1994 and serves in the same
capacity with each of the Company's insurance subsidiaries and Home Mutual.
Mr. Stancati has sixteen years of experience in the property and casualty
insurance industry. Mr. Stancati was employed with the Aetna Life and
Casualty Companies from April, 1979 through August, 1994, and from July
1990 until his departure, he held the position of Standard Strategic
Business Unit Underwriting Manager.
(17) Richard D. Thomas joined the Company in June 1996 as Vice President and
Actuary. Mr. Thomas also serves as Vice President and Actuary for Home
Mutual, Home State, Merchant Bakers, Pinnacle, Quaker City and Westbrook.
Prior to joining the Company, Mr. Thomas worked for Continental/CNA
Insurance from 1983 through 1996, with his most recent position being
Director and Assistant Actuary in charge of commercial lines pricing and
profitability analysis. Mr. Thomas became a fellow in the casualty
Actuarial Society in 1994.
(18) Pauline L. Tuano joined the Company in May 1995 as Vice President,
Statutory Accounting. Ms. Tuano also serves as Vice President, Statutory
Accounting of Home Mutual, Home State, Quaker City, Pinnacle, Westbrook and
Merchant Bakers. Prior to joining the Company, Ms. Tuano was employed by
The Continental Insurance Corporation from 1979 through April 1995, where
she assumed increased levels of responsibilities in her 16 year career.
From 1975 through 1979, Ms. Tuano was General Accounting Manager for Drake
Insurance company and from 1970 through 1974, Ms. Tuano served as an
Assistant Secretary for the Constitution Reinsurance Corporation. Ms. Tuano
has over twenty five years experience in the insurance industry.
30
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since August 12, 1993, the Company's Common Stock has been traded in the
NASDAQ National Market System under the symbol "HOMS". The following table sets
forth the high and low closing sale prices for the Company's Common Stock for
the periods indicated, all as reported on NASDAQ.
1994 High Low
- ---- ---- ---
First Quarter........................... $19.75 $14.50
Second Quarter.......................... $17.50 $14.50
Third Quarter........................... $16.00 $13.25
Fourth Quarter.......................... $15.00 $12.00
1995 High Low
- ---- ---- ---
First Quarter........................... $15.50 $13.25
Second Quarter.......................... $13.88 $ 9.00
Third Quarter........................... $ 9.88 $ 8.00
Fourth Quarter.......................... $10.25 $ 8.00
1994 High Low
- ---- ---- ---
First Quarter........................... $10.75 $ 9.00
Second Quarter.......................... $10.25 $ 8.88
Third Quarter........................... $ 8.75 $ 7.25
Fourth Quarter.......................... $ 8.13 $ 7.25
The number of record holders of the Common Stock was approximately 73 on
April 11, 1997. As most shares of Common Stock are held in street name, the
Company believes that the number of beneficial holders is substantially higher.
The Company has not paid any cash dividends on its Common Stock since its
inception and does not contemplate payment of any cash dividends in the
foreseeable future. See Note 14 to the Consolidated Financial Statements.
31
<PAGE>
Recent Sales of Unregistered Securities
On October 4, 1996, the Company raised $10,000,000 in additional capital
through the private placement of 10,000 shares of its Series A Cumulative Voting
Preferred Stock (the "Preferred Stock") to Swiss Reinsurance America Corporation
("Swiss Re") and Reliance Insurance company ("Reliance") pursuant to a
Securities Purchase Agreement (the "Securities Purchase Agreement") dated as of
October 4, 1996 among the Company, Swiss Re and Reliance. Swiss Re and Reliance
each purchased $5,000,000 of the Preferred Stock.
Each share of Preferred Stock is entitled to one vote along with the
Company's common stock and carries a dividend rate of 7.5%. The Company may call
the Preferred Stock for redemption at any time after the fourth anniversary of
the closing. The Preferred Stock must be redeemed at $1,000 per share plus any
accumulated dividends in five equal tranches at the 10th through 14th
anniversaries of the closing.
Each share of Preferred Stock carries with it detachable Class A Warrants
("Warrants") to purchase 140 shares of the Company's common stock for $9.50 per
share at any time until October 4, 2003. The number of shares of the Company's
common stock deliverable upon exercise of the Warrants, and the exercise price
thereof, are subject to adjustment as provided in the Warrants. If all of the
Warrants issued in connection with the $10,000,000 of Preferred Stock issued
were to be exercised, the 1,400,000 shares of common stock purchased would
represent approximately 19.8% of the Company's issued and outstanding common
stock as of December 31, 1996.
The Company also entered into a Registration Rights Agreement dated as of
October 4, 1996 with Swiss Re and Reliance (the "Current Registration Rights
Agreement") pursuant to which the Company granted Swiss Re and Reliance
registration rights entitling each of such investors to two demand registrations
(for a total of four demand registrations) and unlimited "piggyback" rights with
respect to the shares of common stock issuable upon exercise of the Warrants. In
addition, the Company has amended its October 3, 1994 Registration Rights
Agreement (the "1994 Registration Rights Agreement") entered into at the time of
the Company's 1994 private placement of 11.50% Subordinated Notes (the
"Subordinated Notes") and warrants (the "Existing Warrants") to provide for an
additional demand registration right thereunder and the pro rata, pari passu
treatment of registration rights under the 1994 Registration Rights Agreement
and the Current Registration Rights Agreement.
32
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain selected consolidated operating and
balance sheet data for each of the five years in the period ending December 31,
1996. This data should be read in conjunction with the financial statements and
accompanying notes included elsewhere herein. The consolidated financial
statements for the years ended December 31, 1996, 1995, 1994 and 1993 have been
audited by Coopers & Lybrand, L.L.P., independent accountants. The consolidated
financial statement for the year ended December 31, 1992 was audited by BDO
Seidman, independent accountants.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Operating Data:
Net premiums earned $101,680 $58,915 $29,895 $22,375 $13,627
Net investment income 4,647 3,459 1,935 1,174 573
Reinsurance profit sharing (2,426) 5,993 3,748 2,645 1,425
Net realized capital gains (losses) 5 269 (99) 293 148
Financial services group income (5) 3,692 2,981 2,142 -- --
Other income (1) 135 315 452 1,016 100
Insurance losses and loss 112,395 49,306 22,693 16,155 9,785
adjustment expenses
General and administrative expense 27,727 12,372 7,821 4,110 2,605
Interest expense 2,755 2,066 503 111 164
Income (loss) before taxes on (35,146) 8,188 7,054 7,127 3,319
income and minority interest
Income tax (benefit) (14,456) 2,008 2,477 2,224 744
Minority interest (benefit) expense (163) 57 81 238 182
Net income (loss) (20,527) 6,123 4,497 4,666 2,393
Net income (loss) per common share (2) ($3.66) $1.08 $0.79 $ 1.00 $ 0.59
Other Data:
Gross premiums written $207,367 $124,796 $58,237 $52,273 $35,181
Net premiums written 89,960 67,027 31,246 27,436 17,617
Statutory Data:
Net underwriting gain (loss) (3) ($30,834) $1,313 $2,879 $3,605 $1,253
Policyholders' surplus 29,427 37,292 24,226 11,196 6,063
Financial Ratios: (4)
GAAP
Loss ratio(3) 113% 76% 67% 66% 65%
Expense ratio (3) 25 17 21 14 20
Combined ratio 138 93 88 80 85
Balance Sheet Data:
Investments $91,374 $78,796 $45,831 $30,575 $12,710
Cash and cash equivalents 11,842 9,544 6,183 4,476 4,551
Total assets 343,549 240,521 133,189 87,221 45,994
Unearned premiums 85,863 71,291 32,142 27,788 18,952
Notes and other obligations payable 22,005 18,300 16,220 -- 2,243
Stockholders' equity 19,912 39,052 32,724 28,009 4,876
Capital expenditures 1,607 1,345 2,061 293 137
</TABLE>
- ----------
(1) Primarily book rollover fees and, for years prior to 1994, management fees
which totaled $158,000, $315,000, $914,000 and $30,000 for 1995, 1994, 1993
and 1992 respectively.
(2) 1992 is based upon 4,050,000 shares as adjusted for the Company's 1993
recapitalization. 1996 reflects dividends on the Preferred Stock.
(3) Includes reinsurance profit sharing income.
(4) See "Item 1. Business-Glossary" for a discussion of GAAP.
(5) Formed in 1994.
(6) Includes physical damage quota share adjustments.
33
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company is primarily engaged in underwriting personal and commercial
auto insurance. The Company reported a net loss of $20.5 million in 1996,
compared to net income of $6.1 million for the year ended December 31, 1995.
The loss in 1996 is principally due to an increase in the Company's loss
and LAE ratio, computed under Generally Accepted Accounting Principles ("GAAP"),
from 76% in 1995 to 113% in 1996.
The increase in the loss ratio is predominantly due to: 1) the impact of
the 1996 winter storms; 2) a reassessment of current and prior accident year
anticipated loss experience following an increase in the volume of reported
claims falling below the companies' attachment points; and 3) decreased
reinsurance profit sharing income resulting from the impact of increased loss
ratios.
Winter Storms
The winter storms of 1995-1996 produced significant catastrophic losses for
the property and casualty industry. Particularly affected were insurers like
Home State and Home Mutual, with significant concentrations of insured risks in
the Northeast. The impact of the storms on the Company was greater due to the
recent pooling agreement entered into with Home Mutual effective January 1,
1996. Storm related losses suffered by the Company and Home Mutual combined were
estimated to be approximately $6 million.
Reassessment of Current and Prior Accident Year Loss Experience
The process of estimating the ultimate liability for losses and LAE has
been a particular challenge for the Company due to the significant growth in
business, which has resulted in a substantial increase in claims reported, and
the use of industry data while the Company's loss experience continues to
develop.
During the second quarter of 1996, the Company noted a significant increase
in the volume of reported claims falling below the reinsurance attachment
points, over and above the frequency anticipated in its calculation of loss
reserves. At the same time, the Company conducted a thorough overall
re-evaluation of its business plan and the profitability of the underlying
business. In response to this review, management increased reserves by $12
million in the second quarter, predominantly within IBNR.
In the remainder of 1996, the Company continued to reassess its current and
prior year loss experience. As part of this review, in the fourth quarter of
1996, the Company undertook a comprehensive review of its case reserves. In
addition to addressing loss reserving and growth issues, the Company also
strengthened senior management and supervisory personnel in claims
administration, as well as employing an internal actuary to assist with loss
reserving estimates and pricing of risks. As part of the reassessment of the
Company's loss experience, management made significant additional reserve
increases in the fourth quarter of 1996, leading to a 1996 loss ratio of 113%
and total adverse development of $23 million on 1995 and prior accident years.
The review of open case reserves was concurrent with the hiring of a Senior
Vice President of Claims and the initiation of a new case reserving philosophy.
The new case reserving philosophy is based on earlier recognition of the
ultimate settlement value for a given claim. While information concerning the
comparative negligence of the persons involved in the occurrence is still
utilized in establishing reserves, it receives less emphasis as compared to
prior years. The Company still evaluates all provisions of the policy,
anticipated net effect of salvage and subrogation, the ultimate settlement value
and, where appropriate, the opinion of outside counsel and claims consultants.
Management's emphasis in the fourth quarter of 1996 was to ensure that the
new case reserving philosophy was fully implemented in all open claim files
during the file review. During this process, the Company also implemented a
formula reserve program for its new claims as well as more aggressive practices
in managing pending claims file count per adjuster. These changes in case
reserving were taken into account in setting the assumptions used in calculating
the Company's total reserves requirement at December 31, 1996. These actions
have also resulted in greater case reserves being established quicker than in
the past.
34
<PAGE>
Reinsurance Profit Sharing
The Company uses reinsurance in order to manage its risk and to maintain
premium to surplus ratios recommended by regulatory authorities and rating
agencies. The Company has historically maintained low retention to support its
previous growth objectives through the use of excess of loss reinsurance.
Although a majority of the profits on the ceded premium is retained by
reinsurers, the Company participates in the profitability of such reinsurance in
varying percentages, depending on the line of business. As a result of the
significant reserve adjustments discussed above, the associated reinsurance
profit sharing income recognized in prior years has been reduced significantly.
As this has reduced total income, this has also negatively impacted the 1996
loss ratio. The Company recorded a pre-tax charge to earnings of $11.4 million
in relation to return profit share on 1995 and prior accident years, offset by
profit share income accrued for the 1996 accident year of $9 million (thereby
recording a net charge to income of $2.4 million).
Certain Actions To Improve Profitability
As a result of the net loss incurred during 1996, and the resulting
increase on leverage on the Company's surplus, management has slowed premium
growth rates and reduced the size of its agency force.
The Company is also looking to make changes in its reinsurance program
going forward. In this regard, quota share reinsurance, rather than excess of
loss reinsurance, will be the most effective means to provide the Company with
reinsurance protection.
As discussed above, in order to better control its loss experience, the
Company has instituted a significant change in case reserving methodologies and
taken actions to strengthen its balance sheet to compliment its revised growth
targets. New claims management and loss reserving philosophies provide the
Company with a more timely assessment of the loss characteristics of the
Company's book of business. The change in claim reserving has assisted the
Company in managing its policy renewal and growth efforts, particularly in the
more competitive commercial lines business. Management is continuing to identify
and non-renew commercial accounts which have exhibited poor loss
characteristics, in addition to holding prices where possible in a highly
competitive environment.
Other recent management initiatives include a comprehensive claims
management program, designed with the assistance of the Company's reinsurers to
assist in reducing the pending file counts, thereby providing company staff
adjusters the ability to focus on more recent accident year claims. The
Company's goal is to reduce the period of time between when a claim is reported
and when it is settled. The focus of claims management in 1997 will continue to
be enhancement of operating practices to improve efficiency.
A.M. Best Rating
On April 10, 1997, the Company announced a downgrade by A.M. Best in the
rating of each of its National Pool and New York Pool to "C". Such downgrade
relates primarily to the Company's 1996 net loss from operations of
approximately $20.5 million. Additional factors considered in the rating action
included historical rapid growth, loss reserve development, diminished capital
strength and dependency on surplus relief reinsurance arrangements.
For a discussion of certain factors which could affect the Company's
results of operations and financial position, see "-Safe Harbor Disclosure"
below.
Results of Operations
Year Ended December 31, 1996 Compared To Year Ended December 31, 1995
Gross premiums written by the Company increased 66% from $124.8 million for
the year ended December 31, 1995 to $207.4 million (including $25.4 million
assumed from Home Mutual) for the year ended December 31, 1996. The Company's
net earned premiums increased 72% from $58.9 million for the year ended December
31, 1995 to $101.7 million (including $9.9 million resulting from the pooling
with Home Mutual) in the year ended December 31, 1996. The increase in net
earned premiums resulted from increased premium volume, primarily in the
Company's personal auto book of business, as well as the pooling of Home
Mutual's underwriting results.
35
<PAGE>
Reinsurance profit sharing decreased from income of $6.0 million in 1995 to
an expense of $2.4 million in 1996, primarily as a result of the reassessment of
loss reserve assumptions during the year as previously discussed.
Net investment income increased from $3.5 million in 1995 to $4.6 million
in 1996. The increase in net investment income was primarily a result of an
increase in invested assets which was partially offset by a decrease in
investment yield from 5.8% in 1995 to 5.5% in 1996. Cash and invested assets
were $103.4 million as of December 31, 1996 compared to $88.3 million as of
December 31, 1995.
The Company had $5,000 of net realized gains in 1996 derived from the call
of fixed maturity investments as compared to $269,000 of net realized gains from
the sale of securities in 1995.
Income from the Company's financial services subsidiaries increased from
$3.0 million in 1995 to $3.7 million in 1996. The financial services group is
comprised of Aspen Intermediaries ("Aspen"), which provides reinsurance
brokerage services; Tower Hill, Inc. ("Tower Hill"), which provides premium
finance services; and HSIM L.L.C. ("HSIM") which provides certain administrative
services to the Company. Aspen's reinsurance brokerage fee revenue increased to
$2.1 million in 1996 from $1.6 million in 1995. Tower Hill received $1.5 million
in premium financing income in 1996 compared to $604,000 in 1995. HSIM earned
$775,000 in management fees from Home Mutual in 1995 compared to no such fees in
1996 as a result of the operating losses during 1996 at Home Mutual.
Other income decreased from $315,000 in 1995 to $135,000 in 1996. Other
income in 1996 consisted primarily of insurance premium installment fees, offset
by premium receivable write-offs whereas in 1995, other income consisted
primarily of book rollover fees and insurance premium installment fees.
Insurance losses and LAE increased from $49.3 million in 1995 to $112.4
million in 1996 as a result of the increase in volume and risks assumed under
premiums in force and the significant loss reserve development and establishment
of new loss reserving philosophies during 1996 as discussed in the "Overview"
section above.
The Company's GAAP expense ratio increased from 17% in 1995 to 25% in 1996.
The increase in the GAAP expense ratio in 1996 is the result of a reduction in
reinsurance profit sharing and the Company's ceding commission rates under its
new reinsurance agreements which has the effect of increasing net commission
expenses. Additionally, Home Mutual entered into a service agreement to sell its
assigned risk business which has resulted in a shift of expenses from losses to
underwriting expense. The associated expense for servicing this business is now
being reflected in the statement of operations as a result of the pooling
agreement entered into in 1996 between Home Mutual and Merchant Bakers.
Additionally, the Company's loss reserve increase has impacted the amount of
policy acquisition costs deferred due to higher loss ratios used in determining
the amount of acquisition costs that can be deferred. The impact of this has
been mitigated to some extent by a change in the Company's method of accounting
for deferred policy acquisition costs in the fourth quarter of 1996 to consider
anticipated investment income.
Home Mutual has incurred after pooling operating losses for the year ended
1996 of $1.9 million and as of December 31, 1996, its statutory based surplus is
approximately $1.55 million. As a result, the Company recorded a charge to other
expenses of $2.6 million during the last six months of 1996, representing a
write down of its surplus notes in Home Mutual to their estimated net realizable
value of $2.4 million. Also included in other expenses in 1996 is the benefit of
$3.1 million from the acceleration of the amortization period of the excess of
fair value over cost of the Merchant Bakers acquisition. The remaining other
expenses for 1996 and all of 1995 are the operating expenses of the financial
services group and parent company.
Interest expense on the Company's subordinated notes payable and notes
payable to bank increased to $2.8 million in 1996 from $2.1 million in 1995 due
to the interest expense related to the bank credit facilities which were not
fully utilized during 1995.
The Company incurred a pre-tax loss of $35.1 million during 1996. Primarily
as a result of net operating loss carrybacks, the Company recorded a $6.1
million current tax benefit. In addition, net operating loss carryforwards
generated deferred tax benefits of $8.3 million. During 1995, the Company
reported a tax expense of $2.0 million or a 26% effective tax rate.
36
<PAGE>
For the year ended December 31, 1996, the Company reported a $20.5 million
net loss and a combined ratio of 138% as a result of the factors noted above as
compared to net income of $6.1 million and a combined ratio of 93% for the year
ended December 31, 1995.
Year Ended December 31, 1995 Compared To Year Ended December 31, 1994
Gross premiums written by the Company increased by 114% from $58.2 million
in 1994 to $124.8 million in 1995 (of which $22.8 million represents Merchant
Bakers) due to the continued expansion of Home State's personal auto line of
business in addition to the growth of Westbrook and Pinnacle (late 1994
acquisitions). The Company's net earned premiums increased 97% from $29.9
million in 1994 to $58.9 million in 1995 (of which $14.9 million represents
Merchant Bakers).
The Company has aggressively used reinsurance in order to achieve its
growth objectives. Management has negotiated reinsurance treaties that enable
the Company to leverage its resources in order to write additional risks while
maintaining premium to surplus ratios recommended by regulatory authorities and
rating agencies. Although a majority of the profits on the ceded premium is
retained by reinsurers, the Company receives ceding commissions and profit
sharing revenues which provide a means of participating in the profitability of
the reinsurance programs. The Company continually evaluates the opportunity to
retain a greater portion of ceded premium to reduce reinsurance costs and/or
further enhance profitability. As a result, the Company has made certain changes
in the combined reinsurance program during 1995 for 1996, moving certain classes
of liability insurance business from excess of loss to quota share agreements.
The historical loss ratio and/or policy limits for these classes make quota
share reinsurance, rather than excess of loss reinsurance, the most effective
means to provide the Company with reinsurance protection.
Recoveries on reinsurance premiums increased from $3.7 million in 1994 to
$6.0 million in 1995 (of which $2.8 million represents Merchant Bakers). This
increase is a direct result of an increase of $25.5 million in ceded earned
premium volume (of which $15.9 million is attributable to Merchant Bakers), and
an increase in physical damage quota share adjustments, which were partially
offset by unfavorable development on the Company's ceded risks of prior years.
The volume of reinsurance profit sharing income is impacted by the amount of
premiums ceded to reinsurers as well as the reinsurers' historical cumulative
(over a three year period) loss experience on such premiums. Although adverse
loss development could retroactively reduce profit sharing income, such
retroactive adjustments cannot exceed the amount of the profit sharing
previously recognized by the Company on reinsurance premiums.
Net investment income increased from $1.9 million in 1994 to $3.5 million
in 1995. The increase in net investment income was primarily a result of an
increase in invested assets as well as the inclusion of Merchant Bakers. Cash
and invested assets increased from $52.0 million in 1994 to $88.3 million in
1995 primarily as a result of the inclusion of Merchant Bakers and additional
cash flows provided by operating activities.
The Company had $269,000 of net realized gains in 1995 compared to $99,000
of net realized losses from the sale of securities in 1994. The realized net
gains in 1995 were derived primarily from the sale of the Company's investments
classified as available for sale and several bonds being called before scheduled
maturity while the net realized losses in 1994 resulted from the sale of
selected fixed maturity securities in the first quarter.
Income from Home State Financial Services, Inc. and its subsidiaries,
consisting primarily of reinsurance brokerage fees, financing revenue and
management fees increased $900,000 or 43% from $2.1 million in 1994 to $3.0
million in the comparable period of 1995. In 1995, the financial services group
was comprised of Aspen Intermediaries, Inc., which provides reinsurance
brokerage services; Tower Hill, Inc., which provides premium finance services;
and Home State Insurance Management, Inc., which provides certain administrative
services. Aspen received reinsurance brokerage fees of $1.6 million in 1995 as
compared to $1.1 million in the comparable period of 1994. Home State Insurance
Management received $775,000 in management fees from Home Mutual in 1995 as
compared to $1 million in the comparable period of 1994 and Tower Hill received
$604,000 in financing income in 1995 and none in 1994. In 1996, the business of
Home State Insurance Management was restructured as a limited liability company.
Other income, consisting primarily of book rollover fees, decreased from
$452,000 in 1994 to $315,000 in 1995. Book rollover fees were $315,000 in 1994
and $158,000 in 1995.
37
<PAGE>
Insurance losses and loss adjustment expenses increased $26.6 million or
117% from $22.7 million in 1994 to $49.3 million in 1995 (of which $13.2 million
represents Merchant Bakers), primarily as a result of an increase in volume and
risks assumed under premiums in force and adverse development in prior year
reserves with respect to the commercial auto lines of business in New York and
New Jersey. Consequently, the GAAP loss ratio increased to 76% in 1995 compared
to 67% in 1994, as management is continuing to strengthen loss reserves.
The GAAP expense ratio decreased to 17% in 1995 from 21% in 1994. The
Company has experienced an increase in its overall operating expenses in 1995 as
compared to 1994 largely to support the addition of $43.6 million of gross
written premium in the Company's markets for personal and commercial automobile
business. Favorable comparison of 1995 results to 1994 reflect the positive
benefits of producing incremental premium growth by leveraging the Company's
existing cost structure, as well as efficiencies derived from investments in
technology made during the 1994 and 1995 fiscal years.
Other expenses in 1995 and 1994 include the operating expenses of the
financial services group and the parent company.
Interest expense increased to $2.1 million in 1995 from $503,000 in 1994
due to the interest expense related to the private placement of subordinated
debt completed in October 1994 and an unsecured line of credit.
Tax expense decreased from $2.5 million in 1994 to $2.0 million in 1995 due
primarily to an increase in the ratio of tax free income to taxable income. The
Company's effective tax rate decreased from 30% (before non-recurring
adjustments) in 1994 to 26% in 1995.
Net income increased from $4.5 million in 1994 to $6.1 million in 1995 and
the Company's GAAP combined ratio increased from 88% in 1994 to 93% in 1995 as a
result of the factors noted above.
Liquidity and Capital Resources
In October 1994, the Company completed a private placement of $17.0 million
of subordinated notes and warrants (the "Private Placement"). During 1996, the
Company secured an $18 million line of credit with its bank lenders to support
the premium finance operations as well as provide a working capital facility for
the holding company of which $5.6 million was outstanding at December 31, 1996.
In March, 1997, such line of credit availability was eliminated for the premium
finance operation and was reduced to $4.0 million for the holding company (none
of which may be re-borrowed) in connection with a waiver of certain defaults
resulting from the Company's failure to make a required pay down of the line of
credit in the first quarter of 1997 and as a result of the Company's 1996 net
loss. In connection with such waiver, the Company repaid all outstanding
borrowings of Tower Hill. The amendment and waiver entered into with the banks
provides, among other things, for an increase in interest rates, a February 28,
1998 maturity date and for the Company to make monthly principal repayments of
$100,000 and prepayments of the net proceeds from any sale of a subsidiary or a
subsidiary's assets or from the available portion of an anticipated tax refund.
The March 31, 1997 amendment and waiver also provides for changes to certain of
the debt covenants, including a requirement to maintain consolidated net worth,
as defined of at least $28.5 million. See Note 6 to the Consolidated Financial
Statements.
The absence of financing for Tower Hill's business would have an adverse
effect on the Company's financial services income. Although management plans to
seek an alternate source of financing, there can be no assurance that such
facilities will be secured. Furthermore, the reduction of the holding company's
line of credit and its inability to re-borrow amounts repaid will have an
adverse effect on the Company's liquidity and capital resources.
In October of 1996, the Company raised $10,000,000 in additional capital
through the sale of 10,000 shares of its Series A Cumulative Voting Preferred
Stock (the "Preferred Stock") to Swiss Reinsurance America Corporation and
Reliance Insurance Company. Swiss Re and Reliance each purchased $5,000,000 of
the Preferred Stock. Proceeds of the sale were used to increase the capital and
surplus of Merchant Bakers. The Company, Swiss Re and Reliance have also entered
into agreements for the Company's subsidiaries to purchase reinsurance at
commercially reasonable and actuarially sound rates and for Swiss Re and
Reliance to provide certain management and consulting services to the Company.
38
<PAGE>
Each share of Preferred Stock is entitled to one vote along with the
Company's common stock and carries a dividend rate of 7.5%. The Company may call
the Preferred Stock for redemption at any time after the fourth anniversary of
the closing. The Preferred Stock must be redeemed at $1,000 per share plus any
accumulated dividends in five equal tranches at the 10th through 14th
anniversaries of the closing. In addition, the Preferred Stock is subject to
redemption upon the occurrence of specified redemption events. Each share of
Preferred Stock carries with it detachable Series A Warrants ("Warrants") to
purchase 140 shares of the Company's common stock for $9.50 per share at any
time until October 4, 2003. If all of the Warrants issued in connection with the
$10,000,000 of Preferred Stock issued were to be exercised, the common stock
purchased would represent 19.8% of the Company's issued and outstanding common
stock as of December 31, 1996.
On March 31, 1997, the holders of the Preferred Stock waived a default for
the year ended December 31, 1996 in a covenant requiring the maintenance of a
net written premiums to statutory surplus ratio. In connection with such waiver,
the Company agreed to elect an additional Director acceptable to the parties and
to form a Strategic Planning Committee of the Board (to be chaired by such
additional Director), the functions of which would include pursuing strategic
alternatives for the Company to improve its financial condition.
The Company generated positive cash flow from operations in 1996 of $4.2
million which was invested in high quality investment grade securities. The
Company has a policy of investing a portion of its cash in short-term and highly
liquid investments for the payment of pending claims and expenses. The Company
believes that its liquid assets plus its cash flow from operations will be
adequate to meet foreseeable cash requirements. During 1996, the Company
conducted a thorough review of its business plans and primary insurance
operations. As a result, the Company has re-evaluated its methodologies for case
basis reserving and is aggressively managing its claims handling procedures. The
change in claims management may accelerate the cash needed to settle claims,
which management believes will be sufficiently met with existing cash and
investment assets.
The Company's insurance subsidiaries are subject to certain restrictions on
their ability to transfer funds to the parent company in the form of cash
dividends, loans or advances without regulatory approval. These restrictions,
described below, are not expected to impair the ability of the Company to meet
its cash obligations. However, to the extent the Company seeks to increase the
capital of its insurance subsidiaries or pursue additional business
opportunities, additional financing will be required. Accordingly, the Company
is currently exploring financing alternatives which could take the form of
regular debt, convertible debt, equity securities or some combination thereof.
There can, however, be no assurance that financing will be available or that the
Company will obtain financing on terms it deems acceptable.
The reserve increases and reduction in reinsurance profit sharing
experienced in 1996 have negatively impacted the statutory surplus levels of the
insurance subsidiaries. These subsidiaries still maintain reported surplus at
December 31, 1996 in excess of both minimum surplus and authorized control level
risk based capital. Management does not anticipate this changing in 1997. To the
extent that future premium writings exceed the statutory required leverage
ratios (i.e., net premium writings to surplus), the Company believes it has the
ability to either reduce those premium writings or effect reinsurance in order
to bring the leverage ratios to interim statutory accepted guidelines.
In view of the Company' rapid growth in premiums written, heavy reliance on
reinsurance and unfavorable results in 1996, in February 1997 the Company
retained Donaldson, Lufkin and Jenrette to assist in the Company's review of
strategic alternatives to maximize the perceived inherent value in the direct
premiums produced by the Company. Strategic alternatives could include the
raising of additional capital or a sale of the Company. There can be no
assurance that any such strategic alternative will be successfully achieved.
As of December 31, 1996, the Company had approximately $91.4 million of
investments and $11.8 million of cash and cash equivalents. The Company
maintains a significant portion of its assets in high quality, fixed income
investments with short maturities. An increase in interest rates will generally
cause a decline in the market value of fixed income securities although
presenting the opportunity to reinvest proceeds from maturing securities at
higher yields. A decline in interest rates may result over time in lower yields
as the proceeds from maturing securities are reinvested, although this may be
offset by increases in the market value of fixed income investments with longer
maturities. Because of the relatively short maturities of the Company's
investments, the Company does not anticipate changes in interest rates to
materially affect its liquidity and capital resources.
39
<PAGE>
Dividend Restriction on Insurance Subsidiaries
As a holding company, the principal source of the parent company's cash
available for payment of dividends is dividends received from its insurance
subsidiaries. State regulatory requirements limit the amount of annual dividends
these companies can pay to the holding company without obtaining prior insurance
department approval. The maximum amount distributable is limited to the greater
of (i) 10% of statutory surplus as of the end of the preceding year or (ii) net
investment income for the preceding year, with larger dividends payable only
upon prior regulatory approval. Accordingly, the maximum dividend which may be
paid to the Company by its insurance subsidiaries without prior approval at
December 31, 1996 is approximately $4.6 million.
Impact of Inflation
Inflation may have an impact on property and casualty insurers because
premium rates are established before the amount of losses and loss expenses are
known. The Company attempts to anticipate increases from inflation in
establishing rates, subject to competitive and regulatory limitations.
The Company considers inflation when estimating liabilities for losses and
loss adjustment expenses. The liabilities for losses and loss adjustment
expenses are management's estimates of the ultimate net costs of underlying
claims and expenses and are not discounted for the time value of money. In times
of high inflation, the normally higher yields on investment income may partially
offset potentially higher claims and expenses.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earning per Share" (SFAS 128"). For
the years ended December 31, 1996, 1995 and 1994 the Company has followed the
standards established under APB No. 15 for computing and presenting earnings per
share ("EPS"). SFAS 128 establishes standards for computing and presenting EPS
and applies to entities with publicly held common stock or potential common
stock. SFAS 128 replaces primary EPS, as defined in APB No. 15, with basic EPS.
Additionally, SFAS 128 requires dual presentation of basic and diluted EPS on
the face of the statement of operations for all entities with complex capital
structures. SFAS also requires certain disclosures including: 1) a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation; 2) the effect
given to preferred dividends in arriving at income available to common
shareholders and; 3) securities that could potentially dilute basic EPS in the
future that were not included in the computation of diluted EPS because to do so
would have been anti-dilutive for the period(s) presented.
SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997 and requires restatement of all prior period EPS data
presented.
The Company has calculated basic and diluted EPS, as defined in SFAS 128
and interpreted by the Company based on information currently available, and has
determined that such amounts do not differ materially from primary EPS, which is
reflected in the Company's statement of operations, for the years presented.
Safe Harbor Disclosure
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Act"), the Company sets forth below
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those which might be
projected, forecasted, or estimated in the Company's forward-looking statements,
as defined in the Act, made by or on behalf of the Company in press releases,
written statements or documents filed with the Securities and Exchange
Commission, or in its communications and discussions with investors and analysts
in the normal course of business through meetings, phone calls and conference
calls. Such statements may include, but are not limited to, projections of
premiums, investment income, other revenue,
40
<PAGE>
capital and surplus, reserves, losses, expenses, earnings (including earnings
per share), cash flows, plans for future operations, common stockholders'
equity, financing needs, capital plans, potential corporate transactions, plans
relating to products or services of the Company and estimates concerning the
effects of litigation or other disputes, as well as assumptions for any of the
foregoing and are generally expressed with words such as "believes",
"estimates", "expects", "anticipates", "could have", "may have" and similar
expressions.
Forward-looking statements are inherently subject to risks and
uncertainties. The Company cautions that factors which may cause its results to
differ materially from such forward-looking statements include, but are not
limited to, the following:
(1) Uncertainty regarding the adequacy of reserves for loss adjustment expenses,
the establishment of which involve an inherent degree of uncertainty and may be
impacted by numerous factors; (2) Factors affecting the property and casualty
insurance industry generally including periods of intense price competition, the
size and frequency of claims, escalating damage awards, natural disasters,
changes in statutes, regulations and court decisions and regulatory constraints,
which can cause fluctuations in underwriting results and net income; (3) The
geographic concentration of a disproportionate amount of the Company's business,
which could result in unusually severe storms or other natural disasters or
adverse economic conditions in such geographic areas having an adverse impact on
the Company; (4) Adverse effects resulting from the recent downgrading or any
future downgrades in the ratings assigned by A.M. Best to the National Pool, the
New York Pool or one of the Company's subsidiaries, which could adversely effect
the Company's competitive position; (5) Capital and surplus levels may constrain
the Company's ability to maintain or increase the volume of premiums it writes,
result in regulatory scrutiny and/or require the Company to cede a greater
portion of premiums written to reinsurers, which could reduce profitability; (6)
State laws and regulations applicable to insurance holding companies, such as
the Company, which, among other things, limit the payment of dividends by
insurance subsidiaries; (7) The unavailability of reinsurance on favorable
terms, a reinsurer's insolvency or inability to make payments under a
reinsurance treaty or lower than estimated reinsurance recoveries on unpaid
losses; (8) Changes in subrogation recovery rates; (9) Loss of significant
independent agencies producing business for the Company; (10) Increases in
interest rates, which cause a reduction in the market value of the Company's
interest rate sensitive investments, including, but not limited to, its fixed
income investment portfolio; (11) Decreases in interest rates causing a
reduction of income earned on new cash flow from operations and the reinvestment
of the proceeds from sales, calls or maturities of existing investments; (12)
Changes in the demand for the financial services offered by the Company; and
(13) Adverse results in litigation matters.
In addition to the factors outlined above that are directly related to the
Company's businesses, the Company is also subject to general business risks,
including, but not limited to, adverse state, federal or foreign legislation and
regulation, adverse publicity or news coverage, changes in general economic
factors, and the loss of key employees.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required in response to Item 8 appear
elsewhere in this Report as listed in Item 14(a) of this Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
41
<PAGE>
PART III
In connection with the 1997 Annual Meeting of Stockholders of the Company,
the Company intends to furnish stockholders with proxy materials which set forth
the information required by Items 10 (other than information as to Executive
Officers of the Registrant which is furnished in Part I, Item 4A hereof), 11, 12
and 13 of this Part III. The Company expects to file copies of such material
with the Commission pursuant to Rule 14a-6(c) promulgated under the Securities
Exchange Act of 1934, as amended, not later than 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K.
42
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page(s)
-------
(a) (1) The following financial statements are included in Part II,
Item 8:
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the year ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity for the year
ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the year ended
December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7 - F-30
(2) The following financial statement schedules (pursuant to
Rule 5-04 and Rule 7-05 of Regulation S-X) are presented
herewith:
Report of Independent Accountants S-1
Schedule I Summary of Investments - S-2
Other than Investments in Related Parties
Schedule II Condensed Financial Information of Registrant S-3 - S-5
Schedule III Supplementary Insurance Information S-6
Schedule IV Reinsurance S-7
Schedule VI Supplemental Information Concerning Property/ S-8
Casualty Insurance Operations
Schedules other than those mentioned above are omitted because the conditions
requiring filing do not exist, or because the information is given in the
financial statements filed herewith, including the notes thereto.
(b) During the quarter ended December 31, 1996, a report on Form 8-K
dated October 4, 1996 was filed reporting on the private
placement of Series A Preferred Stock and Warrants:
(c) The following Exhibits are included in this report:
Exhibit No. Description of Exhibit
----------- ----------------------
2.1 Plan of Conversion of New York Merchant Bakers Mutual Fire
Insurance Company (Incorporated by Reference to Exhibit 1 to
the Company's Current Report on Form 8-K dated March 2, 1995)
3.1 (i) Form of Amended and Restated Certificate of Incorporation
of the Company. (Incorporated by reference to Exhibit 3.1 to
the Company's Registration Statement (No. 33-63904) on Form
S-1 (the "S-1"))
43
<PAGE>
Exhibit No. Description of Exhibit
----------- ----------------------
(ii) Form of Amended and Restated By-Laws of the Company.
(Incorporated by Reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K dated October 4, 1996 (the
"October 1996 8-K"))
4.1 Specimen Common Stock Certificate. (Incorporated by Reference
to Exhibit 4.1 to the S-1)
4.2 (i) Purchase Agreement ("Purchase Agreement") dated as of
October 3, 1994, between the Company and purchasers of
$17,000,000 principal amount of 11.50% subordinated notes and
warrants, with form of notes and form of warrant attached.
(Incorporated by reference to the Company's Current Report on
Form 8-K dated September 8, 1994)
(ii) Amendment No. 1, dated as of February 7, 1996, to Purchase
Agreement. (Incorporated by reference to Exhibit 4.2(ii) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 10-K"))
(iii) Letter Agreement dated as of October 4, 1996 amending the
Registration Rights Agreement dated as of October 3, 1994
among the Company and the holders of the Subordinated Notes
and warrants named therein and providing for consents and
waivers from such holders. (Incorporated by reference to
Exhibit 10.4 to the October 1996 8-K).
4.3 Certificate of Designations, Preferences and Rights of Series
A Cumulative Voting Preferred Stock. (Incorporated by
reference to Exhibit 4.1 to the October 1996 8-K).
4.4 Form of Class A Warrant issued to Swiss Reinsurance America
Corporation ("Swiss Re"). (Incorporated by reference to
Exhibit 4.2 to the October 1996 8-K).
4.5 Form of Class A Warrant issued to Reliance Insurance Company
("Reliance"). (Incorporated by reference to Exhibit 4.3 to
the October 1996 8-K).
10.1 Form of Home State Agency-Company Agreement. (Incorporated by
Reference to Exhibit 10.1 to the S-1)
10.2 Form of Home State Contingent Commission Agreement.
(Incorporated by Reference to Exhibit 10.2 to the S-1)
10.3 Form of Quaker City Agency-Company Agreement. (Incorporated
by Reference to Exhibit 10.3 to the S-1)
10.4 Form of Quaker City Agent's Contingent Commission Agreement.
(Incorporated by Reference to Exhibit 10.4 to the S-1)
10.5 Services Agreement dated July 1, 1990 between Home State
and PPIA, Assignment of Services Agreement to PPIM dated
January 1, 1992 and Amendment dated June 3, 1993 to Services
Agreement. (Incorporated by Reference to Exhibit 10.5 to the
S-1)
10.6 Services Agreement dated February 1, 1991 between Quaker
City and PPIA, Assignment of Services Agreement to PPIM dated
January 1, 1992 and Amendment dated June 3, 1993 to Services
Agreement. (Incorporated by Reference to Exhibit 10.6 to the
S-1)
10.7 Form of Investment Management Agreement as amended as of
April 1, 1996 between each of the Company's insurance
subsidiaries and Home Mutual, as client, and Woodhaven, as
manager.
10.8 (i) Surplus Debenture dated December 28, 1992 in the original
principal amount of $1,000,000 made by Merchant Bakers
payable to the Company. (Incorporated by Reference to Exhibit
10.9 to the S-1)
(ii) Endorsement dated October 4, 1994, increasing principal
amount of Surplus Debenture by $4,000,000. (Incorporated by
Reference to Exhibit 10.9 (ii) to the 1994 10-K)
10.9 (i) Surplus Debenture dated December 28, 1992 in the original
principal amount of $500,000 made by Merchant Bakers payable
to Home State. (Incorporated by Reference to Exhibit 10.10 to
the S-1)
(ii) Note Purchase Agreement dated as of July 29, 1994 between
Home State and the Company. (Incorporated by Reference to
Exhibit 10.10(ii) to the 1994 10-K)
44
<PAGE>
Exhibit No. Description of Exhibit
----------- ----------------------
10.10 (i) Surplus Debenture dated December 28, 1992 in the original
principal amount of $500,000 made by Merchant Bakers payable
to Quaker City. (Incorporated by Reference to Exhibit 10.11
to the S-1)
(ii) Note Purchase Agreement dated as of July 29, 1994 between
Quaker City and the Company. (Incorporated by Reference to
Exhibit 10.11(ii) to the 1994 10-K)
10.11 Plan of Capitalization between the Company and Merchant
Bakers approved by the New York State Department of Insurance
on December 18, 1993. (Incorporated by Reference to Exhibit
10.12 to the S-1)
10.12 Agreement dated December 1, 1991 regarding Tax Loss
Allocation among the Company, Home State, Quaker City
Holdings and Quaker City. (Incorporated by Reference to
Exhibit 10.13 to the S-1)
10.13 Lease Agreement dated April 20, 1993 between Walter C.
Zimmerer, Jr. and Erma M. Zimmerer, Partners, as Landlord and
Home State as Tenant. (Incorporated by Reference to Exhibit
10.14 to the S-1)
10.14 Lease Agreement dated May 21, 1992 between The Korman Co. as
agent for the Owner, as Landlord, and Quaker City, as Tenant.
(Incorporated by Reference to Exhibit 10.15 to the S-1)
10.15 Lease Agreement dated October 10, 1990 between Parkway Plaza
Associated, as Landlord and Merchant Bakers, As Tenant.
(Incorporated by Reference to Exhibit 10.16 to the S-1)
10.16 Lease Agreement dated December 28, 1993 between Pinnacle, as
Tenant, and Robert Stone D/B/A/ S&T Realty, as Landlord.
(Incorporated by Reference to Exhibit 10.17 to the 1994 10-K)
10.17 Lease Agreement dated December 19, 1994 between Merchant
Bakers, as Tenant, and Paul F. Callan, Bruce Regenstreich,
and Warren S. Koster, as Landlord. (Incorporated by Reference
to Exhibit 10.20 to the 1994 10-K)
10.18 Lease Agreement dated July 6, 1994 between Montrev L.P., as
Landlord, and Home State, as Tenant. (Incorporated by
Reference to Exhibit 2 to the Company's Current Report on
Form 8-K dated September 8, 1994)
10.19 Sub-lease Agreement dated October 15, 1994 between Westbrook,
as Tenant, and National Indemnity Agency of Connecticut,
Inc., as Landlord. (Incorporated by Reference to Exhibit
10.20 to the 1994 10-K)
10.20 Agreement of Lease dated June 1996 between Hacienda
Intercontinental Realty, N.V., as Landlord, and Merchant
Bakers, as Tenant.
10.21 1993 Stock Incentive Plan of the Company. (Incorporated by
Reference to Exhibit 10.17 to the S-1)
10.22 (i) Employment Agreement dated June 1, 1993 between the
Company and Robert Abidor. (Incorporated by Reference to
Exhibit 10.19 to the S-1)
(ii) Amendment dated as of June 13, 1996 between the Company and
Robert Abidor amending the Employment Agreement.
(Incorporated by reference to Exhibit 0.0 to the Company's
Current Report on Form 8-K dated June 13, 1996)
(iii) Termination Agreement dated December 6, 1996 between the
Company and Robert Abidor.
46
<PAGE>
Exhibit No. Description of Exhibit
----------- ----------------------
10.23 Stock Purchase Agreement, dated as of August 4, 1994, between
the Company and Pinnacle Financial Group, Inc. and Amendment
No. 1 thereto, dated as of November 8, 1994. (Incorporated by
Reference to Exhibits 1 and 2 of the Company's Current Report
on Form 8-K dated November 9, 1994)
10.24 Stock Purchase Agreement between the Company and Home State
dated June 1, 1993. (Incorporated by Reference to Exhibit
10.20 to the S-1)
10.25 Memoranda of Reinsurance
(i) Black and Silver Car Commercial Automobile Liability Quota
Share Reinsurance Agreement Effective January 1, 1997 through
January 1, 1998
(ii) Private Passenger Automobile Liability and Physical Damage
Quota Share Reinsurance Agreement Effective January 1, 1997
through January 1, 1998
(iii) Private Passenger and Commercial Automobile Physical Damage
Quota Share Reinsurance Agreement Effective December 31, 1996
through December 31, 1997
(iv) Commercial Automobile Physical Damage Excess of Loss
Reinsurance Agreement Effective January 1, 1997 through
January 1, 1998
(v) First Personal and Commercial Automobile Liability Excess of
Loss Reinsurance Agreement Effective January 1, 1997 through
January 1, 1998
(vi) Second Personal Automobile Liability Excess of Loss
Reinsurance Agreement Effective January 1, 1997 through
January 1, 1998
(vii) Commercial Automobile Liability Excess of Loss Reinsurance
Agreement Second, Third and Fourth Layers Effective January
1, 1997 through January 1, 1998
(viii) Multiple Line Excess of Loss Reinsurance Agreement First,
Second and Third Layers Effective January 1, 1997 through
January 1, 1998
(ix) Medical and Rehabilitation Expenses Excess of Loss
Reinsurance Agreement Effective December 31, 1996 through
January 1, 1998
(x) Property Catastrophe Excess of Loss Reinsurance Agreement
First, Second, Third and Fourth Layers.
(xi) Property Catastrophe Excess of Loss Reinsurance Agreement
Underlying layer for Home Mutual and New York Merchant Bakers
Effective January 1, 1997 to December 31, 1997, both days
inclusive
47
<PAGE>
Exhibit No. Description of Exhibit
----------- ----------------------
(xii) Casualty Clash Excess of Loss Reinsurance Agreement First,
Second, Third and Fourth Layers Effective January 1, 1997 to
December 31, 1997, both days inclusive
10.26 Reinsurance Cover Memorandum for Private Passenger and
Commercial Automobile Liability and Physical Damage Quota
Share Reinsurance Agreement (unearned premium reserve) as of
December 31, 1996.
10.27 Sale, Lease and License Agreement dated October 6, 1993
between New York Central and the Company. (Incorporated by
Reference to Exhibit 1 to the Company's Current Report on
Form 8-K dated November 8, 1993)
10.28 Letter Agreement dated October 6, 1993 between New York
Central and the Company. (Incorporated by Reference to
Exhibit 2 to the Company's Current Report on Form 8-K dated
November 8, 1993)
10.29 (i) Administrative Services Agreement dated June 26, 1989
between New York Central and Home Mutual. (Incorporated by
Reference to Exhibit 3 to the Company's Current Report on
Form 8-K dated November 8, 1993)
(ii) Assignment and Assumption Agreement dated April 1, 1994
between the Company and Home State Insurance Management, Inc.
(Incorporated by Reference to Exhibit 10.30(ii) to the 1994
10-K)
10.30 (i) Note Purchase Agreement dated October 5, 1993 between New
York Central and the Company. (Incorporated by Reference to
Exhibit 4 to the Company's Current Report on Form 8-K dated
November 8, 1993)
(ii) Four (4) Surplus Notes of Home Mutual each in the principal
amount of $750,000. (Incorporated by Reference to Exhibit 5
to the Company's Current Report on Form 8-K dated November 8,
1993)
10.31 Subordinated Promissory Note of Home Mutual in the principal
amount of $1,500,000. (Incorporated by Reference to Exhibit 6
to the Company's Current Report on Form 8-K dated November 8,
1993)
10.32 (i) Stock Purchase Agreement dated August 4, 1994 between the
Company and Pinnacle Financial Group, Inc. (Incorporated by
Reference to Exhibit 1 of the Company's Current Report on
Form 8-K dated November 9, 1994)
(ii) Amendment No. 1 to the Stock Purchase Agreement dated
November 8, 1994 between the Company and Pinnacle Financial
Group, Inc. (Incorporated by Reference to the Company's
Current Report on Form 8-K dated November 9, 1994)
10.33 Services Agreement dated as of January 1, 1996 between Tower
Hill and Premium Payment Plan. (Incorporated by Reference to
Exhibit 10.38 to the 1995 10-K)
10.34 (i) Loan Agreement dated as of March 4, 1996 among the
Company, Tower Hill, Chase Manhattan Bank (formerly Chemical
Bank), EAB and Chase Manhattan Bank, as agent (the "Agent"),
and notes, Tower Hill security agreement and guaranties
issued pursuant thereto. (Incorporated by Reference to
Exhibit 10.39 to the 1995 10-K)
(ii) First Amendment and Waiver dated as of August 14, 1996 to the
Loan Agreement. (Incorporated by reference to Exhibit 10.5 to
the October 1996 8-K)
(iii) Second Amendment dated as of October 4, 1996 to the Loan
Agreement and related consent of guarantors and note
endorsements. (Incorporated by reference to Exhibit 10.6 to
the October 1996 8-K).
48
<PAGE>
Exhibit No. Description of Exhibit
----------- ----------------------
(iv) Third Amendment and Waiver dated as of March 31, 1997 to the
Loan Agreement
(v) Security Agreement dated as of March 31, 1997 by the Company
in favor of the Agent.
10.35 (i) Securities Purchase Agreement dated as of October 4, 1996
among Swiss Re, Reliance and the Company. (Incorporated by
reference to Exhibit 10.1 to the October 1996 8-K).
(ii) Stockholders' Agreement dated as of October 4, 1996 among the
Company, Swiss Re, Reliance, Michael H. Monier, Edward D.
Herrick and Herrick Partners, L.P. (Incorporated by reference
to Exhibit 10.2 to the October 1996 8-K).
(iii) Registration Rights Agreement dated as of October 4, 1996
among Swiss Re, Reliance and the Company. (Incorporated by
reference to Exhibit 10.3 to the October 1996 8-K).
(iv) Letter Agreement dated as of March 31, 1997 among the
Company, Swiss Re and Reliance.
(v) Management and Consulting Agreement dated October 4, 1996
between the Company and Swiss Re.
(vi) Management and Consulting Agreement dated October 4, 1996
between the Company and Reliance.
(vii Letter Agreement dated October 4, 1996 between Swiss Re and
the Company relating to certain reinsurance arrangements.
(viii) Letter Agreement dated October 4, 1996 between Reliance and
the Company relating to ceded reinsurance agreement.
10.36 Employment Agreement dated as of January 31, 1997 between the
Company and Mark S. Vaughn.
10.37 Employment Agreement dated as of January 31, 1997 between the
Company and Eric A. Reehl.
10.38 Software License Agreement with The Wheatley Group, Ltd.
and related Maintenance and Hardware Purchase Agreements
10.39 Letter Agreement dated August 15, 1996 between the Company
and Isis Consulting, Inc.
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Company. (Incorporated by Reference to
Exhibit 21.1 to the 1995 10-K).
27 Financial Data Schedule
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
HOME STATE HOLDINGS, INC.
Dated: April 15, 1997 By: /s/ MARK S. VAUGHN
-------------------------------
Name: Mark S. Vaughn
Title: President
Pursuant to the Requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ MARK S. VAUGHN President, Chief Executive April 15, 1997
- ----------------------------- Officer and Director
Mark S. Vaughn
/s/ MICHAEL H. MONIER Chairman of the Board of April 15, 1997
- ----------------------------- Directors, Secretary and
Michael H. Monier Director
/s/ ERIC A. REEHL Executive Vice President, April 15, 1997
- ----------------------------- Chief Financial Officer,
Eric A. Reehl Assistant Treasurer,
Assistant Secretary and Director
/s/ EDWARD D. HERRICK Director April 15, 1997
- -----------------------------
Edward D. Herrick
/s/ HAROLD C. STOWE Director April 15, 1997
- -----------------------------
Harold C. Stowe
/s/ PEREZ C. EHRICH Director April 15, 1997
- -----------------------------
Perez C. Ehrich
/s/ WILLIAM L. WALLACE Director April 15, 1997
- -----------------------------
William L. Wallace
/s/ ROBERT M. BAYLIS Director April 15, 1997
- -----------------------------
Robert M. Baylis
/s/ HENRY SOPHER
- ----------------------------- Director April 15, 1997
Henry Sopher
/s/ KENNETH E. EDWARDS Senior Vice President - Finance April 15, 1997
- ----------------------------- (principal financial and
Kenneth E. Edwards accounting officer)
50
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s) No.
-----------
<S> <C>
Report of Independent Accountants............................................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995
and 1994................................................................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994..................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996
1995 and 1994........................................................................... F-6
Notes to Consolidated Financial Statements................................................... F-7 - F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Home State Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Home State
Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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 consolidated financial position of Home
State Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
March 31, 1997
F-2
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
---- ----
<S> <C> <C>
Investments
Fixed maturity securities held - to - maturity, at amortized cost
(market value 1996; $71,804,747 and 1995; $65,472,575) $71,025,541 $64,115,137
Fixed maturity securities available for sale, at market
value (amortized cost 1996; $8,570,488 and 1995; $11,385,460) 8,582,601 11,523,142
Common stocks, at market value (cost 1996; $360,496) 407,079 --
Short term investments at cost, which approximates market 11,359,406 3,157,274
----------- -----------
Total investments 91,374,627 78,795,553
Cash and cash equivalents 11,842,880 9,544,021
Premiums receivable 44,286,720 40,068,207
Reinsurance recoverable 97,191,184 50,580,799
Prepaid reinsurance premiums 61,778,835 35,486,986
Salvage and subrogation receivable (net of allowance of $600,000 in 1996) 3,646,893 2,971,663
Deferred policy acquisition costs 3,116,542 7,086,287
Surplus notes receivable (at cost, less valuation allowance of $2,620,000 in 1996) 2,350,000 4,500,000
Furniture and equipment (at cost, less accumulated depreciation
and amortization of $1,368,142 and $732,342) 4,029,583 3,058,802
Income taxes recoverable, net 6,053,438 973,963
Deferred tax assets, net 10,148,223 1,889,685
Other assets 7,760,928 5,565,372
------------ ------------
Total assets $343,579,853 $240,521,338
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Insurance losses and loss adjustment expense reserves $179,955,063 $95,790,019
Unearned premiums 85,862,693 71,291,232
Reinsurance balances payable 22,717,811 8,532,721
Accrued expenses and other liabilities 3,808,561 3,203,092
Excess of fair value over cost of business acquired -- 3,053,076
Subordinated notes payable, net of original issue discount 16,380,000 16,300,000
Notes payable, bank 5,625,000 2,000,000
Minority interest 792,828 1,298,972
------------ ------------
Total liabilities 315,141,956 201,469,112
------------ ------------
Commitments and contingencies
Mandatory redeemable preferred stock (redemption amount - $10,000,000) 8,525,000 --
------------ ------------
Stockholders' equity
Preferred stock, $.01 par value; 100,000 shares authorized
and none issued and outstanding -- --
Common stock, $.01 par value; (10,000,000 shares
authorized, 5,660,000 shares issued and outstanding) 56,600 56,600
Additional paid-in capital 22,473,463 20,973,463
Unrealized appreciation (depreciation) of fixed maturity securities
available for sale, net of deferred taxes of ($19,926) and $29,700 38,769 (57,704)
Retained earnings (accumulated deficit) (2,655,935) 18,079,867
------------ ------------
Total stockholders' equity 19,912,897 39,052,226
------------ ------------
Total liabilities and stockholders' equity $343,579,853 $240,521,338
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net premiums earned $101,680,053 $58,915,086 $29,894,512
Reinsurance profit sharing (2,426,110) 5,993,112 3,747,636
Net investment income 4,647,194 3,458,692 1,935,434
Financial services group income 3,692,329 2,981,423 2,141,546
Other income 134,723 315,094 452,279
Net realized capital gains (losses) 4,969 269,027 (99,024)
------------ ----------- -----------
Total revenues 107,733,158 71,932,434 38,072,383
------------ ----------- -----------
Expenses:
Insurance losses and loss adjustment expenses 112,395,620 49,306,376 22,693,300
Underwriting expenses and acquisition costs 24,764,987 11,033,682 7,064,851
Other expenses 2,962,927 1,338,000 756,394
Interest expense 2,755,409 2,066,111 503,319
------------ ----------- -----------
Total expenses 142,878,943 63,744,169 31,017,864
------------ ----------- -----------
Income (loss) before income taxes and minority interest (35,145,785) 8,188,265 7,054,519
Income tax (benefit) (14,455,783) 2,008,097 2,476,546
Minority interest (benefit) expense (163,104) 57,507 80,500
------------ ----------- -----------
Net income (loss) ($20,526,898) $6,122,661 $4,497,473
Accretion on mandatory redeemable preferred stock (25,000) -- --
Dividends on mandatory redeemable preferred stock (183,904) -- --
------------ ----------- -----------
Net income (loss) available for common shareholders ($20,735,802) $6,122,661 $4,497,473
============ =========== ===========
Net income (loss) per common share and common share equivalent ($3.66) $1.08 $ .79
============ =========== ===========
Weighted average number of common shares outstanding 5,660,000 5,660,913 5,685,605
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Retained
Additional Unrealized Earnings Total
Preferred Common Paid-In Appreciation (Accumulated Stockholders'
Stock Stock Capital (Depreciation) Deficit) Equity
--------- ------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 (56,600 shares) $ -- $56,600 $20,173,463 $319,655 $ 7,459,733 $28,009,451
Net income 4,497,473 4,497,473
Change in unrealized depreciation of fixed
maturity securities available for sale, net
of deferred taxes of $142,000 (583,185) (583,185)
Original issue discount on subordinated
notes payable 800,000 800,000
--------- ------- ----------- -------- ----------- -----------
Balance, December 31, 1994 -- 56,600 20,973,463 (263,530) 11,957,206 32,723,739
Net income 6,122,661 6,122,661
Change in unrealized appreciation
of fixed maturity securities available
for sale, net of deferred taxes of $29,700 205,826 205,826
--------- ------- ----------- -------- ----------- -----------
Balance, December 31, 1995 -- 56,600 20,973,463 (57,704) 18,079,867 39,052,226
Net loss (20,526,898) (20,526,898)
Change in unrealized appreciation of fixed
maturity securities available for sale, net
of deferred taxes of ($19,926) 96,473 96,473
Difference in carrying amount and
redemption amount of mandatory
redeemable preferred stock at date of
issuance 1,500,000 1,500,000
Accumulated accretion of difference in
carrying amount and redemption amount
of mandatory redeemable preferred stock (25,000) (25,000)
Dividends on mandatory redeemable
preferred stock (183,904) (183,904)
--------- ------- ----------- -------- ----------- -----------
Balance, December 31, 1996 $ -- $56,600 $22,473,463 $ 38,769 ($2,655,935) $19,912,897
========= ======= =========== ======== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating Activities
Net income (loss) ($20,526,898) $6,122,661 $4,497,473
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest (benefit) expense (163,104) 57,507 80,500
Net realized capital losses (gains) (4,969) (269,027) 99,024
Depreciation and amortization 869,682 368,810 330,405
Write down of surplus notes receivable 2,620,000 -- --
Decrease (increase) in assets, net of the effects of
acquisitions:
Premiums receivable (4,218,513) (8,160,846) (732,555)
Reinsurance recoverable (46,610,385) (15,530,213) (15,864,908)
Prepaid reinsurance premium (26,291,849) (7,312,864) (1,728,478)
Salvage and subrogation receivable (675,230) (905,179) (729,233)
Deferred policy acquisition costs 3,969,745 (2,600,000) (917,872)
Income taxes recoverable (5,079,475) (1,728,935) (342,272)
Deferred tax assets, net (8,258,538) (161,895) 203,500
Other assets (1,987,715) 1,157,911 (479,315)
Increase (decrease) in liabilities, net of the effects of
acquisitions:
Unearned premiums 14,571,461 15,423,071 3,089,065
Insurance losses and loss adjustment expense
reserves 84,165,044 32,784,755 17,471,757
Reinsurance balance payable 14,185,090 (1,452,335) (994,606)
Accrued expenses and other liabilities (2,367,607) (1,157,826) 817,876
------------ ----------- -----------
Net cash provided by operating activities 4,196,749 16,635,595 4,800,361
------------ ----------- -----------
Investing Activities
Investment in mutual insurance company -- -- (4,000,000)
Purchases of investment securities, net (30,823,096) (31,116,252) (34,804,166)
Proceeds from sale of fixed maturity investments,
available for sale -- 8,118,284 18,008,766
Proceeds from maturity of fixed maturity investments,
available for sale 6,829,955 80,682 --
Proceeds from maturity of fixed maturity investments,
held-to-maturity 11,281,617 8,077,258 4,537,202
Net cash acquired from purchase of Merchant Bakers -- 2,803,758 --
Purchase of Pinnacle, net of cash acquired -- -- (594,026)
Purchase of surplus notes (470,000) -- --
Proceeds from sale of furniture and equipment -- -- 154,663
Purchases of furniture and equipment (1,606,581) (1,344,754) (2,060,861)
------------ ----------- -----------
Net cash used in investing activities (14,788,105) (13,381,024) (18,758,422)
------------- ------------ ------------
Financing Activities
Proceeds from (repayment of) notes receivable, used for
premium finance, net 305,447 (1,853,591) (572,276)
Proceeds from issuance of mandatory redeemable preferred
stock, net of issuance costs 9,486,712 -- --
Payment of cash dividends on preferred stock (183,904) -- --
Proceeds from (repayment) of notes payable bank and
other obligations 3,625,000 2,000,000 --
Proceeds from subordinated notes and other obligations,
net -- -- 16,290,861
Purchase of minority owned shares (343,040) (39,770) (54,043)
------------ ----------- -----------
Net cash provided by financing activities 12,890,215 106,639 15,664,542
------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents 2,298,859 3,361,210 1,706,481
Cash and cash equivalents, beginning of period 9,544,021 6,182,811 4,476,330
------------ ----------- -----------
Cash and cash equivalents, end of period $11,842,880 $9,544,021 $6,182,811
============ =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid or (recovered) during the year for taxes on
income ($1,068,144) $3,607,701 $2,600,000
============ =========== ===========
Cash paid during the year for interest $2,675,409 $2,549,430 $ --
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accounts of Home State Holdings, Inc. ("Holdings") and all of its
wholly-owned subsidiaries (the "Company"), principally Home State Insurance
Company, ("Home State"), New York Merchant Bakers Insurance Company, ("Merchant
Bakers"), Pinnacle Insurance Company ("Pinnacle"), Westbrook Insurance Company
("Westbrook") and majority-owned Quaker City Insurance Company, ("Quaker City"),
are included in the accompanying consolidated financial statements. Minority
interest represents the non-Company owned interest in Quaker City Holdings, Inc.
All material intercompany accounts and transactions have been eliminated in
consolidation.
Holdings is a property and casualty insurance holding company primarily
engaged through its subsidiaries in providing personal and commercial auto
insurance in New Jersey, New York, Pennsylvania, Delaware, Connecticut, West
Virginia, Florida and Georgia. The Company writes standard and preferred
personal auto insurance and does not write non-standard personal auto insurance.
The Company's commercial auto business is focused on providing coverage for
public transportation (predominantly school buses), luxury limousines and local
charter buses. It does not insure long-haul trucking operations, taxi cabs or
similar livery operations. The Company markets its insurance products through a
network of more than 1,000 independent agencies. Of these independent agencies,
approximately 600 have met special qualifying standards and have been designated
as "preferred agencies." Preferred agencies may submit new business to the
Company and are paid a higher commission, while the other independent agencies
can only renew existing policies.
During 1996, two insurance pooling arrangements were created to
facilitate the Company's growth and maximize utilization of its capital and
surplus. The first, the Home State National Pool (the "National Pool"), consists
of Home State, Quaker City, Pinnacle and Westbrook. The second, the Home State
New York Pool (the "New York Pool"), consists of Merchant Bakers and Home Mutual
Insurance Company of Binghamton, New York ("Home Mutual"), a managed affiliate.
Under the pooling arrangements, the participants share premiums, losses and
underwriting expenses on a pro-rata basis relative to their respective
interests. The New York Pool arrangement provides for an 85% / 15% sharing of
the combined net underwriting results between Merchant Bakers and Home Mutual,
respectively.
During 1996, the Company engaged in insurance-related financial services
through three subsidiaries. The financial services group is comprised of Aspen
Intermediaries which provides reinsurance brokerage services; Tower Hill, Inc.
which provides premium finance services; and HSIM L.L.C. (which in 1996
succeeded to the business of Home State Insurance Management, Inc.) which
provides certain administrative services.
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles ("GAAP"). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Acquisitions
On October 6, 1994, the Company invested $4.0 million in Westbrook, a
wholly-owned property and casualty insurer domiciled in Connecticut.
F-7
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On November 9, 1994, the Company acquired all of the common stock of
Pinnacle, a Georgia domiciled property and casualty insurer, for approximately
$1.1 million in cash. Subsequent to the acquisition, the Company made an
additional capital contribution of $4.8 million in Pinnacle to further enhance
its capital base in preparation for an expansion of its underwriting operations.
The acquisition has been accounted for as a purchase, and accordingly, the net
assets and results of operations of Pinnacle are included in the financial
statements beginning November 9, 1994. A portion of the purchase price has been
allocated to the assets and liabilities of Pinnacle based on their respective
fair values. The purchase price exceeded the fair values allocated to Pinnacle's
net assets by $284,000, which during 1995 was included in "excess of fair value
over cost of business acquired" on the Consolidated Balance Sheets and was being
amortized over a 5-year period. The remaining excess of cost over fair value was
fully charged to operations during 1996. Net premiums earned and net income of
Pinnacle for the period November 9, 1994 through December 31, 1994 were $396,000
and $160,000, respectively.
On March 2, 1995, the New York State Insurance Department (the
"Superintendent") approved the acquisition of control of Merchant Bakers (which
had been managed by the Company since December 28, 1992) by the Company pursuant
to a Plan of Conversion (the "Plan"), converting Merchant Bakers from a mutual
to a stock insurance company. The closing of this transaction occurred on March
31, 1995, and has been accounted for as a purchase, and accordingly, the net
assets and results of operations of Merchant Bakers are included in the
financial statements beginning March 31, 1995. Net premiums earned and net
income of Merchant Bakers for the period April 1, 1995 through December 31, 1995
were $14.9 million and $2.4 million, respectively.
A portion of the purchase price has been allocated to the assets and
liabilities of Merchant Bakers based on their respective fair values. The Plan
provided for a distribution of $642,000 by Merchant Bakers' to its eligible
policy holders in satisfaction of their equitable interests in Merchant Bakers.
The Company, at the date of acquisition, had $6.0 million in surplus notes
issued by Merchant Bakers and accrued interest related to such surplus notes of
$439,000. Two million dollars of these notes were converted to Merchant Bakers
common stock and additional paid-in capital on March 31, 1995. The remaining
$4.0 million of notes and the accrued interest, which have been eliminated in
consolidation, will be converted to additional paid-in capital upon approval by
the Superintendent. The fair value of net assets acquired exceeded the cost by
$3.6 million, which has been included in "excess of fair value over cost of
business acquired" on the consolidated balance sheets, and was being amortized
straight line over a five year period.
During the second quarter of 1996, the Company reviewed the excess of
fair value of acquired net assets over cost, after considering the effects of
significantly increased provisions for net loss and LAE reserves recorded during
that quarter. As a result of this review, coupled with significant provisions
for net loss and LAE reserves during the fourth quarter of 1996, the Company
reduced the amortization period of the excess from five years to two years.
Accordingly, the remaining balance as of December 31, 1995 of $3.1 million
($0.55 per share), was amortized and recognized in earnings during 1996 as a
reduction to other expenses.
The following unaudited pro forma information shows the results of the
Company's operations as if the purchase of Pinnacle and Merchant Bakers had been
made as of January 1, 1994.
1995 1994
---- ----
Net premiums earned $63,221,605 $44,618,619
Net income $7,725,502 $6,132,342
Net income per common share $1.36 $1.08
F-8
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The unaudited pro forma results of Pinnacle's and Merchant Baker's
operations are not necessarily indicative of the actual results of operations
that would have occurred had the purchase actually been made at the beginning of
the respective periods, or of results which may occur in the future.
Insurance Premiums
Premium revenues are reported as earned over the applicable policy
period using the daily pro-rata method for personal policies and the mid-month
method for commercial policies. Unearned premiums represent the portion of net
premiums written relating to the unexpired terms of coverage.
A significant portion of the Company's revenues are derived from
business produced by a relatively small number of independent agencies. Six
independent agencies submitted an aggregate $70 million of commercial auto
business in 1996, which represented approximately 83% of total commercial auto
business. Future profitability and growth are dependent upon the Company's
ability to retain its current network of independent agencies and its ability to
attract additional experienced independent agencies. The Company performs
ongoing risk and credit evaluations of its agents and insureds. The majority of
the Company's business is written in New Jersey, New York and Pennsylvania.
Insurance Losses and Loss Adjustment Expense Reserves
Liabilities for insurance losses and loss adjustment expenses include
case estimates for claims reported, actuarial estimates for claims incurred but
not reported ("IBNR"), and estimated expenses for claims investigation and
adjustment. Losses and loss adjustment expenses included in the statement of
income are reflected net of estimated salvage and subrogation for liability
claims. Physical damage salvage and subrogation is reported separately on the
balance sheet.
The loss reserve estimates have been calculated taking into
consideration that the Company has been writing substantially increasing volume
of personal and commercial auto liability business during the last three years
and that in 1995 and 1996 the Company experienced a substantial increase in the
volume of claims reported and change in the rate at which claims are closed.
Because of the absence of sufficient historical loss development data, the IBNR
provision is calculated by reference to industry loss development factors,
adjusted for the company experience where appropriate. The IBNR provision was
estimated using both paid and incurred loss development methods given the
significant changes in the level of case basis reserves at December 31, 1996.
Estimates are continually reviewed and adjusted as necessary; changes in
estimates, if any, are reflected in operations in the period in which they are
determined.
Reinsurance
In the normal course of business, the Company seeks to reduce the loss
that may arise from catastrophes and other events that cause unfavorable
underwriting results by reinsuring certain levels of risk in various areas of
exposure with reinsurers. The Company's reinsurance intermediary performs due
diligence to ensure that reinsurers with whom the Company has reinsurance
contracts are financially able to perform under the terms of the contract.
The Company accounts for its reinsurance in accordance with the
provisions of Statement of Financial Accounting Standard No. 113, "Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts"
("SFAS 113"). Reinsurance recoverable includes ceded recoverables on paid and
unpaid losses. Prepaid reinsurance premiums represents ceded unearned premiums.
The Company receives profit sharing from reinsurers based upon the
results of the Company's ceded risks. These estimated recoveries are accrued and
included in the statement of income. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policy.
F-9
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The profit sharing recognized is refundable should the reinsurers
experience adverse loss development, however, any such retroactive adjustments
cannot exceed the amount of recoveries on reinsurance premiums previously
recognized by the Company. Included in reinsurance profit sharing in the
statement of operations for the year ended December 31, 1996 is profit sharing
accrued for policy year 1996 of approximately $9.0 million net of return profit
sharing on 1995 and prior policy years of approximately $11.4 million. The
Company had a receivable from reinsurers at December 31, 1996 of approximately
$9.0 million which is included in reinsurance balances payable.
Investments
The Company accounts for its investments in accordance with Statement
of Financial Accounting Standard No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115").
Investments in fixed maturities classified as "available for sale" are
carried at market value. The net unrealized appreciation (depreciation) on
available for sale investments is recognized as a separate component of
stockholders' equity, net of deferred income taxes. Such investments are carried
at market because, although the Company may have the ability to hold these
investments to maturity, its present intent is to hold these securities for
indefinite periods of time, disposing of securities as its investment strategy
changes.
Investments in fixed maturities classified as "held-to-maturity" are
carried at amortized cost.
Common stocks are carried at market value based on quoted market
prices.
Realized investment gains or losses are determined on a specific
identification basis and are included in net income. Investment income is
recorded as earned. Premiums or discounts at acquisition are amortized over the
life of the security. This amortization is included in investment income.
In December 1995, FASB issued "Special Report, A Guide to the
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities." Among other things, this guide provided for a
transition provision permitting a one-time transfer without prejudice of debt
securities from the held to maturity classification to the available for sale
classification. In December 1995, fixed maturities classified as
held-to-maturity with an aggregate amortized cost of $10,681,915 and unrealized
appreciation of $131,569 were reclassified as available-for-sale.
Short-term investments consisting of certificates of deposit with
original maturity greater than 90 days and less than one year are carried at
cost, which approximates market value.
Furniture and Equipment
Furniture and equipment, which includes computer hardware, software and
leasehold improvements is carried at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range from 5 to 10 years.
Income Taxes
The Company files a consolidated federal tax return with all of its
subsidiaries, except for Quaker City, which files a consolidated return with its
parent, Quaker City Holdings, Inc.
The Company utilizes the asset and liability method of accounting for
income taxes as required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under this method, deferred income taxes
(benefits) are provided for temporary differences for the expected future tax
consequences of events that have been recognized for financial reporting
purposes or federal income tax purposes.
F-10
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Policy Acquisition Costs
Policy acquisition costs, which vary with and are primarily related to
the production of business, are comprised of commissions, premium taxes and
underwriting expenses, net of ceding commissions and are deferred and amortized
over the period which the related premiums are earned. Amounts deferred are
calculated using loss and loss expense ratios that are consistent with loss
reserving estimates for each of the Company's pooling arrangements. Effective
October 1, 1996, the Company changed its policy and considers anticipated
investment income in determining the amount of acquisition costs that can be
deferred.
Mandatory Redeemable Preferred Stock
Mandatory redeemable preferred stock consists of 10,000 shares of
Series "A" Cumulative Voting Preferred 7.5% Stock (the "Preferred Stock") and is
carried at its estimated fair value of $8,500,000 as of October 4, 1996, the
date of issuance, plus accumulated accretion of the difference between fair
market value and the redemption amount of $10,000,000. Such difference is being
accreted using the interest method over 14 years (to October 4, 2010, the date
of redemption) with a corresponding charge to retained earnings. Each share of
Preferred Stock carries with it, detachable Series "A" Warrants to purchase 140
shares of the Company's common stock for $9.50 per share at any time until
October 4, 2003.
Estimated fair value of the Preferred Stock was determined by taking
into consideration, among other things, the value assigned to the detachable
warrants of $1.5 million and a comparison of debt offerings of similar size and
structure to that of the Company's offering. The fair value of the warrants is
included in additional paid-in capital.
Surplus Notes Receivable
The Company holds surplus notes in Home Mutual which are stated at
cost, net of a valuation allowance. The demand notes, which have no stated
maturity date, bear interest at prime to prime plus 1% and New York Department
of Insurance approval is required before any interest and principal can be
repaid. Such approval has not been made and accordingly, the Company does not
accrue interest on these notes.
The Company is accounting for the surplus notes in accordance with the
provisions of Statement of Financial Accounting Standard No. 114 ("SFAS 114"),
"Accounting by Creditors for Impairment of a Loan" which requires that impaired
loans be measured based on the present value of expected future cash flows. As a
result of operating losses and reductions in Home Mutual's statutory based
surplus occurring in 1996, a determination of net realizable value of the
surplus notes was estimated to be $2.4 million, resulting in a valuation
allowance of $2.6 million which has been charged to operations and is included
in other expenses.
Financial Services Group Income
Included in financial services group income are brokerage fees received
in connection with the placement of the Company's reinsurance programs with
third party reinsurers. Brokerage fees, which amounted to $2.1 million, $1.6
million and $1.1 million for the years ended December 31, 1996, 1995 and 1994,
respectively, are based on ceded premiums. Also included in financial services
group income are fees earned for management services performed on behalf of Home
Mutual which are recognized when earned. These fees amounted to $775,000 and
$1.0 million for the years ended December 31, 1995 and 1994, respectively. As a
result of operating losses and reductions in Home Mutual's statutory surplus, no
such fees were recognized in 1996. Tower Hill received $1.5 million in financing
income in 1996 and $604,000 in 1995. Tower Hill had net financing receivables
outstanding of $1.7 million and $1.9 million at December 31, 1996 and 1995,
respectively, which are included in other assets in the consolidated balance
sheet.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers
certificates of deposit in banks with original maturities of 90 days or less to
be cash equivalents.
F-11
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplementary information for the consolidated statement of cash flows
relating to the acquisition of Merchant Bakers and Pinnacle is set forth below:
<TABLE>
<CAPTION>
Merchant Bakers Pinnacle
1995 1994
--------------- ---------
<S> <C> <C>
Fair value of assets acquired $60,518,286 $5,876,031
Liabilities assumed 60,518,286 4,793,712
----------- ----------
Cash paid -- 1,082,319
Less cash acquired (2,803,758) (488,293)
---------- ---------
Net cash paid for (acquired in) acquisition ($2,803,758) $594,026
========== =========
</TABLE>
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed based upon the weighted
average number of common shares and common share equivalents (detachable
warrants and options to purchase common stock) outstanding during the year and
after adjustment to net income (loss) for dividends on mandatory redeemable
preferred stock and the associated accretion of the difference in the carrying
amount and redemption amount of such preferred stock.
Stock Incentive Plan
In October 1995, SFAS issued Statement of Financial Accounting
Standards No. 123, "Accounting for Awards of Stock-Based Compensation to
Employees" ("SFAS 123"). SFAS 123 established accounting and reporting standards
for stock-based employee compensation plans. SFAS 123 provides employers a
choice: Adopt SFAS 123 accounting standards for all stock compensation
arrangements which requires the recognition of expense for the fair value of
virtually all stock compensation awards; or, continue to account for stock
options and other forms of stock compensation under APB No. 25 "Accounting for
Stock Issued to Employees" while also providing the disclosure required under
SFAS 123. During 1996, the Company adopted only the disclosure requirements of
SFAS 123 for its stock incentive plan.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earning per Share" (SFAS
128"). For the years ended December 31, 1996, 1995 and 1994 the Company has
followed the standards established under APB No. 15 for computing and presenting
earnings per share ("EPS"). SFAS 128 establishes standards for computing and
presenting EPS and applies to entities with publicly held common stock or
potential common stock. SFAS 128 replaces primary EPS, as defined in APB No. 15,
with basic EPS. Additionally, SFAS 128 requires dual presentation of basic and
diluted EPS on the face of the statement of operations for all entities with
complex capital structures. SFAS also requires certain disclosures including: 1)
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation; 2) the effect
given to preferred dividends in arriving at income available to common
shareholders and; 3) securities that could potentially dilute basic EPS in the
future that were not included in the computation of diluted EPS because to do so
would have been anti-dilutive for the period(s) presented.
SFAS 128 is effective for financial statements issued for periods
ending after December 15, 1997 and requires restatement of all prior period EPS
data presented.
The Company has calculated basic and diluted EPS, as defined in SFAS
128 and interpreted by the Company based on information currently available, and
has determined that such amounts do not differ materially from primary EPS,
which is reflected in the Company's statement of operations, for the years
presented.
Reclassifications
Certain amounts in prior year financial statements have been
reclassified to conform with the 1996 presentation.
F-12
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Investments
The amortized cost, gross unrealized gains and losses, and estimated
market value of investments in fixed maturity securities held-to-maturity and
available for sale at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
Fixed Maturities:
<S> <C> <C> <C> <C>
Held-To-Maturity Securities:
U.S. Government obligations $ 2,242,429 $ 8,862 -- $ 2,251,291
States, municipalities and
political subdivisions 49,025,064 744,239 9,534 49,759,769
Corporate securities 19,758,048 172,690 137,051 19,793,687
----------- -------- -------- -----------
Total 71,025,541 925,791 146,585 71,804,747
----------- -------- -------- -----------
Available for Sale Securities:
U.S. Government Obligations 2,057,754 11,380 10,608 2,058,526
States, municipalities and
political subdivisions 4,623,105 22,350 905 4,644,550
Corporate securities 1,889,629 11 10,115 1,879,525
----------- -------- -------- -----------
Total 8,570,488 33,741 21,628 8,582,601
----------- -------- -------- -----------
Short term investments 11,359,406 -- -- 11,359,406
----------- -------- -------- -----------
Total investments $90,955,435 $959,532 $168,213 $91,746,754
=========== ======== ======== ===========
</TABLE>
The cost, market value and unrealized gain on common stocks was
$360,496, $407,079 and $46,583, respectively, at December 31, 1996. There were
no common stocks held by the Company at December 31, 1995.
F-13
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The amortized cost, gross unrealized gains and losses, and estimated
market value of investments in fixed maturity securities held-to-maturity and
available for sale at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed Maturities:
Held-To-Maturity Securities:
U.S. Government obligations $11,506,159 $70,198 $ -- $11,576,357
States, municipalities and
political subdivisions 46,664,995 1,024,461 80,355 47,609,101
Corporate securities 6,169,069 124,916 6,868 6,287,117
----------- ---------- -------- -----------
Total 64,340,223 1,219,575 87,223 65,472,575
----------- ---------- -------- -----------
Available for Sale Securities:
U.S. Government Obligations 2,746,424 105,232 6,217 2,845,439
States, municipalities and
political subdivisions 8,539,036 52,771 14,104 8,577,703
Corporate securities 100,000 -- -- 100,000
----------- ---------- -------- -----------
Total 11,385,460 158,003 20,321 11,523,142
----------- ---------- -------- -----------
Short term investments 3,157,274 -- -- 3,157,274
----------- ---------- -------- -----------
Total investments $78,882,957 $1,377,578 $107,544 $80,152,991
=========== ========== ======== ===========
</TABLE>
As a result of the transfer of certain securities from available for
sale to held-to-maturity in 1994, the amortized cost for those securities
classified as held-to-maturity in the table above will differ from that reported
in the Consolidated Balance Sheet by $225,086 (which represents the remaining
unamortized, unrealized loss as of December 31, 1995). Such balance was fully
amortized during 1996.
The amortized cost and estimated market value of fixed maturity
securities at December 31, 1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------------ -----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Due within one year $2,591,401 $2,595,070 $ 7,393,722 $ 7,411,985
Due after one year but within five years 4,679,573 4,688,006 51,571,050 52,056,974
Due after five years but within ten years 1,299,514 1,299,525 11,419,311 11,676,514
Due after ten years -- -- 641,458 659,274
---------- ---------- ----------- ----------
Total $8,570,488 $8,582,601 $71,025,541 $71,804,747
========== ========== =========== ===========
</TABLE>
F-14
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The change in unrealized gains (losses) on fixed maturity investments
available for sale and realized gains and losses are summarized below:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Unrealized gains (losses) $99,517 $318,126 $ (897,185)
======= ======== ==========
Gross realized gains $11,386 $324,936 $7,011
Gross realized losses (6,417) (55,909) (106,035)
------- -------- ----------
Net realized capital gains (losses) $4,969 $269,027 $ (99,024)
======= ======== ==========
</TABLE>
The change in unrealized gains on common stocks for the year ended
December 31, 1996 was $46,583. There were no realized gains on common stocks in
1996 and no common stocks were held by the Company during the years ended
December 31, 1995 and 1994.
Net investment income is derived from the following sources:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $4,183,799 $3,177,335 $1,490,774
Short term investments and cash 936,171 503,060 539,750
----------- ----------- -----------
Gross investment income 5,119,970 3,680,395 2,030,524
Investment expenses (472,776) (221,703) (95,090)
---------- ---------- -----------
Net investment income $4,647,194 $3,458,692 $1,935,434
=========== =========== ==========
</TABLE>
F-15
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
None of the Company's investments were in default or non-income
producing at December 31, 1996. At December 31, 1996 substantially all
securities carried an S & P rating of A or better.
3. Statutory Deposits
Cash in the amount of $766,061 and $1,601,275 and securities with a
carrying value of $4,073,493 and $3,319,047 were deposited by the Company under
requirements of regulatory authorities as of December 31, 1996 and 1995,
respectively.
4. Deferred Policy Acquisition Costs
The following reflects the policy acquisition costs deferred for
amortization against future income and the related amortization charged to
income, excluding certain amounts deferred and amortized in the same period:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Balance at January 1 $ 7,086,287 $ 3,735,726 $2,617,854
Balance assumed in respect of Merchant Bakers
acquisition -- 750,561 --
Acquisition costs incurred 21,530,343 14,021,173 8,362,053
Amortized to expense (25,500,088) (11,421,173) (7,244,181)
----------- ----------- ----------
Balance at December 31 $ 3,116,542 $ 7,086,287 $3,735,726
=========== =========== ==========
</TABLE>
Effective October 1, 1996, the Company changed its method of accounting
for deferred policy acquisition costs to include anticipated investment income
in determining the amount of acquisition costs that can be deferred. The effect
of the change was to increase deferred policy acquisition costs and reduce the
loss before income taxes and minority interest by approximately $1.4 million as
of and for the year ended December 31, 1996.
5. Surplus Notes Receivable
In November 1993, the Company assumed the administration of Home Mutual
and purchased $3.0 million of Home Mutual's surplus notes. At this time, the
Company also loaned $1.5 million to Home Mutual in the form of a subordinated
note. During 1996, the Company purchased an additional $470,000 surplus note.
The notes bear interest at rates from prime to prime plus one. However, all
principal and interest payments are subject to the prior approval of the
Insurance Department of the State of New York. The Company has not received and
does not accrue interest income on these notes (which amounted to $3.5 million
at December 31, 1996). As discussed in Note 1, a valuation allowance of $2.62
million has been established against the aggregate $4.97 million cost of these
surplus notes. This was the result of operating losses incurred by Home Mutual
in 1996. Home Mutual's statutory audit report for the year ended December 31,
1995 included a material uncertainty in connection with Home Mutual's ability to
continue as a going concern. Home Mutual had statutory surplus of $1.55 million
as of December 31, 1996 and incurred a net statutory loss of $1.9 million for
the year ended December 31, 1996. Home Mutual's reported surplus at December 31,
1996 is below authorized control level risk based capital by approximately
$420,000.
F-16
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company, through HSIM L.L.C., has a management contract with Home
Mutual, whereby the Company provides, on a fee basis, various services including
accounting, claims, underwriting, management information systems and financial
management services for Home Mutual. The Company's revenues include management
fee income of $775,000 and $1.0 million for 1995 and 1994, respectively. No such
fees were recognized in 1996. Certain Home State officers and directors also
serve as officers and directors of Home Mutual.
On October 29, 1996 an arbitration commenced between New York Central
Mutual Insurance Company ("NYCM") against Home Mutual. NYCM seeks an award of
$1,200,000 against Home Mutual for payment to NYCM of amounts it alleges are due
to it by reason of claims for reinsurance payments under two excess of loss
reinsurance treaties. The claim arises out of a loss transfer agreement dated
October 5, 1993 between NYCM and Home Mutual (the "Agreement"), pursuant to
which NYCM assumed liability for all claims against Home Mutual relating to
occurrences on or prior to September 30, 1993. In consideration therefore, Home
Mutual assigned to NYCM all of Home Mutual's rights under its reinsurance
agreements relating to such claims, including the excess of loss treaties which
provided that as losses and loss adjustment expense were actually paid within
the layer covered by the treaties, the ceded premium payable would be increased,
dollar for dollar, until the total ceded premium payable with respect to such
treaties aggregated 10% of the net premium written. In practice, the result was
that no reinsurance recoverables would be paid under the excess of loss treaties
until paid losses exceeded 10% of net premium written. NYCM claims that
subsequent to September 30, 1993 it has paid approximately $1 million in losses
and loss adjustment expense relating to the layer covered by the Excess of Loss
Treaties which has not been reimbursed since the aggregate of 10% of net written
premium has not been reached. It alleges, in effect, that in order for NYCM to
have the benefit of the Excess of Loss Treaties, Home Mutual should make these
payments. Since these losses occurred prior to September 30, 1993, Home Mutual
believes they are the responsibility of NYCM under the Agreement. Home Mutual
has denied liability. While the result of the arbitration cannot be predicted
with certainty, management believes that it is not probable that this
arbitration will be decided against Home Mutual.
6. Notes and Other Obligations Payable
On October 3, 1994, the Company received net proceeds of $16.3 million
from the private placement of $17.0 million of ten-year subordinated notes which
bear an interest rate of 11.5% per annum and have detachable common stock
warrants entitling the holders to purchase an aggregate of 255,000 shares of
common stock at $13.80 per share (which was reduced to $9.52 in 1996 in
consideration for certain modifications to the terms of the notes). These
warrants were assigned an estimated fair value of $800,000 at the time of
issuance and have been recorded as a discount on the issuance of the notes and
as an addition to paid-in capital. Costs incurred in connection with issuance of
the notes, amounted to approximately $710,000 and are capitalized and included
in other assets. Such deferred costs and the discount are being amortized using
the effective yield method over the life of the notes. At December 31, 1996, the
Company was in compliance with debt covenants related to subordinated notes.
In September, 1995, the Company borrowed $2 million under a $7.5
million revolving credit facility it maintained with a bank and infused the
proceeds as additional capital and surplus into its New Jersey insurance
subsidiary. The credit line bore interest at prime which approximated 8.5% at
December 31, 1995 and had a maturity date of September 29, 1996. Interest was
payable on a monthly basis. In February 1996, such line of credit was replaced
by a $13.0 million line of credit on behalf of Tower Hill and a $5.0 million
line of credit for use by the Company, of which $625,000 and $5,000,000 was
outstanding and $12,375,000 and $0 was available, respectively, as of December
31, 1996. The credit line bore interest at the bank's LIBOR rate plus 2% which
approximated 8.00% at December 31, 1996 and on a weighted average basis was 8%
during 1996. Interest is payable on a monthly basis. The line of credit
agreement is collateralized by the premium finance receivables of Tower Hill and
certain assets of the Company's financial services group.
F-17
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The agreement contains certain covenants, the more restrictive of which
require the maintenance of certain statutory net premiums written to surplus
ratios, minimum debt service coverage ratios and minimum consolidated equity
computed under GAAP. The Company obtained waivers from the bank on March 31,
1997 for violations existing at December 31, 1996 of certain of these covenants.
In addition, the line of credit agreement was amended and availability was
eliminated for the Company's premium finance operations and was reduced to $4.0
million for the holding Company (upon repayment of $1.0 million by the Company
in March, 1997) and the maturity date was extended to February 28, 1998. The
amendments provide for an increase in interest rates, monthly repayments of
$100,000 and prepayments of the net proceeds from any sale of a subsidiary or a
subsidiary's assets to further reduce the outstanding line in addition to the
requirement that the Company maintain consolidated GAAP equity of at least the
level at least $28.5 million.
7. Reinsurance
The Company has reinsured certain portions of its personal and
commercial insurance coverages to limit the amount of losses on claims. The
Company is not, however, relieved of its primary obligation to the policyholder
in a reinsurance transaction. The Company is contingently liable for the ceded
risks to the extent that reinsuring companies are unable to meet their
obligations on these agreements. The Company evaluates the financial condition
of its reinsurers and attempts to minimize its exposure to significant losses
from reinsurer insolvencies by contracting with highly rated reinsurers who are
all rated A- or better by A.M. Best.
The Company has entered into quota share agreements for its physical
damage business which provides that the Company cedes on any one vehicle 40% of
the first $85,000 (policy limits) and 40% of the first $125,000 (policy limits)
for personal and commercial losses, respectively. In addition, the Company is
reinsured in excess of $500,000, not to exceed $20,000,000 on each and every
loss occurrence under a catastrophic excess of loss agreement which covers the
maximum amount of coverage written by the Company.
The Company has entered into excess of loss reinsurance agreements
which have the effect of limiting its ultimate liability retained on a single
loss to $40,000 for 1994 and 1995 and $50,000 for 1996 for its commercial and
private passenger liability losses. The excess of loss treaties reinsure the
Company's commercial and private passenger automobile liability policies to
their maximum written limits ($5,000,000 and $700,000, respectively, per loss
occurrence).
In an effort to increase the available statutory surplus in the
Company's National Pool, the Company effected an unearned premium reserve quota
share reinsurance treaty at December 31, 1996. Under the terms of the treaty,
$21.9 million of unearned premium reserve was ceded, which when adjusted for
ceding commissions earned by the Company, increased the available statutory
surplus of the National Pool by $7.1 million. There was no impact on GAAP equity
or net income as a result of this transaction.
F-18
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The effect of reinsurance on premiums written and earned is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Premiums Written
Direct and Assumed $207,367,102 $124,796,731 $58,237,004
Ceded (117,407,437) (57,770,169) (26,990,541)
------------ ------------ -----------
Net of Reinsurance $ 89,959,665 $ 67,026,562 $31,246,463
============ ============ ===========
Premiums Earned
Direct and Assumed $188,267,549 $109,370,359 $54,811,984
Ceded (86,587,496) (50,455,273) (24,917,472)
------------ ------------ -----------
Net of Reinsurance $101,680,053 $58,915,086 $29,894,512
============ ============ ===========
</TABLE>
Included in the 1996 assumed written premium and ceded written premium
is $25,367,400 and $12,362,462, respectively, resulting from the pooling
arrangement with Home Mutual. Included in the 1996 assumed earned premium and
ceded earned premium is $16,295,632 and $6,335,556, respectively, resulting from
the pooling arrangement with Home Mutual.
Reinsurance recoveries which reduced insurance losses and loss
adjustment expenses incurred amounted to $68,915,523, $34,475,434 and
$15,494,408, respectively for the years ended December 31, 1996, 1995 and 1994.
Included in the 1996 reinsurance recoveries is $6,758,780 resulting from the
pooling arrangement with Home Mutual.
Underwriting expenses in the accompanying consolidated statement of
income have been reduced by reinsurance ceding commissions of $24,925,480,
$18,665,189 and $8,461,876 for the years ended December 31, 1996, 1995 and 1994,
respectively. Included in the 1996 reinsurance ceding commissions is $77,190
relating to the pooling arrangement with Home Mutual.
Supplemental information for gross unearned premiums and loss reserves
net of ceded reinsurance at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996
----
As Net of
Reported Reinsurance
---------- -------------
<S> <C> <C>
Reinsurance recoverable $97,191,184
Prepaid reinsurance premium 61,778,835
Unearned premiums (85,862,693) ($24,083,858)
Insurance losses and loss adjustment expenses (179,955,063) (82,763,879)
</TABLE>
<TABLE>
<CAPTION>
1995
----
As Net of
Reported Reinsurance
---------- -------------
<S> <C> <C>
Reinsurance recoverable $50,580,799
Prepaid reinsurance premium 35,486,986
Unearned premiums (71,291,232) $35,804,246
Insurance losses and loss adjustment expenses (95,790,019) 45,209,220
</TABLE>
F-19
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Included in reinsurance recoverable at December 31, 1996 of $97.2
million is $1.3 million in reinsurance recoverable on paid losses and loss
adjustment expenses, $51.5 million in reinsurance recoverables on case reserves
and $44.4 million in reinsurance recoverable on IBNR. The balance at December
31, 1995 of $50.6 million consisted of $1.2 million in reinsurance recoverable
on paid losses and loss adjustment expenses, $16.3 million in reinsurance
recoverables on unpaid losses and loss adjustment expenses and $33.1 million in
reinsurance recoverable on IBNR.
8. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107) requires disclosure of fair
value information about financial instruments for which it is practicable to
estimate such fair value. SFAS 107 excludes certain financial instruments,
including those related to insurance contracts.
The following methods and assumptions were used by the Company in
estimating the fair value of the financial instruments presented: (i) Cash and
cash equivalents and short-term investments. The carrying amounts reported for
these instruments approximate fair values. (ii) Fixed maturity securities. Fair
values for fixed maturity securities carried at amortized cost or at market
value were generally based upon quoted market prices. For certain fixed maturity
securities for which market prices were not readily available, fair values were
estimated using values obtained from independent pricing services. (iii) Surplus
notes receivable. The carrying amounts reported approximate the estimated fair
value of the notes and were determined based on the net present value of
estimated future cash flows. (iv) Subordinated notes payable. The carrying value
and the fair value of these obligations amounted to $16.4 million and $18.0
million at December 31, 1996, respectively. The fair value was estimated using
discounted cash flow calculations based upon an estimate of the Company's
current borrowing rates for similar types of borrowings with maturities
consistent with those for the debt being valued. (v) Notes payable bank. The
carrying amount of these short term borrowings approximates fair value.
(vi) Mandatory redeemable preferred stock. The carrying amount represents
estimated fair value at the date of issuance determined by taking into
consideration, among other things, the value assigned to the detachable warrants
and a comparison of debt offerings of similar size and stature. (vii) Common
stocks are carried at quoted market prices.
F-20
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Insurance Loss and Loss Adjustment Expense Reserves
The following table provides a reconciliation of the beginning and
ending reserve balances for unpaid loss and loss adjustment expense reserves,
net of reinsurance:
<TABLE>
<CAPTION>
(in thousands)
Year Ended December 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Reserves for losses and LAE, net of reinsurance recoverable,
at beginning of year $ 45,209 $18,410 $13,735
Reserve for losses and LAE assumed in respect of Pinnacle
acquisition in 1994 and Merchant Bakers acquisition in 1995 -- 9,544 3,068
-------- ------- -------
45,209 27,954 16,803
-------- ------- -------
Incurred losses and LAE:
Provision for insured events of the current year 89,038 45,065 21,559
Increase in provision for insured events of prior years 23,357 4,241 1,134
-------- ------- -------
Total incurred losses and LAE 112,395 49,306 22,693
-------- ------- -------
Payments:
Losses and LAE attributable to insured events of the current year 39,286 16,465 10,365
Losses and LAE attributable to insured events of prior years 35,554 15,586 10,721
-------- ------- -------
Total payments 74,840 32,051 21,086
-------- ------- -------
Reserves for losses and LAE, net of reinsurance recoverable,
at end of year 82,764 45,209 18,410
Reinsurance recoverables on reserves for losses and LAE,
at end of year 97,191 50,581 26,546
-------- ------- -------
Reserves for losses and LAE, gross of reinsurance recoverables,
at end of year $179,955 $95,790 $44,956
======== ======= =======
</TABLE>
During the second quarter of 1996, the Company noted a significant
increase in the volume of reported claims falling below the reinsurance
attachment points, over and above the frequency anticipated in its calculation
of loss reserves. At the same time, the Company conducted a thorough overall
re-evaluation of its business plan and the profitability of the underlying
business. As a result, management increased loss reserves by $12 million in the
second quarter, predominantly within IBNR.
In the remainder of 1996, the Company continued to reassess its current
and prior year loss experience. In addition to addressing loss reserving and
growth issues, the Company also strengthened senior management and supervisory
personnel in claims administration, as well as employing an internal actuary to
assist with loss reserving estimates and pricing of risks. As a result of the
reassessment, the Company made significant additional loss reserve increases in
the fourth quarter of 1996, which resulted in a 1996 loss ratio of 113% and
total adverse development of $23 million on 1995 and prior accident year loss
reserves.
F-21
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. Mandatory Redeemable Preferred Stock
On October 4, 1996, the Company completed the sale of 10,000 shares of
its Series A Cumulative Voting Preferred Stock (the "Preferred Stock") for
$10,000,000. Each holder purchased $5,000,000 of the Preferred Stock. In
addition, such holders will provide significant reinsurance on the Company's
1997 book of business and were provided representation on the Board of Directors
of the Company. Proceeds of the sale were used to increase the statutory surplus
of Merchant Bakers.
Each share of Preferred Stock is entitled to one vote along with the
Company's common stock and carries a dividend rate of 7.5%. The Company may call
the Preferred Stock for redemption at any time after the fourth anniversary of
the closing subject to a declining prepayment penalty. The Preferred Stock must
be redeemed at $1,000 per share plus any accumulated dividends in five equal
tranches at the 10th through 14th anniversaries of the closing (October 4,
2010).
Each share of Preferred Stock carries with it detachable Series A
Warrants ("Warrants") to purchase 140 shares of the Company's common stock for
$9.50 per share at any time until October 4, 2003. The number of shares of the
Company's common stock deliverable upon exercise of the warrants, and the
exercise price thereof, are subject to adjustment. If all of the Warrants issued
in connection with the $10,000,000 of Preferred Stock issued were to be
exercised, the common stock purchased would represent approximately 19.8% of the
Company's issued and outstanding common stock at December 31, 1996.
The Preferred Stock agreement contains certain covenants similar to
those required under the line of credit agreements described in Note 6.
Violations of such covenants only cause a redemption event if assessed to have a
"Material Adverse Effect" on the Company as defined in the agreement. The
Company has obtained a waiver from the Preferred Stockholders dated March 31,
1997 for a violation existing at December 31, 1996 of a certain covenant.
In connection with the Preferred Stock issuance, the Preferred
Stockholders, the Company, and certain common stockholders (the "Management
Group") entered into an agreement whereby the Management Group and the Company
would cooperate with the Preferred Stockholders with regard to certain corporate
governance matters. At the date of the Preferred Stock issuance, the Management
Group owned 20% of the outstanding common stock of the Company.
F-22
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Income Taxes
The Company and its subsidiaries file a consolidated U.S. Federal
Income Tax return. The Company's U.S. federal tax rate was 34% for 1996, 1995
and 1994. Current income tax expense (benefit) calculated at the statutory
corporate tax rate differs from the expense (benefit) included in the
accompanying financial statements due to the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ------------------- --------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------ ----- ---------- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Income tax (benefit) computed on
pre-tax operating income
at statutory rate ($11,949,567) (34.0)% $2,784,010 34.0% $2,398,536 34.0%
Tax exempt investment income (699,288) (1.9) (718,931) (8.8) (348,669) (4.9)
Goodwill amortization (1,038,020) (2.9) (98,087) (1.2) -- --
Other, primarily prior year
income tax accrual (768,908) (2.2) 41,105 0.5 426,679 6.0
------------ ----- ---------- ---- ---------- ----
Total income tax expense ($14,455,783) (41.0)% $2,008,097 24.5% $2,476,546 35.1%
============ ===== ========== ==== ========== ====
</TABLE>
Components of the total income tax expense are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current tax expense (benefit) ($6,147,619) $2,225,546 $2,273,046
Deferred income tax expense (benefit) (8,308,164) (217,449) 203,500
------------ ---------- ----------
Total ($14,455,783) $2,008,097 $2,476,546
============ ========== ==========
</TABLE>
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Discounting of liability for insurance losses and LAE $ 2,990,428 $1,834,585
Unearned premium adjustments 1,637,702 2,434,700
Surplus notes receivable - valuation allowance 890,800 --
Other -- 29,700
Net operating loss and alternative minimum tax credit carryforwards 5,738,516 --
----------- ----------
Total deferred tax assets 11,257,446 4,298,985
----------- ----------
Deferred tax liabilities:
Deferred policy acquisition costs (1,059,625) (2,409,300)
Other (49,598) --
----------- ----------
Total deferred tax liabilities (1,109,223) (2,409,300)
----------- ----------
Valuation allowance -- --
----------- ----------
Net deferred tax assets $10,148,223 $1,889,685
=========== ==========
</TABLE>
F-23
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company has recorded a net deferred tax asset of $10.1 million
comprised of the benefit of $5.7 million in net operating loss and alternative
minimum tax credit carryforwards which expire in 2011 and $4.4 million in other
net temporary differences. Realization of the net deferred tax asset is
dependent on generating sufficient taxable income prior to expiration of the
loss carryforwards. Although realization is not assured, management believes it
is more likely than not that all of the deferred tax assets will be realized.
The amount of the deferred tax asset considered realizable, however, will be
reduced if estimates of future taxable income during the carryforward periods
are reduced.
12. Stock Incentive Plan
The Company maintains a Stock Incentive Plan (the "Plan") which enables
officers, directors and key employees of the Company to participate in the
Company's future and to enable the Company to attract and retain these persons
by offering them proprietary interests in the Company. The Plan provides for the
issuance of up to 350,000 shares of Common Stock and is administered by a
committee appointed by the Board of Directors. The Plan provides for the
issuance of stock options, stock appreciation rights, restricted stock, deferred
stock or combinations thereof.
Two types of stock options may be granted under the Plan: Incentive
stock options which are intended to qualify under Section 422 of the Internal
Revenue Code, and non-qualified stock options. The exercise price of each option
granted under the Plan may not be less than the fair market value (for incentive
stock options) or 85% of the fair market value (for non-qualified stock options)
of the underlying shares on the date of grant. The Plan committee determines the
option exercise period, which may not exceed ten years. The options granted
generally vest at 20% per year over a five year period except for certain of the
options granted during 1996 which are fully or partially vested. As of December
31, 1996, options for 102,988 shares were fully vested and options for 65,140
shares were available to be granted in the future.
The Company accounts for stock options using the provisions of APB
Opinion 25 and related interpretations in accounting for the plan. Accordingly,
no compensation cost has been recognized in the financial statements. The
following disclosures are provided in accordance with SFAS 123, "Accounting for
Awards of Stock-Based Compensation to Employees", which as discussed in Note 1,
was adopted by the Company in 1996 for disclosure requirement purposes only.
F-24
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the status of the Plan as of December 31, 1996, 1995 and
1994 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- --------------------------- ---------------------------
Weighted Average Weighted Average Weighted Average
Stock Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------- ------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 270,000 $12.50 249,000 $13.36 167,000 $13.57
Granted 157,500 $7.63 45,000 $8.14 98,500 $13.00
Exercised
Forfeited/Canceled (142,640) $13.39 (24,000) $13.25 (16,500) $13.25
Expired
-------- ------ ------- ------ -------- ------
Outstanding at end
of year 284,860 $9.37 270,000 $12.50 249,000 $13.36
======= ====== ======= ====== ======= ======
Options exercisable at
year end 102,988 78,300 38,100
======= ======= ======
</TABLE>
The approximate weighted average grant-date fair value of options
granted during the years ending December 31, 1996 and 1995 using the
Black-Scholes Model were $492,000 and $149,000, respectively. Significant
assumptions used in the determination of such fair values were as follows:
1996 1995
---- ----
Risk free interest rate 6.1% 5.5%
Expected life 5 years 5.5 years
Expected volatility 35% 35%
Pro forma net income (loss) and pro forma earnings (loss) per share as
if the fair value based accounting method in SFAS 123 had been used to account
for stock-based compensation cost for the years ending December 31, 1996, 1995
and 1994 follows:
December 31,
--------------------------------
1996 1995
---- ----
Pro forma net income (loss) ($21,018,898) $5,973,661
Pro forma earnings (loss) per share ($3.75) $1.06
F-25
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- ------------------------------------------
Weighted
Range of Number Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$7.75 - $14.58 284,860 9 Years $9.37 102,988 $10.00
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13. Commitments and Contingencies
(a) Lease
The Company's subsidiaries lease office space under non-cancelable
operating leases through 2005. The leases also stipulate that the Company pay
certain costs associated with the rental of the office space.
Future minimum lease payments at December 31, 1996 are as follows:
1997................................................... $ 1,899,202
1998................................................... 1,804,694
1999................................................... 1,759,918
2000 .................................................. 1,465,272
2001................................................... 1,102,292
2002 and thereafter.................................... 3,475,000
-----------
$11,506,378
===========
Rental expense for operating leases was as follows:
1996 1995 1994
---- ---- ----
Total rental expense $1,155,870 $824,524 $239,180
Lease termination charge -- -- 380,000
Less income from sub-leases (236,053) (159,967) (6,533)
---------- -------- --------
Net rental expense $919,817 $664,557 $612,647
========== ======== ========
(b) Lease Termination
In September 1994, the Company moved into its new corporate
headquarters. The Company's vacated facilities have a non-cancelable lease which
expires in April 2000. The Company currently sublets a majority of the space.
The Company has at December 31, 1996 and 1995 recorded a liability of $285,000
and $380,000, respectively, for the expected deficiency which is included in
other liabilities in the balance sheets.
F-26
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(c) Professional Services Agreements
In 1996 and prior years, the Company entered into agreements with
various law firms to provide professional services primarily related to auto
liability claims litigation and settlement in return for a fixed fee based on a
percentage of direct (gross) earned liability premiums. The agreements, which
extend for a three year period in order to cover the expected period of claims
settlements, require the Company to make scheduled periodic fee payments over
the period. To the extent that any of the law firms fail to perform under the
agreement, which in the opinion of management is unlikely, additional
liabilities could emerge. The agreements were not renewed effective January 1,
1997.
(d) Take All Comers
In January 1995, the Company was informed by the New Jersey Insurance
Department that it could no longer remain exempt from the state's Take All
Comers ("TAC") laws regarding personal auto insurance as provided under the Fair
Automobile Insurance Act of 1990. In general, TAC requires that automobile
insurers provide coverage to any licensed person having fewer than nine (9)
eligibility points. The Company's underwriting guidelines had previously
specified that the maximum eligibility points allowed for any one driver to
offer insurance was four (4) points.
Since the loss of the exemption from TAC, the Company has accepted
personal auto insurance risks with up to a maximum of eight points under its
revised underwriting guidelines. With the implementation of TAC, the Company has
experienced an increase in the percentage of its New Jersey personal auto
business with eligibility points of five or more from 1.4% of the total New
Jersey personal auto book in January of 1995 to 7.0% at December 1996. In
addition, the number of youthful operators (those drivers under 25 years of age)
increased from 2.1% to 8.0% during the same period. Although the actual impact
of the loss of the TAC exemption on the 1995 and 1996 results for the New Jersey
personal auto business is not material, the loss of the exemption may adversely
impact the Company's experience in the future.
(e) Fair Automobile Insurance Reform Act of 1990
The Fair Automobile Insurance Reform Act of 1990 ("FAIRA") provides for
an assessment to be charged to insurance companies writing automobile insurance
in New Jersey. As Home State was writing at premium to surplus ratios in excess
of 3:1 through 1993, the Company had been exempt from payment of this levy for
the years 1990 and 1991, and presently has a deferral from paying assessments
for 1992 and 1993. Subsequent to 1993, the Company has paid annual assessments
under FAIRA. Management believes that it is not likely that the Company will be
required to pay the deferred assessments for 1992 and 1993, which aggregate
$1.23 million. Accordingly, no provision has been made for these deferred
assessments in the financial statements.
(f) Litigation
In the normal course of business, the Company is a defendant in various
lawsuits. In the opinion of management, disposition of such litigation will not
have a material impact on the financial position or result of operations of the
Company.
14. Dividend Restrictions on Insurance Company Subsidiaries
As a holding company, the principal source of the parent company's cash
available for payment of dividends is dividends received from its insurance
subsidiaries. State regulatory requirements limit the amount of annual dividends
these companies can pay to the holding company without obtaining prior insurance
department approval. The maximum amount distributable is limited to the greater
of (i) 10% of statutory surplus as of the end of the preceding year or (ii) net
investment income for the preceding year, with larger dividends payable only
upon prior regulatory approval. Accordingly, the maximum dividend which may be
paid to the Company by its insurance subsidiaries without prior approval at
December 31, 1996 is approximately $4.6 million.
F-27
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Statutory policyholders' surplus for the combined insurance
subsidiaries at December 31, 1996 and 1995 was $29,427,357 and $37,291,911,
respectively. Statutory net income (loss) for the combined insurance
subsidiaries for the years ended December 31, 1996, 1995 and 1994 was
($24,825,093), $3,061,448 and $3,188,706, respectively. During 1996, the Company
contributed approximately $17.7 million of capital to its insurance
subsidiaries. The principal differences between statutory financial statements
and those prepared in accordance with generally accepted accounting principles
are that statutory financial statements do not reflect fixed maturity
investments available for sale at market value, deferred policy acquisition
costs and deferred income taxes. In addition, for statutory purposes, the
Company recognized $7.1 million of commission income on the date of the unearned
premium reserve quota share reinsurance treaty which is deferred and recognized
as the related unearned premium is earned for GAAP purposes.
15. Related Party Transactions
The Company has an agreement with a company owned by two of its
stockholders/directors to provide management and investment services at an
annual fee not to exceed 1/2% of investable assets. The total expense incurred
under such agreement was $405,661, $296,239 and $173,000 in 1996, 1995 and 1994,
respectively.
The Company had also entered into an agreement with a limited
partnership ("PPIM"), whose partners include certain directors and officers of
the Company, to provide various administrative services to the Company. The
agreement provided for a fee of 2% of direct gross written premium up to a
maximum of $1,250,000 in any one year. During 1996, such fees were paid to HSIM
L.L.C. and accordingly, such fees are eliminated in consolidation in 1996. Total
fees paid to PPIM for the years ended December 31, 1995 and 1994 amounted to
approximately $1,250,000 and $1,118,400, respectively. The agreement also
provided that PPIM pay the Company an annual fee of 1% of direct gross premium
written up to a maximum of $625,000 in any one year for certain administrative
services the Company provides PPIM. The Company earned $625,000 and $559,500 for
services rendered to PPIM during 1995 and 1994, respectively.
Included in other assets is $1.1 million due from Home Mutual for net
amounts due under the pooling arrangement with Merchant Bakers.
The sister-in-law of one of the Company's directors served as a
consultant to the Company in connection with the Company's August 1993 initial
public offering and since completion of such offering, served as the Company's
director of investor relations on a consultant basis until January, 1995. In
1995 and 1994, an aggregate of $15,000 and $62,690, respectively in consulting
fees were paid in connection with such services. No such fees were paid during
1996.
During 1994, the Company made a six-month $490,000 loan, collateralized
by a deed of trust and assignment of rents, to Brooks Creek Vineyards, Ltd., a
California limited partnership of which a director of the Company is one of six
general partners. This loan was repaid during 1994.
In October 1994, in conjunction with the private placement of $17.0
million in subordinated notes, two directors purchased notes totaling $700,000
and received 10,500 detachable common stock warrants.
In October 1996, the Company entered into agreements with Swiss
Reinsurance America Corporation and Reliance Insurance Company, the holders of
the Preferred Stock, for the Company's subsidiaries to purchase reinsurance from
such holders at commercially reasonable and actuarially sound rates and for such
holders to provide certain consulting and management services to the Company.
F-28
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. Summary of Quarterly Financial Information (unaudited)
The following quarterly financial information for each of the three
months ended March 31, June 30, September 30 and December 31, 1996 and 1995 is
unaudited. However, in the opinion of management, all adjustments (consisting of
normal recurring adjustments except as explained below) necessary to present
fairly the results of operations for such periods, have been made for a fair
presentation of the results shown.
<TABLE>
<CAPTION>
(in thousands - except per share amounts)
-----------------------------------------
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earned premiums $23,445 $25,576 $26,439 $26,220
Recoveries (returns) on reinsurance
premiums 1,681 434 1,485 (6,026)
Net investment income 1,025 1,061 1,259 1,302
Net realized capital gain (2) (2) (1) 10
Insurance losses and loss adjustment
expenses 20,484 31,388 20,541 39,983
Writedown of surplus notes receivable -- -- 500 2,120
Net income (loss) 503 (5,115) 1,133 (17,048)
Net income (loss) per common share $0.09 $(0.90) $0.20 ($3.05)
Weighted average number of common shares 5,667 5,660 5,660 5,660
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER
- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earned premiums $8,698 $14,674 $16,091 $19,450
Recoveries on reinsurance premiums 612 1,234 2,323 1,821
Net investment income 686 880 850 1,041
Net realized capital gain (losses) 95 68 12 90
Insurance losses and loss adjustment
expenses 6,690 12,144 13,646 16,823
Net income (loss) 1,024 1,230 1,904 1,962
Net income (loss) per common share $0.18 $0.22 $0.34 $0.35
Weighted average number of common shares 5,693 5,660 5,660 5,661
</TABLE>
The Company's quarterly information for the fourth quarter of 1996
included above, includes the impact of an increase in loss and loss adjustment
expenses, the associated reduction in reinsurance profit sharing of $6.0 million
and reduction in deferred policy acquisition costs. See Note 9 for further
information regarding the increase in loss reserves. In addition, during the
fourth quarter of 1996, an additional $2.1 million was charged against earnings
as the result of an additional adjustment to the valuation allowance on the
Company's surplus notes receivable.
F-29
<PAGE>
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. Segment Information
The Company's operations are conducted principally through two business
segments. These segments and their respective operations are as follows:
Property and Casualty Insurance - The insurance operations primarily
write standard and preferred personal and commercial auto insurance.
Financial Services - The Company's financial services operations engage
in diversified financial services for affiliated companies only. Such operations
include, but are not limited to, reinsurance brokerage services, premium
financing and management services.
The following table is a summary of operations by major operating
segment, as of and for the years ended December 31, 1996 and 1995 (in
thousands).
<TABLE>
<CAPTION>
Property & Financial Adjustments
1996 Casualty Services Parent & Eliminations Consolidated
- ---- ---------- --------- ------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues* $104,038 $6,071 $42 ($2,418) $107,733
======== ====== ======= ======== ========
Income (loss) before
taxes and minority
interest ($35,614) $4,171 ($6,755) $3,053 ($35,145)
======== ====== ======= ======== ========
Identifiable assets $333,961 $9,845 $56,136 ($56,363) $343,579
======== ====== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996 Property & Financial Adjustments
Casualty Services Parent & Eliminations Consolidated
---------- --------- ------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues* $68,530 $4,166 $394 ($1,159) $71,931
======== ====== ======= ======== ========
Income (loss) before
taxes and minority
interest $7,953 $2,892 ($2,637) ($19) $8,189
======== ====== ======= ======== ========
Identifiable assets $214,426 $8,586 $57,956 ($40,447) $240,521
======== ====== ======= ======== ========
</TABLE>
* Net investment income and realized capital gains and losses have been
reflected in the above table based on the portfolio of investments held by
such business segments.
18. 401(k) Plan
The Company maintains a 401(k) Plan for the benefit of its employees.
The Company matches 25% of the first 5% contributed by the participant. The
Company match was approximately $68,000, $41,000 and $20,000 during 1996, 1995
and 1994, respectively.
F-30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Home State Holdings, Inc.
Our report on the consolidated financial statements of Home State Holdings, Inc.
and Subsidiaries is included on page F-2 of this Form 10-K. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedules listed in the index on page 42 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
New York, New York
March 31, 1997
S-1
<PAGE>
SCHEDULE 1
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1996
<TABLE>
<CAPTION>
Amount
Shown
Estimated In The
Amortized Market Balance
Type of Investment Cost Value Sheet
- ------------------ ----------- ---------- -----------
<S> <C> <C> <C>
Fixed maturity securities, held-to-maturity:
Bonds:
U.S. Government obligations $ 2,242,429 $ 2,251,291 $ 2,242,429
States, municipalities and political
subdivisions 49,025,064 49,759,769 49,025,064
Corporate securities 19,758,048 19,793,687 19,758,048
----------- ----------- -----------
Total 71,025,541 71,804,747 71,025,541
----------- ----------- -----------
Fixed maturity securities available for sale:
Bonds:
U.S. Government obligations 2,057,754 2,058,526 2,058,526
States, municipalities and political
subdivisions 4,623,105 4,644,550 4,644,550
Corporate securities 1,889,629 1,879,525 1,879,525
----------- ----------- -----------
Total 8,570,488 8,582,601 8,582,601
----------- ----------- -----------
Common Stocks 360,496 407,079 407,079
----------- ----------- -----------
Short term investments 11,359,406 11,359,406 11,359,406
----------- ----------- -----------
Total investments $91,315,931 $92,153,833 $91,374,627
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
included on pages F-7 through F-30.
S-2
<PAGE>
SCHEDULE II
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Parent Company Only)
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ------ ----------- ----------
<S> <C> <C>
Cash and cash equivalents $ 854,754 $ 1,978,928
Investment in subsidiaries 42,972,916 43,692,017
Investment in mutual insurance company, at cost 4,000,000 4,000,000
Fixed maturity securities, available for sale, at market 403,550 703,545
Surplus notes receivable 2,350,000 4,500,000
Other assets 5,555,099 3,075,003
----------- -----------
Total assets $56,136,319 $57,955,606
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Subordinated notes $16,380,000 $16,300,000
Due to affiliates 5,965,573 497,112
Notes payable, bank 5,000,000 2,000,000
Accrued expenses and other liabilities 352,849 106,268
----------- -----------
Total liabilities 27,698,422 18,903,380
----------- -----------
Mandatory redeemable preferred stock 8,525,000 --
----------- -----------
Stockholders' Equity
Common Stock - $.01 par value; (10,000,000 shares
authorized, 5,660,000 shares issued and outstanding) 56,600 56,600
Additional paid-in capital 22,473,463 20,973,463
Unrealized appreciation (depreciation) of fixed maturities
available for sale, net of taxes 38,769 (57,704)
Retained earnings (2,655,935) 18,079,867
----------- -----------
Total stockholders' equity 19,912,897 39,052,226
----------- -----------
Total liabilities and stockholders' equity $56,136,319 $57,955,606
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
included on pages F-7 through F-30.
S-3
<PAGE>
SCHEDULE II
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (Continued)
CONDENSED STATEMENTS OF OPERATIONS
(Parent Company Only)
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ----------- ----------
<S> <C> <C> <C>
Revenue:
Management fee income $ -- $ -- $ 252,104
Net investment income 42,060 236,615 577,133
Other income -- -- 133,500
Gain (loss) on sale of investments -- 157,933 (68,388)
------------- ----------- ----------
Total Revenues 42,060 394,548 894,349
------------ ----------- ----------
Expenses:
General and administrative expense 4,433,971 1,269,204 1,243,055
Interest expense 2,363,144 2,051,528 522,934
------------ ----------- ----------
Total Expenses 6,797,115 3,320,732 1,765,989
------------ ----------- ----------
Income (loss) before equity in affiliates and
income taxes (benefit) (6,755,055) (2,926,184) (871,640)
Equity in earnings (loss) of subsidiaries (15,921,922) 8,162,952 5,576,133
------------ ----------- ----------
Income (loss) before income taxes (22,676,977) 5,236,768 4,704,493
Income taxes (benefit) (2,150,079) (885,893) 207,020
------------ ----------- ----------
Net income (loss) ($20,526,898) $ 6,122,661 $4,497,473
============ =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
included on pages F-7 through F-30.
S-4
<PAGE>
SCHEDULE II
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
(Parent Company Only)
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) ($20,526,898) $ 6,122,661 $ 4,497,473
----------- ------------ ------------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Undistributed equity in (earnings) loss of affiliates 15,921,922 (8,162,952) (5,576,133)
(Increase) decrease in other assets (2,132,463) (1,802,012) 76,292
Writedown of surplus note receivable 2,620,000 -- --
Increase (decrease) in accrued expenses and other 392,279 (437,502) 129,112
Depreciation and amortization 193,609 192,885 81,730
Net realized capital losses -- 157,933 68,388
----------- ------------ ------------
Total adjustments 16,995,347 (10,051,648) (5,220,611)
----------- ------------ ------------
Net cash used in operating activities (3,531,551) (3,928,987) (723,138)
----------- ------------ ------------
Investing Activities
Sales (purchases) of investments, net 306,108 5,119,744 1,190,555
Investment in note receivable - affiliate -- (5,000,000)
Purchase of surplus notes (470,000) -- --
Investment in affiliates (15,200,000) (1,664,496) (12,069,150)
Proceeds from sale of equipment -- -- 351,989
----------- ------------ ------------
Net cash provided by (used in) investing activities (15,363,892) 3,455,248 (15,526,606)
----------- ------------ ------------
Financing Activities
Net proceeds from (repayment of) amounts due to/from
affiliates 5,468,461 (694,577) 825,104
Proceeds from subordinated notes issuance -- -- 16,290,861
Purchase of notes receivable -- -- (2,347,202)
Proceeds from issuance of mandatory redeemable preferred stock 9,486,712 -- --
Proceeds from notes receivable, net -- 113,051 2,234,151
Payment of cash dividends on preferred stock (183,904) -- --
Proceeds from notes payable, bank 3,000,000 2,000,000 --
Proceeds from acquisition of stock or private placement
proceeds -- -- (54,043)
Net cash provided by financing activities 17,771,269 1,418,474 16,948,871
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,124,174) 944,735 699,127
Cash and cash equivalents, beginning of period 1,978,928 1,034,193 335,066
----------- ----------- ------------
Cash and cash equivalents, end of period $ 854,754 $ 1,978,928 $ 1,034,193
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
included on pages F-7 through F-30.
S-5
<PAGE>
SCHEDULE III
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Liability
for
Insurance Insurance
Deferred Losses Losses
Policy And loss Unearned Net Net And loss
Acquisition Adjustment Premium Premiums Investment Adjustment
Cost Expenses Reserve Earned Income Expenses
----------- ----------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Property & Casualty
December 31, 1996 $3,116 $179,955 $85,863 $101,680 $4,647 $112,396
Property & Casualty
December 31, 1995 $7,086 $95,790 $71,291 $58,915 $3,459 $49,306
Property & Casualty
December 31, 1994 $3,736 $44,957 $32,142 $29,895 $1,935 $22,693
<CAPTION>
Amortization
of Deferred
Policy Other Net
Acquisition Operating Premium
Costs Expenses Written
----------- ---------- ---------
<S> <C> <C> <C>
Property & Casualty
December 31, 1996 $25,500 $21,530 $89,860
Property & Casualty
December 31, 1995 $11,421 $14,021 $67,027
Property & Casualty
December 31, 1994 $7,244 $8,362 $31,246
</TABLE>
See accompanying notes to consolidated financial statements
included on pages F-7 through F-30
S-6
<PAGE>
SCHEDULE IV
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
CEDED
GROSS TO OTHER NET
AMOUNT COMPANIES AMOUNT
--------- --------- --------
<S> <C> <C> <C>
Year Ended December 31, 1996
Earned Premium $188,268 $86,588 $101,680
======== ======= ========
Year Ended December 31, 1995
Earned Premium $109,370 $50,455 $ 58,915
======== ======= ========
Year Ended December 31, 1994
Earned Premium $ 54,812 $24,917 $ 29,895
======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
included on pages F-7 through F-30.
S-7
<PAGE>
SCHEDULE VI
HOME STATE HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
YEAR ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
INSURANCE LOSS AND PAID
LOSS ADJUSTMENT INSURANCE
EXPENSES INCURRED LOSSES
RELATING TO AND LOSS
CURRENT PRIOR ADJUSTMENT
YEAR YEARS EXPENSES
------- ------- ----------
<S> <C> <C> <C>
Year Ended December 31, 1996 $89,038 $23,357 $74,840
======= ======= =======
Year Ended December 31, 1995 $45,065 $ 4,241 $32,052
======= ======= =======
Year Ended December 31, 1994 $21,559 $ 1,134 $21,086
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
included on pages F-7 through F-30.
S-8
<PAGE>
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made as of the ____ day of _________, 199_ by and
between ______________ INSURANCE COMPANY ("Client") and WOODHAVEN INVESTORS,
INC. ("Manager").
W I T N E S S E T H:
In consideration of the mutual promises and agreements herein
contained and other good and valuable consideration, the receipt of which is
hereby acknowledged, it is hereby agreed between the parties hereto as follows:
1. General. Client hereby employs Manager as investment
manager for the purpose of managing the investment and reinvestment of funds of
Client (the "Funds") subject to the terms and conditions set forth in this
Agreement.
2. Authority of Manager. Manager will supervise and direct the
investments of Client, subject to the limitations and investment guidelines set
forth in Paragraph 15 below or as Client may impose by notice in writing to the
Manager ("Investment Guidelines"). Manager, as agent and attorney-in-fact of
Client with respect to the Funds, when it deems appropriate, without prior
consultation with Client, may, subject to the Investment Guidelines, (a) buy,
sell, exchange, convert and otherwise trade in any stocks, bonds and debt and
other securities, including money-market instruments, and (b) place orders for
the execution of such securities transactions with or through brokers, dealers
or issuers, including those from which
<PAGE>
Manager or its affiliates may receive research, brokerage and other services, or
which may be otherwise affiliated with Manager.
3. Services of Manager. Manager accepts the appointment as
investment manager and agrees to supervise and direct the investments in
accordance with the Investment Guidelines. Manager, in the maintenance of
records pertaining to Client's investments, does not assume responsibility for
the accuracy of information furnished by Client or any other party.
4. Transaction Procedures. Manager may issue appropriate
instructions to the custodian designated by Client (the "Custodian"), in
connection with the settlement of transactions initiated by Manager hereunder,
either in writing sent by first-class mail or orally, and confirmed in writing
as soon as practical thereafter. Manager shall instruct brokers or dealers
executing orders for the account of Client to forward to Client and/or the
Custodian copies of all confirmations promptly after each execution. Manager
shall not be responsible for any loss incurred by reason of any act or omission
of any broker or the Custodian; provided, however, that Manager will make
reasonable efforts to require that brokers and dealers selected by Manager
perform their obligations with respect to the Client's account (the "Account").
5. Removal of Assets. Client may, by written notice to
Manager, remove any assets from the Account, in which event Manager shall have
no further responsibility or authority with respect to such assets.
2
<PAGE>
6. Reports to Manager. Client will provide or instruct
Custodian to provide Manager with such periodic reports concerning the status of
the funds in the Account as Manager may reasonably request.
7. Confidential Relationship. All information and advice
furnished by either party to the other hereunder including their respective
agents and employees, shall be treated as confidential.
8. Service to Other Clients. It is understood that Manager may
perform investment advisory services for other clients. Manager may give advice
and take actions with respect to any of its other clients which may differ from
advice given or the timing or nature of action taken with respect to Client.
Manager shall not have any obligation to purchase or sell, or to recommend for
purchase or sale, for Client any security which Manager, its principals,
affiliates or employees may purchase or sell, or recommend for purchase or sale,
for its or their own accounts or for the account of any other client. Investment
decisions for each account managed by Manager are made independently of each
other in the light of differing conditions. However, the same investment
decision may occasionally be made for two or more of such accounts. In such
cases, simultaneous transactions may occur at different prices .
9. Allocation of Brokerage. If Client does not direct in
writing that transactions be executed by a designated broker(s), in placing
orders for the execution of portfolio transactions for the Account, Manager may
allocate such transactions to such brokers or dealers for execution on such
markets and at such commission rates
3
<PAGE>
or at such terms as, in the good faith judgment of Manager, will be in the best
interests of Client taking into consideration not only the rate of brokerage
commissions or markups or markdowns but also, to the extent permitted by
applicable law, other relevant factors such as, without limitation, net price
execution capabilities, research and other services, which aid the Manager in
the performance of its investment-making responsibilities, without having to
demonstrate that such services specifically benefitted the Client.
10. Manager's Standard of Care. Manager, in providing
investment advice hereunder, will use its best efforts to achieve the investment
objectives of Client. Manager shall not be liable to Client for any error of
judgment or for any loss suffered by Client in connection with any Investment
Guideline or the purchase, sale or retention of any security on this
recommendation of Manager, provided that Manager shall nonetheless be
responsible for its acts or omissions due to its negligence, bad faith or
reckless disregard of duties, and further provided that nothing herein shall in
any way constitute a waiver or limitation of any rights which Client may have
under any federal or state securities laws.
11. Inside Information. Manager shall have no obligation to
seek to obtain any material non-public ("inside") information about any issuer
of securities, or to purchase or sell, or to recommend for purchase or sale, for
Client, the securities of any issuer on the basis of any such information as may
come into its possession.
12. Proxies and Other Legal Notices. Manager will not be
required to take any actions or render any advice with respect to the voting of
proxies solicited
4
<PAGE>
by, or with respect to, the issuers of any securities held in the Account, nor
will Manager be obligated to render any advice or take any actions on behalf of
Client with respect to securities or other investments held in the Account, or
the issuers thereof, which become the subject of any legal proceedings,
including those under the Federal bankruptcy laws.
13. Fees. In consideration of the Manager's services pursuant
to the Investment Management Agreement, the Client hereby agrees to pay the
Manager an annual management fee equal to Client's pro rata share (based on the
proportion Client's investible assets under the management of Manager bears to
the total investible assets of Client and the Common Clients (as hereinafter
defined) under the management of Manager) of the sum of (i) one quarter of one
percent (1/4 of 1%) of the total value of the first one hundred million dollars
($100,000,000) of Client's and the Common Clients' investible assets under the
management of the Manager and (ii) one eighth of one percent (1/8%) of the
Client's and the Common Clients' investible assets under the management of the
Manager in excess of one hundred million dollars ($100,000,000). As used herein,
the "Common Clients" refers to the other insurance companies which are direct or
indirect subsidiaries of (or managed by) Home State Holdings, Inc.
14. Valuation. In computing the market value of investments in
the Account for purposes of calculating the Fee when such is required under the
terms of Section 13, above, Manager shall use sources which it in good faith
deems appropriate. At present: for securities other than money-market
instruments,
5
<PAGE>
Manager shall use the values obtained from various independent data sources;
money-market investments are valued at cost; zero-Treasury instruments are
valued at amortized cost; and any other assets, including securities not in such
data sources to be valued in such manner as is determined in good faith by
Manager to reflect their fair market value.
15. Investment Guidelines. Until such time as Client achieves
pre-tax profit at an annual rate of $400,000.00 the Funds shall be invested only
in securities guaranteed by the United States Government, its agencies or
divisions, or in corporate securities rated AAA by Standard and Poor's or
Moody's. In addition, Client shall give Manager written notice of all investment
objectives and all other investment restrictions applicable to the Account, and
any broker(s) through which Client directs that orders be executed or not to be
executed, and of any changes or modifications thereof. Client shall give Manager
prompt written notice if Client deems any investment selected by Manager for the
Account to be violative of these or any other such Investment Guidelines as they
may exist from time to time.
16. Assignment. No assignment, as that term is defined in the
Investment Advisors Act of 1940, of this Agreement shall be made by Manager
without the written consent of Client.
17. Notices. Unless otherwise specified herein, all notices
with respect to this Agreement shall be deemed duly given only when received in
writing by the other party or the custodian at such address as shall be
specified by notice similarly given. Manager may rely upon any notice,
instruction or other
6
<PAGE>
communication from any person reasonably believed by Manager to be genuine and
authorized.
18. Client Authority. Client represents and confirms that the
execution and performance of this Agreement is authorized by the governing
documents relating to the Account and that the terms hereof do not violate any
obligations by which Client is bound, and that (a) this Agreement has been duly
authorized by appropriate action and when executed and delivered will be binding
upon Client in accordance with its terms, and (b) Client will deliver to Manager
such evidence of such authority as Manager may reasonably require, whether by
way of a certified resolution or otherwise. Client agrees to promptly advise
Manager of any event which might affect this authority or the propriety of this
Agreement.
19. Representations by Manager. Manager represents and
confirms that it is registered as an investment advisor under the Investment
Advisors Act of 1940.
20. Modification. This Agreement shall not be changed,
modified, terminated, or discharged in whole or in part, except by an instrument
in writing signed by both parties hereto or their respective successors or
assigns or except as set forth in Paragraph 16 above.
7
<PAGE>
21. Governing Law. This Agreement is made in and shall be
construed under the laws of the State of _________ without giving effect to
principles of conflicts of law.
IN WITNESS WHEREOF, the parties hereto have executed this
Management Agreement on the day and year first above written.
-------------------------------
INSURANCE COMPANY
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
WOODHAVEN INVESTORS, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
===============================================================================
STANDARD FORM OF OFFICE LEASE
The Real Estate Board of New York, Inc.
===============================================================================
AGREEMENT OF LEASE, made as of this _____________ day of JUNE 1996, between
HACIENDA INTERCONTINENTAL REALTY, N.V., c/o Williamson, Picket, Gross, Inc.,
having an office at 85 John Street, New York, New York 10038 party of the first
part, hereafter referred to as OWNER, and NEW YORK MERCHANT BAKERS INSURANCE
COMPANY party of the second part, hereinafter referred to as TENANT, WITNESSETH:
Owner hereby leases to Tenant and Tenant hereby hires from Owner THE ENTIRE 21ST
FLOOR shown as cross-hatched area on plan attached as ATTACHMENT "B" (See
Article 58) in the building known as 116 John Street in the Borough of
Manhattan, City of New York, for the term of Eight (8) years and four (4) months
(or until such term shall sooner cease and expire as hereinafter provided) to
commence on the First day of July nineteen hundred and Ninety-Six , and to end
on the Thirty-first day of October Two thousand and four both dates inclusive,
at an annual rental rate of One hundred ninety-thousand seven hundred fifty
dollars and no cents ($190,750.00) or $15,895.83 per month (See Article 58)
which Tenant agrees to pay in lawful money of the United States which shall be
legal tender in payment of all debts and dues, public and private, at the time
of payment, in equal monthly installments in advance on the first day of each
month during said term, at the office of Owner or such other place as Owner may
designate, without any set off or deduction whatsoever, except that Tenant shall
pay the first monthly installment(s) on the execution hereof (unless this lease
be a renewal).
In the event that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment of rent payable hereunder and
the same shall be payable to Owner as additional rent.
The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby covenant
as follows:
Rent Occupancy:
1. Tenant shall pay the rent as above and as hereinafter provided.
2. Tenant shall use and occupy demised premises for insurance offices and
no other purpose.
Tenant Alterations:
3. Tenant shall make no changes in or to the demised premises of any nature
without Owner's prior written consent, Subject to the prior written consent of
Owner, and to the provisions of this Article, Tenant at Tenant's expense, may
make alterations, installations, additions or improvements which are
non-structural and which do not affect utility services or plumbing and
electrical lines, or to the interior of the demised premises by using
contractors or mechanics first approved by Owner. Tenant shall, before making
any alterations, additions, installations or improvements, at its expense,
obtain all permits, approvals and certificates required by any governmental or
quasi-governmental bodies and (upon completion) certificates of final approval
thereof and shall deliver promptly duplicates of all such permits, approvals and
certificates to Owner and Tenant agrees to carry and will cause Tenant's
contractors and sub-contractors to carry such workman's compensation, general
liability, personal and property damage insurance as Owner may require. If any
mechanic's lien is filed against the demised premises, or the building of which
the same forms a part, for work claimed to have been done for, or materials
furnished to, Tenant, whether or not done pursuant to this article, the same
shall be discharged by Tenant within thirty (30) days thereafter, at Tenant's
expense, by filing the bond required by law. All fixtures and all paneling,
partitions, railings and like installations, installed in the premises at any
time, either by Tenant or by Owner in Tenant's behalf, shall, upon installation,
become the property of Owner and shall remain upon and be surrendered with the
demised premises unless Owner, by notice to Tenant no later than twenty (20)
days prior to the date fixed as the termination of this lease, elects to
relinquish Owner's right thereto and to have them removed by Tenant, in which
event the same shall be removed from the premises by Tenant prior to the
expiration of the lease, at Tenant's expense. Nothing in this Article shall be
construed to give Owner title to or to prevent Tenant's removal of trade
fixtures, moveable office furniture and equipment, but upon removal of any such
from the premises or upon removal of other installations as may be required by
Owner, Tenant shall immediately and at its expense, repair and restore the
premises to the condition existing prior to installation and repair any damage
to the demised premises or the building, due to such removal. All property
permitted or required to be removed, by Tenant at the end of the term remaining
in the premises after Tenant's removal shall be deemed abandoned and may, at the
election of Owner, either be retained as Owner's property or may be removed from
the premises by Owner, at Tenant's expense.
Maintenance and Repairs:
4. Tenant shall, throughout the term of this lease, take good care of the
demised premises and the fixtures and appurtenances therein. Tenant shall be
responsible for all damage or injury to the demised premises or any other part
of the building and the systems and equipment thereof, whether requiring
structural or non-structural repairs caused by or resulting from carelessness,
omission, neglect or improper conduct of Tenant, Tenant's subtenants, agents,
employees, invitees or licensees, or which arise of any work, labor, service or
equipment done for or supplied to Tenant or any subtenant or arising out of the
installation, use or operation of the property or equipment of Tenant or any
subtenant. Tenant shall also repair all damage to the building and the demised
premises caused by the moving of Tenant's fixtures, furniture and equipment.
Tenant shall promptly make, at Tenant's expense, all repairs in and to the
demised premises for which Tenant is responsible, using only the contractor for
the trade or trades in question, selected from a list of at least two
contractors per trade submitted by Owner. Any other repairs in or to the
building or the facilities and systems thereof for which Tenant is responsible
shall be performed by Owner at the Tenant's expense. Owner shall maintain in
good working order and repair the
<PAGE>
building interior and the building plumbing, electrical, heating and ventilating
systems (to the extent such systems presently exist) serving the demised
premises. Tenant agrees to give prompt notice of any defective condition in the
premises for which Owner may be responsible hereunder. There shall be no
allowance to Tenant for diminution of rental value and no liability on the part
of Owner by reason of inconvenience, annoyance or injury to business arising
from Owner or others making repairs, alterations, additions or improvements in
or to any portion of the building or the demised premises or in and to the
fixtures, appurtenances or equipment thereof. It is specifically agreed that
Tenant shall not be entitled to any set-off or reduction of rent by reason of
any failure of Owner to comply with the covenants of this or any other article
of this Lease. Tenant agrees that Tenant's sole remedy at law in such instance
will be by way of an action for damages for breach of contract. The provisions
of this Article 4 shall not apply in the case of fire or other casualty which
are dealt with in Article 9 hereof.
Window Cleaning:
5. Tenant will not clean nor require, permit, suffer or allow any window in
the demised premises to be cleaned from the outside in violation of Section 202
of the Labor Law or any other applicable law or of the Rules of the Board of
Standards and Appeals, or of any other Board or body having or asserting
jurisdiction.
Requirements of Law, Fire Insur., Floor Loads:
6. Prior to the commencement of the lease term, if Tenant is then in
possession, and at all times thereafter, Tenant, at Tenant's sole cost and
expense, shall promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and boards and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire
Underwriters, Insurance Services Office, or any similar body which shall impose
any violation, order or duty upon Owner or Tenant with respect to the demised
premises, whether or not arising out of Tenant's use or manner of use thereof,
(including Tenant's permitted use) or, with respect to the building if arising
out of Tenant's use or manner of use of the premises or the building (including
the use permitted under the lease). Nothing herein shall require Tenant to make
structural repairs or alterations unless Tenant has, by its manner of use of the
demised premises or method of operation therein, violated any such laws,
ordinances, orders, rules, regulations or requirements with respect thereto.
Tenant may, after securing Owner to Owner's satisfaction against all damages,
interest, penalties and expenses, including, but not limited to, reasonable
attorney's fees, by cash deposit or by surety bond in an amount and in a company
satisfactory to Owner, contest and appeal any such laws, ordinances, orders,
rules, regulations or requirements provided same is done with all reasonable
promptness and provided such appeal shall not subject Owner to prosecution for a
criminal offense or constitute a default under any lease or mortgage under which
Owner may be obligated, or cause the demised premises or any part thereof to be
condemned or vacated. Tenant shall not do or permit any act or thing to be done
in or to the demised premises which is contrary to law, or which will invalidate
or be in conflict with public liability, fire or other policies of insurance at
any time carried by or for the benefit of Owner with respect to the demised
premises or the building of which the demised premises form a part, or which
shall or might subject Owner to any liability or responsibility to any person or
for property damage. Tenant shall not keep anything in the demised premises
except as now or hereafter permitted by the Fire Department, Board of Fire
Underwriters, Fire Insurance Rating Organization or other authority having
jurisdiction, and then only in such manner and such quantity so as not to
increase the rate for fire insurance applicable to the building, nor use the
premises in a manner which will increase the insurance rate for the building or
any property located therein over that in effect prior to the commencement of
Tenant's occupancy. Tenant shall pay all costs, expenses, fines, penalties, or
damages, which may be imposed upon Owner by reason of Tenant's failure to comply
with the provisions of this article and if by reason of such failure the fire
insurance rate shall, at the beginning of this lease or at any time thereafter,
be higher than it otherwise would be, then Tenant shall reimburse Owner, as
additional rent hereunder, for that portion of all fire insurance premiums
thereafter paid by Owner which shall have been charged because of such failure
by Tenant. In any action or proceeding wherein Owner and Tenant are parties, a
schedule or "make-up" of rate for the building or demised premises issued by the
New York Fire Insurance Exchange, or other body making fire insurance rates
applicable to said premises shall be conclusive evidence of the facts therein
stated and of the several items and charges in the fire insurance rates then
applicable to said premises. Tenant shall not place any load upon any floor of
the demised premises exceeding the floor load per square foot area which it was
designed to carry and which is allowed by law. Owner reserves the right to
prescribe the weight and position of all safes, business machines and mechanical
equipment. Such installations shall be placed and maintained by Tenant, at
Tenant's expense, in settings sufficient, in Owner's judgement, to absorb and
prevent vibration, noise and annoyance.
Subordination:
7. This lease is subject and subordinate to all ground or underlying leases
and to all mortgages which may now or hereafter affect such leases or the real
property of which demised premises are a part and to all renewals,
modifications, consolidations, replacements and extensions of any such
underlying leases and mortgages. This clause shall be self-operative and no
further instrument of subordination shall be required by any ground or
underlying lessor or by any mortgagee, affecting any lease or the real property
of which the demised premises are a part. In confirmation of such subordination,
Tenant shall execute promptly any certificate that Owner may request.
Property -- Loss, Damage, Reimbursement, Indemnity:
8. Owner or its agents shall not be liable for any damage to property of
Tenant or of others entrusted to employees of the building, nor for loss of or
damage to any property of Tenant by theft or otherwise, nor for any injury or
damage to persons or property resulting from any cause of whatsoever nature,
unless caused by or due to the negligence of Owner, its agents, servants or
employees. Owner or its agents will not be liable for any such damage caused by
other tenants or persons in, upon or about said building or caused by operations
in construction of any private, public or quasi public work. If at any time any
windows of the demised premises are temporarily closed, darkened or bricked up
(or permanently closed, darkened or bricked up, if required by law) for any
reason whatsoever including, but not limited to Owner's own acts, Owner shall
not be liable for any damage Tenant may sustain thereby and Tenant shall not be
entitled to any compensation therefor nor abatement or diminution of rent nor
shall the same release Tenant from its obligations hereunder nor constitute an
eviction. Tenant shall indemnify and save harmless Owner against and from all
liabilities, obligations, damages, penalties, claims, costs and expenses for
which Owner shall not be reimbursed by insurance, including reasonable attorneys
fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's
agents, contractors, employees, invitees, or licensees, of any covenant or
condition of this lease, or the carelessness, negligence or improper conduct of
the Tenant, Tenant's agents, contractors, employees, invitees or licensees.
Tenant's liability under this lease
2
<PAGE>
extends to the acts and omissions of any sub-tenant, and any agent, contractor,
employee, invitee or licensee of any sub-tenant. In case any action or
proceeding is brought against Owner by reason of any such claim, Tenant, upon
written notice from Owner, will, at Tenant's expense, resist or defend such
action or proceeding by counsel approved by Owner in writing, such approval not
to be unreasonably withheld.
Destruction, Fire and Other Casualty:
9. (a) If the demised premises or any part thereof shall be damaged by fire
or other casualty, Tenant shall give immediate notice thereof to Owner and this
lease shall continue in full force and effect except as hereinafter set forth.
(b) If the demised premises are partially damaged or rendered partially unusable
by fire or other casualty, the damages thereto shall be repaired by and at the
expense of Owner and the rent, until such repair shall be substantially
completed, shall be apportioned from the day following the casualty according to
the part of the premises which is usable. (c) If the demised premises are
totally damaged or rendered wholly unusable by fire or other casualty, then the
rent shall be proportionately paid up to the time of the casualty and
thenceforth shall cease until the date when the premises shall have been
repaired and restored by Owner, subject to Owner's right to elect not to restore
the same as hereinafter provided. (d) If the demised premises are rendered
wholly unusable or (whether or not the demised premises are damaged in whole or
in part) if the building shall be so damaged that Owner shall decide to demolish
it or to rebuild it, then, in any of such events, Owner may elect to terminate
this lease by written notice to Tenant, given within 90 days after such fire or
casualty, specifying a date for the expiration of the lease, which date shall
not be more than 60 days after the giving of such notice, and upon the date
specified in such notice the term of this lease shall expire as fully and
completely as if such date were the date set forth above for the termination of
this lease and Tenant shall forthwith quit, surrender and vacate the premises
without prejudice however, to Landlord's rights and remedies against Tenant
under the lease provisions in effect prior to such termination, and any rent
owing shall be paid up to such date and any payments of rent made by Tenant
which were on account of any period subsequent to such date shall be returned to
Tenant. Unless Owner shall serve a termination notice as provided for herein,
Owner shall make the repairs and restorations under the conditions of (b) and
(c) hereof, with all reasonable expedition, subject to delays due to adjustment
of insurance claims, labor troubles and causes beyond Owner's control. After any
such casualty, Tenant shall cooperate with Owner' restoration by removing from
the premises as promptly as reasonably possible, all of Tenant's salvageable
inventory and movable equipment, furniture, and other property. Tenant's
liability for rent shall resume five (5) days after written notice from Owner
that the premises are substantially ready for Tenant's occupancy. (e) Nothing
contained hereinabove shall relieve Tenant from liability that may exist as a
result of damage from fire or other casualty. Notwithstanding the foregoing,
each party shall look first to any insurance in its favor before making any
claim against the other party for recovery for loss or damage resulting from
fire or other casualty and to the extent that such insurance is in force and
collectible and to the extent permitted by law, Owner and Tenant each hereby
releases and waives all right of recovery against the other or any one claiming
through or under each of them by way of subrogation or otherwise. The foregoing
release and waiver shall be in force only if both releasors' insurance policies
contain a clause providing that such a release or waiver shall not invalidate
the insurance. If, and to the extent, that such waiver can be obtained only by
the payment of additional premiums, then the party benefiting from the waiver
shall pay such premium within ten days after written demand or shall be deemed
to have agreed that the party obtaining insurance coverage shall be free of any
further obligation under the provisions hereof with respect to waiver of
subrogation. Tenant acknowledges that Owner will not carry insurance on Tenant's
furniture and/or furnishings or any fixtures or equipment, improvements, or
appurtenance removable by Tenant and agrees that Owner will not be obligated to
repair any damage thereto or replace the same. (f) Tenant hereby waives the
provisions of Section 227 of the Real Property Law and agrees that the
provisions of this article shall govern and control in lieu thereof.
Eminent Domain:
10. If the whole or any part of the demised premises Domain: shall be
acquired or condemned by for any public or quasi public use or purpose, then and
in that event, the term of this lease shall cease and terminate from the date of
title vesting in such proceeding and Tenant shall have no claim for the value of
any unexpired term of said lease and assigns to Owner, Tenant's entire interest
in any such award.
Assignment, Mortgage, Etc.:
11. Tenant, for itself, its heirs, distributees, executors, administrators,
legal representatives, successors and assigns, expressly covenants that it shall
not assign, mortgage or encumber this agreement, nor underlet, or suffer or
permit the demised premises or any part thereof to be used by others, without
the prior written consent of Owner in each instance. Transfer of the majority of
the stock of a corporate Tenant shall be deemed an assignment. If this lease be
assigned, or if the demised premises or any part thereof be underlet or occupied
by anybody other than Tenant, Owner may, after default by Tenant, collect rent
from the assignee, under-tenant or occupant, and apply the net amount collected
to the rent herein reserved, but no such assignment, underletting, occupancy or
collection shall be deemed a waiver of this covenant, or the acceptance of the
assignee, under-tenant or occupant as tenant, or a release of Tenant from the
further performance by Tenant of covenants on the part of Tenant herein
contained. The consent by Owner to an assignment or underletting shall not in
any wise be construed to relieve Tenant from obtaining the express consent in
writing of Owner to any further assignment or underletting.
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Electric Current:
12. Rates and conditions in respect to submetering or rent
inclusion, as the case may be, to be added in RIDER attached hereto. Tenant
covenants and agrees that at all times its use of electric current shall not
exceed the capacity of existing feeders to the building or the risers or wiring
installation and Tenant may not use any electrical equipment which, in Owner's
opinion, reasonably exercised, will overload such installations or interfere
with the use thereof by other tenants of the building. The change at any time of
the character of electric service shall in no wise make Owner liable or
responsible to Tenant, for any loss, damages or expenses which Tenant may
sustain.
Access to Premises:
13. Owner or Owner's agents shall have the right (but shall not obligated)
to enter the demised premises in any emergency at any time, and, at other
reasonable times, upon prior notice to examine the same and to make such
repairs, replacements and improvements as Owner may deem necessary and
reasonably desirable to the demised premises or to any other portion of the
building or which Owner may elect to perform. While the Landlord or its agents
or representatives are in the demised premises in accordance with the provisions
of this Article 13, Landlord shall use all reasonable efforts and shall cause
such agents or representatives to use their reasonable efforts to safeguard and
protect Tenant's property from damage and to minimize the interference with
Tenant's business. Tenant shall permit Owner to use and maintain and replace
pipes and conduits in and through the demised premises and to erect new pipes
and conduits therein provided they are concealed within the walls, floor, or
ceiling. Owner may, during the progress of any work in the demised premises,
take all necessary materials and equipment into said premises without the same
constituting an eviction nor shall the Tenant be entitled to any abatement of
rent while such work is in progress nor to any damages by reason of loss or
interrupting of business or otherwise. Throughout the term hereof Owner shall
have the right to enter the demised premises at reasonable hours for the purpose
of showing the same to prospective purchasers or mortgagees of the building, and
during the last six months of the term for the purpose of showing the same to
prospective tenants. If Tenant is not present to open and permit an entry into
the premises, Owner or Owner' s agents may enter the same whenever such entry
may be necessary or permissible by master key or forcibly and provided
reasonable care if exercised to safeguard Tenant's property, such entry shall
not render Owner or its agents liable therefor, nor in any event shall the
obligations of Tenant hereunder be affected. If during the last month of the
term Tenant shall have removed all or substantially all of Tenant's property
therefrom, Owner may immediately enter, alter, renovate or redecorate the
demised premises without limitation or abatement of rent, or incurring liability
to Tenant for any compensation and such as shall have no effect on this lease or
Tenant's obligations hereunder.
Vault, Vault Space, Area:
14. No Vaults, vault space or area, whether or not enclosed or covered, not
within the property line of the building is leased hereunder, anything contained
in or indicated on any sketch, blue print or plan, or anything contained
elsewhere in this lease to the contrary notwithstanding. Owner makes no
representation as to the location of the property line of the building. All
vaults and vault space and all such areas not within the property line of the
building, which Tenant may be permitted to use and/or occupy, is to be used
and/or occupied under a revocable license, and if any such license be revoked,
or if the amount of such space or area be diminished or required by any federal,
state or municipal authority or public utility, Owner shall not be subject to
any liability nor shall Tenant be entitled to any compensation or diminution or
abatement of rent, nor shall such revocation, diminution or requisition be
deemed constructive or actual eviction. Any tax, fee or charge of municipal
authorities for such vault or area shall be paid by Tenant.
Occupancy:
15. Tenant will not at any time use or occupy the demised premises in
violation of the certificate of occupancy issued for the building of which the
demised premises are a part. Tenant has inspected the premises and accepts them
as is, subject to the riders annexed hereto with respect to Owner's work, if
any. In any event, Owner makes no representation as to the condition of the
premises except that there are no violations of record as of the Commencement
Date of the Lease and that the Certificate of Occupancy for the building is
currently in full force and effect.
Bankruptcy:
16. (a) Anything elsewhere in this lease to the contrary notwithstanding,
this lease may be cancelled by Owner by the sending of a written notice to
Tenant within a reasonable time after the happening of any one or more of the
following events: (1) the commencement of a case in bankruptcy or under the laws
of any state naming Tenant as the debtor; or (2) the making by Tenant of an
assignment or any other arrangement for the benefit of creditors under any state
statute. Neither Tenant nor any person claiming through or under Tenant, or by
reason of any statute or order of court, shall thereafter be entitled to
possession of the premises demised but shall forthwith quit and surrender the
premises. If this lease shall be assigned in accordance with its terms, the
provisions of this Article 16 shall be applicable only to the party then owning
Tenant's interest in this lease.
(b) it is stipulated and agreed that in the event of the termination of
this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any
other provisions of this lease to the contrary, be entitled to recover from
Tenant as and for liquidated damages an amount equal to the difference between
the rent reserved hereunder for the unexpired portion of the term demised and
the fair and reasonable rental value of the demised premises for the same
period. In the computation of such damages the difference between any
installment of rent becoming due hereunder after the date of termination and the
fair and reasonable rental value of the demised premises for the period for
which such installment was payable shall be discounted to the date of
termination at the rate of four percent (4%) per annum. If such premises or any
part thereof be relet by the Owner for the unexpired term of said lease, or any
part thereof, before presentation of proof of such liquidated damages to any
court, commission or tribunal, the amount of rent reserved upon such reletting
shall be deemed to be the fair and reasonable rental value for the part or the
whole of the premises so relet during the term of the reletting. Nothing herein
contained shall limit or prejudice the right of the Owner to prove for and
obtain as liquidated damages by reason of such termination, an amount equal to
the maximum allowed by any statute or rule of law in effect at the time when,
and governing the proceedings in which, such damages are to be proved, whether
or not such amount be greater, equal to, or less than the amount of the
difference referred to above.
Default:
17. (1) If Tenant defaults in fulfilling any of the covenants of this lease
other than the covenants for the payment of rent or additional rent; or if any
of the demised premises becomes vacant or deserted; or if any execution or
attachment shall be issued against Tenant or any of Tenant's property whereupon
the demised premises shall be taken or occupied by someone other than Tenant; or
if this lease be rejected under ss. 235 of Title 11 of the U.S. Code (bankruptcy
code); or if Tenant shall fail to move into or take possession of the premises
within fifteen (15) days after the commencement of the term of this lease, then,
in any one or more of such events, upon Owner serving a written ten (10) days
notice upon Tenant specifying the nature of said default and upon the expiration
of said ten (10) days if Tenant shall have failed to comply with or remedy such
default, or if the said default or omission complained of shall be of a nature
that the same cannot be completely cured or remedied within said ten (10) day
period, and if Tenant shall not have diligently commenced during such default
within such ten (10) day period, and shall not thereafter with reasonable
diligence and in good faith, proceed to remedy or cure such default, or if
Tenant defaults in the payment of rent on additional rent and fails to cure such
default within five (5) days after written notice thereof, then Owner may serve
a written five (5) days' notice of cancellation of this lease upon Tenant, and
upon the expiration of said five (5) days this lease and the term thereunder
shall end and expire as fully and completely as if the expiration of such five
(5) day period were the day herein definitely fixed for the end and expiration
of this lease and the term thereof and Tenant shall then quit and surrender the
demised premises to Owner but Tenant shall remain liable as hereinafter
provided.
(2) If the notice provided for in (1) hereof shall have been given, and
the term shall expire as aforesaid; or if Tenant shall make default in the
payment of the rent reserved herein or any item of additional rent herein
mentioned or any part of either or in making any other payment herein required;
then and in any of such events Owner may without notice, re-enter the demised
premises either by force or otherwise, and dispossess Tenant by summary
proceedings or otherwise, and the legal representative of Tenant or other
occupant of demised premises and remove their effects and hold the premises as
if this lease had not been made, and Tenant hereby waives the service of notice
of intention to re-enter or to institute legal proceedings to that end. If
Tenant shall make default hereunder prior to the date fixed as the commencement
of any renewal or extension of this lease, Owner may cancel and terminate such
renewal or extension agreement by written notice.
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Remedies of owner and Waiver of Redemption:
18. In case of any such default, re-entry, expiration and and/or dispossess
by summary proceedings or otherwise (a) the rent shall become due thereupon and
be paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner
may re-let the premises or any part or parts thereof, either in the name of
Owner or otherwise, for a term or terms, which may at Owner's option be less
than or exceed the period which would otherwise have constituted the balance of
the term of this lease and may grant concessions or free rent or charge a higher
rental than that in this lease, and/or (c) Tenant or the legal representatives
of Tenant shall also pay Owner as liquidated damages for the failure of Tenant
to observe and perform said Tenant's covenants herein contained, any deficiency
between the rent hereby reserved and/or covenanted to be paid and the net
amount, if any, of the rents collected on account of the lease or leases of the
demised premises for each month of the period which would otherwise have
constituted the balance of the term of this lease. The failure of Owner to
re-let the premises or any part or parts thereof shall not release or affect
Tenant's liability for damages. In computing such liquidated damages there shall
be added to the said deficiency such expenses as Owner may incur in connection
with re-letting, such as legal expenses, reasonable attorneys' fees, brokerage,
advertising and for keeping the demised premises in good order or for preparing
the same for re-letting. Any such liquidated damages shall be paid in monthly
installments by Tenant on the rent day specified in this lease and any suit
brought to collect the amount of the deficiency for any month shall not
prejudice in any way the rights of Owner to collect the deficiency for any month
shall not prejudice in any way the rights of Owner to collect the deficiency of
any subsequent month by a similar proceeding. Owner, in putting the demised
premises in good order or preparing the same for re- rental may, at Owner's
option, make such alterations, repairs, replacements, and/or decorations in the
demised premises as Owner, in Owner's sole judgment, considers advisable and
necessary for the purpose of re-letting the demised premises, and the making of
such alterations, repairs, replacements, and/or decorations shall not operate or
be construed to release Tenant from liability hereunder as aforesaid. Owner
shall in no event be liable in any way whatsoever for failure to re-let the
demised premises, or in the event that the demised premises are re-let, for
failure to collect the rent thereof under such re-letting, and in no event shall
Tenant be entitled to receive any excess, if any, of such net rents collected
over the sums payable by Tenant to Owner hereunder. In the event of a breach or
threatened breach by Tenant of any of the covenants or provisions hereof, Owner
shall have the right of injunction and the right to invoke any remedy allowed at
law or in equity as if re-entry, summary proceedings and other remedies were not
herein provided for. Mention in this lease of any particular remedy, shall not
preclude Owner from any other remedy, in law or in equity. Tenant hereby
expressly waives any and all rights of redemption granted by or under any
present or future laws in the event of Tenant being evicted or dispossessed for
any cause, or in the event of Owner obtaining possession of demised premises, by
reason of the violation by Tenant of any of the covenants and conditions of this
lease, or otherwise.
Fees and Expenses:
19. If Tenant shall default in the observance or performance of any term or
covenant on Tenant's part to be observed or performed under or by virtue of any
of the terms or provisions in any article of this lease, then, unless otherwise
provided elsewhere in this lease, Owner may immediately or at any time
thereafter and without notice perform the obligation of Tenant thereunder. If
Owner, in connection with the foregoing or in connection with any default by
Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs
any obligations for the payment of money, including but not limited to
reasonable attorney's fees, in instituting, prosecuting or defending any action
or proceeding, then Tenant will reimburse Owner for such sums so paid or
obligations incurred with interest and costs. The foregoing expenses incurred by
reason of Tenant's default shall be deemed to be additional rent hereunder and
shall be paid by Tenant to Owner within five (5) days of rendition of any bill
or statement to Tenant therefor. If Tenant's lease term shall have expired at
the time of making of such expenditures or incurring of such obligations, such
sums shall be recoverable by Owner as damages.
Building Alterations and Management:
20. Owner shall have the right at any time without the same constituting an
eviction and without incurring liability to Tenant therefor to change the
arrangement and/or location of public entrances, passageways, doors, doorways,
corridors, elevators, stairs, toilets or other public parts of the building and
to change the name, number or designation by which the building may be known.
There shall be no allowance to Tenant for diminution of rental value and no
liability on the part of Owner by reason of inconvenience, annoyance or injury
to business arising from Owner or other Tenants making any repairs in the
building or any such alterations, additions and improvements. Furthermore,
Tenant shall not have any claim against owner by reason of Owner's imposition of
such controls of the manner of access to the building by Tenant's social or
business visitors as the Owner may deem necessary for the security of the
building and its occupants.
No Representations by Owner:
21. Neither Owner nor Owner's agents have made any representations or
promises with respect to the physical condition of the building, the land upon
which it is erected or the demised premises, the rents, leases, expenses of
operation or any other matter or thing affecting or related to the premises
except as herein expressly set forth and no rights, easements or licenses are
acquired by Tenant by implication or otherwise except as expressly set forth in
the provisions of this lease. Tenant has inspected the building and the demised
premises and is thoroughly acquainted with their condition and agrees to take
the same "as is" subject to Articles 51 and 58 and acknowledges that the taking
of possession of the demised premises by Tenant shall be conclusive evidence
that the said premises and the building of which the same form a part were in
good and satisfactory condition at the time such possession was so taken, except
as to latent defects. All understandings and agreements heretofore made between
the parties hereto are merged in this contract, which alone fully and completely
expresses the agreement between Owner and Tenant and any executory agreement
hereafter made shall be in effective to change, modify, discharge or effect an
abandonment of it in whole or in part, unless such executory agreement is in
writing and signed by the party against whom enforcement of the change,
modification, discharge or abandonment is sought.
End of Term:
22. Upon the expiration or other termination of the term of this lease,
Tenant shall quit and surrender to Owner the demised premises, broom clean, in
good order and condition, ordinary wear and damages which Tenant is not required
to repair as provided elsewhere in this lease excepted, and Tenant shall remove
all its property. Tenant's obligation to observe or perform this covenant shall
survive the expiration or other termination of this lease. If the last day of
the term of this Lease or any renewal thereof, falls on Sunday, this lease shall
expire at noon on the preceding Saturday unless it be a legal holiday in which
case it shall expire at noon on the preceding business day.
Quiet Enjoyment:
23. Owner covenants and agrees with Tenant that upon Tenant paying the rent
and additional rent and observing and performing all the terms, covenants and
conditions, on Tenant's part to be observed and performed, Tenant may peaceably
and quietly enjoy the premises hereby demised, subject, nevertheless, to the
terms and conditions of this lease including, but not limited to, Article 31
hereof and to the ground leases, underlying leases and mortgages hereinbefore
mentioned.
No Waiver:
24. The failure of Owner or Tenant to seek redress for violation of, or to
insist upon the strict performance of any covenant or condition of this lease or
of any of the Rules or Regulations, set forth or hereafter adopted by Owner,
shall not prevent a subsequent act which would have originally constituted a
violation from having all the force and effect of an original violation. The
receipt by Owner of rent with knowledge of the breach of any covenant of this
lease shall not be deemed a waiver of such breach and no provision of this lease
shall be deemed to have been waived by Owner unless such waiver be in writing
signed by Owner. No payment by Tenant or receipt by Owner of a lesser amount
than the monthly rent herein stipulated shall be deemed to be other than on
account of the earliest stipulated rent, nor shall any endorsement or statement
of any check or any letter accompanying any check or payment without prejudice
to Owner's right to recover the balance of such rent or pursue any other remedy
in this lease provided. No act or thing done by Owner or Owner's agents during
the term hereby demised shall be deemed an acceptance of a surrender of said
premise, and no agreement to accept such surrender shall be valid unless in
writing signed by Owner. No employee of Owner or Owner's agent shall have any
power to accept the keys of said premises prior to the termination of the lease
and the delivery of keys to any such agent or employee shall not operate as a
termination of the lease or a surrender of the premises.
Waiver of Trial by Jury:
25. It is mutually agreed by and between Owner and Tenant that the
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or counter-claim brought by either of the parties hereto
against the other (Except for personal injury or property damage) on any matters
whatsoever arising out of or in any way connected with this lease, the
relationship of Owner and Tenant, Tenant's use of or occupancy of said premises,
and any emergency statutory or any other statutory remedy. It is further
mutually agreed that in the event Owner commence any summary proceeding for
possession of the premises, Tenant will not interpose any counterclaim of
whatever nature or description in any such proceeding including a counterclaim
under Article 4 except for any mandatory counterclaims that are available to
Tenant.
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Inability to Perform:
26. This Lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in no wise be affected, impaired or excused because Owner is
unable to fulfill any of its obligations under this lease or to supply or is
delayed in supplying any service expressly or impliedly to be supplied or is
unable to make, or is delayed in making any repair, additions, alterations or
decorations or is unable to supply or is delayed in supplying any equipment or
fixtures if Owner is prevented or delayed from so doing by reason of strike or
labor troubles or any cause whatsoever including, but not limited to, government
preemption in connection with a National Emergency or by reason of any rule,
order or regulation of any department or subdivision thereof of any government
agency or by reason of the conditions of supply and demand which have been or
are affected by war or other emergency.
Bills and Notices:
27. Except as otherwise in this lease provided, a bill, statement, notice
or communication which Owner may desire or be required to give to Tenant, shall
be deemed sufficiently given or rendered if, in writing, delivered to Tenant
personally or sent by registered or certified mail addressed to Tenant at the
building of which the demised premises form a part or at the last known
residence address or business address of Tenant or left at any of the aforesaid
premises addressed to Tenant, and the time of the rendition of such bill or
statement and of the giving of such notice or communication shall be deemed to
be the time when the same is delivered to Tenant, mailed, or left at the
premises as herein provided. Any notice by Tenant to Owner must be served by
registered or certified mail addressed to Owner at the address first hereinabove
given or at such other address as Owner shall designate by written notice.
Services Provided by Owners:
28. As long as Tenant is not in default under any of covenants of this
lease, Owners shall provide: (a) necessary elevator facilities on business days
from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m. to 1 p.m. and have one
elevator subject to call at all other times; (b) heat to the demised premises
when and as required by law, on business days from 8 a.m. to 6 p.m. and on
Saturdays from 8 a.m. to 1 p.m.; (c) water for ordinary lavatory purposes, but
if Tenant uses or consumes water for any other purposes or in unusual quantities
)of which fact Owner shall be the sole judge), Owner may install a water meter
at Tenant's expense which Tenant shall thereafter maintain at Tenant's expense
in good working order and repair to register such water consumption and Tenant
shall pay for water consumed as shown on said meter as additional rent as and
when bills are rendered; (d) cleaning service for the demised premises on
business days at Owner's expense provided that the same are kept in order by
Tenant. If, however, said premises are to be kept clean by Tenant, it shall be
done at Tenant's sole expense, in a manner satisfactory to Owner and no one
other than persons approved by Owner shall be permitted to enter said premises
or the building of which they are a part for such purpose. Tenant shall pay
Owner the cost of removal of any of Tenant's refuse and rubbish from the
building. RIDER to be added in respect to rates and conditions for such
additional service; (f) Owner reserves the right to stop services of the
heating, elevators, plumbing, air-conditioning, power systems or cleaning or
other services, if any, when necessary by reason of accident or for repairs,
alterations, replacements or improvements necessary or desirable in the judgment
of Owner for as long as may be reasonably required by reason thereof. If the
building of which the demised premises are a part supplies manually operated
elevator service, Owner at any time may substitute automatic control elevator
service and upon ten days' written notice to Tenant, proceed with alterations
necessary therefor without in any wise affecting this lease or the obligation of
Tenant hereunder. The same shall be done with a minimum of inconvenience to
Tenant and Owner shall pursue the alteration with due diligence.
Captions:
29. The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this lease nor
the intent of any provisions thereof.
Definitions:
30. The term "office", or "offices", wherever used in this lease, shall not
be construed to mean premises used as a store or stores, for the sale or
display, at any time, of goods, wares or merchandise, of any kind, or as a
restaurant, shop, booth, bootblack or other stand, barber shop, or for other
similar purposes or for manufacturing. The term "Owner" means a landlord or
lessor, and as used in this lease means only the owner, or the mortgagee in
possession, for the time being of the land and building (or the owner of a lease
of the building or of the land and building) of which the demised premises form
a part, so that in the event of any sale or sales of said land and building or
of said lease, or in the event of a lease of said building, or of the land and
building, the said Owner shall be and hereby is entirely freed and relieved of
all covenants and obligations of Owner hereunder, and it shall be deemed and
construed without further agreement between the parties or their successors in
interest, or between the parties and the purchaser, at any such ale, or the said
lessee of the building, or of the land and building, that the purchaser or the
lessee of the building has assumed and agreed to carry out any and all covenants
and obligations of Owner, hereunder. The words "re-enter" and "re-entry" as used
in this lease are not restricted to their technical legal meaning. The term
"business days" as used in this lease shall exclude Saturdays (except such
portion thereof as is covered by specific hours in Article 28 hereof), Sundays
and all days observed by the State or Federal Government as legal holidays and
those designated as holidays by the applicable building service union employees
service contract or by the applicable Operating Engineers contract with respect
to HVAC service.
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Adjacent Excavation -- Shoring:
31. If an excavation shall be made upon land adjacent to the demised
premises, or shall be authorized to be made, Tenant shall afford to the person
causing or authorized to cause such excavation, license to enter upon the
demised premises for the purpose of doing such work as said person shall deem
necessary to preserve the wall or the building of which demised premises form a
part from injury or damage and to support the same by proper foundations without
any claim for damages or indemnity against Owner, or diminution or abatement of
rent.
Rules and Regulations:
32. Tenant and Tenant's servants, employees, agents, visitors and licensees
shall observe faithfully, and comply strictly with, the Rules and Regulations
and such other and further reasonable Rules and Regulations as Owner or Owner's
agents may from time to time adopt. Notice of any additional rules or
regulations shall be given in such manner as Owner may elect. In case Tenant
disputes the reasonableness of any additional Rule or Regulation hereafter made
or adopted by Owner or Owner's agents, the parties hereto agree to submit the
question of the reasonableness of such Rule or Regulation for decision to the
New York office of the American Arbitration Association, whose determination
shall be final and conclusive upon the parties hereto. The right to dispute the
reasonableness of any additional Rule or Regulation upon Tenant's part shall be
deemed waived unless the same shall be asserted by service of a notice, in
writing upon Owner within ten (10) days after the giving of notice thereof.
Nothing in this lease contained shall be construed to impose upon Owner any duty
or obligation to enforce the Rules and Regulations or terms, covenants or
conditions in any other lease, as against any other tenant and Owner shall not
be liable to Tenant for violation of the same by any other tenant, its servants,
employees, agents, visitors or licensees. All Rules and Regulations shall be
adopted and enforced in a non-discriminatory manner.
Security:
33. Tenant has deposited with Owner the sum of $72,666.66 as security for
the faithful performance and observance by Tenant of the terms, provisions and
conditions of this lease; it is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this lease, including,
but not limited to, the payment of rent and additional rent, Owner may use,
apply or retain the whole or any part of the security so deposited to the extent
required for the payment of any rent and additional rent or any other sum as to
which Tenant is in default or for any sum which Owner may expend or may be
required to expend by reason of Tenant's default in respect of any of the terms,
covenants and conditions of this lease, including but not limited to, any
damages or deficiency in the re-letting of the premises, whether such damages or
deficiency accrued before or after summary proceedings or other re-entry by
Owner. In the event that Tenant shall fully and faithfully comply with all of
the terms, provisions, covenants and conditions of this lease, the security
shall be returned to Tenant after the date fixed as the end of the Lease and
after delivery of entire possession of the demised premises to Owner. In the
event of a sale of the land and building or leasing of the building, of which
the demised premises form a part, Owner shall have the right to transfer the
security to the vendee or lessee and Owner shall thereupon be released by Tenant
from all liability for the return of such security; and Tenant agrees to look to
the new Owner solely for the return of said security, and it is agreed that the
provisions hereof shall apply to every transfer or assignment made of the
security to a new Owner. Tenant further covenants that it will not assign or
encumber or attempt to assign or encumber the monies deposited herein as
security and that neither Owner nor its successors or assigns shall be bound by
any such assignment, encumbrance, attempted assignment or attempted encumbrance.
See Article 60.
Estoppel Certificate:
34. Tenant, at any time, and from time to time, upon at least 10 days'
prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or
to any other person, firm or corporation specified by Owner, a statement
certifying that this Lease is unmodified and in full force and effect (or, if
there have been modifications, that the same is in full force and effect as
modified and stating the modifications), stating the dates to which the rent and
additional rent have been paid, and stating whether or not there exists any
default by Owner under this Lease, and, if so, specifying each such default.
Successors and Assigns:
35. The covenants, conditions and agreement contained in this lease shall
bind and inure to the benefit of Owner and Tenant and their respective heirs,
distributees, executors, administrators, successors, and except as otherwise
provided in this lease, their assigns.
Rider containing Articles 36 thru 60 inclusive is annexed hereto and made
part hereof
IN WITNESS WHEREOF, Owner and Tenant have respectively signed and sealed this
lease as of the day and year first above written.
HACIENDA INTERCONTINENTAL REALTY, N.V.
Witness for Owner:
________________________________
By: ____________________________[CORP. SEAL]
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
Witness for Tenant:
________________________________
By: ____________________________[CORP. SEAL]
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ACKNOWLEDGMENTS
CORPORATE OWNER
STATE OF NEW YORK, ss.:
County of
On this day of , 19 , before me personally came
to me known, who being by me duly sworn, did depose and say that he
resides
in :
that he is the of
the corporation described in and which executed the foregoing instrument, as
OWNER: that he knows the seal of said corporation; that the seal affixed to said
instrument is such corporate seal; that it was so affixed by order of the Board
of Directors of said corporation, and that he signed his name thereto by like
order.
-----------------------------------------------
INDIVIDUAL OWNER
STATE OF NEW YORK, ss.:
County of
to me known and known to be the individual
described in and who, as OWNER, executed the foregoing instrument
and acknowledged to me that he executed the same.
-----------------------------------------------
CORPORATE TENANT
STATE OF NEW YORK, ss.:
County of
On this day of , 19 , before me personally came
to me known, who being by me duly sworn, did depose and say that he
resides
in :
that he is the of
the corporation described in and which executed the foregoing instrument, as
OWNER: that he knows the seal of said corporation; that the seal affixed to said
instrument is such corporate seal; that it was so affixed by order of the Board
of Directors of said corporation, and that he signed his name thereto by like
order.
-----------------------------------------------
INDIVIDUAL TENANT
STATE OF NEW YORK, ss.:
County of
to me known and known to be the individual
described in and who, as OWNER, executed the foregoing instrument
and acknowledged to me that he executed the same.
-----------------------------------------------
RIDER ANNEXED TO LEASE DATED JUNE , 1996 BY AND BETWEEN HACIENDA
INTERCONTINENTAL REALTY, N.V., AS LANDLORD AND NEW YORK MERCHANT BAKERS
INSURANCE COMPANY, AS TENANT, OF THE ENTIRE 21ST FLOOR OF THE BUILDING
KNOWN AS 116 JOHN STREET, NEW YORK, NEW YORK 10038
============================================
36. Rider Provisions Paramount: If and to the extent that any of the provisions
of this Rider conflict or are otherwise inconsistent with any of the preceding
printed provisions of this lease, whether or not such inconsistency is expressly
noted in this Rider, the provisions of this Rider shall prevail, and in case of
inconsistency with said Rules and Regulations, shall be deemed a waiver of such
Rules and Regulations with respect to Tenant to the extent of such
inconsistency.
37. Additional Definitions: For the purposes of this Lease and all agreements
supplemental to this lease, and all communications with respect thereto, unless
the context otherwise requires:
A. The term "fixed rent" shall mean rent at the annual rental rate or rates
provided for in the granting clause appearing at the beginning of this lease.
B. The term "additional rent" shall mean all sums of money, other than
fixed rent, and which become due and payable from Tenant to Landlord hereunder,
and Landlord shall have the same remedies therefor as for a default in payment
of fixed rent.
C. The term "rent" shall mean fixed rent and/or additional rent.
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D. The terms "Commencement Date" and "Expiration Date" shall mean the dates
fixed in this lease, or to be determined pursuant to the provisions of this
lease, respectively, as the beginning and the end of the term for which the
demised premises are hereby leased.
38. Escalation for Increase in Real Estate Taxes:
A. As used herein:
(a) "Taxes" shall mean the real estate taxes and assessments imposed
upon the land and building of which the demised premises are a part. Penalties
and interest on Taxes, and income, franchise, transfer, inheritance and capital
stock taxes shall be deemed excluded from the term Taxes for the purposes
hereof. However, if and to the extent that, due to a change in the method of
assessment or taxation, any franchise, capital stock, capital, rents, income,
profits or other tax or charge shall be substituted in whole or in part for the
Taxes now or hereafter imposed upon said land and building, such franchise,
capital stock, capital, rents, income, profits or other tax or charge, computed
as if Landlord owned or operated no property other than said land and building,
shall be deemed included in the term Taxes for the purposes hereof.
(b) "Tax Year" shall mean each period of twelve (12) months, commencing
on the first day of July of each such period, in which occurs any part of the
term of this lease or such other period of twelve (12) months occurring during
the term of this lease as hereafter may be duly adopted as the fiscal year for
real estate tax purposes of the City of New York.
(c) "Base Tax" shall mean the Taxes for the period July 1, 1996 through
June 30, 1997 (the "Base Tax Year").
B. If the Taxes for any Tax Year shall be greater than the Base Tax, Tenant
shall pay as additional rent for such Tax Year a sum equal to 3.449% of the
amount by which the Taxes for such Tax Year are greater than the Base Tax (which
amount is hereinafter called the "Tax Payment"). Should this lease commence or
terminate prior to the expiration of a Tax Year, such Tax Payment shall be
prorated to, and shall be payable on, or as and when ascertained after, the
Commencement Date or the Expiration Date, as the case may be. Tenant's
obligation to pay such additional rent and Landlord's obligation to refund
pursuant to Paragraph C below, as the case may be, shall survive the termination
of this lease for a period of two (2) years. If the Taxes for any Tax Year
subsequent to the Base Tax Year, or an installment thereof, shall be reduced
before such Taxes, or such installment, shall be paid, the amount of Landlord's
reasonable costs and expenses of obtaining such reduction (but not exceeding the
amount of such reduction) shall be added to and be deemed part of the Taxes for
such Tax Year. Payment of additional rent for any Tax Payment due from Tenant
shall be made as and subject to the conditions hereinafter provided in this
Article.
C. Landlord shall be under no obligation to contest the Taxes or the
assessed valuation of the land and the building for any Tax Year or to refrain
from contesting the same, and may settle any such contest on such terms as
Landlord in its sole judgment considers proper. If Landlord shall receive a
refund for any Tax Year for which a Tax Payment shall have been made by Tenant
pursuant to Paragraph B above, Landlord shall repay to Tenant, with reasonable
promptness, 3.449% of such refund after deducting from such refund the
reasonable costs and expenses (including experts' and attorneys' fees) of
obtaining such refund. If the assessment for the Base Tax Year shall be reduced
from the amount originally imposed after Landlord shall have rendered a
comparative statement (as provided in Paragraph D below) to Tenant with respect
to a Tax Year, the amount of the Tax Payment shall be adjusted in accordance
with such change and Tenant, on Landlord's demand, shall pay any increase in
additional rent resulting from such adjustment.
D. At any time during a Tax Year after the taxes for such Tax Year become
known Landlord may, or else with reasonable promptness after the end of each Tax
Year, Landlord shall render to Tenant a comparative statement together with a
copy of the tax bill showing the amount of the Base Tax, the amount of the Taxes
for such Tax Year and the Tax Payment, if any, due from Tenant for such Tax
Year, indicating thereon in reasonable detail the computation of such Tax
Payment. The Tax Payment shown on such comparative statement may, at Landlord's
option, be payable in full or in such installments (not more frequent than
monthly) as Landlord may determine. Tenant shall pay the amount of the Tax
Payment shown on such comparative statement (or the balance of a proportionate
installment thereof, if only an installment is involved) concurrently with the
installment of fixed
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<PAGE>
rent then or next due, or if such statement shall be rendered at or after the
termination of this lease within thirty (30) days after such rendition. Whenever
so requested, but not more often than once a year, Landlord will furnish Tenant
with a reproduced copy of the bill (or receipted bill) for the Taxes for the
current or next preceding Tax Year.
39. Escalation for Wage Rates:
A. As used herein:
(a) "Wage Rate" shall mean the minimum regular hourly wage rate required
to be paid to or for the benefit of porters engaged in the general maintenance
and operation of Class A office buildings in the vicinity of the building
pursuant to a collective bargaining agreement negotiated by Realty Advisory
Board on Labor Relations, Inc., or any successor thereto.
(b) "Base Wage Rate" shall mean the Wage Rate in effect for the calendar
year 1996.
B. If the Wage Rate shall be increased at any time after the date of this
lease and shall be greater than the Base Wage Rate, Tenant shall pay to Landlord
as additional rent an annual sum equal to the product obtained by multiplying
(i) one times the number of cents (including any fraction of a cent), by which
the Wage Rate exceeds the Base Wage Rate by (ii) the number of square feet of
rentable area of the demised premises, which for the purposes of this Paragraph
shall be deemed to be 10,900 square feet. Such additional rent shall be payable
in equal monthly installments commencing with the first monthly installment of
fixed rent falling due hereunder after the effective date of such a change in
the Wage Rate and continuing thereafter until a new adjustment in such
additional rent shall be established and become effective in accordance with the
provisions of this Article. If any increase in the Wage Rate shall be made
retroactive, Tenant shall pay Landlord the amount of the consequent adjustment
of fixed rent. Landlord shall give Tenant written notice of each change in the
Wage Rate which will be effective to create or change Tenant's obligation to pay
additional rent pursuant to the provisions of this Paragraph B, with reasonable
promptness after Landlord learns thereof, and such notice shall contain
Landlord's calculation of the annual rate of additional rent payable resulting
from such change in the Wage Rate.
C. Landlord's failure during the lease term to prepare and deliver any
notice, statement or bill, or Landlord's failure to make a demand, shall not in
any way cause Landlord to forfeit or surrender Landlord's right to collect any
additional rent which may have become due during the term of this lease under
this Article and Tenant's liability for amounts due under this Article shall
survive the termination of this lease for a period of two (2) years.
40. Amending Article 11:
Notwithstanding the provisions of Article 11, and in modification and
amplification thereof:
A. If Tenant's interest in this lease is assigned, whether or not in
violation of the provisions of this lease, Landlord may collect rent from the
assignee. If the demised premises or any part thereof are sublet to, or occupied
by, or used by, any person other than Tenant, whether or not in violation of
this lease, Landlord, after default by Tenant under this lease and expiration of
Tenant's time, if any, to cure such default, may collect rent from the
subtenant, user or occupant. In either case, Landlord shall apply the net amount
collected to the rents reserved in this lease, but neither any such assignment,
subletting, occupancy, nor use, nor any such collection or application shall be
deemed a waiver of any term, covenant or condition of this lease or the
acceptance by Landlord of such assignee, subtenant occupant or user as a tenant.
The consent by Landlord to any assignment, subletting, occupancy or use shall
not relieve Tenant from its obligation to obtain the express prior written
consent of Landlord to any further assignment, subletting, occupancy or use. The
listing of
10
<PAGE>
any name other than Tenant's on any door of the demised premises, or on any
directory, other than the names of Tenant's business entity and Tenant's
associates/employees or on any elevator in the building, or otherwise, shall not
operate to vest in the party so named, any right or interest in this lease or in
the demised premises, or be deemed to constitute, or serve as a substitute for,
any prior written consent of Landlord required under this Article,and it is
understood that any such listing shall constitute a privilege extended by
Landlord which shall be revocable at Landlord's will by notice to Tenant. Tenant
agrees to pay to Landlord any reasonable counsel fees incurred by Landlord in
connection with any proposed assignment of Tenant's interest in this lease or
any proposed subletting of the demised premises or any part thereof. Neither any
assignment of Tenant's interest in this lease nor any subletting, occupancy or
use of the demised premises or any part thereof by any person other than Tenant,
nor any collection of rent by Landlord from any person other than Tenant as
provided in this Paragraph A, nor any application of any such rent as
aforementioned as provided in this Paragraph A, shall in any circumstances
relieve Tenant of Tenant's obligation fully to observe and perform the terms,
covenants and conditions of this lease on Tenant's part to be observed and
performed.
Landlord shall not unreasonably withhold consent to the proposed assignment
or subletting, provided that Tenant is not then in default under this lease and
further provided that the following further conditions shall be fulfilled:
i) The proposed subtenant or assignee shall not be a school of any kind,
or an employment or placement agency or governmental or quasi-governmental
agency;
ii) The subletting or assignment shall be to a tenant whose occupancy
will be in keeping with the dignity and character of the then use and occupancy
of the building and whose financial standing and occupancy will not be more
objectionable or more hazardous than that of Tenant herein or impose any
additional burden upon Landlord in the operation of the building;
iii) The proposed sublessee or assignee shall not be at a lower rental
rate than that being charged by Landlord at the time for similar space in the
building;
iv) The proposed sublessee or assignee shall not be a tenant, subtenant
or assignee of any premises in the building; nor shall the proposed sublessee or
assignee be a person or entity with whom Landlord is then negotiating to lease
space in the building.
v) In case of a subletting, it shall be expressly subject to all of the
obligations of Tenant under this lease and the further condition and restriction
that the sublease shall not be assigned, encumbered or otherwise transferred or
the subleased premises further sublet by the sublessee in whole or in part, or
any part thereof suffered or permitted by the sublessee to be used or occupied
by others, without the prior written consent of Landlord in each instance.
vi) The demised premises shall not, without Landlord's prior written
consent, have been listed or otherwise publicly advertised for assignment or
subletting at a rental rate less than the lower of the rate of fixed rent then
payable hereunder for such space or the then prevailing rental rate for other
space in the building. However, this shall not be deemed to prohibit Tenant from
negotiating or consummating a sublease at a lower rental rate.
vii) The character of the business to be conducted or the proposed use
of the demised premises by the proposed sublessee or assignee shall not (i) be
likely to increase Landlord's operating expenses beyond that which would be
incurred in accordance with the standards of use of other tenancies in the
building; (ii) increase the burden on existing building services including,
without limitation, cleaning and elevator service over the burden prior to such
proposed subletting or assignment; or (iii) violate or be likely to violate any
provisions or restrictions herein relating to the use or occupancy of the
demised premises.
B. Anything herein contained to the contrary notwithstanding, but without
releasing Tenant from its obligations for full performance hereunder, Tenant
shall have the right, without the consent of Landlord, to assign or sublet all
or any part of the demised premises to one or more controlled or subsidiary
companies, or to a parent company (existing or future), and Tenant shall have
the right to permit the demised premises or any part thereof to be used by any
controlled subsidiary or affiliated and/or parent companies, provided that a
duplicate original of the assignment or sublease shall be delivered to Landlord
within seven (7) days after execution, and provided that such assignment or
sublease shall permit only such use and occupancy as is permitted under this
lease.
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<PAGE>
Further, Tenant may assign this lease in its entirety without the consent
of Landlord to any successor corporation (by consolidation or merger or sale of
substantially all of its assets) provided the assets and consolidated net worth
of such successor corporation and its consolidated subsidiaries, determined in
accordance with generally accepted accounting principles on a pro forma basis
from the then most recent audited (by independent certified public accountants)
balance sheets of all corporations which shall have been merged or consolidated
with or into such successor corporation, shall not be materially less than the
assets and consolidated net worth of Tenant and its consolidated subsidiaries as
shown by Tenant's most recent audited (by independent certified public
accountants) balance sheet, provided that Tenant shall have delivered to
Landlord an agreement on the part of such successor corporation whereby such
successor corporation agrees to assume, and does assume, all of the obligations
and duties on the part of the Tenant to be performed hereunder.
C. No permitted or consented to assignment or subletting shall be effective
or valid for any purpose whatsoever unless and until a counterpart of the
assignment or a counterpart or reproduced copy of the sublease shall have been
first delivered to the Landlord and, in the event of an assignment, the Tenant
shall deliver to Landlord a written agreement executed and acknowledged by the
Tenant and such assignee in recordable form wherein such assignee shall assume
jointly and severally with Tenant the due performance of this lease on Tenant's
part to be performed to the full end of the term of this lease notwithstanding
any other or further assignment.
D. Any transfer by operation of law or otherwise, of Tenant's interest in
this lease or of a 50% or greater interest in Tenant (whether stock, partnership
interest or otherwise) shall be deemed an assignment of this lease for purposes
of this Article.
E. If Landlord shall decline to give its consent to any proposed assignment
or sublease or if Landlord shall exercise its option under this Article, Tenant
shall indemnify, defend and hold harmless Landlord against and from any and all
loss, liability, damages, costs and expenses (including reasonable legal fees)
resulting from any claims that may be made against Landlord by the proposed
assignee or sublessee or by any brokers or other persons claiming a commission
or similar compensation in connection with the proposed assignment or sublease.
41. Supplementing Article 3:
Landlord's consent shall not be required for minor changes to the demised
premises such as painting and installation of cabinets and shelves. All other
renovations, decorations, additions, installations, improvements and or
alterations of any kind or nature in the demised premises (herein "Tenant's
Changes") shall require the prior written consent of Landlord thereto which, in
the case of non-structural Tenant's Changes, Landlord agrees not to unreasonably
withhold. In granting its consent to any Tenant's Changes, Landlord may impose
such conditions (as to guarantee of completion, payment, restoration and
otherwise) as Landlord may reasonably require. In no event shall Landlord be
required to consent to any Tenant's Change which would physically affect any
part of the building outside of the demised premises or would adversely affect
the proper functioning of the mechanical, electrical, sanitary or other service
systems of the building. At the time Tenant requests Landlord's written consent
to any Tenant's Changes, Tenant shall deliver to Landlord detailed plans and
specifications therefor. Tenant shall pay to Landlord any reasonable fees or
expenses incurred by Landlord in connection with Landlord's submitting such
plans and specifications, it reasonably deems it necessary to an architect or
engineer selected by Landlord for review or examination. Landlord's approval of
any plans or specifications does not relieve Tenant from the responsibility for
the legal sufficiency and technical competency thereof. Tenant before
commencement of any Tenant's Changes shall;
i) Obtain the necessary consents, authorizations and licenses from all
federal, state and/or municipal authorities having jurisdiction over such work;
ii) Furnish to Landlord a certificate or certificates of Workmen's
Compensation Insurance covering all persons who will perform Tenant's Changes
for Tenant or any contractor, subcontractor or other person;
iii) Furnish to Landlord an original Policy of Public Liability
Insurance covering Landlord in limit of not less than one million
($1,000,000.00) dollars for injuries or damages to person and property, in a
company approved by Landlord. Such policy shall be maintained at all times
during the progress of Tenant's Changes and until completion thereof, and shall
provide that no cancellation shall be effective unless ten (10) days prior
written notice has been given to Landlord.
iv) Tenant shall employ as its general contractor for the performance of
Tenant's Work such contractor as Tenant may select and Landlord shall approve.
Landlord shall not unreasonably withhold such approval. Tenant's contractor
shall only use union labor.
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Tenant agrees to indemnify and save Landlord harmless from and against any
and all bills for labor performed and equipment, fixtures and materials
furnished to Tenant and from and against any and all liens, bills or claims
therefor or against the demised premises or the building containing the same and
from and against all losses, damages, costs, expenses, suits and claims
whatsoever in connection with Tenant's Changes. The cost of Tenant's Changes
shall be paid for in cash or its equivalent, so that the demised premises and
the building containing the same shall at all times be free of liens for labor
and materials supplied or claimed to have been supplied.
Tenant, at its expense, shall cause any Tenant's Changes consented to by
Landlord to be performed in compliance with all applicable requirements of
insurance bodies having jurisdiction and in such manner as not to interfere
with, delay or impose any additional expense upon the Landlord in the
maintenance or operation of the building and so as to maintain harmonious labor
relations in the building.
Notwithstanding the provisions of Article 3, Tenant shall not be required
to restore the demised premises to its condition prior to the making of any
Tenant's Change except if and to the extent that such restoration is made an
express condition of Landlord's consent to such Tenant's Change.
If the performance of Tenant's Change shall unreasonably interfere with the
comfort and/or convenience of other tenants in the building or shall cause
damage to or otherwise interfere with the occupancy of adjacent buildings,
Tenant shall upon Landlord's demand remedy or remove the condition or conditions
complained of. Tenant further covenants and agrees to indemnify and save
Landlord harmless from and against any and all claims, losses, damages, costs,
expenses, suits and demands whatsoever made or asserted against Landlord by
reason of the foregoing.
42. Certificates by Tenant:
At any time and from time to time, Tenant, for the benefit of Landlord and
the lessor under any ground lease or underlying lease or the holder of any
leasehold mortgage affecting any ground lease or underlying lease, or of any fee
mortgage covering the land or the land and building containing the demised
premises, on at least fifteen (15) days prior written request by Landlord, will
deliver to Landlord a statement, certifying that this lease is not modified and
is in full force and effect as modified, and stating the modifications, the
Commencement and Expiration Dates hereof, the dates to which the fixed rent,
additional rent and other charges have been paid, and whether or not, to the
best knowledge of the signer of such statement, there are any then existing
defaults on the part of either Landlord or Tenant in the performance of the
terms, covenants and conditions of this lease, and if so, specifying the default
of which the signer of such statement has knowledge.
43. Limitation of Liability:
Tenant agrees that the liability of Landlord under this lease and all
matters pertaining to or arising out of the tenancy and the use and occupancy of
the demised premises, shall be limited to Landlord's interest in the building of
which the demised premises form a part and in no event shall Tenant make any
claim against or seek to impose any personal liability upon any general or
limited partner of Landlord, or any principal of any firm or corporation that
may hereafter be or become the Landlord.
44. Indemnification and Insurance:
Tenant will indemnify and save Landlord harmless from and against all
damages, liabilities, claims, costs and expenses, including reasonable
attorneys' fees, arising out of the use of the demised premises or any work or
thing done, or any condition created by Tenant or its employees, agents or
contractors whether or not caused by negligence or breach of an obligation by
Tenant.
Tenant shall, throughout the terms of this lease, at its own
cost and expense, but for the mutual benefit of Landlord and Tenant, maintain,
General Public Liability Insurance against claims for personal injury, death or
property damage occurring upon, in or about the demised premises, such insurance
to afford protection to the limit of not less than $1,000,000.00 in respect of
personal injury or death and damage to property in respect of any one
occurrence. The Certificate of Insurance should specifically have the proposed
indemnity clause referred to in the first paragraph of this Article typed on the
certificate evidencing that the "hold harmless" clause has been insured. Tenant
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shall furnish to Landlord certificates of such policies and provide for the
insurance carrier's endorsements and such policies shall not be terminated
without ten (10) days' prior notice to Landlord as well as Tenant.
45. Electricity:
A. Except as herein otherwise provided, Landlord shall furnish the
electrical energy that Tenant shall reasonably require for its normal business
purposes in the demised premises on a "rent inclusion" basis. That is, there
shall be no separate charge to Tenant for such electric energy by way of
measuring the same on a meter but the value of distributing or furnishing such
electrical energy shall be included in the fixed rent reserved hereunder. The
fixed rent specified in the granting clause of this lease has not been, but is
to be, increased by the value of the electrical energy to be furnished to the
demised premises on an annual basis to be determined as hereinafter provided.
Until such time as the value of the electrical energy to be furnished to the
demised premises shall be determined as in paragraph B below, the fixed rent
specified in the granting clause shall be increased by the annual sum of
$27,250.00 which reflects an electricity charge of $2.50 per square foot per
annum.
B. At Landlord's option, Landlord shall cause an inspection, survey and
evaluation to be made of Tenant's electrical equipment and installations in the
demised premises by a reputable independent electrical engineer or consultant
(herein "Engineer") designated by Landlord. The Engineer shall make a written
determination of the value, on an annual basis, of the electric energy to be
furnished to the demised premises including any electric energy to be consumed
in furnishing the demised premises with air conditioning irrespective of whether
such air conditioning equipment is located exclusively within the demised
premises. Such value shall be calculated by applying the electrical demand and
consumption determined by the Engineer to the public utility rate schedule then
applicable to Landlord for the purchase of electricity for the building but
without regard for the electricity used in the rest of the building. The amount
of the value so determined by the Engineer shall be substituted for and
incorporated in the fixed rent reserved hereunder with respect to the demised
premises in place of the amount provided for in paragraph A above, effective as
of the Commencement Date, and the parties shall execute a supplementary
agreement to reflect the resulting amendment of this lease; and any resulting
overpayment or underpayment for the period between the Commencement Date and the
date of determination shall be refunded by Landlord or paid by Tenant, as the
case may be, on demand.
C. If at any time or times after the initial determination of the value of
the electricity service to the demised premises described in paragraph B above,
Tenant shall wish to connect any additional fixtures, appliances or equipment
(other than ordinary lamps, typewriters, wordprocessors, personal computers and
other small office machines) to the building electric distribution system or to
increase its use of electricity in the demised premises by increase in its hours
of usage or otherwise, Tenant shall first request Landlord's consent therefor,
and shall not proceed without such consent. Landlord shall not unreasonably
withhold or delay any such consent. However, as a condition to such consent
Landlord may require Tenant to agree to an increase in the fixed rent by an
amount which will reflect the value of such additional electric energy to be
furnished by Landlord.
If the parties cannot agree on the amount of such rent increase within 10
days after Landlord shall have granted such consent, such amount shall be
determined by an Engineer selected by Landlord and to be paid equally by both
parties who shall determine the value of the additional electric service in the
same manner as is provided in paragraph B above for determination of the
original electric service, and said amount shall be added to and incorporated in
the fixed rent reserved hereunder effective from the date such additional
electric service is either first used or made available, and shall be reflected
in a supplementary agreement amending this lease, in the same manner as is
provided in paragraph B above with respect to the initial determination of the
value of electric services. All additional feeders or risers or other electrical
conductors or equipment required to provide any increase in electric service to
the demised premises shall be provided by Landlord, and the cost thereof shall
be paid by Tenant on Landlord's demand, provided that, in Landlord's judgment,
such additional feeders or risers are necessary and are permissible under
applicable laws and insurance regulations and the installation of such
additional feeders or risers will not cause permanent damage or injury to the
building or the demised premises or cause or create a dangerous or hazardous
condition or entail excessive or unreasonable alterations or repairs or
interfere with or disturb other tenants or occupants of the building.
D. If at any time or times after the initial determination of the value of
the electric service to the demised premises the rates at which Landlord
purchases electricity from the public utility serving the building shall be
increased or decreased (including without limitation, by reason of fuel
adjustment) or any charge or tax shall be
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imposed upon Landlord in connection herewith or shall be increased or decreased
(all of which are hereinafter called a "rate change"), the fixed rent hereunder
shall be increased or decreased, as the case may be, effective as of the date of
the rate change, upon the demand of either party, by an annual amount equal to
the amount then included in the fixed rent for electric energy times the
percentage increase or decrease in such electric rates. Such increase or
decrease in fixed rent shall be calculated by Landlord and the Engineer and
reflected in the fixed rent in the following manner: First: the average monthly
number of kilowatts of demand and the average monthly number of kilowatt hours
of consumption (or at the option of Landlord only the average monthly number of
kilowatt hours of consumption) shall first be determined for the electricity
used in the entire building over the 12 monthly periods immediately preceding
the rate change. Second: the cost thereof to Landlord shall be calculated at the
rates in effect immediately prior to the rate change and at the rates in effect
immediately after the rate change. Third: the percentage by which such cost
after the rate change is greater or less than such cost before the rate change
shall be determined. Fourth: the amount then included in the fixed rent
hereunder for the value of electric service shall be increased or decreased by
the same percentage, as the case may be, and the fixed rent shall be increased
or decreased by a like amount. At the request of either party, the resulting
increase or decrease in fixed rent and in the amount included in the fixed rent
for electric energy shall be recorded in a memorandum signed by the parties and
from time to time as appropriate may be incorporated in a supplementary
agreement modifying this lease to reflect the then current amount included in
the fixed rent for electric energy.
E. Landlord reserves the right to discontinue furnishing electricity to
Tenant in the demised premises on not less than 30 days' notice to Tenant, or
upon such shorter notice as may be required by the public utility serving the
building. If Landlord exercises such right to discontinue, or is compelled to
discontinue, furnishing electricity to Tenant, this lease shall continue in full
force and effect and shall be unaffected thereby, except only that from and
after the effective date of such discontinuance, Landlord shall not be obligated
to furnish electricity to Tenant and the fixed rent payable under this lease
shall be reduced by the amount then included therein for electricity. If
Landlord so discontinues furnishing electricity to Tenant, Tenant shall arrange
to obtain electricity directly from the public utility serving the building.
Such electricity shall be furnished to Tenant by means of the then existing
building system feeders, risers and wiring to the extent that the same are
available, suitable and safe for such purposes. All meters and all additional
panel boards, feeders, risers, wiring and other conductors and equipment which
may be required to obtain electricity of substantially the same quantity,
quality and character, directly from such public utility shall be installed by
Landlord; at Landlord's expense, if Landlord shall have discontinued furnishing
electricity to Tenant voluntarily or shall have been compelled to do so by
reason of any act or omission of Landlord in violation of any law or any rule or
regulation of the public utility; or at Tenant's expense, if Landlord shall have
been compelled to discontinue furnishing electricity to Tenant by reason of any
act or omission of Tenant in violation of any law or any rule or regulation of
the public utility, or at the Landlord's sole cost and expense, if such
discontinuance shall have been by compulsion of law or of any rule or regulation
of the public utility and not by reason of any act or omission of Landlord or
Tenant in violation of any law or any rule or regulation of the utility.
Landlord will not terminate Tenant's electricity unless it is doing so for all
tenants of the building.
F. Landlord shall not be liable to Tenant in any way for any failure or
defect in the supply or character of electricity furnished to the demised
premises by reason of any requirement, act or omission of the public utility
serving the building with electricity or for any reason not attributable to
Landlord. Tenant's use of electricity in the demised premises shall not at any
time exceed the capacity of any of the electrical conductors and equipment in or
otherwise serving the demised premises. Tenant shall furnish and install, at its
expense, all replacement lighting tubes, lamps, bulbs and ballasts required in
the demised premises.
G. If at any time during the term of this lease the public utility company
supplying electricity to the building shall permit the remetering of electricity
to the tenants of the building, Tenant shall, at Landlord's election, purchase
Tenant's electricity requirements in the demised premises from Landlord and pay
Landlord therefor at the same rates and in accordance with the same rules,
regulations and requirements of said public utility company as are set forth in
the service classification or rate schedule under which Landlord purchases
electricity from said public utility. In the event the Landlord shall elect to
remeter electricity at a separate charge to Tenant as aforesaid, the fixed rent
shall be decreased by the amount included for furnishing electric energy as of
the date preceding the date of commencement of such remetering. Landlord may at
any time thereafter during the term of this lease revert to redistribution of
electricity to Tenant on a "rent inclusion" basis, in which event the fixed rent
shall be increased as of the date Landlord reverts back to furnishing Tenant
with electricity on a "rent inclusion" basis by an amount determined in
accordance with the provisions of paragraph B of this Article and thereafter the
fixed rent shall be subject to future adjustment as provided in paragraphs C, D
and E of this Article.
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46. Broker:
Tenant represents and warrants that it neither consulted nor negotiated
with any broker or finder with regard to the rental of the demised premises from
Landlord other than Williamson, Picket, Gross, Inc. Tenant agrees to indemnify
and hold Landlord harmless from any damages, costs and expenses suffered by
Landlord by reason of any breach of the foregoing representation.
47. Binding Effect:
It is specifically understood and agreed that this lease is offered to
Tenant for signature by the managing agent of the building solely in its
capacity as such agent and subject to Landlord's acceptance and approval, and
that Tenant shall have affixed its signature hereto with the understanding that
such act shall not, in any way, bind Landlord or its agent until such time as
this lease shall have been approved and executed by Landlord and delivered to
Tenant.
48. Air-Conditioning:
Subject to applicable governmental regulations, Tenant shall use the
air-conditioning which is part of the Basic Improvements (as defined in
Attachment A hereto) only from 8:00 AM to 6:00 PM on weekdays (other than
holidays) from May 15th through September 30th. Landlord shall, at Landlord's
sole cost and expense, maintain, repair and replace, if necessary, all
air-conditioning units and all ducts, wiring and equipment required in
connection therewith. If any such repairs are required, Landlord shall perform
the repairs as soon as reasonably possible after notice of such requirement.
49. Miscellaneous:
Without incurring any liability to Tenant, Landlord may permit access to
the demised premises and open the same, whether or not Tenant shall be present,
upon demand of any receiver, trustee, assignee for the benefit of creditors,
sheriff, marshall or court officer entitled to, or reasonably purporting to be
entitled to, such access for the purpose of taking possession of, or removing,
Tenant's property or for any other lawful purpose (but this provision and any
action by Landlord hereunder shall not be deemed a recognition by Landlord that
the person or official making such demand has any right or interest in or to
this lease,or in or to the premises), or upon demand of any representative of
the fire, police, building, sanitation or other department of the city, state or
federal governments.
The terms "person" and "persons" as used in this lease, shall be deemed to
include natural persons, firms, corporations,associations and any other private
or public entities.
No receipt of monies by Landlord from Tenant, after any reentry or after
the cancellation or termination of this lease in any lawful manner, shall
reinstate the lease; and after the service of notice to terminate this lease, or
after the commencement of any action, proceeding or other remedy, Landlord may
demand, receive and collect any monies due, and apply them on account of
Tenant's obligations under this lease but without in any respect affecting such
notice, action, proceeding or remedy, except that if a money judgment is being
sought in any such action or proceeding, the amount of such judgment shall be
reduced by such payment.
If Tenant is in arrears in the payment of fixed rent or additional rent,
Tenant waives its right, if any, to designate the items in arrears against which
any payments made by Tenant are to be credited and Landlord may apply any of
such payments to any such items in arrears as Landlord, in its sole discretion,
shall determine, irrespective of any designation or request by Tenant as to the
items against which any such payments shall be credited.
No payment by Tenant nor receipt by Landlord of a lesser amount than may be
required to be paid hereunder shall be deemed to be other than on account of any
such payment, nor shall any endorsement or statement
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on any check or any letter accompanying any check tendered as payment be deemed
an accord and satisfaction and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such payment due or
pursue any other remedy in this lease provided.
If in this lease it is provided that Landlord's consent or approval as to
any matter will not be unreasonably withheld, and it is established by a court
or body having final jurisdiction thereover that Landlord has been unreasonable,
the only effect of such finding shall be that Landlord shall be deemed to have
given its consent or approval; but Landlord shall not be liable to Tenant in any
respect for money damages by reason of withholding its consent.
Any statement or notice by Landlord pursuant to this lease of rent
increase, including, without limitation, any statements, notices or valuations
made according to the Article 39 (Escalation for Wage Rates), or 45
(Electricity), shall be conclusive and binding upon Tenant subject to the
correction of mathematical errors unless within ninety (90) days after receipt
of such notice Tenant shall notify Landlord in writing that it disputes the
correctness thereof, specifying the particular respects in which such statement
or notice is claimed to be incorrect. If Tenant timely disputes such statement
or notice, Tenant shall nevertheless pay the rent in accordance with the
disputed statement or notice until such time as the Landlord's statement or
notice is resolved, either by agreement of the parties or by decision of a court
of competent jurisdiction.
50. Amending Article 7:
If, in connection with the procurement, continuation or renewal of any
financing for which the land and/or the building or the interest of the lessee
therein under a superior lease represents collateral in whole or in part an
institutional lender shall request modifications of this lease as a condition of
such financing, Tenant will not withhold its consent thereto provided that such
modifications do not materially increase the obligations of Tenant under this
lease or materially and adversely affect any rights of Tenant under this lease
and do not increase any financial obligations of Tenant under this lease.
51. Landlord's Work:
As per Tenant's proposed floor plan dated June 24, 1996 and initialed by
Tenant on July 1, 1996 and attached to this lease; Landlord, at its sole cost
and expense, will perform the following work (Items A through H) for the Tenant
at no extra charge to the Tenant;
A. Landlord will demolish any and all of the existing installation that
Tenant so desires. (The demolition will include the ceiling, all existing carpet
and base.)
B. Landlord will furnish and install a new building-standard 2 X 2 tile
ceiling with building- standard light fixtures and lenses.
C. Landlord will furnish and install new building-standard venetian blinds
where necessary.
D. Landlord will furnish and install new building-standard carpet in a
professional manner throughout the demised premises in Tenant's choice of
building-standard samples.
E. Landlord will paint the demised premises in a professional manner with
building- standard paint in Tenant's choice of colors.
F. Landlord will construct one (1) computer room as shown on attached plan.
G. Landlord will provide a sink and counter as shown on attached plan in
Tenant's "employee lounge".
H. Landlord will also hardwire Tenant's power poles and whips as shown on
attached plan.
Landlord shall substantially complete Landlord's Work (as described above)
not later than the date forty-five (45) days after the date of this lease (the
"Substantial Completion Date"). Within fourteen (14) days after the date upon
which Landlord shall notify Tenant that Landlord's Work is substantially
completed, Tenant shall provide Landlord with a list (the "Punchlist") of items
to be completed or erected in order to complete Landlord's Work and Landlord
shall perform the work set forth on the Punchlist within fourteen (14) days
after Landlord's
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receipt of the same. As used in this Lease, the term "substantially completed"
shall mean that stage of Landlord's Work when all work has been properly
performed and only minor work items remain to be performed which would not
interfere with Tenant's use or enjoyment of the demised premises or the conduct
of Tenant's business therein. As used in this Lease with respect to Landlord's
Work, the terms "complete" shall mean that stage of Landlord's Work when all
work, including all items on the Punchlist have been completed.
If Landlord fails to timely complete Landlord's Work, then, for every
period of fourteen (14) days (or portion thereof) after the Substantial
Completion Date until the date upon which Landlord's Work shall be substantially
completed, Tenant shall be entitled to occupy the demised premises free of fixed
rent for a period of thirty (30) days.
Notwithstanding anything to the contrary contained hereinabove, if Landlord
is delayed in fulfilling any of its obligations under this Article, as a result
of strikes or other labor disputes, unavailability of materials, national or
local emergency, any law, regulation, rules; or order of any government
authority or other similar cause beyond Landlord's control, and if Landlord
promptly notifies Tenant in writing of said cause of delay, then the fourteen
(14) day period provided in this Article for the fulfillment of said obligation
to complete the Punchlist shall be extended by the period during which said
cause of delay shall continue.
52. Continuing Obligations:
Tenant may continue to meet its obligations under its sublease agreement
dated December 19, 1994 with Callen, Regenstreich and Koster for 4,325 rentable
square feet on the 16th floor of this Building until March 30, 1997.
53. Cleaning:
Tenant shall receive basic building cleaning services at no extra charge to
the Tenant. If Tenant shall require extraordinary cleaning services, it will be
responsible for acquiring such services and the additional cost of such
services.
54. Storage:
Storage Space is available in the building at the cost of $10.00 per
rentable square foot for the Tenant.
55. Rent Credit:
Tenant will receive a rent credit totaling $90,000.00 which will be
deducted from Tenant's fixed rent at $5,000.00 per month for the first eighteen
(18) months of this lease beginning on the Commencement Date.
56. Commencement Date:
This lease shall commence on a date (herein, including as used in Article
37D, the "Commencement Date") which shall be the later of (a) July 1, 1996 or
(b) the date on which Landlord's Work under Article 51 is substantially
completed and possession has been delivered to Tenant. The fact that the
"Commencement Date" occurs after July 1, 1996 shall not extend the term of this
lease beyond October 31, 2004. If the Commencement Date is a date other than the
first day of a calendar month, then the rent for the calendar month in which the
Commencement Date occurs shall be pro-rated based on the ratio of the number of
days left in the calendar month (including the Commencement Date) to the total
number of days in the calendar month.
57. Cancellation of Prior Lease:
Tenant currently leases Rooms 1602-05 (consisting of 4,308 rentable square
feet) from Landlord under an Agreement of Lease dated July 6, 1995 between
Hacienda Intercontinental Realty, N.V., c/o Williamson, Picket, Gross, Inc.,
having an office at 85 John Street, New York, New York 10038, as Landlord, and
New York Merchant Bakers Insurance Company, as Tenant (the "Prior Lease"). The
Prior Lease provides for a term of five (5) years commencing on August 1, 1995
and expiring on July 31, 2000. Landlord and Tenant hereby agree and covenant
that, notwithstanding the provision under the Prior Lease for such five year
term, the Prior Lease shall terminate as of the day immediately preceding the
Commencement Date (as defined in Article 56) with the same force and effect as
if said date was the date originally set forth in the Prior Lease as the
expiration date thereof.
58. Additional Space on the 22nd Floor:
A. The number of square feet of rentable area on the 22nd floor shall be
deemed to be 10,900 rentable square feet.
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B. Landlord shall provide Tenant no later than February 1, 1997 with a
scale floor plate for the entire 22nd floor of the building and an "as-built"
architectural scale floor plan which describes existing conditions in a portion
of the 22nd floor which consists of approximately 5,000 to 6,000 rentable square
feet. Tenant, at its sole cost and expense, shall provide Landlord no later than
March 1, 1997 with four (4) architectural scale floor plans (hereinafter in this
Article 58B, the "Plans") relating to the portion of the 22nd floor depicted in
the aforementioned "as-built" plan. The Plans shall be comprised of a demolition
plan, a reflected ceiling plan, a furniture plan and an electrical power plan.
The work described in the Plans shall constitute "Landlord's Work" for purposes
of this Article 58B. The scope of Landlord's Work will be similar to and will
not materially exceed the scope of the work described under Article 51.
In addition to the 21st floor of the building, Landlord hereby leases to
Tenant and Tenant hires from Landlord the portion of the 22nd floor depicted in
the Plans for a term commencing on a date (hereinafter in this Article 58B only,
the "Commencement Date") which shall be the later of June 1, 1997 or the date on
which Landlord's Work is substantially completed and possession has been
delivered to Tenant, and expiring on October 31, 2004. Tenant agrees to pay as
additional rent to Landlord during such term rent with respect to such portion
of the 22nd floor at the-then-escalated base rental per rentable square foot
being paid for the demised premises on the 21st floor. Tenant further agrees to
pay as additional rent during such term $2.50 per rentable square foot per year
for the cost of electricity for such portion of the 22nd floor. Tenant further
agrees to pay the escalations under Article 38 and 39 with respect to such
portion of the 22nd floor with appropriate adjustments made for the increase of
Tenant's demised premises.
The fact that the "Commencement Date" occurs after June 1, 1997 shall not
extend the term of this lease beyond October 31, 2004. If the Commencement Date
is other than the first day of a calendar month, then the rent for such month in
which the Commencement Date occurs shall be prorated based on the ratio of the
number of days left in the calendar month (including the Commencement Date) to
the total number of days in the calendar month.
The provisions of Article 51 requiring Tenant to provide Landlord with a
Punchlist and requiring Landlord to complete the work set forth on the
Punchlist, including the time periods set forth therein, are incorporated herein
with respect to the portion of the 22nd floor depicted in the Plans.
C. Landlord shall provide Tenant no later than February 1, 1998 with an
"as-built" architectural scale floor plan which describes existing conditions in
the remaining portion of the 22nd floor of the building (that is, all portions
of the 22nd floor not demised to Tenant under Article 58B). Tenant, at its sole
cost and expense, shall provide Landlord no later than March 1, 1998 with four
(4) architectural scale floor plans (hereinafter in this Article 58C, the
"Plans") relating to the remaining portion of the 22nd floor. The Plans shall be
comprised of a demolition plan, a reflected ceiling plan, a furniture plan and
an electrical power plan. The work described in the Plans shall constitute
"Landlord's Work" for purposes of this Article 58C. The scope of Landlord's Work
will be similar to and will not materially exceed the scope of the work
described under Article 51.
In addition to the 21st floor of the building, Landlord hereby leases to
Tenant and Tenant hires from Landlord the portion of the 22nd floor depicted in
the Plans for a term commencing on a date (hereinafter in this Article 58C only,
the "Commencement Date") which shall be the later of June 1, 1998 or the date on
which Landlord's Work is substantially completed and possession has been
delivered to Tenant, and expiring on October 31, 2004. Tenant agrees to pay as
additional rent to Landlord during such term rent with respect to such portion
of the 22nd floor at the-then-escalated base rental per rentable square foot
being paid for the demised premises on the 21st floor. Tenant further agrees to
pay as additional rent during such term $2.50 per rentable square foot per year
for the cost of electricity for such portion of the 22nd floor. Tenant further
agrees to pay the escalations under Articles 38 and 39 with respect to such
portion of the 22nd floor with appropriate adjustments made for the increase in
Tenant's demised premises.
The fact that the "Commencement Date" occurs after June 1, 1998 shall not
extend the term of this lease beyond October 31, 2004. If the Commencement Date
is other than the first day of a calendar month, then the rent for such month in
which the Commencement Date occurs shall be prorated based on the ratio of the
number of days left in the calendar month (including the Commencement Date) to
the total number of days in the calendar month.
The provisions of Article 51 requiring Tenant to provide Landlord with a
Punchlist and requiring Landlord to complete the work set forth on the
Punchlist, including the time periods set forth therein, are incorporated herein
with respect to the portion of the 22nd floor depicted in the Plans.
59. Temporary Space:
If Landlord is unable to provide Tenant with any portion of the additional
space on the 22nd floor demised under Article 58B by June 1, 1997, or Landlord
is unable to provide Tenant with any portion of the additional space on the 22nd
floor demised under Article 58C by June 1, 1998, then Landlord shall offer
Tenant occupancy of a temporary space in a rentable area of the building
("Temporary Space") until such portion of the demised premises on the 22nd floor
is substantially completed and ready for occupancy by the Tenant. Tenant, in its
sole discretion, may choose to accept or not accept Landlord's offer of the
Temporary Space.
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In the event Tenant accepts such offer: (a) Tenant will be charged $8.00
per rentable square foot per year base rent for the Temporary Space; (b)
Tenant's electricity cost shall be $2.50 per rentable square foot per year for
the Temporary Space; (c) Tenant will also be charged the escalations under
Articles 38 and 39 with respect to the Temporary Space, with appropriate
adjustments made for the rentable square footage of the Temporary Space; and (d)
Landlord will incur all reasonable moving costs relating to the relocation of
the Tenant from the Temporary Space to the 22nd floor of the building. The
number of square feet of rentable area in the Temporary Space shall be a number
mutually agreed upon in a writing signed by Landlord and Tenant.
60. Security Deposit:
The Security Deposit of $72,666.66 as discussed in Article 33 of this lease
shall be held in an interest bearing account selected by the Landlord for the
benefit of the Tenant. Landlord shall refund the interest on the security
deposit to the Tenant annually less the Landlord's administrative fee.
Under the Existing Lease, Tenant has deposited with Landlord the sum of
$13,283.00 as Security Deposit. Tenant will forward a check in the sum of
$59,383.66 to Landlord who will hold said sum in the same interest bearing
account so that the total Security Deposit for this lease shall be $72,666.66.
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ATTACHMENT A
The term "Basic Requirements" as used in the annexed lease, shall mean as
follows:
1. Any openings at the building exterior wall within convector enclosures
located between offices will be filled with a sound deadening material.
2. Partitioning terminating at the building exterior walls shall meet a
mullion or a column.
3. Demising walls shall be constructed of dry wall partitions with 2-1/2 inch
metal studs and one layer 5/8 inch sheet rock on each side with both layers
of sheet rock to underside of slab and with 3-1/2 inch batt insulation.
4. Suitable openings shall be made above hung ceiling to accommodate
air-conditioning requirements, pipes, ducts, beams, etc.
5. A lock set and door closure shall be installed on tenant's entrance door;
lock sets will be keyed to the building master key system.
6. The average electrical load of demised premises exclusive of
air-conditioning shall be no more than 5 watts per square foot; if the
demised premises consist of more than one floor, then such 5 watts per
square foot limit shall apply to each floor of the demised premises.
7. Air-conditioning systems will be designed to maintain air-conditions of at
least 78 degrees dry bulb and 50% relative humidity when outside
temperature is 95 degrees.
8. All low tension (telephone) cables installed in air handling ceilings shall
either have a teflon jack or be enclosed in raceway (electrical metallic
tubing, rigid or flexible conduit, etc.).
The term "Basic Improvements" as used in the annexed lease shall mean:
1. Dry wall partitions with 2-1/2 inch metal studs and one layer 5/8 inch
sheet rock on each side.
2. 3 feet by 7 feet single-swing hollow metal or wood doors in steel frames as
required.
3. Closet doors shall be a pair of 2 feet by 7 feet hollow metal or wood doors
in a steel frame, together with sliding door hardware on basis of one pair
of closet doors for 3,000 square feet of demised premises.
4. Latch sets, butts and wall door stops for all interior doors.
5. A lock set and door closure on tenant's entrance door.
6. Mechanically suitable fissured pattern acoustic tile ceiling in a 12 inch
by 12 inch pattern with concealed splines.
7. Floors shall be finished in vinyl asbestos tile 1/8 inch gauge with 4 inch
rubber vinyl base carpet.
8. Facilities sufficient for 2 watts per square foot of rentable area
connected load at 110v single phase for receptacles.
9. Recessed fluorescent lighting fixtures, size 2 feet by 4 feet containing
three 35 "wattmizer" lamps with virgin acrylic lenses, one such fixture per
90 square feet of rentable area.
10. One single pole switch for each private office and in open office areas in
adequate number to meet code requirements; all switches to be located on
columns or partitions.
11. One 110V duplex wall receptacle outlet for every 100 square feet of
rentable area.
12. Circuit required by code to connect lighting fixtures referred to in 10
above, and receptacles referred to in 11 above to the floor panel board.
13. One wall telephone outlet box for every 150 square feet of rentable area.
14. Air-conditioning systems sufficient to maintain interior conditions of 78
degrees dry bulb and 50% relative humidity when outside temperature is 95
degrees.
15. Painting of all walls with a flat stipple finish paint and painting of all
metal doors, frames and enclosures with a semi-gloss paint.
16. Building standard venetian blinds.
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TERMINATION AGREEMENT
Agreement made this 6th day of December, 1996 by and between Home State
Holdings, Inc., a Delaware Corporation with offices at Three South Revmont
Drive, Shrewsbury, New Jersey 07702 (the "Company") and Robert Abidor, an
individual residing at 55 Shrewsbury Drive, Rumson, New Jersey 07760 ("Abidor").
W I T N E S S E T H
WHEREAS, the Company and Abidor are parties to that certain
employment agreement entered into the 1st day of June 1993, as amended by an
agreement entered into the 13th day of June 1996 (as amended, the "Employment
Agreement"); and
WHEREAS, Abidor's recuperation from his recent surgery has
progressed more slowly than anticipated, as a result of which the services he
will be able to perform under the Employment Agreement would be materially
curtailed; and
WHEREAS, differences have arisen between Abidor and the
Company which have diminished the likelihood of Abidor being utilized in the
capacities contemplated by the Employment Agreement; and
WHEREAS, the Company and Abidor desire to terminate Abidor's
relationship as an employee and independent consultant to the Company under the
Employment Agreement.
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Company and Abidor
hereby agree as follows:
1. Effective immediately, the Employment Agreement is
terminated and shall be of no further force and effect (except for those
provisions which by the terms of this Termination Agreement expressly survive
termination of the Employment Agreement).
2. Abidor is entitled to no compensation or benefits from the
Company other than amounts paid to him prior to the date of this Termination
Agreement. Furthermore, Abidor acknowledges that there are no unreimbursed
business expenses of Abidor. Abidor shall, however, be given the opportunity (if
and for so long as permitted by the insurance policies then in effect) to
continue his
<PAGE>
group health insurance coverage under the Consolidated Omnibus Budget
Reconciliation Act ("COBRA") and to transfer the ownership of any term life
insurance insuring his life and owned by the Company or any other insurance
policies on or for Abidor to himself (or his designee) upon such person assuming
all obligations thereunder.
3. Abidor agrees to cooperate with the Company in responding
to requests by the Company and its subsidiaries and affiliates and by Home
Mutual Insurance Company of Binghamton, New York ("HMI") for information
concerning events, actions and transactions which occurred during his tenure
with the Company, and in the defense of any claims asserted or enforced against
any of such persons or their directors, officers, employees or affiliates.
4. The provisions of Section 7 of the Employment Agreement
relating to confidential information will remain in force. The Obligation to
return proprietary information and copies thereof will commence on the date of
this Termination Agreement to the extent, if any, requested by the Company from
time to time.
5. The provisions of Section 8 of the Employment Agreement
relating to non-competition shall continue in force until June 13, 1999.
6. The provisions of Section 9 of the Employment Agreement
relating to Proprietary Intellectual Property will remain in effect.
7. The provisions of Section 10 of the Employment Agreement
relating to Enforcement will remain in effect.
8. The provisions of Section 11 of the Employment Agreement
relating to Survival will remain in effect.
9. The provisions of Section 14(b) of the Employment Agreement
relating to indemnification of Abidor will continue in full force and effect.
10. The obligation of Abidor not to communicate with employees
of the Company in a manner which disrupts the relations between the Company and
such employee will remain in full force and effect. Should any potential or
future employer contact the Company for a reference, the Company may, pursuant
to its established procedures, limit its response to verify only Abidor's job
title and dates of employment. The reciprocal obligations to refrain from
disparagement set forth in Section 10 of the Employment Agreement will remain in
full force and effect and as to Abidor will include subsidiaries and affiliates
of the Company and the directors, officers and shareholders of the Company, its
subsidiaries and affiliates; provided, however, this paragraph will not be
deemed breached by any disclosure
<PAGE>
which has been advised by counsel as necessary or appropriate to comply with
applicable securities laws, insurance laws, or regulations.
11. The Company releases, and as controlling shareholder of
each of its subsidiaries will cause each subsidiary to release Abidor and his
heirs from and in respect of any causes of action, suits, claims, demands,
charges, judgments, damages, levies and executions of whatsoever kind, nature
and/or descriptions, whether legal or equitable, whether known or unknown,
liquidated or contingent, direct or indirect, which it may have from the
beginning of time to the date of this Agreement arising out of or related to any
matter whatsoever from the beginning of time to the date of this Agreement
excepting only Abidor's obligations under this Agreement and any matter as to
which Abidor committed fraud or any matter involving the performance by Abidor
of his duties as an officer or director of the Company or any of its
subsidiaries or affiliates which constituted wilfull misconduct on the part of
Abidor.
12. Abidor, on his own behalf and on behalf of his family,
releases the Company, its subsidiaries and their respective directors, officers,
and employees and agents, and affiliates of such officers and directors, and
their respective heirs, successors and assigns, from and in respect of any
causes of action, suits, claims, demands, charges, judgments, damages, levies
and executions of whatsoever kind, nature and/or descriptions, whether legal or
equitable, whether known or unknown, liquidated or contingent, direct or
indirect, which he or members of his family may have from the beginning of time
to the date of this Agreement arising out of or related to any matter
whatsoever, including, without limitation, their status as an employee or
sharehoder of the Company or any subsidiary or affiliate, excepting only the
obligations of the Company and its subsidiaries set forth in this Agreement.
13. Abidor acknowledges and agrees that he fully understands
this Termination Agreement and has signed it voluntarily after consultation with
counsel.
IN WITNESS WHEREOF, the parties hereto have caused this
Termination Agreement to be duly executed on the date first above written.
HOME STATE HOLDINGS, INC.
/s/ Robert Abidor
- -----------------
Robert Abidor
By: /s/ Mark Vaughn
----------------------
Mark Vaughn
Its: President and CEO
REINSURANCE COVER NOTE
Agreement No: 970062
MEMORANDUM OF REINSURANCE EFFECTED ON BEHALF OF:
REINSURED: HOME STATE INSURANCE GROUP
- ---------
HOME STATE INSURANCE COMPANY
Red Bank, New Jersey
QUAKER CITY INSURANCE COMPANY
Trevose, Pennsylvania
NEW YORK MERCHANT BAKERS INSURANCE
COMPANY Binghamton, New York
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
Binghamton, New York
PINNACLE INSURANCE COMPANY
Carrollton, Georgia
WESTBROOK INSURANCE COMPANY
Wallingford, Connecticut
(hereinafter referred to as the "Company")
TYPE: BLACK AND SILVER CAR COMMERCIAL AUTOMOBILE LIABILITY QUOTA
- ---- SHARE REINSURANCE AGREEMENT
PERIOD: Continuous from January 1, 1997 at 12:01 a.m., Eastern
- ------ Standard Time, subject to cancellation at any January 1
anniversary thereafter by either party giving ninety (90)
days' prior written notice.
In the event of cancellation, at the Company's option:
1. Reinsurers shall remain liable for their share of all
policies in force hereunder at the effective date of
cancellation until the natural expiration or prior
termination date of said policies, but in no event
more than twelve (12) months plus three (3) months'
odd time.
2. The Company shall reassume the unexpired liability for
all in-force business as of the date of cancellation
and the Reinsurers shall return their share of the
unearned premium less ceding commission.
CLASS: All in-force, new and renewal business classified by the
- ----- Company as Black and Silver Car Commercial Automobile
Liability including No-Fault, Uninsured and Underinsured
Motorists and Medical Payments.
SEC:vs
1/8/97 1
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970062
EXCLUSIONS: This Agreement shall not apply to:
- ----------
1. Assumed reinsurance other than business assumed via
intra-company reinsurance and facultative commercial
automobile liability reinsurance in connection with
business originally produced by the Company and
reported to Reinsurers;
2. Loss or liability excluded by the provision of the
"Nuclear Incident Exclusion Clauses - Liability -
Reinsurance - USA and Canada";
3. Financial Guarantee and Insolvency;
4. Insolvency Funds;
5. War Risks, as described in the North American War Risk
Exclusion Clause;
6. All business derived directly or indirectly from any
Pool, Association or Syndicate, except that individual
losses from Assigned Risk Plans or similar plans are
not excluded.
TERRITORIAL
SCOPE: As per the Company's original policies.
- -----
QUOTA SHARE
PARTICIPATION: 50% of the Company's net liability, not to exceed 50% of
- ------------- $100,000 per person/$300,000 per occurrence Bodily Injury
and $50,000 per occurrence Property Damage for Black Cars
and $25,000 per person/$50,000 per occurrence Bodily Injury
and $10,000 per occurrence Property Damage for Silver Cars,
including Personal Injury Protection and Uninsured and
Underinsured Motorists.
PREMIUM: 50% of original net written premium. Premium ceded shall be
- ------- net of the cost of the First-Fourth Casualty Clash Excess
of Loss Reinsurance Agreements' earned reinsurance premium.
WARRANTY: Reinsurers hereon to have the benefit of recoveries from
- -------- the Company's Casualty Clash Excess of Loss Reinsurance
Agreements with limits of 100% of $6,000,000 each
occurrence excess of $500,000 each occurrence. The First
Casualty Clash Excess of Loss Reinsurance Agreement, 100%
of $500,000 each occurrence excess $500,000 each
occurrence, will have two reinstatements The Second-Fourth
Casualty Excess of Loss Reinsurance Agreement will have one
reinstatement on each layer.
SEC:vs
1/8/97 2
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970062
CEDING
COMMISSION: Three-Year Block: January 1, 1996 - December 31, 1998
- ----------
Provisional commission of 27.0% of ceded premiums, subject
to adjustment on earned-to-incurred basis, as follows:
Minimum Ceding Commission of 22.00% at a Loss Ratio of
71.50% or higher; Increasing 1.00% for each 1.00% reduction
in Loss Ratio; Provisional Ceding Commission of 27.00% at a
Loss Ratio of 66.50%; Increasing 1.00% for each 0.75%
reduction in Loss Ratio; Maximum Commission of 39.00% at a
57.50% Loss Ratio. Loss Corridor: The Company will retain
net 7.0 loss ratio points attaching at a ceded loss ratio
of 71.5% and ending at 78.5%.
Annual adjustments at the end of each Agreement period
based on losses incurred during each accident year. No
upward adjustment until the end of the three-year block.
Deficit/Credit carry forward not to exceed three (3) years.
Calculation of this commission adjustment shall apply
collectively for all Companies reinsured under this
Agreement, and not individually.
REPORTS AND
ACCOUNTS: Within sixty (60) days after the close of each month, the
- -------- Company shall render to the Reinsurers the following:
a. Reinsurance premium written for the month;
b. Less ceded earned premium for Casualty Clash
reinsurance for the month which inures to the benefit
of the Quota Share;
c. Less commission allowed on the reinsurance premium for
the month;
d. Less Reinsurers' share of paid loss and loss
adjustment expenses paid during the month;
e. Plus Reinsurers' share of all salvage recovered during
the month;
f. Net balance due.
SEC:vs
1/8/97 3
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970062
The Company shall advise the unearned premium and
outstanding losses by line of business and remit the
Reinsurers' net balance within sixty (60) days after the
end of each month.
CLAUSES: Net Liability.
- ------- Parties to the Agreement.
Reinsurers Liability.
Losses and Loss Settlements.
Extra Contractual Obligations on a 100% basis, subject to a
maximum loss of $250,000 plus allocated loss adjustment
expenses for Reinsurers' share.
Loss in Excess of Policy Limits on a 100% basis, subject to
a maximum loss of $250,000 plus allocated loss
adjustment expenses for Reinsurers' share.
Funding of Reserves.
Currency.
Taxes.
Access to Records.
Errors and Omissions, not to apply to Exclusions.
Original Conditions.
Insolvency.
Arbitration.
Federal Excise Tax.
Service of Suit - NMA 1998 - Mendes & Mount (where
applicable).
Offset.
Severability.
Minet Re North America, Inc. Intermediary.
WORDING: As per existing Reinsurance Agreements as far as applicable
- ------- and as noted herein, which complies with the requirements
of the State of New York Insurance Department.
REINSURERS:
- ----------
<TABLE>
<CAPTION>
NAIC
FEIN No. No. Through Minet Re North America Share
-------- ---- ------------------------------ -----
<S> <C> <C> <C>
23-0580680 24457 Reliance Insurance Company
through Reliance Reinsurance Corp. 50%
Philadelphia, Pennsylvania
16-0366830 22314 Underwriters Reinsurance Company 50%
Concord, New Hampshire --
TOTAL PLACEMENT: 100%
====
</TABLE>
SEC:vs
1/8/97 4
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970062
We will periodically provide a list of those companies with which Minet Re North
America, Inc. is affiliated, which may be parties to this placement. This list
is available on request.
FOR AND ON BEHALF OF:
MINET RE NORTH AMERICA, INC.
___________________________ DATE: _______________
Senior Vice President
AGREED TO:
HOME STATE INSURANCE GROUP
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
___________________________ DATE: _______________
Authorized Signature
Please examine this document carefully and advise us immediately if any of the
details on the security used are not in accordance with your order or
requirements.
SEC:vs
1/8/97 5
REINSURANCE COVER NOTE
Agreement No: 970063
MEMORANDUM OF REINSURANCE EFFECTED ON BEHALF OF:
REINSURED: HOME STATE INSURANCE GROUP
- ---------
HOME STATE INSURANCE COMPANY
Red Bank, New Jersey
QUAKER CITY INSURANCE COMPANY
Trevose, Pennsylvania
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
Binghamton, New York
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
Binghamton, New York
PINNACLE INSURANCE COMPANY
Carrollton, Georgia
WESTBROOK INSURANCE COMPANY
Wallingford, Connecticut
(hereinafter referred to as the "Company")
TYPE: PRIVATE PASSENGER AUTOMOBILE LIABILITY AND PHYSICAL DAMAGE
- ---- QUOTA SHARE REINSURANCE AGREEMENT
PERIOD: Continuous from January 1, 1997 at 12:01 a.m., Eastern
- ------ Standard Time, subject to cancellation at any January 1
anniversary thereafter by either party giving ninety (90)
days' prior written notice.
In the event of cancellation, at the Company's option:
1. Reinsurers shall remain liable for their share of all
policies in force hereunder at the effective date of
cancellation until the natural expiration or prior
termination date of said policies.
2. The Company shall reassume the unexpired liability for
all in-force business as of the date of cancellation and
the Reinsurers shall return their share of the unearned
premium less ceding commission.
CLASS: All in-force, new and renewal business classified by the
- ----- Company as Private Passenger Automobile Liability and Physical
Damage (Comprehensive and Collision), including No-Fault,
Uninsured and Underinsured Motorists and Medical Payments, in
the states of Connecticut, Florida and Georgia.
SEC:vs
1/8/97 1
<PAGE>
EXCLUSIONS: This Agreement shall not apply to:
- ----------
1. Assumed reinsurance other than business assumed via
intra-company reinsurance.
2. Loss or liability excluded by the provision of the
"Nuclear Incident Exclusion Clauses - Liability and
Physical Damage - Reinsurance - USA and Canada."
3. Financial Guarantee and Insolvency.
4. Insolvency Funds.
5. War Risks, as described in the North American War Risk
Exclusion Clause.
6. All business derived directly or indirectly from any
Pool, Association or Syndicate. As respects Physical
Damage business, loss or liability excluded by the
provisions of the "Pools, Associations, Syndicates
Exclusion Clause." It is understood and agreed that this
exclusion shall not apply to individual risks assigned to
the Company under an Assigned Risk Plan or similar plan.
7. Speed Contests.
8. Ambulances.
TERRITORIAL
SCOPE: As per the Company's original policies.
- -----
QUOTA SHARE
PARTICIPATION: A. 50% of the Company's net automobile liability losses, not
- ------------- to exceed 50% of $100,000 each and every loss occurrence.
B. 50% of the Company's net automobile physical damage
losses, not to exceed 50% of $85,000, any one vehicle.
PREMIUM: 50% of original net written premium. Premium ceded shall
- ------- be net of the cost of the Private Passenger Second Automobile
Liability Excess of Loss net earned reinsurance premium.
CEDING
COMMISSION: Provisional commission of 26.00% of ceded premiums, subject to
- ---------- adjustment on earned-to-incurred basis, as follows:
Minimum Ceding Commission of 23.00% at a Loss Ratio of 70.00%
or higher; Increasing 1.00% for each 1.00% reduction in Loss
Ratio; Provisional Ceding Commission of 26.00% at a Loss Ratio
of 67.00%; Increasing 1.00% for each 1.00% reduction in Loss
Ratio;
SEC:vs
1/8/97 2
<PAGE>
CEDING
COMMISSION
(Continued): Ceding Commission of 29.00% at a Loss Ratio of 64.00%;
- ----------- Increasing 0.50% for each 1.00% reduction in Loss Ratio;
Maximum Ceding Commission of 32.00% at a 58.00% Loss Ratio.
Loss Corridor: The Company will retain net 5.0 loss ratio
points attaching at a ceded loss ratio of 72.0% and ending at
77.0%.
Annual adjustments at the end of each Agreement
period based on losses incurred during each accident
year. No upward adjustment until twelve (12) months
after the end of each year.
Deficit/Credit carry forward not to exceed three (3) years.
Calculation of this Commission adjustment shall apply
collectively for all Companies reinsured under this Agreement,
and not individually.
WARRANTY: Reinsurers hereon to have the benefit of recoveries from the
- -------- Company's Second Private Passenger Automobile Liability Excess
of Loss Reinsurance Agreement with limits of 100% of
$1,100,000 each occurrence (unlimited reinstatements) excess
$100,000 each occurrence.
REPORTS AND
ACCOUNTS: Within sixty (60) days after the close of each month, the
- -------- Company shall render to the Reinsurers the following:
a. Reinsurance premium written for the month;
b. Less net ceded earned second excess of loss private
passenger automobile liability reinsurance premium for the
month; c. Less commission allowed on the reinsurance
premium for the month; d. Less Reinsurers' share of paid
loss and paid loss adjustment expenses during the month;
e. Plus Reinsurers' share of all salvage recovered during
the month; f. Net balance due.
The Company shall advise the unearned premium and outstanding
losses by line of business and remit the Reinsurers' net
balance within sixty (60) days after the end of each month.
SEC:vs
1/8/97 3
<PAGE>
REINSURANCE COVER NOTE
Agreement No.: 970063
CLAUSES: Net Liability.
- ------- Parties to the Agreement.
Reinsurers Liability.
Losses and Loss Settlements.
Extra Contractual Obligations on a 100% basis within the
Agreement limit. Loss in Excess of Policy Limits on a 100%
basis within the Agreement limit.
Funding of Reserves.
Currency.
Taxes.
Access to Records.
Errors and Omissions, not to apply to Exclusions.
Original Conditions.
Insolvency.
Arbitration.
Federal Excise Tax.
Service of Suit - NMA 1998 - Mendes & Mount (where applicable).
Offset.
Severability.
Minet Re North America, Inc. Intermediary.
WORDING: As per existing Reinsurance Agreement as far as applicable
- ------- and as noted herein, which complies with the requirements
of the State of New York Insurance Department.
REINSURERS:
- ----------
<TABLE>
<CAPTION>
NAIC
FEIN No. No. Through Minet Re North America Share
-------- ---- ------------------------------ -----
<S> <C> <C> <C> <C>
23-0580680 24457 Reliance Insurance Company
through Reliance Reinsurance Corp. 50%
Philadelphia, Pennsylvania
16-0366830 22314 Underwriters Reinsurance Company 50%
Concord, New Hampshire --
TOTAL PLACEMENT: 100%
====
</TABLE>
SEC:vs
1/8/97 4
<PAGE>
REINSURANCE COVER NOTE
Agrement No.: 970063
We will periodically provide a list of those companies with which Minet Re North
America, Inc. is affiliated, which may be parties to this placement. This list
is available on request.
FOR AND ON BEHALF OF:
MINET RE NORTH AMERICA, INC.
___________________________ DATE: _______________
Senior Vice President
AGREED TO:
HOME STATE INSURANCE GROUP
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
___________________________ DATE: _______________
Authorized Signature
Please examine this document carefully and advise us immediately if any of the
details on the security used are not in accordance with your order or
requirements.
SEC:vs
1/8/97 5
REINSURANCE COVER NOTE
Agreement No: 960006
MEMORANDUM OF REINSURANCE EFFECTED ON BEHALF OF:
REINSURED: HOME STATE INSURANCE GROUP
- ---------
HOME STATE INSURANCE COMPANY
Red Bank, New Jersey
QUAKER CITY INSURANCE COMPANY
Trevose, Pennsylvania
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
Binghamton, New York
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
Binghamton, New York
PINNACLE INSURANCE COMPANY
Carrollton, Georgia
WESTBROOK INSURANCE COMPANY
Wallingford, Connecticut
(hereinafter referred to as the "Company")
TYPE: PRIVATE PASSENGER AND COMMERCIAL AUTOMOBILE PHYSICAL DAMAGE
- ---- QUOTA SHARE REINSURANCE AGREEMENT
PERIOD: Continuous from December 31, 1996 at 12:01 a.m., Eastern
- ------ Standard Time, subject to cancellation at any December 31
anniversary thereafter by either party giving ninety (90)
days' prior written notice.
In the event of cancellation, at the Company's option:
1. Reinsurers shall remain liable for their share of all
policies in force hereunder at the effective date of
cancellation until the natural expiration or prior
termination date of said policies.
2. The Company shall reassume the unexpired liability for
all in-force business as of the date of cancellation
and the Reinsurers shall return their share of the
unearned premium less ceding commission.
CLASS: All in-force, new and renewal business classified by the
- ----- Company as Private Passenger Automobile Physical Damage and
Commercial Automobile Physical Damage (including
Collision), except Private Passenger business written in
Connecticut, Florida and Georgia.
SEC:vs
1/8/97 1
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 960006
EXCLUSIONS: This Agreement shall not apply to:
- ----------
1. Assumed reinsurance other than business assumed via
intra-company reinsurance, United Pacific Insurance
Company and Reliance Insurance Company, and Delaware
private passenger business written as a 100% Quota
Share of companies with whom Quaker City Insurance
Company has entered into rollover agreements.
2. Loss or liability excluded by the provision of the
"Nuclear Incident Exclusion Clauses - Physical Damage
- Reinsurance - USA and Canada."
3. Financial Guarantee and Insolvency.
4. Insolvency Funds.
5. War Risks.
6. Loss or liability excluded by the provisions of the
"Pools, Associations, Syndicates Exclusion Clause." It
is understood and agreed that this exclusion shall not
apply to individual risks assigned to the Company
under an Assigned Risk Plan or similar plan.
7. Bodily Injury and Property Damage Liability, including
Personal Injury Liability and Medical Payments.
8. Personal Accident and Health.
TERRITORIAL
SCOPE: As per the Company's original policies.
- -----
QUOTA SHARE
PARTICIPATION: 40% of the Company's net liability, not to exceed 40% of
- ------------- $85,000, any one vehicle for Private Passenger Automobile
Physical Damage business and not to exceed 40% of $125,000,
any one vehicle, for Commercial Automobile Physical Damage
business.
PREMIUM: 40% of original written premium. 1997 estimated ceded
- ------- written premium is $19,352,600.
CEDING
COMMISSION: Provisional commission of 34.000% of ceded premiums,
- ---------- subject to adjustment on earned-to-incurred basis, as
follows:
Minimum Ceding Commission of 27.500% at a Loss Ratio of
64.500% or higher; Increasing 1.000% for each 1.000%
reduction in Loss Ratio; SEC:vs 1/8/97 2
SEC:vs
1/8/97 2
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 960006
CEDING
COMMISSION
(Continued): Provisional Ceding Commission of 34.000% at a Loss Ratio of
- ----------- 58.000%; Increasing 1.000% for each 1.000% reduction in
Loss Ratio; Ceding Commission of 45.000% at a Loss Ratio of
47.000%; Increasing 0.750% for each 1.000% reduction in
Loss Ratio; Maximum Ceding Commission of 60.000% at a
27.000% Loss Ratio. Loss Corridor: The Company will retain
net 5.0 loss ratio points attaching at a ceded loss ratio
of 68.5% and ending at 73.5%.
Annual adjustments at the end of each Agreement period
based on losses incurred during each calendar year.
Deficit/Credit carry forward not to exceed three (3) years.
Calculation of this commission adjustment shall apply
collectively for all Companies reinsured under this
Agreement, and not individually.
REPORTS AND
ACCOUNTS: Within sixty (60) days after the close of each month, the
- -------- Company shall render to the Reinsurers the following:
a. Reinsurance premium written for the month;
b. Less commission allowed on the reinsurance premium for
the month;
c. Less Reinsurers' share of paid loss and paid loss
adjustment expenses during the month;
d. Plus Reinsurers' share of all salvage recovered during
the month;
e. Net balance due.
The Company shall advise the unearned premium and
outstanding losses by line of business and remit the
Reinsurers' net balance within sixty (60) days after the
end of each month.
GENERAL
CONDITIONS: The Company shall have permission to purchase excess of
- ---------- loss protection, recoveries under which shall inure to the
benefit of this Agreement.
SEC:vs
1/8/97 3
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 960006
CLAUSES: Net Liability.
- ------- Parties to the Agreement.
Reinsurers Liability.
Losses and Loss Settlements.
Extra Contractual Obligations on a 100% basis within the
Agreement limit.
Loss in Excess of Policy Limits on a 100% basis within the
Agreement limit.
Funding of Reserves.
Currency.
Taxes.
Access to Records.
Errors and Omissions, not to apply to Exclusions.
Original Conditions.
Insolvency.
Arbitration.
Federal Excise Tax.
Service of Suit - NMA 1998 - Mendes & Mount (where
applicable).
Offset.
Severability.
Minet Re North America, Inc. Intermediary.
WORDING: As per expiring Reinsurance Agreements as far as applicable
- ------- and as noted herein, which complies with the requirements
of the State of New York Insurance Department.
REINSURERS:
- ----------
<TABLE>
<CAPTION>
NAIC
FEIN No. No. Through Minet Re North America Share
-------- ---- ------------------------------ -----
<S> <C> <C> <C> <C>
23-0580680 24457 Reliance Insurance Company
through Reliance Reinsurance Corp. 45%
Philadelphia, Pennsylvania
16-0366830 22314 Underwriters Reinsurance Company 45%
Concord, New Hampshire
63-0598629 11762 Vesta Fire Insurance Corporation 10%
Birmingham, Alabama --
TOTAL PLACEMENT: 100%
====
</TABLE>
SEC:vs
1/8/97 4
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 960006
We will periodically provide a list of those companies with which Minet Re North
America, Inc. is affiliated, which may be parties to this placement. This list
is available on request.
FOR AND ON BEHALF OF:
MINET RE NORTH AMERICA, INC.
___________________________ DATE: _______________
Senior Vice President
AGREED TO:
HOME STATE INSURANCE GROUP
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
___________________________ DATE: _______________
Authorized Signature
Please examine this document carefully and advise us immediately if any of the
details on the security used are not in accordance with your order or
requirements.
SEC:vs
1/8/97 5
REINSURANCE COVER NOTE
Agreement No: 970069
MEMORANDUM OF REINSURANCE EFFECTED ON BEHALF OF:
REINSURED: HOME STATE INSURANCE GROUP
- ---------
HOME STATE INSURANCE COMPANY
Red Bank, New Jersey
QUAKER CITY INSURANCE COMPANY
Trevose, Pennsylvania
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
Binghamton, New York
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
Binghamton, New York
PINNACLE INSURANCE COMPANY
Carrollton, Georgia
WESTBROOK INSURANCE COMPANY
Wallingford, Connecticut
(hereinafter referred to as the "Company")
TYPE: COMMERCIAL AUTOMOBILE PHYSICAL DAMAGE EXCESS OF LOSS
- ---- REINSURANCE AGREEMENT
PERIOD: Continuous from January 1, 1997 at 12:01 a.m., Eastern
- ------ Standard Time, subject to cancellation at any January 1
anniversary thereafter by either party giving ninety (90)
days' prior written notice.
In the event of cancellation the Company shall have the
option to cancel on a cut-off basis or on a run-off basis.
If run-off is chosen, the Reinsurers shall remain liable
for their share of all policies in force hereunder at the
effective date of cancellation until the natural expiration
or prior cancellation of said policies at expiring terms,
not to exceed twelve (12) months after the effective date
of cancellation. The additional premium to reinsurers for
run-off shall be the expired rate applied to the unearned
premium in force at the time of cancellation.
Should this Agreement terminate while a loss occurrence is
in progress, the Reinsurers shall be liable for their share
of all individual losses resulting from such loss
occurrence whether any such individual losses take place
before or after such termination.
SEC:vs
1/8/97 1
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970069
CLASS: All in-force, new and renewal business classified by the
- ----- Company as Commercial Automobile Physical Damage (including
Collision).
EXCLUSIONS: This Agreement shall not apply to:
- ----------
1. Assumed reinsurance other than business assumed via
intra-company reinsurance and from United Pacific
Insurance Company and Reliance Insurance Company,
2. Loss or liability excluded by the provision of the
"Nuclear Incident Exclusion Clauses - Physical Damage
- Reinsurance - USA and Canada."
3. Financial Guarantee and Insolvency.
4. Insolvency Funds.
5. War Risks.
6. Loss or liability excluded by the provisions of the
"Pools, Associations, Syndicates Exclusion Clause." It
is understood and agreed that this exclusion shall not
apply to individual risks assigned to the Company
under an Assigned Risk Plan or similar plan.
7. Bodily Injury and Property Damage Liability, including
Personal Injury Liability and Medical Payments.
8. Personal Accident and Health.
TERRITORIAL
SCOPE: As per the Company's original policies.
- -----
LIMIT AND
RETENTION: 100% of $375,000 each and every loss occurrence, each and
- --------- every vehicle, in excess of $125,000 each and every loss
occurrence, each and every vehicle.
GROSS RATE: 3.00%. Rate applies to the Company's Gross Net Earned Premium
- ---------- Income estimated to be $3,127,150 for 1997.
NET RATE: 2.03%.
- --------
CEDING
COMMISSION: 32.5% of ceded earned premium.
- ----------
SEC:vs
1/8/97 2
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970069
REPORTS AND
ACCOUNTS: Accounts and premium are due and payable quarterly thirty
- -------- (30) days after the close of each calendar quarter.
CLAUSES: Parties to the Agreement.
- ------- Net Retained Lines.
Ultimate Net Loss - Loss Adjustment Expenses included in the
limit of the Agreement.
Extra Contractual Obligations on a 90%/10% basis within the
limit of the Agreement.
Loss in Excess of Policy Limits on a 90%/10% basis within the
limit of the Agreement.
Subrogation.
Salvage and Recoveries.
Definition of Loss Occurrence.
Loss Notice and Settlements.
Funding of Reserves.
Currency.
Taxes.
Access to Records.
Errors and Omissions not to override Loss Notice and
Settlements, and not to apply to Exclusions.
Original Conditions.
Insolvency.
Arbitration.
Federal Excise Tax.
Service of Suit - NMA 1998- Mendes & Mount (where
applicable).
Offset.
Severability.
Minet Re North America, Inc. Intermediary.
WORDING: As per expiring Reinsurance Agreement as far as applicable
- ------- and as noted herein, which complies with the requirements of
the State of New York Insurance Department.
REINSURERS:
- ----------
NAIC
FEIN No. No. Through Minet Re North America Share
-------- ---- ------------------------------ -----
23-0580680 24457 Reliance Insurance Company
through Reliance Reinsurance Corp. 25%
Philadelphia, Pennsylvania
16-0366830 22314 Underwriters Reinsurance Company 25%
Concord, New Hampshire --
TOTAL PLACEMENT: 50%
===
SEC:vs
1/8/97 3
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970069
We will periodically provide a list of those companies with which Minet Re North
America, Inc. is affiliated, which may be parties to this placement. This list
is available on request.
FOR AND ON BEHALF OF:
MINET RE NORTH AMERICA, INC.
___________________________ DATE: _______________
Senior Vice President
AGREED TO:
HOME STATE INSURANCE GROUP
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
___________________________ DATE: _______________
Authorized Signature
Please examine this document carefully and advise us immediately if any of the
details on the security used are not in accordance with your order or
requirements.
SEC:vs
1/8/97 4
REINSURANCE COVER NOTE
Agreement No: 970044
MEMORANDUM OF REINSURANCE EFFECTED ON BEHALF OF:
REINSURED: HOME STATE INSURANCE GROUP
- ---------
HOME STATE INSURANCE COMPANY
Red Bank, New Jersey
QUAKER CITY INSURANCE COMPANY
Trevose, Pennsylvania NEW YORK
MERCHANT BAKERS INSURANCE COMPANY
Binghamton, New York
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
Binghamton, New York
PINNACLE INSURANCE COMPANY
Carrollton, Georgia
WESTBROOK INSURANCE COMPANY
Wallingford, Connecticut
(hereinafter referred to as the "Company")
TYPE: FIRST PERSONAL AND COMMERCIAL AUTOMOBILE LIABILITY EXCESST
- ---- OF LOSS REINSURANCE AGREEMEN
PERIOD: Continuous from 12:01 a.m., Eastern Standard Time,
- ------ January 1, 1997, subject to cancellation at any January 1
anniversary thereafter by either party giving ninety (90)
days' prior written notice. Agreement originally effective
July 1, 1993.
In the event of cancellation, the Company shall have the
option to cancel on a cut-off basis or on a run-off basis.
If run-off is chosen, the Reinsurers shall remain liable
for their share of all policies in force hereunder at the
effective date of cancellation until the natural expiration
or prior cancellation of said policies at expiring terms,
not to exceed twelve (12) months after the effective date
of cancellation. The additional premium to Reinsurers for
run-off shall be the expired rate applied to the unearned
premium in force at the time of cancellation.
Should this Agreement terminate while a loss occurrence is
in progress, the Reinsurers shall be liable for their share
of all individual losses resulting from such loss
occurrence whether any such individual losses take place
before or after such termination.
SEC:vs
1/7/97 1
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970044
CLASS: All in-force, new and renewal business classified by the
Company as Personal Automobile Liability in all states,
except business written in Connecticut, Florida and
Georgia, and Commercial Automobile Liability, including
No-Fault, Uninsured and Underinsured Motorists and Medical
Payments plus Garagekeepers Legal Liability and Garage
Liability, except Black Car and Silver Car business.
EXCLUSIONS: This Agreement shall not apply to:
- ----------
1. Assumed reinsurance other than business assumed via
intra-company reinsurance, United Pacific Insurance
Company and Reliance Insurance Company, facultative
commercial automobile liability reinsurance in
connection with business originally produced by the
Company and specifically reported to working layer
Reinsurers, and Delaware private passenger business
written as a 100% Quota Share of companies with whom
Quaker City Insurance Company has entered into
rollover agreements;
2. Loss or liability excluded by the provisions of the
"Nuclear Incident Exclusion Clauses - Liability
-Reinsurance - USA and Canada";
3. Financial Guarantee and Insolvency;
4. Insolvency Funds;
5. War Risks, as described in the North American War Risk
Exclusion Clause;
6. All business derived directly or indirectly from any
Pool, Association or Syndicate, except that individual
losses from Assigned Risk Plans or similar plans are
not excluded;
7. Speed Contests; and
8. Ambulances.
TERRITORIAL
SCOPE: As per the Company's original policies.
- -----
LIMIT AND
RETENTION: A. Business classified as Private Passenger Automobile
- --------- $50,000 Ultimate Net Loss each and every loss
occurrence in excess of $50,000 Ultimate Net Loss
each and every loss occurrence.
SEC:vs
1/7/97 2
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970044
LIMIT AND
RETENTION
(Continued): B. Business classified as Commercial Automobile,
- ---------- Garagekeepers Legal Liability and Garage Liability
$50,000 Ultimate Net Loss each and every loss
occurrence in excess of $50,000 Ultimate Net Loss each
and every loss occurrence.
Notwithstanding any other provisions of this Agreement, the
aggregate total of all loss payments made by the Reinsurer
shall not exceed 200% of the net earned reinsurance premium
received by the Reinsurer during the cumulative period this
Agreement remains in effect. In addition, the maximum
amount payable by the Reinsurer as respects the 1997 year
shall not exceed the greater of 225% of the net earned
reinsurance premium or $35,000,000.
RATE: A. Private Passenger Automobile
- ----
19.30% Gross Rate, 13.00% Net Rate. Rate applies to the
Company's Gross Net Earned Premium, estimated to be
$70,076,900 for 1997.
B. Commercial Automobile, Garagekeepers Legal Liability
and Garage Liability
19.30% Gross Rate, 13.00% Net Rate. Rate applies to the
Company's Gross Net Earned Premium, estimated to be
$50,358,250 for 1997.
REPORTS AND
ACCOUNTS: Accounts and premiums are due and payable quarterly thirty
- --------- (30) days after the close of each calendar quarter.
CEDING
COMMISSION: 32.5% of gross ceded premium.
- ----------
CONTINGENT
COMMISSION: Three-Year Block: January 1, 1997 - December 31, 1999
- ---------- ------------------------------------------------------
Cumulative Net Earned Reinsurance Premium less Cumulative
Incurred Losses plus Pro Rata Loss Adjustment Expenses
occurring on and after January 1, 1997 to the termination
of the Agreement, plus deficit, if any, from the preceding
SEC:vs
1/7/97 3
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970044
period, and less Reinsurers' Margin shall equal the
Cumulative Net Balance. Balance times 100% equals
Contingent Commission. SEC:vs 1/7/97 4
CONTINGENT
COMMISSION
(Continued): Incurred Losses in this calculation to include IBNR
- ----------- factors of 50% of net earned reinsurance premium at the
first calculation at 12/31/97; 30% of net earned
reinsurance premium at the second calculation at 12/31/98;
10% of net earned reinsurance premium at the third
calculation at 12/31/99 and 0% at subsequent calculations.
Reinsurers' Margin shall be 17.5% of the Net Earned
Reinsurance Premium.
Payable annually within ninety (90) days after the close of
each year. Unlimited deficit carry forward. Annual
calculations until all losses are settled. Annual
calculations at each December 31 thereafter until all
losses are settled.
Calculation of this Contingent Commission shall apply
collectively for all Companies reinsured under this
Agreement, and not individually.
CLAUSES: Parties to the Agreement.
- ------- Net Retained Lines.
Ultimate Net Loss - Loss Adjustment Expenses pro rata
in addition to the limits of the Agreement.
Extra Contractual Obligations on a 90%/10% basis within
the limits of the Agreement.
Loss in Excess of Policy Limits on a 90%/10% basis within
the limits of the Agreement.
Subrogation.
Salvage and Recoveries.
Definition of Loss Occurrence.
Loss Notice and Settlements.
Funding of Reserves.
Currency.
Taxes.
Access to Records.
Errors and Omissions not to override Loss Notice and
Settlements, and not to apply to Exclusions.
Original Conditions.
Insolvency.
SEC:vs
1/7/97 4
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970044
CLAUSES
(Continued): Arbitration.
- ----------- Federal Excise Tax.
Service of Suit - NMA 1998- Mendes & Mount (where
applicable).
Offset.
Severability.
Minet Re North America, Inc. Intermediary.
WORDING: As per expiring Reinsurance Agreement as far as applicable
- ------- and as noted herein, which complies with the requirements
of the State of New York Insurance Department.
REINSURERS:
- ----------
<TABLE>
<CAPTION>
NAIC
FEIN No. No. Through Minet Re North America Share
<S> <C> <C> <C> <C>
23-0580680 24457 Reliance Insurance Company
through Reliance Reinsurance Corp. 25%
Philadelphia, Pennsylvania
16-0366830 22314 Underwriters Reinsurance Company25%
Concord, New Hampshire --
TOTAL PLACEMENT: 50%
===
</TABLE>
SEC:vs
1/7/97 5
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970044
We will periodically provide a list of those companies with which Minet Re North
America, Inc. is affiliated, which may be parties to this placement. This list
is available on request.
FOR AND ON BEHALF OF:
MINET RE NORTH AMERICA, INC.
___________________________ DATE: _______________
Senior Vice President
AGREED TO:
HOME STATE INSURANCE GROUP
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
___________________________ DATE: _______________
Authorized Signature
Please examine this document carefully and advise us immediately if any of the
details on the security used are not in accordance with your order or
requirements.
SEC:vs
1/7/97 6
REINSURANCE COVER NOTE
Agreement No: 970008
MEMORANDUM OF REINSURANCE EFFECTED ON BEHALF OF:
REINSURED: HOME STATE INSURANCE GROUP
- ---------
HOME STATE INSURANCE COMPANY
Red Bank, New Jersey
QUAKER CITY INSURANCE COMPANY
Trevose, Pennsylvania
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
Binghamton, New York
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
Binghamton, New York
PINNACLE INSURANCE COMPANY
Carrollton, Georgia
WESTBROOK INSURANCE COMPANY
Wallingford, Connecticut
(hereinafter referred to as the "Company")
TYPE: SECOND PERSONAL AUTOMOBILE LIABILITY
- ---- EXCESS OF LOSS REINSURANCE AGREEMENT
PERIOD: Continuous from 12:01 a.m., Eastern Standard Time,
- ------ January 1, 1997, subject to cancellation at any January 1
anniversary thereafter, by either party giving ninety (90)
days' prior written notice. Agreement originally effective
November 1, 1989.
In the event of cancellation, the Company shall have the
option to cancel on a cut-off basis or a run-off basis.
If run-off is chosen, the Reinsurers shall remain liable
for their share of all policies in force hereunder at the
effective date of cancellation until the natural expiration
or prior cancellation of said policies at expiring terms,
not to exceed twelve (12) months after the effective date
of cancellation. The additional premium to Reinsurers for
run-off shall be the expired rate applied to the unearned
premium in force at the time of cancellation.
Should this Agreement terminate while a loss occurrence is
in progress, the Reinsurers shall be liable for their share
of all individual losses resulting from such loss
occurrences whether any such individual losses take place
before or after such termination.
SEC:vs
1/7/97 1
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970008
CLASS: All in-force, new and renewal business classified by the
- ----- Company as Personal Automobile Liability.
EXCLUSIONS: This Agreement shall not apply to:
1. Assumed Reinsurance other than business assumed via
intra-company reinsurance and Delaware private
passenger business written as a 100% Quota Share of
companies with whom Quaker City Insurance Company has
entered into rollover agreements;
2. Loss or liability excluded by the provision of the
"Nuclear Incident Exclusion Clauses - Liability -
Reinsurance - USA and Canada";
3. Financial Guarantee and Insolvency;
4. Insolvency Funds;
5. War Risks, as described in the North American War Risk
Exclusion Clause;
6. All business derived directly or indirectly from any
Pool, Association or Syndicate, except that individual
losses from Assigned Risk Plans or similar plans are
not excluded;
7. Speed Contests; and
8. Ambulances.
TERRITORIAL
SCOPE: As per the Company's original policies.
- -----
LIMIT AND
RETENTION: $1,100,000 Ultimate Net Loss each and every loss occurrence
- --------- in excess of $100,000 Ultimate Net Loss each and every loss
occurrence.
RATE: Gross Rate: 13.5%; Net Rate: 9.1%
- ----
Rate applies to the Company's Gross Net Earned Premium
Income, estimated to be $76,534,700 for 1997.
REPORTS AND
ACCOUNTS: Accounts and premium are due and payable quarterly thirty
- -------- (30) days after the close of each calendar quarter.
SEC:vs
1/7/97 2
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970008
CEDING
COMMISSION: 32.5% of gross ceded premium.
CONTINGENT
COMMISSION: Three-Year Block: January 1, 1997 - December 31, 1999
- ---------- ------------------------------------------------------
Net Earned Reinsurance Premium; Less 17.5% of Net Earned
Reinsurance Premium; Less Incurred Losses, including IBNR;
Less Deficit, if any, from preceding period; Balance times
100% equals Contingent Commission.
Payable annually within ninety (90) days after the close of
each year. Unlimited deficit carry forward. Annual
calculations at each December 31 thereafter until all
losses are settled.
Incurred Losses to include IBNR factors as follows: 50% of
net earned reinsurance premium at the first calculation at
12/31/97; 30% of net earned reinsurance premium at the
second calculation at 12/31/98; 10% of net earned
reinsurance premium at the third calculation at 12/31/99
and 0% at subsequent calculations.
Calculation of this Contingent Commission shall apply
collectively for all Companies reinsured under this
Agreement, and not individually.
GENERAL
CONDITIONS: The Company shall have permission to purchase Pennsylvania
- ---------- catastrophic personal injury protection excess of loss
reinsurance, recoveries under which shall inure to the
benefit of this Agreement.
CLAUSES: Parties to the Agreement.
- ------- Net Retained Lines.
Ultimate Net Loss - Loss Adjustment Expenses pro rata in
addition to the limits of the Agreement.
Extra Contractual Obligations on a 90%/10% basis within the
limit of the Agreement.
Loss in Excess of Policy Limits on a 90%/10% basis within
the limit of the Agreement.
Subrogation.
Salvage and Recoveries.
SEC:vs
1/7/97 3
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970008
CLAUSES
(Continued): Definition of Loss Occurrence.
- ----------- Loss Notice and Settlements.
Funding of Reserves.
Currency.
Taxes.
Access to Records.
Errors and Omissions not to override Loss Notice and
Settlements, and not to apply to Exclusions.
Original Conditions.
Insolvency.
Arbitration.
Federal Excise Tax.
Service of Suit - NMA 1998 - Mendes & Mount (where
applicable).
Offset.
Severability.
Minet Re North America, Inc. Intermediary.
WORDING: As per expiring Reinsurance Agreement as far as applicable
- ------- and as noted herein, which complies with the requirements
of the State of New York Insurance Department.
REINSURERS:
- ----------
<TABLE>
<CAPTION>
NAIC
FEIN No. No. Through Minet Re North America Share
-------- ----- ------------------------------ -----
<S> <C> <C> <C> <C>
23-0580680 24457 Reliance Insurance Company
through Reliance Reinsurance Corp. 25%
Philadelphia, Pennsylvania
16-0366830 22314 Underwriters Reinsurance Company 25%
Concord, New Hampshire --
TOTAL PLACEMENT: 50%
===
</TABLE>
SEC:vs
1/7/97 4
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970008
We will periodically provide a list of those companies with which Minet Re North
America, Inc. is affiliated, which may be parties to this placement. This list
is available on request.
FOR AND ON BEHALF OF:
MINET RE NORTH AMERICA, INC.
___________________________ DATE: _______________
Senior Vice President
AGREED TO:
HOME STATE INSURANCE GROUP
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
___________________________ DATE: _______________
Authorized Signature
Please examine this document carefully and advise us immediately if any of the
details on the security used are not in accordance with your order or
requirements.
SEC:vs
1/7/97 5
REINSURANCE COVER NOTE
Agreement No: 970018/19/35
MEMORANDUM OF REINSURANCE EFFECTED ON BEHALF OF:
REINSURED: HOME STATE INSURANCE GROUP
- ---------
HOME STATE INSURANCE COMPANY
Red Bank, New Jersey
QUAKER CITY INSURANCE COMPANY
Trevose,Pennsylvania
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
Binghamton, New York
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
Binghamton, New York
PINNACLE INSURANCE COMPANY
Carrollton, Georgia
WESTBROOK INSURANCE COMPANY
Wallingford, Connecticut
(hereinafter referred to as the "Company")
TYPE: COMMERCIAL AUTOMOBILE LIABILITY
- ---- EXCESS OF LOSS REINSURANCE AGREEMENT
PERIOD: Continuous from January 1, 1997, Eastern Standard Time,
- ------ subject to cancellation at any January 1 anniversary
thereafter by either party giving ninety (90) days' prior
written notice. Agreement originally effective November 1,
1990.
In the event of cancellation the Company shall have the
option to cancel on a cut-off basis or on a run-off basis.
If run-off is chosen, the Reinsurers shall remain liable
for their share of all policies in force hereunder at the
effective date of cancellation until the natural expiration
or prior cancellation of said policies at expiring terms,
not to exceed twelve (12) months after the effective date
of cancellation. The additional premium to reinsurers for
run-off shall be the expired rate applied to the unearned
premium in force at the time of cancellation.
Should this Agreement terminate while a loss occurrence is
in progress, the Reinsurers shall be liable for their share
of all individual losses resulting from such loss
occurrence whether any such individual losses take place
before or after such termination.
SEC:vs
1/7/97 1
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970018/19/35
CLASS: All in-force, new and renewal business classified by the
- ----- Company as Commercial Automobile Liability, including
No-Fault, Uninsured and Underinsured Motorists and Medical
Payments plus Garagekeepers Legal Liability and Garage
Liability except Black Car and Silver Car business.
EXCLUSIONS: This Agreement shall not apply to:
- ----------
1. Assumed reinsurance other than business assumed via
intra-company reinsurance, United Pacific Insurance
Company and Reliance Insurance Company, and
facultative commercial automobile liability
reinsurance in connection with business originally
produced by the Company and specifically reported to
working layer Reinsurers;
2. Loss or liability excluded by the provisions of the
"Nuclear Incident Exclusion Clauses - Liability -
Reinsurance - USA and Canada";
3. Financial Guarantee and Insolvency;
4. Insolvency Funds;
5. War Risks, as described in the North American War Risk
Exclusion Clause;
6. All business derived directly or indirectly from any
Pool, Association or Syndicate, except that individual
losses from Assigned Risk Plans or similar plans are
not excluded.
TERRITORIAL
SCOPE: As per the Company's original policies.
- -----
LIMIT AND
RETENTION: See attached Exhibits A, B and C.
- ---------
RATE: See attached Exhibits A, B and C. Rate applies to the
- ---- Company's Gross Net Earned Premium Income estimated to be
$50,358,250 for 1997.
REPORTS AND
ACCOUNTS: Accounts and premium are due and payable quarterly thirty
- -------- (30) days after the close of each calendar quarter.
CEDING
COMMISSION: 32.5% of ceded earned premium.
- ----------
SEC:vs
1/7/97 2
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970018/19/35
PROFIT
COMMISSION: See attached Exhibits B and C. This provision is not
- ---------- applicable to Exhibit A.
GENERAL
CONDITIONS: The Company shall have permission to purchase facultative
- ---------- excess of loss reinsurance, as well as public
transportation personal injury protection excess of loss
reinsurance, recoveries under which shall inure to the
benefit of this Agreement.
CLAUSES: Parties to the Agreement.
- ------- Net Retained Lines.
Ultimate Net Loss - Loss Adjustment Expenses pro rata in
addition to the limits of the Agreement.
Extra Contractual Obligations on a 90%/10% basis within the
limit of the Agreement.
Loss in Excess of Policy Limits on a 90%/10% basis within
the limit of the Agreement.
Subrogation.
Salvage and Recoveries.
Definition of Loss Occurrence.
Loss Notice and Settlements.
Funding of Reserves.
Currency.
Taxes.
Access to Records.
Errors and Omissions not to override Loss Notice and
Settlements, and not to apply to Exclusions.
Original Conditions.
Insolvency.
Arbitration.
Federal Excise Tax.
Service of Suit - NMA 1998- Mendes & Mount (where
applicable).
Offset.
Severability.
Minet Re North America, Inc. Intermediary.
SEC:vs
1/7/97 3
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970018/19/35
WORDING: As per expiring Reinsurance Agreement as far as applicable
- ------- and as noted herein, which complies with the requirements
of the State of New York Insurance Department.
We will periodically provide a list of those companies with which Minet Re North
America, Inc. is affiliated, which may be parties to this placement. This list
is available on request.
FOR AND ON BEHALF OF:
MINET RE NORTH AMERICA, INC.
___________________________ DATE: _______________
Senior Vice President
AGREED TO:
HOME STATE INSURANCE GROUP
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
___________________________ DATE: _______________
Authorized Signature
Please examine this document carefully and advise us immediately if any of the
details on the security used are not in accordance with your order or
requirements.
SEC:vs
1/7/97 4
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970018/19/35
EXHIBIT A
SECOND COMMERCIAL AUTOMOBILE LIABILITY
EXCESS OF LOSS REINSURANCE AGREEMENT
------------------------------------
(BN970018)
LIMIT AND
RETENTION: 100% of $400,000 each and every loss occurrence in excess
- --------- of $100,000 each and every loss occurrence.
GROSS
RATE: 4.4% Minimum; 22.2% Provisional; 29.6% Maximum.
- ----
NET
RATE: 3.0% Minimum; 15.0% Provisional; 20.0% Maximum.
- ----
RATE
ADJUSTMENT: Losses loaded at 3.0%; adjusted annually at each December
- ---------- 31 until all losses are settled.
REINSURERS:
- ----------
<TABLE>
<CAPTION>
NAIC
FEIN No. No. Through Minet Re North America Share
-------- ---- ------------------------------ -----
<S> <C> <C> <C> <C>
23-0580680 24457 Reliance Insurance Company
through Reliance Reinsurance Corp. 25%
Philadelphia, Pennsylvania
16-0366830 22314 Underwriters Reinsurance Company 25%
Concord, New Hampshire --
TOTAL PLACEMENT: 50%
===
</TABLE>
SEC:vs
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970018/19/35
EXHIBIT B
THIRD COMMERCIAL AUTOMOBILE LIABILITY
EXCESS OF LOSS REINSURANCE AGREEMENT
------------------------------------
(BN970019)
LIMIT AND
RETENTION: 100% of $1,000,000 each and every loss occurrence in excess
- --------- of $500,000 each and every loss occurrence.
GROSS RATE: 9.6%.
- ----------
NET RATE: 6.5%.
- --------
CONTINGENT
COMMISSION: Three-Year Block: January 1, 1997 - December 31, 1999
- ---------- ------------------------------------------------------
Cumulative Net Earned Reinsurance Premium less Cumulative
Incurred Losses plus Pro Rata Loss Adjustment Expenses
occurring on and after January 1, 1997 to the termination
of the Agreement, plus deficit, if any, from the preceding
period, and less Reinsurers' Margin shall equal the
Cumulative Net Balance. Balance times 100% equals
Contingent Commission.
Incurred Losses in this calculation to include IBNR factors
of 50% of net earned reinsurance premium at the first
calculation at 12/31/97; 30% of net earned reinsurance
premium at the second calculation at 12/31/98; 10% of net
earned reinsurance premium at the third calculation at
12/31/99 and 0% at subsequent calculations. Reinsurers'
Margin shall be 17.5% of the Net Earned Reinsurance
Premium.
Payable annually within ninety (90) days after the close of
each year. Unlimited deficit carry forward. Annual
calculations until all losses are settled. Annual
calculations at each December 31 thereafter until all
losses are settled.
Calculation of this Contingent Commission shall apply
collectively for all Companies reinsured under this
Agreement, and not individually.
SEC:vs
1/7/97 B-1
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970018/19/35
REINSURERS:
- ----------
<TABLE>
<CAPTION>
NAIC
FEIN No. No. Through Minet Re North America Share
-------- ---- ------------------------------ -----
<S> <C> <C> <C> <C>
23-0580680 24457 Reliance Insurance Company
through Reliance Reinsurance Corp. 25%
Philadelphia, Pennsylvania
16-0366830 22314 Underwriters Reinsurance Company 25%
Concord, New Hampshire --
TOTAL PLACEMENT: 50%
===
</TABLE>
SEC:vs
1/7/97 B-2
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970018/19/35
EXHIBIT C
---------
FOURTH COMMERCIAL AUTOMOBILE LIABILITY
EXCESS OF LOSS REINSURANCE AGREEMENT
------------------------------------
(BN970035)
LIMIT AND
RETENTION: 100% of $3,500,000 each and every loss occurrence in excess
- --------- of $1,500,000 each and every loss occurrence.
GROSS RATE: 5.9%.
- ----------
NET RATE: 4.0%
- --------
CONTINGENT
COMMISSION: Three-Year Block: January 1, 1997 - December 31, 1999
- ---------- ------------------------------------------------------
Cumulative Net Earned Reinsurance Premium less Cumulative
Incurred Losses plus Pro Rata Loss Adjustment Expenses
occurring on and after January 1, 1997 to the termination
of the Agreement, plus deficit, if any, from the preceding
period, and less Reinsurers' Margin shall equal the
Cumulative Net Balance. Balance times 100% equals
Contingent Commission.
Incurred Losses in this calculation to include IBNR factors
of 50% of net earned reinsurance premium at the first
calculation at 12/31/97; 30% of net earned reinsurance
premium at the second calculation at 12/31/98; 10% of net
earned reinsurance premium at the third calculation at
12/31/99 and 0% at subsequent calculations. Reinsurers'
Margin shall be 17.5% of the Net Earned Reinsurance
Premium.
Payable annually within ninety (90) days after the close of
each year. Unlimited deficit carry forward. Annual
calculations until all losses are settled. Annual
calculations at each December 31 thereafter until all
losses are settled.
Calculation of this Contingent Commission shall apply
collectively for all Companies reinsured under this
Agreement, and not individually.
SEC:vs
1/7/97 C-1
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970018/19/35
REINSURERS:
- ----------
<TABLE>
<CAPTION>
NAIC
FEIN No. No. Through Minet Re North America Share
-------- ---- ------------------------------ -----
<S> <C> <C> <C>
23-0580680 24457 Reliance Insurance Company
through Reliance Reinsurance Corp. 25%
Philadelphia, Pennsylvania
16-0366830 22314 Underwriters Reinsurance Company 25%
Concord, New Hampshire --
TOTAL PLACEMENT: 50%
===
</TABLE>
SEC:vs
1/7/97 C-2
REINSURANCE COVER NOTE
Agreement No: 970038/39/40
MEMORANDUM OF REINSURANCE EFFECTED ON BEHALF OF:
REINSURED: HOME STATE INSURANCE GROUP
- ---------
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
Binghamton, New York
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
Binghamton, New York
QUAKER CITY INSURANCE COMPANY
Trevose, Pennsylvania
PINNACLE INSURANCE COMPANY
Carrollton, Georgia
WESTBROOK INSURANCE COMPANY
Wallingford, Connecticut
HOME STATE INSURANCE COMPANY
Red Bank, New Jersey
(hereinafter referred to as the "Company")
TYPE: MULTIPLE LINE EXCESS OF LOSS REINSURANCE AGREEMENT
- ----
PERIOD: Continuous from 12:01 a.m., Eastern Standard Time,
- ------ January 1, 1997, subject to cancellation at any January 1
anniversary thereafter by either party giving ninety (90)
days' prior written notice.
In the event of cancellation the Company shall have the
option to cancel on a cut-off basis or on a run-off basis.
If run-off is chosen, the Reinsurers shall remain liable
for their share of all policies in force hereunder at the
effective date of cancellation until the natural expiration
or prior cancellation of said policies at expiring terms,
not to exceed twelve (12) months after the effective date
of cancellation. The additional premium to reinsurers for
run-off shall be the expired rate applied to the unearned
premium in force at the time of cancellation.
Should this Agreement terminate while a loss occurrence is
in progress, the Reinsurers shall be liable for their share
of all individual losses resulting from such loss
occurrence whether any such individual losses take place
before or after such termination.
SEC:vs
1/20/97 1
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970038/39/40
CLASS: All in-force, new and renewal Property and Casualty
- ----- business written by the Company.
EXCLUSIONS: See attached schedule.
- ----------
TERRITORY: As per the Company's original policies.
- ---------
LIMIT AND
RETENTION: See attached Exhibits A, B and C.
- ---------
RATE: See attached Exhibits A, B and C. Rate applies to the
- ---- Company's Gross Net Earned Premium Income.
REPORTS AND
ACCOUNTS: Accounts and premium are due and payable quarterly thirty
- -------- (30) days after the close of each calendar quarter.
CEDING
COMMISSION: 32.5% of the gross net earned premium ceded.
- ----------
CONTINGENT
COMMISSION: See attached Exhibits A, B and C.
- ----------
CLAUSES: Preamble.
- ------- Definition of Loss Occurrence.
Net Retained Lines.
Ultimate Net Loss - to include loss adjustment expenses for
Property, pro rata in addition to the Agreement limit for
Casualty.
Loss Notice and Settlements.
Extra Contractual Obligations on a 90%/10% basis within the
Agreement limit.
Losses in Excess of Policy Limits on a 90%/10% basis within
the Agreement limit.
Offset.
Errors and Omissions not to override Loss Notice and
Settlements Clause; not to apply to Exclusions list.
Currency.
Taxes.
Service of Suit Clause - NMA 1998 - Mendes & Mount (where
applicable).
Arbitration.
Reserves.
Insolvency.
Severability.
Minet Re North America, Inc. Intermediary.
SEC:vs
1/20/97 2
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970038/39/40
WORDING: As per expiring Reinsurance Agreement as far as applicable
- ------- and as noted herein, which complies with the requirements
of the State of New York Insurance Department.
We will periodically provide a list of those companies with which Minet Re North
America, Inc. is affiliated, which may be parties to this placement. This list
is available on request.
FOR AND ON BEHALF OF:
MINET RE NORTH AMERICA, INC.
___________________________ DATE: _______________
Senior Vice President
AGREED TO:
HOME STATE INSURANCE GROUP
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
QUAKER CITY INSURANCE COMPANY
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
HOME STATE INSURANCE COMPANY
___________________________ DATE: _______________
Authorized Signature
Please examine this document carefully and advise us immediately if any of the
details on the security used are not in accordance with your order or
requirements.
SEC:vs
1/20/97 3
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970038/39/40
EXHIBIT A
FIRST MULTIPLE LINE EXCESS OF LOSS REINSURANCE AGREEMENT
--------------------------------------------------------
(BN970038)
LIMIT AND
RETENTION: Section A - Property:
- --------- ---------------------
$160,000 each and every loss, each and every risk, in
excess of $40,000 each and every loss, each and every risk,
subject to an occurrence limitation of $480,000.
Section B - Casualty:
---------------------
$160,000 per occurrence in excess of $40,000 per
occurrence.
Basket Retention:
-----------------
In the event Sections A and B are involved in the same
occurrence, the retention shall be limited to $40,000 from
such occurrence. The $40,000 retention shall be allocated
by the percentage that the loss for each Section bears to
the total loss for Sections A and B. The Reinsurers'
liability shall then apply over the appropriate allocated
retention for each Section, subject to a maximum additional
recovery of $40,000.
RATE: 25.2% Gross Rate, 17.0% Net Rate. Rate applies to the
- ---- Company's Gross Net Earned Premium, estimated to be
$3,400,000.
CONTINGENT
COMMISSION: Three-Year Block: January 1, 1997 - December 31, 1999
- ---------- ------------------------------------------------------
Net Earned Reinsurance Premium; Less 17.5% of Net
Earned Reinsurance Premium; Less Incurred Losses,
including IBNR; Less Deficit, if any, from preceding
period; Balance times 100% equals Contingent
Commission.
Payable annually within ninety (90) days after the close of
each year. Unlimited deficit carry forward. Annual
calculations at each December 31 thereafter until all
losses are settled.
SEC:vs
1/20/97 A-1
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970038/39/40
CONTINGENT
COMMISSION: Incurred Losses in the Contingent Commission calculation to
- ---------- include IBNR factors as follows: 50% of net earned
reinsurance premium at the first calculation at 12/31/97;
30% of net earned reinsurance premium at the second
calculation at 12/31/98; 10% of the net earned reinsurance
premium at the third calculation at 12/31/99 and 0% at
subsequent calculations.
Calculation of this Contingent Commission shall apply
collectively for all Companies reinsured under this
Agreement, and not individually.
REINSURERS:
- ----------
<TABLE>
<CAPTION>
NAIC
FEIN No. No. Through Minet Re North America Share
-------- ---- ------------------------------ -----
<S> <C> <C> <C>
06-0383750 19682 Hartford Re Management Company40%
On behalf of: Hartford Fire Insurance Company
Hartford, Connecticut
23-0580680 24457 Reliance Insurance Company
through Reliance Reinsurance Corp. 5%
Philadelphia, Pennsylvania
16-0366830 22314 Underwriters Reinsurance Company 5%
Concord, New Hampshire --
TOTAL PLACEMENT: 50%
---
</TABLE>
SEC:vs
1/20/97 A-2
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970038/39/40
EXHIBIT B
SECOND MULTIPLE LINE EXCESS OF LOSS REINSURANCE AGREEMENT
---------------------------------------------------------
(BN970039)
LIMIT AND
RETENTION: Section A - Property:
- --------- --------------------
$300,000 each and every loss, each and every risk, in
excess of $200,000 each and every loss, each and
every risk, subject to an occurrence limitation of
$900,000.
Section B - Casualty:
--------------------
$300,000 per occurrence in excess of $200,000 per
occurrence.
RATE: 7.407% Gross Rate, 5.000% Net Rate. Rate applies to the
- ---- Company's Gross Net Earned Premium, estimated to be
$3,400,000.
CONTINGENT
COMMISSION: Three-Year Block: January 1, 1997 - December 31, 1999
- ---------- ------------------------------------------------------
Net Earned Reinsurance Premium; Less 17.5% of Net Earned
Reinsurance Premium; Less Incurred Losses, including IBNR;
Less Deficit, if any, from preceding period; Balance times
100% equals Contingent Commission.
Payable annually within ninety (90) days after the close of
each year. Unlimited deficit carry forward. Annual
calculations at each December 31 thereafter until all
losses are settled.
SEC:vs
1/20/97 B-1
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970038/39/40
CONTINGENT
COMMISSION: Incurred Losses in the Contingent Commission calculation
- ---------- to include IBNR factors as follows: 50% of net earned
reinsurance premium at the first calculation at 12/31/97;
30% of net earned reinsurance premium at the second
calculation at 12/31/98; 10% of the net earned reinsurance
premium at the third calculation at 12/31/99 and 0% at
subsequent calculations.
Calculation of this Contingent Commission shall apply
collectively for all Companies reinsured under this
Agreement, and not individually.
REINSURERS:
- ----------
<TABLE>
<CAPTION>
NAIC
FEIN No. No. Through Minet Re North America Share
-------- ---- ------------------------------ -----
<S> <C> <C> <C> <C>
06-0383750 19682 Hartford Re Management Company40%
On behalf of: Hartford Fire Insurance Company
Hartford, Connecticut
23-0580680 24457 Reliance Insurance Company
through Reliance Reinsurance Corp. 5%
Philadelphia, Pennsylvania
16-0366830 22314 Underwriters Reinsurance Company 5%
Concord, New Hampshire
--
TOTAL PLACEMENT: 50%
---
</TABLE>
SEC:vs
1/20/97 B-2
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970038/39/40
EXHIBIT C
THIRD MULTIPLE LINE EXCESS OF LOSS REINSURANCE AGREEMENT
--------------------------------------------------------
(BN970040)
LIMIT AND
RETENTION: Section A - Property:
- --------- --------------------
$500,000 each and every loss, each and every risk, in
excess of $500,000 each and every loss, each and every
risk, subject to an occurrence limitation of $1,000,000.
Section B - Casualty:
--------------------
$500,000 per occurrence in excess of $500,000 per
occurrence.
RATE: 4.444% Gross Rate, 3.000% Net Rate. Rate applies to the
- ---- Company's Gross Net Earned Premium, estimated to be
$3,400,000.
CONTINGENT
COMMISSION: Three-Year Block: January 1, 1997 - December 31, 1999
- ---------- ------------------------------------------------------
Net Earned Reinsurance Premium; Less 17.5% of Net Earned
Reinsurance Premium; Less Incurred Losses, including IBNR;
Less Deficit, if any, from preceding period; Balance times
100% equals Contingent Commission.
Payable annually within ninety (90) days after the close of
each year. Unlimited deficit carry forward. Annual
calculations at each December 31 thereafter until all
losses are settled.
SEC:vs
1/20/97 C-1
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970038/39/40
CONTINGENT
COMMISSION: Incurred Losses in the Contingent Commission calculation
- ---------- to include IBNR factors as follows: 50% of net earned
reinsurance premium at the first calculation at 12/31/97;
30% of net earned reinsurance premium at the second
calculation at 12/31/98; 10% of the net earned reinsurance
premium at the third calculation at 12/31/99 and 0% at
subsequent calculations.
Calculation of this Contingent Commission shall apply
collectively for all Companies reinsured under this
Agreement, and not individually.
REINSURERS:
- -----------
<TABLE>
<CAPTION>
NAIC
FEIN No. No. Through Minet Re North America Share
-------- ---- ------------------------------ -----
<S> <C> <C> <C> <C>
06-0383750 19682 Hartford Re Management Company40%
On behalf of: Hartford Fire Insurance Company
Hartford, Connecticut
23-0580680 24457 Reliance Insurance Company
through Reliance Reinsurance Corp. 5%
Philadelphia, Pennsylvania
16-0366830 22314 Underwriters Reinsurance Company 5%
Concord, New Hampshire
--
TOTAL PLACEMENT: 50%
---
</TABLE>
SEC:vs
1/20/97 C-2
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970038/39/40
EXCLUSIONS:
General
- -------
1. Assumed reinsurance other than business assumed via intra-company
reinsurance, United Pacific Insurance Company and Reliance
Insurance Company, and facultative reinsurance in connection with
business originally produced by the Company.
2. Loss or liability excluded by the provisions of the "Nuclear
Incident Exclusion Clause - Physical Damage
and Liability - Reinsurance."
3. Financial Guarantee and Insolvency.
4. Insolvency Funds.
5. War Risks.
6. Loss or liability excluded by the provisions of the "Pools
Exclusion Clause."
7. Accident and health, aviation, boiler and machinery, fidelity and
surety, automobile, when written as such.
8. Workers' Compensation and Employers' Liability, when written as
such.
Liability Lines
1. Professional Liability, Errors and Omissions Liability, Directors
and Officers Liability, SEC Liability, Fiduciary Liability, when
written as such.
2. Ocean Marine Liability when written as such; not applicable to
watercraft of twenty-six (26) feet or less in length.
3. Amusement parks, carnivals, circuses, fairs, zoos, and the
operation or manufacture of mechanical or animal rides, when
written as such.
4. Manufacture, application or wholesale distribution of industrial
chemicals, fertilizers, insecticides, herbicides, animal feeds.
5. Manufacture, including component parts, of autos, trucks, buses,
mobile homes, trailers, snowmobiles, tires, motorcycles, go-carts.
6. Manufacture, distribution, sale and repair of aircraft, aircraft
components or other products necessary or critical to aircraft
safety or flight.
7. Crane manufacture or rental.
8. Contractors principally engaged in or construction of:
a. Blasting;
b. Bridges, tunnels, dams, reservoirs;
c. Demolition or wrecking of structures over four (4) stories;
d. Erection of iron or steel over four (4) stories;
e. Tunnelling;
f. Fumigating or exterminating.
SEC:vs
1/20/97 1
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970038/39/40
9. Gas or electric utilities.
Liability Lines
(Continued)
- -----------
10. Manufacture and/or production, detonation, storage, processing,
handling or transport of:
a. Fireworks, fuse(s), cartridges, ammunition, powder,
nitroglycerine or any explosives;
b. Gases and/or air under pressure in containers;
c. Butane, methane, propane and other liquefied gases;
d. Toxic substances and toxic waste with inherent potential for
catastrophic loss.
11. Products Recall.
12. Railroad Liability.
13. Municipality Liability.
14. Underground or surface mining and quarrying.
15. Nursing homes or residential care facilities.
16. Liquor Liability, when written as such.
17. Security Guard Liability.
18. Manufacture, assembly or wholesale distribution of:
a. Industrial farm machinery;
b. Ladders and scaffolding;
c. Athletic equipment; not applicable to sporting goods stores;
d. Pharmaceuticals;
e. Medical/surgical products;
f. Tobacco products;
g. Fire alarms, burglar alarms, sprinkler systems;
h. Railroad products, wheels, axles, brakes, etc.;
i. Toys;
j. Valves--industrial type.
19. Oil lease operators, driller, exploration.
20. Medical Malpractice.
21. Stevedoring.
22. Insurance coverage for punitive or exemplary damages when written
as such.
23. Landfill operations.
24. Warehousemen's Legal Liability.
25. Firearms and/or other weapons manufacturing, repairing,
distribution or sale.
26. Electrical control equipment.
27. Manufacture of helmets.
28. Manufacture or recapping of tires.
29. Products Liability written without an annual aggregate limit, when
written as such.
30. Products integrity impairment and products guarantee.
31. Animal feed or additives, not to include retail pet stores.
SEC:vs
1/20/97 2
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970038/39/40
Property Lines
- --------------
1. Flood when written as such.
2. Earthquake when written as such.
3. Mortgage Impairment insurance and similar kinds of insurance,
however styled, providing coverage to an insured as respects its
mortgagee interest in property or its owner interest in foreclosed
property.
4. Difference in Conditions insurance.
5. Insurance on growing, standing or drying crops, and timber.
6. Inland Marine policies covering railroad rolling stock, animal
mortality, jewelers and furriers block, and manufacturers output.
7. Products integrity or products tampering.
8. Underground mining.
9. Oil or gas drilling production rigs.
10. Space and space-related risks as of intentional ignition of the
launch vehicle.
11. Contingency risks of any kind (e.g., share price, unemployment,
computer crime, contract frustration, legacy, confiscation or
expropriation, recourse indemnity, extended warranties, kidnap and
ransom, residual value, equipment value, appraisal value, asset
value or similar covers).
Notwithstanding the foregoing, any exclusions set forth in the General (except
1, 2, 3, 4, 5 and 6), Liability Lines and Property Lines sections shall be
waived automatically when, in the opinion of the Company, the exposure excluded
therein is incidental to the principal exposure on the risk in question.
SEC:vs
1/20/97 4
REINSURANCE COVER NOTE
Agreement No. BN970028/71/72/73
MEMORANDUM OF REINSURANCE EFFECTED ON BEHALF OF:
REINSURED: HOME STATE INSURANCE GROUP
- ---------
HOME STATE INSURANCE COMPANY
Red Bank, New Jersey
QUAKER CITY INSURANCE COMPANY
Trevose, Pennsylvania
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
Binghamton, New York
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
Binghamton, New York PINNACLE INSURANCE COMPANY
Carrollton, Georgia WESTBROOK INSURANCE COMPANY
Wallingford, Connecticut (hereinafter referred to as
the "Company"
TYPE: MEDICAL AND REHABILITATION EXPENSES
- ---- EXCESS OF LOSS REINSURANCE AGREEMENT
PERIOD: Continuous Agreement covering losses occurring from
- ------ January 1, 1997, Eastern Standard Time, subject to
cancellation at any January 1 anniversary thereafter
by either party giving ninety (90) days' prior written
notice. In the event of cancellation, the Reinsurer
shall run off coverage of the in-force business to
natural expiration.
CLASS: All in-force, new and renewal business written by the
- ----- Company, classified as Personal Injury Protection
(PIP) under No-Fault Insurance Laws in all states, Canada
and Mexico. Exhibit A, attached to and forming part of
this Agreement, provides coverage for Pennsylvania
Extraordinary Medical Benefits on Private Passenger
Automobile. Exhibits B, C and D, attached to and forming
part of this Agreement, provides coverage on Commercial
Automobile Charter, Line and School Bus Transportation
vehicles and all other Commercial Automobile and Private
Passenger vehicles in all states, Canada and Mexico.
EXCLUSIONS: As respects Commercial Automobile and Private Passenger
- ---------- Automobile, this Agreement shall not apply to "bodily
injury":
MMW 1
2/18/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970028/71/72/73
1. Sustained by any person while intentionally causing or
attempting to cause "bodily injury" to:
EXCLUSIONS
(Continued): a. himself;
- ----------- b. herself; or
c. any other person;
nor will the Company pay Accidental Death Benefits on
behalf of that person.
2. Sustained by any person while committing a felony.
3. Sustained by any person while seeking to elude lawful
apprehension or arrest by a law enforcement official.
4. Caused by or as a consequence of:
a. discharge of a nuclear weapon (even if
accidental);
b. war (declared or undeclared);
c. civil war;
d. insurrection; or
e. rebellion or revolution.
5. From or as a consequence of the following whether
controlled or uncontrolled or however caused:
a. nuclear reaction;
b. radiation; or
c. radioactive contamination.
6. Extra Contractual Obligations and Loss in Excess of
Policy Limits.
7. Insolvency funds.
As respects Private Passenger Automobile, this Agreement
shall not apply to "bodily injury":
8. Sustained by any person while maintaining or using a
"motor vehicle" knowingly converted by that person.
However, this exclusion (8) does not apply to:
a. insured; or
b. any insured's "family member".
9. Sustained by any person, who, at the time of the
accident:
a. is the owner of one or more registered "motor
vehicles" and none of those "motor vehicles"
have in effect the financial responsibility
required by the Act; or
b. is "occupying" a "motor vehicle" owned by that
person for which the financial responsibility
required by the Act is not in effect.
10. Sustained by any person maintaining or using a "motor
vehicle" while located for use as a residence or
premises.
MMW 2
2/18/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970028/71/72/73
11. Sustained by any person injured as a result of conduct
within the course of the business of repairing,
servicing or otherwise maintaining "motor vehicles".
This exclusion (11) does not apply if the conduct is
off the business premises.
12. Sustained by any person while "occupying":
EXCLUSIONS
(Continued): a. a recreational vehicle designed for use off
- ----------- public roads; or
b. a motorcycle, moped, or similar-type
vehicle.
13. Sustained by any person as a direct result of loading
or unloading any "motor vehicle."
As respects Private Passenger Automobile in Exhibit A
only, this Agreement shall not apply to "bodily
injury":
14. Sustained by a pedestrian if the accident occurs
outside of Pennsylvania. This exclusion (14) does not
apply to:
a. insured; or
b. any insured's "family member."
TERRITORIAL
SCOPE: Losses wheresoever arising as per the Company's original
- ----- policies.
LIMIT AND
RETENTION: See Exhibits A, B, C and D.
- ---------
PREMIUM: See Exhibits A, B, C and D.
- -------
GENERAL
CONDITIONS Commutation Clause - five (5) years after the end of each
- ---------- Agreement year this Agreement is in force, the Company
shall advise the Reinsurer of any outstanding claims and/or
occurrences during that Agreement year which have not been
finally settled and which may cause a claim under this
Agreement.
The Company or the Reinsurer may then, or at any time
thereafter, request that their Liability of such unsettled
claims be commuted. Upon such request, the Reinsurer and
the Company shall review all claims and shall attempt to
reach a settlement by mutual agreement. If the Reinsurer
and the Company cannot reach a settlement by mutual
agreement, then the Reinsurer and the Company shall
mutually appoint an independent actuary (FSA/FCA or
ASA/ACAS) who shall investigate, determine and capitalize
the present value of any such unsettled claims. In the
event the Reinsurer and the Company cannot reach an
MMW 3
2/18/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970028/71/72/73
agreement on an independent actuary, each party shall
appoint an actuary within thirty (30) days after receipt of
the written request for commutation. The requesting party
may appoint a second actuary if the responding party fails
to appoint an actuary within thirty (30) days after being
requested to do so. The two (2) appointed
GENERAL
CONDITIONS
(Continued): actuaries will then appoint a third actuary. If the third
- ----------- actuary does not respond within thirty (30) days of their
appointment, each of the two (2) appointed GENERAL
CONDITIONS (Continued): actuaries shall name three (3)
individuals, of whom the other shall decline two (2), and
the decision shall be made by drawing lots. All actuaries
selected by drawing lots shall be disinterested in the
outcome of the commutation.
Any payment by the Reinsurer under this clause shall
constitute a complete release of the Reinsurer for their
Liability as respects all claims. The cost of any
independent actuary shall be shared on an equal basis by
the Reinsurer and the Company. This clause shall survive
the expiration or cancellation of this Agreement.
CLAUSES: Parties to the Agreement.
- ------- Net Retained Lines.
Ultimate Net Loss - Loss Adjustment Expenses included in
the limit of the Agreement.
Subrogation.
Salvage and Recoveries.
Definition of Loss Occurrence.
Loss Notice and Settlements.
Funding of Reserves.
Currency.
Taxes.
Access to Records.
Errors and Omissions not to override Loss Notice and
Settlements, and not to apply to Exclusions.
Original Conditions.
Insolvency.
Arbitration.
Federal Excise Tax.
Service of Suit - NMA 1998 - Mendes & Mount (where
applicable).
Minet Re North America, Inc. Intermediary.
MMW 4
2/18/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970028/71/72/73
WORDING: As per expiring Reinsurance Agreement as far as applicable
- ------- and as noted herein, which complies with the requirements
of the State of New York Insurance Department.
We will periodically provide a list of those companies with which Minet Re North
America, Inc. is affiliated, which may be parties to this placement. This list
is available on request.
For and on behalf of:
MINET RE NORTH AMERICA, INC.
-------------------------
Vice President
HOME STATE INSURANCE GROUP
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
- ------------------------------
Authorized Signature
- ------------------------------
Date
Please examine this document carefully and advise us immediately if any of the
details or the security used are not in accordance with your order or
requirements.
MMW 5
2/18/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970028/71/72/73
EXHIBIT A
PENNSYLVANIA MEDICAL AND REHABILITATION EXPENSES
EXCESS OF LOSS REINSURANCE AGREEMENT
------------------------------------
(BN970028)
LIMIT AND
RETENTION: $1,000,000 ultimate net loss each and every person in
- --------- excess of $100,000 ultimate net loss each and every person.
Subject to a lifetime aggregate reinsured limit of
$1,000,000 per person and a $50,000 limit per person, per
year, after the first eighteen (18) months of eligibility.
Coverage shall apply only if the incurred casualty medical
expenses of an individual exceeds $100,000 during the first
five (5) years of eligibility.
DEPOSIT
PREMIUM: $20,000 adjusted annually at ISO rate per vehicle. Deposit
- ------- payable in four equal quarterly installments of $5,000 on
January 1, April 1, July 1 and October 1, 1997.
MINIMUM
PREMIUM: $20,000 annually.
- -------
Reinsurer Effective January 1, 1997:
- -----------------------------------
<TABLE>
<CAPTION>
% FEIN NAIC
- ---- ----
<S> <C> <C> <C>
Federal Insurance Company
Indianapolis, Indiana 100% 13-1963496 20281
----
Through Duncanson & Holt, Inc.
Placement Total: 100%
</TABLE>
MMW
2/18/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970028/71/72/73
EXHIBIT B
---------
PER PERSON MEDICAL AND REHABILITATION EXPENSES
EXCESS OF LOSS REINSURANCE AGREEMENT
------------------------------------
(BN970071)
LIMIT AND
RETENTION: $2,250,000 ultimate net loss each and every person, each
- --------- and every loss occurrence, in excess of $250,000 ultimate
net loss each and every person, each and every loss
occurrence.
RATE: 5.75% of subject matter net written premium. 1997 estimated
- ---- premium for Bus PIP is $850,000.
DEPOSIT
PREMIUM: $40,000 payable in four equal quarterly installments of
- ------- $10,000 on January 1, April 1, July 1 and October 1, 1997,
subject to adjustment at December 31, 1997.
MINIMUM
PREMIUM: $40,000 annually.
- -------
Reinsurer Effective January 1, 1997:
- ------------------------------------
<TABLE>
<CAPTION>
% FEIN NAIC
- ---- ----
<S> <C> <C> <C>
Federal Insurance Company
Indianapolis, Indiana 100% 13-1963496 20281
----
Through Duncanson & Holt, Inc.
Placement Total: 100%
</TABLE>
MMW
2/18/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970028/71/72/73
EXHIBIT C
FIRST PER OCCURRENCE MEDICAL AND REHABILITATION EXPENSES
EXCESS OF LOSS REINSURANCE AGREEMENT
------------------------------------
(BN970072)
LIMIT AND
RETENTION: $2,250,000 each and every loss occurrence in excess of
- --------- $250,000 each and every loss occurrence.
Maximum any one person $250,000. Two-person warranty.
RATE: 4.50% of subject matter net written premium. 1997 estimated
- ---- premium for Bus PIP is $850,000.
DEPOSIT
PREMIUM: $31,000 payable in four equal quarterly installments of
- ------- $7,750 on January 1, April 1, July 1 and October 1, 1997,
subject to adjustment at December 31, 1997.
MINIMUM
PREMIUM: $31,000 annually.
- -------
Reinsurer Effective January 1, 1997:
- ------------------------------------
<TABLE>
<CAPTION>
% FEIN NAIC
- ---- ----
<S> <C> <C> <C>
Federal Insurance Company
Indianapolis, Indiana 100% 13-1963496 20281
----
Through Duncanson & Holt, Inc.
Placement Total: 100%
</TABLE>
MMW
2/18/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970028/71/72/73
EXHIBIT D
---------
SECOND PER OCCURRENCE MEDICAL AND REHABILITATION EXPENSES
EXCESS OF LOSS REINSURANCE AGREEMENT
------------------------------------
(BN970073)
LIMIT AND
RETENTION: $8,750,000 each and every loss occurrence in excess of
- --------- $2,500,000 each and every loss occurrence.
Maximum any one person $250,000. Three-person warranty.
RATE: 2.50% of subject matter net written premium. 1997 estimated
- ---- premium for Bus PIP is $850,000.
DEPOSIT
PREMIUM: $17,000 payable in four equal quarterly installments of
- ------- $4,250 on January 1, April 1, July 1 and October 1, 1997,
subject to adjustment at December 31, 1997.
MINIMUM
PREMIUM: $17,000 annually.
- -------
Reinsurer Effective January 1, 1997:
- ------------------------------------
<TABLE>
<CAPTION>
% FEIN NAIC
- ---- ----
<S> <C> <C> <C>
Federal Insurance Company
Indianapolis, Indiana 100% 13-1963496 20281
----
Through Duncanson & Holt, Inc.
Placement Total: 100%
</TABLE>
MMW
2/18/97
COVER NOTE NO. BN960014/15/29/56 DATE: January 15, 1996
MEMORANDUM OF REINSURANCE EFFECTED ON BEHALF OF:
REINSURED: HOME STATE INSURANCE GROUP
- ---------
HOME STATE INSURANCE COMPANY
Red Bank, New Jersey
QUAKER CITY INSURANCE COMPANY
Trevose, Pennsylvania
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
Binghamton, New York
PINNACLE INSURANCE COMPANY
Carrollton, Georgia
WESTBROOK INSURANCE COMPANY
Wallingford, Connecticut
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
Binghamton, New York
(hereinafter referred to as the "Company")
TYPE: PROPERTY CATASTROPHE
- ---- EXCESS OF LOSS REINSURANCE AGREEMENT
PERIOD: Losses occurring during the period January 1, 1996 to
- ------ December 31, 1996, both days inclusive.
Should this Agreement terminate while a loss occurrence is
in progress, the Reinsurers shall be liable for their share
of all individual losses resulting from such loss
occurrences whether any such individual losses take place
before or after such termination.
CLASS: All in-force, new and renewal business classified by the
- ----- Company as Automobile Physical Damage and Property
business.
EXCLUSIONS: This Agreement shall not apply to:
- ----------
1. Bodily Injury and Property Damage Liability including
Personal Injury Liability and Medical Payments.
2. Personal Accident and Health.
3. Assumed reinsurance other than business assumed via
intra-company reinsurance, from United Pacific
Insurance Company for the Dave, Inc. policy and
Delaware private passenger business written as a 100%
Quota Share of companies with whom Quaker City
Insurance Company has entered into rollover
agreements.
4. Loss or liability excluded by the provisions of the
"Nuclear Incident Exclusion Clause - Physical Damage -
Reinsurance."
5. Financial Guarantee and Insolvency.
1
<PAGE>
BN960014/15/29/56
January 15, 1996
EXCLUSIONS
(Continued): 6. Insolvency Funds.
- ----------- 7. War Risks as described in the North American War Risk
Exclusion Clause.
8. Loss or liability as excluded by the provisions of the
"Pools Exclusions Clause." It is understood and agreed
that this exclusion shall not apply to individual
risks assigned to the Company under an "Assigned Risk"
plan.
9. Seepage and Pollution.
10. Transmission and Distribution Lines.
11. Extra Contractual Obligations and Losses in Excess of
Policy Limits.
TERRITORY: As per the Company's original policies.
- ---------
LIMIT AND
RETENTION: See attached Exhibits A, B, C and D.
- ---------
REINSTATEMENT: One reinstatement of limit for all perils at pro rata
- ------------- additional premium as to amount and 100% as to time.
Simultaneous settlement of reinstatement premium with
loss payment.
RATE: See attached Exhibits A, B, C and D. Rate applies
- ---- to the Company's Gross Net Earned Premium Income,
estimated to be $26,229,087 for 1996.
DEPOSIT
PREMIUM: See attached Exhibits A, B, C and D. Payable in equal
- ------- quarterly installments at January 1, April 1, July 1
and October 1, 1996.
MINIMUM
PREMIUM: See attached Exhibits A, B, C and D.
- -------
WARRANTY: Home State Insurance Group agrees to carry at its own
- -------- risk and not reinsured in any way the remaining 5% of
each excess net loss for which claim is made on the
reinsurance limits specified in Exhibits A, B, C and
D.
CLAUSES: Definition of Policies.
- ------- Definition of Loss Occurrence to follow Lloyd's NMA
2244 - Amended; no reinstatement in the same event.
Net Retained Lines.
Ultimate Net Loss - loss adjustment expenses included.
Notice of Loss and Loss Settlement.
Offset.
Errors and Omissions.
Currency.
Taxes.
2
<PAGE>
BN960014/15/29/56
January 15, 1996
CLAUSES
(Continued): Access to Records.
- ----------- Service of Suit - NMA 1998 - Mendes and Mount (where
applicable).
Arbitration.
Insolvency.
Reserves.
Minet Re North America, Inc. Intermediary.
WORDING: As per expiring Reinsurance Agreement as far as
- ------- applicable and as noted herein, which complies with
the requirements of the State of New York Insurance
Department.
We will periodically provide a list of those companies with which Minet Re North
America, Inc. is affiliated, which may be parties to this placement. This list
is available on request.
For and on behalf of:
MINET RE NORTH AMERICA, INC.
-------------------------
Senior Vice President
HOME STATE INSURANCE GROUP
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
- -------------------------------
Authorized Signature
- -------------------------------
Date
Please examine this document carefully and advise us immediately if any of the
details or the security used are not in accordance with your order or
requirements.
<PAGE>
SEC:vs 3
EXHIBIT A
HOME STATE INSURANCE GROUP
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
FIRST PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE AGREEMENT
Effective January 1, 1996
-------------------------
LIMIT AND
RETENTION: $2,000,000 Ultimate Net Loss each and every loss occurrence
- --------- in excess of $1,000,000 Ultimate Net Loss each and every
loss occurrence.
RATE: 1.471% of Company's Gross Net Earned Premium Income.
- ----
DEPOSIT
PREMIUM: $386,000 payable in equal quarterly installments of $96,500
- ------- each at January 1, April 1, July 1 and October 1, 1996.
MINIMUM
PREMIUM: $328,000 annually.
- -------
Reinsurers Effective January 1, 1996:
- ------------------------------------
<TABLE>
<CAPTION>
% FEIN NAIC
- ---- ----
<S> <C> <C> <C>
Nationwide Mutual Insurance Company 5.000% 31-4177100 23787
Vesta Fire Insurance Corporation 30.000% 63-0598629 11762
-------
Sub-Total: 35.000%
Through Swire Fraser Insurance Brokers Limited:
----------------------------------------------
Underwriting Members of Lloyd's 54.261% AA-1122000
London, England (as per Schedule)
The Copenhagen Reinsurance Company 2.609% AA-1120440
(UK) Limited, London, U.K.
Terra Nova Insurance Company Limited, 3.130% AA-1121425
London, U.K.
------
Sub-Total: 60.000%
Placement Total: 95.000%
======
</TABLE>
SEC:vs
BN960014
1/15/96
<PAGE>
COVER NOTE NO. BN960014 DATE: January 15, 1996
REVISED: April 15, 1996
SCHEDULE OF
UNDERWRITING MEMBERS OF LLOYD'S PARTICIPATION
FIRST PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT
---------------------------------------------------------------
Syndicate Pseudonym AIIN Share
- --------- --------- ---- -----
435 DPM AA-1126435 3.913%
623 AFB AA-1126623 3.130%
780 BFC AA-1126780 2.609%
958 GSC AA-1126958 3.130%
40 KJC AA-1126040 6.522%
219 RAE AA-1126219 2.609%
1028 HRD AA-1127028 1.565%
33 AER AA-1126033 6.521%
51 ANT AA-1126051 10.435%
183 DFB AA-1126183 6.522%
205 HGJ AA-1126205 2.609%
570 GNR AA-1126570 2.087%
1003 SJC AA-1127003 2.609%
------
Total Participation through the
Underwriting Members of Lloyd's 54.261%
------
SEC:vs
<PAGE>
EXHIBIT B
HOME STATE INSURANCE GROUP
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
SECOND PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE AGREEMENT
Effective January 1, 1996
-------------------------
LIMIT AND
RETENTION: $3,000,000 Ultimate Net Loss each and every loss
- --------- occurrence in excess of $3,000,000
Ultimate Net Loss each and every loss occurrence.
RATE: 1.112% of Company's Gross Net Earned Premium Income.
- ----
DEPOSIT
PREMIUM: $292,000 payable in equal quarterly installments of
- ------- $73,000 each at January 1, April 1, July 1 and
October 1, 1996.
MINIMUM
PREMIUM: $248,000 annually.
- -------
Reinsurers Effective January 1, 1996:
- ------------------------------------
<TABLE>
<CAPTION>
% FEIN NAIC
- ---- ----
<S> <C> <C> <C>
Nationwide Mutual Insurance Company 5.000% 31-4177100 23787
Security Insurance Company of Hartford 5.000% 06-0529570 24902
Vesta Fire Insurance Corporation 25.000% 63-0598629 11762
-------
Sub-Total: 35.000%
Patriot Re Corporation
For and on behalf of Underwriters at Lloyd's 2.500% 22-3126506
------
London, England
BAR 990 39.2157%
ROS 227 39.2157%
WHS 002 9.8039%
MED 609 6.8627%
JRR 047 4.9020%
Sub-Total: 2.500%
B-1
<PAGE>
Through Swire Fraser Insurance Brokers Limited:
Underwriting Members of Lloyd's 51.227% AA-1122000
London, England (as per Schedule)
The Copenhagen Reinsurance Company 3.485% AA-1120440
(UK) Limited, London, U.K.
Terra Nova Insurance Company Limited, 2.788% AA-1121425
London, U.K. ------
Sub-Total: 57.500%
Placement Total: 95.000%
======
</TABLE>
SEC:vs
BN960015
1/15/96 B-2
<PAGE>
COVER NOTE NO. BN960015 DATE: January 15, 1996
REVISED: April 18, 1996
SCHEDULE OF
UNDERWRITING MEMBERS OF LLOYD'S PARTICIPATION
SECOND PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT
----------------------------------------------------------------
Syndicate Pseudonym AIIN Share
--------- --------- ---- -----
435 DPM AA-1126435 2.788%
566 STN AA-1126566 5.227%
623 AFB AA-1126623 4.182%
40 KJC AA-1126040 3.485%
219 RAE AA-1126219 3.485%
780 BFC AA-1126780 3.485%
51 ANT AA-1126051 13.939%
205 HGJ AA-1126205 3.485%
570 GNR AA-1126570 1.394%
557 CKM AA-1126557 1.394%
510 RJK AA-1126510 2.091%
1027 MFN AA-1127027 2.788%
947 CBK AA-1126947 2.439%
923 FCD AA-1126923 1.045%
------
Total Participation through the
Underwriting Members of Lloyd's 51.227%
------
SEC:vs
<PAGE>
EXHIBIT C
HOME STATE INSURANCE GROUP
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
THIRD PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE AGREEMENT
Effective January 1, 1996
-------------------------
LIMIT AND
RETENTION: $4,000,000 Ultimate Net Loss each and every loss occurrence
- --------- in excess of $6,000,000 Ultimate Net Loss each and every
loss occurrence.
RATE: 0.922% of Company's Gross Net Earned Premium Income.
- ----
DEPOSIT
PREMIUM: $242,000 payable in equal quarterly installments of $60,500
- ------- each January 1, April 1, July 1 and October 1, 1996.
MINIMUM
PREMIUM: $205,600 annually.
- -------
Reinsurers Effective January 1, 1996:
- ------------------------------------
<TABLE>
<CAPTION>
% FEIN NAIC
- ---- ----
<S> <C> <C> <C>
United States Fidelity & Guaranty Company
(F&G Re) 7.500% 52-0515280 25887
Nationwide Mutual Insurance Company 5.000% 31-4177100 23787
Security Insurance Company of Hartford 5.000% 06-0529570 24902
Vesta Fire Insurance Corporation 20.000% 63-0598629 11762
-------
Sub-Total: 37.500%
C-1
<PAGE>
Through Swire Fraser Insurance Brokers Limited:
----------------------------------------------
Underwriting Members of Lloyd's 48.892% AA-1122000
London, England (as per Schedule)
The Copenhagen Reinsurance Company 3.443% AA-1120440
(UK) Limited, London, U.K.
Terra Nova Insurance Company Limited, 5.165% AA-1121425
London, U.K. ------
Sub-Total: 57.500%
Placement Total: 95.000%
=======
</TABLE>
SEC:vs
BN960029
1/15/96 C-2
<PAGE>
COVER NOTE NO. BN960029 DATE: January 15, 1996
REVISED: April 18, 1996
SCHEDULE OF
UNDERWRITING MEMBERS OF LLOYD'S PARTICIPATION
THIRD PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT
---------------------------------------------------------------
Syndicate Pseudonym AIIN Share
--------- --------- ---- -----
435 DPM AA-1126435 2.754%
623 AFB AA-1126623 3.443%
958 GSC AA-1126958 1.377%
40 KJC AA-1126040 3.443%
33 AER AA-1126033 8.610%
205 HGJ AA-1126205 3.443%
570 GNR AA-1126570 2.066%
1003 SJC AA-1127003 5.165%
557 CKM AA-1126557 2.341%
510 RJK AA-1126510 4.545%
1027 MFN AA-1127027 2.754%
1141 JEM AA-1127141 1.377%
314 CFP AA-1126314 1.377%
588 SES AA-1126588 3.443%
947 CBK AA-1126947 1.928%
923 FCD AA-1126923 0.826%
------
Total Participation through the
Underwriting Members of Lloyd's 48.892%
-------
SEC:vs
<PAGE>
EXHIBIT D
HOME STATE INSURANCE GROUP
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
FOURTH PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE AGREEMENT
Effective January 1, 1996
-------------------------
LIMIT AND
RETENTION: $10,000,000 Ultimate Net Loss each and every loss occurrence
- --------- in excess of $10,000,000 Ultimate Net Loss each and every
loss occurrence.
RATE: 1.364% of Company's Gross Net Earned Premium Income.
- ----
DEPOSIT
PREMIUM: $358,000 payable in equal quarterly installments of $89,500
- ------- each at January 1, April 1, July 1 and October 1, 1996.
MINIMUM
PREMIUM: $304,000 annually.
- -------
Reinsurers Effective January 1, 1996:
- ------------------------------------
<TABLE>
<CAPTION>
% FEIN NAIC
- ---- ----
<S> <C> <C> <C>
Nationwide Mutual Insurance Company 4.000% 31-4177100 23787
Security Insurance Company of Hartford 3.500% 06-0529570 24902
Vesta Fire Insurance Corporation 22.500% 63-0598629 11762
-------
Sub-Total: 30.000%
Patriot Re Corporation
For and on behalf of Underwriters at Lloyd's 1.750% 22-3126506
------
London, England
BAR 990 39.2157%
ROS 227 39.2157%
WHS 002 9.8039%
MED 609 6.8627%
JRR 047 4.9020%
Sub-Total: 1.750%
D-1
<PAGE>
Through Swire Fraser Insurance Brokers Limited:
Underwriting Members of Lloyd's 55.896% AA-1122000
London, England (as per Schedule)
The Copenhagen Reinsurance Company 2.206% AA-1120440
(UK) Limited, London, U.K.
Terra Nova Insurance Company Limited, 5.148% AA-1121425
London, U.K. ------
Sub-Total: 63.250%
Placement Total: 95.000%
=======
</TABLE>
SEC:vs
BN960056
1/15/96 D-2
<PAGE>
COVER NOTE NO. BN960056 DATE: January 15, 1996
REVISED: April 18, 1996
SCHEDULE OF
UNDERWRITING MEMBERS OF LLOYD'S PARTICIPATION
FOURTH PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT
----------------------------------------------------------------
Syndicate Pseudonym AIIN Share
--------- --------- ---- -----
435 DPM AA-1126435 1.471%
566 STN AA-1126566 3.677%
623 AFB AA-1126623 2.206%
780 BFC AA-1126780 1.839%
40 KJC AA-1126040 1.471%
219 RAE AA-1126219 3.677%
33 AER AA-1126033 4.413%
51 ANT AA-1126051 14.712%
205 HGJ AA-1126205 1.839%
1003 SJC AA-1127003 5.516%
557 CKM AA-1126557 0.588%
510 RJK AA-1126510 1.618%
1027 MFN AA-1127027 2.206%
1141 JEM AA-1127141 0.735%
625 TMH AA-1126625 3.677%
672 IAM AA-1126672 3.677%
588 SES AA-1126588 2.574%
Total Participation through the
Underwriting Members of Lloyd's 55.896%
-------
SEC:vs
REINSURANCE COVER NOTE
Agreement No. BN970046
MEMORANDUM OF REINSURANCE ISSUED ON BEHALF OF:
REINSURED: HOME STATE INSURANCE GROUP
- ---------
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
Binghamton, New York
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
Binghamton, New York
(hereinafter referred to as the "Company")
TYPE: PROPERTY CATASTROPHE
- ---- EXCESS OF LOSS REINSURANCE AGREEMENT
PERIOD: Losses occurring during the period January 1, 1997 to
- ------ December 31, 1997, both days inclusive.
Should this Agreement terminate while a loss occurrence is
in progress, the Reinsurers shall be liable for their share
of all individual losses resulting from such loss
occurrences whether any such individual losses take place
before or after such termination.
CLASS: All in-force, new and renewal business classified by the
- ----- Company as Automobile Physical Damage and Property
business.
EXCLUSIONS: This Agreement shall not apply to:
- ----------
1. Bodily Injury and Property Damage Liability including
Personal Injury Liability and Medical Payments.
2. Personal Accident and Health.
3. Assumed reinsurance other than business assumed via
intra-company reinsurance and from United Pacific
Insurance Company for the Dave, Inc. policy.
4. Loss or liability excluded by the provisions of the
"Nuclear Incident Exclusion Clause - Physical Damage -
Reinsurance."
5. Financial Guarantee and Insolvency.
6. Insolvency Funds.
7. War Risks as described in the North American War Risk
Exclusion Clause.
8. Loss or liability as excluded by the provisions of the
"Pools Exclusions Clause." It is understood and agreed
that this exclusion shall not apply to individual
risks assigned to the Company under an "Assigned Risk"
plan.
9. Seepage and Pollution.
10. Transmission and Distribution Lines.
11. Extra Contractual Obligations and Losses in Excess of
Policy Limits.
TERRITORY: As per the Company's original policies.
- ---------
MMW 1
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970046
LIMIT AND
RETENTION: $500,000 Ultimate Net Loss each and every loss occurrence
- --------- in excess of $500,000 Ultimate Net Loss each and every loss
occurrence.
REINSTATEMENT: One reinstatement of limit for all perils at pro rata
- ------------- additional premium as to amount and 100% as to time.
Simultaneous settlement of reinstatement premium with loss
payment.
RATE: 1.305% of the Company's gross net earned premium income,
- ---- estimated to be $8,230,000 for 1997.
DEPOSIT
PREMIUM: $107,500 payable in four equal quarterly installments of
- ------- $26,875 each at January 1, April 1, July 1 and October 1,
1997.
The New York Pool consists of: New York Merchant Bakers
Insurance Company (85%); Home Mutual Insurance Company of
Binghamton, New York (15%).
MINIMUM
PREMIUM: $86,000 annually.
- -------
WARRANTY: The Company agrees to carry at its own risk and not
- -------- reinsured in any way the remaining 5% of each excess net
loss for which claim is made on the reinsurance limits
specified herein.
CLAUSES: Parties to the Agreement.
- ------- Net Retained Lines.
Ultimate Net Loss - loss adjustment expensed included.
Subrogation.
Salvage and Recoveries.
Underlying Excess.
Definition of Loss Occurrence to follow Lloyd's NMA 2244-
Amended; no reinstatement in the same event.
Loss Notice and Settlement.
Funding of Reserves.
Offset
Original Conditions.
Currency.
Taxes.
Federal Excise Tax.
Errors and Omissions.
Access to Records.
Service of Suit - NMA 1998 - Mendes and Mount (where
applicable).
Arbitration.
Insolvency.
Minet Re North America, Inc. Intermediary.
MMW 2
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970046
WORDING: As per expiring Reinsurance Agreement as far as applicable
- ------- and as noted herein, which complies with the requirements
of the State of New York Insurance Department.
Reinsurers Effective January 1, 1997:
- ------------------------------------
<TABLE>
<CAPTION>
% FEIN NAIC
- ---- ----
<S> <C> <C> <C>
Through Swire Fraser Insurance Brokers Limited:
----------------------------------------------
Underwriting Members of Lloyd's 78.334% AA-1122000
London, England (as per Schedule)
The Copenhagen Reinsurance Company 3.333%
(UK) Limited, London, England AA-1120440
Terra Nova Insurance Company Limited, 13.333%
London, England ------- AA-1121425
Placement Total: 95.000%
=======
</TABLE>
We will periodically provide a list of those companies with which Minet Re North
America, Inc. is affiliated, which may be parties to this placement. This list
is available on request.
For and on behalf of:
MINET RE NORTH AMERICA, INC.
-------------------------
Senior Vice President
HOME STATE INSURANCE GROUP
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
- -------------------------------
Authorized Signature
- -------------------------------
Date
Please examine this document carefully and advise us immediately if any of the
details or the security used are not in accordance with your order or
requirements.
MMW 3
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970046
SCHEDULE OF
UNDERWRITING MEMBERS OF LLOYD'S PARTICIPATION
PROPERTY CATASTROPHE
EXCESS OF LOSS REINSURANCE AGREEMENT
------------------------------------
(BN970046)
Syndicate Pseudonym ACIN Share
--------- --------- ---- -----
435 DPM AA-1126435 9.999%
566 STN AA-1126566 6.667%
623 AFB AA-1126623 6.667%
780 BFC AA-1126780 6.667%
382 PWH AA-1126382 15.667%
40 KJC AA-1126040 8.333%
1028 HRD AA-1127028 6.667%
958 GSC AA-1126958 10.000%
219 RAE AA-1126219 6.667%
------
Total Participation 78.334%
-------
through the
Underwriting Members of Lloyd's, London
MMW
1/7/97
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
REINSURED: HOME STATE INSURANCE GROUP
- ---------
HOME STATE INSURANCE COMPANY
Red Bank, New Jersey
QUAKER CITY INSURANCE COMPANY
Trevose, Pennsylvania
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
Binghamton, New York
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
Binghamton, New York PINNACLE INSURANCE COMPANY
Carrollton, Georgia WESTBROOK INSURANCE COMPANY
Wallingford, Connecticut
(hereinafter referred to as the "Company")
TYPE: CASUALTY CLASH
- ---- EXCESS OF LOSS REINSURANCE AGREEMENT
PERIOD: Losses occurring during the period January 1, 1997 to
- ------ December 31, 1997, both days
inclusive.
Should this Agreement terminate while a loss occurrence is
in progress, the Reinsurers shall be liable for their share
of all individual losses resulting from such loss
occurrences whether any such individual losses take place
before or after such termination.
CLASS: All in-force, new and renewal business classified by the
- ----- Company as Casualty, Personal and Commercial Automobile
Liability, Garagekeepers Legal Liability and Garage
Liability.
EXCLUSIONS: See attached schedule.
- ----------
TERRITORY: As per the Company's original policies.
- ---------
LIMIT AND
RETENTION: See attached Exhibits A, B, C and D.
- ---------
MMW 1
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
REINSTATEMENT: See attached Exhibits A, B, C and D.
- -------------
WARRANTY: Maximum Commercial Automobile Liability policy limit
- -------- $5,000,000 or so deemed. It is understood that policies
issued in excess of $5,000,000 shall be reinsured on a
facultative basis. However, the Company has a specific
Reinsurance Program for Commercial Automobile Liability of
$4,950,000 each occurrence excess of $50,000 each
occurrence. For the purpose of this Agreement, $4,500,000
each occurrence (Unlimited Reinstatements) excess of
$500,000 shall inure to the benefit of this program;
$450,000 each occurrence excess of $50,000 shall be
considered as Underlying Reinsurance.
Maximum Personal Automobile Liability policy limit
$1,200,000 or so deemed. However, the Company has a
specific Reinsurance Program for Personal Automobile
Liability of $1,160,000 each occurrence excess of $40,000
each occurrence. For the purpose of this Agreement,
$700,000 each occurrence (Unlimited Reinstatements) excess
of $500,000 shall inure to the benefit of this program;
$460,000 each occurrence excess of $40,000 shall be
considered as Underlying Reinsurance.
Reinsurers hereon to have the benefit of recoveries from a
specific reinsurance in respect of public transportation
PIP coverage of $11,150,000 excess of $100,000 each and
every occurrence deemed to be maintained in force.
It is warranted that the Company writes maximum policy
limits of $1,000,000 or so deemed (Non-Automobile
business). However, the Company has a Multiple Line
Reinsurance Program for non-automobile business of $960,000
each occurrence excess $40,000 each occurrence. For the
purpose of this Agreement, $500,000 each occurrence
(Unlimited Reinstatements) excess of $500,000 shall inure
to the benefit of this program; $460,000 each occurrence
excess of $40,000 shall be considered as Underlying
Reinsurance.
The Company may include up to $50,000 from Personal
Umbrella Liability as part of the Ultimate Net Loss, which
is its maximum net loss from its 5% participation in its
95% Personal Umbrella Quota Share Treaty. It is warranted
that the Company maintains a 95% Quota Share of a
$1,000,000 limit or so deemed.
MMW 2
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
RATE: See attached Exhibits A, B, C and D. Rate applies to the
- ---- Company's subject net earnedpremium income, estimated to be
$142,412,640 for 1997, of which $40,900,300 pertains to
New York only.
DEPOSIT
PREMIUM: See attached Exhibits A, B, C and D. Payable in equal
- ------- quarterly installments at January 1, April 1, July 1 and
October 1, 1997.
MINIMUM
PREMIUM: See attached Exhibits A, B, C and D.
- -------
CLAUSES: Parties to the Agreement.
- ------- Net Retained Lines.
Ultimate Net Loss - loss adjustment expenses pro rata in
addition to the Agreement limit.
Extra Contractual Obligations on a 90%/10% basis within the
Agreement limit.
Losses in Excess of Policy Limits on a 90%/10% basis within
the Agreement limit.
Subrogation.
Salvage and Recoveries.
Loss Notice and Settlement.
Funding of Reserves.
Offset - applicable only to each layer of this Agreement.
Original Conditions.
Currency.
Taxes.
Federal Excise Tax.
Errors and Omissions not to override Notice of Loss and
Loss Settlement Clause; not to apply to Exclusions.
Access to Records.
Service of Suit - NMA 1998 - Mendes and Mount (where
applicable).
Arbitration.
Insolvency.
Severability.
Minet Re North America, Inc. Intermediary.
WORDING: As per expiring Reinsurance Agreement as far as applicable
- ------- and as noted herein, which complies with the requirements
of the State of New York Insurance Department.
MMW 3
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
We will periodically provide a list of those companies with which Minet Re North
America, Inc. is affiliated, which may be parties to this placement. This list
is available on request.
For and on behalf of:
MINET RE NORTH AMERICA, INC.
-------------------------
Senior Vice President
HOME STATE INSURANCE GROUP
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
NEW YORK MERCHANT BAKERS INSURANCE COMPANY
HOME MUTUAL INSURANCE COMPANY OF BINGHAMTON, NEW YORK
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
- -------------------------------
Authorized Signature
- -------------------------------
Date
Please examine this document carefully and advise us immediately if any of the
details or the security used are not in accordance with your order or
requirements.
MMW 4
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
EXCLUSIONS:
- ----------
1. Assumed Reinsurance other than business assumed via intra-company
reinsurance, from United Pacific Insurance Company for the Dave, Inc.
policy, facultative reinsurance in connection with business
originally produced by the Company and specifically reported to
working-layer reinsurers and Delaware private passenger business
written as a 100% Quota Share of companies with whom Quaker City
Insurance Company has entered into rollover agreements.
2. Loss or liability excluded by the provision of the "Nuclear Incident
Exclusion Clause - Liability - Reinsurance."
3. Financial Guarantee and Insolvency.
4. Insolvency Funds.
5. War Risks as described in the North American War Risk Exclusion
Clause.
6. Loss or Liability excluded by the provisions of the "Pools Exclusion
Clause." It is understood and agreed that this exclusion shall not
apply to individual risks assigned to the Company under an "Assigned
Risk" plan.
7. Speed Contests.
8. Ambulances.
9. Accident and health, aviation, boiler and machinery, fidelity and
surety, when written as such.
10. Workers' Compensation and Employers' Liability, when written as such.
11. Professional Liability, Errors and Omissions Liability, Directors and
Officers Liability, SEC Liability, Fiduciary Liability, when written
as such.
12. Ocean Marine Liability when written as such; not applicable to
watercraft of 26 feet or less in length.
13. Amusement parks, carnivals, circuses, fairs, zoos, and the operation
or manufacture of mechanical or animal rides.
14. Manufacture, application or wholesale distribution of industrial
chemicals, fertilizers, insecticides, herbicides, animal feeds.
15. Manufacture, including component parts, of autos, trucks, buses,
mobile homes, trailers, snowmobiles, tires, motorcycles, go-carts.
16. Manufacture, distribution, sale and repair of aircraft, aircraft
components or other products necessary or critical to aircraft safety
or flight.
17. Crane manufacture or rental.
18. Contractors principally engaged in or construction of:
a. Blasting;
b. Bridges, tunnels, dams, reservoirs;
c. Demolition or wrecking of structures over 4 stories;
d. Erection of iron or steel over 4 stories;
e. Tunnelling;
f. Fumigating or exterminating.
19. Gas or electric utilities.
MMW 1
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
20. Manufacture and/or production, detonation, storage, processing,
handling or transport of:
a. Fireworks, fuse(s), cartridges, ammunition, powder,
nitroglycerine or any explosives;
b. Gases and/or air under pressure in containers;
c. Butane, methane, propane and other liquified gases;
d. Toxic substances and toxic waste with inherent potential for
catastrophic loss;
e. Asbestos and asbestos products.
21. Products Recall.
22. Railroad Liability.
23. Municipality Liability.
24. Underground or surface mining and quarrying.
25. Nursing homes or residential care facilities.
26. Liquor Liability, when written as such.
27. Security Guard Liability.
28. Manufacture, assembly or wholesale distribution of:
a. Industrial farm machinery;
b. Ladders and scaffolding;
c. Athletic equipment; not applicable to sporting goods stores;
d. Pharmaceuticals;
e. Medical/surgical products;
f. Tobacco products;
g. Fire alarms, burglar alarms, sprinkler systems;
h. Railroad products, wheels, axles, brakes, etc.;
i. Toys;
j. Valves--industrial type.
29. Oil lease operators, driller, exploration.
30. Medical Malpractice.
31. Stevedoring.
32. Insurance coverage for punitive or exemplary damages when written as
such.
33. Landfill operations.
34. Warehousemen's Legal Liability.
35. Firearms and/or other weapons manufacturing, repairing, distribution
or sale.
36. Electrical control equipment.
37. Manufacture of helmets.
38. Manufacture or recapping of tires.
39. Products integrity impairment and products guarantee.
40. Animal feed or additives, not to include retail pet stores.
41. Commercial Umbrella Liability.
MMW 2
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
EXHIBIT A
FIRST CASUALTY CLASH
EXCESS OF LOSS REINSURANCE AGREEMENT
------------------------------------
(BN970011)
LIMIT AND
RETENTION: 100% of $500,000 Ultimate Net Loss each and every loss
- --------- occurrence in excess of $500,000 Ultimate Net Loss each and
every loss occurrence.
REINSTATEMENT: Two full reinstatements - first reinstatement at 50% as to
- ------------- time and pro rata as to amount; second reinstatement at
100% as to time and pro rata as to amount.
RATE: 0.126% of the Company's subject net earned premium income.
- ----
DEPOSIT
PREMIUM: $180,000 (National Pool: $128,300; New York Pool: $51,700)
- ------- payable in four equal quarterly installments of $45,000
(National Pool: $32,075; New York Pool: $12,925) each at
January 1, April 1, July 1 and October 1, 1997.
MINIMUM
PREMIUM: $162,000 (National Pool: $115,470; New York Pool: $46,530).
- -------
The National Pool consists of: Home State Insurance Company
(40%); Quaker City Insurance Company (25%); Pinnacle
Insurance Company (20%); and Westbrook Insurance Company
(15%).
The New York Pool consists of: New York Merchant Bakers
Insurance Company (85%); Home Mutual Insurance Company of
Binghamton, New York (15%).
Reinsurers Effective January 1, 1997:
- ------------------------------------
<TABLE>
<CAPTION>
% FEIN NAIC
-
<S> <C> <C> <C>
Signet Star Reinsurance Company 10.000% 47-0574325 32603
Wilmington, Delaware
Transatlantic Reinsurance Company 10.000% 13-5616275 19453
New York, New York
Underwriters Reinsurance Company 40.000% 16-0366830 22314
Concord, New Hampshire -------
Sub-Total: 60.000%
</TABLE>
MMW 1
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
Through Swire Fraser Insurance Brokers Limited:
-----------------------------------------------
Underwriting Members of Lloyd's
London, England (as per Schedule) 31.304% AA-1122000
Terra Nova Insurance Company Limited,
London 8.696% AA-1121425
-------
Sub-Total: 40.000%
Placement Total: 100.000%
--------
MMW 2
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
SCHEDULE OF
UNDERWRITING MEMBERS OF LLOYD'S PARTICIPATION
FIRST CASUALTY CLASH EXCESS OF LOSS REINSURANCE AGREEMENT
---------------------------------------------------------
(BN970011)
Syndicate Pseudonym AIIN Share
--------- --------- ---- -----
570 GNR AA-1126570 8.697%
205 HGJ AA-1126205 5.217%
1141 JEM AA-1127141 5.217%
780 BFC AA-1126780 5.217%
623 AFB AA-1126623 3.478%
1096 RAS AA-1127096 3.478%
------
Total Participation through the
Underwriting Members of Lloyd's 31.304%
-------
MMW
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
EXHIBIT B
SECOND CASUALTY CLASH
EXCESS OF LOSS REINSURANCE AGREEMENT
------------------------------------
(BN970012)
RETENTION: 100% of $1,500,000 Ultimate Net Loss each and every loss
- --------- occurrence in excess of $1,000,000 Ultimate Net Loss each
and every loss occurrence.
REINSTATEMENT: One full reinstatement at 100% as to time and pro rata as
- ------------- to amount.
RATE: 0.178% of the Company's subject net earned premium income.
----
DEPOSIT
PREMIUM: $250,000 (National Pool: $178,200; New York Pool: $71,800)
- ------- payable in four equal quarterly installments of $62,500
(National Pool: $44,550; New York Pool: $17,950) each at
January 1, April 1, July 1 and October 1, 1997.
MINIMUM
PREMIUM: $225,000 (National Pool: $160,380; New York Pool: $64,620).
- -------
The National Pool consists of: Home State Insurance Company
(40%); Quaker City Insurance Company (25%); Pinnacle
Insurance Company (20%); and Westbrook Insurance Company
(15%).
The New York Pool consists of: New York Merchant Bakers
Insurance Company (85%); Home Mutual Insurance Company of
Binghamton, New York (15%).
Reinsurers Effective January 1, 1997:
- ------------------------------------
<TABLE>
<CAPTION>
% FEIN NAIC
- ---- ----
<S> <C> <C> <C>
Signet Star Reinsurance Company 10.000% 47-0574325 32603
Wilmington, Delaware
Transatlantic Reinsurance Company 10.000% 13-5616275 19453
New York, New York
Underwriters Reinsurance Company 40.000% 16-0366830 22314
Concord, New Hampshire -------
Sub-Total: 60.000%
</TABLE>
MMW 1
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
<TABLE>
<S> <C> <C>
Through Swire Fraser Insurance Brokers Limited:
----------------------------------------------
Underwriting Members of Lloyd's (as per Schedule) AA-1122000
London, England 35.000%
Terra Nova Insurance Company Limited,
London 5.000% AA-1121425
-------
Sub-Total: 40.000%
Placement Total: 100.000%
========
</TABLE>
MMW 2
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
SCHEDULE OF
UNDERWRITING MEMBERS OF LLOYD'S PARTICIPATION
SECOND CASUALTY CLASH EXCESS OF LOSS REINSURANCE AGREEMENT
----------------------------------------------------------
(BN970012)
Syndicate Pseudonym AIIN Share
--------- --------- ---- -----
570 GNR AA-1126570 8.334%
205 HGJ AA-1126205 3.333%
623 AFB AA-1126623 5.667%
1141 JEM AA-1127141 5.000%
780 BFC AA-1126780 3.333%
1007 RCV AA-1127007 5.000%
1096 RAS AA-1127096 3.333%
------
Total Participation through the
Underwriting Members of Lloyd's 35.000%
-------
MMW
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
EXHIBIT C
THIRD CASUALTY CLASH
EXCESS OF LOSS REINSURANCE AGREEMENT
------------------------------------
(BN970033)
LIMIT AND
RETENTION: 100% of $2,000,000 Ultimate Net Loss each and every loss
- --------- occurrence in excess of $2,500,000 Ultimate Net Loss each
and every loss occurrence.
REINSTATEMENT: One full reinstatement at 100% as to time and pro rata as
- ------------- to amount.
RATE: 0.140% of the Company's subject net earned premium income.
- ----
DEPOSIT
PREMIUM: $200,000 (National Pool: $142,560; New York Pool: $57,440)
- ------- payable in four equal quarterly installments of $50,000
(National Pool: $35,640; New York Pool: $14,360) each at
January 1, April 1, July 1 and October 1, 1997.
MINIMUM
PREMIUM: $180,000 (National Pool: $128,304; New York Pool: $51,696).
- -------
The National Pool consists of: Home State Insurance Company
(40%); Quaker City Insurance Company (25%); Pinnacle
Insurance Company (20%); and Westbrook Insurance Company
(15%).
The New York Pool consists of: New York Merchant Bakers
Insurance Company (85%); Home Mutual Insurance Company of
Binghamton, New York (15%).
Reinsurers Effective January 1, 1997:
- ------------------------------------
<TABLE>
<CAPTION>
% FEIN NAIC
- ---- ----
<S> <C> <C> <C>
Signet Star Reinsurance Company 10.000% 47-0574325 32603
Wilmington, Delaware
Underwriters Reinsurance Company 40.000% 16-0366830 22314
Concord, New Hampshire -------
Sub-Total: 50.000%
</TABLE>
MMW 1
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
Through Swire Fraser Insurance Brokers Limited:
----------------------------------------------
Underwriting Members of Lloyd's AA-1122000
London, England (as per Schedule) 50.000%
-------
Sub-Total: 50.000%
Placement Total: 100.000%
========
MMW 2
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
SCHEDULE OF
UNDERWRITING MEMBERS OF LLOYD'S PARTICIPATION
THIRD CASUALTY CLASH EXCESS OF LOSS REINSURANCE AGREEMENT
---------------------------------------------------------
(BN970033)
Syndicate Pseudonym AIIN Share
--------- --------- ---- -----
570 GNR AA-1126570 9.327%
205 HGJ AA-1126205 5.597%
727 SAM AA-1127727 5.597%
1141 JEM AA-1127141 4.478%
219 RAE AA-1126219 5.597%
623 AFB AA-1126623 7.463%
1007 RCV AA-1127007 7.463%
1096 RAS AA-1127096 4.478%
------
Total Participation through the
Underwriting Members of Lloyd's 50.000%
-------
MMW
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
EXHIBIT D
FOURTH CASUALTY CLASH
EXCESS OF LOSS REINSURANCE AGREEMENT
------------------------------------
(BN970034)
LIMIT AND
RETENTION: 100% of $2,000,000 Ultimate Net Loss each and every loss
- --------- occurrence in excess of $4,500,000 Ultimate Net Loss each
and every loss occurrence.
REINSTATEMENT: One full reinstatement at 100% as to time and pro rata as
- ------------- to amount.
RATE: 0.098% of the Company's subject net earned premium income.
- ----
DEPOSIT
PREMIUM: $140,000 (National Pool: $99,790; New York Pool: $40,210)
- ------- payable in four equal quarterly installments of $35,000
(National Pool: $24,947.50; New York Pool: $10,052.50) each
at January 1, April 1, July 1 and October 1, 1997.
MINIMUM
PREMIUM: $126,000 (National Pool: $89,811; New York Pool: $36,189).
- -------
The National Pool consists of: Home State Insurance Company
(40%); Quaker City Insurance Company (25%); Pinnacle
Insurance Company (20%); and Westbrook Insurance Company
(15%).
The New York Pool consists of: New York Merchant Bakers
Insurance Company (85%); Home Mutual Insurance Company of
Binghamton, New York (15%).
Reinsurers Effective January 1, 1997:
- ------------------------------------
% FEIN NAIC
- ---- ----
Signet Star Reinsurance Company 10.000% 47-0574325 32603
Wilmington, Delaware
Transatlantic Reinsurance Company 10.000% 13-5616275 19453
New York, New York
Underwriters Reinsurance Company 40.000% 16-0366830 22314
Concord, New Hampshire -------
Sub-Total: 60.000%
MMW 1
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
Through Swire Fraser Insurance Brokers Limited:
----------------------------------------------
Underwriting Members of Lloyd's AA-1122000
London, England (as per Schedule) 34.667%
Terra Nova Insurance Company Limited,
London 5.333% AA-1121425
------
Sub-Total: 40.000%
Placement Total: 100.000%
========
MMW 2
1/7/97
<PAGE>
REINSURANCE COVER NOTE
Agreement No. BN970011/12/33/34
SCHEDULE OF
UNDERWRITING MEMBERS OF LLOYD'S PARTICIPATION
FOURTH CASUALTY CLASH EXCESS OF LOSS REINSURANCE AGREEMENT
----------------------------------------------------------
(BN970034)
Syndicate Pseudonym AIIN Share
--------- --------- ---- -----
570 GNR AA-1126570 6.667%
205 HGJ AA-1126205 4.000%
1007 RCV AA-1127007 4.000%
219 RAE AA-1126219 4.000%
623 AFB AA-1126623 5.333%
780 BFC AA-1126780 2.667%
727 SAM AA-1127727 3.200%
1141 JEM AA-1127141 2.133%
1096 RAS AA-1127096 2.667%
------
Total Participation through the
Underwriting Members of Lloyd's 34.667%
-------
MMW
1/7/97
REINSURANCE COVER NOTE
Agreement No: 970078
MEMORANDUM OF REINSURANCE EFFECTED ON BEHALF OF:
REINSURED: HOME STATE INSURANCE COMPANY
Red Bank, New Jersey
QUAKER CITY INSURANCE COMPANY
Trevose, Pennsylvania
PINNACLE INSURANCE COMPANY
Carrollton, Georgia
WESTBROOK INSURANCE COMPANY
Wallingford, Connecticut
(hereinafter referred to as the "Company")
TYPE: PRIVATE PASSENGER AND COMMERCIAL AUTOMOBILE
LIABILITY AND PHYSICAL DAMAGE QUOTA SHARE
REINSURANCE AGREEMENT
PERIOD: Continuous from December 31, 1996 at 12:01 a.m.,
Eastern Standard Time, subject to cancellation at any
December 31 anniversary thereafter by either party
giving ninety (90) days' prior written notice.
In the event of cancellation:
1. Reinsurers shall remain liable for their share of
all policies in force hereunder at the effective
date of cancellation until the natural expiration
or prior termination date of said policies, not
to exceed twelve (12) months, plus six (6) months
odd time, or;
2. By mutual consent, Company shall reassume the
unexpired liability for all in-force business as
of the date of cancellation and the Reinsurers
shall return their share of the unearned premium
less ceding commission.
CLASS: All net in-force business classified by the Company
as Private Passenger and Commercial Automobile
Liability and Physical Damage (Comprehensive and
Collision), including No-Fault, Uninsured and
Underinsured Motorists and Medical Payments plus
Garagekeepers Legal Liability and Garage Liability.
EXCLUSIONS: This Agreement shall not apply to:
1. Assumed reinsurance other than business assumed
via intra-company reinsurance, from United
Pacific Insurance Company and Reliance Insurance
Company, Delaware Private Passenger business
written as a 100% Quota Share of companies with
whom Quaker City Insurance Company has entered
into rollover agreements, and facultative
commercial automobile liability
1
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970078
reinsurance in connection with business
originally produced by the Company and
specifically reported to working layer
Reinsurers.
EXCLUSIONS
(Continued): 2. Loss or liability excluded by the provision of
the "Nuclear Incident Exclusion Clauses -
Liability and Physical Damage - Reinsurance -
USA and Canada."
3. Financial Guarantee and Insolvency.
4. Insolvency Funds.
5. War Risks, as described in the North American
War Risk Exclusion Clause.
6. All business derived directly or indirectly
from any Pool, Association or Syndicate. As
respects Physical Damage business, loss or
liability excluded by the provisions of the
"Pools, Associations, Syndicates Exclusion
Clause." It is understood and agreed that this
exclusion shall not apply to individual risks
assigned to the Company under an Assigned Risk
Plan or similar plan.
7. Speed Contests.
8. Ambulances.
TERRITORIAL
SCOPE: As per the Company's original policies.
QUOTA SHARE
PARTICIPATION: 60% of the Company's Net Unearned Premium as
of December 31, 1996.
Net Unearned Premium shall be defined as the
Company's net after all inuring reinsurance.
PREMIUM: 60% of the Company's Net Unearned Premium as of
December 31, 1996. The Ceded Unearned
Premium as of December 31, 1996 is $21,974,603,
payable as follows.
1. Funds transferred to Reinsurer - $7,400,000 at
March 31, 1997 via wire transfer.
2. Funds held by Company - $14,574,603.
CEDING
COMMISSION: 32.5% of ceded premium.
2
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970078
REINSURER'S
AGGREGATE
LIMIT: Inclusive of allocated Loss Adjustment Expenses,
shall be 175% of Nett Ceded Premium, not to
exceed $35,000,000 for the Agreement period.
Nett Ceded Premium is defined to be Gross Ceded
Premium less Ceding Commission.
LOSS
CORRIDOR: The Company shall retain 100% of the losses between
64.0% and 82.0% loss ratio.
PROFIT
COMMISSION: At commutation of each underwriting year of
account, the Company shall be entitled to a
Profit Commission equal to 100% of the following
balance (if positive):
Gross Ceded Reinsurance Premium LESS,
Ceding Commission LESS,
3.50% of Gross Ceded Premium for Reinsurers' Expenses
(subject to a minimum of $500,000) LESS,
Paid Losses and Loss Adjustment Expenses PLUS,
Salvage and Subrogation PLUS,
Interest credited on funds withheld (at the 90-day
Treasury-Bill rate).
Commutation is at the Company's option any time after
six (6) months from inception of each underwriting
year of account. However, a given underwriting year
of account shall not be commuted unless all prior
underwriting years of account have been commuted.
Payment by the Reinsurer of Profit Commission balance
above, shall constitute a complete and final release
of the Reinsurer from any further liability whether
known or unknown.
Calculation of this Profit Commission adjustment
shall apply collectively for all Companies reinsured
under this Agreement, and not individually.
3
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970078
COMMUTATION: Provided that the balance in the Profit Commission
Account is positive, the Company may
commute this Agreement at the end of any calendar
quarter ending after June 30, 1997.
Upon commutation, the Reinsurer shall pay the Company
Profit Commission per the above schedule. In exchange
for such payment, the Reinsurer shall be released
from any and all current and future liability under
this agreement.
LOSS
ADJUSTMENT
EXPENSES: Reinsurers shall be liable for their proportionate
share of loss adjustment expenses incurred (including
litigation expenses and interest on judgments, but
not including office expenses or salaries for the
Company's regular employees).
REPORTS AND
ACCOUNTS: Within thirty (30)days after the close of each
quarter, the Company shall furnish to the
Reinsurer the following:
Gross Earned Premium for the quarter LESS,
Ceding Commission allowed on the reinsurance premium
for the quarter LESS,
Reinsurers' share of paid loss and paid loss
adjustment expenses during the quarter PLUS,
Reinsurers' share of all salvage recovered
during the QUARTER,
Net balance due.
Any balances due either party will be payable within
forty-five (45) days after the close of each quarter.
All losses to be settled from funds withheld account
until the fund balance is exhausted.
SPECIAL
TERMINATION: The Reinsurer may terminate this Agreement at any
time upon giving at least thirty (30) days'
prior notice in writing, for any of the following
reasons:
A. Company's policyholders surplus drops by more
than 35% from the prior year end.
B. Company is declared insolvent or placed in
rehabilitation or receivership, etc.
4
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970078
C. Company ceases writing new and renewal business
subject to this Agreement.
D. Company becomes acquired or controlled by another
entity.
E. Company fails to pay reinsurance premium
when due.
SPECIAL
TERMINATION
(Continued): In the event of Special Termination:
1. The annual aggregate limit shall equal 130% of
net ceded premium actually received by
the Reinsurer as of the date of Special
Termination.
2. The Reinsurer shall have the option to terminate
this Agreement on a cut-off basis.
CLAUSES: Net Liability.
Parties to the Agreement.
Reinsurers Liability.
Losses and Loss Settlements.
Extra Contractual Obligations on a 100% basis within
the Agreement limit.
Loss in Excess of Policy Limits on a 100% basis
within the Agreement limit.
Funding of Reserves.
Currency.
Taxes.
Access to Records.
Errors and Omissions, not to apply to Exclusions.
Original Conditions.
Insolvency.
Arbitration.
Federal Excise Tax.
Service of Suit - NMA 1998 - Mendes & Mount
(where applicable).
Offset.
Severability.
Minet Re North America, Inc. Intermediary.
WORDING: Wording to follow Minet Re Clauses or BRMA Clauses
where specified above and which comply with the
requirements of the State of New York Insurance
Department.
5
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970078
<TABLE>
<CAPTION>
REINSURERS:
NAIC
FEIN No. No. Through Minet Re North America Share
-------- --- ------------------------------ -----
<S> <C> <C> <C>
16-0366830 22314 Underwriters Reinsurance Company
Concord, New Hampshire 100%
----
Sub Total: 100%
----
TOTAL PLACEMENT: 100%
====
</TABLE>
We will periodically provide a list of those companies with which Minet Re North
America, Inc. is affiliated, which may be parties to this placement. This list
is available on request.
FOR AND ON BEHALF OF:
MINET RE NORTH AMERICA, INC.
___________________________ DATE: _______________
Senior Vice President
AGREED TO:
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
___________________________ DATE: _______________
Authorized Signature
6
<PAGE>
REINSURANCE COVER NOTE
Agreement No: 970078
Please examine this document carefully and advise us immediately if any of the
details on the security used are not in accordance with your order or
requirements.
7
<PAGE>
INTERESTS AND LIABILITIES CONTRACT
Agreement No.: BN970078
INTERESTS AND LIABILITIES CONTRACT
in respect of
PRIVATE PASSENGER AND COMMERCIAL AUTOMOBILE LIABILITY
AND PHYSICAL DAMAGE QUOTA SHARE REINSURANCE AGREEMENT
between
HOME STATE INSURANCE COMPANY
Red Bank, New Jersey
QUAKER CITY INSURANCE COMPANY
Trevose, Pennsylvania
PINNACLE INSURANCE COMPANY
Carrollton, Georgia
WESTBROOK INSURANCE COMPANY
Wallingford, Connecticut
(hereinafter referred to as the "Company")
and
UNDERWRITERS REINSURANCE COMPANY
Concord, New Hampshire
(hereinafter referred to as the "Subscribing Reinsurer")
It is hereby agreed by and between the Company of the one part, and the
Subscribing Reinsurer of the other part, that effective 12:01 a.m., Eastern
Standard Time, December 31, 1996, the Subscribing Reinsurer subscribes a 100%
share of the Interests and Liabilities of the "Reinsurer" as set forth in the
PRIVATE PASSENGER AND COMMERCIAL AUTOMOBILE LIABILITY AND PHYSICAL DAMAGE QUOTA
SHARE REINSURANCE AGREEMENT.
The share of the Subscribing Reinsurer in the Interests and Liabilities of the
"Reinsurer" in respect of said Agreement shall be separate and apart from the
shares of the other reinsurers subscribing to said Agreement, and the Interests
and Liabilities of the Subscribing Reinsurer shall not be joint with those of
the other reinsurers, and the Subscribing Reinsurer in no event shall
participate in the Interests and Liabilities of the other reinsurers subscribing
hereon.
1
<PAGE>
INTERESTS AND LIABILITIES CONTRACT
Agreement No.: BN970078
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be executed
in triplicate by their duly authorized officers:
In Shrewsbury, New Jersey, this day of , 1997,
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
- -----------------------------------------------------
2
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
PRIVATE PASSENGER AND COMMERCIAL AUTOMOBILE LIABILITY
AND PHYSICAL DAMAGE QUOTA SHARE REINSURANCE AGREEMENT
between
HOME STATE INSURANCE COMPANY
Red Bank, New Jersey
QUAKER CITY INSURANCE COMPANY
Trevose, Pennsylvania
PINNACLE INSURANCE COMPANY
Carrollton, Georgia
WESTBROOK INSURANCE COMPANY
Wallingford, Connecticut
and
Various Insurance/Reinsurance Companies
EFFECTIVE: December 31, 1996
<PAGE>
INTERESTS AND LIABILITIES CONTRACT
Agreement No.: BN970078
HOME STATE INSURANCE COMPANY
QUAKER CITY INSURANCE COMPANY
PINNACLE INSURANCE COMPANY
WESTBROOK INSURANCE COMPANY
PRIVATE PASSENGER AND COMMERCIAL AUTOMOBILE LIABILITY
AND PHYSICAL DAMAGE QUOTA SHARE REINSURANCE AGREEMENT
INDEX
ARTICLE
-------
I - Business Covered
- Net Liability
- Parties to the Agreement
II - Commencement and Termination
- Basis of Termination
- Special Termination
III - Territory
IV - Exclusions
V - Reinsurer's Liability
- Quota Share Participation
VI - Premium and Ceding Commission
- Reports and Accounts
- Contingent Commission
VII - Losses and Loss Settlements
- Extra Contractual Obligations
- Loss in Excess of Policy Limits
VIII - Funding of Reserves
IX - Currency
X - Taxes
XI - Access to Records
XII - Errors and Omissions
XIII - Original Conditions
XIV - Insolvency
XV - Arbitration
XVI - Federal Excise Tax
1
<PAGE>
REINSURANCE AGREEMENT
Agreement No: BN970078
ARTICLE
-------
XVII - Service of Suit
XVIII - Offset
XIX - Severability
XX - Intermediary
Attachments:
- ------------
Letter of Credit Trust Agreement
Nuclear Incident Exclusion Clauses - Physical Damage and Liability -
Reinsurance - USA and Canada
Pools, Associations, Syndicates Exclusion Clause
2
<PAGE>
REINSURANCE AGREEMENT
Agreement No: BN970078
PRIVATE PASSENGER AND COMMERCIAL AUTOMOBILE LIABILITY
AND PHYSICAL DAMAGE QUOTA SHARE REINSURANCE AGREEMENT
In consideration of the premium and terms and conditions
hereinafter set forth
The Reinsurers executing the
Interests and Liabilities Contract
attached to this Agreement
(hereinafter referred to as the "Reinsurer")
do hereby indemnify, as herein provided and specified,
HOME STATE INSURANCE COMPANY
Red Bank, New Jersey
QUAKER CITY INSURANCE COMPANY
Trevose, Pennsylvania
PINNACLE INSURANCE COMPANY
Carrollton, Georgia
WESTBROOK INSURANCE COMPANY
Wallingford, Connecticut
(hereinafter referred to as the "Company")
ARTICLE I
Business Covered:
The Reinsurer agrees to indemnify the Company, in respect of the net liability
which may accrue to the Company under its policies, binders, or contracts of
insurance or reinsurance or other evidence of liability, whether oral or written
(hereinafter called "policies"), issued or contracted for by the Company,
subject to the exclusions set forth in ARTICLE IV, Exclusions, and other terms
and conditions of this Agreement as set forth herein on all net in-force
business classified by the Company as Private Passenger and Commercial
Automobile Liability and Physical Damage (Comprehensive and Collision),
including No-Fault, Uninsured and Underinsured Motorists and Medical Payments
plus Garagekeepers Legal Liability and Garage Liability.
Net Liability:
As respects Private Passenger and Commercial Automobile Liability, including
No-Fault, Uninsured and Underinsured Motorists, Medical Payments, Garagekeepers
Legal Liability and Garage Liability,
1
<PAGE>
the term "net liability" shall mean the gross amount on any one (1) loss
occurrence less any reinsurance effected by the Company or by its agents. The
term "loss occurrence" shall follow the definitions of the Company's original
policies.
As respects Private Passenger and Commercial Automobile Physical Damage
(Comprehensive and Collision), the term "net liability" shall mean the gross
amount on any one (1) vehicle, or risk, less any reinsurance effected by the
Company or by its agents.
The Company shall be the sole judge of what constitutes one (1) vehicle, or
risk.
Parties to the Agreement:
Whenever the word "Company" is used in this Agreement, same shall be held to
include any and/or all of the Companies, which are or may hereafter be under
common control and named as reinsured companies forming the Company. This
Agreement shall operate as if it were made between the Reinsurer and each
reinsured Company individually. Premiums and Reports and Accounts made in
accordance with ARTICLE VI and Losses and Loss Settlements made in accordance
with ARTICLE VII are to be submitted in a manner that will identify each
Company's premium remittances to the Reinsurer and the Reinsurer's individual
loss obligations to each reinsured Company. Balances payable or recoverable by
any insurer or individual named reinsurer shall not serve to offset any balances
payable or recoverable to or from any other reinsured party to the Agreement.
The first named affiliated Company hereunder shall be deemed to be the agent of
the Company and shall allocate each Company's premiums and losses as set forth
in the preceding paragraph. However, each reinsured will be responsible for
verifying the accuracy of the amounts reported.
ARTICLE II
Commencement and Termination:
The term of this Agreement shall be from 12:01 a.m., Eastern Standard Time,
December 31, 1996 and shall remain in force continuously thereafter subject to
cancellation as of 12:01 a.m., Eastern Standard Time, any December 31 thereafter
by either party upon not less than ninety (90) days' prior written notice being
given to the other party. Such notice shall be sent by registered or certified
mail, return receipt requested, and shall be deemed given upon its dispatch.
2
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
Basis of Termination:
Should this Agreement be cancelled, the Reinsurer shall remain liable for all
loss occurrences taking place subsequent to the time and date of cancellation of
this Agreement covered by policies in force at the time and date of cancellation
of this Agreement until the natural expiration or prior termination of such
policies, but in no event for any loss occurrences taking place more than twelve
(12) months plus six (6) months' odd time subsequent to the cancellation of this
Agreement; or by mutual consent between the Company and the Reinsurer, the
Reinsurer shall not be liable for any loss occurrences taking place subsequent
to the cancellation of this Agreement. Should the Company exercise the latter
option, the Reinsurer shall return to the Company its share of the unearned
premium, less the ceding commission allowed by the Reinsurer, applicable to the
unexpired portion of policies covered under this Agreement.
If this Agreement should be cancelled while a loss occurrence covered hereunder
is in progress, the Reinsurer shall be liable, subject to all other conditions
of this Agreement, for its share of all individual losses resulting from such
loss occurrence whether any such individual losses take place before or after
such cancellation.
Special Termination:
It is especially understood and agreed that the Reinsurer shall have the right
to terminate this Agreement forthwith upon the giving of thirty (30) days'
notice in writing, which notice shall be in accordance with the termination
provisions of this Article, for any of the following reasons:
1. The Company's policyholders' surplus drops by more than thirty-five
percent (35%) from the prior year end.
2. The Company is declared insolvent or placed in rehabilitation,
receivership, conservation or liquidation.
3. The Company ceases writing new and renewal business subject to this
Agreement.
4. The Company becomes acquired or controlled by another entity.
5. The Company fails to pay reinsurance premium when due.
If any law or regulation of the federal or state or local government of any
jurisdiction in which the Company is doing business shall render illegal the
arrangements made in this Agreement, the Agreement may be terminated immediately
insofar as it applies to such jurisdiction by the Company giving notice to the
Reinsurer to such effect.
3
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
In the event of Special Termination:
1. The annual aggregate limit shall equal 130% of net ceded premium
actually received by the Reinsurer as of the date of Special
Termination.
2. The Reinsurer shall have the option to terminate this Agreement on a
cut-off basis.
ARTICLE III
Territory:
The liability of the Reinsurer under this Agreement shall be limited to losses
in connection with business written by the Company's offices or agencies in the
United States of America, its territories, possessions, dependencies, Puerto
Rico and Canada, and shall apply to losses occurring within the territorial
limits of the Company's original policies.
ARTICLE IV
Exclusions:
This Agreement shall not cover:
1. Assumed reinsurance other than business assumed via intra-company
reinsurance, from United Pacific Insurance Company and Reliance
Insurance Company, Delaware private passenger business written as a 100%
Quota Share of companies with whom Quaker City Insurance Company has
entered into rollover agreements, and facultative commercial automobile
liability reinsurance in connection with business originally produced by
the Company and specifically reported to working layer Reinsurers.
2. Loss or liability excluded by the provisions of the "Nuclear Incident
Exclusion Clauses Physical Damage and Liability - Reinsurance - USA and
Canada," attached to, and forming part of, this Agreement.
3. Financial Guarantee and Insolvency.
4. All liability of the Company arising, by contract, operation of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency Fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, howsoever denominated, established or governed; which
provides for any assessment of or payment or assumption by the Company
of part or all of any claim, debt, charge, fee, or other obligation of
an insurer, or its successors or assigns, which has been
4
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
declared by any competent authority to be insolvent, or which is
otherwise deemed unable to meet any claim, debt, charge, fee or other
obligation in whole or in part.
5. War Risks, as per the following clause:
Regarding interests which at time of loss or damage are on shore, no
liability shall attach hereto for any loss or damage which is occasioned
by war, invasion, hostilities, acts of foreign enemies, civil war,
rebellion, insurrection, military or usurped power, or martial law or
confiscation by order of any government or public authority.
This War Exclusion Clause shall not, however, apply to interests which
at time of loss or damage are within the territorial limits of the
United States of America (comprising the fifty (50) states of the Union,
the District of Columbia, its territories and possessions including the
Panama Canal Zone and the Commonwealth of Puerto Rico, and including
bridges between the USA and Mexico, provided they are under United
States ownership), Canada, St. Pierre and Miquelon, provided such
interests are insured under policies containing a standard war or
hostilities or warlike operations exclusion clause.
Nevertheless, this clause shall not be construed to apply to riots,
strikes, civil commotion, vandalism, malicious damage, including acts
committed by the agent of any government, party or faction engaged in
war, hostilities, or other warlike operations, providing such agent is
acting secretly and not in connection with any operation of military or
naval armed forces in the country where the interest insured is
situated.
6. Loss or liability excluded by the provisions of the "Pools,
Associations, Syndicates Exclusion Clause," attached to, and forming
part of, this Agreement. It is understood and agreed that this exclusion
shall not apply to individual risks assigned to the Company under an
Assigned Risk Plan or similar plan.
7. Speed Contests.
8. Ambulances.
ARTICLE V
Reinsurer's Liability:
The liability of the Reinsurer shall commence obligatorily and simultaneously
with that of the Company, the premium on account of such liability to be
credited to the Reinsurer from the original date of the Company's liability.
5
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
Quota Share Participation:
As respects Private Passenger and Commercial Automobile Liability, the Company
shall cede and the Reinsurer shall accept sixty percent (60%) of the Company's
net liability on loss occurrences under all policies covered hereunder.
As respects Private Passenger and Commercial Automobile Physical Damage, the
Company shall cede and the Reinsurer shall accept sixty percent (60%) of the
Company's net liability on each vehicle under all policies covered hereunder.
Nevertheless, the Reinsurer's liability hereunder, inclusive of allocated loss
adjustment expenses, shall not exceed 175% of the Nett Ceded Premium or
$35,000,000, whichever the lesser, for the Agreement period. "Nett Ceded
Premium" shall be the gross ceded premium during the Agreement period less the
ceding commission allowed during the Agreement period.
Notwithstanding the above, the Company shall be responsible for all ultimate net
loss otherwise recoverable from the Reinsurer under this Agreement above a loss
ratio to the Reinsurer of sixty-four percent (64.0%) up to a loss ratio to the
Reinsurer of eighty-two percent (82.0%). Loss ratio means the total of ultimate
net loss from losses that occur with a date of loss during each twelve-month
Agreement period for which the Reinsurer would be responsible under this
Agreement in the absence of this Clause, divided by the ceded Reinsurer's
premium during the same Agreement period.
With respect to extra contractual obligations and loss in excess of policy
limits, as defined in ARTICLE VII, one hundred percent (100%) of the extra
contractual loss and loss in excess of policy limits recoverable hereunder shall
be included in any loss, but the contractual loss plus the extra contractual
obligation and loss in excess of policy limits shall not exceed the limit of
this Agreement.
ARTICLE VI
Premium and Ceding Commission:
The premium payable to the Reinsurer shall be sixty percent (60%) of the
Company's net unearned premiums on policies in force at the inception of this
Agreement on the business covered hereunder. The Reinsurer shall allow the
Company a provisional commission of 32.5% on the net premium ceded, (being gross
written premium less cancellations and return premium). The commission allowance
shall cover premium taxes of all kinds, local board assessments, and all other
expenses and charges whatsoever (except losses and loss adjustment expenses)
based upon premium ceded under this Agreement. The term "net unearned premium"
shall be the unearned premium after all inuring reinsurance.
6
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
The ceded unearned premium is payable to the Reinsurer on the following basis.
a) Funds transferred to the Reinsurer via wire transfer at March 31, 1997
in the amount of $7,400,000.
b) Funds held by the Company in the amount of $14,574,603.
Reports and Accounts:
Within thirty (30) days after the close of each quarter, the Company shall
render to the Reinsurer the following:
a) Gross earned premium for the quarter, LESS
b) Ceding commission allowed on the reinsurance premium for the quarter,
LESS
c) Reinsurer's share of paid loss and paid loss adjustment expenses during
the quarter, PLUS
d) Reinsurer's share of all salvage or subrogation recovered during the
quarter,
e) Net balance due.
The Company shall advise the unearned premium and outstanding losses by line of
business and remit the Reinsurer's net balance within forty-five (45) days after
the close of each quarter. In the event the net balance is due from the
Reinsurer to the Company, the Reinsurer shall remit such net balance due within
forty-five (45) days after receipt of the report. All losses shall be settled
from the funds-withheld account until the fund balance is exhausted.
Contingent Commission:
The Reinsurer shall make a further allowance of 100% commission on the net
profit for each period, calculated on the following basis:
Commission calculations shall be prepared at commutation of each
underwriting year of account with all losses occurring on ceded business in
force during a calculation period charged against all premium ceded during
the same calculation period.
INCOME
(I) Gross ceded reinsurance premium during the current period, PLUS
(II) Interest credited on funds withheld net of the ceding commission.
Interest shall be applied at the 90-day Treasury-Bill rate.
7
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
OUTGO
(I) The losses and loss adjustment expenses paid for the current period less
salvage, subrogation and other recoveries, PLUS
(II) The commission allowance applied to the gross ceded reinsurance premium
for the period, PLUS
(III) An allowance of 3.50% of the gross ceded premium for the period for the
management expenses of the Reinsurer, subject to a minimum of $500,000.
Note: The amount by which the total INCOME exceeds the total OUTGO shall be
the net profit on which the profit commission will be calculated.
The first period shall cover from December 31, 1996 to December 30, 1997, and
subsequent periods shall be each twelve (12) months thereafter. Commutation
shall be at the Company's option any time after six (6) months following the
inception of each underwriting year of account. However, a given underwriting
year of account shall not be commuted unless all prior underwriting years of
account have been commuted.
Provided that the balance in the profit commission calculation is positive, the
Company may commute this Agreement at the close of any calendar quarter ending
after June 30, 1997.
The commission calculation shall be prepared by the Company and forwarded to the
Reinsurer for examination within thirty (30) days after the close of each
period; the profit commission, if any, shall be payable by the Reinsurer within
forty-five (45) days after the close of each period. Payment by the Reinsurer of
the profit commission shall constitute a complete and final release of the
Reinsurer from any and all further liability whether known or unknown under this
Agreement.
Notwithstanding anything herein to the contrary, it is understood and agreed
that the calculation of this commission adjustment shall apply to the aggregate
commission collectively for all Companies reinsured under this Agreement, and
not each reinsured Company individually.
ARTICLE VII
Losses and Loss Settlements:
The Company or its designated representatives shall adjust, settle or compromise
all losses hereunder. All such adjustments, settlements and compromises shall be
binding on the Reinsurer, in proportion to
8
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
its participation and the Reinsurer shall benefit proportionately in all
salvage, subrogation and recoveries.
The Reinsurer shall bear its proportionate share of all loss expenses incurred
by the Company including litigation expenses and interest on judgments (but not
including office expenses or salaries of the Company's regular employees) in the
investigation, adjustment, appraisal or defense of all claims under policies
reinsured hereunder and the Reinsurer shall receive its proportionate share of
any recoveries of such expense.
Extra Contractual Obligations:
Loss includes, within the limits as set forth in ARTICLE V, Quota Share
Participation, any extra contractual obligations. "Extra contractual
obligations" are defined as those liabilities not covered under any other
provision of this Agreement and which arise from the handling of any claim on
business covered hereunder, such liabilities arising because of, but not limited
to, the following: failure by the Company to settle within the policy limit, or
by reason of alleged or actual negligence, fraud or bad faith in rejecting an
offer of settlement or in the preparation of the defense or in the trial of any
action against its insured or reinsured or in the preparation or prosecution of
an appeal consequent upon such action.
The date on which an extra contractual obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original accident,
casualty, disaster or loss occurrence.
However, this clause shall not apply where the loss has been incurred due to the
fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
Notwithstanding the foregoing, as respects New York Merchant Bakers Insurance
Company and Home Mutual Insurance Company of Binghamton, New York only, in no
event shall coverage be provided to the extent that such coverage is not
permitted under New York law.
Loss in Excess of Policy Limits:
Loss includes, within the limits as set forth in ARTICLE V, Quota Share
Participation, loss in excess of the limit of the Company's original policy,
such loss in excess of the limit having been incurred because of failure by it
to settle within the policy limit or by reason of alleged or actual negligence,
fraud or bad faith in rejecting an offer of settlement or in the preparation of
the defense or in the trial of any action against its insured or reinsured or in
the preparation or prosecution of an appeal consequent upon such action.
9
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
However, this clause shall not apply where the loss has been incurred due to the
fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
For the purpose of this clause, the word "loss" shall mean any amounts for which
the Company would have been contractually liable to pay had it not been for the
limit of the original policy.
ARTICLE VIII
(Applies only to a reinsurer who does not qualify for full credit as an admitted
reinsurer by any state or any other governmental authority having jurisdiction
over the Company's reserves.)
Funding of Reserves:
If a jurisdiction of the United States will not permit the Company, in the
statements required to be filed with its regulatory authority(ies), to receive
full credit as admitted reinsurance for any Reinsurer's share of obligations,
the Company shall forward to such Reinsurer a statement of the Reinsurer's share
of such obligations. Upon receipt of such statement the Reinsurer shall promptly
apply for, and provide the Company with, a "clean," unconditional and
irrevocable Letter of Credit, in the amount specified in the statement
submitted, with terms and bank acceptable to the regulatory authority(ies)
having jurisdiction over the Company.
"Obligations," as used in this Article shall mean the sum of reserves for
unearned premiums, plus losses paid and allocated loss adjustment expenses paid
by the Company but not yet recovered from the Reinsurer, reserves for reported
losses, allocated loss adjustment expenses and losses incurred but not reported.
The Reinsurer hereby agrees that the Letter of Credit will provide for automatic
extension of the Letter of Credit without amendment for one (1) year from the
date of expiration of said Letter or any future expiration date unless thirty
(30) days prior to any expiration the issuing bank shall notify the Company by
registered mail that the issuing bank elects not to consider the Letter of
Credit renewed for any additional period. An issuing bank, not a "qualified
bank" as defined by Regulation No. 133 promulgated by the Insurance Department
of the State of New York, shall provide sixty (60) days' notice to the Company
prior to any expiration.
Notwithstanding any other provision of this Agreement, the Company or any
successor by operation of law of the Company including, without limitation, any
liquidator, rehabilitator, receiver or conservator
10
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
of the Company may draw upon such credit, without diminution because of the
insolvency of any party hereto, at any time and undertakes to use and apply such
credit for one (1) or more of the following purposes only:
1. To pay the Reinsurer's share or to reimburse the Company for the
Reinsurer's share of any obligations, as stipulated in the statement
submitted by the Company to the Reinsurer, which is due to the
Company and not otherwise paid by the Reinsurer.
2. In the event the Company has received effective notice of
non-renewal of the Letter of Credit and the Reinsurer's liability
remains unliquidated and undischarged thirty (30) days prior to the
expiry date of the Letter of Credit, to withdraw the balance of the
Letter of Credit and place such sums in an interest bearing trust
account to secure the continuing liabilities of the Reinsurer under
this Agreement until a renewal Letter of Credit acceptable to the
regulatory authority(ies) having jurisdiction over the Company, has
been received by the Company. The Company shall provide to the
Reinsurer payment of any interest thereon accruing from such
account.
3. To make refund of any sum which is in excess of the actual amount
required for sub-paragraphs 1. and 2. of this paragraph of this
Article.
At annual intervals or more frequently as determined by the Company, but never
more frequently than quarterly, the Company shall prepare a specific statement,
for the sole purpose of amending the Letter of Credit, of the Reinsurer's share
of any obligations. If the statement shows that the Reinsurer's share of
obligations exceeds the balance of credit as of the statement date, the
Reinsurer shall, within thirty (30) days after receipt of notice of such excess,
secure delivery to the Company of an amendment of the Letter of Credit
increasing the amount of credit by the amount of such difference. If the
statement shows, however, that the Reinsurer's share of obligations is less than
the balance of credit as of the statement date, the Company shall, within thirty
(30) days after receipt of written request from the Reinsurer, release such
excess credit by agreeing to secure an amendment to the Letter of Credit
reducing the amount of credit available by the amount of such excess credit.
The bank shall have no responsibility whatsoever in connection with the
propriety of withdrawals made by the Company or the disposition of funds
withdrawn, except to assure that withdrawals are made only upon the order of
properly authorized representatives of the Company. The Company shall incur no
obligation to the bank in acting upon the credit, other than as appears in the
express terms thereof.
If a Letter of Credit is issued as provided herein, the Reinsurer shall enter
into a Letter of Credit Trust Agreement which shall conform in substance to the
Trust Agreement attached to, and forming part of, this Agreement.
11
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
ARTICLE IX
Currency:
All payments made under this Agreement shall be in currency of the United States
of America.
ARTICLE X
Taxes:
It is understood and agreed that in consideration of the terms under which this
Agreement is issued, the Company undertakes not to claim any deduction with
respect to the premium hereon when making premium tax returns to the appropriate
tax authorities.
ARTICLE XI
Access to Records:
Upon reasonable notice being given to the Company, the Reinsurer or its duly
authorized representatives shall at all reasonable times have free access during
the term of this Agreement and subsequent to its termination, to the books and
records of the Company so far as they relate to the business reinsured under
this Agreement.
ARTICLE XII
Errors and Omissions:
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made, provided such delay, omission or
error is rectified immediately upon discovery. This Article shall not apply to
failure of the Company to comply with any exclusion provided in ARTICLE IV,
Exclusions.
12
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
ARTICLE XIII
Original Conditions:
All amounts ceded hereunder shall be subject to the same gross rates and to the
same clauses, conditions and modifications of the Company's policies, subject to
the limits, terms and conditions of this Agreement.
ARTICLE XIV
Insolvency:
In the event of the insolvency of the Company or the appointment of a
conservator, liquidator, receiver or statutory successor, this reinsurance shall
be payable by the Reinsurer immediately upon demand directly to the Company or
its liquidator, receiver, conservator or statutory successor on the basis of the
liability of the Company without diminution because of the insolvency of the
Company or because the liquidator, receiver, conservator or statutory successor
of the Company has failed to pay all or a portion of any claim.
It is agreed however, that the liquidator, receiver, conservator or statutory
successor of the Company shall give written notice to the Reinsurer of the
pendency of a claim against the insolvent Company indicating the policy or bonds
reinsured which claim would involve a possible liability on the part of the
Reinsurer within a reasonable time after such claim is filed in the conservation
or liquidation proceeding or in the receivership and that during the pendency of
such claim the Reinsurer may investigate such claim and interpose, at its own
expense, in the proceeding where such claim is to be adjudicated any defense or
defenses which it may deem available to the Company or its liquidator, receiver,
conservator or statutory successor. The expense thus incurred by the Reinsurer
shall be chargeable subject to court approval against the insolvent Company as
part of the expense of liquidation to the extent of a proportionate share of the
benefit which may accrue to the Company solely as a result of the defense
undertaken by the Reinsurer.
Where two (2) or more reinsurers are involved in the same claim and a majority
in interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the Company.
The reinsurance under this Agreement shall be payable by the Reinsurer directly
to the Company, or to its liquidator, receiver, conservator or statutory
successor, except as provided by Section 4118(a) of the New York Insurance Law
or except (a) where the agreement specifically provides another payee of
13
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
such reinsurance in the event of the insolvency of the Company and (b) where the
Reinsurer with the consent of the direct insured or insureds and with the prior
approval of the Superintendent of Insurance of the state of New York to the
certificate of assumption on New York risks has assumed such policy obligations
of the Company as direct obligations of the Reinsurer to the payees under such
policies and in substitution for the obligations of the Company to such payees.
ARTICLE XV
Arbitration:
Any dispute or other matter in question between the Company and the Reinsurer
arising out of or relating to the formation, interpretation, performance, or
breach of this Agreement, whether such dispute arises before or after
termination of this Agreement, shall be settled by arbitration. Arbitration
shall be initiated by the delivery of a written notice of demand for arbitration
by one (1) party to the other within a reasonable time after the dispute has
arisen.
If more than one (1) reinsurer is involved in the same dispute, all such
reinsurers shall constitute and act as one (1) party for the purposes of this
Article, provided, however, that nothing herein shall impair the rights of such
reinsurers to assert several, rather than joint, defenses or claims, nor be
construed as changing the liability of the reinsurers under the terms of this
Agreement from several to joint.
Each party shall appoint an individual as arbitrator and the two (2) so
appointed shall then appoint a third arbitrator. If either party refuses or
neglects to appoint an arbitrator within sixty (60) days, the other party may
appoint the second arbitrator. If the two (2) arbitrators do not agree on a
third arbitrator within sixty (60) days of their appointment, each of the
arbitrators shall nominate three (3) individuals. Each arbitrator shall then
decline two (2) of the nominations presented by the other arbitrator. The third
arbitrator shall then be chosen from the remaining two (2) nominations by
drawing lots. The arbitrators shall be active or retired officers of insurance
or reinsurance companies or Lloyd's, London Underwriters; the arbitrators shall
not have a personal or financial interest in the result of the arbitration.
Any arbitration hearings shall be held in the Company's Home Office, unless some
other place is mutually agreed upon by the interacting parties. With regard to
any New York domicile, arbitration hearings shall be held in New York. Each
party shall submit its case to the arbitrators within sixty (60) days of the
selection of the third arbitrator or within such longer period as may be agreed
by the arbitrators. The arbitrators shall not be obliged to follow judicial
formalities or the rules of evidence except to the extent required by governing
law, that is, the state law of the situs of the arbitration as herein agreed;
they shall make their decisions according to the practice of the reinsurance
business. The decision rendered by a majority of the arbitrators shall be made
within sixty (60) days upon the
14
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
close of the arbitration hearing, and the decision shall be final and binding on
both parties. Such decision shall be a condition precedent to any right of legal
action arising out of the arbitrated dispute which either party may have against
the other. Judgment upon the award rendered may be entered in any court having
jurisdiction thereof.
Each party shall pay the fee and expenses of its own arbitrator and one-half of
the fee and expenses of the third arbitrator. All other expenses of the
arbitration shall be equally divided between the parties.
Except as provided above, arbitration shall be based, insofar as applicable,
upon the procedures of the American Arbitration Association.
ARTICLE XVI
(Applicable to those reinsurers, excepting Underwriters at Lloyd's, London and
other reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
Federal Excise Tax:
The Reinsurer has agreed to allow for the purpose of paying the Federal Excise
Tax the applicable percentage of the premium payable hereon (as imposed under
the Internal Revenue Code) to the extent such premium is subject to the Federal
Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurer will
deduct the aforesaid percentage from the return premium payable hereon and the
Company or its agent should take steps to recover the tax from the United States
Government.
ARTICLE XVII
(This Article only applies to reinsurers who are not domiciled in the USA and
are not authorized in any state where authorization is required by insurance
regulatory authorities in order for the Company to take credit for this
reinsurance.)
Service of Suit:
In the event of the failure of the Reinsurer hereon to pay any amount claimed to
be due hereunder, the Reinsurer hereon, at the request of the Company, will
submit to the jurisdiction of a court of competent jurisdiction within the
United States. Nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurer's rights to commence an action in any court
of competent
15
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
jurisdiction in the United States, to remove an action to a United States
District Court, or to seek a transfer of a case to another court as permitted by
the laws of the United States or of any state in the United States.
Service of process in such suit may be made upon Messrs. Mendes and Mount, 750
Seventh Avenue, New York, New York 10019-6829, and in any suit instituted
against it, under this Agreement, the Reinsurer will abide by the final decision
of such court or of any appellate court in the event of an appeal.
The above named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the Company
to give a written undertaking to the Company that they will enter a general
appearance upon the Reinsurer's behalf in the event such a suit shall be
instituted.
Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefor, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the statute, or his successor or
successors in office, as its true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on behalf
of the Company or any beneficiary hereunder arising out of this Agreement, and
hereby designates the above named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE XVIII
Offset:
The Company and the Reinsurer, each at its option, may offset any balance or
balances, whether on account of premiums, claims and losses, loss expenses or
salvages due from one party to the other under this Agreement; provided,
however, that in the event of the insolvency of a party hereto, offsets shall
only be allowed in accordance with applicable statutes and regulations. In case
of insolvency of a party hereto, offsets shall only be allowed in accordance
with Section 7427 of the New York Insurance Law.
ARTICLE XIX
Severability:
16
<PAGE>
REINSURANCE AGREEMENT
Agreement No.: BN970078
If any provision of this Agreement shall be rendered illegal or unenforceable by
the laws, regulations or public policy of any state, such provision shall be
considered void in such state, but this shall not affect the validity or
enforceability of any other provision of this Agreement or the enforceability of
such provision in any other jurisdiction.
ARTICLE XX
Intermediary:
Minet Re North America, Inc., is hereby recognized as the Intermediary
negotiating this Agreement for all business hereunder. All communications
(including but not limited to notices, statements, premiums, return premiums,
commissions, taxes, losses, loss adjustment expenses, salvages and loss
settlements) relating thereto shall be transmitted to the Company or the
Reinsurer through Minet Re North America, Inc., Wadsworth Village - School
Building, 130 Centre Street, 2nd Floor, Danvers, MA 01923. Payments by the
Company to the Intermediary shall be deemed to constitute payment to the
Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed only to
constitute payment to the Company to the extent that such payments are actually
received by the Company.
17
<PAGE>
LETTER OF CREDIT TRUST AGREEMENT
This Agreement between __________, (hereinafter called the "reinsurer"), and
____________ ________________(hereinafter called the "ceding insurer"),
including any successor by operation of law of the ceding insurer including,
without limitation, any liquidator, rehabilitator, receiver or conservator of
such insurer.
WITNESSETH:
The reinsurer has secured delivery to the ceding insurer of a clean,
unconditional and irrevocable Letter of Credit of (issuing bank), No. ________,
issued on ______, 19_____, in the sum of United States $__________, expiring on
__________, 19____ ("the Credit") securing refund and payment to the ceding
insurer of reinsurer's share of any obligations due or which may become due to
the ceding insurer pursuant to the terms of the specific Reinsurance Agreement
No. _______, between the parties which became effective on ____________, 19____.
Now THEREFORE, in consideration of reinsurer having so applied for and
secured delivery of said Letter of Credit, which is hereby acknowledged, the
ceding insurer undertakes to use and apply any amounts which it may draw upon
such Credit, without diminution because of the insolvency of the ceding insurer
or the reinsurer, for the following purposes:
(1) To pay or reimburse the ceding insurer for the reinsurer's share
under the specific reinsurance agreement for any losses and allocated loss
expenses paid by the ceding insurer but not recovered from the reinsurer or for
unearned premiums due to the ceding insurer, if not otherwise paid by the
reinsurer in accordance with the terms of such agreement or;
(2) Where the ceding insurer has received notification of the nonrenewal
of the Letter of Credit and where the reinsurer's entire obligations under the
specific reinsurance agreement remain unliquidated and undischarged ten (10)
days prior to such expiration date, to obtain a cash deposit equal to such
obligations and deposit such amounts in a separate account in the name of the
ceding insurer in any United States bank or trust company, apart from its
general assets in trust for such uses and purposes specified in paragraph (1) of
this Agreement as may remain executory after obtaining the cash deposit and for
any period after such expiration date. Where the amounts held in such separate
account exceed the actual amount required to fund the reinsurer's entire
obligations under the specific reinsurance agreement, the ceding insurer shall
make payment to the reinsurer of the excess amount.
"Obligations," whenever used in this Agreement, shall mean the following:
a) reserves for unearned premiums;
b) losses and allocated loss expenses paid by the ceding insurer, but not
recovered from the reinsurer;
c) reserves for losses reported and outstanding;
d) reserves for losses incurred but not reported; and
e) reserves for allocated loss expenses.
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE
PHYSICAL DAMAGE - REINSURANCE - USA
1. This Reinsurance does not cover any loss or liability accruing to the
Company, directly or indirectly, and whether as Insurer or Reinsurer, from
any Pool of Insurers or Reinsurers formed for the purpose of covering
Atomic or Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph 1. of this
Clause, this Reinsurance does not cover any loss or liability accruing to
the Company, directly or indirectly and whether as Insurer or Reinsurer,
from any insurance against Physical Damage (including business interruption
or consequential loss arising out of such Physical Damage) to:
I. Nuclear reactor power plants including all auxiliary property on the
site, or
II. Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and "critical facilities" as such, or
III. Installations for fabricating complete fuel elements or for processing
substantial quantities of "special nuclear material", and for
reprocessing, salvaging, chemically separating, storing or disposing
of "spent" nuclear fuel or waste materials, or
IV. Installations other than those listed in paragraph 2. III. above using
substantial quantities of radioactive isotopes or other products of
nuclear fission.
3. Without in any way restricting the operations of paragraphs 1. and 2.
hereof, this Reinsurance does not cover any loss or liability by
radioactive contamination accruing to the Company, directly or indirectly,
and whether as Insurer or Reinsurer from any insurance on property which is
on the same site as a nuclear reactor power plant or other nuclear
installation and which normally would be insured therewith except that this
paragraph 3. shall not operate.
(a) where Company does not have knowledge of such nuclear reactor power
plant or nuclear installation, or
(b) where said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused. However on and after 1st January 1960
this sub-paragraph (b) shall only apply provided the said radioactive
contamination exclusion provision has been approved by the
Governmental Authority having jurisdiction thereof.
4. Without in any way restricting the operations of paragraphs 1., 2. and 3.
hereof, this Reinsurance does not cover any loss or liability by
radioactive contamination accruing to the Company, directly or indirectly,
and whether as Insurer or Reinsurer, when such radioactive contamination is
a named hazard specifically insured against.
5. It is understood and agreed that this Clause shall not extend to risks
using radioactive isotopes in any form where the nuclear exposure is not
considered by the Company to be the primary hazard.
6. The term "special nuclear material" shall have the meaning given it in the
Atomic Energy Act of 1954 or by any law amendatory thereof.
7. Company to be sole judge of what constitutes
(a) substantial quantities and
(b) the extent of installation, plant or site.
1
<PAGE>
NOTES:
1. Without in any way restricting the operation of paragraph 1. hereof, it is
understood and agreed that
(a) all policies issued by the Company on or before 31st December 1957
shall be free from the application of the other provisions of this
Clause until expiry date or 31st December 1960 whichever first occurs
whereupon all the provisions of this Clause shall apply.
(b) with respect to any risk located in Canada policies issued by the
Company on or before 31st December 1958 shall be free from the
application of the other provisions of this Clause until expiry date
or 31st December 1960 whichever first occurs whereupon all the
provisions of this Clause shall apply.
2. Wherever used herein the term "Company" shall be understood to mean
"Reassured", "Reinsured" or whatever other term is used in the attached
reinsurance Agreement to designate the reinsured company.
2
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE -
LIABILITY - REINSURANCE - USA
1. This reinsurance does not cover any loss or liability accruing to the
Company as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
2. Without in any way restricting the operation of paragraph (1) of this
Clause it is understood and agreed that for all purposes of this
reinsurance all the original policies of the Company (new, renewal and
replacement) of the classes specified in Clause II of this paragraph (2)
from the time specified in Clause III in this paragraph (2) shall be deemed
to include the following provision (specified as the Limited Exclusion
Provision):
LIMITED EXCLUSION PROVISION.*
I. It is agreed that the policy does not apply under any liability
coverage, to
{injury, sickness, disease, death or destruction
with respect to which an
{bodily injury or property damage
insured under the policy is also an insured under a nuclear energy
liability policy issued by Nuclear Energy Liability Insurance
Association, Mutual Atomic Energy Liability Underwriters or Nuclear
Insurance Association of Canada, or would be an insured under any such
policy but for its termination upon exhaustion of its limit of
liability.
II. Family Automobile Policies (liability only), Special Automobile
Policies (private passenger automobiles, liability only), Farmers
Comprehensive Personal Liability Policies (liability only),
Comprehensive Personal Liability Policies (liability only) or policies
of a similar nature; and the liability portion of combination forms
related to the four classes of policies stated above, such as the
Comprehensive Dwelling Policy and the applicable types of Homeowners
Policies.
III. The inception dates and thereafter of all original policies as
described in II above, whether new, renewal or replacement, being
policies which either
(a) become effective on or after May 1st, 1960, or
(b) become effective before that date and contain
the Limited Exclusion Provision set out above;
provided this paragraph (2) shall not be applicable to Family
Automobile Policies, Special Automobile Policies, or policies or
combination policies of a similar nature, issued by the Company on New
York risks, until 90 days following approval of the Limited Exclusion
Provision by the Governmental Authority having jurisdiction thereof.
3. Except for those classes of policies specified in Clause II of paragraph
(2) and without in any way restricting the operation of paragraph (1) of
this Clause, it is understood and agreed that for all purposes of this
reinsurance the original liability policies of the Company (new, renewal
and replacement) affording the following coverages:
Owners, Landlords and Tenants Liability, Contractual Liability, Elevator
Liability, Owners or Contractors (including railroad) Protective Liability,
Manufacturers and Contractors Liability, Product Liability, Professional
and Malpractice Liability, Storekeepers Liability, Garage Liability,
Automobile Liability (including Massachusetts Motor Vehicle or Garage
Liability)
shall be deemed to include, with respect to such coverages, from the time
specified in Clause V of this paragraph (3), the following provision (specified
as the Broad Exclusion Provision):
1
<PAGE>
BROAD EXCLUSION PROVISION.*
It is agreed that the policy does not apply:
I. Under any Liability Coverage, to
{injury, sickness, disease, death or destruction
{bodily injury or property damage
(a) with respect to which an insured under the policy is also an
insured under a nuclear energy liability policy issued by
Nuclear Energy Liability Insurance Association, Mutual Atomic
Energy Liability Underwriters or Nuclear Insurance Association
of Canada, or would be an insured under any such policy but for
its termination upon exhaustion of its limit of liability; or
(b) resulting from the hazardous properties of nuclear material and
with respect to which (1) any person or organization is required
to maintain financial protection pursuant to the Atomic Energy
Act of 1954, or any law amendatory thereof, or (2) the insured
is, or had this policy not been issued would be, entitled to
indemnity from the United States of America, or any agency
thereof, under any agreement entered into by the United States
of America, or any agency thereof, with any person or
organization.
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision
relating to {immediate medical or surgical relief,
to expenses incurred with respect
{first aid,
to {bodily injury, sickness, disease or death
resulting from the hazardous
{bodily injury
properties of nuclear material and arising out of the operation of a nuclear
facility by any person or organization.
III. Under any Liability Coverage, to {injury, sickness, disease,
death or destruction
{bodily injury or property damage
resulting from the hazardous properties of nuclear material, if
(a) the nuclear material (1) is at any nuclear facility owned by, or
operated by or on behalf of, an insured or (2) has been
discharged or dispersed therefrom;
(b) the nuclear material is contained in spent fuel or waste at any
time possessed, handled, used, processed, stored, transported or
disposed of by or on behalf of an insured; or
(c) The {injury, sickness, disease, death or
destruction
arises out of the
{bodily injury or property damage
furnishing by an insured of services, materials, parts or
equipment in connection with the planning, construction,
maintenance, operation or use of any nuclear facility, but if
such facility is located within the United States of America,
its territories, or possessions or Canada, this exclusion (c)
applies only
to {injury to or destruction of property at such
nuclear facility.
{property damage to such nuclear facility and any
property thereat.
IV. As used in this endorsement:
"hazardous properties" include radioactive, toxic or explosive
properties; "nuclear material" means source material, special nuclear
material or by-product material; "source material", "special nuclear
material", and "by-product material" have the meanings given them in
the Atomic Energy Act of 1954 or in any law amendatory thereof; "spent
fuel" means any fuel element or fuel component, solid or liquid, which
has been used or exposed to radiation in a nuclear reactor; "waste"
means any waste material (1) containing by-product material other than
2
<PAGE>
the tailings or wastes produced by the extraction or concentration of
uranium or thorium from any ore processed primarily for its source
material content and (2) resulting from the operation by any person or
organization of any nuclear facility included within the definition of
nuclear facility included under the first two paragraphs of the
definition of nuclear facility. "Nuclear facility" means
(a) any nuclear reactor;
(b) any equipment or device designed or used for (1) separating the
isotopes of uranium or plutonium, (2) processing or utilizing
spent fuel, or (3) handling, processing or packaging waste;
(c) any equipment or device used for the processing, fabricating or
alloying of special nuclear material if at any time the total
amount of such material in the custody of the insured at the
premises where such equipment or device is located consists of
or contains more than 25 grams of plutonium or uranium 233 or
any combination thereof, or more than 250 grams of uranium 235;
(d) any structure, basin, excavation premises or place prepared or
used for the storage or disposal of waste; and includes the site
on which any of the foregoing is located, all operations
conducted on such site and all premises used for such
operations: "nuclear reactor" means any apparatus designed or
used to sustain nuclear fission in a self-supporting chain
reaction or to contain a critical mass of fissionable material;
{With respect to injury to or
{destruction of property, the
word "injury" or "property damage" includes all
{"destruction" includes all forms of radioactive
forms of contamination of property.
{radioactive contamination
of property.
V. The inception dates and thereafter of all original policies affording
coverages specified in this paragraph (3), whether new, renewal or
replacement, being policies which become effective on or after May
1st, 1960, provided this paragraph (3) shall not be applicable to
(i) Garage and Automobile Policies issued by the Company on New York
risks, or
(ii) statutory liability insurance required under Chapter 90, General
Laws of Massachusetts,
until 90 days following approval of the Broad Exclusion
Provision by the Governmental Authority having jurisdiction
thereof.
4. Without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above are
not applicable to original liability policies of the Company in Canada and
that with respect to such policies this Clause shall be deemed to include
the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian
Underwriters' Association or the Independent Insurance Conference of
Canada.
*NOTE: The words printed in italics in the Limited Exclusion Provision and in
the Broad Exclusion Provision shall apply only in relation to original liability
policies which include a Limited Exclusion Provision or a Broad Exclusion
Provision containing those words.
3
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE -
PHYSICAL DAMAGE - REINSURANCE - CANADA
1. This Agreement does not cover any loss or liability accruing to the Company
directly or indirectly, and whether as Insurer or Reinsurer, from any Pool
of Insurers or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph 1. of this
clause, this Agreement does not cover any loss or liability accruing to the
Company, directly or indirectly, and whether as Insurer or Reinsurer, from
any insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:
(1) Nuclear reactor power plants including all auxiliary property on the
site, or
(2) Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and critical facilities as such, or
(3) Installations for fabricating complete fuel elements or for processing
substantial quantities of prescribed substances, and for reprocessing,
salvaging, chemically separating, storing or disposing of spent
nuclear fuel or waste materials, or
(4) Installations other than those listed in (3) above using substantial
quantities of radioactive isotopes or other products of nuclear
fission.
3. Without in any way restricting the operation of paragraphs 1. and 2. of
this clause, this Agreement does not cover any loss or liability by
radioactive contamination accruing to the Company directly or indirectly,
and whether as Insurer or Reinsurer, from any insurance on property which
is on the same site as a nuclear reactor power plant or other nuclear
installation and which normally would be insured therewith, except that
this paragraph 3. shall not operate.
(a) where the Company does not have knowledge of such nuclear reactor power
plant or nuclear installation, or
(b) where the said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused.
4. Without in any way restricting the operation of paragraphs 1., 2. and 3. of
this clause, this Agreement does not cover any loss or liability by
radioactive contamination accruing to the Company, directly or indirectly,
and whether as Insurer or Reinsurer, when such radioactive contamination is
a named hazard specifically insured against.
5. This clause shall not extend to risks using radioactive isotopes in any
form where the nuclear exposure is not considered by the Company to be the
primary hazard.
6. The term "prescribed substances" shall have the meaning given to it by the
Atomic Energy Control Act R.S.C. 1974 or by any law amendatory thereof.
7. Company to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
8. Without in any way restricting the operation of paragraphs 1., 2., 3. and 4
of this clause, this Agreement does not cover any loss or liability
accruing to the Company, directly or indirectly, and whether as Insurer or
Reinsurer caused by any nuclear incident as defined in The Nuclear
Liability Act, nuclear explosion or contamination by radioactive material.
1
<PAGE>
NOTE: Without in any way restricting the operation of paragraph 1., 2., 3. and
4. of this clause, paragraph 8. of this clause shall only apply to all original
contracts of the Company whether new, renewal or replacement which become
effective on or after December 31, 1984.
2
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE -
LIABILITY REINSURANCE - CANADA
1. This Agreement does not cover any loss or liability accruing to the
Company as a member of, or subscriber to, any association of insurers
or reinsurers formed for the purpose of covering nuclear energy risks
or as a direct or indirect reinsurer of any such member, subscriber or
association.
2. Without in any way restricting the operation of paragraph 1 of this
Clause, it is agreed that for all purposes of this Agreement all the
original liability contracts of the Company whether new, renewal or
replacement, of the following classes, namely,
Personal Liability,
Farmers Liability,
Storekeepers Liability,
which become effective on or after 31st December 1984, shall be deemed
to include, from their inception dates and thereafter, the following
provision:
LIMITED EXCLUSION PROVISION
The Agreement does not apply to bodily injury or property damage with
respect to which the Insured is also insured under a contract of
nuclear energy liability insurance (whether the insured is unnamed in
such contract and whether or not it is legally enforceable by the
Insured) issued by the Nuclear Insurance Association of Canada or any
other group or pool of insurers or would be an Insured under any such
policy but for its termination upon exhaustion of its limits of
liability.
With respect to property, loss of use of such property shall be deemed
to be property damage.
3. Without in any way restricting the operation of paragraph 1 of this
Clause it is agreed that for all purposes of this Agreement all the
original liability contracts of the Company, whether new, renewal or
replacement, of any class whatsoever (other than Personal Liability,
Farmers Liability, Storekeepers Liability or Automobile Liability
contracts), which become effective on or after 31st December 1984,
shall be deemed to include from their inception dates and thereafter,
the following provision:
BROAD EXCLUSION PROVISION
It is agreed that this Policy does not apply:
(a) to liability imposed by or arising under The Nuclear Liability
Act, nor
(b) to bodily injury or property damage with respect to which an
Insured under this policy is also insured under a contract of
nuclear energy liability insurance (whether the Insured is
unnamed in such contract and whether or not it is legally
enforceable by the Insured) issued by the Nuclear Insurance
Association of Canada or any other insurer or group or pool of
insurers or would be an Insured under any such policy but for
its termination upon exhaustion of its limit of liability; nor
(c) to bodily injury or property damage resulting directly or
indirectly from the nuclear energy hazard arising from:
(i) the ownership, maintenance, operation or use of a nuclear
facility by or on behalf of an Insured;
(ii) the furnishing by an Insured of services, materials, parts
or equipment in connection with the planning,
construction, maintenance, operation or use of any nuclear
facility; and
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(iii) the possession, consumption, use, handling, disposal or
transportation of fissionable substances, or of other
radioactive material (except radioactive isotopes, away
from a nuclear facility, which have reached the final
stage of fabrication so as to be usable for any
scientific, medical, agricultural, commercial or
industrial purpose) used, distributed, handled or sold by
an Insured.
As used in this Endorsement:
1. The term "nuclear energy hazard" means the radioactive, toxic,
explosive or other hazardous properties of radioactive material;
2. The term "radioactive material" means uranium, thorium, plutonium,
neptunium, their respective derivatives and compounds, radioactive
isotopes of other elements and any other substances that the Atomic
Energy Control Board may, by regulation, designate as being prescribed
substances capable of releasing atomic energy, or as being requisite
for the production, use or application of atomic energy;
3. The term "nuclear facility" means:
(a) any apparatus designed or used to sustain nuclear fission in a
self-supporting chain reaction or to contain a critical mass of
plutonium, thorium and uranium or any one or more of them;
(b) any equipment or device designed or used for (i) separating the
isotopes of plutonium, thorium and uranium or any one or more of
them, (ii) processing or utilizing spent fuel, or (iii)
handling, processing or packaging waste;
(c) any equipment or device used for the processing, fabricating or
alloying of plutonium, thorium or uranium enriched in the
isotope uranium 233 or in the isotope uranium 235, or any one or
more of them if at any time the total amount of such material in
the custody of the Insured at the premises where such equipment
or device is located consists of or contains more than 25 grams
of plutonium or uranium 233 or any combination thereof, or more
than 250 grams of uranium 235;
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste radioactive material;
and includes the site on which any of the foregoing is located,
together with all operations conducted thereon and all premises used
for such operations.
4. The term "fissionable substance" means any prescribed substance that
is, or from which can be obtained, a substance capable of releasing
atomic energy by nuclear fission.
5. With respect to property, loss of use of such property shall be deemed
to be property damage.
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POOLS, ASSOCIATIONS, SYNDICATES EXCLUSION CLAUSE
Section A
Excluding:
(a) All business derived directly or indirectly from any Pool,
Association or Syndicate, which maintains its own
reinsurance facilities.
(b) Any Pool or Scheme (whether voluntary or mandatory) formed
after March 1, 1968 for the purpose of insuring property
whether on a countrywide basis or in respect of designated
areas. This exclusion shall not apply to so-called
Automobile Insurance Plans or other Pools formed to provide
coverage for Automobile Physical Damage.
Section B
It is agreed that business written by the Company for the same
perils, which is known at the time to be insured by, or in excess of underlying
amounts placed in the following Pools, Associations or Syndicates, whether by
way of insurance or reinsurance is excluded hereunder:
Industrial Risk Insurers (successor to Factory Insurance Association
and Oil Insurance Association), Associated Factory Mutuals, Improved
Risk Mutuals.
Any Pool, Association or Syndicate formed for the purpose of writing
Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs.
United States Aircraft Insurance Group, Canadian Aircraft Insurance
Group, Associated Aviation Underwriters, American Aviation
Underwriters.
Section B does not apply:
(a) Where the Total Insured Value over all interests of the risk
in question is less than $250,000,000.
(b) To interests traditionally underwritten as Inland Marine or
Stock and/or Contents written on a Blanket basis.
(c) To Contingent Business Interruption, except when the Company
is aware that the key location is known at the time to be
insured in any Pool, Association or Syndicate named above,
other than as provided under Section B(a).
(d) To Risks as follows: Offices, Hotels, Apartments, Hospitals,
Educational Establishments, Public Utilities (other than
Railroad Schedules) and Builders Risks on the classes of
risks specified in this subsection (d) only.
NOTES: Wherever used herein the term:
"Company" shall be understood to mean "Reassured", "Reinsured" or
whatever other term is used in the attached reinsurance Agreement to
designate the reinsured company.
"Agreement" shall be understood to mean "Contract", "Policy" or
whatever other term is used to designate the attached reinsurance
document.
THIRD AMENDMENT AND WAIVER
DATED AS OF MARCH 31, 1997
TO LOAN AGREEMENT
DATED AS OF MARCH 4, 1996
This Third Amendment and Waiver Agreement (the "Third Amendment") is
dated as of March 31, 1997 and is by and among HOME STATE HOLDINGS, INC.
("Holdings"), a Delaware corporation, having its principal place of business at
3 South Revmont Drive, Shrewsbury, New Jersey 07702, TOWER HILL, INC. ("Tower"),
a Delaware corporation, having its principal place of business at 3 South
Revmont Drive, Shrewsbury, New Jersey 07702, (Holdings and Tower collectively,
the "Credit Parties"), THE CHASE MANHATTAN BANK ("Chase"), (formerly known as
Chemical Bank) a New York banking corporation, having an office at 395 N.
Service Road, Melville, New York 11747, EUROPEAN AMERICAN BANK ("EAB"), a New
York banking corporation, having an office at 335 Madison Avenue, New York, New
York 10017 (Chase and EAB, individually, a "Bank" and collectively, the "Banks")
and THE CHASE MANHATTAN BANK ("Agent"), a New York banking corporation having an
office at 395 N. Service Road, Melville, New York 11747 hereby agree as follows:
W I T N E S S E T H :
WHEREAS, the Banks, the Agent and the Credit Parties entered into a
Loan Agreement dated as of March 4, 1996 and amended as of August 14, 1996 and
October 4, 1996 (as amended, the "Agreement") pursuant to which Agreement the
Banks have each made certain revolving credit facilities available to the Credit
Parties upon the terms and conditions of the Agreement; and
WHEREAS, the Credit Parties have requested that the Agent and the Banks
(i) waive certain existing Events of Default, (ii) modify certain provisions of
the Agreement and (iii) consent to certain transactions and the Agent and the
Banks have agreed to same provided, among other things, the Credit Parties enter
into this Third Amendment.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the Agent, the Banks and the Credit
Parties agree as follows:
1. Definitions. As used in this Third Amendment, capitalized terms
unless otherwise defined, shall have the meanings given to them in the
Agreement.
2. Representations and Warranties. As an inducement for the Banks to
enter into this Third Amendment, each of the Credit Parties represent and
warrant as follows:
That with respect to the Agreement and the Loan Documents:
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(i) There are no defenses, offsets or counterclaims to the
respective obligations of the Credit Parties under the Agreement, the
Loans, the Notes or any of the other Loan Documents, and if any such
defenses, offsets or counterclaims exist without the knowledge of one
or more of the Credit Parties, the same are hereby waived.
(ii) Except as disclosed in Schedule A annexed hereto, all of
the representations and warranties made by the Credit Parties in the
Agreement and the other Loan Documents (except for those
representations and warranties that are affected by the events
described in, or which are subject to the waivers granted by, Section
10 hereof) are true and correct in all material respects as of the date
of this Third Amendment provided that the representations and
warranties set forth in Section 4.01(f) of the Agreement shall relate
to the consolidated financial statements of Holdings and its
Consolidated Affiliates for the fiscal year ended December 31, 1995 and
for the nine month period ended September 30, 1996.
(iii) Upon the execution of this Third Amendment and the grant
of the waivers contained herein, and upon the receipt of any required
consents and/or waivers of or from the Purchasers of the Preferred
Stock, no Default or Event of Default is, or will be, existing under
the Agreement (as amended by this Third Amendment) or the other Loan
Documents or will result from the execution of this Third Amendment and
the consummation of the transaction contemplated thereby.
(iv) The continued performance by the Credit Parties of the
Agreement (as amended by this Third Amendment), including without
limitation the repayment of the Notes in accordance with this Third
Amendment and the guarantee of the obligations of Holdings by Tower and
the guarantee of the obligations of Tower by Holdings will not conflict
with, result in a breach of, constitute a default under, or result in
the occurrence of Redemption Event or Put Event under the Securities
Purchase Agreement or a Repurchase Event under the Subordinated Note
Agreement.
(v) The outstanding principal balance of (i) Chase's Revolving
Credit Note (Holdings) is $2,666,800.00, (ii) Chase's Revolving Credit
Note (Tower) is $-0-, (iii) EAB's Revolving Credit Note (Holdings) is
$1,333,200.00 and (iv) EAB's Revolving Credit Note (Tower) is $-0-.
(vi) Interest on all of the Notes has been paid through
March 31, 1997.
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3. Amendment. The Agreement is hereby amended as follows:
(a) The following defined terms shall be added to Section 1.01
of the Agreement:
"Holdings Prepayment Event" means the occurrence of one or
more of the following events: (i) any Sale of Assets, or (ii) the Private
Placement.
"Income Tax Refund" means the federal income tax refund due to
Holdings arising out of the net loss incurred by Holdings for the fiscal year
ended December 31, 1996, net of amounts due to Insurance Subsidiaries under the
Holdings tax sharing agreement with its Subsidiaries.
"Private Placement" means any transaction pursuant to which a
Person makes an Investment in Holdings, other than Investments made pursuant to
the exercise of stock options pursuant to the Holdings' Stock Incentive Plan
described in Schedule 4.01(a).
"Sale of Assets" means, with respect to Holdings and one or
more of its Subsidiaries, the sale, transfer or other disposition by Holdings
and/or one or more of its Subsidiaries, whether by a sale of assets, a sale of
stock, a merger, a consolidation or other similar transaction described in
Section 5.02(c) or (d) of this Agreement, of all or any part of its interest in
any such Subsidiary, provided that a sale of premium finance receivables by
Tower shall be deemed to be described herein only if it is a sale of all or
substantially all of such receivables, and provided further that a sale by Tower
of premium finance receivables to an Insurance Affiliate to satisfy liabilities
of Tower to such Insurance Affiliate related to such receivables shall not be
deemed to be a Sale of Assets.
(b) Section 1.01 of the Agreement, and certain defined terms therein
are hereby amended as follows:
(i) "Chemical's Holdings Commitment" shall be amended to read
in its entirety as follows:
"Chase's Holdings Commitment" means (i) from the date of this
Agreement to and until February 4, 1997 Three Million Three Hundred Thirty Three
Thousand Five Hundred ($3,333,500.00) Dollars, and (ii) from February 5, 1997,
through and until the Holdings Maturity Date, Two Million Six Hundred Sixty Six
Thousand Eight Hundred ($2,666,800.00) Dollars as reduced by the mandatory
payments required by Section 2.07 of this Agreement.
(ii) "Chemical's Tower Commitment" shall be amended to
read in its entirety as follows:
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<PAGE>
"Chase's Tower Commitment" means (i) from the date of this
Agreement to and until February 1, 1997, Eight Million Six Hundred Sixty Seven
Thousand One Hundred ($8,667,100.00) Dollars, or (ii) from the date specified in
clause (i) until the Tower Maturity Date, Two Hundred Fifty Thousand Forty and
83/100 ($250,040.83) Dollars, as reduced by the mandatory payments required by
Section 2.07 of this Agreement, and in the case of each of one (i) and (ii) such
Commitment, combined with the EAB Tower Commitment shall be, subject to the
Borrowing Base.
(iii) "EAB's Holdings Commitment" shall be amended to read in
its entirety as follows:
"EAB's Holdings Commitment" means (i) from the date of this
Agreement to and until February 4, 1997, One Million Six Hundred Sixty Six
Thousand Five Hundred ($1,666,500.00) Dollars, and (ii) from February 5, 1997
through and until the Holdings Maturity Date, One Million Three Hundred Thirty
Three Thousand Two Hundred ($1,333,200.00) Dollars as reduced by the mandatory
payments required by Section 2.07 of this Agreement.
(iv) "EAB's Tower Commitment" shall be amended to read in its
entirety as follows:
"EAB's Tower Commitment" means (i) from the date of this
Agreement to and until February 1, 1997, Four Million Three Hundred Thirty Two
Thousand Nine Hundred ($4,332,900.00) Dollars, or (ii) from the date specified
in clause (i) until the Tower Maturity Date, One Hundred Twenty Four Thousand
Nine Hundred Fifty Nine and 17/100 ($124,959.17) Dollars, as reduced by the
mandatory payments required by Section 2.07 of this Agreement and in the case of
each of one (i) and (ii) such Commitment, combined with the Chase Tower
Commitment, shall be subject to the Borrowing Base.
(v) "Field Audit" shall be amended to read in its entirety as
follows:
"Field Audit" means an audit of (i) the premium finance
receivables of Tower, and its books and records relating thereto, including the
PPP Receivables and PPP's books and records relating thereto (or any successor
to PPP) or (ii) the books and records of Holdings, in either case conducted by
the Agent or its designated representatives.
(vi) "Holdings Maturity Date" shall be amended to read in its
entirety as follows:
"Holdings Maturity Date" means February 28, 1998.
(vii) "Tower Maturity Date shall be amended to read in its
entirety as follows:
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"Tower Maturity Date" means March 31, 1997.
(c) Section 2.01(a) and Section 2.01(b) of the Agreement shall be
amended to read in their entirety as follows:
"SECTION 2.01. The Revolving Credit Loans. (a) The Banks
agree, severally but not jointly, on the date of this Agreement, and on the
terms and conditions and in reliance upon the representations and warranties
hereinafter set forth in this Agreement, to lend to Holdings prior to the
Holdings Maturity Date, such amounts as Holdings may request from time to time
(individually, a "Revolving Credit Loan (Holdings)" or collectively, the
"Revolving Credit Loans (Holdings)"), which amounts, once borrowed and repaid
may not be reborrowed, provided, however, that the aggregate amount of such
Revolving Credit Loans (Holdings) outstanding at any one time shall not exceed
(i) in the case of both Banks, (x) from the date of this Agreement until
February 4, 1997, Five Million ($5,000,000.00) Dollars in the aggregate, or (y)
from February 5, 1997 until the Holdings Maturity Date, Four Million
($4,000,000.00) Dollars in the aggregate, as reduced by the mandatory payments
required by Section 2.07 of this Agreement and (ii) in the case of Chase,
Chase's Holdings Commitment or, in the case of EAB, EAB's Holdings Commitment.
(b) The Banks agree, severally but not jointly, on the date of
this Agreement, on the terms and conditions and in reliance upon the
representations and warranties hereinafter set forth in this Agreement, to lend
to Tower prior to the Tower Maturity Date, such amounts as Tower may request
from time to time (individually, a "Revolving Credit Loan (Tower)" or
collectively, the "Revolving Credit Loans (Tower)", which amounts once borrowed
and repaid may not be reborrowed, provided, however, that the aggregate amount
of such Revolving Credit Loans (Tower) outstanding at any one time shall not
exceed (i) in the case of both Banks, the lesser of (x) (1) from the date of
this Agreement until February 1, 1997, Thirteen Million ($13,000,000.00) Dollars
in the aggregate, or (2) from the date specified in clause (1) until the Tower
Maturity Date, Three Hundred Seventy Five Thousand ($375,000.00) Dollars in the
aggregate, as reduced by the mandatory payments required by Section 2.07 hereof
or (y) the Borrowing Base and (ii) in the case of Chase, Chase's Tower
Commitment or, in the case of EAB, EAB's Tower Commitment."
(d) Section 2.03 of the Agreement shall be amended to read in
its entirety as follows:
"SECTION 2.03. Payment of Interest on the Notes. (a) In the
case of an Alternate Base Rate Loan, interest shall be payable at a rate per
annum (computed on the basis of the actual number of days elapsed over a year of
360 days) equal at all times to the Alternate Base Rate plus (i) in the case of
Holdings, 200 basis points and (ii) in the case of Tower, 100 basis points. Such
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<PAGE>
interest shall be payable on each Interest Payment Date, commencing with the
first Interest Payment Date after the date of such Alternate Base Rate Loan, on
each Interest Determination Date and on the Maturity Date. Any change in the
rate of interest on a Revolving Credit Note due to a change in the Alternate
Base Rate shall take effect as of the date of such change in the Alternate Base
Rate.
(b) In the case of a Eurodollar Loan, interest shall be
payable at a rate per annum (computed on the basis of the actual number of days
elapsed over a year of 360 days) equal to the Adjusted LIBOR Rate plus, in the
case of Holdings, 400 basis points and (ii) in the case of Tower, 300 basis
points. Such interest shall be payable on each Interest Payment Date, commencing
with the first Interest Payment Date after the date of such Eurodollar Loan, on
each Interest Determination Date and on the Maturity Date. In the event
Eurodollar Loans are available, the Agent shall determine the rate of interest
applicable to each requested Eurodollar Loan for each Interest Period at 11:00
a.m., New York City time, or as soon as practicable thereafter, two (2) Business
Days prior to the commencement of such Interest Period and shall notify the
appropriate Credit Party of the rate of interest so determined. Such
determination shall be conclusive absent manifest error.
(c) All interest shall be paid to the Agent, for the pro
rata distribution to the Banks."
(e) Section 2.05 of the Agreement shall be amended to read in
its entirety as follows:
"SECTION 2.05. Fees. (a) The Credit Parties agree to pay (i)
to the Agent for its own account, on the date of this Agreement and on each
anniversary thereof, an annual agent's fee of $15,000.00; (ii) a one time
facility fee of $40,000.00 to Chemical and $11,000.00 to EAB; (iii) to the
Agent, for the pro rata distribution to the Banks, from the date of this
Agreement until December 31, 1996, on the last Business Day of each quarter a
commitment fee computed at the rate of one eighth of one (1/8%) percent per
annum (computed on the basis of the actual number of days elapsed over 360 days)
on the average daily unused amount of the Holdings Commitment or the Tower
Commitment, as the case may be, such commitment fee being payable for the
calendar quarter, or part thereof, preceding the payment date, including the
calendar quarter ended December 31, 1996; and (iv) to the Agent, the costs and
expenses incurred in connection with Field Audits, provided that (x) the costs
and expenses for the initial Field Audit shall not exceed $15,000.00 and (y) the
Credit Parties shall not be required to pay for more than one (1) Field Audit
during each calendar year unless an Event of Default occurs."
(f) Section 2.07(b) of the Agreement shall be amended to read
in its entirety as follows:
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<PAGE>
"(b) Mandatory. (i) Upon the occurrence of a Borrowing Base
Deficiency, Tower shall, without demand by the Agent or the Banks, prepay so
much of the Revolving Credit Loans (Tower) as shall equal the Borrowing Base
Deficiency. Any such mandatory prepayment required under this Section 2.07(b)(i)
shall be applied first to Tower's Alternate Base Rate Loans outstanding and then
to Tower's Eurodollar Loans outstanding. In the event of any such mandatory
prepayment of a Eurodollar Loan, such prepayment shall be held by the Agent as
cash collateral for the Revolving Credit Loans (Tower), and shall earn interest
at a rate then generally paid by the Agent on cash collateral accounts, and
shall be applied to prepay the Eurodollar Loan on the last day of such Loan's
Interest Period, or upon an Event of Default, if earlier.
(ii) Holdings shall make a mandatory payment of the principal
amount of the Revolving Credit Notes (Holdings) at the following times and in
the following amounts:
(a) a prepayment in the principal amount of $4,000,000.00, or
such lesser amount as is equal to the net proceeds of such Holdings Prepayment
Event, on the day that the first Holdings Prepayment Event occurs; and
(b) if such first Holdings Prepayment Event does not result in
a prepayment of $4,000,000.00, a prepayment in the principal amount equal to the
difference between (x) $4,000,000.00 and (y) the prepayment made upon the first
Holdings Prepayment Event, such prepayment to be made on the day that the second
Holdings Prepayment Event occurs; and
(c) a prepayment in a principal amount equal to the lesser of
(i) the outstanding principal amount of the Notes or (ii) the greater of (x) the
amount of the Income Tax Refund or (y) $2,000,000.00, such prepayment to be due
on the day of receipt of the Income Tax Refund.
Any mandatory payment made pursuant to any provision of this
clause (ii) shall be applied to the payments required by clause (iii) in the
inverse order of maturity.
(iii) In addition to the mandatory payments required by clause
(ii) above, Holdings shall make monthly prepayments of principal, each in the
principal amount of $100,000.00, beginning on the last Business Day of April,
1997 and continuing on the last Business Day of each month thereafter, until the
Holdings Maturity Date, when the then outstanding principal amount of all
Revolving Credit Loans (Holdings) shall be paid in full.
(iv) Any mandatory payment required under this Section 2.07(b)
shall be applied first to Holdings' Alternate Base Rate Loans outstanding and
then to Holding's Eurodollar Loans outstanding. If there are no Revolving Credit
Loans (Holdings)
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<PAGE>
then outstanding, any mandatory payment required under this Section 2.07 shall
be applied first to Tower's Alternate Base Rate Loans outstanding and then to
Tower's Eurodollar Loans outstanding. Any mandatory payment of a Eurodollar Loan
made pursuant to this Section 2.07(b) shall be subject to the provisions of
Section 2.07 of this Agreement.
(v) All mandatory prepayments shall be applied pro rata
between the Banks.
(vi) All Revolving Credit Loans (Holdings) shall be paid in
full on the Holdings Maturity Date and all Revolving Credit Loans (Tower) shall
be paid in full on the Tower Maturity Date."
(g) Section 5.01 of the Agreement shall be amended by adding the
following new subsections (r) and (s):
"(r) Cooperate with the Agent and take all proper and
necessary steps to provide the Agent, on behalf of the Banks, with a first
priority security interest in the Income Tax Refund and cooperate with the Agent
and take all proper and necessary steps to perfect the Agent's lien on the
Income Tax Refund pursuant to the Federal Assignment of Claims Act.
(s) Enter into and deliver to the Agent and the Banks, not
later than June 15, 1997, a definitive executed sale agreement for the sale of
Pinnacle Insurance Company, together with evidence satisfactory to the Agent and
the Banks that all material conditions to the consummation of such sale have
been satisfied or waived (other than required regulatory approvals and usual and
customary closing conditions), and such agreement shall not be terminated or
cancelled and shall remain in full force and effect until the closing of such
sale."
(h) Section 5.02 (k) of the Agreement shall be amended to read in its
entirety as follows:
"(k) Losses Incur a net consolidated loss in any amount
for any fiscal quarter or for any fiscal year."
(i) Section 5.03(a) of the Agreement shall be amended to read in its
entirety as follows:
"(a) Minimum Consolidated Net Worth (Holdings).
Holdings will maintain a Consolidated Net Worth at all times of not
less than $28,500,000.00.
(j) Section 5.03(b) of the Agreement shall be amended to read
in its entirely as follows:
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<PAGE>
"(b) Consolidated Leverage Ratio. Holdings will
maintain, at the end of each fiscal quarter, a Consolidated
Leverage Ratio of not greater than 0.55 to 1.00."
(k) Section 5.03(c) of the Agreement shall be amended to read in its
entirety as follows:
"(c) Consolidated Premium to Surplus Ratio. Holdings will
maintain, at the end of each fiscal quarter, a Consolidated Premium to Surplus
Ratio of not greater than 3.00 to 1.00, provided that at the end of the fiscal
year ending December 31, 1997, its Consolidated Premium to Surplus Ratio shall
be not greater than 2.00 to 1.00 and further provided that if at any time the
provisions of the Securities Purchase Agreement or the Other Transaction
Documents (as they may be amended or modified from time to time) require a
Consolidated Premium to Surplus Ratio other than 2.00 to 1.00, such other ratio
(but not greater than 3.00 to 1.00) shall be required to be met by Holdings
under this Section 5.03(c) for the same time periods as required by the
Securities Purchase Agreement or other Transaction Documents."
(l) Section 5.03(h) of the Agreement shall be amended to read in its
entirety as follows:
"(h) Dividends Ratio. Holdings will maintain, at the end of each
fiscal quarter, a Dividend Ratio of not less than 1.00 to 1.00, provided however
that for the fiscal year ending December 31, 1997, the Dividend Ratio shall not
be calculated for the most recent four (4) fiscal quarters but on a cumulative
basis for the number of fiscal quarters during 1997 that are ended to the date
of calculation."
(m) Section 6.01(m) of the Agreement shall be amended to read in its
entirety as follows:
"(m) Holdings, any Insurance Subsidiary or Home Mutual
shall have its rating, as determined by A.M. Best, reduced below
"C-"; or"
4. Availability; Repayment. Notwithstanding anything in the Agreement
to the contrary, the Credit Parties agree that as of February 1, 1997 and until
the Tower Maturity Date and the Holdings Maturity Date, respectively, there is
no availability under either the Tower Commitment or the Holdings Commitment.
Upon repayment of the Revolving Credit Loans (Tower) in full and termination of
the Tower Commitment, the Agent and the Banks agree to release their security
interest in the Collateral.
5. Eurodollar Loans. Notwithstanding anything in the Agreement to the
contrary, the Credit Parties, the Agent and the Banks agree that as of the date
of this Third Amendment, Eurodollar Loans shall no longer be available.
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6. Sale of Assets; Sale of Tower Premium Finance Receivables.
Notwithstanding the provisions of Section 5.02(c) or 5.02(d) of the Agreement
(i) a Sale of Assets by Holdings and/or one or more of its Subsidiaries shall be
permitted if (i) it results in a Holdings Prepayment Event and (ii) Holdings
makes the associated mandatory prepayments required by Section 2.07(b) of this
Agreement and (ii) a sale of premium finance receivables by Tower (other than a
sale constituting a Sale of Assets) shall be permitted.
7. Effectiveness. This Third Amendment shall become effective upon the
occurrence of the following events and the receipt and satisfactory review by
the Agent and the Banks of the following documents:
(a) The Third Amendment, duly executed by all parties
thereto;
(b) Endorsement No. 2 to each of the Notes;
(c) Certified (as of the date of this Third Amendment) copies
of the resolutions of the boards of directors of each of the Credit Parties,
approving and authorizing this Third Amendment and the transactions contemplated
thereby;
(d) An opinion of Dorsey & Whitney, LLP, counsel to the Credit
Parties as to certain matters relating to this Third Amendment;
(e) A certification from Coopers and Lybrand that Holdings has
a valid claim for the Income Tax Refund in the approximate amount of
$6,000,000.00 and that Holdings has taken all necessary and desirable steps,
including but without limitation the filing therefor, to collect the Income Tax
Refund.
(f) A Security Agreement from Holdings, granting to the Agent,
on behalf of the Banks, a first priority security interest in the Income Tax
Refund, together with UCC-1 financing statements related thereto.
(g) Executed copies of waivers of any defaults, repurchase
events, Redemption Events or any other similar events, if any, arising under the
Subordinated Note Agreement, the Subordinated Notes or the Securities Purchase
Agreement and the Other Transaction Documents, such waivers to be in effect and
in form and substance satisfactory to the Agent and the Banks.
(h) The following statements shall be true and the Agent and
the Banks shall have received a certificate signed by an Authorized Official of
each of the Credit Parties dated the date of this Third Amendment, stating that:
- 10 -
<PAGE>
(i) Except as disclosed in Schedule A annexed thereto, the
representations and warranties contained in Article IV of the Agreement and in
the other Loan Documents with respect to such Credit Party (except for those
representations and warranties that are affected by the events described in, or
which are subject to the waivers granted by Section 10 of this Third Amendment)
are correct in all material respects on and as of such date provided that the
representations and warranties set forth in Section 4.01(f) if the Agreement
shall relate to the consolidated financial statements of Holdings and its
Consolidated Affiliates for the fiscal year ended December 31, 1995 and for the
nine month period ended September 30, 1996.
(ii) Except for any Default or Event of Default waived
hereby, no Default or Event of Default has occurred and is continuing; and
(iii) Since December 31, 1995, except for any events which
are the subject of the waivers provided herein, and except as disclosed in
Schedule A annexed hereto, no Material Adverse Change has occurred in either of
the Credit Parties or any of their Affiliates or Subsidiaries.
(i) An amendment fee of $85,000.00 will have been paid to the
Agent, for the pro rata distribution to the Banks, and all fees and expenses of
counsel to the Agent and the Banks will have been paid.
8. Reaffirmation by Holdings. By its execution of this Third Amendment,
Holdings reaffirms its guarantee of the reimbursement obligations of New York
Merchant Bakers Insurance Company to EAB under EAB's Letter of Credit No.
S0213865 in the amount of $120,000.00 originally issued on August 12, 1994 with
a current expiry date of August 12, 1997 to Security Re of Farmington,
Connecticutt.
9. Ratification and Reaffirmation of Agreement. Except as hereby
amended, the Agreement and all other Loan Documents executed in connection
therewith, are, in all respected ratified and confirmed.
10. Ratification and Reaffirmation by Guarantors. By their execution of
the Third Amendment, each of the Guarantors expressly ratify and reaffirm their
Guaranties.
11. Waivers. In consideration of the Credit Parties entering into this
Third Amendment, and provided no Default or Event of Default (other than as
consented to herein) has occurred or results therefrom, the Agent and the Banks
waive any Defaults or Events of Default resulting from the following:
- 11 -
<PAGE>
(i) The breach of Section 2.07(b) of the Agreement resulting
from the failure of Holdings to repay $4,000,000.00 of Revolving Credit Loans
(Holdings) on February 1, 1997.
(ii) The breach of Section 5.02(k) of the Agreement resulting
from the incurring of a consolidated net loss of not more than $20,500,000.00
for the fiscal year ended December 31, 1996.
(iii) The breach of Section 5.03(a), (b), (d) and (h) of the
Agreement resulting from the incurring of a consolidated net loss of not more
than $20,500,000.00 for the fiscal year ended December 31, 1996.
(iv) Events of Default described in Sections 6.01(a), (c),
(d), (j), or (k) resulting from any of the events described in clauses (i), (ii)
or (iii) above.
The granting of the waivers hereunder shall be limited specifically to
the matters set forth above and does not constitute directly or by implication
an amendment or waiver of any other provisions of the Agreement or any other
Default or Event of Default which may occur or may have occurred under the
Agreement.
12. Release of Agent and Banks. In consideration of the Agent and the
Banks entering into this Third Amendment and Waiver Agreement, each of the
Credit Parties hereby waives and releases the Agent and each of the Banks from
any and all claims that they, their successors or assigns, have or may have
against the Agent and/or any of the Banks including, but not limited to, those
which in any way relate to the Loan Agreement, as amended, including as amended
by this Third Amendment and the transactions contemplated thereunder. Each of
the Credit Parties, jointly and severally, agree that they shall protect,
indemnify, defend and save harmless the Agent and each of the Banks from and
against any and all claims, actions, suits and other legal proceedings and
liabilities, obligations, losses, damages, penalties, judgments, costs, expenses
or disbursements which the Agent or either of the Banks may, at any time,
sustain or incur by reason of or in consequence of or arising out of the
execution and delivery of this Third Amendment and Waiver Agreement and the
consummation of the transactions contemplated hereby.
- 12 -
<PAGE>
13. Execution in Counterparts. This Third Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this Third
Amendment as of the year and date first above written.
HOME STATE HOLDINGS, INC.
By /s/
----------------------------------
Eric A. Reehl
Assistant Secretary
TOWER HILL, INC.
By /s/
----------------------------------
Eric A. Reehl
Chief Operating Officer
THE CHASE MANHATTAN BANK
By /s/
----------------------------------
James M. Diver
Vice President
EUROPEAN AMERICAN BANK
By /s/
----------------------------------
Kevin Lord
Vice President
THE CHASE MANHATTAN BANK, as Agent
By /s/
----------------------------------
James M. Diver
Vice President
- 13 -
<PAGE>
Consent and Reaffirmation
Each of the following Guarantors consent to the Third Amendment to the
Loan Agreement dated as of March 4, 1996 among Home State Holdings, Inc., Tower
Hill, Inc., The Chase Manhattan Bank, as Agent, and The Chase Manhattan Bank and
European American Bank, as Banks, and the transactions contemplated thereby, and
reaffirm their obligations under the Guaranties previously executed and
delivered.
ASPEN INTERMEDIARIES, LLC
By____________________________
Name:
Title:
HOME STATE INSURANCE MANAGEMENT,
LLC
By____________________________
Name:
Title:
ASPEN INTERMEDIARIES, INC.
By____________________________
Name:
Title:
- 14 -
SECURITY AGREEMENT
In consideration of advances, loans and extensions of credit now
outstanding or hereafter made to, or for the account or benefit of, Home State
Holdings, Inc. (the "Company") by The Chase Manhattan Bank and European American
Bank (collectively, the "Banks"), whether alone or in conjunction with another
or others and/or the granting to, or for the account or benefit of the Company,
extensions, forbearances, modifications or renewals thereof, as the Agent, as
defined below, or the Banks, in their sole discretion may deem advisable, and/or
of any advances, loans or extensions of credit now outstanding or hereafter made
by the Agent or any of the Banks to another, the payment of which is guaranteed
by the Company to the Agent and/or the Banks, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the Company does
hereby agree with the Agent and the Banks as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the following terms shall
have the following meanings, unless the context otherwise requires:
"Agreement" shall mean this Security Agreement, as amended or
modified, and any and all other documents and instruments now or
hereafter executed and delivered in conjunction herewith.
"Collateral" shall mean the Income Tax Refund and all
proceeds thereof.
"Credit Agreement" shall mean the Loan Agreement dated as of
March 4, 1996 among the Company, Tower Hill, Inc., The Chase Manhattan
Bank, as Agent and the Banks, as amended from time to time.
"Event of Default" shall mean any of the events specified in
Section 5 hereof, provided that any requirement for the giving of
notice, or the lapse of time, or both has been satisfied.
"Income Tax Refund" shall have the meaning given such term in
the Credit Agreement.
"Obligations" shall mean any and all liabilities and
obligations of the Company to the Agent or any of the Banks of every
kind whether arising under this Agreement, the Credit Agreement or any
other agreement of the Company with the Agent or any of the Banks,
including any liability of the Company pursuant to any guarantee
executed by the Company in favor of the Agent or any of the Banks,
however evidenced and whether
- 1 -
<PAGE>
now existing or hereafter incurred, originally contracted with the
Agent or any of the Banks alone or with another or others, or as agent
for another or others, secured or not secured, direct or indirect,
matured or not matured, absolute or contingent, now due or hereafter to
become due (including, without limitation, any and all costs and
reasonable attorneys' fees incurred by the Agent or any of the Banks in
the collection, whether by suit or by any other means of any of the
Obligations hereunder) and any amendment, modification, extension or
renewal of any of the foregoing.
"UCC" shall mean the New York Uniform Commercial Code, as
amended from time to time.
Section 1.2. Usage. Any term not otherwise defined herein shall be
deemed to be defined in accordance with the definition thereof ascribed to it in
the Credit Agreement. Except where the context otherwise requires, references
herein to the Agent shall mean the Agent as collateral agent for the Banks and,
to the extent any Obligations are owing from the Company to the Agent, for the
Agent in its capacity as a creditor.
SECTION 2. SECURITY INTEREST
As collateral security for the prompt, complete and unconditional
payment and performance of the Obligations, the Company does hereby grant to the
Agent continuing first priority security interest in and to the Collateral. Such
security interest shall continue until terminated by a written agreement
executed by the Agent, notwithstanding the fact that there may be no Obligations
outstanding from time to time. As additional security for the payment of the
Obligations, the Company hereby grants to the Agent a continuing lien, security
interest and right of set-off in and to all property of the Company, and the
proceeds thereof, now or hereafter actually or constructively held or received
by or for the Agent or any of the Banks for any purpose, including safekeeping,
custody, pledge, transmission and collection, and the Agent and any of the Banks
shall have a continuing lien and/or right of set-off for the amount of any of
the Obligations upon all of the Company's deposits (general and special) and
credits with the Agent or such Bank. The Agent or any such Bank is authorized at
any time or from time to time, during the existence and continuation of an Event
of Default, with or without notice to the Company, to apply all or part of such
property, deposits or credits to any of the Obligations in such amounts as the
Agent or such Bank may elect in its sole and absolute discretion, although the
Obligations may be contingent or unmatured, and whether or not the Collateral
may be deemed adequate.
- 2 -
<PAGE>
SECTION 3. REPRESENTATIONS AND WARRANTIES OF COMPANY
The Company represents and warrants to the Agent and the Banks, and
shall be deemed to continually do so, as long as this Agreement shall remain in
force, as follows:
3.1 Corporate Existence. The Company is duly organized and validly
existing and is in good standing under the laws of each jurisdiction in which it
transacts its business (except where the failure to so qualify would not result
in a Material Adverse Change in the Company or any of its Affiliates), has the
power to own its assets and to transact the business in which it presently is
engaged and to subject the Collateral to the security interest herein provided.
3.2 Corporate Power and Authorization. The Company is authorized to
enter into this Agreement and is empowered to implement and carry out the
provisions hereof, and has taken all necessary actions, corporate or otherwise,
in respect thereto.
3.3 Corporate Name. The full, complete and accurate legal name of the
Company is correctly stated above the signature line of the Company at the end
hereof. The Company has not been known by, or used, any other name (including
trade names) at any time during the past five (5) years.
3.4 Ownership of Collateral. The Company is the owner of the Collateral
free and clear of all security interests or encumbrances of any kind, except as
created by this Agreement or as permitted by the Credit Agreement.
3.5 Collateral Information. The chief executive office of the Company
is set forth below. The Company's principal place of business and the location
at which the Company maintains its books and records with respect to Collateral
are as set forth below.
3.6 Enforceable Security Interest. The provisions of this Agreement are
effective to create a legal, valid and enforceable first priority security
interest in favor of the Agent in all right, title and interest of the Company
in the Collateral, and when financing statements have been filed in the
appropriate offices in the jurisdiction where the Company has its chief
executive office, the Company shall have granted a fully perfected first lien
on, and security interest in, all right, title and interest of the Company in
the Collateral.
SECTION 4. AFFIRMATIVE COVENANTS
4.1 Income Tax Refund. The Company shall promptly apply for and take
all reasonable steps necessary to receive payment of the Income Tax Refund.
- 3 -
<PAGE>
4.2 Expenses of the Agent. The Company shall reimburse the Agent for
all reasonable expenses including, without limitation, disbursements and any
other costs and fees incurred by the Agent in connection this Agreement or with
the Collateral, including, without limitation, any reasonable attorneys' fees.
SECTION 5. EVENTS OF DEFAULT
Any of the following events shall be an Event of Default:
(a) The Company fails to make any payment of principal or interest or
any other payment on any Obligation when due and payable, by acceleration or
otherwise;
(b) The Company fails to observe or perform any covenant, condition, or
agreement to be observed or performed pursuant to the terms hereof;
(c) A court enters a decree or order for relief in respect of the
Company in an involuntary case under any applicable bankruptcy, insolvency, or
other similar law then in effect, or appoints a receiver, liquidator, assignee,
custodian, trustee, or sequestrator (or other similar official) of the Company
or for any substantial part of its property, or orders the windup or liquidation
of the Company's affairs; or a petition initiating an involuntary case under any
such bankruptcy, insolvency, or similar law is filed against the Company and is
pending for ninety (90) days without dismissal;
(d) The Company commences a voluntary case under any applicable
bankruptcy, insolvency, or other similar law then in effect, makes any general
assignment for the benefit of creditors, fails generally to pay its debts as
such debts become due, or takes corporate action in furtherance of any of the
foregoing; or
(e) An Event of Default occurs under the terms of the Credit Agreement.
SECTION 6. AGENT'S RIGHTS AND REMEDIES
6.1 General Rights. The rights of the Agent shall at all times be those
of a secured party under the UCC and without limiting the generality of the
foregoing, the Agent shall have the additional rights set forth in this Section.
6.2 Rights upon Default. Upon the occurrence or continuance of any
Event of Default hereunder, the Agent may declare any or all of the Obligations
to be immediately due and payable without presentment, demand, protest, or
notice of any kind, all of which are expressly waived, notwithstanding anything
to the contrary
- 4 -
<PAGE>
contained in any instrument evidencing any of the Obligations. The Company
further authorizes the Agent and does hereby irrevocably make, constitute and
appoint the Agent and any officer or agent thereof, with full power of
substitution, as the Company's true and lawful attorney-in-fact with full power,
in its own name or in the name of the Company: (a) to endorse any notes, checks,
drafts, money orders or other instruments of payment (including payments payable
under or with respect to any policy of insurance) relating to the Collateral or
in connection therewith, to sign and endorse any invoices, drafts against
debtors, assignments, verifications and notices in connection with accounts and
other documents relating to the Collateral; (b) to give written notice to such
officialsof the United States Post Office to effect such change or changes of
address so that all mail addressed to the Company may be delivered directly to a
Post Office Box or to such other depository as may be selected by the Agent and
consented to by the Company and to receive, open and dispose of mail addressed
to the Company or as otherwise agreed by the Company; (c) to pay or discharge
taxes, liens, security interests or other encumbrances levied or placed on or
threatened against the Collateral; (d) to receive payment of, receipt for,
settle, compromise or adjust and give discharges and releases for or in respect
of any and all moneys, claims and other amounts due and to become due at any
time under or rising out of the Collateral; (e) to defend any suit, action or
proceeding brought against the Company with respect to any Collateral; and (f)
to settle, compromise or adjust any suit, action or proceeding described above
and in connection therewith, to give such discharges or releases as the Agent
may deem appropriate and, generally, to sell, transfer, pledge, make any
agreement with respect to or otherwise deal with any of the Collateral as fully
and completely as though the Agent was the absolute owner thereof for all
purposes.
6.3 Sale of the Collateral. In the event the Agent determines that the
Collateral should be sold to satisfy all or any part of the Obligations, the
Agent may dispose of the Collateral in whole or in part at public or private
sale, and any notice required to be given shall be given in accordance with
Section 7.4 herein at least ten (10) days before the proposed sale. The parties
agree said notice shall be reasonable, provided, however, the Agent need not
give such notice with respect to Collateral which is perishable or threatens to
decline speedily in value or is a type customarily sold on a recognized market.
At any such sale the Agent may purchase the Collateral free from, and discharged
of all trusts, claims, rights of redemption and equities of the Company, all of
which are hereby waived and released. The Company shall remain liable for any
deficiency resulting from any sale of the Collateral and shall pay such
deficiency promptly on the Agent's demand.
6.4 Expense of Collection and Sale. The Company agrees to pay all
reasonable costs and expenses incurred by the Agent in enforcing, collecting or
realizing upon the Obligations or the
- 5 -
<PAGE>
Collateral (including, without limitation, reasonable attorneys' fees).
6.5 Financing Statements. Where permitted by applicable law, the Agent
is authorized to file financing statements relating to the Collateral without
the Company's signature thereon, executed only by the Agent and at the expense
of the Company. The Company will, however, at the request of the Agent, execute
any financing statement or amendment of any financing statement with respect to
the Collateral. Upon the Company's failure to do so, any officer of the Agent is
authorized as the Company's agent and in its name to execute any such financing
statement or amendment to any such financing statement.
6.6 Exercise of Remedies. If any Obligations are now or hereafter
secured by property other than the Collateral, or by any guaranty, endorsement
or property now or hereafter owned by any other person, firm or corporation,
then the Agent shall have the right in its sole discretion to determine, which
rights, security, liens, security interests or remedies the Agent shall at any
time pursue, relinquish, subordinate, modify or take any other action with
respect thereto, without in any way modifying or affecting any such rights or
any of the Agent's rights hereunder.
SECTION 7. MISCELLANEOUS
7.1 Limited Role of the Agent. The relationship between the Company and
the Agent shall be solely that of debtor and agent for the Banks as secured
parties, respectively. The Agent shall not have any fiduciary responsibilities
to the Company or with respect to the Collateral and no joint venture exists
between the Company and the Agent. The Company and the Agent each hereby
severally acknowledge that there are no representations, warranties, covenants,
undertakings or agreements by the parties hereto as to this Agreement except as
specifically provided herein. The Agent shall have no obligation to sell or
otherwise realize upon the Collateral and shall not be responsible for, and the
Company shall not assert as a defense, the Agent's failure to realize upon the
Collateral.
7.2 Choice of Law, Construction. This Agreement shall be construed in
accordance with the internal laws (and not the law of conflicts) of the State of
New York. If any provision of this Agreement shall be or become unenforceable or
illegal under any law, all other provisions shall remain in full force and
effect.
7.3 Consent to Jurisdiction. (a) The Company hereby irrevocably submits
to the non-exclusive jurisdiction of any United States federal or New York state
court sitting in New York, Nassau or Suffolk Counties in any action or
proceeding arising out of or relating to this Agreement and the Company hereby
irrevocably
- 6 -
<PAGE>
agrees that all claims in respect of such action or proceeding may be heard and
determined in any such court and irrevocably waives any objection it may now or
hereafter have as to the venue of any such action or proceeding brought in such
a court or the fact that such court is an inconvenient forum.
(b) The Company irrevocably and unconditionally consents to the service
of process in any such action or proceeding in any of the aforesaid courts by
the mailing of copies of such process to it, by certified or registered mail in
accordance with the terms of Section 7.4 herein.
(c) The Company agrees that nothing herein shall affect the Agent's
right to effect service of process in any other manner permitted by law and the
Agent shall have the right to bring any legal proceeding (including a proceeding
for enforcement of a judgment entered by any of the aforementioned courts)
against the Company in any other court or jurisdiction in accordance with
applicable law.
7.4 Notices. All notices, requests and demands to or upon the
respective parties hereto shall be in writing and shall be deemed to have been
duly given or made when delivered by hand, or if sent by certified mail, three
days after the day in which mailed, or, in the case of telecopier, when evidence
of receipt is obtained, or, in the case of overnight courier service, one
business day after delivery to such courier service, addressed as set forth
below, or to such other address as may be hereafter notified by the respective
parties hereto.
The Agent: The Chase Manhattan Bank
395 North Service Road
Suite 302
Melville, New York 11747
Attention: Home State Holdings, Inc.
Account Officer
The Banks: The Chase Manhattan Bank
395 North Service Road
Suite 302
Melville, New York 11747
Attention: Home State Holdings, Inc.
Account Officer
European American Bank
335 Madison Avenue
New York, New York 10017
Attention: Home State Holdings, Inc.
Account Officer
- 7 -
<PAGE>
The Company: Home State Holdings, Inc.
3 South Revmont Drive
Shrewsbury, New Jersey 07702
Attention: Eric Reehl
7.5 Waivers. The Company expressly waives notice of non-payment or
protest, demand, or presentment, in relation to the Obligations or the
Collateral. No delay or omission of the Agent or any of the Banks in exercising
or enforcing any of their rights, powers, privileges, options or remedies under
this Agreement or any other agreement or promissory note between the Agent, any
of the Banks and the Company shall constitute a waiver thereof, and no waiver by
the Agent or any of the Banks of any Event of Default by the Company shall
operate as a waiver of any other Event of Default. Except for the terms and
provisions of any promissory notes or other security agreements now existing or
hereafter executed and delivered to the Agent or any of the Banks by the Company
(which terms and provisions are specifically deemed to be in addition to and not
in derogation of the terms and provisions hereof), this Agreement constitutes
the entire understanding between the Company, the Agent and the Banks with
respect to the subject matter hereof and supersedes all prior written or oral
communications or understandings. No term or provision of this Agreement shall
be waived, altered or modified except in writing signed by the parties hereto.
All rights and remedies of the Agent and the Banks under this Agreement shall be
cumulative and not alternative or exclusive of any rights or remedies provided
by law and may be exercised by the Agent and the Banks at such time or times and
in such order as the Agent and Banks, in their sole discretion, may determine
and are for the sole benefit of the Agent and the Banks and the exercise or
failure to exercise such shall not result in liability to the Company or others
except in the event of willful misconduct or gross negligence by the Agent or
the Banks, and in no event shall the Agent and the Banks be liable for more than
they actually receive as a result of the exercise or failure to exercise such
right and remedies. Neither the Agent nor any of the Banks shall be liable for
any failure by it to comply with any recording, re-recording, filing, refiling
or other legal requirement necessary to establish or maintain the validity,
priority or enforceability of, or the Agent's right in and to the Collateral, or
any part thereof.
7.6 Successors and Survival. This Agreement shall remain in full force
and effect until terminated as to future transactions by written agreement of
the parties. The Company may not transfer or assign any of its rights, interest
or obligations hereunder without the prior written consent of the Agent and the
Required Banks. This Agreement shall be binding upon the Company and shall inure
to the benefit of the Agent and the Banks and their successors and assigns and
to the permitted successors and assigns of the Company. All representations,
warranties and covenants contained herein or in any other agreement between the
Agent, and of the Banks and the
- 8 -
<PAGE>
Company shall survive the execution hereof and thereof and the granting of loans
or advances pursuant hereto or thereto.
7.7 Waiver of Counterclaim; Setoff. In any litigation whether pursuant
hereto or otherwise in which the Company and the Agent or any of the Banks are
adverse parties the Company waives the right to interpose any set-off or
counterclaim of any nature or description against the Agent or any such Bank.
7.8 Captions. The headings of the Section in this Agreement are for
convenience only; they form no part of this Agreement and shall not affect its
interpretation.
7.9 Severability. If any provision of this Agreement shall be or become
illegal or unenforceable in whole or in part for any reason whatsoever, the
remaining provisions shall nevertheless be deemed valid, binding and subsisting.
- 9 -
<PAGE>
7.10 WAIVER OF JURY TRIAL. COMPANY, THE AGENT AND BANKS HEREBY WAIVE
TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT
OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT OR THE RELATIONSHIP ESTABLISHED
HEREUNDER.
IN WITNESS WHEREOF, this Agreement has been executed this 31st day of
March, 1997.
HOME STATE HOLDINGS, INC.
By: /s/
-----------------------
Mark S. Vaughn
President
By: /s/
------------------------
Eric A. Reehl
Executive Vice President
Company's Executive Office and
Principal Place of Business:
3 South Revmont Drive
Shrewsbury, New Jersey 07702
Location of books and records
relating to the Collateral:
Company's Tradename(s):
3 South Revmont Drive
Shrewsbury, New Jersey 07702
None
Company's Tradestyle(s):
None
- 10 -
MANAGEMENT AND CONSULTING AGREEMENT
SWISS REINSURANCE AMERICA CORPORATION
237 Park Avenue
New York, New York 10017
October 4, 1996
Home State Holdings, Inc.
Three South Revmont Drive
Shrewsbury, New Jersey 07702
Re: Management Services
Gentlemen:
This letter will confirm the agreement between Swiss Reinsurance America
Corporation, a New York corporation ("Swiss Re"), and Home State Holdings, Inc.,
a Delaware corporation (the "Company"), pursuant to which Swiss Re will render
to the Company certain management and consulting services in connection with the
operation and conduct of the Company's and its subsidiaries' business. Swiss Re
shall commence providing these services as of the date of this letter agreement
(this "Agreement"). Swiss Re and the Company shall agree, from time to time, on
the specific type and extent of services to be provided pursuant to this
Agreement.
As consideration for the management and consulting services to be
provided to it by Swiss Re, the Company shall pay Swiss Re a minimum monthly
(each calendar month being a "Payment Period") retainer fee of $8,333.33 which
payment shall be made on the first day of each such Payment Period with the
first such payment to be made on the date hereof. The retainer fee is a minimum
fee for services to be rendered regardless of the amount of services requested
and rendered hereunder.
Swiss Re shall also be entitled to receive (or be reimbursed for) its
reasonable out-of-pocket expenses incurred in connection with its services
performed hereunder, upon submission of appropriate receipts and documentation
in support thereof.
In addition to its agreements and obligations under this Agreement, the
Company agrees to indemnify and hold harmless Swiss Re and its affiliates
(including its and their officers, directors, stockholders, partners, employees
and agents) from and against any and all claims, liabilities, losses and damages
(or actions in respect thereof), in any way related to or arising out of the
performance by Swiss Re of services under this Agreement, and to reimburse Swiss
Re and any other such indemnified person for reasonable out-of-pocket legal and
other expenses incurred by it in connection with or relating to investigating,
preparing to defend, or defending any actions, claims or other proceedings
(including any investigation or inquiry) arising in any manner out of or in
connection with Swiss Re's performance under this Agreement (whether or
<PAGE>
not such indemnified person is a named party in such proceedings), provided,
however, that the Company shall not be responsible under this paragraph for any
claims, liabilities, losses, damages or expenses to the extent that they are
finally judicially determined to result from actions taken by Swiss Re (or such
other indemnified person) which constitute gross negligence or willful
misconduct.
This Agreement shall terminate on the earlier of (i) September 30, 2010
or (ii) the date on which Swiss Re neither provides reinsurance to the Company
or any of its Insurance Subs nor holds, directly or indirectly, any shares of
the Company's Series A Cumulative Voting Preferred Stock which are being
acquired by Swiss Re on the date hereof pursuant to a Securities Purchase
Agreement between, inter alia Swiss Re and the Company.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto, their legal representatives, successors and assigns. This
Agreement and its performance shall be governed by the internal laws (and not
the laws of conflicts) of the State of New York.
If the foregoing is acceptable to you, please sign this letter in the
space provided below and return it to the undersigned.
Very truly yours,
SWISS REINSURANCE AMERICA CORPORATION,
a New York corporation
By: /s/ Thomas Forsyth
---------------------------------
Thomas Forsyth
Senior Vice President and
General Counsel
ACCEPTED AND AGREED TO:
HOME STATE HOLDINGS, INC.,
a Delaware corporation
By: /s/ [CLIENT SUPPLY]
-----------------------
MANAGEMENT AND CONSULTING AGREEMENT
RELIANCE INSURANCE COMPANY
4 Penn Plaza
Philadelphia Pennsylvania 19103
October 4, 1996
Home State Holdings, Inc.
Three South Revmont Drive
Shrewsbury, New Jersey 07702
Re: Management Services
Gentlemen:
This letter will confirm the agreement between Reliance Insurance
Company, a Pennsylvania corporation ("Reliance"), and Home State Holdings, Inc.,
a Delaware corporation (the "Company"), and the Company's insurance
subsidiaries, Home State Insurance Company, New York Merchant Bakers Insurance
Company, Pinnacle Insurance Company, Quaker City Insurance Company and Westbrook
Insurance Company (collectively the "Insurance Subs"), pursuant to which
Reliance will render to the Company and the Insurance Subs certain management
and consulting services in connection with the operation and conduct of the
Company's and the Insurance Subs' business, including reinsurance programs.
Reliance shall commence providing these services as of the date of this letter
agreement (this "Agreement"). Reliance the Company and the Insurance Subs shall
agree from time to time, on the specific type and extent of services to be
provided pursuant to this Agreement
As consideration for the management and consulting services to be
provided to it by Reliance, the Company and the Insurance Subs shall pay
Reliance a minimum monthly (each calendar month being a "Payment Period")
retainer fee of $8,333.33, which payment shall be made on the first day of each
such Payment Period with the first such payment to be made on October 4, 1996.
The retainer fee is a minimum fee for services to be rendered regardless of the
amount of services requested and rendered.
Reliance shall also be entitled to receive (or be reimbursed for) its
reasonable out-of-pocket expenses incurred in connection with its services
performed hereunder, upon submission of appropriate receipts and documentation
in support thereof.
In addition to its agreements and obligations under this Agreement, the Company
and the Insurance Subs agree to indemnify and hold harmless Reliance ant its
affiliates (including its and their officers, directors, stockholders, partners,
employees and agents) from and against any and all claims, liabilities, losses
and damages (or actions in respect thereof), in any way related to or arising
out of the performance by Reliance of services under this Agreement, and to
reimburse Reliance and any other such indemnified person for reasonable
out-of-pocket legal and other expenses incurred by it in connection with or
relating to investigating, preparing to defend, or
<PAGE>
expenses incurred by it in connection with or relating to investigating,
preparing to defend, or defending any actions, claims or other proceedings
(including any investigation or inquiry) arising in any manner out of or in
connection with Reliance's performance under this Agreement (whether or not such
indemnified person is a named party in such proceedings); provided, however,
that the Company and the Insurance Subs shall not be responsible under this
paragraph for any claims, liabilities, losses, damages or expenses to the extent
that they are finally judicially determined to result from actions taken by
Reliance (or such other indemnified person) which constitute gross negligence or
willful misconduct.
In the event the Company or the Insurance Subs shall fall to any payment
due when due under this agreement to Reliance, interest shall accrue and the
Company and the Insurance Subs shall be obligated to pay interest on any overdue
amount from the date due at the rate of 1.5% per month on the unpaid balance of
principal and interest (compounded monthly).
In the event the Company or the Insurance Subs fail to make payment when
due and Reliance refers the balance due to an attorney for collection, the
Company and the Insurance Subs shall reimburse Reliance for reasonable
attorney's fees.
This Agreement shall terminate on the earlier of (i) September 30, 2010
or (ii) the date on which Reliance neither provides reinsurance to the company
or any of the Insurance Subs nor holds, directly or indirectly, any shares of
the Company's Shares A Cumulative Voting Preferred Stock which is being acquired
by Reliance on the date hereof pursuant to a Securities Purchase Agreement
between inter alia Reliance and the Company.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto, their legal representatives, sucessors and assigns. This
Agreement and its performance shall be governed by the internal laws (and not
the laws of conflicts) of the State of New Tork.
If the foregoing is acceptable to you, please sign this letter in the
space provided below and return it to the undersigned.
Very truly yours,
RELIANCE INSURANCE COMPANY
By: /s/ Albert A. Benchimol
--------------------------
Name: Albert A. Benchimol
Title: Vice President
<PAGE>
ACCEPTED AND AGREED TO:
HOME STATE HOLDINGS, INC.
By: /s/ Mark Vaughn
-----------------------
Title: Acting President
HOME STATE INSURANCE COMPANY
By: /s/ Mark Vaughn
-----------------------
Title: Chief Executive Officer
NEW YORK MERCHANT BAKERS INSURANCE
BY: /s/ Mark Vaughn
-----------------------
Title: Chief Executive Officer
PINNACLE INSURANCE COMPANY
By: /s/ Mark Vaughn
-----------------------
Title: Chief Executive Officer
QUAKER CITY INSURANCE COMPANY
By: /s/ Mark Vaughn
-----------------------
Title: Chief Executive Officer
WESTBROOK INSURANCE COMPANY
By: /s/ Mark Vaughn
-----------------------
Title: Chief Executive Officer
October 4, 1996
Swiss Reinsurance America Corporation
237 Park Avenue
New York, NY 10017
Re: Certain Reinsurance Arrangements
Gentlemen:
As of the date of this Agreement, Swiss Reinsurance America Corporation
("Swiss Re") is purchasing $5,000,000 of Series A Cumulative Voting Preferred
Stock and Class A Warrants of Home State Holdings, Inc. (the "Company")
pursuant to that certain Securities Purchase Agreement of even date herewith
(the "Purchase Agreement") by and among Swiss Re, Reliance Insurance Company and
the Company. In connection with such purchase, the parties desire to enter into
and deliver this Agreement.
Each of the Company and Swiss Re, intending to be legally bound, hereby
agrees as follows (capitalized terms used herein and not otherwise defined shall
have the meanings ascribed to them in the Purchase Agreement):
1. Undertaking to Renew Reinsurance Agreements. Appended hereto as
Exhibit A are copies of the Reinsurance Binders (collectively, the
"Reinsurance Binder") being entered into on the date hereof by Swiss Re,
the Company and the various Insurance Subsidiaries named therein reflecting
Swiss Re's agreement to reinsure certain classes of property and casualty
insurance business underwritten by various of the Insurance Subsidiaries,
such reinsurance representing not less than 50% of the Company's aggregate
ceded property and casualty excess of loss reinsurance programs. The
Company acknowledges and agrees that, pursuant to the Reinsurance Binder,
Swiss Re is and shall be the lead reinsurer (having set the terms and
conditions, and written the language, of the reinsurance treaties evidenced
by the Reinsurance Binder) on the Company's property and casualty excess of
loss reinsurance programs, and at no time that Swiss Re holds any of the
Preferred Stock or the Warrants shall the Company (subject to agreement of
the renewal terms of the reinsurance coverage as hereinbelow contemplated)
negotiate or seek to negotiate with any other reinsurer to provide
reinsurance coverage in an amount (or, if greater, a percentage) in excess
of that being provided by Swiss Re with respect to the Company's ceded
property and casualty excess of loss reinsurance programs as more fully
described in the Reinsurance Binder.
<PAGE>
Effective for the calendar year commencing January 1, 1998 and for
each year subsequent thereto (each a "Coverage Year"), for so long as Swiss
Re owns any of the Preferred Stock or the Warrants: (i) the Company will
cause the Insurance Subsidiaries to, and the Insurance Subsidiaries will,
annually renew those reinsurance agreements entered into pursuant to the
Reinsurance Binder hereinbefore referenced, with the renewal terms of such
reinsurance agreements (A) computed on the same or similar basis as those
underlying the 1997 reinsurance agreements, varying with loss ratio,
expenses and otherwise constituting for and reasonable terms (provided,
however, in assessing whether the renewal terms are "reasonable", multiple
factors, including without limitation the credit rating of Swiss Re and
Swiss Re's claims paying ability as historically demonstrated, shall be
taken into account) and (B) allowing for adjustments in limits and
retention levels and otherwise to take into consideration business and
financial developments or plans of the Company and changing market
conditions, and (ii) Swiss Re shall retain, in each and every Coverage Year
subsequent to 1997, its position (subject to renewal of the reinsurance
agreements as herein contemplated) as the reinsurer which sets the terms
and conditions, and writes the language, of the reinsurance treaties with
respect to the Company's ceded property and casualty excess of loss
reinsurance programs as described in the Reinsurance Binder. In furtherance
of the foregoing, each of Swiss Re, the Company and each of the Insurance
Subsidiaries agrees to negotiate in good faith, from year to year, terms of
renewal of the reinsurance agreements entered into pursuant to the
Reinsurance Binder.
2. Redemption of Preferred Stock: Appointment of Actuary.
Notwithstanding the foregoing, in the event the Insurance Subsidiaries are
unable, or fail, to agree with Swiss Re by November 15, 1997 and by
November 15 of each calendar year thereafter on the terms and conditions of
renewal of the reinsurance agreements applicable to the next succeeding
Coverage Year, Swiss Re, at its option, shall have the right to:
(a) require the Company to redeem all of the shares of the
Preferred Stock held by Swiss Re at a redemption price per share equal
to 102.5% of the Preferred Liquidation Value (as defined in the
Certificate of Designations of the Company filed with the Secretary of
State of Delaware on the date hereof), plus accrued and unpaid
dividends thereon, if any, whether or not earned or declared, and
otherwise exercise the rights available to a holder of the Preferred
Stock upon the occurrence of a Redemption Event (as defined in the
Certificate of Designations), or
(b) refer the matter to a nationally recognized actuarial firm
mutually acceptable to Swiss Re, the Company and the Insurance
Subsidiaries (the "Actuary"), which Actuary shall determine, prior to
January 1 of the applicable
<PAGE>
forthcoming Coverage Year, the terms and conditions for Swiss Re's
reinsurance coverage of the Insurance Subsidiaries' insured risks for
that forthcoming Coverage Year, based on information and proposals
submitted to the Actuary by the Insurance Subsidiaries and by Swiss
Re.
(i) In the event Swiss Re, the Company and the Insurance
Subsidiaries are unable to agree by the November 20 prior to the next
succeeding Coverage Year on the identity of the Actuary, the Actuary
shall be Allan M. Kaufman of Milliman & Robertson or, if Mr. Kaufman
shall at such time not be a partner of Milliman & Robertson, then such
other partner as may be designated by the managing partner of Milliman
& Robertson's New York office.
(ii) In making the determination of terms and conditions for
Swiss Re's reinsurance renewal coverage for the Insurance Subsidiaries
(the "Actuarial Determination"), the Actuary shall apply a computation
utilizing the same, or as substantially similar to the same as
possible, basis underlying the 1997 reinsurance agreements, such basis
varying with loss ratio, expenses and otherwise containing fair and
reasonable terms for the reinsurance proposed for cession to Swiss Re
by the Insurance Subsidiaries, based upon proposals of the Insurance
Subsidiaries and Swiss Re. The costs for the Actuarial Determination
shall be paid equally by the Company and the Insurance Subsidiaries on
the one hand and by Swiss Re on the other hand.
(iii) In the event Swiss Re, in its sole discretion, is not
satisfied with the terms and conditions proposed by the Actuary as set
forth in the Actuarial Determination, Swiss Re shall have the right to
reject the selected terms and conditions for Swiss Re's reinsurance
coverage for the Insurance Subsidiaries for that forthcoming Coverage
Year, and not assume the reinsurance coverage for the Insurance
Subsidiaries that would have been ceded by the Insurance Subsidiaries
pursuant to the selected terms and conditions for that reinsurance
coverage provided by the Acturial Determination. Under such
circumstances, Swiss Re also may elect to (but need not) exercise its
option to require the Company to redeem all of the shares of the
Preferred Stock held by Swiss Re as set forth in this Section 2.
<PAGE>
(iv) If Swiss Re elects to accept the terms and conditions for
Swiss Re's reinsurance coverage for the Insurance Subsidiaries for the
forthcoming Coverage Year as proposed by the Actuary in the Actuarial
Determination, the Actuarial Determination of the Actuary shall be
final and binding on both the Insurance Subsidiaries on the one hand
and Swiss Re on the other hand.
3. Assignment. This Agreement shall be binding upon and inure to the
benefit of Swiss Re, the Company and the Insurance Subsidiaries and their
respective successors and assigns; provided, however, Swiss Re may assign
this Agreement to any affiliate of Swiss Re.
4. Entire Agreement. This Agreement supersedes any and all prior
agreements, whether written or oral, among Swiss Re, the Company and the
Insurance Subsidiaries with respect to the subject matter hereof, and this
Agreement, along with the Purchase Agreement and all exhibits, schedules
and agreements contemplated therein, constitute the full and complete
agreement among the parties with respect thereto. No amendment to this
Agreement shall be effective unless set forth in a writing executed by all
parties to this Agreement.
5. Governing Law. This Agreement shall be governed by and construed in
accordance with the substantive laws of the State of New York, without
regard to the conflicts of laws provisions thereof.
6. No Waiver. The failure of Swiss Re, the Company or the Insurance
Subsidiaries to insist on strict compliance with the provisions of this
Agreement or to exercise any right or remedy shall not constitute a waiver
of any rights contained herein nor estop the parties from demanding full
and complete compliance herewith nor prevent the parties from exercising a
remedy in the future.
7. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute one instrument.
<PAGE>
To acknowledge your agreement to the foregoing, please execute this
Agreement in the space provided below, whereupon it shall constitute a binding
agreement among the parties hereto.
Very truly yours,
HOME STATE HOLDINGS, INC.
(a Delaware corporation)
By: /s/ Mark Vaughn
-------------------
Name: Mark Vaughn
Title: Acting President
HOME STATE INSURANCE COMPANY
(A New Jersey corporation)
By: /s/ Mark Vaughn
-------------------
Name: Mark Vaughn
Title: Chief Executive Officer
NEW YORK MERCHANT BAKERS
INSURANCE COMPANY
(A New York corporation)
By: /s/ Mark Vaughn
-------------------
Name: Mark Vaughn
Title: Chief Executive Officer
PINNACLE INSURANCE COMPANY
(A Georgia corporation)
By: /s/ Mark Vaughn
-------------------
Name: Mark Vaughn
Title: Chief Executive Officer
<PAGE>
QUAKER CITY INSURANCE COMPANY
(A Pennsylvania corporation)
By: /s/ Mark Vaughn
-------------------
Name: Mark Vaughn
Title: Chief Executive Officer
WESTBROOK INSURANCE COMPANY
(A Connecticut corporation)
BY: /s/ Mark Vaughn
-------------------
Name: Mark Vaughn
Title: Chief Executive Officer
ACCEPTED AND AGREED TO:
SWISS REINSURANCE AMERICA
CORPORATION
BY: /s/ Thomas L. Forsyth
-----------------------------
Name: Thomas L. Forsyth
Title: Senior Vice President and
General Counsel
October 4, 1996
Reliance Insurance Company
4 Penn Center Plaza
Philadelphia, Pennsylvania 19103
Re: Ceded Reinsurance Agreement
Dear Mr. Roberts:
1. Background. As of the date of this Agreement, Reliance Insurance Company
("Reliance") is purchasing $5,000,000 of Series A Cumulative Voting
Preferred Stock (the "Preferred Stock") and Class A Warants (the "Warrants") of
Home State Holdings, Inc. (the "Company") pursuant to a Securities Purchase
Agreement of this same date among the Company, Reliance and other purchasers
named therein (the "Securities Purchase Agreement"). The Preferred Stock is
subject to a Certificate of Designations, Preferences and Rights (the
"Certificate of Designations"), Reliance is unwilling to enter into the
Securities Purchase Agreement unless the Company agrees to cause and the
Company's insurances subsidiaries, Home State Insurance Company, York Merchant
Bakers Insurance Company, Pinnacle Insurance Company, Quaker City Insurance
Company and Westbrook Insurance Company, (collectively the "Insurance Subs"),
agree to cede reinsurance to Reliance on the basis of the terms and conditions
as set forth in this Agreement. Capitalized terms used in this Agreement which
are defined in the Securities Purchase Agreement and the Certificate of
Designations shall have the same meanings in this Agreement as therein unless
otherwise defined in this Agreement.
2. Agreement. In order to induce Reliance to purchase the Preferred Stock and
the Warrants, the proceeds of which are to be used as provided for in the
Securities Purchase Agreement, intending to be legally bound, and for good and
valuable consideration, the sufficiency and receipt of which is hereby
acknowledged, and subject to the terms and conditions set forth in this
Agreement, effective for the calendar year commencing January 1, 1997 and for
each subsequent calendar year ("Coverage Year") so long as Reliance owns any of
the Preferred Stock or the Warrants, the Company will cause the Insurance Subs
to and the Insurance Subs will annually cede for Reinsurance coverage during
each
<PAGE>
Coverage Year to Reliance, or affiliates of Reliance designated by Reliance that
have an A.M. Best's Rating at least equal to Reliance (collectively, the
"Reliance Group"), gross written reinsurance premium with terms, conditions,
classes of business and treaties acceptable to Reliance in its sole discretion
in an amount (the "Annual Commitment") at least equal to the greater of:
(a) $20,000,000, or
(b) the percentage of the aggregate ceded reinsurance program of the
Insurance Subs that was ceded by the Insurance Subs to and recorded by
the Reliance Group as gross written reinsurance premium for the
reinsurance coverage written for calendar year l996.
For purposes of determining whether the Annual Commitment has been
satisfied, if the Company or one of its subsidiaries shall direct the ceded
reinsurance program of Home Mutual Insurance Company of Binghamton, New York
(the "Managed Insurance Sub") pursuant to a management or similar agreement for
any Coverage Year, any gross written reinsurance premiums ceded by the Managed
Insurance Sub for reinsurance coverage of the Managed Insurance Sub by the
Reliance Group for any Coverage Year shall be added to the gross written
reinsurance premiums ceded by the Insurance Subs to the Reliance Group for that
Coverage Year. The provisional rate or premium shall be used in calculating the
Annual Commitment for purposes of any reinsurance coverage subject to loss
sensitive rating formulas.
In the event that the A.M. Best's Rating of Reliance shall fall below B+,
the Company and the Insurance Subs shall not be required to cede the Annual
Commitment for any Coverage Year that Reliance's A.M. Best's Rating remains B+
but if the Company and the Insurance Subs so elect not to cede because A.M.
Best's Rating of Reliance is less than B+, Reliance shall be entitled to
exercise its rights under the provisions of Section 5 of this Agreement as if
Reliance elected to reject the Actuarial Determination.
3. Annual Terms Resolution. During the Term of this Agreement, the Insurance
Subs and Reliance shall commence good faith discussions and exchange
proposals for a ceded reinsurance program for the forthcoming Coverage Year that
shall satisfy the Annual Commitment no later than sixty (60) days prior to each
forthcomming Coverage Year. In the event the Insurance Subs fail to agree with
Reliance by November 15, 1996 and by November 15 of each Coverage Year
thereafter on the terms, conditions classes of business, and coverage to cede to
the Reliance Group for the next Coverage Year that will result in gross written
reinsurance premiums at least equal to the Annual Commitment with terms,
conditions, classes of business and treaties acceptable to Reliance in its sole
discretion, Reliance at its option shall have the right to:
a) require the Company to redeem all of the shares of the Preferred Stock
2
<PAGE>
held by Reliance at a price pet share equal to the Premium Redemption
Price (as defined in Section 6(a) of the Certificate Or Designations)
or; if Reliance exercises its option under this Section 3(a) during
the period commencing on the effective date of this Agreement up to
and including September 30, ____, at the applicable Optional
Redemption Price (as defined in Section 6(b) of the Certificate of
Designations) and otherwise exercise the rights and remedies available
to a holder of the Preferred Stock upon the occurrence of a Redemption
Event (as defined in the Certificate of Designations), or
b) refer the matter to a nationally recognized actuarial firm mutually
acceptable to Reliance and the Insurance Subs (the "Actuary"), which
Actuary shall determine, prior to January 1 of the forthcoming
Coverage Year, the terms and conditions on classes of business and
treat as acceptable to Reliance for reinsurance coverage of the
Insurance Subs for that forthcoming Coverage Year that will satisfy
the Annual Commitment (the Actuarial Determination"). In the event
Reliance, the Company and the Insurance Subs are unable to agree by
November 20 prior to the forthcoming Coverage Year on the identity of
the Actuary, the Actuary shall be Towers Perrin, 335 Madison Avenue,
New York, NY 10017, or in the event this firm shall no longer exist,
the successor of that firm and if there is no successor to that firm,
any former senior officer or partner of Towers Perrin.
4. Actuarial Determination. In making the Actuarial Determination for the
forthcoming Coverage Year, the Actuary shall select, based on information
and from, between, and among the proposals submitted to the Actuary by the
Insurance Subs and by Reliance by December 1 prior to the forthcoming Coverage
Year, commercially reasonable and actuarially sound terms and conditions for the
reinsurance to be ceded by the Insurance Subs. The Actuarial Determination shall
be in the form of proposed professionally drawn comprehensive placing slip(s)
for each proposed reinsurance coverage in sufficient detail as to allow the
Insurance Subs and Reliance to clearly determine the proposed terms and
conditions for each reinsurance coverage and the corresponding estimated gross
written reinsurance premium. The Insurance Subs and Reliance shall equally pay
50% of the professional fees and expenses of the Actuary, for making the
Actuarial Determination.
5. Reliance Declination Option. In the event Reliance, in its sole discretion
is not satisfied with the terms and conditions on classes of business and
treaties acceptable to Reliance that will satisfy the Annual Commitment as set
forth in the Actuarial Determination, Reliance shall have the right to reject
the Actuarial Determination and not provide the reinsurance coverage that would
have been ceded by the Insurance Subs pursuant to the Actuarial Determination
and to:
3
<PAGE>
a) require the Company to redeem all of the shares of the Preferred Stock
held by Reliance as set forth in Section 3(a) above, and/or
b) require that for subsequent Coverage Years, the Insurance Subs
continue to fulfill their reinsurance premium ceding obligations in
an amount that will satisfy the Annual Commitment on classes of
business and treaties acceptable to Reliance as set forth above for
so long as Reliance owns any of the Preferred Stock or Warrants.
Furthermore, in the event that an Actuarial Determination is not received
by Reliance and the Insurance Subs by January 1 of the Coverage Year, Reliance
shall be entitled to proceed as if an Actuanal Determination had been received
and Reliance elected to reject the Actuarial Determination and exercise one or
both of the options set forth immediately above in this paragraph.
6. Reliance Acceptance Option. If Reliance elects to accept the Actuarial
Determination, the Actuarial Determination of the Actuary shall be final
and binding on the Company, the Insurance Subs and Reliance and the Insurance
Subs and Reliance shall execute customary reinsurance placing slips and
reinsurance agreements for those reinsurance terms and conditions consistent
with the Actuarial Determination and the prior practice with respect to
reinsurance documentation between Reliance and the Insurance Subs.
7. Term. This Agreement will commence upon the date hereof and continue until
Reliance ceases to own the Preferred Stock or the Warrants.
8. Waiver. The failure of Reliance, the Company, or the Insurance Subs to
insist on strict compliance with any provision of this Agreement or to exercise
any right or remedy shall not constitute a waiver of any rights contained herein
nor estop the parties from demanding full and complete compliance nor prevent
the parties from exercising a right or remedy in the future.
9. Severability. If any provisions of this Agreement should be invalid and
unenforceable under applicable law, the latter shall control but only to the
extent of the conflict without affecting the remaining provisions of this
Agreement.
10. Headings. The headings preceding the text of the paragraphs of this
Agreement are intended solely for the convenience of reference and shall not
affect the meaning, interpretation, construction or effect of this Agreement.
11. Assignment. This Agreement shall be binding upon and inure to the
benefit of Reliance, the Company and the Insurance Subs and their respective
successors and assigns provided this Agreement may not be assigned by the
Company, the Insurance Subs or Reliance without the prior written consent of
the other parties to this Agreement which consent may be withheld in any party's
sole unfettered
4
<PAGE>
discretion provided that Reliance shall have the right to assign this
Agreement to any wholly owned subsidiary or affiliate of Reliance that has the
minimum A.M. Best's Rating described in Section 2 of this Agreement.
12. Governing Law. This Agreement shall be governed as to performance,
administration, and interpretation by the laws of the State of New York,
exclusive of its rules with respect to conflicts of law.
13. Notices. Wherever written notice is required under this Agreement, absent
subsequent notice changing the address set forth in this Agreement, it shall be
in writing and either delivered personally or sent either by express mail by a
nationally recognized and reputable overnight courier, by facsimile, or by
certified mail return receipt requested:
a) If To Reliance, to Reliance at the address set forth above, attention
George Roberts, Vice President; or
b) If to the Company or to the Insurance Subs, to the Company at the
address of the Company set forth at the top of this Agreement,
attention Mark Vaughn, Acting President.
All notices and other communications shall when mailed or sent by facsimile,
respectively shall be effective when deposited in the mails, delivered to the
overnight express mail service or received if sent by facsimile. Only one
notice need be sent to the Company and the Insurance Subs at the required
address and the Company shall convey the notice to the Insurance Subs.
14. Entire Agreement. This Agreement supersedes any and all previous
agreements, whether written or oral, between Reliance, the Company and the
Insurance Subs with respect to the ceded reinsurance that is the subject of
this Agreement and this Agreement, along with the Securities Purchase Agreement
and all exhibits, schedules and agreements contemplated therein, constitutes the
full and complete agreement between the parties with respect thereto. No
amendment to this Agreement shall be valid and effective unless in writing and
signed by all the parties to this Agreement.
If the above correctly sets forth our agreement, please sign the enclosed
copies of this letter and return one copy each to each signatory to this letter.
Very truly yours,
HOME STATE HOLDINGS, INC. (A Delaware Corporation)
By: /s/ Mark Vaughn
- ------------------------------
Name: Mark Vaughn
Title: Acting President
5
<PAGE>
HOME STATE HOLDINGS, INC. (A Delaware Corporation)
By: /s/ Mark Vaughn
- ------------------------------
Name: Mark Vaughn
Title: Chief Executive Officer
HOME STATE INSURANCE COMPANY NY (A New Jersey Corporation)
By: /s/ Mark Vaughn
- ------------------------------
Name: Mark Vaughn
Title: Chief Executive Officer
NEW YORK MERCHANT BAKERS INSURANCE COMPANY (A New York Corporation)
By: /s/ Mark Vaughn
- ------------------------------
Name: Mark Vaughn
Title: Chief Executive Officer
PINNACLE INSURANCE COMPANY (A Georgia Corporation)
By: /s/ Mark Vaughn
- ------------------------------
Name: Mark Vaughn
Title: Chief Executive Officer
QUAKER CITY INSURANCE COMPANY (A Pennsylvania Corporation)
By: /s/ Mark Vaughn
- ------------------------------
Name: Mark Vaughn
Title: Chief Executive Officer
WESTBROOK INSURANCE COMPANY (A Connecticut Corporation)
By: /s/ Mark Vaughn
- ------------------------------
Name: Mark Vaughn
Title: Chief Executive Officer
Accepted and agreed to as of the date above written:
RELIANCE INSURANCE COMPANY (A Pennsylvania Corporation)
By:
------------------------------
Name:
Title:
SIGNATURE PAGE OF CEDED REINSURANCE AGREEMENT DATED OCTOBER 2, 1996
6
<PAGE>
HOME STATE HOLDINGS, INC. (A Delaware Corporation)
By:
------------------------------
Name:
Title:
HOME STATE INSURANCE COMPANY (A New Jersey Corporation)
By:
------------------------------
Name:
Title:
NEW YORK MERCHANT BAKERS INSURANCE COMPANY (A New York Corporation)
By:
------------------------------
Name:
Title:
PINNACLE INSURANCE COMPANY (A Georgia Corporation)
By:
------------------------------
Name:
Title:
QUAKER CITY INSURANCE COMPANY (A Pennsylvania Corporation)
By:
------------------------------
Name:
Title:
WESTBROOK INSURANCE COMPANY (A Connecticut Corporation)
By:
------------------------------
Name:
Title:
Accepted and agreed to as of the date above written:
RELIANCE INSURANCE COMPANY (A Pennsylvania Corporation)
By: /s/ Albert A. Benchimol
------------------------------
Name: Albert A. Benchimol
Title: Vice President
SIGNATURE PAGE OF CEDED REINSURANCE AGREEMENT DATED OCTOBER 4, 1996.
7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and
entered into as of the 31st day of January, 1997, between HOME STATE HOLDINGS,
INC., a Delaware corporation with it principal place of business at 3 South
Revmont Drive, Shrewsbury, New Jersey 07702 (the "Company"), and MARK S. VAUGHN,
an individual residing at 9 Jackson Court, Monmouth Beach, New Jersey 07750 (the
"Executive" ).
W I T N E S S E T H:
WHEREAS, the Executive has been employed by the Company since
July 1994 and has extensive and valuable experience in the business of the
Company and its subsidiaries; and
WHEREAS, the Executive was appointed President and Chief
Executive Officer of the Company in June 1996; and
WHEREAS, the Executive and the Company entered into an
employment agreement dated June 15, 1995 which the Executive and the Company
desire to amend and restate;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and intending to be
legally bound, the Company and the Executive hereby agree to amend and restate
<PAGE>
the employment agreement between them dated June 15, 1995 so as to provide as
follows:
1. Employment. The Company shall, and does hereby, employ the
Executive, and the Executive shall, and does hereby accept employment from the
Company in the capacity of President and Chief Executive Officer of the Company
and as an officer of certain of its subsidiaries (collectively, together with
any entity which is now, or may hereinafter become, a direct or indirect
subsidiary of the Company, the "Subsidiaries"). In such capacity, the Executive
shall at all times during the term of his employment hereunder:
(i) devote his full business attention, knowledge, experience,
skills and best endeavors to the business and affairs of the Company and the
Subsidiaries;
(ii) perform services and discharge duties set forth herein
and generally associated with the offices held by him in a trustworthy manner;
(iii) perform and discharge in a trustworthy manner such other
services and duties as the Company's or the Subsidiaries' Board of Directors may
reasonably assign to him from time to time, including, without limitation,
serving as a member of the Board of Directors of the Company and/or certain
Subsidiaries; and
(iv) devote a significant amount of time to assist the Company
in its active efforts to place itself in a better position to capitalize on its
ability to produce direct premiums through strengthening the capital available
to support such business.
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2. Authority. The Executive shall have full power,
responsibility and authority to manage the day-to-day operations of the Company
and the insurance Subsidiaries in the ordinary course subject to the supervision
of the Board of Directors of the Company and the Subsidiaries.
3. Term. Subject to the termination provisions herein
provided, the term of this Agreement shall commence on the date hereof, and
shall continue in full force and effect until January 31, 2000; provided,
however, that the term of this Agreement shall automatically be extended for an
additional one year period on January 31, 1998 and on each succeeding January 31
that this Agreement is in effect, unless either party shall have given notice to
the other on or before January 1 in any year that it elects not to have any
further extensions of the term of this Agreement in which event this Agreement
shall terminate at the expiration of its then current term, as previously
extended.
4. Compensation.
(a) As compensation for the Executive's services during the
term of his employment, the Company shall pay to the Executive a base salary at
the rate of TWO HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($225,000) per annum, less
appropriate deductions as required by law, payable in substantially equal
monthly, semi-monthly or weekly installments in conformity with the Company's
regular payroll dates, provided, however, that on each January 31, commencing
January 31, 1998, the salary paid during the prior year may be increased by an
amount determined by the Compensation Committee of the Board of Directors of
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the Company in the sole discretion of the members of the Compensation Committee.
In addition, the Compensation Committee may elect to pay to the Executive a
discretionary bonus for any calendar year and also in recognition of the
specific services contemplated in Section 1(iv), above, and results achieved in
such effort, in each case in an amount to be determined by the Compensation
Committee.
(b) The Company hereby confirms the grant to Executive on
January 7, 1997 of an option under the Company's 1993 Stock Incentive Plan (the
"Plan") to purchase 60,070 shares of the common stock, par value $.01 per share,
of the Company at a purchase price of $7.25 per share, 41,379 of which will be
Incentive Stock Options which will vest 13,793 on each of January 31, 1997, 1998
and 1999, and 18,691 of which will be non-qualified options which vests as to
6,231 shares on January 31, 1997, and 6,230 shares on each of January 31, 1998
and 1999, provided, in each case, that the Executive remains employed by the
Company at each such date; and provided, further, that all of such shares will
become fully vested upon a change in control of the Company (as defined in the
Plan) or the Company's breach of the Agreement. Each option will be exercisable
for a term of 10 years from the date of grant. In connection with such grant,
Executive voluntarily terminated and cancelled options to purchase 20,000 shares
granted on December 8, 1994. The Company further confirms its agreement that
payment in full or in part of the exercise price of such option may be made (i)
by delivering common stock of the Company already owned by the Executive having
a total Fair Market Value (as defined in the Plan) on the date of such delivery
equal to the option exercise price;
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(ii) by authorizing the Company to retain shares of common stock which would
otherwise be issuable upon exercise of the option having a total Fair Market
Value on the date of delivery equal to the option exercise price; or (iii) by
any combination of the foregoing.
(c) The Company hereby confirms that it will grant to
Executive options to purchase up to an additional 39,930 shares of the common
stock, par value $.01 per share, of the Company when and as such shares become
available under the Plan on the same terms and conditions (except that the
exercise price will be the closing price of the Company's common stock on the
date of grant and such options will vest 1/3 upon grant and 1/3 on each of
January 31, 1998 and January 31, 1999). This provision shall not require the
Company to amend the Plan or to take any action which would violate the negative
covenants of any agreement to which the Company is presently bound.
5. Fringe Benefits. The Executive shall be eligible to
participate in any employee benefit or welfare plan, including any life,
accident or medical insurance plan or program maintained or which shall be
maintained from time to time during the term of this Agreement by the Company
for its executive employees and their immediate families, on the same basis and
subject to the same requirements and limitations as are or shall be applicable
to other employees or executive employees of the Company. In addition, the
Executive shall be entitled to the use of a Company car and all expenses
relating thereto shall be paid by the Company.
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6. Vacation. The Executive shall be entitled to four (4) weeks
vacation each year during the term of this Agreement to be taken at times not
inconvenient to the Company. To the extent that the Executive has any accrued
but unused vacation days at the end of any calendar year during the term of this
Agreement by reason of the Company having requested the Executive to defer such
vacation, the Executive shall be entitled to payment for the portion of unused
vacation caused by such request of the Company within 30 days after the end of
such year at a per diem rate equal to the quotient of the Executive's base
salary during such year divided by 365.
7. Expenses. The Company (or if the expenditure was incurred
on behalf of a Subsidiary, then such Subsidiary) shall reimburse the Executive
for all ordinary, necessary and reasonable business expenditures made by him in
connection with, or in furtherance of, his employment hereunder, upon
presentation and approval of itemized expense statements, receipts or vouchers
or such other supporting information as may from time to time be reasonably
requested by the Company (or such Subsidiary).
8. Confidentiality. The Executive recognizes that he will have
access to certain information, data and other aspects of the business of the
Company and the Subsidiaries which are secret, confidential and proprietary and
which the Company and the Subsidiaries desire to maintain and continue as such.
The Executive agrees that all such information gained by him in the course of
his employment hereunder is confidential and is the property of the Company and
the
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Subsidiaries and shall remain so. The Executive covenants that he will not,
during the term of his employment hereunder or any time thereafter, directly or
indirectly, communicate, divulge, discuss, use, furnish, disclose or make
accessible to anyone other than the Company, its Subsidiaries, its affiliated
entities or the directors, appropriate officers, employees, attorneys and
accountants thereof, any knowledge or information with respect to:
(i) Plans, reports, programs, data, statistics, or any other
factual matters or projections of a confidential nature relating to the
business, products, services or activities of the Company or any Subsidiary;
(ii) Any confidential plans and developments, trade secrets
and processes of the Company or any Subsidiary;
(iii) Customer, sales agent, agent or supplier lists of the
Company or any Subsidiary;
(iv) The business, territory, commission rates or any other
matters of a confidential nature relating to agents of the Company or any
Subsidiary; or
(v) insurance history, backgrounds, names, addresses,
telephone numbers, or any other matters of a confidential nature relating to
insureds of the Company or any Subsidiary; provided, however, if required by
law, subpoena or an order of court, the Executive may make such disclosure as is
so required if the Executive has first given prompt written notice of such
request or requirement so that the Company may seek an appropriate protective
order or other remedy. If a protective order or other remedy is not obtained or
the Company waives
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compliance with the relevant provisions of this Agreement, Executive will
furnish only such information which, in the written opinion of counsel, is
legally required to be disclosed and, upon the Company's request, Executive will
use his best efforts to obtain assurances that confidential treatment will be
accorded to such information.
All records, memoranda, calculations, letters, papers, lists,
drawings, graphs, and copies thereof or any other materials and documents
directly or indirectly concerning, affecting or relating to the business and
products of the Company or the Subsidiaries obtained by the Executive from
whatever source in the course of his employment hereunder are confidential and
shall remain the exclusive property of the Company or the Subsidiaries, as the
case may be. During the term of his employment, the Executive shall not use the
contents of such materials and documents or copies thereof or remove the same
for use outside the Company's office, unless it is within the scope of his
employment. Upon termination of his employment, the Executive shall return any
and all such materials and documents or copies thereof in his custody to the
Company or the Subsidiaries, as the case may be. This provision shall not apply
to any information which is now, or which subsequently becomes available in the
public domain, provided the Executive has not, other than in the ordinary course
of business or as required by law, disclosed or caused to be disclosed such
information such as to make it publicly available.
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9. Noncompetition. The Executive covenants and agrees that he
will not, during the term of his employment hereunder and for a period after the
termination of his employment hereunder as hereinafter provided, (unless the
termination is by reason of the expiration of the term of this Agreement or by
reason of a breach of this Agreement by the Company or the Subsidiaries), engage
in, manage, operate, enter into the employ of, be a shareholder of, organize,
assist in the planning, development or organization of, or render any financial
or other services or assistance to, directly or indirectly (as incorporator,
promoter, principal, agent, employee, employer, consultant, investor, officer,
director, shareholder, partner or in any other capacity), any other insurance
company or otherwise assist any other insurance company which is in, or has the
intention to become engaged in, the same lines of insurance as the Company or
any of the Subsidiaries in the State in which the Company or the Subsidiaries
write insurance. The Executive further covenants that for such period that he
will not:
(i) Divulge, teach, sell or utilize the techniques,
methodology, procedures and processes used by the Company or any Subsidiary, in
its marketing and business activities;
(ii) Solicit or approach any customer or outside agent of the
Company or the Subsidiaries for the purpose of attempting to provide such
customer or outside agent with the same or competitive services provided by the
Company or the Subsidiaries; or
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(iii) Interfere with, disrupt or attempt to disrupt any past,
present or prospective relationship, contractual or otherwise, between the
Company or any Subsidiary and any customer, outside agent, supplier, investor,
shareholder or employee of the Company or such Subsidiary.
Notwithstanding the foregoing, this Section 9 shall apply only in those states
in the United States in which the Company or any Subsidiary carries on business
and markets its services, shall not prohibit or restrict the Executive from
entering into the employ (after the termination of his employment hereunder) of
an organization or business entity which engages in a dissimilar field of
business endeavor from the Company or the Subsidiaries, and shall not prohibit
or restrict the Executive from being an investor in any corporation whose
securities are publicly owned, or regularly traded on any national stock
exchange or in the over-the-counter market, provided that his investment at no
time, directly or indirectly, shall exceed five (5%) percent of the outstanding
stock of any class of any such corporation. A dissimilar business shall include,
among others, insurance companies underwriting or placing insurance for risks
different from those underwritten by the Company and its Subsidiaries, and
insurance agencies.
(iv) Nothing herein shall prevent the Executive, subject to
the performance of his duties hereunder, from participating in business
endeavors which do not involve the writing of insurance or in engaging in any
business opportunity directly related to the business of the Company and
Subsidiaries in which they have declined to engage.
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10. Proprietary Intellectual Property. The Executive agrees to
treat as for the sole benefit of the Company and the Subsidiaries, and fully and
promptly disclose and assign to them without additional compensation, all
proprietary intellectual property, including, without limitation, all ideas,
discoveries, inventions and improvements, patentable or not, as well as all
formulae, processes, know-how, patent rights, letters patent, programs,
copyrights, trademarks, trade names, and applications therefor filed in the
United States and all other countries, and any and all rights and interests in,
to and under the same, made, conceived, acquired, reduced to practice or
otherwise possessed by the Executive, alone or with other employees, during or
after usual working hours, either on or off the job, and which are related to
the business of the Company or the Subsidiaries. In addition, the Executive
agrees that, upon request, he will promptly make all disclosures, execute all
instruments and papers, and perform all acts whatsoever necessary or desired by
the Company or any Subsidiary, to vest in and assign to it, its successors,
assigns and nominees, fully and completely, all rights created or contemplated
by this Section 10 and which may be necessary or desirable to enable it, its
successors, assigns and nominees to secure and enjoy the full benefits and
advantages thereof, including any and all applications, writings or other
documents, as may be necessary to apply for and obtain any patent, copyright or
trademark registration by it or any assignment thereof. The covenant made by the
Executive under the terms of this Section 10 shall be enforceable for the term
of this Agreement and for twelve (12)
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months immediately following the termination or expiration of this Agreement
either under the terms of Section 3 or Section 13 hereof.
11. Enforcement. The parties hereto acknowledge and agree that
the Executive will have access to confidential information concerning the
customers, outside agents, services, trade secrets and business of the Company
and the Subsidiaries, the disclosure, divulgence or unauthorized use of which
will cause them irreparable injury and harm. Accordingly, the Executive
acknowledges that a breach by him of the provisions of this Agreement,
especially the provisions of Sections 8 through 10 inclusive hereof, would cause
damage to the Company or the Subsidiaries, for which remedy at law would be
inadequate. Therefore, the Executive expressly agrees that the Company or any
Subsidiary shall be entitled to temporary and permanent injunctive or other
equitable relief in any court of competent jurisdiction to prevent or otherwise
restrain a breach or compel specific performance of this Agreement for the
purpose of enforcing this Agreement or any part hereof. Nothing herein shall be
construed to prohibit or restrain the Company or any Subsidiary from pursuing
any other remedies available to it for any breach or threatened breach of this
Agreement, including the recovery of damages from the Executive.
12. Survival. The covenants and agreements contained in
Sections 8, 9, 10 and 11 hereof shall survive any termination or expiration of
this Agreement and the termination of the Executive's employment hereunder,
except as otherwise expressly provided in Section 13 below.
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13. Termination.
(a) Notwithstanding the provisions set forth in Section 3
hereof, the Company's Board of Directors may terminate the Executive's
employment upon the occurrence of any of the following events:
(i) For cause which is defined for the purposes of
this Agreement as (A) willful breach or reckless disregard by the Executive of
his duties hereunder which materially disrupts the operations of the Company or
the Subsidiaries; (B) habitual drunkenness; (C) narcotic drug addiction;
(D) theft or embezzlement; or (E) willful breach of any law for which the
Executive would not be entitled to indemnification under Section 15(b) below and
which directly or indirectly, has a material adverse effect on the Company or
the Subsidiaries. Upon the termination of the Executive's employment pursuant to
Section 13(a)(i), the Executive shall be entitled to no further compensation
from the Company or the Subsidiaries after the Date of Termination and the
Executive shall be bound by the provisions of Section 9 for a period of
twenty-four (24) months following such termination.
(ii) If the Executive shall become disabled and shall
have failed to cure such "Disability." For the purposes of this Agreement, such
Disability shall be deemed to have occurred upon written notice by the Company
to the Executive, or his committee, guardian or other person, as the case may
be, then in charge of his affairs, given at any time that a guardian, committee
or legal representative has been appointed for his person, or, at any time after
the Executive
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shall have failed on account of illness or incapacity to render services of the
character herein contemplated for an aggregate of one hundred eighty (180)
consecutive days during the preceding twelve-month period; provided, however,
that if the Executive, within ten (10) days after such notice, effectively
resumes and performs his ordinary duties hereunder on a regular basis for at
least sixty (60) consecutive days, such Disability shall be deemed to have been
cured, except that this right to cure may not be exercised more than once during
any three-year period. In the event of the termination of the Executive pursuant
to this Section 13(a)(ii), the Executive shall receive 75% of his full base
salary then in effect for an additional two (2) years following the Date of
Termination or shall have the benefit of any disability benefits provided by the
Company under Section 5 of this Agreement, if greater and the Executive shall
comply with the provisions of Section 9 hereof until the earlier of two (2)
years following the Date of Termination or the discontinuance of the payments
hereinabove provided. Throughout such period, the Company will use its best
efforts to cause to be continued life, health and disability coverage, at the
Executive's expense, substantially identical to the coverage maintained by the
Company for the Executive prior to his severance, but no legal liability shall
attach to the Company if for any reason the Company cannot, after reasonable
endeavor, arrange such continuance.
(b) The Executive shall not be released from his obligations
under Sections 8 through 11 inclusive of this Agreement upon termination of this
Agreement except upon a bona fide decision made by the Company's Board
of
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Directors to terminate the Company's business and liquidate its assets, or as
expressly provided in this Agreement.
(c) The Executive shall have the right to terminate this
Agreement upon the occurrence of a material breach of this Agreement by the
Company and the Company shall pay the Executive for the remaining term of this
Agreement. Further, if the Company breaches this Agreement by wrongful
termination, the Executive shall be paid for the remaining term of this
Agreement. In the event the Company wrongfully terminates this Agreement during
a period in which a transaction which would be a change in control is under
consideration, the Executive shall be paid an amount equal to three times his
annual base salary then in effect. In each such case the provisions of Section 9
of the Agreement shall not survive termination and all stock options, stock
grants and stock appreciation rights will be deemed fully vested. It is
acknowledged by the parties hereto that damages by reason of termination by the
Company of the Executive's employment are difficult to ascertain and the
foregoing provisions shall constitute liquidated damages, and not a penalty, and
shall be in lieu of any other claim of the Executive, at law or in equity, with
respect to such termination.
(d) The Executive shall have the right after the original
three (3) year term hereof, upon three (3) months' written notice to the Company
(which may be given any time before or after the end of the term), to terminate
this Agreement. Upon such voluntary termination the Executive (or, in the event
of his subsequent death, his beneficiary or estate, as the case may be) shall be
bound by the
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provisions of Section 9 for a period of twelve (12) months following such
termination and the Executive shall be paid, as severance pay, his then base
salary for twelve (12) months following such termination, payable in
substantially equal installments in conformity with the Company's regular
payroll dates, unless the Executive is employed by another employer prior to the
end of such one-year period, in which case such severance payments shall cease
upon his reemployment or unless the Executive has violated or will violate
Sections 8 or 9 of this Agreement, in which case such severance payments shall
cease immediately and the Executive shall return any severance payments already
paid to him.
(e) Any purported termination by the Company or by the
Executive shall be communicated by written Notice of Termination to the other
party hereto in accordance with Section 19 hereof. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated.
(f) "Date of Termination" shall mean (i) if the Executive's
employment is terminated for cause pursuant to Section 13(a)(i), the date
specified in the Notice of Termination, which shall not be less than 30 days
after the Notice of Termination is given; (ii) if the Executive's employment is
terminated for Disability pursuant to Section 13(a)(ii), thirty (30) days after
the Notice of Termination is given; (iii) if the Executive terminates his
employment pursuant to Section 13(c),
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the date specified in the Notice of Termination; and (iv) if the Executive's
employment is terminated voluntarily pursuant to Section 13(d), the date
specified in the Notice of Termination, which shall not be less than three (3)
months after the Notice of Termination is given.
(g) Upon termination of this Agreement for whatever reason,
the Executive shall upon the request of the Company resign as a Director and
from any offices held by him in the Company and from all directorships and
offices held by him in any Subsidiary.
14. Termination on Change in Control.
In the event of a change in control of the Company (as
hereinafter defined) the Executive may terminate his employment either simply by
reason of the change in control or for "Good Reason" (as hereinafter defined) by
written notice to the Chairman of the Board of Directors of the Company or to
the Chief Executive Officer of an entity which acquires the Company, as the case
may be, given within 60 days after the effective date of such change in control
or other event giving rise to the Executive's right to terminate this Agreement;
provided, however, that if the change in control is a transaction approved by at
least 75% of the members of the Board of Directors of the Company the Executive
will be obligated to assist diligently in the consummation of the transaction,
regardless of whether such assistance amounts to a change in his duties;
provided, however, notwithstanding the Executive's election to terminate this
Agreement other than pursuant to Section 13(c), the Company or its successor may
require that this Agreement remain in effect
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and the Executive will remain employed for a period of up to 180 days after the
effective date of the change in control in order to assist with the transition
of his duties to another person or in the transition of the business of the
Company and its Subsidiaries to such successor; provided, however, the
Executive's duties during such transition period will reasonably relate to the
services he performed for the Company prior to such change in control, the
Executive's work hours will not be more onerous than his work hours prior to
such change in control, and the Executive will be allowed reasonable
opportunities to seek other employment, consistent with the requirements for his
services in such transition. During any such transition period when the
Executive remains employed, the Executive shall be entitled to compensation
pursuant to this Agreement based on his annual base salary in effect immediately
prior to the change in control and such compensation shall not be applied
against the severance pay due under Section 14(a) or Section 14(b), as the case
may be.
(a) In the event there is a change in control and the
Executive terminates this Agreement for Good Reason, the Company shall pay to
the Executive as severance pay in one lump sum upon the effective date of such
termination an amount equal to the base salary he would have received (at the
greater of the rate of $225,000 per annum or the annual base salary in effect
immediately prior to the change in control) from the effective date of the
change in control until the expiration of this Agreement (assuming no further
automatic extensions of the expiration date) and the Executive will be released
from the non-
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competition provisions contained in Section 9 of this Agreement. For purposes
of this Agreement "Good Reason" shall mean the occurrence of any of the
following events in connection with or after a change in control of the Company.
(i) the assignment to the Executive of any duties inconsistent
with his status as Chief Executive Officer and President of the Company or his
corresponding duties as an officer of the insurance Subsidiaries; a substantial
alteration in the nature or status of his responsibilities from those in effect
immediately prior to a change in control of the Company; or a change in lines of
authority such that the Executive is no longer reporting directly to the Board
of Directors of the Company and of its Subsidiaries;
(ii) a reduction by the Company in the Executive's base salary
as in effect on the date of a change in control;
(iii) the Company's requiring the Executive to be based
anywhere other than within a 50 mile radius of the Company's office at which he
was based prior to the change in control of the Company; or
(iv) the failure by the Company to continue to provide the
Executive with benefits substantially similar to those received by the Executive
prior to the change in control.
(b) In the event there is a change in control and the
Executive terminates this Agreement without Good Reason, the Company shall pay
to the Executive as severance pay in one lump sum upon the effective date of
such termination an amount equal to twenty-four (24) months base salary (at the
greater
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of the rate of $225,000 per annum or the annual base salary in effect
immediately prior to the change in control) and the Executive will be released
from the provisions contained in Section 9 of this Agreement except for the
provisions of clauses (ii) and (iii) of Section 9, which shall be binding on the
Executive for a period of eighteen (18) months following the date of
termination; provided, however, the Executive may elect to be paid less than
twenty-four (24) months base salary in which event his obligation to observe
provisions contained in clauses (ii) and (iii) of Section 9 will be shortened to
the number of months of base salary he has elected to be paid.
(c) The Company will cause to be continued life, health and
disability coverage substantially identical to the coverage maintained by the
Company for Executive prior to his severance until one (1) year after the change
in control (unless the Executive is employed by another employer prior to the
end of such one-year period, in which case such obligation to maintain coverage
shall cease upon his reemployment), but no legal liability shall attach to the
Company if for any reason the Company cannot, after reasonable endeavor, arrange
such continuance.
(d) Notwithstanding any provision of any stock option plan or
SAR agreement of the Company inconsistent herewith, all options and SARs will be
deemed to have fully vested upon the effective date of the change of control and
Executive will have a period of six (6) months from his severance of employment
within which to exercise options and SARs granted to him under any such stock
option plan or SAR agreement, provided however, with respect to incentive
stock
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options, as defined in Section 422A of the Code, not later than the date
which is ten (10) years from the date of grant of such incentive stock option.
(e) For purposes hereof, a "Change in Control" shall mean the
happening of any of the following events:
(i) An acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a
"Person") of the beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of the then outstanding shares of common
stock of the Company (the "Outstanding Company Common Stock") or the combined
voting power of the then outstanding voting securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Company Voting
Securities"); or, the approval by the stockholders of the Company of a
reorganization, merger, consolidation, complete liquidation or dissolution of
the Company, the sale or disposition of all or substantially all of the assets
of the Company or similar corporate transaction (in each case referred to in
this Section 14 as a "Corporate Transaction") or, if consummation of such
Corporate Transaction is subject, at the time of such approval by shareholders,
to the consent of any government or governmental agency, the obtaining of such
consent (either explicitly or implicitly); provided such acquisition of
beneficial ownership or such Corporation Transaction would result in any person
(other than the stockholders immediately prior to the Effective Date)
beneficially owning (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) following the acquisition or Corporate Transaction 20% or
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more of the Outstanding Company Common Stock or 20% or more of the Outstanding
Company Voting Securities; excluding, however any acquisition by any subsidiary
of the Company or by an employee benefit plan (or related trust) sponsored or
maintained by the Company or an Affiliate; or
(ii) A change in the composition of the Board such that
the individuals who, as of the date hereof, constitute the Board (such Board
shall be hereinafter referred to as the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board; provided, however, for purposes
of this Section 14(e)(ii), that any individual who becomes a member of the Board
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of those
individuals who are members of the Board and who were also members of the
Incumbent Board (or deemed to be such pursuant to this proviso) shall be
considered as though such individual were a member of the Incumbent Board; but,
provided, further, that any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board shall not be so considered as a member
of the Incumbent Board.
(f) The effective date of a change in control shall be the
date of the closing of a transaction, or the effective date of an action, which
constitutes a change in control as hereinabove defined.
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(g) If, following a change of control, the Company fails to
comply with its obligations under this Agreement or if the Company or any other
person takes action to declare this Agreement void or unenforceable, or
institutes any legal proceeding or any other action designed to deny the
Executive the benefits of this Agreement and the Executive has complied with all
his obligations hereunder, the Company shall directly pay or reimburse the
Executive for the reasonable legal expenses incurred by the Executive in
enforcing his rights hereunder or in defense of any such legal proceeding or
action promptly upon presentation by the Executive of a statement or statements
prepared his counsel.
15. Representations and Warranties: Indemnification.
(a) By the Executive. The Executive represents and warrants to
the Company that his employment hereunder does not violate any provision of law
or fiduciary duty by which he is bound or conflict with or result in a breach of
any agreement, instrument, arrangement or other understanding to which he is a
party or by which he is bound; and the Executive agrees that he will indemnify
and hold harmless the Company and its affiliates and their respective directors,
officers and employees against any claims, damages, liabilities and expenses
incurred by them (including legal fees and reasonable expenses of investigation
or of defending against the same), including amounts paid in settlement, by any
of them in connection with any claim based upon or related to the Executive's
aforestated representation and warranty.
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(b) By the Company. Should the Executive be made a party or
threatened to be made a party to or be involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter, a "Proceeding"), by reason of the fact that he is or was an
officer, employee or agent of the Company or the Subsidiaries, including service
with respect to employee benefit plans, whether the basis of such Proceeding is
an alleged action in his official capacity as an officer, employee or agent or
in any other capacity while serving as an officer, employee or agent, he shall
be indemnified and held harmless by the Company to the fullest extent authorized
by Delaware General Corporation Law, or as otherwise permitted by such law as
the same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Company to provide
broader indemnification rights than said law permitted the Company to provide
prior to such amendment), against all expense, liability and loss (including
attorneys' fees), judgments, fines and amounts paid or to be paid in settlement
actually and reasonably incurred by the Executive in connection therewith,
provided, however, that the Executive shall have acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interest of
the Company and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Such indemnification shall
continue should the Executive cease to be an officer, employee or agent of the
Company and shall inure to the benefit of his heirs, executors and
administrators.
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This right to indemnification shall include the right of the
Executive to have the Company pay the expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that, if the
Delaware General Corporation Law requires, the payment of such expenses incurred
by the Executive in his capacity as an officer (and not in any other capacity in
which service was or is rendered by the Executive while an officer, including,
without limitation, service to an employee benefit plan) in advance of the final
disposition of a Proceeding, shall be made only upon delivery to the Company of
an undertaking, by or on behalf of the Executive, to repay all amounts so
advanced if it shall ultimately be determined that he is not entitled to be
indemnified under this section or otherwise.
16. Partial Invalidity. If any provision of this Agreement
shall contravene or be invalid under the laws of any state, county or
jurisdiction in which this Agreement shall be performed or enforced, then such
contravention or invalidity shall not invalidate the entire Agreement. Such
provision shall be deemed to be modified to the extent necessary to render it
valid and enforceable, and if no such modification shall render it valid and
enforceable, then the Agreement shall be construed as is not containing the
provision held to be invalid, and the rights and obligations of the parties
shall be construed and enforced accordingly.
17. Parties in Interest; Assignments; Amendment. This
Agreement is binding upon and solely for the benefit of the parties hereto
except as otherwise provided in this Agreement. The Executive may not delegate
any of his duties hereunder. Neither party hereto may assign any rights
hereunder. Any such
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purported delegation or assignment shall be void. Notwithstanding the foregoing,
upon the sale of all or substantially all of the assets, business and goodwill
of the Company or the Subsidiaries, upon the merger or consolidation of the
Company or the Subsidiaries with another corporation, this Agreement shall, at
the election of the Company, bind and inure to the benefit of both the Executive
and the acquiring, succeeding or surviving corporation, as the case may be. No
modification or amendment of this Agreement or any provision hereof shall be
enforceable unless in writing and executed by the party against whom such
waiver, modification or amendment is claimed.
18. Headings. The headings to sections in this Agreement are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or the interpretation of this Agreement.
19. Notices. All notices or other communications required or
permitted hereunder must be in writing and shall be deemed given only (i) when
delivered personally against receipt therefor, or (ii) when sent by certified
mail, postage prepaid and return receipt requested, or (iii) when transmitted by
telecopier, facsimile, telex or other electronic transmission method, provided
that receipt is confirmed and within seven (7) days of such transmission a copy
of such notice is sent by certified mail, postage prepaid and return receipt
requested, or (iv) when sent overnight by Federal Express or other nationally
recognized overnight delivery service.
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If more than one (1) party is entitled to receive a specific
notice or other communication, the same shall be deemed to have been given when
given to all of the parties entitled to receive the same, addressed to the
respective parties hereto at the following address:
If to the Company: Home State Holdings, Inc.
3 South Revmont Drive
Shrewsbury, New Jersey 07702
Attn: Mr. Michael Monier, Chairman
Facsimile: (908) 935-0156
With a copy to: Dorsey & Whitney LLP
250 Park Avenue
New York, New York 10177
Attention: Perez C. Ehrich, Esq.
Facsimile: (212) 953-7201
If to the Executive: Mr. Mark S. Vaughn
9 Jackson Court
Monmouth, New Jersey 07750
With a copy to: Koo & Larrabee, LLP
Suite 230, 774 White Plains Road
Scarsdale, NY 10538
Attention: Richard Koo, Esq.
Facsimile: (914) 723-1636
or to any other address designated by and for any party hereto by written notice
similarly given, and all notices given shall be deemed effective (i) upon
delivery if delivered personally, (ii) on the date indicated on the return
receipt if mailed, (iii) on the next business day if transmitted electronically,
and (iv) on the next business day if sent via recognized overnight delivery
service.
20. Waiver. The failure of the Company to insist upon strict
compliance with respect to any of the terms or conditions hereof shall not
be
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deemed a waiver or relinquishment of any other term or condition nor shall any
failure to exercise any right or power hereunder at any time be deemed a waiver
or relinquishment of such right or power at any other time.
21. Entire Agreement. This Agreement supersedes any and all
oral or written agreements and understandings heretofore made relating to the
subject matter hereof and contains the entire Agreement of the parties hereto
relating to the subject matter hereof.
22. Arbitration. The parties hereby agree that all disputes
and controversies which may arise in connection with this Agreement or the
construction, performance or breach of this Agreement, other than enforcement
actions contemplated under Section 11 above, shall be determined by binding
arbitration, to be held in the City of New York, State of New York, unless
otherwise agreed to by the parties hereto, and in accordance with the rules then
obtaining of the American Arbitration Association; provided, however, that the
arbitrators shall be knowledgeable with respect to the practices and the matters
giving dispute, that the authority of the arbitrators shall be limited to
construing and enforcing the terms and conditions of this Agreement as expressly
set forth herein and the arbitrators shall state the reasons for the award in a
written opinion. The award of the arbitrators, or a majority of them, shall be
final and judgment upon the award may be confirmed and entered in any United
States court, state or Federal, or other court having jurisdiction. The parties
hereby waive any right of appeal of any such judgment.
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23. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New Jersey, without giving
effect to principles of conflicts of laws.
24. Expenses. Each party shall pay its or his own expenses
incident to the negotiation, preparation and execution of this Agreement, except
that the Company shall reimburse the Executive up to $2,500 for legal expenses
incurred by the Executive in connection therewith.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed on the date first above written.
HOME STATE HOLDINGS, INC.
By: /s/ Edward D. Herrick
--------------------------------
EDWARD D. HERRICK,
EXECUTIVE COMMITTEE MEMBER
/s/ Mark S. Vaughn
--------------------------------
MARK S. VAUGHN
29
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and
entered into as of the 31st day of January, 1997, between HOME STATE HOLDINGS,
INC., a Delaware corporation with it principal place of business at 3 South
Revmont Drive, Shrewsbury, New Jersey 07702 (the "Company"), and ERIC REEHL, an
individual residing at 435 Navesink River Road, Red Bank, New Jersey 07701 (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Executive has been employed by the Company since
August 1993 and has extensive and valuable experience in the business of the
Company and its subsidiaries; and
WHEREAS, the Executive was appointed Executive Vice President
and Chief Financial Officer of the Company in June 1996; and
WHEREAS, the Executive and the Company wish to enter into an
employment agreement on the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and intending to be
legally bound, the Company and the Executive hereby agree as follows:
1. Employment. The Company shall, and does hereby, employ the
Executive, and the Executive shall, and does hereby accept employment from
the
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Company in the capacity of Executive Vice President and Chief Financial
Officer of the Company and as an officer of certain of its subsidiaries
(collectively, together with any entity which is now, or may hereinafter become,
a direct or indirect subsidiary of the Company, the "Subsidiaries"). In such
capacity, the Executive shall at all times during the term of his employment
hereunder:
(i) devote such of his business attention, knowledge,
experience, skills and best endeavors to the business and affairs of the Company
and the Subsidiaries as is reasonably necessary to perform his duties hereunder;
(ii) perform services and discharge duties set forth
herein and generally associated with the offices held by him in a trustworthy
manner;
(iii) perform and discharge in a trustworthy manner such
other services and duties as the Company's or the Subsidiaries' Board of
Directors may reasonably assign to him from time to time, including, without
limitation, serving as a member of the Board of Directors of the Company and/or
certain Subsidiaries; and
(iv) devote a significant amount of time to assist the
Company in its active efforts to place itself in a better position to capitalize
on its ability to produce direct premiums through strengthening the capital
available to support such business.
2. Authority. The Executive shall have full power,
responsibility and authority to manage the financial reporting and financial
planning operations of the Company and the Subsidiaries in the ordinary course
as well as for obtaining
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financing of the Company's and the Subsidiaries' operations and for matters
relating to corporate acquisitions, dispositions and development, subject to the
supervision of the Board of Directors of the Company and the Subsidiaries.
3. Term. Subject to the termination provisions herein
provided, the term of this Agreement shall commence on the date hereof, and
shall continue in full force and effect until January 31, 2000; provided,
however, that the term of this Agreement shall automatically be extended for an
additional one year period on January 31, 1998 and on each succeeding January 31
that this Agreement is in effect, unless either party shall have given notice to
the other on or before January 1 in any year that it elects not to have any
further extensions of the term of this Agreement in which event this Agreement
shall terminate at the expiration of its then current term, as previously
extended.
4. Compensation.
(a) As compensation for the Executive's services during the
term of his employment, the Company shall pay to the Executive a base salary at
the rate of TWO HUNDRED THOUSAND DOLLARS ($200,000) per annum, less appropriate
deductions as required by law, payable in substantially equal monthly,
semi-monthly or weekly installments in conformity with the Company's regular
payroll dates, provided, however, that on each January 31, commencing January
31, 1998, the salary paid during the prior year may be increased by an amount
determined by the Compensation Committee of the Board of Directors of the
Company in the sole discretion of the members of the Compensation Committee. In
addition, the
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Compensation Committee may elect to pay to the Executive a discretionary bonus
for any calendar year and also in recognition of the specific services
contemplated in Section 1(iv), above, and results achieved in such effort, in
each case in an amount to be determined by the Compensation Committee.
(b) The Company hereby confirms the grant to Executive on
January 7, 1997 of an option under the Company's 1993 Stock Incentive Plan (the
"Plan") to purchase 60,070 shares of the common stock, par value $.01 per share,
of the Company at a purchase price of $7.25 per share, 41,379 of which will be
Incentive Stock Options which will vest 13,793 on each of January 31, 1997, 1998
and 1999, and 18,691 of which will be non-qualified options which vests as to
6,231 shares on January 31, 1997, and 6,230 shares on each of January 31, 1998
and 1999, provided, in each case, that the Executive remains employed by the
Company at each such date; and provided, further, that all of such shares will
become fully vested upon a change in control of the Company (as defined in the
Plan) or the Company's breach of the Agreement. Each option will be exercisable
for a term of 10 years from the date of grant. In connection with such grant,
Executive voluntarily terminated and cancelled options to purchase 20,000 shares
granted on December 8, 1994. The Company further confirms its agreement that
payment in full or in part of the exercise price of such option may be made (i)
by delivering common stock of the Company already owned by the Executive having
a total Fair Market Value (as defined in the Plan) on the date of such delivery
equal to the option exercise price; (ii) by authorizing the Company to retain
shares of common stock which would
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<PAGE>
otherwise be issuable upon exercise of the option having a total Fair Market
Value on the date of delivery equal to the option exercise price; or (iii) by
any combination of the foregoing.
(c) The Company hereby confirms that it will grant to
Executive options to purchase up to an additional 39,930 shares of the common
stock, par value $.01 per share, of the Company when and as such shares become
available under the Plan on the same terms and conditions (except that the
exercise price will be the closing price of the Company's common stock on the
date of grant and such options will vest 1/3 upon grant and 1/3 on each of
January 31, 1998 and January 31, 1999). This provision shall not require the
Company to amend the Plan or to take any action which would violate the negative
covenants of any agreement to which the Company is presently bound.
5. Fringe Benefits. The Executive shall be eligible to
participate in any employee benefit or welfare plan, including any life,
accident or medical insurance plan or program maintained or which shall be
maintained from time to time during the term of this Agreement by the Company
for its executive employees and their immediate families, on the same basis and
subject to the same requirements and limitations as are or shall be applicable
to other employees or executive employees of the Company. In addition, the
Executive shall be entitled to the use of a Company car and all expenses
relating thereto shall be paid by the Company.
5
<PAGE>
6. Vacation. The Executive shall be entitled to four (4) weeks
vacation each year during the term of this Agreement to be taken at times not
inconvenient to the Company. To the extent that the Executive has any accrued
but unused vacation days at the end of any calendar year during the term of this
Agreement by reason of the Company having requested the Executive to defer such
vacation, the Executive shall be entitled to payment for the portion of unused
vacation caused by such request of the Company within 30 days after the end of
such year at a per diem rate equal to the quotient of the Executive's base
salary during such year divided by 365.
7. Expenses. The Company (or if the expenditure was incurred
on behalf of a Subsidiary, then such Subsidiary) shall reimburse the Executive
for all ordinary, necessary and reasonable business expenditures made by him in
connection with, or in furtherance of, his employment hereunder, upon
presentation and approval of itemized expense statements, receipts or vouchers
or such other supporting information as may from time to time be reasonably
requested by the Company (or such Subsidiary).
8. Confidentiality. The Executive recognizes that he will have
access to certain information, data and other aspects of the business of the
Company and the Subsidiaries which are secret, confidential and proprietary and
which the Company and the Subsidiaries desire to maintain and continue as such.
The Executive agrees that all such information gained by him in the course of
his employment hereunder is confidential and is the property of the Company and
the
6
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Subsidiaries and shall remain so. The Executive covenants that he will not,
during the term of his employment hereunder or any time thereafter, directly or
indirectly, communicate, divulge, discuss, use, furnish, disclose or make
accessible to anyone other than the Company, its Subsidiaries, its affiliated
entities or the directors, appropriate officers, employees, attorneys and
accountants thereof, any knowledge or information with respect to:
(i) Plans, reports, programs, data, statistics, or any
other factual matters or projections of a confidential nature relating to the
business, products, services or activities of the Company or any Subsidiary;
(ii) Any confidential plans and developments, trade
secrets and processes of the Company or any Subsidiary;
(iii) Customer, sales agent, agent or supplier lists of
the Company or any Subsidiary;
(iv) The business, territory, commission rates or any
other matters of a confidential nature relating to agents of the Company or any
Subsidiary; or
(v) insurance history, backgrounds, names, addresses,
telephone numbers, or any other matters of a confidential nature relating to
insureds of the Company or any Subsidiary; provided, however, if required by
law, subpoena or an order of court, the Executive may make such disclosure as is
so required if the Executive has first given prompt written notice of such
request or requirement so that the Company may seek an appropriate protective
order or other remedy. If a protective order or other remedy is not obtained or
the Company waives
7
<PAGE>
compliance with the relevant provisions of this Agreement, Executive will
furnish only such information which, in the written opinion of counsel, is
legally required to be disclosed and, upon the Company's request, Executive will
use his best efforts to obtain assurances that confidential treatment will be
accorded to such information.
All records, memoranda, calculations, letters, papers, lists,
drawings, graphs, and copies thereof or any other materials and documents
directly or indirectly concerning, affecting or relating to the business and
products of the Company or the Subsidiaries obtained by the Executive from
whatever source in the course of his employment hereunder are confidential and
shall remain the exclusive property of the Company or the Subsidiaries, as the
case may be. During the term of his employment, the Executive shall not use the
contents of such materials and documents or copies thereof or remove the same
for use outside the Company's office, unless it is within the scope of his
employment. Upon termination of his employment, the Executive shall return any
and all such materials and documents or copies thereof in his custody to the
Company or the Subsidiaries, as the case may be. This provision shall not apply
to any information which is now, or which subsequently becomes available in the
public domain, provided the Executive has not, other than in the ordinary course
of business or as required by law, disclosed or caused to be disclosed such
information such as to make it publicly available.
8
<PAGE>
9. Noncompetition. The Executive covenants and agrees that he
will not, during the term of his employment hereunder and for a period after the
termination of his employment hereunder, as hereinafter provided (unless the
termination is by reason of the expiration of the term of this Agreement or by
reason of a breach of this Agreement by the Company or the Subsidiaries), engage
in, manage, operate, enter into the employ of, be a shareholder of, organize,
assist in the planning, development or organization of, or render any financial
or other services or assistance to, directly or indirectly (as incorporator,
promoter, principal, agent, employee, employer, consultant, investor, officer,
director, shareholder, partner or in any other capacity), any other insurance
company or otherwise assist any other insurance company which is in, or has the
intention to become engaged in, the same lines of insurance as the Company or
any of the Subsidiaries in the State in which the Company or the Subsidiaries
write insurance. The Executive further covenants that for such period that he
will not:
(i) Divulge, teach, sell or utilize the techniques,
methodology, procedures and processes used by the Company or any Subsidiary, in
its marketing and business activities;
(ii) Solicit or approach any customer or outside agent of
the Company or the Subsidiaries for the purpose of attempting to provide such
customer or outside agent with the same or competitive services provided by the
Company or the Subsidiaries; or
9
<PAGE>
(iii) Interfere with, disrupt or attempt to disrupt any
past, present or prospective relationship, contractual or otherwise, between the
Company or any Subsidiary and any customer, outside agent, supplier, investor,
shareholder or employee of the Company or such Subsidiary.
Notwithstanding the foregoing, this Section 9 shall apply only in those states
in the United States in which the Company or any Subsidiary carries on business
and markets its services, shall not prohibit or restrict the Executive from
entering into the employ (after the termination of his employment hereunder) of
an organization or business entity which engages in a dissimilar field of
business endeavor from the Company or the Subsidiaries, and shall not prohibit
or restrict the Executive from being an investor in any corporation whose
securities are publicly owned, or regularly traded on any national stock
exchange or in the over-the-counter market, provided that his investment at no
time, directly or indirectly, shall exceed five (5%) percent of the outstanding
stock of any class of any such corporation. A dissimilar business shall include,
among others, insurance companies underwriting or placing insurance for risks
different from those underwritten by the Company and its Subsidiaries, and
insurance agencies.
(iv) Nothing herein shall prevent the Executive, subject
to the performance of his duties hereunder, from participating in business
endeavors which do not involve the writing of insurance or in engaging in any
business opportunity directly related to the business of the Company and
Subsidiaries in which they have declined to engage.
10
<PAGE>
10. Proprietary Intellectual Property. The Executive agrees to
treat as for the sole benefit of the Company and the Subsidiaries, and fully and
promptly disclose and assign to them without additional compensation, all
proprietary intellectual property, including, without limitation, all ideas,
discoveries, inventions and improvements, patentable or not, as well as all
formulae, processes, know-how, patent rights, letters patent, programs,
copyrights, trademarks, trade names, and applications therefor filed in the
United States and all other countries, and any and all rights and interests in,
to and under the same, made, conceived, acquired, reduced to practice or
otherwise possessed by the Executive, alone or with other employees, during or
after usual working hours, either on or off the job, and which are related to
the business of the Company or the Subsidiaries. In addition, the Executive
agrees that, upon request, he will promptly make all disclosures, execute all
instruments and papers, and perform all acts whatsoever necessary or desired by
the Company or any Subsidiary, to vest in and assign to it, its successors,
assigns and nominees, fully and completely, all rights created or contemplated
by this Section 10 and which may be necessary or desirable to enable it, its
successors, assigns and nominees to secure and enjoy the full benefits and
advantages thereof, including any and all applications, writings or other
documents, as may be necessary to apply for and obtain any patent, copyright or
trademark registration by it or any assignment thereof. The covenant made by the
Executive under the terms of this Section 10 shall be enforceable for the term
of this Agreement and for twelve (12)
11
<PAGE>
months immediately following the termination or expiration of this Agreement
either under the terms of Section 3 or Section 13 hereof.
11. Enforcement. The parties hereto acknowledge and agree that
the Executive will have access to confidential information concerning the
customers, outside agents, services, trade secrets and business of the Company
and the Subsidiaries, the disclosure, divulgence or unauthorized use of which
will cause them irreparable injury and harm. Accordingly, the Executive
acknowledges that a breach by him of the provisions of this Agreement,
especially the provisions of Sections 8 through 10 inclusive hereof, would cause
damage to the Company or the Subsidiaries, for which remedy at law would be
inadequate. Therefore, the Executive expressly agrees that the Company or any
Subsidiary shall be entitled to temporary and permanent injunctive or other
equitable relief in any court of competent jurisdiction to prevent or otherwise
restrain a breach or compel specific performance of this Agreement for the
purpose of enforcing this Agreement or any part hereof. Nothing herein shall be
construed to prohibit or restrain the Company or any Subsidiary from pursuing
any other remedies available to it for any breach or threatened breach of this
Agreement, including the recovery of damages from the Executive.
12. Survival. The covenants and agreements contained in
Sections 8, 9, 10 and 11 hereof shall survive any termination or expiration of
this Agreement and the termination of the Executive's employment hereunder,
except as otherwise expressly provided in Section 13 below.
12
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13. Termination.
(a) Notwithstanding the provisions set forth in Section 3
hereof, the Company's Board of Directors may terminate the Executive's
employment upon the occurrence of any of the following events:
(i) For cause which is defined for the purposes of this
Agreement as (A) willful breach or reckless disregard by the Executive of his
duties hereunder which materially disrupts the operations of the Company or the
Subsidiaries; (B) habitual drunkenness; (C) narcotic drug addiction; (D) theft
or embezzlement; or (E) willful breach of any law for which the Executive would
not be entitled to indemnification under Section 15(b) below and which directly
or indirectly, has a material adverse effect on the Company or the Subsidiaries.
Upon the termination of the Executive's employment pursuant to Section 13(a)(i),
the Executive shall be entitled to no further compensation from the Company or
the Subsidiaries after the Date of Termination and the Executive shall be bound
by the provisions of Section 9 for a period of twenty-four (24) months following
such termination.
(ii) If the Executive shall become disabled and shall have
failed to cure such "Disability." For the purposes of this Agreement, such
Disability shall be deemed to have occurred upon written notice by the Company
to the Executive, or his committee, guardian or other person, as the case may
be, then in charge of his affairs, given at any time that a guardian, committee
or legal representative has been appointed for his person, or, at any time after
the Executive
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shall have failed on account of illness or incapacity to render services of the
character herein contemplated for an aggregate of one hundred eighty (180)
consecutive days during the preceding twelve-month period; provided, however,
that if the Executive, within ten (10) days after such notice, effectively
resumes and performs his ordinary duties hereunder on a regular basis for at
least sixty (60) consecutive days, such Disability shall be deemed to have been
cured, except that this right to cure may not be exercised more than once during
any three-year period. In the event of the termination of the Executive pursuant
to this Section 13(a)(ii), the Executive shall receive 75% of his full base
salary then in effect for an additional two (2) years following the Date of
Termination or shall have the benefit of any disability benefits provided by the
Company under Section 5 of this Agreement, if greater and the Executive shall
comply with the provisions of Section 9 hereof until the earlier of two (2)
years following the Date of Termination or the discontinuance of the payments
hereinabove provided. Throughout such period, the Company will use its best
efforts to cause to be continued life, health and disability coverage, at the
Executive's expense, substantially identical to the coverage maintained by the
Company for the Executive prior to his severance, but no legal liability shall
attach to the Company if for any reason the Company cannot, after reasonable
endeavor, arrange such continuance.
(b) The Executive shall not be released from his obligations
under Sections 8 through 11 inclusive of this Agreement upon termination of this
Agreement except upon a bona fide decision made by the Company's Board
of
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Directors to terminate the Company's business and liquidate its assets, or as
expressly provided in this Agreement.
(c) The Executive shall have the right to terminate this
Agreement upon the occurrence of a material breach of this Agreement by the
Company and the Company shall pay the Executive for the remaining term of this
Agreement. Further, if the Company breaches this Agreement by wrongful
termination, the Executive shall be paid for the remaining term of this
Agreement. In the event the Company wrongfully terminates this Agreement during
a period in which a transaction which would be a change in control is under
consideration, the Executive shall be paid an amount equal to three times his
annual base salary then in effect. In each such case the provisions of Section 9
of the Agreement shall not survive termination and all stock options, stock
grants and stock appreciation rights will be deemed fully vested. It is
acknowledged by the parties hereto that damages by reason of termination by the
Company of the Executive's employment are difficult to ascertain and the
foregoing provisions shall constitute liquidated damages, and not a penalty, and
shall be in lieu of any other claim of the Executive, at law or in equity, with
respect to such termination.
(d) The Executive shall have the right after the original
three (3) year term hereof, upon three (3) months' written notice to the Company
(which may be given any time before or after the end of the term), to terminate
this Agreement. Upon such voluntary termination the Executive (or, in the event
of his subsequent death, his beneficiary or estate, as the case may be) shall be
bound by the
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provisions of Section 9 for a period of twelve (12) months following such
termination and the Executive shall be paid, as severance pay, his then base
salary for twelve (12) months following such termination, payable in
substantially equal installments in conformity with the Company's regular
payroll dates, unless the Executive is employed by another employer prior to the
end of such one-year period, in which case such severance payments shall cease
upon his reemployment or unless the Executive has violated or will violate
Sections 8 or 9 of this Agreement, in which case such severance payments shall
cease immediately and the Executive shall return any severance payments already
paid to him.
(e) Any purported termination by the Company or by the
Executive shall be communicated by written Notice of Termination to the other
party hereto in accordance with Section 19 hereof. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated.
(f) "Date of Termination" shall mean (i) if the Executive's
employment is terminated for cause pursuant to Section 13(a)(i), the date
specified in the Notice of Termination, which shall not be less than 30 days
after the Notice of Termination is given; (ii) if the Executive's employment is
terminated for Disability pursuant to Section 13(a)(ii), thirty (30) days after
the Notice of Termination is given; (iii) if the Executive terminates his
employment pursuant to Section 13(c),
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the date specified in the Notice of Termination; and (iv) if the Executive's
employment is terminated voluntarily pursuant to Section 13(d), the date
specified in the Notice of Termination, which shall not be less than three (3)
months after the Notice of Termination is given.
(g) Upon termination of this Agreement for whatever reason,
the Executive shall upon the request of the Company resign as a Director and
from any offices held by him in the Company and from all directorships and
offices held by him in any Subsidiary.
14. Termination on Change in Control.
In the event of a change in control of the Company (as
hereinafter defined) the Executive may terminate his employment either simply by
reason of the change in control or for "Good Reason" (as hereinafter defined) by
written notice to the Chairman of the Board of Directors of the Company or to
the Chief Executive Officer of an entity which acquires the Company, as the case
may be, given within 60 days after the effective date of such change in control
or other event giving rise to the Executive's right to terminate this Agreement;
provided, however, that if the change in control is a transaction approved by at
least 75% of the members of the Board of Directors of the Company the Executive
will be obligated to assist diligently in the consummation of the transaction,
regardless of whether such assistance amounts to a change in his duties;
provided, however, notwithstanding the Executive's election to terminate this
Agreement other than pursuant to Section 13(c), the Company or its successor may
require that this Agreement remain in effect
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<PAGE>
and the Executive will remain employed for a period of up to 180 days after the
effective date of the change in control in order to assist with the transition
of his duties to another person or in the transition of the business of the
Company and its Subsidiaries to such successor; provided, however, the
Executive's duties during such transition period will reasonably relate to the
services he performed for the Company prior to such change in control, the
Executive's work hours will not be more onerous than his work hours prior to
such change in control, and the Executive will be allowed reasonable
opportunities to seek other employment, consistent with the requirements for his
services in such transition. During any such transition period when the
Executive remains employed, the Executive shall be entitled to compensation
pursuant to this Agreement based on his annual base salary in effect immediately
prior to the change in control and such compensation shall not be applied
against the severance pay due under Section 14(a) or Section 14(b), as the case
may be.
(a) In the event there is a change in control and the
Executive terminates this Agreement for Good Reason, the Company shall pay to
the Executive as severance pay in one lump sum upon the effective date of such
termination an amount equal to the base salary he would have received (at the
greater of the rate of $225,000 per annum or the annual base salary in effect
immediately prior to the change in control) from the effective date of the
change in control until the expiration of this Agreement (assuming no further
automatic extensions of the expiration date) and the Executive will be released
from the non-
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<PAGE>
competition provisions contained in Section 9 of this Agreement.
For purposes of this Agreement "Good Reason" shall mean the occurrence of any of
the following events in connection with or after a change in control of the
Company.
(i) the assignment to the Executive of any duties
inconsistent with his status as Executive Vice President and Chief Financial
Officer of the Company or his corresponding duties as an officer of the
Subsidiaries; a substantial alteration in the nature or status of his
responsibilities from those in effect immediately prior to a change in control
of the Company; or a change in lines of authority such that the Executive is no
longer reporting directly to the Board of Directors of the Company and of its
Subsidiaries;
(ii) a reduction by the Company in the Executive's base
salary as in effect on the date of a change in control;
(iii) the Company's requiring the Executive to be based
anywhere other than within a 50 mile radius of the Company's office at which he
was based prior to the change in control of the Company; or
(iv) the failure by the Company to continue to provide the
Executive with benefits substantially similar to those received by the Executive
prior to the change in control.
(b) In the event there is a change in control and the
Executive terminates this Agreement without Good Reason, the Company shall pay
to the Executive as severance pay in one lump sum upon the effective date of
such termination an amount equal to twenty-four (24) months base salary (at the
greater
19
<PAGE>
of the rate of $225,000 per annum or the annual base salary in effect
immediately prior to the change in control) and the Executive will be released
from the provisions contained in Section 9 of this Agreement except for the
provisions of clauses (ii) and (iii) of Section 9, which shall be binding on the
Executive for a period of eighteen (18) months following the date of
termination; provided, however, the Executive may elect to be paid less than
twenty-four (24) months base salary in which event his obligation to observe
provisions contained in clauses (ii) and (iii) of Section 9 will be shortened to
the number of months of base salary he has elected to be paid.
(c) The Company will cause to be continued life, health and
disability coverage substantially identical to the coverage maintained by the
Company for Executive prior to his severance until one (1) year after the change
in control (unless the Executive is employed by another employer prior to the
end of such one-year period, in which case such obligation to maintain coverage
shall cease upon his reemployment), but no legal liability shall attach to the
Company if for any reason the Company cannot, after reasonable endeavor, arrange
such continuance.
(d) Notwithstanding any provision of any stock option plan or
SAR agreement of the Company inconsistent herewith, all options and SARs will be
deemed to have fully vested upon the effective date of the change of control and
Executive will have a period of six (6) months from his severance of employment
within which to exercise options and SARs granted to him under any such stock
option plan or SAR agreement, provided however, with respect to incentive
stock
20
<PAGE>
options, as defined in Section 422A of the Code, not later than the date
which is ten (10) years from the date of grant of such incentive stock option.
(e) For purposes hereof, a "Change in Control" shall mean the
happening of any of the following events:
(i) An acquisition by any individual, entity or group
(within the meaning of Section 13 (d) (3) or 14 (d) (2) of the Exchange Act (a
"Person") of the beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of the then outstanding shares of common
stock of the Company (the "Outstanding Company Common Stock") or the combined
voting power of the then outstanding voting securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Company Voting
Securities"); or, the approval by the stockholders of the Company of a
reorganization, merger, consolidation, complete liquidation or dissolution of
the Company, the sale or disposition of all or substantially all of the assets
of the Company or similar corporate transaction (in each case referred to in
this Section 14 as a "Corporate Transaction") or, if consummation of such
Corporate Transaction is subject, at the time of such approval by shareholders,
to the consent of any government or governmental agency, the obtaining of such
consent (either explicitly or implicitly); provided such acquisition of
beneficial ownership or such Corporation Transaction would result in any person
(other than the stockholders immediately prior to the Effective Date)
beneficially owning (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) following the acquisition or Corporate Transaction 20% or
21
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more of the Outstanding Company Common Stock or 20% or more of the Outstanding
Company Voting Securities; excluding, however any acquisition by any subsidiary
of the Company or by an employee benefit plan (or related trust) sponsored or
maintained by the Company or an Affiliate; or
(ii) A change in the composition of the Board such that
the individuals who, as of the date hereof, constitute the Board (such Board
shall be hereinafter referred to as the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board; provided, however, for purposes
of this Section 14(e)(ii), that any individual who becomes a member of the Board
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of those
individuals who are members of the Board and who were also members of the
Incumbent Board (or deemed to be such pursuant to this proviso) shall be
considered as though such individual were a member of the Incumbent Board; but,
provided, further, that any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board shall not be so considered as a member
of the Incumbent Board.
(f) The effective date of a change in control shall be the
date of the closing of a transaction, or the effective date of an action, which
constitutes a change in control as hereinabove defined.
22
<PAGE>
(g) If, following a change of control, the Company fails to
comply with its obligations under this Agreement or if the Company or any other
person takes action to declare this Agreement void or unenforceable, or
institutes any legal proceeding or any other action designed to deny the
Executive the benefits of this Agreement and the Executive has complied with all
his obligations hereunder, the Company shall directly pay or reimburse the
Executive for the reasonable legal expenses incurred by the Executive in
enforcing his rights hereunder or in defense of any such legal proceeding or
action promptly upon presentation by the Executive of a statement or statements
prepared his counsel.
15. Representations and Warranties: Indemnification.
(a) By the Executive. The Executive represents and warrants to
the Company that his employment hereunder does not violate any provision of law
or fiduciary duty by which he is bound or conflict with or result in a breach of
any agreement, instrument, arrangement or other understanding to which he is a
party or by which he is bound; and the Executive agrees that he will indemnify
and hold harmless the Company and its affiliates and their respective directors,
officers and employees against any claims, damages, liabilities and expenses
incurred by them (including legal fees and reasonable expenses of investigation
or of defending against the same), including amounts paid in settlement, by any
of them in connection with any claim based upon or related to the Executive's
aforestated representation and warranty.
23
<PAGE>
(b) By the Company. Should the Executive be made a party or
threatened to be made a party to or be involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter, a "Proceeding"), by reason of the fact that he is or was an
officer, employee or agent of the Company or the Subsidiaries, including service
with respect to employee benefit plans, whether the basis of such Proceeding is
an alleged action in his official capacity as an officer, employee or agent or
in any other capacity while serving as an officer, employee or agent, he shall
be indemnified and held harmless by the Company to the fullest extent authorized
by Delaware General Corporation Law, or as otherwise permitted by such law as
the same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Company to provide
broader indemnification rights than said law permitted the Company to provide
prior to such amendment), against all expense, liability and loss (including
attorneys' fees), judgments, fines and amounts paid or to be paid in settlement
actually and reasonably incurred by the Executive in connection therewith,
provided, however, that the Executive shall have acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interest of
the Company and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Such indemnification shall
continue should the Executive cease to be an officer, employee or agent of the
Company and shall inure to the benefit of his heirs, executors and
administrators.
24
<PAGE>
This right to indemnification shall include the right of the
Executive to have the Company pay the expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that, if the
Delaware General Corporation Law requires, the payment of such expenses incurred
by the Executive in his capacity as an officer (and not in any other capacity in
which service was or is rendered by the Executive while an officer, including,
without limitation, service to an employee benefit plan) in advance of the final
disposition of a Proceeding, shall be made only upon delivery to the Company of
an undertaking, by or on behalf of the Executive, to repay all amounts so
advanced if it shall ultimately be determined that he is not entitled to be
indemnified under this section or otherwise.
16. Partial Invalidity. If any provision of this Agreement
shall contravene or be invalid under the laws of any state, county or
jurisdiction in which this Agreement shall be performed or enforced, then such
contravention or invalidity shall not invalidate the entire Agreement. Such
provision shall be deemed to be modified to the extent necessary to render it
valid and enforceable, and if no such modification shall render it valid and
enforceable, then the Agreement shall be construed as is not containing the
provision held to be invalid, and the rights and obligations of the parties
shall be construed and enforced accordingly.
17. Parties in Interest; Assignments; Amendment. This
Agreement is binding upon and solely for the benefit of the parties hereto
except as otherwise provided in this Agreement. The Executive may not delegate
any of his duties hereunder. Neither party hereto may assign any rights
hereunder. Any such
25
<PAGE>
purported delegation or assignment shall be void. Notwithstanding the foregoing,
upon the sale of all or substantially all of the assets, business and goodwill
of the Company or the Subsidiaries, upon the merger or consolidation of the
Company or the Subsidiaries with another corporation, this Agreement shall, at
the election of the Company, bind and inure to the benefit of both the Executive
and the acquiring, succeeding or surviving corporation, as the case may be. No
modification or amendment of this Agreement or any provision hereof shall be
enforceable unless in writing and executed by the party against whom such
waiver, modification or amendment is claimed.
18. Headings. The headings to sections in this Agreement are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or the interpretation of this Agreement.
19. Notices. All notices or other communications required or
permitted hereunder must be in writing and shall be deemed given only (i) when
delivered personally against receipt therefor, or (ii) when sent by certified
mail, postage prepaid and return receipt requested, or (iii) when transmitted by
telecopier, facsimile, telex or other electronic transmission method, provided
that receipt is confirmed and within seven (7) days of such transmission a copy
of such notice is sent by certified mail, postage prepaid and return receipt
requested, or (iv) when sent overnight by Federal Express or other nationally
recognized overnight delivery service.
26
<PAGE>
If more than one (1) party is entitled to receive a specific
notice or other communication, the same shall be deemed to have been given when
given to all of the parties entitled to receive the same, addressed to the
respective parties hereto at the following address:
If to the Company:
Home State Holdings, Inc.
3 South Revmont Drive
Shrewsbury, New Jersey 07702
Attn: Mr. Michael Monier, Chairman
Facsimile: (908) 935-0156
With a copy to: Dorsey & Whitney LLP
250 Park Avenue
New York, New York 10177
Attention: Perez C. Ehrich, Esq.
Facsimile: (212) 953-7201
If to the Executive: Mr. Eric Reehl
435 Navesink River Road
Red Bank, New Jersey 07701
With a copy to: Koo & Larrabee, LLP
Suite 230, 774 White Plains Road
Scarsdale, NY 10538
Attention: Richard Koo, Esq.
Facsimile: (914) 723-1636
or to any other address designated by and for any party hereto by written notice
similarly given, and all notices given shall be deemed effective (i) upon
delivery if delivered personally, (ii) on the date indicated on the return
receipt if mailed, (iii) on the next business day if transmitted electronically,
and (iv) on the next business day if sent via recognized overnight delivery
service.
20. Waiver. The failure of the Company to insist upon strict
compliance with respect to any of the terms or conditions hereof shall not
be
27
<PAGE>
deemed a waiver or relinquishment of any other term or condition nor shall any
failure to exercise any right or power hereunder at any time be deemed a waiver
or relinquishment of such right or power at any other time.
21. Entire Agreement. This Agreement supersedes any and all
oral or written agreements and understandings heretofore made relating to the
subject matter hereof and contains the entire Agreement of the parties hereto
relating to the subject matter hereof.
22. Arbitration. The parties hereby agree that all disputes
and controversies which may arise in connection with this Agreement or the
construction, performance or breach of this Agreement, other than enforcement
actions contemplated under Section 11 above, shall be determined by binding
arbitration, to be held in the City of New York, State of New York, unless
otherwise agreed to by the parties hereto, and in accordance with the rules then
obtaining of the American Arbitration Association; provided, however, that the
arbitrators shall be knowledgeable with respect to the practices and the matters
giving dispute, that the authority of the arbitrators shall limited to
construing and enforcing the terms and conditions of this Agreement as expressly
set forth herein and the arbitrators shall state the reasons for the award in a
written opinion. The award of the arbitrators, or a majority of them, shall be
final and judgment upon the award may be confirmed and entered in any United
States court, state or Federal, or other court having jurisdiction. The parties
hereby waive any right of appeal any such judgment.
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<PAGE>
23. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New Jersey, without giving
effect to principles of conflicts of laws.
24. Expenses. Each party shall pay its or his own expenses
incident to the negotiation, preparation and execution of this Agreement, except
that the Company shall reimburse the Executive up to $2,500 for legal expenses
incurred by the Executive in connection therewith.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed on the date first above written.
HOME STATE HOLDINGS, INC.
By: /s/ Edward D. Herrick
------------------------------
EDWARD D. HERRICK,
EXECUTIVE COMMITTEE MEMBER
By: /s/ Eric Reehl
------------------------------
ERIC REEHL
EXHIBIT 10.38
SOFTWARE LICENSE
AND MAINTENANCE
AGREEMENT
This is a standard WINS Software License Agreement prepared
by The Wheatly Group, Ltd. This contract may not
be altered in part or in whole.
<PAGE>
SOFTWARE LICENSE AGREEMENT
FOR
Home State Insurance Company
This Agreement is entered into and effective this day of August 12,
1994 by and between The Wheatly Group, Ltd., a New York corporation with offices
at One Huntington Quadrangle, Melville, New York 11747 (hereinafter called
"Licensor") and Home State Insurance Management, Inc. with offices at
One Harding Road
Red Bank, NJ 07701
(hereinafter called "Licensee").
WHEREAS, Licensor has developed certain software and related documentation known
as the WINS insurance information processing system (hereinafter referred to as
WINS), including object code and source code, and will provide a copy for
Licensee's internal use only for the lines of business as described in the
attached Product Description/Price Schedule;
WHEREAS, Licensor is willing to grant such rights as hereinafter defined in
consideration of payment as hereinafter set forth;
NOW THEREFORE, in consideration of the mutual convenants and conditions set
forth herein it is agreed as follows:
Section 1
LICENSE
1.1 Licensor grants to Licensee a 5 year, non-exclusive,
non-transferable license for products described in the attached WINS Product
Description/Price Schedule to use WINS only for its own internal use in a single
AS/400 machine. Such license may not be assigned, sub-licensed, or otherwise
transferred by License without prior written consent of Licensor, except as
provided in Section 5.2. No right to copy WINS, in whole or in part, is granted
except as hereinafter expressly provided. The serial number(s) of the single
computer system on which WINS will be used is ______________.
1.2 At the conclusion of this license term, will have the option to
extend this Software License Agreement, at no additional cost, by signing a new
5 year Maintenance Agreement, and thereby automatically extend the software
license for as long as a Maintenance Agreement is in effect, or, forego
maintenance and opt for a separate extension of this Software License Agreement
for multiple 5 year consecutive terms at a cost of 25 percent of the total
software license fees listed in this Agreement.
Section 2
PAYMENT
Payment is in compliance with the payment schedule listed in the
Product Description/Price Schedule.
- --------------------------------------------------------------------------------
Software License Agreement Page 1
<PAGE>
Section 3
RIGHT TO COPY
WINS may be copied, in whole or in part, in print or machine-readable
form solely for on-site and off-site backup and disaster recovery purposes.
Section 4
WINS REMAINS LICENSOR'S PROPERTY
Title to WINS licensed hereunder and all rights therein, including all
rights in patents, copyrights, trademarks and trade secrets applicable thereto,
or to any modifications or derivatives of WINS, shall remain vested in Licensor,
unless otherwise specifically agreed to in writing in advance of any such
modifications or derivatives. Any type or manner of copies made by Licensee, in
whole or in part, shall remain Licensor's property.
Section 5
PROTECTION AND SECURITY
5.1 With reference to any copyright notice or other proprietary legend
of Licensor associated with WINS, Licensee agrees to include the same on all
copies it makes, in whole or in part, and to include the same on any updated
work. Licensor's copyright notice may appear in any of several forms, including
machine-readable form within WINS.
5.2 Licensee agrees to hold WINS in confidence and not to provide or
otherwise make available in any form the system or any portion thereof, to any
person other than employees of Licensee or Licensor without prior written
consent thereof by Licensor. Licensee agrees to obtain the written agreement of
each such employee of Licensee to abide by the applicable terms of this
Agreement.
5.3 Each party acknowledges that all information concerning the
business of the other party is "Confidential and Proprietary Information." Each
party agrees that it will not permit the duplication, use or disclosure of any
such Confidential and Proprietary Information to any person (other than its own
employees who must have such information for the performance of its obligations
under this Agreement), unless authorized in writing by the other party.
"Confidential and Proprietary Information" is not meant to include any
information which, at the time of disclosure, is generally known by the public
or in the trade.
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Software License Agreement Page 2
<PAGE>
Section 6
TERMINATION
Licensor may terminate this Agreement if Licensee is in default of any
of the terms and conditions of this Agreement and termination is effective if
Licensee fails to correct such default within 30 days after written notice
thereof by Licensor. In the event of termination, Licensee shall immediately
cease using WINS and, at the option of Licensor, either return to Licensor or
destroy any and all copies of WINS, giving Licensor a written statement
certifying such return or destruction.
Section 7
MAINTENANCE
Wheatly requires a maintenance program for the term of this License
Agreement as stated in the attached Maintenance Agreement.
Section 8
WARRANTY
8.1 Licensor warrants that WINS upon original delivery shall conform to
the product specifications, descriptions and user documentation delivered by
Licensor. In case of failure of WINS to perform as warranted, Licensor shall
replace or correct WINS as soon as possible so that it will perform in
substantial conformance with the product specifications, descriptions and
applicable user documentation at no charge to Licensee. If such programs are
altered from their delivered basis by the Licensee, then this warranty is null
and void. All reasonable out-of-pocket expenses are additional and billed at
cost at the time they are incurred, unless it is demonstrably clear that the
out-of-pocket expenses are as a result of a "bug" in the Licensor's software and
are of no fault of the Licensee.
8.2 The foregoing states the Licensor's sole liability for warranty
claims. This warranty is exclusive of WINS maintenance as described in
Section 7.
Section 9
DISCLAIMER OF WARRANTY
Except as provided in Section 8, no other warranty is provided with
respect to WINS, whether express, implied, or statutory, including implied
warranties of merchantability or fitness for a particular purpose.
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Software License Agreement Page 3
<PAGE>
Section 10
PATENT AND COPYRIGHT INDEMNITY
10.1 Licensor agrees to defend at its expense any suits against
Licensee based upon a claim that WINS directly infringes a U.S. patent or
copyright, trademark or other proprietary right, and to pay costs and damages
finally awarded in any suit, provided that Licensor is given control of said
suit by Licensee and all reasonably requested assistance for defense of same.
10.2 Licensor shall have no liability for any claim of copyright or
patent infringement if the infringement arises out of compliance with Licensee's
specification, or from the use of other than a current unaltered release of WINS
available from Licensor if such infringement would have been avoided by the use
of a current unaltered release of WINS, or from the use or combination of WINS
with programs not supplied by Licensor.
10.3 The foregoing states the entire liability of Licensor with respect
to infringement of any proprietary rights, including patents, copyrights, or any
other rights. In no event shall Licensor be liable for incidental or
consequential damages arising from infringement or alleged infringement of
patents or copyrights.
Section 11
LIMITATION OF LIABILITY
Licensee agrees that Licensor's total liability under this Agreement
above shall not exceed the fees paid by Licensee for WINS, except in Section 10.
IN NO EVENT SHALL LICENSOR BE LIABLE FOR INCIDENTAL, SPECIAL, INDIRECT, COVER OR
CONSEQUENTIAL DAMAGES FOR THE USE OF WINS.
Section 12
APPLICABLE LAW
This Agreement shall be governed by the laws of the state of New York.
Section 13
TAXES
Licensee shall be responsible for the payment of all taxes in
connection with this Agreement, except for any tax based on Licensor's net
income.
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Software License Agreement Page 4
<PAGE>
Section 14
NOTICES
All notices in connection with this Agreement shall be in writing via
certified mail, return receipt requested, to the following address:
If to Licensor:
The Wheatley Group, Ltd.
One Huntington Quadrangle
Melville, New York 11747
Attention: C.E.O. and President
If to Licensee:
(To address listed above, unless stated herein).
For purposes of this Agreement, a notice shall be deemed effective upon
receipt by the noticed party.
Section 15
ASSIGNMENT
This Agreement may not be assigned by either party without the prior
written consent of the other.
Section 16
PRECEDENCE
This Agreement sets forth the entire understanding between the parties
with respect to the subject matter herein, and shall not be replaced by any
other facsimile thereof. This Agreement supercedes all prior written agreements,
discussions and understandings, expressed or implied, concerning such matters,
and shall take precedence over any conflicting terms which may be contained in
Licensee's purchase order or any other form submitted by Licensee.
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Software License Agreement Page 5
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of
the day and year first written above.
Home State The Wheatley Group, Ltd.
- --------------------------------- ----------------------------------
Licensee Licensor
/s/ Bob Abidor /s/ John Reeves
- --------------------------------- ----------------------------------
Authorized Signature Authorized Signature
CEO Exec. Vice Pres.
- --------------------------------- ----------------------------------
Title Title
8/12/94 8/12/94
- --------------------------------- ----------------------------------
Date Date
- --------------------------------------------------------------------------------
Software License Agreement Page 6
<PAGE>
PRODUCT DESCRIPTION/PRICE SCHEDULE
FOR
HOME STATE INSURANCE COMPANY
I. The standard WINS base system, including personal and commercial recording,
consisting of:
-- Policy Management
-- Premium Accounting
-- Claim Management
-- Reinsurance Processing
-- File Maintenance
-- Management/Insurance Information
-- Statistical Reporting
Base License Fee: $195,000
II. Selected product processors for the specific lines of business required by
Home State Insurance Company as listed below.
(Each product processor includes standard WINS forms and is integrated with
the standard WINS base system. Automatic rating for particular product
processors, where applicable, is listed separately.)
1. Standard WINS Personal Automobile, including automatic rating for the
states of Connecticut, Delaware, Maryland, New Jersey, New York,
Pennsylvania, West Virginia, Georgia, Florida, South Carolina and
Alabama
Product License Fee: $125,000
Additional standard ISO automatically rated states for Personal Auto (except
Massachusetts) will be provided at $2,500 per state.
2. Standard WINS Commercial Auto
Product License Fee: $ 50,000
<PAGE>
III. Additional Products and Services:
1. Eighty (80) WINS Standard Reports.
2. Up to twenty-five (25) days of implementation and training assistance
provided by Wheatley.
3. WINS Documentation
-- User Guides
-- Operation Guides
Based on the total WINS software package listed above, including the lines of
business selected, the additional products and services listed in this section
are included without additional charge, with the exception of out of pocket
expenses, which are additional and are billed separately. Additional reports and
additional implementation and training assistance may be purchased at Wheatley's
prevailing rates. Unused implementation and training assistance days included in
this section expire ninety (90) days after going live. Prices listed in this
proposal are valid for ninety days from proposal date.
IV. Maintenance
1. WINS Maintenance Service provides ongoing support to the WINS
operational system. This support is based on the total WINS software
package, including the lines of business selected, and is required
initially for a term of sixty (60) months commencing thirty days after
initial delivery of WINS. It consists of:
-- WINS Software Version Upgrades
-- On-Line Trouble-Shooting
-- Dial-Up communication from our Melville office
-- Hot line service to Wheatley customer service
-- Bureau & Regulatory Support
Maintenance Fees, per month: $ 5,250
<PAGE>
V. Commercial Rating Interface
The Wheatley Group and ISI, Inc. are in the process of developing an interface
from The Insurance Writer commercial rating system to WINS. Phase one (new
business and renewals) is completed and is currently being tested at an
insurance company; phase two (endorsements and subsequent activity) is scheduled
to be completed by October 1, 1994. If the interface is delivered by Wheatley to
Home State before January 1, 1995, the cost for this interface will be as
follows:
Interface License Fee: $25,000
Interface Maintenance Fee, per month: $ 1,500
If the interface is not delivered by January 1, 1995, the interface license fee
will be reduced by $5,000 for each calendar month that it is not delivered
(e.g. delivery in January: $20,000 interface license fee; delivery in February:
$15,000; delivery in March: $10,000; etc.) until there is no charge for it.
VI. Payment Schedule
The payment schedule for WINS will be as follows:
1) Twenty percent (20%) of the total software license fee upon execution of
this contract.
2) Seventy percent (70%) of the total software license fee upon completion
of successful installation of the standard WINS software described above.
(Successful installation means that the software has been loaded on Home
State's AS/400 and it is operational.)
3) Ten Percent (10%) of the total software license fee thirty (30) days
after Home State has gone into production with WINS, or on January 15,
1995, whichever is earlier.
The payment schedule for the commercial rating interface from The Insurance
Writer to WINS will be as follows:
1) Ninety percent (90%) of the interface license fee upon delivery of phase
one and phase two of the interface, as described in section V. Commercial
Rating Interface, above.
2) Ten percent (10%) of the interface license fee thirty (30) days after
delivery of the interface.
Maintenance fees for the interface will begin thirty (30) days after delivery of
the interface.
<PAGE>
MAINTENANCE AGREEMENT
FOR
Home State Insurance Company
This Maintenance Agreement is entered into as of August 12, 1994 by and
between The Wheatley Group, Ltd. (hereinafter called "Vendor"), and Home State
Insurance Management, Inc. (hereinafter called "Customer").
WHEREAS, Customer has acquired a license to use the Software owned by Vendor and
identified below;
WHEREAS, Customer wishes Vendor to perform certain maintenance services with
respect to the Software, in accordance with the terms set forth herein;
NOW THEREFORE, the parties agree as follows:
Section 1
DEFINITIONS
1.1 "Software" shall mean the source and/or object code for Vendor's WINS
standard software product, in whatsoever form, format and medium, related
documentation or information and any corrections, modifications, updates and
enhancements supplied from time to time by Vendor and which are licensed by
Customer.
1.2 "Maintenance Services" shall mean the maintenance services of Vendor
described in Section 3 herein.
Section 2
PROVISION OF MAINTENANCE SERVICES
In consideration of the payments to be made to the Vendor, the Vendor
agrees to provide the Maintenance Services described in this Agreement with
respect to the Software. The location(s) at which the Services shall be
performed, and the term of this Agreement, shall be as set forth in Section 5
herein and any schedule attached hereto.
- --------------------------------------------------------------------------------
Maintenance Agreement Page 1
<PAGE>
Section 3
MAINTENANCE RESPONSIBILITIES OF THE VENDOR
3.1 Defects and Nonconformities. Vendor shall maintain the Software so that
it operates in conformity with descriptions in the applicable Software License
Agreement. Vendor shall correct defects and nonconformities discovered by the
Customer, and in connection therewith shall furnish off-site telephone support,
in the form of consultations, assistance and advice on the use and maintenance
of the Software. In the event that such problem in the Software is not
identified within 48 hours of the initiation of such off-site telephone support,
Customer shall submit to Vendor a listing of output and all such other data
which Vendor reasonably may request in order to reproduce operating conditions
similar to those present when the defect or nonconformity was discovered. In the
event that such problem is not corrected within a reasonable time after Vendor
receives from Customer a listing of output and other data, Vendor shall make
available on-site consulting in order to remedy the problem, but Customer shall
be responsible for Vendor's actual travel and other out-of-pocket expenses,
unless it is demonstrably clear that the out-of-pocket expenses are as a result
of a "bug" in the Vendor's Software and are of no fault of the Customer.
3.2 Inclusive Maintenance Services. During the term of this Maintenance
Agreement, Vendor shall provide Customer with the following Maintenance
Services:
3.2.1 NAIC and ISO statistical bureau reporting changes for the lines of
business listed in the attached Product Description/Price Schedule.
3.2.2 Version upgrades of WINS to Wheatley's clients who are participants
in the Maintenance Agreement.
3.2.3 On-line troubleshooting, in the form of a hotline service to Wheatley
customer service personnel, during regular business hours (8:00-8:00 EST) and a
remote dial-up communication from the Melville, New York office of Wheatley.
3.3 Additional Services. Any Customer-initiated requirements, ratings, new
lines of business, new states, or special state requirements may be developed by
Vendor for Customer for reasonable per diem rates and may be maintained by
Vendor for an additional monthly maintenance fee. If any customer initiated
requirements developed by vendor need to be retrofitted (because of a new
software version upgrade or other enhancement), customer may contract with
vendor to retrofit these requirements for reasonable per diem rates.
3.4 Exclusions. Vendor shall not be responsible for the provisions of any
Maintenance Services in the event that Customer fails to upgrade its IBM AS/400
operating system software (OS/400) to its latest version within 60 days of the
availability of any such upgrade to IBM's customers, and shall not be
responsible for the provision of Maintenance Services to any portion of the
Software which has been altered by Customer from its original state as delivered
to Customer and subsequently modified by Vendor.
- --------------------------------------------------------------------------------
Maintenance Agreement Page 2
<PAGE>
Section 4
CHARGES
4.1 Computation. Monthly charges shall be as stated in the attached Product
Description/Price Schedule. These monthly charges shall be paid in advance of
each month and shall cover all Maintenance Services provided under this
Agreement, with the exception of out-of-pocket expenses, and all charges shall
be paid within 10 days of receipt of the invoice.
4.2 Price Protection and Changes. The charges as stated shall not be
increased for a period of 1 year after commencement of services hereunder, and
not to exceed annual increases in the Consumer Price Index in years two through
five. Thereafter, such prices may be increased to Vendor's prevailing prices to
its customers generally for similar services.
Section 5
TERM AND TERMINATION
5.1 Term. This Agreement shall have an initial term of 5 years, and shall
thereafter have optional renewal. Written notification of an election not to so
renew is required to be forwarded by one party to the other at least 45 days
prior to the expiration of the initial term or a renewal term, or unless
terminated sooner in accordance herewith.
5.2 Termination of Maintenance Agreement. If either the Vendor or the
Customer terminates the License Agreement between the parties for any reason
provided therein, Customer shall have the right without penalty to terminate
this Agreement.
5.3 Default. Each party has the right to terminate this Agreement if the
other party breaches or is in default of any obligation hereunder which default
is incapable of cure or which, being capable of cure, has not been cured within
30 days after receipt of notice of such default (or such additional cure period
as the nondefaulting party may authorize).
5.4 Acts of Insolvency. Either party may immediately terminate this
Agreement by written notice to the other and may regard the other party as in
default of this Agreement, if the other party becomes insolvent, makes a general
assignment for the benefit of creditors, files a voluntary petition of
bankruptcy, suffers or permits the appointment of a receiver for its business or
assets, or becomes subject to any proceeding under any bankruptcy or insolvency
law, whether domestic or foreign, or has wound up or liquidated, voluntarily or
otherwise. In the event that any of the above events occurs, the affected party
shall immediately notify the other party of its occurrence.
- --------------------------------------------------------------------------------
Maintenance Agreement Page 3
<PAGE>
5.5 Force Majeure; Suspension and Termination. In the event that either
party is unable to perform any of its obligations under this Agreement or to
enjoy any of its benefits because of (or if loss of the services is caused by)
natural disaster, action or decrees of governmental bodies or communication line
failure not the fault of the affected party (hereinafter referred to as a "Force
Majeure Event") the party who has been so affected immediately shall give notice
to the other party and shall do everything possible to resume performance. Upon
receipt of such notice, all obligations under this Agreement shall be
immediately suspended. If the period of nonperformance exceeds 15 days from the
receipt of notice of the Force Majeure Event, the party whose performance has
not been so affected may, by giving written notice, terminate this Agreement.
5.6 Rights and Obligations of the Parties on Termination. In the event that
this Agreement is terminated as a result of the occurrence of a Force Majeure
Event, or other cause as provided herein, each party shall return to the other
all data, materials, and other properties of the other party then in its
possession.
5.7 Continuing Obligations. The obligations of the parties under Sections
5, 6 and 8 shall survive the termination of any services hereunder.
Section 6
PROPRIETARY INFORMATION
Each party acknowledges that all information concerning the business of the
other party is "Confidential and Proprietary Information." Each party agrees
that it will not permit the duplication, use or disclosure of any such
Confidential and Proprietary Information to any person (other than its own
employees who must have such information for the performance of its obligations
under this Agreement), unless authorized in writing by the other party.
Confidential and Proprietary Information is not meant to include any information
which, at the time of disclosure, is generally known by the public or in the
trade.
Section 7
DISCLAIMER OF LIABILITY
VENDOR DISCLAIMS ANY AND ALL REPRESENTATIONS OR WARRANTIES WITH RESPECT TO
THE MAINTENANCE SERVICES PROVIDED HEREUNDER, EXPRESS OR IMPLIED, INCLUDING
WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. IN NO EVENT SHALL VENDOR BE LIABLE FOR DAMAGES, INCLUDING BUT NOT
LIMITED TO SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, COVER DAMAGES OR DAMAGES
FOR LOSS OF USE, DATA OR PROFITS, IN CONNECTION WITH OR ARISING OUT OF THIS
AGREEMENT OR CUSTOMER'S USE OF THE SOFTWARE, EVEN IF VENDOR SHALL HAVE BEEN
INFORMED IN ADVANCE OF THE POSSIBILITY OF SUCH DAMAGE.
- --------------------------------------------------------------------------------
Maintenance Agreement Page 4
<PAGE>
Section 8
TAXES
Customer shall be responsible for the payment of all taxes in connection
with this Agreement, except for any tax based on Vendor's net income.
Section 9
MISCELLANEOUS
9.1 Applicable Law. This Agreement shall be governed by the laws of the
State of New York.
9.2 Severability. Any invalidity, in whole or in part, of any provision of
this Agreement shall not affect the validity of any other of its provisions.
9.3 Notices. Any notice or other communication hereunder shall be in
writing and shall be either personally served or mailed, registered or
certified, return receipt requested.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the day and year first written above.
Home State The Wheatley Group, Ltd.
- ---------------------------------- -----------------------------------
Customer Vendor
/s/ Bob Abidor /s/ John Reeves
- ---------------------------------- -----------------------------------
Authorized Signature Authorized Signature
President Exec. Vice Pres.
- ---------------------------------- -----------------------------------
Title Title
8/12/94 8/15/94
- ---------------------------------- -----------------------------------
Date Date
- --------------------------------------------------------------------------------
Maintenance Agreement Page 5
<PAGE>
HARDWARE
PURCHASE
AGREEMENT
This is a standard WINS Hardware Purchase Agreement prepared
by The Wheatley Group, Ltd. This contract may not
be altered in part or in whole.
<PAGE>
Agreement Number: 9405
----------
Agreement Date:
----------
HARDWARE PURCHASE AGREEMENT
FOR
Home State Insurance Company
This Agreement of Sale is entered into and effective this day of August 12,
1994 by and between The Wheatley Group, Ltd., a New York corporation with
offices at One Huntington Quadrangle, Melville, New York 11747 (hereinafter
called "Seller"), and HSIM having its principal offices at
One Harding Road
Red Bank, NJ 07701
(hereinafter called "Buyer") is the complete Agreement between the parties,
replacing any prior oral or written communications between us, regarding the
sale of certain Equipment, described below, by Seller to Buyer.
Section 1
DEFINITIONS
(Shown in bold type in this Agreement)
1.1 "Equipment." shall mean the IBM AS/400 machine, its features,
conversions, upgrades, elements, or accessories, or any combination of them
described in Section 2.
1.2 "Date of Installation." shall mean the business day Buyer's Equipment
is installed or, if Buyer defers installation, when Seller makes it available to
Buyer for installation.
Section 2
EQUIPMENT
Seller agrees to sell, Buyer agrees to purchase from Seller the following
Equipment detailed on the Hardware Purchase Agreement Supplement.
Section 3
PURCHASE PRICE
3.1 The purchase price of the Equipment is detailed on the Hardware
Purchase Agreement Supplement. The Buyer agrees to pay the Seller as follows:
a. 20 percent of purchase price upon execution of this Agreement;
b. the balance (80 percent of purchase price) is due on the Date of
Installation or if boxes are opened.
c. A 2% late-payment fee will be billed for any balance not paid within
30 days from the invoice date and compounded each subsequent 30 days.
d. This price does not include applicable sales taxes.
- --------------------------------------------------------------------------------
Hardware Purchase Agreement Page 1
<PAGE>
3.2 Maintenance option. Initial here if this Equipment should be placed
under IBM Hardware Maintenance. ________ (Price not included above.)
Section 4
DELIVERY
Seller will deliver Equipment to Buyer at buyer's location on a date to be
mutually agreed upon. Seller will pay normal transportation charges for
Equipment shipped.
Seller will use its best efforts to deliver Equipment as agreed but shall
not be liable for delays in delivery beyond its control including, but not
limited to, delays resulting from inventory shortages, acts of God, strikes, or
weather.
Section 5
TITLE
Seller will transfer title to Buyer on the Date of Installation and upon
receipt of the purchase price shown in Section 3.
Seller reserves a purchase money security interest in Equipment and Buyer
grants Seller a purchase money security interest (and agrees to sign appropriate
documents to permit Seller to perfect its purchase money security interest) from
the date of sale until Seller receives the amounts due under this Agreement for
the purchase of the hardware hereunder.
Section 6
RISK OF LOSS
Seller bears the risk of loss for Equipment until the Date of Installation.
Section 7
TAXES
Buyer will be responsible for and shall pay all applicable taxes imposed by
taxing authorities on the sale and delivery of the Equipment described in
Section 2.
Section 8
CANCELLATION
Buyer may cancel an order for Equipment prior to shipment. Seller may
charge Buyer a cancellation charge not to exceed 10 percent of the purchase
price for cancellations within 2 weeks of confirmed delivery, and shall deduct
such charge from the monies paid by Buyer at the execution of this Agreement.
- --------------------------------------------------------------------------------
Hardware Purchase Agreement Page 2
<PAGE>
Section 9
WARRANTY PROVISIONS
Seller assigns to Buyer all IBM Warranties currently in effect on the
Equipment to the fullest extent such IBM Warranties are assignable by an
authorized IBM reseller that is in good standing with IBM, and agrees to execute
all documents and take all other action reasonably necessary to effect such
assignment, provided, however, that such assignment shall not impose any
additional responsibilities on Seller or create any additional warranties,
express or implied, with respect to the Equipment.
Limitation of Liability: (a) Except as specifically set forth in this
Agreement, Seller makes no representations or warranties, express or implied,
including without limitation, the warranties of merchantability and fitness for
a particular purpose with respect to the Equipment. (b) Seller's liability to
Buyer for damages, from any cause whatsoever, and regardless of the form of
action, including Seller's liability for its own negligence, shall be limited to
the purchase price. (c) Seller shall not be liable to Buyer or any other person
for any claim arising, directly or indirectly, from or in connection with the
furnishing of services or Equipment pursuant to this Agreement, or the
interruption, use or loss of use or performance thereof. (d) Under no
circumstances shall Seller be liable to any person not a party to this Agreement
and Buyer shall indemnify Seller and hold Seller harmless against any claim or
action brought by such a party. Such indemnification shall include all costs and
attorneys fees.
Section 10
NOTICES
Any notice provided for herein shall be in writing and sent by registered
or certified mail, postage prepaid, addressed to the party for which it is
intended at the address set forth in the first paragraph of this Agreement or to
such other address as either party shall from time to time indicate in writing.
Any such notice to be deemed to be effective upon receipt or 5 days from the
date of mailing, whichever occurs first.
Section 11
GOVERNING LAW: AMENDMENTS
This Agreement shall be construed in accordance with and governed by the
laws of the state of New York (without regard to choice of law principles). This
Agreement may not be amended except by written agreement signed by both the
parties hereto.
Section 12
TERMS
All prices listed on this Agreement are subject to change after 10 days.
This offer shall be valid for a period of 10 days.
- --------------------------------------------------------------------------------
Hardware Purchase Agreement Page 3
<PAGE>
IN WITNESS WHEREOF, the parties have cause this Agreement to be executed as of
the day and year first written above.
Home State Insurance Company The Wheatley Group, Ltd.
- ---------------------------------- -----------------------------------
Buyer Seller
/s/ Bob Abidor /s/ John Reeves
- ---------------------------------- -----------------------------------
Authorized Signature Authorized Signature
President Exec. Vice Pres.
- ---------------------------------- -----------------------------------
Title Title
8/12/94 9/1/94
- ---------------------------------- -----------------------------------
Date Date
- --------------------------------------------------------------------------------
Hardware Purchase Agreement Page 4
<PAGE>
Reference Agreement Number: 9405
----------
HARDWARE PURCHASE AGREEMENT SUPPLEMENT
EQUIPMENT
<TABLE>
<CAPTION>
HARDWARE:
Machine Purchase Warranty
Qty Type Model Description Price Period
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 9406 300 Advanced Series AS/400 Model 300 $152,235 1 Yr
(As proposed and fax'd on 8/11/94)
1 9348 001 1/2" Reel Tape Drive $ 18,500 1 Yr
1 9309 002 Rack Enclosure $ 3,820 1 Yr
1 7855 010 Modem $ 1,455 1 Yr
1 3490 E11 1/2" Cartridge Tape Drive -- Rack mounted $ 27,275 1 Yr
1 2386 BG3 Infowindow Display Station $ 1,000 3 Yr
HARDWARE TOTAL $204,285.00
</TABLE>
<TABLE>
<CAPTION>
IBM SOFTWARE:
Program One-time Warranty
Qty Type Model Description Charge Period
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 5763 SS1 OS/400 Version (Unltd Users) $ 33,600 N/A
1 5763 XA1 Client Access (Unltd Users) $ 51,145 N/A
1 5763 PW1 Application Development Tools (ADS & ADM) $ 13,200 N/A
1 5763 DB1 AS/400 System/38 Utilities $ 5,625 N/A
1 5763 DCT Dictionaries $ 495 N/A
1 5763 WP1 Officevision (Unltd Users) $ 30,995 N/A
1 5763 QU1 Query/400 (4 Users) $ 3,000 N/A
1 5763 CB1 Cobol/400 $ 6,000 N/A
1 5763 PT1 Performance Tools/400 $ 4,190 N/A
IBM SOFTWARE TOTAL $148,250.00
EQUIPMENT TOTAL $352,535.00
WHEATLEY VALUE-ADD ALLOWANCE $ 67,113.00
NET EQUIPMENT TOTAL PRICE $285,422.00
</TABLE>
Home State Insurance Company 8/12/94
- ---------------------------------- -----------------------------------
Customer Name Date
/s/ Bob Abidor President
- ---------------------------------- -----------------------------------
Name Title
Bob Abidor
- ----------------------------------
Authorized Signature
- --------------------------------------------------------------------------------
Hardware Purchase Agreement Supplement Page 1
<PAGE>
Isis Consulting, Inc.
12 E. 49th Street
32nd Floor
New York, NY 10017
Tel: 212-317-5610
Fax: 212-317-5455
PRIVATE AND CONFIDENTIAL
August 15, 1996
Mr. Eric A. Reehl
Executive Vice President
Home State Holdings, Inc.
3 South Revmont Drive
Shrewsbury, NJ 07702
Re: Sources of Finance
Dear Eric:
This letter will serve to confirm our agreement regarding the
investigation and identification of sources of capital for Home State Holdings,
Inc. ("HSH").
Isis Consulting, Inc. ("Isis") has been made aware of the certain and
immediate capital needs of HSH and has introduced Swiss Re America Corporation
("SRA") as a private source of such capital. In that respect Isis has offered to
act as a "finder". HSH has indicated that it would compensate Isis if the
introduction to SRA results in a transaction leading to the availability of
funds. It is understood that Isis will not provide any advice with respect to
the terms of the transaction or the merits of any offers. Further, Isis will not
participate in any negotiations other than to respond to any enquiries regarding
issues within its scope of competence. With regard to any materials or data
provided by HSH for the purpose of making the introductions, Isis undertakes to
keep them in strictest confidence and will not disclose the information to third
parties without your consent.
As we have discussed, if a transaction is consummated with SRA or any of
its affiliates, HSH has agreed to pay Isis a "finders fee" of $100,000 in
respect of such capital provider plus 1% of the total amount of capital paid,
which fee would be payable when such capital is actually transferred to HSH. HSH
also understands and agrees that the fee of 1% of capital raised will apply not
only to any initial infusion of capital but also to any future transactions with
SRA for a period of one year from the date of this letter. Isis anticipates that
the terms of compensation for having served as a "finder" will be reflected and
honored in any resulting definitive purchase agreement.
<PAGE>
Finally, as we have previously disclosed to you, Isis is owned, in part,
by an affiliate of SRA. HSH acknowledges that it is aware of such ownership
interest and waives any conflict of interest arising as a result thereof.
If the foregoing correctly reflects our understandings and agreements,
please indicate your acknowledgement and agreement by executing this letter in
the space below, Upon your acknowledgement this letter will constitute a binding
agreement between us that can only be revised in writing and signed by HSH and
Isis.
Kind regards,
Sincerely,
Isis Consulting, Inc.
By: /s/ Henry Sopher
-----------------------------
Name: Henry Sopher
Title: Chairman & Treasurer
Acknowledged and agreed as of the
date first written above:
Home State Holdings, Inc.
By: /s/ Eric Reehl
--------------------------------
Name: Eric Reehl
Title: Executive Vice President
August 19, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 8,583
<DEBT-CARRYING-VALUE> 71,025
<DEBT-MARKET-VALUE> 71,805
<EQUITIES> 407
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 91,375
<CASH> 11,843
<RECOVER-REINSURE> 97,191
<DEFERRED-ACQUISITION> 3,116
<TOTAL-ASSETS> 343,580
<POLICY-LOSSES> 179,955
<UNEARNED-PREMIUMS> 85,863
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 22,005
8,525
0
<COMMON> 56
<OTHER-SE> 19,857
<TOTAL-LIABILITY-AND-EQUITY> 343,580
101,680
<INVESTMENT-INCOME> 4,647
<INVESTMENT-GAINS> 5
<OTHER-INCOME> 1,401
<BENEFITS> 112,396
<UNDERWRITING-AMORTIZATION> 24,764
<UNDERWRITING-OTHER> 2,963
<INCOME-PRETAX> (35,146)
<INCOME-TAX> (14,456)
<INCOME-CONTINUING> (20,527)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,527)
<EPS-PRIMARY> (3.66)
<EPS-DILUTED> (3.66)
<RESERVE-OPEN> 45,209
<PROVISION-CURRENT> 89,038
<PROVISION-PRIOR> 23,357
<PAYMENTS-CURRENT> 39,286
<PAYMENTS-PRIOR> 35,554
<RESERVE-CLOSE> 82,764
<CUMULATIVE-DEFICIENCY> 23,357
</TABLE>
