<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
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: 0-23830
CROP GROWERS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 81-0491497
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
201 CROP GROWERS DRIVE
GREAT FALLS, MONTANA 59401
(Address of principal executive offices) (zip code)
(406) 791-3418
(Registrant's telephone number, including area code)
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_________
The number of shares outstanding of the registrant's common stock on June 30,
1996 was 8,149,291 shares.
<PAGE>
CROP GROWERS CORPORATION
FORM 10-Q
Quarter ended June 30, 1996
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996 (unaudited)
and December 31, 1995 3
Consolidated Statements of Income (Loss) (unaudited) for the Three and Six
Months Ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended
June 30, 1996 and 1995 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CROP GROWERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
(UNAUDITED)
ASSETS ----------- ------------
<S> <C> <C>
Investments:
Fixed maturities, held to maturity $ 2,309,939 $2,311,177
Fixed maturities, available for sale 5,773,243 5,838,391
Equity securities, available for sale 1,876,712 1,757,540
------------ ----------
Total investments 9,959,894 9,907,108
Cash and cash equivalents 1,506,773 6,980,570
Premiums receivable, net 260,479,033 73,870,654
Prepaids and other assets 4,805,486 8,556,765
Reinsurance balances receivable 100,012,520 31,779,006
Property and equipment, net 12,195,200 11,687,066
Intangible assets, net 8,634,834 9,264,662
------------ ------------
$397,593,740 $152,045,831
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Premiums and commissions payable $135,616,503 $ 23,572,783
Accounts payable and other liabilities 11,218,506 8,183,036
Loss reserves 99,939,313 21,726,157
Reinsurance balances payable 82,177,302 17,787,552
Note payable to bank 18,765,639 32,245,539
Long-term debt 3,498,932 4,188,540
------------ ------------
Total liabilities $351,216,195 $107,703,607
Stockholders' equity:
Preferred stock (par value $.01):
10,000,000 shares authorized;
none issued and outstanding -- --
Common stock (par value $.01):
40,000,000 shares authorized;
8,149,291 and 8,172,581 shares issued and
outstanding at June 30, 1996 and
December 31, 1995, respectively 81,492 81,726
Paid-in capital 37,857,936 38,244,567
Retained earnings 8,268,819 5,881,973
Unrealized appreciation of fixed maturity and equity
investments, net of taxes 219,298 208,958
Unearned compensation (50,000) (75,000)
------------- -------------
Total stockholders' equity $ 46,377,545 $ 44,342,224
Contingencies
------------- -------------
$397,593,740 $152,045,831
============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Service fees $12,340,984 $13,822,377 $78,613,681 $62,577,179
Software and hardware sales 269,555 60,786 932,806 639,309
Premiums earned and other income 2,328,053 95,125 2,444,821 334,811
Investment income 152,799 252,451 714,312 714,271
---------- ---------- ---------- ----------
Total revenues 15,091,391 14,230,739 82,705,620 64,265,570
Expenses:
Agent commissions and other direct costs 8,342,057 7,600,127 54,622,067 42,948,587
Cost of software and hardware sold 365,146 17,800 712,351 17,800
Losses incurred and other expenses 2,303,609 148,476 2,401,016 347,480
General and administrative expenses 8,433,676 5,288,019 15,587,626 10,704,628
Restructuring and non-core expenses 2,065,668 -- 2,617,064 --
Depreciation expense 446,989 284,297 870,286 565,329
Amortization expense 382,490 230,192 833,729 429,266
Interest expense 296,713 244,039 1,130,749 514,956
---------- ---------- ---------- ----------
Total expenses 22,636,348 13,812,950 78,774,888 55,528,046
---------- ---------- ---------- ----------
Income (loss) before income taxes (7,544,957) 417,789 3,930,732 8,737,524
Income tax benefit (expense) 2,959,276 (206,895) (1,543,888) (3,348,186)
---------- ---------- ---------- ----------
Net income (loss) $(4,585,681) $ 210,894 2,386,844 5,389,338
========== ========== ========== ==========
Net income (loss) per common share $ (.56) $ .03 .29 .65
========== ========== ========== ==========
Weighted average common shares
outstanding 8,149,291 8,330,904 8,292,707 8,315,403
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 2,386,844 $ 5,389,338
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation 870,286 565,329
Amortization 833,729 429,266
Other changes:
Premiums receivable (186,608,379) (122,432,788)
Premiums and commissions payable 92,061,379 75,413,186
Accounts payable and other liabilities 3,026,801 649,857
Loss reserves 78,213,156 18,588,345
Reinsurance balances receivable (68,233,514) (18,732,949)
Reinsurance balances payable 64,389,751 21,683,769
Prepaids and other assets 3,854,064 1,444,896
------------ -------------
Net cash used by operating activities (9,205,398) (19,891,543)
Investing activities:
Decrease in company financed premiums 19,981,856 27,052,181
Purchases of equity securities - available for sale (739,919) --
Purchases of fixed maturity securities -
available for sale (37,426) (7,628,671)
Proceeds from sale of equity securities -
available for sale 671,837 --
Maturities of fixed maturity securities -
available for sale 23,584 6,293,344
Capitalization of intangible assets, including
acquisitions of businesses (203,902) (1,534,984)
Proceeds from sale of property and equipment 166,975 --
Purchases of property and equipment (1,575,033) (2,983,127)
------------ -------------
Net cash provided by investing activities 18,287,972 21,198,743
Financing activities:
Net repayments of note payable to bank (13,479,900) (3,968,000)
Proceeds from issuance of long-term debt 20,034 2,109,360
Repayments on long-term debt (709,642) (482,865)
Repurchase of common stock (394,063) --
Issuance of common stock 7,200 1,500
------------ ------------
Net cash used by financing activities (14,556,371) (2,340,005)
------------ ------------
Net decrease in cash and cash equivalents (5,473,797) (1,032,805)
Cash and cash equivalents, beginning of year 6,980,570 2,975,363
------------ ------------
Cash and cash equivalents, end of period $ 1,506,773 $ 1,942,558
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY PRESENTATION
The unaudited consolidated financial statements have been prepared by Crop
Growers Corporation (the Company), pursuant to the rules and regulations of
the Securities and Exchange Commission applicable to quarterly reports on
Form 10-Q. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although management believes that the disclosures are
adequate to make the information presented not misleading. Results of
operations for interim periods are not indicative of results of operations
to be expected for the full year ending December 31, 1996. It is suggested
that these unaudited consolidated financial statements be read in
conjunction with the consolidated financial statements and related notes in
the Company's Form 10-K for the year ended December 31, 1995, as amended.
In the opinion of management, the information furnished reflects all
adjustments which are of a normal recurring nature and are necessary for a
fair presentation of the Company's financial position as of June 30, 1996
and December 31, 1995, and the results of its operations for the three and
six months ended June 30, 1996 and 1995, and its cash flows for the six
months ended June 30, 1996 and 1995.
2. RECONCILIATION OF STOCKHOLDERS' EQUITY 1996 1995
---- ----
Balance at January 1, $44,342,224 $38,668,720
Net income 2,386,844 5,389,338
Change in unrealized appreciation of
fixed maturity and equity investments,
net of taxes 10,340 362,824
Restricted stock compensation earned 25,000 25,000
Exercise of stock options 7,200 1,500
Issuance of common stock -- 759,500
Repurchase of common stock (394,063) --
------------ -----------
Balance at June 30, $46,377,545 $45,206,882
------------ -----------
------------ -----------
3. ISSUANCE OF CONVERTIBLE PREFERRED STOCK
On July 10, 1996, Fireman's Fund Insurance Company purchased 10,000 shares
of a new series of preferred stock of the Company for $10 million. The
preferred stock is convertible into common stock at a price of $13.25 per
share (equivalent to 754,717 shares), subject to certain adjustments. The
preferred stock pays a quarterly dividend (on each January 1, April 1, July
1 and October 1 commencing October 1, 1996) of 5% per annum and is entitled
to vote on all matters brought before the common stockholders on an as-
converted basis. The preferred stock is redeemable at the option of the
Company after July 8, 1997, at $1,000 per share plus all dividends
accumulated and unpaid on the date fixed for redemption; however the
Company may not redeem the shares prior to July 9, 2001 unless the price
of the common stock exceeds a redemption threshold set forth in the
certificate of designations creating the preferred stock. The preferred
stock is subject to mandatory redemption on July 9, 2006.
4. CORPORATE RESTRUCTURING
On March 28, 1996, the Company announced that it will relocate its
headquarters and main office to Overland Park, Kansas. Since then, the
Company has begun relocation efforts and anticipates substantial completion
of these efforts by the end of 1996. At June 30, 1996, the Company had
accrued severance costs of $825,000, the majority of which will be paid in
August 1996. The Company also incurred $238,000 in relocation and other
restructuring expenses in the three months ended June 30, 1996. Amounts
incurred as part of the relocation and other restructuring expenses will
continue to be charged to expense when incurred. The Company expects these
costs to continue to be significant and to be substantially completed by
December 1996.
6
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CON'T.)
5. SEPARATION AGREEMENTS
As a result of discussions with the Federal Crop Insurance Corporation, the
Company has agreed in principle regarding separation agreements with its
former President and Chief Executive Officer John Hemmingson and its former
Executive Vice President Gary Black. These agreements will terminate
the existing leave of absence agreements between the Company and each of
Hemmingson and Black. As part of the arrangement, Hemmingson and Black
would no longer receive any compensation or benefits from the Company
effective as of June 30, 1996, and the Company would purchase 68,000 and
64,000 shares of its common stock from Hemmingson and Black, respectively;
at a price of approximately $9.88 per share (based on, among other factors,
the market price of the stock on the date the agreement in principle was
reached, and the termination of compensation and benefits to Hemmingson
and Black). Additionally, the Company would agree to purchase up to an
additional 8,000 and 4,000 shares of common stock monthly from each of
Hemmingson and Black on the last day of August through December of 1996 at
prices related to the then bid and asked price of the stock. Additionally,
Hemmingson would agree to reduce his ownership in the Company to less than
10% of the voting stock on an as converted basis by June 30, 1998. As a
part of the separation agreements, Hemmingson and Black would also enter
into proxy agreements pursuant to which an independent third party
institutional proxy holder will exercise voting authority with respect to
all matters on which shares then owned by either Hemmingson or Black are
entitled to vote. Hemmingson and Black will, subject to certain conditions,
be able to dispose of their shares during the period that the proxy
agreement remains in effect. The proxies would remain in place until the
earlier of the acquittal of Messrs. Hemmingson and Black under the
indictments obtained by the Independent Counsel or the end of the
suspension/debarment periods currently being imposed by the Federal Crop
Insurance Corporation on Messrs. Hemmingson and Black.
6. LEGAL MATTERS
INDEPENDENT COUNSEL INVESTIGATION. On May 30, 1996, the Company announced
that it, its former President and Chief Executive Officer John Hemmingson
and its former Executive Vice President Gary Black were indicted by a
federal grand jury in Washington, D.C. in connection with the previously
announced investigation of the Company being conducted by the Independent
Counsel appointed to investigate matters relating to former Secretary of
Agriculture, Mike Espy. The indictment alleges conspiracy to violate
federal election laws, false statements to a government agency,
falsification of books and records, false statements to auditors and
other matters. The Company formed a special committee (the "Special
Committee") consisting of outside directors of the Board of Directors to
review matters related to the investigation. The Special Committee had
the authority and discretion to take any and all appropriate actions
relating to the investigation. In August 1996, the Company announced
that; subject to completion of certain matters; the Board of Directors
would have the authority to take actions with respect to the
investigation and the special committee's function would end. On August
6, 1996, Mr. Hemmingson, but not the Company, was added to a previous
indictment in federal district court in New Orleans of Henry Espy, Alvarez
Ferrouillet and other entities. The charges involve money laundering and
other matters.
The Company intends to vigorously defend the charges brought against it by
the Independent Counsel. Although the ultimate outcome of the proceedings
cannot be determined, if the outcome is unfavorable, the Company could be
subject to substantial monetary fines and other sanctions. In addition,
the charges or convictions could result in state insurance regulatory
issues and could effect the ability of the company to participate in the
MPCI program. Any such result could have a material adverse effect on the
Company, its results of operations, financial position or liquidity. No
provision for any liability that may result from events relating to the
charges have been made in the Company's Consolidated Financial Statements.
SHAREHOLDER LITIGATION. On May 22, 1995, a complaint in an action entitled
JEANNE M. WEILEIN VS. JOHN HEMMINGSON, GARY BLACK AND CROP GROWERS
CORPORATION (CIV. NO. 95-58-GF-PGH) was filed in the United States District
Court for the District of Montana. On May 26, 1995, a complaint in an
action entitled SANDRA L. ING. VS. JOHN HEMMINGSON, GARY BLACK AND CROP
GROWERS CORPORATION (CIV. NO. 95-59-GF-PGH) was filed in the same court.
Each suit was filed by one shareholder of the Company as a class action on
behalf of all persons who purchased the Company's common stock between
February 13, 1995 and May 16, 1995. Except for the identities of the named
plaintiffs, the complaints are identical in all respects. The two suits
have been consolidated by the court into a single action entitled IN RE
CROP GROWERS SECURITIES LITIGATION (CIV. NO. 95-58-GF-PGH). The complaint
alleges, among other things, that the Company made false and misleading
statements in publicly filed or disseminated documents to inflate
artificially the price of its common stock. The complaint seeks
compensatory damages for the class. On March 20, 1996, the Magistrate Judge
issued a Report and Recommendation granting the plaintiffs' motion for
class certification and issued an Order denying defendants' motion to
dismiss. The Company has filed objections to the Magistrate's Report and
Recommendation and appealed his Order to the District Court. The District
Court currently has the Company's objections and appeal under advisement.
The parties are engaging in discovery, which to date has involved the
answering of written questions and production of documents.
7
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company considers the claims made in the complaint to be without merit
and intends to continue to vigorously defend against them. However, an
unfavorable decision in this case would likely have a material adverse
effect on the Company's results of operations, financial position or
liquidity. No provision for any liability that may result from events
relating to the charges have been made in the Company's Consolidated
Financial Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company operates principally in three business segments:
Agency operations: Servicing of multi-peril crop insurance ("MPCI"), crop
hail insurance and other insurance products underwritten by third party
insurance companies as well as its own property and casualty insurance
subsidiaries.
Software operations: Development, marketing, and sale of proprietary
software and related products to agents, farmers and others. A majority of
the software operations revenues to date have been derived from
intercompany charges primarily to the agency operations.
Insurance operations: Underwriting of premiums by the Company's property
and casualty insurance subsidiaries and the developing of risk management
strategies for all premiums serviced by the Company. A substantial portion
of the insurance company revenues are derived from underwriting fees
charged to the agency operations.
The sources of revenues and the related expenses for each of these segments are
described below.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- --------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Agency operations $13,821,108 $14,222,229 $81,033,301 $63,129,684
Software operations 1,115,784 1,093,556 4,178,131 3,554,163
Insurance operations 2,295,025 7,354 3,372,984 466,008
Corporate operations 247,699 238,458 504,796 395,454
Investment income 152,799 252,451 714,312 714,271
Less intercompany revenues (2,541,024) (1,583,309) (7,097,904) (3,994,010)
----------- ------------ ----------- ------------
Total revenues $15,091,391 $14,230,739 $82,705,620 $64,265,570
=========== ============ =========== ============
INCOME (LOSS) BEFORE TAXES
Agency operations $(1,875,733) $ 507,379 $ 9,873,283 $ 8,638,551
Software operations (790,785) 639,506 557,366 1,689,470
Insurance operations (479,839) (139,055) 67,910 87,963
Corporate operations (4,551,399) (842,492) (7,282,139) (2,392,731)
Investment income 152,799 252,451 714,312 714,271
------------ ------------ ----------- ------------
Income (loss) before taxes $(7,544,957) $ 417,789 $3,930,732 $ 8,737,524
============ ============ =========== ============
</TABLE>
8
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
AGENCY OPERATIONS
SERVICE FEES
The Company's agency operations revenues include service fees related to
MPCI and crop hail, and excess loss adjusting expense reimbursement related to
MPCI premiums serviced.
For MPCI buy-up coverage, the Company is entitled to the expense
reimbursement payable by the Federal Crop Insurance Corporation (the "FCIC").
This expense reimbursement is passed through to the Company under its MPCI
contracts with third party insurance companies and is paid directly to the
Company for MPCI premiums underwritten by its property and casualty insurance
subsidiaries. For the 1996 and 1995 crop years, the expense reimbursement for
buy-up coverage was established by the FCIC at 31%.
For MPCI basic coverage, the Company retains a portion of the
administrative fee paid by the insured and receives an amount for loss adjusting
expenses (regardless of the loss experience of the insureds), whichh amounts are
passed through or paid directly to the Company under its MPCI contracts. For
basic coverage, the Company's portion of the administrative fee is up to the
first $100 of the administration fee paid by the insured and the loss adjusting
expense reimbursement is equal to 4.7% of an imputed premium.
The expense reimbursement level for the 1997, 1998 and 1999 crop years for
buy-up coverage is limited under the Federal Crop Insurance Reform Act of 1994
(the "Reform Act") to levels not to exceed 29%, 28% and 27.5%, respectively.
For the 1997 crop year, the expense reimbursement for buy-up has been
established by the FCIC at 29%. Because the Company's MPCI service fees are
directly related to the expense reimbursement established by the FCIC, the
Company's future MPCI service fees will be affected by the reduction in the
level of expense reimbursement. In the past, the impact of FCIC expense
reimbursement level reductions on the Company's net earnings has been minimized
because the Company has reduced its agents' commissions in order to minimize the
impact on its margin on MPCI business. MPCI agent commissions vary by agent
depending on such factors as the volume of premium produced by the agent,
whether or not the agent is responsible for any direct costs and other
competitive factors. The Company is negotiating with agents regarding reduced
commissions on buy-up coverage to offset the impact of the expense reimbursement
to be paid by the FCIC in the 1997 crop year, however, the Company believes,
based on competitive factors within the industry, that it will likely have to
absorb a significant portion of the reduction.
Under its MPCI contracts, the Company is also entitled to receive any
excess loss adjustment expense reimbursement from the FCIC. The FCIC pays
contracting insurance companies an amount up to 4% of premium on buy-up coverage
for excess loss adjusting expenses on such coverage if loss ratios on the
Company's total book of MPCI business, by state and by risk retention fund, are
in excess of the ratios established by the FCIC. Generally, the excess loss
adjustment expense reimbursement increases as the loss ratio increases. Under
basic coverage policies, the FCIC pays contracting insurance companies an amount
up to 1.7% of the imputed premium for excess loss adjusting expenses in the
event loss ratios on the overall book of basic coverage are in excess of loss
ratios established by the FCIC.
The Company's service fees related to crop hail insurance are a percentage
of the premiums serviced for third party insurance companies.
AGENT COMMISSIONS AND OTHER DIRECT COSTS
Agent commissions and other direct costs related to marketing and servicing
MPCI are obligations of the Company and, accordingly, are reflected as expenses
of the Company. Additionally, agent commissions and other direct costs on crop
hail insurance are generally direct obligations of the Company and, therefore,
are reflected as expenses of the Company.
9
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Under the Company's crop hail contract with CNA Insurance Companies ("CNA"),
agent commissions and other direct costs, except loss adjusting expense, are
the direct obligations of CNA and, therefore are not reflected as an expense
of the Company.
Other direct costs include overwrite fees payable to third party insurance
companies, loss adjusting expenses, premium taxes on crop hail insurance, bureau
fees and other costs. These costs, except for loss adjusting expense, vary
proportionally with the amount of premiums serviced. The Company's overwrite
fees are negotiated with such companies and are generally based on the amount of
premiums serviced. Overwrite fees are reduced as a percentage of the Company's
overall premium serviced to the extent its property and casualty insurance
subsidiaries are utilized to underwrite a portion of premiums serviced by the
Company. Additionally, as a result of the Fireman's Fund alliance (see
"Recent Developments"), the Company will no longer pay any overwrite fee on
premiums it places with Fireman's Fund.
Loss adjustment expenses are based on management's estimate of all Company
adjusting costs to settle claims incurred or to be incurred on policies on which
revenue has been recognized. The estimate is reviewed periodically and
variances, if any, in estimated versus actual amounts are reflected in current
operations. In some instances, agents are responsible for loss adjusting
expenses or other direct costs associated with policies sold by them, and those
agents generally receive higher commissions in return for the assumption of
those direct costs. Bureau fees are fees charged by National Crop Insurance
Service for providing rates and procedures required to be used by the FCIC.
RECOGNITION OF SERVICE FEES AND DIRECT COSTS
Crop Growers recognizes service fees from MPCI policies and the related
direct costs as of the sales closing date for the particular policy. The sales
closing date, which is established by the FCIC, is the date on which coverage
for a crop must be bound or renewed by the policyholder and when substantially
all required services relating to placing the insurance have been rendered by
the Company. Unless canceled by the farmer, policies in place from the prior
year automatically renew on the same terms on the sales closing date. Since
sales closing dates precede the date on which farmers plant their insured crop,
MPCI coverage and related premiums are estimated by the Company until the farmer
subsequently submits his or her report on actual acreage planted. The effect of
changes in such estimated premiums are included in the results of operations in
the period in which the estimates are changed.
For crop hail insurance, service fees are recognized when the insurance
coverage is accepted by the insurance company, which is concurrent with the
completion of substantially all services required by the Company. Direct costs
such as agent commissions, loss adjusting and premium taxes are recognized at
the time service fees are recognized.
RECENT DEVELOPMENTS
LEGISLATIVE DEVELOPMENTS. Under the Reform Act, beginning with the 1995
crop year, farmers were required to obtain at least basic coverage on
eligible crops in order to participate in many federal farm subsidy programs.
Basic coverage is available through private companies or at USDA field
service offices. Based on statistics provided by the FCIC, the majority of
farmers participating in the MPCI program at the basic coverage level in the
1996 and 1995 crop years obtained such coverage through USDA offices. On
April 4, 1996, a new farm bill was enacted into law. Certain of the farm
bill's provisions relate to the MPCI program. One change affects the
mandatory link of basic coverage and participation in United States
Department of Agriculture ("USDA") farm and credit programs by permitting
farmers, effective for 1996 spring crops, to participate in such programs
without buying at least basic coverage, provided such farmers waive any right
to any possible emergency crop loss assistance in connection with the
particular crop. In addition, the farm bill provides that, effective with the
1997 crop year, the USDA will offer basic coverage only if the Secretary of
Agriculture determines that there is an insufficient number of approved
insurance providers operating in the particular state or region to adequately
provide basic coverage to farmers. On July 11, 1996, the USDA announced that
it will no longer offer basic coverage in 14 states. The transfer process
will begin with crops having a sales closing date of September 30, 1996 and
applies to all subsequently insured crops. The farmer has until the sales
closing date to
10
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
chose an agent, otherwise the FCIC will randomly assign the policy to an
authorized private insurance company. Insurance companies and agents must
accept and service all policies transferred or reassigned to them. The Company
cannot predict the impact of the changes to the MPCI program on the MPCI
industry or its business as a result of enactment of the farm bill or any other
proposals that may be made or implemented in the future.
Fireman's Fund Transaction. On July 10, 1996, the Company announced
that it had formed a new strategic alliance with Fireman's Fund Insurance
Company ("Fireman's Fund"). As a result, and pursuant to a three year MPCI
agency agreement with Fireman's Fund, the Company will substantially increase
the amount of MPCI premium it places with Fireman's Fund beginning with the
1997 crop year. Under the terms of the MPCI agreement, the Company will not
pay any overwrite fees on premiums placed with Fireman's Fund. As a part of
the strategic alliance, the Company also will write crop hail business
through Fireman's Fund beginning in 1997.
On July 10, 1996, Fireman's Fund also purchased from the Company 10,000
shares of a new series of preferred stock of the Company for $10 million. The
preferred stock is convertible into common stock at a price of $13.25 per share
(equivalent to 754,717 shares), subject to certain adjustments. The preferred
stock pays a quarterly dividend (on each January 1, April 1, July 1 and October
1 commencing October 1, 1996) of 5% per annum and is entitled to vote on all
matters brought before the common stockholders on an as-converted basis. The
preferred stock is redeemable at the option of the Company after July 8,
1997, at $1,000 per share plus all dividends accumulated and unpaid on the
date fixed for redemption, however; that the Company may not redeem the
shares prior to July 9, 2001 unless the price of the common stock exceeds a
redemption threshold set forth in the certificate of designations creating
the preferred stock. The preferred stock is subject to mandatory redemption
on July 9, 2006.
Under the stock purchase agreement relating to the preferred stock, the
Company agreed to appoint immediately a designee of Fireman's Fund as a Class 2
director of the Company, and thereafter to use its best efforts to have one
individual designated by Fireman's Fund on the Company's board so long as
Fireman's Fund continues to hold at least 25% of the preferred stock (or common
stock issued upon conversion of the preferred stock). The Company also granted
Fireman's Fund pro rata purchase rights with respect to certain sales of capital
stock by the Company to other insurance companies, as well as demand and
incidental registration rights with respect to shares of common stock issued
upon conversion of the preferred shares. Fireman's Fund granted to the Company
rights of first refusal on certain sales of the Company's capital stock prior to
July 10, 1998. Fireman's Fund also agreed not to acquire shares exceeding 20%
of the Company's outstanding common stock (assuming exercise or conversion of
all outstanding rights to acquire common stock) or to participate in any tender
offer for common stock of the Company or proxy contest with respect to the
election of Company directors until the earlier of (i) July 10, 2001 or (ii) any
date after July 10, 1998 on which Fireman's Fund beneficially owns less than
150,000 shares.
The forgoing summary of the terms of these agreements with Fireman's Fund
is qualified in its entirety by reference to the copies of such agreements which
are filed as exhibits to this Form 10-Q.
As a result of the Fireman's Fund transaction, the Company plans to
terminate its agency and reinsurance agreements with CNA. The Company is in
the process of finalizing a termination agreement with CNA regarding these
matters.
INDEPENDENT COUNSEL INVESTIGATION. On May 30, 1996, the Company and
Messrs. Hemmingson and Black were indicted by federal grand jury in
Washington D.C. in connection with the previously announced investigation of
the Company being conducted by the Independent Counsel appointed to
investigate matters relating to former Secretary of Agriculture, Mike Espy
(see Note 6 to the Company's Financial Statements for the quarter ended June
30, 1996). On August 6, 1996, Mr. Hemmingson, but not the Company, was added
to a previous indictment in federal district court in New Orleans of Henry
Espy, Alverez Ferrouillet and other entities. The indictment is part of the
investigation being conducted by the Independent Counsel. At the end of
March 1996, the Company granted leaves of absence to it's President and Chief
Executive Officer, John Hemmingson, and it's Vice President, Gary Black. On
May 9, 1996, Mr. Black began his leave of absence and resigned as a director
and officer of the Company. On May 30, 1996, Mr. Hemmingson took his leave
of absence and resigned as a director and officer of the Company. As a result
of discussions with the FCIC, the Company has agreed in principle regarding
separation agreements with Messrs. Hemmingson and Black (see Note 5 to the
Company's Financial Statements for the quarter ended June 30, 1996).
OTHER. On July 10, 1996, John Menschle, senior vice president of Fireman's
Fund, was appointed as a Class 2 director of the Company (term expiring in
1999). Effective July 14, 1996, Reford S. Halgrove, Jr., resigned as a
Class 1 director of the Company.
On August 7, 1996, Lawrence Martinez was named chief executive officer
of the Company. Martinez had previously been appointed acting chief executive
officer of the Company on May 31, 1996. Martinez is a Class 3 director, (term
expiring in 1997).
SOFTWARE OPERATIONS
The Company's software operations revenues include sales of VisAg-TM-
software, mapping products, and hardware products. Costs include commissions on
software and mapping sales, mapping product development costs, hardware costs,
and other direct costs such as shipping, postage, and packaging. The VisAg
product is a PC-based map driven farm management system designed for use by
small family farms to large corporate operations. Mapping products are computer
generated geo-referenced maps which allow an agent or farmer to view an entire
agricultural operation on a single map. Hardware products represent various
hardware products
11
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
manufactured by third parties sold to agents and other outside customers.
Revenues from the sale of VisAg, mapping products and hardware are
recognized upon shipment to the customer.
Revenues from the sale of VisAg and other mapping products has not made
a significant contribution to revenues or earnings since their introduction.
Management is currently assessing the VisAg products marketing and
distribution strategies and does not expect to achieve significant
profitability in its software operations over the next twelve to eighteen
months. The Company will seek to manage these operations to a break even
level over this period. The Company does, however, continue to believe map
based technology is important in supporting its crop insurance operations and
will continue to develop products for use by its agency distribution network.
INSURANCE OPERATIONS
The Company's insurance operations include premiums earned and losses
incurred on MPCI buy up and basic coverages, crop hail, and other insurance
coverages underwritten and retained by the Company's property and casualty
insurance subsidiaries. Additionally, the Company has arrangements with its
third party insurance companies pursuant to which it is entitled to receive a
percentage of the underwriting gains, if any, on crop insurance it services.
These gains are reflected as additional service fees.
The Company's operating results may vary significantly depending on the
underwriting results of the premiums serviced and underwritten by it. The
Company does not assume any of the underwriting loss under its servicing
contracts with third party insurers; and under the Company's servicing agreement
with Fireman's Fund, there is no loss carryforward to reduce future underwriting
gains. For the 1996 crop hail season, the Company retained 15% of crop hail
premiums underwritten by Dawson Hail Insurance Co. The Company has secured
stop loss coverage whereby the reinsures shall indemnify the Company for
signficantly all of the aggregate net losses in excess of 80% of net earned
premiums. The reinsurers are not obligated for aggregate net losses in excess
of 180% of net earned premiums. Underwriting gains or losses on crop insurance
are generally not determinable until sometime after the second quarter of any
year and, accordingly, the Company expects that revenues, if any, from these
arrangements will typically be recognized in the third and fourth quarters.
Underwriting gains on premiums serviced by the Company are recognized by the
Company as additional service fees and, because they generally have very low
related expenses, can have a material impact on the Company's operating results.
Accordingly, although the Company's risk management strategy is to minimize its
exposure to underwriting risk, the Company's earnings can be materially affected
by factors which impact underwriting results and, accordingly, its portion of
any underwriting gains, including the timing and severity of losses from storms
and other natural perils.
INVESTMENT INCOME
The Company derives investment income from interest charged to
policyholders who elect not to pay their MPCI premiums on the FCIC established
due date and from investments. Under the MPCI program, the FCIC charges interest
at a rate of 1.25% per month on overdue premiums and the insurance company,
which is responsible for payment of the policyholder's premiums to the FCIC,
passes such interest cost on to the policyholder. The Company has agreed with
its contracting insurance companies to assume the responsibility for such
payments to the FCIC and, therefore, receives interest payments made by
policyholders on deferred premiums. In the event of an insured loss, the
Company deducts premium payments and interest, if any, from the claim payment to
the farmer.
The Company also earns investment income on interest and dividends on
investment securities and excess cash invested at certain times of the year,
which typically occurs after MPCI and crop hail premiums are collected. Also
included in investment income are income and losses on investments in companies
which are less than 50% owned, which are accounted for under the equity method.
12
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SEASONALITY
The Company's quarterly operating results vary substantially from quarter
to quarter as a result of various factors, including MPCI sales closing dates,
crop production cycles and recognition of underwriting gains, if any. The
Company recognizes the highest amount of service fees and related direct costs
in the first quarter. The majority of these amounts are attributed to service
fees related to MPCI. Virtually all of the Company's service fees and direct
costs related to crop hail insurance are recognized in the second quarter. The
Company generally recognizes its second highest amount of revenues and related
direct costs in the third quarter because the MPCI sales closing date for the
majority of fall crops is September 30. In addition, the Company may recognize
a portion of underwriting gains or losses, if any, on the premiums it
underwrites or services in the third quarter. In the fourth quarter, the
Company also recognizes underwriting gains or losses, if any, on the premiums it
underwrites or services, most of the interest income on MPCI deferred premium
financing and service fees on MPCI premiums with sales closing dates occurring
in the fourth quarter. Crop Growers cannot predict whether MPCI sales closing
dates will be changed in the future, but any such change could have a material
effect on the Company's quarterly results of operations. Because the Company's
business is directly tied to the production cycle of crops, the Company expects
that seasonal patterns in its operating results will continue.
The following table sets forth MPCI and crop hail premiums serviced by quarter.
MPCI premiums for 1995 have been adjusted to reflect actual premiums serviced by
quarter.
<TABLE>
<CAPTION>
Three months ended Three months ended Six months ended
March 31, June 30, June 30,
1996 1995 1996 1995 1996 1995
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Premiums serviced
(in millions)
MPCI Buy-up $187.4 126.4 (7.2) -- 180.2 126.4
Basic 38.5 28.5 ( .9) -- 37.6 28.5
----- ----- ----- ----- ----- -----
Total $225.9 154.9 (8.1) -- 217.8 154.9
===== ===== ===== ===== ===== =====
Crop Hail $ -- -- 76.4 63.3 76.4 63.3
===== ===== ===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
AGENCY OPERATIONS. Service fees decreased 10.7% to $12.3 million for the
three months ended June 30, 1996 compared to $13.8 million in the three months
ended June 30, 1995. The decrease in service fees in the three months ended
June 30, 1996 was primarily the result of reductions in service fees due to the
resolution of a dispute relating to a former general agency of the Company which
resulted in a reduction of $2.2 million in services fee revenues. The decrease
in service fees in the three months ended June 30, 1996 was partially offset by
the increase in service fees on additional crop hail premiums serviced. In the
three months ended June 30, 1995 an additional $1.2 million in service fees was
recognized due to a MPCI premium estimate revision. The premium estimate
revision has been reflected in the table above.
Agent commissions and other direct costs increased 9.8% to $8.3 million for
the three months ended June 30, 1996 compared to $7.6 million for the three
months ended June 30, 1995. The increase in agent commissions and other direct
costs was the result of the increased crop hail premiums serviced by the
Company. The increase in agent commissions and other direct costs in the three
months ended June 30, 1996 was partially offset by $2.3 million in reductions in
agent commissions and other direct costs due to the resolution of a dispute
relating to a former general agency of the Company. In the three months ended
June 30, 1995
13
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
an additional $640,000 in agent commissions and other direct costs was
recognized due to MPCI premium estimate revisions. Additionally, for the
three months ended June 30, 1995, the Company recorded $1.6 million in
reductions in loss adjusting expense reserves based on estimates of remaining
costs to be incurred in adjusting MPCI and crop hail losses. No such
reductions were made in three months ended June 30, 1996.
SOFTWARE OPERATIONS. Software and hardware sales increased $209,000 to
$270,000 for the three months ended June 30, 1996 compared to $61,000 in the
three months ended June 30, 1995. Cost of software sold increased $347,000 in
the three month ended June 30, 1996 to $365,000 from $18,000 in three months
ended June 30, 1995. The increases were attributed to sales of VisAg-TM- which
was introduced in December 1995, and increased sales of mapping products.
The Company believes software sales were negatively impacted in the second
quarter for seasonality reasons relating to the production cycle for crops.
Accordingly, the effects of the Company's software operations are not material
to second quarter operations. The Company expects the seasonality factor to
continue to affect sales in the third quarter of 1996. See "Software
Operations."
INSURANCE OPERATIONS. During the second quarter of 1996, the Company
retained 15% of the crop hail premiums underwritten by its insurance company
subsidiary Dawson Hail Insurance Co. ("Dawson"). For the three months ended June
30, 1996, Dawson wrote $17.1 million in crop hail premiums. These premiums have
been reflected in the accompanying financial statements assuming a 70% loss
ratio. Dawson was not acquired until July 14, 1995, which was after most all
crop hail premiums were written. Virtually all other premiums underwritten by
the Company's property and casualty insurance subsidiaries are reinsured with
third party insurance companies.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 59.5% in the three months ended June 30, 1996 to $8.4 million from
$5.3 million in the three months ended June 30, 1995. The increase was due
primarily to increased costs incurred in servicing the increased MPCI and crop
hail premium volumes in 1996. After completion of the consolidation and move
of the Company's home office to Overland Park, Kansas, the Company expects
its overall workforce to be reduced by approximately 10%.
RESTRUCTURING AND NON-CORE EXPENSES In the three months ended June
30, 1996, the Company incurred approximately $917,000 in expenses, primarily
legal fees, in connection with the indictment of the Company and certain of
its former officers being conducted by the Independent Counsel appointed to
investigate matters relating to former Secretary of Agriculture, Mike Espy.
The Company also incurred approximately $86,000 in the three months ended
June 30, 1996 in connection with defending a shareholder class action lawsuit
filed in May 1995. While the Company expects these legal expenses to continue
to be significant for the foreseeable future, it expects to see a reduction
in expenses relating to the Independent Counsel matter over the next two
quarters. The Company also accrued $825,000 in connection with severance
costs and incurred $238,000 in relocation and other restructuring expenses as
part of the relocation of the Company's main office to Overland Park, Kansas.
The Company expects the relocation and other restructuring expenses to
continue to be significant and to be substantially completed by December
1996. The Company expects to offset the severance and other related
relocation costs through the reduction in its workforce occuring as a part of
the relocation and other administrative cost savings over the next year.
DEPRECIATION AND AMORTIZATION EXPENSE Depreciation and amortization
expenses increased to $829,000 in the three months ended June 30, 1996 from
$514,000 for the three months ended June 30, 1995. The increase was primarily a
result of increased property and equipment purchased in 1995 and an increase in
the amortization of intangible assets as a result of 1995 acquisitions.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
AGENCY OPERATIONS. Service fees increased 25.6% to $78.6 million for the
six months ended June 30, 1996 compared to $62.6 million in the six months ended
June 30, 1995. The
14
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
increase in service fees was primarily the result of increased MPCI premiums
serviced primarily attributable to acquisitions made in 1995 and FCIC
established rate increases as well as increased crop hail premiums serviced.
MPCI buy up and basic coverage premiums serviced in the six months ended June
30, 1996 were $180.2 million and $37.6 million respectively, as compared to
$126.4 million and $28.5 million in the six months ended June 30, 1995. Crop
hail premiums serviced in the six months ended June 30, 1996 were $76.4
million as compared to $63.3 million in the six months ended June 30, 1995.
Included in premiums serviced in the six months ended June 30, 1996 were
$38.4 million and $4.3 million, respectively, of MPCI buy-up and basic
coverage premiums attributed to acquisitions made in 1995.
Agent commissions and other direct costs increased 27.2% to $54.6 million
for the six months ended June 30, 1996 compared to $42.9 million for the six
months ended June 30, 1995. The increase in agent commissions and other direct
costs was the result of the increased MPCI and crop hail premiums serviced by
the Company.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 45.6% in the six months ended June 30, 1996 to $15.6 million from
$10.7 million in the six months ended June 30, 1995. The increase was due
primarily to increased costs incurred in servicing the increased MPCI and crop
hail premium volumes. After completion of the consolidation and move of the
Company's home office to Overland Park, Kansas, the Company expects its overall
workforce to be reduced by approximately 10%.
RESTRUCTURING AND NON-CORE EXPENSES In the six months ended June 30,
1996, the Company incurred approximately $1,419,000 in expenses, primarily
legal, in connection with an investigation of the Company and certain of its
officers being conducted by the Independent Counsel appointed to investigate
matters relating to former Secretary of Agriculture, Mike Espy. The Company
also incurred approximately $135,000 in the six months ended June 30, 1996 in
connection with defending a shareholder class action lawsuit filed in May 1995.
The Company also accrued $825,000 in connection with severance costs and
incurred $238,000 in relocation and other restructuring expenses as part of the
relocation of the Company's main office to Overland Park, Kansas.
DEPRECIATION AND AMORTIZATION EXPENSE Depreciation and amortization
expenses increased to $1,704,000 in the six months ended June 30, 1996 from
$995,000 for the six months ended June 30, 1995. The increase was primarily a
result of increased property and equipment purchased in 1995 and an increase in
the amortization of intangible assets as a result of 1995 acquisitions.
INTEREST EXPENSE. Interest expense increased 119.6% to $1,131,000 in the
six months ended June 30, 1996 from $515,000 in the six months ended June 30,
1995. The increase in interest expense was primarily due to additional
borrowings necessary to finance MPCI deferred premiums and the increase in
operating expenses necessary to service the increase in premium volumes.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash used by operating activities was $9.2 million in the six months ended
June 30, 1996 and $19.9 million in the six months ended June 30, 1995. The
primary use of cash by operating activities resulted from an increase in MPCI
and crop hail premiums serviced by the Company which premiums have not yet been
collected from policyholders.
INVESTING ACTIVITIES
Cash provided by investing activities was $18.3 million in the six months
ended June 30, 1996 and $21.2 million in the six months ended June 30, 1995.
The primary source of cash provided by investing activities was the receipt of a
substantial portion of the deferred MPCI premiums which were financed by the
Company in the fourth quarter.
15
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The remaining investing activities of the Company have been primarily the
acquisitions of certain agency operations, purchases and sales of investment
securities, and the purchase of property and equipment needed as a result of the
growth of the Company.
FINANCING ACTIVITIES
The Company used cash for financing activities of $14.6 million in the six
months ended June 30, 1996 and $2.3 million in the six months ended June 30,
1995. The primary uses of cash were to repay borrowings of $13.5 and $4.0
million under its lines of credit in the six months ended June 30, 1996 and
1995, respectively.
CAPITAL RESOURCES
The Company currently maintains two secured revolving lines of credit in
the amount of $35 and $15 million. The lines of credit are committed through
October 15, 1996. At the Company's option, interest on borrowings made under
the lines of credit may be based on the bank's base rate or LIBOR plus 2%. The
$15 million facility is available solely to pay crop hail losses with respect to
policies issued, serviced or managed by or through the Company or its
subsidiaries. The credit agreements require the maintenance of a minimum level
of reinsurance on MPCI and crop hail loss reserves, and contain certain
covenants which require the Company to meet certain financial ratios and levels
of tangible net worth. At June 30, 1996, $18.8 million was outstanding under
the $35 million facility. At June 30, 1996, no amounts were outstanding under
the $15 million facility.
The Company believes that the availability of borrowings under its current
lines of credit and cash generated from operations will provide sufficient
resources to finance the Company's current operations, projected working
capital needs and dividends on its newly issued preferred stock. See "Recent
Developments" and "Note 3 of Notes to Unaudited Consolidated Financial
Statements.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Part I, Item 3 and Part II, Item 8, Note 16 (Legal Matters), of
the Company's Annual Report on Form 10-K for the year ended December 31, 1995,
as amended, Note 6 (Legal Matters), of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 and Form 8-K dated June 10, 1996.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting of stockholders on May 30, 1996.
At the meeting, the stockholders re-elected Paul T. Horn as a Class 2 director.
The vote for Mr. Horn was as follows:
Votes For: 4,703,909
Votes Against or Withheld: 2,184
Abstentions: 3,444,248
At the meeting, the stockholders also ratified the appointment of
KPMG Peat Marwick LLP as the Company's independent public accountants. The vote
was as follows:
Votes For: 4,700,465
Votes Against or Withheld: 5,628
Abstentions: 3,444,248
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1. Certificate of Incorporation
10.1. Preferred Stock Purchase Agreement dated July 10, 1996 between
Crop Growers Corporation and Fireman's Fund Insurance Company
10.2. MPCI General Agency Agreement dated July 10, 1996 between
Crop Growers Insurance, Inc. and Fireman's Fund Insurance
Company (confidential treatment of certain information has
been requested pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934)
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated June 10, 1996 announcing
that it and its former Chief Executive Officer, John Hemmingson and its former
Executive Vice President, Gary Black, had been indicted by the Independent
Counsel appointed to investigate matters relating to former Secretary of
Agriculture, Mike Espy. In addition, the Company announced the appointment of
Larry Martinez as acting Chief Executive Officer and as a member of the
Company's Board of Directors.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROP GROWERS CORPORATION
August 11, 1996 ________________________________
David E. Hill
Chief Financial Officer
18
<PAGE>
OFFICE OF THE SECRETARY OF STATE
----------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "CROP GROWERS CORPORATION", FILED IN THIS OFFICE ON THE FOURTH
DAY OF APRIL, A.D. 1994, AT 12:30 0'CLOCK P.M.
/s/Edward J. Freel
[SEAL] -------------------------------------------
EDWARD J. FREEL, SECRETARY STATE
2391476 8100 AUTHENTICATION: 7313798
944227379 DATE: 11-23-94
<PAGE>
CERTIFICATE OF INCORPORATION
OF
CROP GROWERS CORPORATION
ARTICLE 1
The name of this Corporation is Crop Growers Corporation.
ARTICLE 2
The address of the registered office of this Corporation in the State
of Delaware is 1209 Orange Street in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
ARTICLE 3
The purpose of this Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE 4
Section 1. AUTHORIZED CLASSES OF STOCK.
The total number of shares of all classes of stock which this
Corporation shall have authority to issue is 50,000,000 shares, consisting of
40,000,000 shares of Common Stock, par value $.01 per share ("Common Stock")
and 10,000,000 shares of preferred stock, par value $.01 per share
("Preferred Stock"). Shares of any class of stock of the Corporation may be
issued for such consideration and for such corporate purposes as the Board of
Directors may from time to time determine.
Section 2. DESCRIPTION OF CAPITAL STOCK.
The following is a description of each of the classes of capital stock which the
Corporation has authority to issue with the designations, preferences, voting
powers and participating, optional or other special rights and the
qualifications, limitations or restrictions thereof. Except as otherwise
required by law or by the provisions of a resolution or resolutions of the Board
of Directors establishing a series of Preferred Stock, all matters shall be
voted upon without distinction as to classes or series of stock.
<PAGE>
(a) COMMON STOCK.
The holders of Common Stock shall have and possess all rights as
stockholders of the Corporation, except as such rights may be limited by the
preferences, rights, limitations and restrictions of the Preferred Stock.
Subject to provisions of a resolution or resolutions of the Board of Directors
establishing a series of Preferred Stock, dividends may be declared by the Board
of Directors and paid from time to time out of any funds legally available
therefor. In the event of any dissolution, liquidation or winding up of the
affairs of the Corporation, all assets and funds of the Corporation remaining
after paying all amounts payable to the holders of Preferred Stock, as provided
by a resolution or resolutions of the Board of Directors establishing a series
of Preferred Stock, shall be distributed to the holders of Common Stock ratably
according to the number of shares of Common Stock held.
(b) PREFERRED STOCK.
Authority is hereby expressly vested in the Board of Directors of the
Corporation, subject to the provisions of this Article 4 and to the limitations
prescribed by law, to authorize the issue from time to time of one or more
series of Preferred Stock and, with respect to each such series, to fix by
resolution or resolutions adopted by the affirmative vote of a majority of the
whole Board of Directors providing for the issue of such series the voting
powers, full or limited, if any, of the shares of such series and the
designations, preferences and relative, participating, optional or other special
rights and the qualifications, limitations or restrictions thereof. The
authority of the Board of Directors with respect to each series shall include,
but not be limited to, the determination or fixing of the following:
(1) The number of shares constituting such series and the designation
of such series.
(2) The dividend rate of such series, the conditions and dates upon
which such dividends shall be payable, the relation which such dividends
shall bear to the dividends payable on any other class or classes or series
of the Corporation's capital stock, and whether such dividends shall be
cumulative or noncumulative.
(3) Whether the shares of such series shall be subject to redemption
by the Corporation at the option of either the Corporation or the holder or
both or upon the happening of a specified event, and, if made subject to
any such redemption, the times or events, prices and other terms and
conditions of such redemption.
- 2 -
<PAGE>
(4) The terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such series.
(5) Whether or not the shares of such series shall be convertible
into, or exchangeable for, at the option of either the holder or the
Corporation or upon the happening of a specified event, shares of any other
class or classes or of any other series of the same or any other class or
classes of the Corporation's capital stock, and, if provision be made for
conversion or exchange, the times or events, prices, rates, adjustments,
and other terms and conditions of such conversions or exchanges.
(6) The restrictions, if any, on the issue or reissue of any
additional preferred stock, including increases or decreases in the number
of shares of any series subsequent to the issue of shares of that series.
(7) The rights of the holders of the shares of such series upon the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation.
(8) Any right to vote with holders of shares of any other series or
class and any right to vote as a class, either generally or as a condition
to specified corporate action, in addition to any voting powers required by
law.
ARTICLE 5
Section 1. SPECIAL VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS.
In addition to any affirmative vote required by law or this
Certificate of Incorporation or the bylaws of this Corporation, and except as
otherwise expressly provided in Section 2 of this Article 5, a Business
Combination (as hereinafter defined) with, or proposed by or on behalf of, any
Interested Stockholder (as hereinafter defined) or any Affiliate or Associate
(as hereinafter defined) of any Interested Stockholder or any person who after
such Business Combination would be an Affiliate or Associated of such Interested
Stockholder shall require the affirmative vote of not less than two-
thirds of the votes entitled to be cast by the holders of all of the then
outstanding shares of Voting Stock (as hereinafter defined) voting together as a
single class, excluding Voting Stock beneficially owned by such Interested
Stockholder. Such affirmative vote shall be required notwithstanding the fact
that no vote may be required, or that a lesser percentage or separate class vote
may be specified, by law, by any other provision of this Certificate of
Incorporation or the bylaws of this Corporation, by any agreement with any
national securities exchange or otherwise.
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Section 2. WHEN SPECIAL VOTE NOT REQUIRED.
The provisions of Section 1 of this Article 5 shall not be applicable
to any particular Business Combination, and such Business Combination shall
require only such affirmative vote, if any, as is required by law, by any other
provision of this Certificate of Incorporation or the bylaws of this
Corporation, by any agreement with any national securities exchange or
otherwise, if, in the case of a Business Combination involving the receipt of
consideration by the holders of this Corporation's outstanding Capital Stock (as
hereinafter defined), the condition specified in paragraph (a) below is met or
all of the conditions specified in paragraph (b) below are met or if, in the
case of a Business Combination not involving the receipt of consideration by the
holders of the Corporation's outstanding Capital Stock, the condition specified
in paragraph (a) below is met:
(a) APPROVAL BY CONTINUING DIRECTORS
The Business Combination (either specifically or as a transaction
which is within an approved category of transactions) shall have been approved
by a majority of the Continuing Directors (as hereinafter defined).
(b) MINIMUM PRICE AND OTHER REQUIREMENTS:
All of the following conditions shall have been met:
(1) MINIMUM PRICE REQUIREMENTS. With respect to every class or
series of outstanding Capital Stock of this corporation, whether or not the
Interested Stockholder has previously acquired beneficial ownership of any
shares of such class or series of Capital Stock:
(A) The aggregate amount of cash plus the Fair Market Value (as
hereinafter defined), as of the date of the consummation of the
Business Combination, of consideration other than cash to be received
per share by holders of common stock in such Business Combination
shall be at least equal to the higher of the amount determined
pursuant to clauses (i) and (ii) below:
(i) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by
or on behalf of the Interested Stockholder for any share of
common stock in connection with the acquisition by the Interested
Stockholder of beneficial ownership of shares of common stock (x)
within the two-year period immediately prior
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to the Announcement Date (as hereinafter defined) or (y) in the
transaction or series of related transactions in which it became
an Interested Stockholder, whichever is higher, in either case as
adjusted for any subsequent stock split, stock dividend,
subdivision or reclassification with respect to the common stock;
and
(ii) The Fair Market Value per share of common stock (x)
on the Announcement Date or (y) on the Determination Date (as
hereinafter defined), whichever is higher, as adjusted for any
subsequent stock split, stock dividend, subdivision or
reclassification with respect to the common stock.
(B) The aggregate amount of cash plus the Fair Market Value, as
of the date of the consummation of the Business Combination, of
consideration other than cash to be received per share by holders of
shares of any class or series of outstanding Capital Stock, other than
common stock, shall be at least equal to the highest of the amounts
determined pursuant to clauses (i), (ii) and (iii) below:
(i) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees ) paid
by or on behalf of the Interested Stockholder for any share of
such class or series of Capital Stock in connection with the
acquisition by the Interested Stockholder of beneficial ownership
of shares of such class or series of Capital Stock (x) within the
two-year period immediately prior to the Announcement Date or (y)
in the transaction or series of related transactions in which it
became an Interested Stockholder, whichever is higher, in either
case as adjusted for any subsequent stock split, stock dividend,
subdivision or reclassification with respect to such class or
series of Capital Stock;
(ii) the Fair Market Value per share of such class or
series of Capital Stock (x) on the Announcement Date or (y) on
the Determination Date, whichever is higher, as adjusted for any
subsequent stock split, stock dividend, subdivision or
reclassification with respect to such class or series of Capital
Stock; and
(iii) the highest preferential amount per share, if any,
to which the holders of shares of such class or series of Capital
Stock would be entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs
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of this corporation regardless of whether the Business
Combination to be consummated constitutes such an event.
(2) OTHER REQUIREMENTS.
(A) The consideration to be received by holders of a particular
class or series of outstanding Capital Stock shall be in cash or in
the same form as previously has been paid by or on behalf of the
Interested Stockholder in connection with its direct or indirect
acquisition of beneficial ownership of shares of such class or series
of Capital Stock. If the consideration so paid for shares of any
class or series of Capital Stock varies as to form, the form of
consideration for such class or series of Capital Stock shall be
either cash or the form paid by or on behalf of the Interested
Stockholder in connection with its direct or indirect acquisition of
beneficial ownership of the largest number of shares of such class or
series of Capital Stock.
(B) After the Determination Date and prior to the consummation
of such Business Combination:
(i) there shall have been no failure to declare and pay
at the regular date therefor any full regular dividends (whether
or not cumulative) payable in accordance with the terms of any
outstanding Capital Stock, other than the common stock, except as
approved by a majority of the Continuing Directors;
(ii) there shall have been no reduction in the amount, or
change in the frequency or payment, of any dividends regularly
paid on the common stock (except as necessary to reflect any
stock split, stock dividend, subdivision or reclassification of
the common stock), except as approved by a majority of the
Continuing Directors;
(iii) there shall have been an increase in the amount of
any dividends regularly paid on the common stock as necessary to
reflect any reverse stock split or reclassification of the common
stock, or any split, recapitalization, reorganization or any
similar transaction that has the effect of reducing the number of
outstanding shares of common stock, unless the failure so to
increase the amount of such dividends is approved by a majority
of the Continuing Directors; and
(iv) such Interested Stockholder shall not have become
the beneficial owner of any additional shares of Capital Stock
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except as part of or otherwise in connection with the transaction
or series of related transactions that resulted in such
Interested Stockholder becoming an Interested Stockholder
(including the exercise of any right to purchase additional
shares of Capital Stock granted to any Interested Stockholder by
this Corporation in connection with such transaction or series of
related transactions) and except in a transaction or series of
related transactions that, after giving effect thereto, would not
result in any increase in the Interested Stockholder's percentage
beneficial ownership of any class or series of Capital Stock.
(C) After the Determination Date, such Interested Stockholder
shall not have received the benefit, directly or indirectly (except
proportionately as a stockholder of this Corporation), of any loans,
advances, guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided by this Corporation, whether
in anticipation of or in connection with such Business Combinations or
otherwise.
(D) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder (the "Act") (or any subsequent provisions
replacing such Act), shall be mailed to all stockholders of this
Corporation at least 30 days prior to the consummation of such
Business Combination (whether or not such proxy or information
statement is required to be mailed pursuant to such Act or subsequent
provisions). Such proxy or information statement shall contain, in a
prominent place, any statement as to the advisability (or
inadvisability) of the Business Combination that the Continuing
Directors, or any of them, may choose to make and, if deemed advisable
by a majority of the Continuing Directors, the opinion of an
investment banking firm selected by a majority of the Continuing
Directors as to the fairness (or not) of the terms of the Business
Combination from a financial point of view to the holders of the
outstanding shares of Capital Stock other than the Interested
Stockholder and its Affiliates or Associates, such investment banking
firm to be paid a reasonable fee for its services by this Corporation.
(E) After the Determination Date, such Interested Stockholder
shall not have made any major change in this Corporation's business or
capital structure without the approval of a majority of the Continuing
Directors.
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Section 3. CERTAIN DEFINITIONS. The following definitions shall apply with
respect to this Article 5:
(a) The term "Business Combination" shall mean:
(1) any merger or consolidation of this Corporation or any Subsidiary
(as hereinafter defined) with (A) any Interested Stockholder or (B) any
other company (whether or not itself an Interested Stockholder) that is or
after such merger or consolidation would be an Affiliate or Associate of an
Interested Stockholder; or
(2) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition, or any security arrangement, investment, loan, advance,
guarantee, agreement to purchase, agreement to pay, extension of credit,
joint venture participation or other arrangement in one transaction or in a
series of transaction, with of for the benefit of any Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder
involving any assets, securities or commitments of this Corporation, any
Subsidiary, any Interested Stockholder or any Affiliate or Associate of any
Interested Stockholder that, together with all other such arrangements, has
an aggregate Fair Market Value and/or involves aggregate commitments equal
to 10% or more of the book value of the total assets (in the case of
transactions involving assets or commitments other than capital stock) or
10% or more of the stockholders' equity (in the case of transactions in
capital stock) of the entity in question (the "Substantial Part"), as
reflected in the most recent fiscal year-end consolidated balance sheet of
such entity existing at the time the stockholders of this Corporation would
be required to approve or authorize the Business Combination involving the
assets, securities and/or commitments constituting any Substantial Part; or
(3) the adoption of any plan or proposal for the liquidation or
dissolution of this Corporation which any Interested Stockholder votes for
or consents to; or
(4) any issuance or reclassification of securities (including any
stock dividend, split or reverse split or any other distribution of
securities in respect of stock), any recapitalization of this Corporation,
any merger or consolidation of this Corporation with any of its
Subsidiaries or any other transaction (whether or not with or otherwise
involving an Interested Stockholder) that has the effect, directly or
indirectly, of increasing the proportionate share of any class or series of
Capital Stock, or any securities convertible into or rights, options or
warrants to acquire Capital Stock or equity securities of any Subsidiary,
that is beneficially owned by any Interested Stockholder or any Affiliate
or Associate of any Interested Stockholder; or
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<PAGE>
(5) any agreement, arrangement or other understanding providing for
any one or more of the actions specified in the foregoing clauses (1)
or (4).
(b) The term "Capital Stock" shall mean all capital stock of this
Corporation authorized to be issued from time to time under Article 5 of this
Certificate of Incorporation, and the term "Voting Stock" shall mean all Capital
Stock which by its terms may be voted on all matters submitted to stockholders
of this Corporation generally.
(c) The term "person" shall mean any individual, firm, company or
other entity and shall include any group comprised of any person or any other
person with whom such person or any Affiliate or Associate of such person has
any agreement, arrangement or understanding, directly or indirectly, for the
purpose of acquiring, holding, voting or disposing of Capital Stock.
(d) The term "Interested Stockholder" shall mean any person (other
than this Corporation or any Subsidiary and other than any profit-sharing,
employee stock ownership or other employee benefit plan of this Corporation or
any Subsidiary or any trustee of or fiduciary with respect to any such plan when
acting in such capacity) who (1) is, or has publicly disclosed a plan or
intention to become, the beneficial owner of Voting Stock representing 10% or
more of the votes entitled to be cast by the holders of all then outstanding
shares of Voting Stock or (2) is an Affiliate or Associate of this Corporation
and at any time within the two-year period immediately prior to the date in
questions was the beneficial owner of Voting Stock representing 10% or more of
the votes entitled to be cast by the holders of all then outstanding shares of
Voting Stock.
(e) A person shall be a "beneficial owner" of, shall "beneficially
own" and shall have "beneficial ownership" of any Capital Stock (1) that such
person or any of its Affiliates or Associates owns, directly or indirectly;
(2) that such person or any of its Affiliates or Associates has, directly or
indirectly, (A) the right to acquire (whether such right is exercisable
immediately or subject only to the passage of time) pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, or (B) the right
to vote pursuant to any agreement, arrangement or understanding; or (3) which
is beneficially owned, directly or indirectly, by any other person with which
such person or any of its Affiliates or Associates has any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of any shares of Capital Stock. For the purposes of determining
whether a person is an Interested Stockholder pursuant to paragraph (d) of
this Section 3, the number of shares of Capital Stock deemed to be
outstanding shall include shares deemed beneficially owned by such person
through application of this paragraph(e) of Section 3, but shall not include
any other shares of Capital Stock that may be
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<PAGE>
issuable pursuant to any agreement, arrangement or understanding, or upon
exercise of conversion rights, warrants or options, or otherwise.
(f) The terms "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 under the Act as in effect on the
date that this Certificate of Incorporation is filed with the Secretary of State
of the State of Delaware (the term "registrant" in Rule 12b-2 meaning in this
case this Corporation).
(g) The term "Subsidiary" means any company or which a majority of
any class of equity securities are beneficially owned, directly or indirectly,
by this Corporation; PROVIDED, HOWEVER, that for the purposes of the definition
of Interested Stockholder set forth in paragraph (d) of this Section 3, the term
"Subsidiary" shall mean only a company of which a majority of each class of
equity security is beneficially owned by this Corporation.
(h) The term "Continuing Director," with respect to any particular
Business Combination with, or proposed by or on behalf of, any Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder or
any person who thereafter would be an Affiliate or Associate of any
Interested Stockholder, means any member of the Board of Directors of this
Corporation, while such person is a member of the Board of Directors, who is
not an Affiliate, Associate or representative of such Interested Stockholder
and was a member of the Board of Directors prior to the time that such
Interested Stockholder became an Interested Stockholder, and any successor of
a Continuing Director, while such successor is a member of the Board of
Directors, who is not an Affiliate or Associate or representative of such
Interested Stockholder and is recommended or elected to succeed the
Continuing Director by a majority of Continuing Directors.
(i) The term "Fair Market Value" means (1) in the case of cash, the
amount of such cash; (2) in the case of stock, the highest closing sale price
during the 30-day period immediately preceding the date in question of a share
of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks,
or, if such stock is not quoted on the Composite Tape, on the New York Stock
Exchange, or, if such stock is not listed on such Exchange, on the principal
United States securities exchange registered under the Act on which such stock
is listed, or, if such stock is not listed on any such exchange, the highest
closing sale price with respect to a share of such stock during the 30-day
period preceding the date in question as reported by the National Association of
Securities Dealers, Inc. Automated Quotation System or any similar system then
in use, or if no such sale prices are available, the highest of the means
between the last reported bid and asked price with respect to a share of such
stock on each day during the 30-day period preceding the date in question as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation System, or if not so reported, as determined by a member firm of the
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<PAGE>
National Association of Securities Dealers, Inc. selected by the Continuing
Directors, or if no such bid and asked prices are available, the fair market
value on the date in question of a share of such stock as determined in good
faith by a majority of the Continuing Directors; and (3) in the case of property
other than cash or stock, the fair market value of such property on the date in
question as determined in good faith by a majority of the Continuing Directors.
(j) In the event of any Business Combination in which this
Corporation survives, the phrase "consideration other than cash to be received"
as used in paragraph (b)(1)(A) and (b)(1)(B) of Section 2 of this Article 5
shall include the shares of common stock and the shares of any other class or
series of Capital Stock retained by the holders of such shares.
(k) The term "Announcement Date" means the date on which the proposed
Business Combination is first publicly announced, disclosed or reported.
(l) The term "Determination Date" means with respect to any
Interested Stockholder the later of the date that this Certificate of
Incorporation is filed with the Secretary of State of the State of Delaware or
the date on which such Interested Stockholder became an Interested Stockholder.
Section 4. POWERS OF DIRECTORS.
For the purpose of this Article 5, a majority of the Continuing
Directors shall have the power and duty to determine in good faith, on the basis
of information known to them after reasonable inquiry, all questions arising
under this Article 5, including, without limitation (a) whether a person is an
Interested Stockholder, (b) the number of shares of Capital Stock beneficially
owned by any person, (c) whether a person is an Affiliate or Associate of
another, (d) whether a Business Combination or any proposal to amend, repeal or
adopt any provision of this Certificate of Incorporation inconsistent with this
Article 5 is with, or proposed by or on behalf of, an Interested Stockholder or
an Affiliate or Associate of an Interested Stockholder or a person who
thereafter would be an Interested Stockholder or an Affiliate or Associate of an
Interest Stockholder, and (e) whether any transaction specified in paragraph
(a)(2), or Section 3 of this Article 5 meets the Substantial Part test set forth
therein; except that a majority of the entire Board of Directors shall have the
power and duty to determine in good faith, on the basis of information known to
them after reasonable investigation, whether a director is a "Continuing
Director" as defined in paragraph (h) of Section 3 of this Article 5 Any such
determination made in good faith shall be binding and conclusive on all parties.
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Section 5. NO EFFECT ON FIDUCIARY OBLIGATIONS.
(a) Nothing contained in this Article 5 shall be construed to relieve
any Interested Stockholder from any fiduciary obligation imposed by law.
(b) The fact that any Business Combination complies with the
provisions of Section 2 of this Article 5 shall not be construed to impose any
fiduciary duty, obligation or responsibility on the Board of Directors, or any
member thereof, to approve such Business Combination or recommend its adoption
or approval to the stockholders of this corporation, and such compliance shall
not limit, prohibit or otherwise restrict in any manner the Board of Directors,
every member thereof, with respect to evaluations of or actions and
responsibilities with respect to such Business Combination.
ARTICLE 6
The number of directors of this Corporation shall be fixed from
time to time by the Board of Directors pursuant to a resolution adopted by a
majority of the directors in office, but shall not be less than three (3) or
greater than eleven (11). The directors shall be divided into three classes,
as nearly equal in number as reasonably possible, with the term of office of
the first class to expire at the 1995 annual meeting of shareholders, the
term of office of the second class to expire at the 1996 annual meeting of
shareholders and the term of office of the third class to expire at the 1997
annual meeting of shareholders. At each annual meeting of shareholders
following such initial classification and election, directors elected to
succeed those directors whose terms expire shall be elected for a term of
office to expire at the third succeeding annual meeting of shareholders after
their election.
Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled by a majority vote of the directors then in
office though less than a quorum, and directors so chosen shall hold office for
a term expiring at the next annual meeting of shareholders. At such next annual
meeting, the stockholders shall elect a director to fill the balance of the
unexpired term of the director whose place was originally vacated or the term
established by the Board in accordance with the preceding paragraph. No decrease
in the number of directors constituting the Board of Directors shall shorten the
term of any incumbent director.
Any director, or the entire Board of Directors, may be removed from
office at any time, with or without cause, but only by the affirmative vote of
the holders of not less than 66 2/3% of the outstanding shares of the capital
stock of the
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Corporation entitled to vote generally in the election of directors, voting
together as a single class.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of shareholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation applicable thereto, and such
directors so elected shall not be divided into classes pursuant to this Article
6 unless expressly provided by such terms.
The provisions of this Article 6 may not be repealed or amended in any
respect, unless such action is approved by the affirmative vote of the holders
of not less than 75% of the outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class.
ARTICLE 7
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, amend,
alter, change, add to or repeal the Bylaws of the Corporation, without any
action on the part of the stockholders. The Bylaws made by the directors may
be amended, altered, changed, added to repealed by the stockholders. Any
specific provision in the Bylaws regarding amendment thereof shall be
controlling.
ARTICLE 8
Elections of directors need not be by written ballot except and to the
extent provided in the Bylaws of the Corporation.
ARTICLE 9
No action shall be taken by the stockholders except at an annual or
special meeting with prior notice and a vote.
ARTICLE 10
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, however, that this Article 10 shall not eliminate
or limit the liability of a director (a) for any breach of the director's duty
of loyalty to the Corporation or its stockholders; (b) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (c) under Section
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174 of the General Corporation Law of the State of Delaware; or (d) for any
transaction from which the director derived an improper personal benefit.
If the General Corporation Law of the State of Delaware is hereafter
amended to authorize any further limitation of the liability of a director, then
the liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the General Corporation Law of the State of
Delaware, as then emended.
Any repeal or modification of the foregoing provisions of this Article
10 by the stockholders of the Corporation shall not adversely affect any right
or protection of a director of the Corporation existing at the time of such
repeal or modification.
ARTICLE 11
The name and mailing address of the incorporator are as follows:
NAME ADDRESS
Frederick S. Richard II Dorsey & Whitney
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402
Dated: April 4, 1994 /s/Frederick S. Richards II
-----------------------------------
Frederick S. Richards II
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STOCK PURCHASE AGREEMENT -
CROP GROWERS CORPORATION
This Stock Purchase Agreement dated July 10, 1996 is between FIREMAN'S
FUND INSURANCE COMPANY, a California corporation (the "PURCHASER"), and CROP
GROWERS CORPORATION, a Delaware corporation (the "COMPANY").
The Company markets and services federal multi-peril crop insurance,
crop hail and other insurance products on behalf of insurance companies. The
Purchaser desires to purchase 10,000 shares of the Company's Series A
Convertible Preferred Stock, $.01 par value (the "SHARES") and the Company
desires to sell the Shares to the Purchaser on the terms and conditions set
forth herein. Capitalized terms used herein are defined as set forth in
Section 8.
SECTION 1. PURCHASE OF THE SHARES
1.1 THE SHARES; PURCHASE PRICE. The Purchaser hereby purchases the
Shares at a price of $1,000.00 per Share or $10,000,000 in the aggregate (the
"PURCHASE PRICE"). The Shares will be convertible, at the Purchaser's
election, into shares of common stock, $.01 par value of the Company (the
"COMMON STOCK") in accordance with the Certificate of Designations. The
Purchase Price shall be paid in cash in immediately available funds
simultaneously with the execution of this Agreement.
1.2 DELIVERY OF CERTIFICATES. Simultaneously with the execution of
this Agreement, the Company shall deliver to the Purchaser a certificate duly
issued in the name of the Purchaser representing the Shares.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser that at
the date hereof, except as set forth in the Disclosure Memorandum (which
constitutes a part of the representations and warranties made in this Section
2), which Disclosure Memorandum shall reference the Section or Sections in
this Section 2 as to which each exception set forth therein applies:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly incorporated, validly existing and in good standing under the
law of Delaware and has all necessary power and authority under applicable
corporate law to own its Properties and to carry on its business as now owned
and operated by it. The Company is duly qualified as a foreign corporation to
do business, and is in good standing, in each of the states where the failure of
the Company to be so qualified would, either individually or in the aggregate,
have a Material Adverse Effect on the Company.
<PAGE>
2.2 AUTHORITY. Subject to the effectiveness of the Certificate of
Designations, the Company has full power, legal capacity and authority under
applicable corporate law to enter into, perform and comply with this Agreement
and all proceedings required to be taken by the Company to authorize the
execution, delivery and performance of and compliance with this Agreement have
been legally and properly taken, no action by the shareholders of the Company
being required.
2.3 NO CONFLICT, CHANGE. Subject to the consents and other actions
referred to in Section 2.4 having been obtained and taken, if any, the
execution and delivery of this Agreement, and the performance of and
compliance with this Agreement, will not give rise to, accelerate the
maturity of or otherwise modify any obligation of the Company or any
Subsidiary, or result in a breach of or constitute a default under or result
in the creation of a lien on any of the Company's Properties or the
Properties of any Subsidiary, which obligation, acceleration, modification,
breach, default or lien would have a Material Adverse Effect on the Company
or a material adverse impact on the transactions contemplated herein, in each
case pursuant to: (a) any Governmental Requirement applicable to the Company
or any Subsidiary; or (b) the charter documents or by-laws of the Company or
any Subsidiary; or (c) any Employee Plan, judgment, order or decree, or any
contract or other instrument or arrangement, to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary or any
Property of any of them is bound. To the Company's Knowledge, no Person who
has a material business or business relationship with the Company or any of
its Subsidiaries has notified the Company that the likely result of the
transactions contemplated herein will be a change in such business or
business relationship that would have a Material Adverse Effect on the
Company.
2.4 APPROVALS, ETC. No consent, permit or approval of, filing with
or notice to any Governmental Agency or any other Person (whether or not
governmental in character) has been or is required to be obtained, made or
given by the Company or any Subsidiary in order for the Company without any
breach or violation by it or any Subsidiary, to consummate or comply with
this Agreement, the absence of which would be a breach or violation having a
Material Adverse Effect on the Company or a material adverse impact on the
transactions contemplated herein.
2.5 SUBSIDIARIES AND OTHER INVESTMENTS. The Company does not own,
directly or indirectly, any material interest or investment (whether equity or
debt) in any corporation, business, association, trust or other entity. Each of
the corporate entities designated as a subsidiary in the Disclosure Memorandum
(the "SUBSIDIARIES") which is a Significant Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it was organized and has all necessary power and authority
under applicable law to own its Properties and to carry on its business as now
owned and operated by it. Each Significant Subsidiary is duly qualified as a
foreign corporation to do business in jurisdictions where failure to so qualify
would have a Material Adverse Effect on the Company.
2.6 CAPITAL STRUCTURE.
(a) The authorized capital stock of the Company consists of 40,000,000
shares of Common Stock and 10,000,000 shares of Preferred Stock. As of May 31,
1996 there were issued and outstanding 8,149,131 shares of Common Stock and no
shares of Preferred Stock. Since that date, the Company has issued no capital
shares except upon exercise of options outstanding on that date under the
Company's 1994 Stock Incentive Plan or under the Company's Non-Employee
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Director Stock Option Plan. All such outstanding shares are validly issued,
fully paid and non-assessable and no holder thereof is entitled to preemptive
rights.
(b) There are no outstanding subscriptions, options, rights,
warrants, convertible securities or other contracts obligating the Company or
any Subsidiary to issue or to transfer from treasury any shares of its
capital stock (collectively, "STOCK RIGHTS").
(c) All of the issued and outstanding shares of capital stock of the
Significant Subsidiaries are validly issued, fully paid and non-assessable.
The Company owns, directly or indirectly through one or more wholly-owned
Subsidiaries, all the issued and outstanding shares of capital stock of all
Significant Subsidiaries.
(d) The Shares, when issued and paid for in accordance with this
Agreement, will be validly issued, fully paid and non-assessable.
(e) Except for Cede & Co., there are no record holders of 800,000 or
more shares of the outstanding Common Stock as of May 31, 1996. To the
Knowledge of the Company, there was no "beneficial owner" (as that term is
defined by SEC Rule 13d-3) of 5% or more of the outstanding Common Stock on
May 31, 1996.
2.7 FINANCIAL STATEMENTS. The consolidated financial statements
audited by KPMG Peat Marwick LLP and contained in the Company's annual report
on Form 10-K for the fiscal year ended December 31, 1995, as amended, filed
with the SEC (the "ANNUAL FINANCIAL STATEMENTS"), and the consolidated
unaudited financial statements of the Company and its Subsidiaries for the
fiscal quarter ended on March 31, 1996, contained in the Company's quarterly
report on Form 10-Q for such fiscal quarter filed with the SEC (the "INTERIM
FINANCIAL STATEMENTS") (i) have been prepared in accordance with generally
accepted accounting principles ("GAAP") consistently applied throughout the
periods indicated and in prior periods, except as set forth therein and for
any adjustments arising from the Espy Matters, and in the case of the Interim
Financial Statements, for the omission of footnotes, summarization of
financial information and year-end adjustments, and (ii) fairly present in
all material respects the consolidated financial position of the Company and
its Subsidiaries as of the respective dates indicated and the consolidated
results of its operations for the respective periods indicated, except for
any adjustments arising from the Espy Matters.
2.8 ABSENCE OF CERTAIN CHANGES. Since the date of the Interim
Financial Statements, to the Knowledge of the Company, there has not been,
with respect to, the Company or any Significant Subsidiary, any change that
has had, or is reasonably likely to have, a Material Adverse Effect on the
Company, other than the Espy Matters.
2.9 MATERIAL TRANSACTIONS. There have been no transactions engaged
in by the Company or any Significant Subsidiary since March 31, 1996 that (a)
will be required to be described in reports on Form 8-K, (b) were not and
would not be required to be disclosed in such Form 8-K but were not in the
ordinary course of business and involved payments by or to the Company or any
Subsidiary of $250,000 or more per annum, or (c) create a contractual
liability of $500,000. SCHEDULE 2.9 identifies all businesses or business
relationships of the Company or any Significant Subsidiary which contributed,
to the Knowledge of the Company, $250,000 or more to the gross income of the
Company and its Subsidiaries taken as a whole and have been terminated
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since March 31, 1996 except those terminated in the ordinary course of business
without breach or alleged breach by any party.
2.10 INTELLECTUAL PROPERTY. The Company and/or the Subsidiaries own,
or are licensed or otherwise have the rights to use, all patents, trademarks,
trade names, copyrights, technology, trade secrets, know-how and processes
(collectively, "INTELLECTUAL PROPERTY RIGHTS") material to or necessary for
the conduct of their businesses as presently conducted. No claims are
pending by any Person against the Company or any Subsidiary as to the use of
any Intellectual Property Rights or challenging or questioning the validity
or effectiveness of any license or agreement regarding Intellectual Property
Rights and, to the Company's Knowledge, the use by the Company or any
Subsidiary of all Intellectual Property Rights does not infringe on the
rights of any Person. To the Knowledge of the Company, no third Person is
infringing on the Intellectual Property Rights of the Company or any
Subsidiary, which infringement would have a Material Adverse Effect on the
Company.
2.11 LIABILITIES, DEBTS, ETC. As of the date of the Annual Financial
Statements and as of the date of the Interim Financial Statements, the Company
had no material liabilities, obligations or debts, which must be accrued as
liabilities on a balance sheet, or disclosed in financial statements, prepared
under generally accepted accounting principles, other than those reflected or
disclosed in the Annual Financial Statements and the Interim Financial
Statements, respectively, and other than those adjustments, as necessary,
arising from the Espy Matters.
2.12 TAX RETURNS AND PAYMENTS. The provisions made in the Annual
Financial Statements and the Interim Financial Statements with regard to
accrued and deferred income taxes are in accordance with GAAP. The material
income tax reporting positions of the Company and the Subsidiaries have
substantial support.
2.13 COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS, RIGHTS OF OTHERS.
(a) To the Knowledge of the Company, neither the Company nor any
Subsidiary is in violation of, nor has the Company nor any Subsidiary violated,
any applicable Governmental Requirement or any rights (whether contractual or
other) of any Person, which violation has had or would have a Material Adverse
Effect on the Company, other than a violation, if any, in connection with the
Espy Matters.
(b) Without limiting the generality of Section 2.13(a), to the
Knowledge of the Company, the Company and the Subsidiaries hold all permits,
licenses and other authorizations required to be obtained from any
Governmental Agency, other than any permits, licenses and authorizations
whose absence has not had or would not have a Material Adverse Effect on the
Company.
2.14 LITIGATION, ETC. There are no notices, litigation, arbitrations or
proceedings pending or threatened, to the Knowledge of the Company, for the
purpose of enjoining or preventing the consummation of the transactions
contemplated by this Agreement or otherwise claiming that the consummation of
such transactions is illegal or improper or (i) which have been brought by any
Person and which may have a material adverse effect on the transactions
contemplated hereby or a Material Adverse Effect on the Company, or (ii) which
have been brought by a Governmental
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Agency or (iii) in which a temporary restraining order, preliminary or permanent
injunction or other order or stay against consummation of the transactions
contemplated hereby has been entered and remains in effect.
2.15 CONTRACTS. SCHEDULE 2.15 sets forth a complete and accurate
list of any contract or agreement currently in effect:
(a) that was, is or will be required to be filed with the SEC with
Form 10-K, 10-Q or 8-K;
(b) that relates to the borrowing of money or a guarantee by the
Company or any Subsidiary or to debt securities, a capitalized lease, a lien,
a security agreement or an agreement regarding capital expenditures under
which (in each case) the aggregate obligations of the Company and the
Subsidiaries exceed $1,000,000;
(c) that relates to an operating lease under which the aggregate
obligations of the Company and the Subsidiaries exceed $500,000 in any fiscal
year beginning after December 31, 1995;
(d) that constitutes a stock plan of the Company, or that relates to
any agreement or arrangement (other than pursuant to a stock plan listed in
SCHEDULE 2.15) with any executive officer of the Company relating to stock or
stock options;
(e) that relates to a supply or customer agreement (i) pursuant to
which the Company is subject to a binding obligation to purchase or sell
insurance or other products with an aggregate purchase price of $500,000 or
more in any fiscal year and (ii) having a term expiring later than December
31, 1996;
(f) that relates to an employee pension, welfare or benefit plan of
the Company or any Subsidiary, or that relates to an agreement between any
present or former executive officer of the Company or a Subsidiary, on the
one hand, and the Company or any Subsidiary on the other, relating to
compensation;
(g) between the Company or any Subsidiary on the one hand and any
Affiliate of the Company (other than a direct or indirect wholly-owned
Subsidiary) on the other hand that relates to an aggregate amount in excess
of $60,000;
(h) that limits the freedom of the Company or any Subsidiary to
enter into in any line of business in any area of the world which has had or
would have a Material Adverse Effect on the Company; and
(i) that requires the Company or any Subsidiary to remediate, or
indemnify or reimburse the costs of remediation of, a specific condition
existing at any real Property, whether currently or formerly owned or
operated by it or owned or operated by any third party.
To the Knowledge of the Company, there is no current or overtly threatened
breach or claim of a breach by any party under any of the contracts listed on
SCHEDULE 2.15.
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2.16 CONTAMINATION, ETC.
(a) To the Knowledge of the Company, there is no contamination of
the soil underlying any real estate owned, leased, operated or used
(currently or formerly) by the Company or any Subsidiary, or of any structure
or other property on such real estate or any surface or ground water on or
under such real estate, by any Regulated Material, and there is no and has
been no release or disposition of any Regulated Material from any such real
estate, which contamination, release or disposition has had or is reasonably
likely to have a Material Adverse Effect on the Company.
(b) To the Knowledge of the Company, SCHEDULE 2.16(B) lists all
currently-pending and past remediation actions taken or required to be taken
by the Company or any Subsidiary with respect to any real Property, and any
site currently or previously owned or operated by the Company or any
Subsidiary which, to the Knowledge of the Company, is or was included in any
site list of any Governmental Agency (including without limitation any CERCLA
list, federal National Priority List or abandoned site list).
2.17 CORPORATE DOCUMENTS. The Company has delivered to the Purchaser
for its examination true, correct and complete copies of the certificates of
incorporation and by-laws of the Company and each Significant Subsidiary,
each as amended and currently in effect, and of the documents listed in the
Disclosure Memorandum.
2.18 CERTIFICATE OF DESIGNATIONS. The Company has duly filed the
certificate of designations of rights, preferences and privileges set forth
in EXHIBIT A (the "CERTIFICATE OF DESIGNATIONS").
2.19 ESPY MATTERS. To the Knowledge of the Company, there are no
material threatened or pending proceedings, investigations or notices
relating to, or material facts pertaining to, the Espy Matters, other than
those disclosed by the Company in their reports filed with the SEC on Form
10-Q as of May 15, 1996 or on Form 8-K as of June 10, 1996.
2.20 BROKERAGE, ETC. Neither the Company nor any Subsidiary is a
party to any arrangement, or is subject to any obligation, relating to any
brokerage fee, finder's fee, or similar compensation or consideration payable
in respect of the transactions contemplated hereby, other than a fee (not to
exceed $500,000) and reasonable and customary expenses of Dean Witter
Reynolds Inc.
2.21 MISSTATEMENTS AND OMISSIONS.
(a) The representations and warranties made in this Section 2 and in
any certificate delivered pursuant hereto do not contain any untrue statement
of material fact or, when considered with the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995, as amended, and the
Company's filings with the SEC on Form 10-Q as of May 15, 1996 and on Form
8-K as of June 10, 1996 and together as a whole, omit to state any material
fact necessary to make the statements contained herein and therein not
misleading.
(b) Neither the Company's annual report on Form 10-K for each of the
fiscal years ended December 31, 1994 or December 31, 1995, as amended,
including its proxy statements for the 1994 or 1995 annual shareholders'
meetings, respectively, nor any other filing by the Company with the SEC
after December 31, 1995 under the Securities Exchange Act (when considered
with the
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Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, as amended, and together as a whole), contained, as of the respective
dates thereof, any untrue statement of material fact or omitted to state any
material fact necessary to make the statements contained therein, as of the
respective dates thereof, not misleading.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Company that at the
date hereof:
3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Purchaser is a
corporation duly organized, validly existing and in good standing under the law
of California and has all necessary power and authority under applicable
corporate law to own its property and to carry on its business as now owned and
operated.
3.2 AUTHORITY. The Purchaser has full power, legal capacity and
authority under applicable corporate law to enter into, perform and comply
with this Agreement. All proceedings required to be taken by the Purchaser
to authorize the execution, delivery and performance of and compliance with
this Agreement have been properly taken, no action by the shareholders the
Purchaser being required.
3.3 NO CONFLICT. Subject to the consents and other actions referred
to in Section 3.4 having been obtained and taken, the execution and delivery
of this Agreement, and the performance of and compliance with this Agreement,
will not give rise to, accelerate the maturity of or otherwise modify any
obligation of the Purchaser, or result in a breach of or constitute a default
under or result in the creation of a lien on the Purchaser's Properties
pursuant to (a) any Governmental Requirement applicable to the Purchaser, or
(b) the charter documents or by-laws of the Purchaser, or (c) to the
Knowledge of the Purchaser, any material Employee Plan or any material
contract, judgment, order, decree or other instrument or arrangement to which
the Purchaser is a party or by which the Purchaser is bound.
3.4 APPROVALS, ETC. No consent, permit or approval of, filing with
or notice to any Governmental Agency or any other Person (whether or not
governmental in character) has been or is required to be obtained, made or
given by the Purchaser in order to consummate this Agreement, the absence of
which would have a Material Adverse Effect on the Purchaser.
3.5 SECURITIES LAWS STATUS. The Purchaser is acquiring the Shares
being purchased by it (and will acquire the Common Stock of the Company upon
conversion of the Shares) solely for its own account for investment and not
with a view toward the resale, transfer or distribution thereof or of the
Common Stock issuable upon conversion thereof, but without prejudice,
however, to the right of the Purchaser at all times to sell or otherwise
dispose of all or any part of the Shares or of the Common Stock issuable upon
conversion thereof in any lawful manner. The Purchaser understands that the
Shares have not been registered under the Securities Act and that any
subsequent disposition thereof must be registered under the Securities Act or
be exempt from such registration. The Purchaser has the ability to bear the
economic risks of its investment in the Shares and qualifies as an
"accredited investor" (as such term is defined in Rule 501 of Regulation D
promulgated under the Securities Act).
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3.6 OWNERSHIP OF COMPANY STOCK. Neither the Purchaser nor any
Affiliate of the Purchaser nor any Person with whom the Purchaser or any
Affiliate of the Purchaser is acting (within the meaning of Section 13(d)(3)
of the Securities Exchange Act) as a partnership, limited partnership,
syndicate or other group for the purpose of acquiring, holding or disposing
of securities issued by the Company owns any stock or other equity security
issued by the Company as of the date of this Agreement other than the Shares
purchased by the Purchaser hereunder.
3.7 BROKERAGE, ETC. Neither the Purchaser nor any Affiliate of the
Purchaser is a party to any arrangement, or subject to any obligation,
relating to any brokerage fee, finder's fee, compensation or other
consideration payable in respect of the transactions contemplated hereby.
SECTION 4. OBLIGATIONS OF THE COMPANY
4.1 PRO RATA PURCHASE RIGHT.
(a) Prior to any issuance of any shares of capital stock or any
Stock Rights by the Company or any Subsidiary on or after the date hereof to
any Third-Party Insurer, the Company will notify the Purchaser of the terms
thereof, including without limitation a description of the shares or Stock
Rights to be issued, the amount to be issued, the consideration to be
received therefor and the identity of the Third-Party Insurer. The Purchaser
may, by written notice given to the Company within 30 days after such Company
notice, elect to purchase a number of such shares or Stock Rights up to its
pro rata share of the proposed issuance, on the same terms as, and
simultaneously with the closing of, the balance of such issuance. Such pro
rata share shall be the fraction whose numerator is the aggregate number of
shares of Common Stock then held by the Purchaser (assuming conversion of all
Shares and other Stock Rights for Common Stock then held by it) and whose
denominator is the aggregate number of shares of Common Stock then
outstanding (assuming conversion of all Shares and other Stock Rights for
Common Stock then outstanding), which the Company shall specify in its
notice. If the terms of the proposed issuance are changed from those stated
in such notice, then it shall be treated as a new issuance, subject again to
this Section 4.1(a), and any election to purchase made prior to such change
may, at the sole discretion of the Purchaser, be withdrawn. The right of pro
rata purchase pursuant to this Section 4.1(a) shall not, however, apply to:
(i) any issuance pursuant to any employee, director or agent
stock option plan, restricted stock plan, stock purchase plan or other
employee benefit plan of the Company or any Subsidiary; or
(ii) any issuance in consideration of the acquisition of a
business, merger, reorganization or similar transaction;
(iii) any issuance pursuant to exercise or conversion of any
right to acquire Common Stock of the Company issued after the date
hereof in compliance with this Section 4.1(a);
(iv) any issuance at a time from and after the date when the
Purchaser does not own beneficially at least 150,000 shares of Common
Stock (directly or through conversion of purchase rights on a
hypothetical as-converted basis, subject to
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adjustment for stock splits, reverse stock splits, and other actions
affecting the Common Stock generally); or
(v) any issuance incidental to a bona fide firm underwritten
offering to the public not involving any negotiations with, or for the
purpose of selling to, a Third-Party Insurer, in which, to the
Knowledge of the Company, no Third-Party Insurer acquires beneficial
ownership of more than 15% of the offering and in which, to the
Knowledge of the Company, all Third-Party Insurers acquire beneficial
ownership of, in the aggregate, no more than 30% of the offering. For
purposes of this Section 4.1(a)(v) only, the term "Third-Party
Insurer" is limited to those insurance companies engaged primarily in
the property and casualty insurance business.
(b) Prior to any sale, transfer or assignment by the Company to any
Person of its obligations and/or rights to purchase shares of Common Stock
owned by either of John Hemmingson or Gary Black under the Separation
Agreements dated July __, 1996 by and between the Company and each of John
Hemmingson and Gary Black, the Company will notify the Purchaser of the terms
of such proposed sale, transfer or assignment, including without limitation
the number of shares of Common Stock applicable to such purchase obligations
and/or rights, the consideration to be received therefor and the identity of
the prospective purchaser. The Purchaser may, by written notice given to the
Company within 30 days after such Company notice, elect to participate in
such proposed sale, transfer or assignment in an amount up to its pro rata
share of the proposed sale, transfer or assignment, on the same terms as, and
simultaneously with the closing of, the balance of such sale, transfer or
assignment. Such pro rata share shall be the fraction whose numerator is the
aggregate number of shares of Common Stock then held by the Purchaser
(assuming conversion of all Shares and other Stock Rights for Common Stock
then held by it) and whose denominator is the aggregate number of shares of
Common Stock then outstanding (assuming conversion of all Shares and other
Stock Rights for Common Stock then outstanding), which the Company shall
specify in its notice. If the terms of the proposed sale, transfer or
assignment are changed from those stated in such notice, then it shall be
treated as a new sale, transfer or assignment, subject again to this Section
4.1(b), and any election to purchase made prior to such change may, at the
sole discretion of the Purchaser, be withdrawn.
4.2 THIRD-PARTY CLAIMS. The Company agrees to indemnify the
Purchaser and any of its Affiliates, officers, directors, employees and its
respective successors, heirs and personal representatives (each a "PURCHASER
PARTY" and collectively the "PURCHASER PARTIES") against any Losses resulting
from claims asserted against any Purchaser Party:
(i) by any security holder, creditor, contract party, employee,
director, underwriter, supplier or customer of the Company or any
Subsidiary or a purchaser or seller (or potential purchaser or seller)
of the Company securities or an acquirer (or potential acquirer) of
the Company with respect to the purchase of Shares under this
Agreement and/or the entry by the parties simultaneously with the
consummation of such purchase into any of the following agreements:
MGA Agreement, Quota-share Agreement, Crop-Hail MGA Agreement,
Retrocession Agreement, Reinsurance Quota-share Agreement (Crop-Hail)
and Farm-Ranch MGA Agreement (collectively, the "BUSINESS AGREEMENTS");
provided, however, that there
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shall be no such indemnification for claims by the Company for the breach
by the Purchaser of its obligations hereunder to the Company or for
claims against the Purchaser relating to performance of the Business
Agreements; or
(ii) asserting any matter which, if true, would constitute a
breach of any representation or warranty of the Company contained in
this Agreement or in any certificate delivered by the Company pursuant
to this Agreement.
A Purchaser Party shall give the Company reasonable notice of any
claim or demand asserted by third parties against it for which indemnity may
be sought under this Section 4.2, and shall permit the Company to have
reasonable access to relevant information in its possession or control
related to the claim or demand. The Company shall have the right at its own
expense to appoint counsel to participate in the defense of such matter, but
the Purchaser Party shall have the right to prosecute, defend, compromise,
settle or pay any claim. The Company may, however, compromise, settle or pay
any claim if it procures from the claimant a full and complete release not
entailing any commitment of or limitation of any kind on the Purchaser Party
and reasonably satisfactory in form and substance to the Purchaser Party and
its counsel. No monetary compromise or settlement of any such claim shall be
subject to indemnification under this Section 4.2 unless consented to by the
Company, which consent shall not be unreasonably withheld. Any failure of
the Purchaser Party to comply with this Section 4.2 shall reduce the amount
subject to indemnification under this Section 4.2 by the damages actually and
foreseeably resulting from such failure, but shall not release or otherwise
affect the Company from its obligations under this Section 4.2 or elsewhere
in this Agreement. The remedies set forth in this Section 4.2 shall be in
addition to, and not in lieu of, any remedies otherwise available, including,
without limitation, those remedies contained in the Company's By-Laws.
4.3 BOARD NOMINEE. Immediately upon execution of this Agreement, the
Company will appoint John Meuschke to the Company's Board of Directors as a
Class 2 director. At the annual meetings of the Company's shareholders in 1999
and thereafter, as long as the Purchaser owns at least 188,679 shares of Common
Stock (directly or through conversion of purchase rights on a hypothetical as-
converted basis, subject to adjustment for stock splits, reverse stock splits,
and other actions affecting the Common Stock generally), the Company will
nominate and use its best efforts to have one individual designated by the
Purchaser elected to, and remain as, a director on the Company's Board of
Directors.
4.4 CAPITAL CONTRIBUTION RIGHT. After the date hereof and at any time
that the Purchaser owns any amount of Shares (or Common Stock issuable upon
conversion of the Shares), the Purchaser shall have the right to contribute such
Shares or shares of Common Stock to the capital of the Company for any
regulatory purpose or otherwise.
SECTION 5. OBLIGATIONS OF THE PURCHASER AFTER CLOSING
5.1 COMPANY RIGHT OF FIRST REFUSAL. Prior to any sale of Shares (or
shares of Common Stock issued upon conversion of Shares) aggregating more than
377,359 shares (as constituted on the date hereof, adjusted for stock splits,
reverse stock splits, and other actions affecting the Common Stock generally) of
Common Stock prior to the 2d anniversary of the date hereof, the Purchaser will
notify the Company of the terms thereof, including without limitation a
description of the Shares or
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shares of Common Stock to be sold, the amount to be sold and the consideration
to be received therefor. The Company may, by notice given to the Purchaser
within 30 days after such Purchaser notice, elect to purchase all, but not less
than all, such Shares or shares of Common Stock, on the same terms as such
proposed sale. If the terms of the proposed sale are changed from those stated
in such notice, then it shall be treated as a new sale, subject again to this
Section 5.1, and any election to purchase made prior to such change may, at the
sole discretion of the Company, be withdrawn.
5.2 STANDSTILL AGREEMENT. Following the Closing, neither the
Purchaser nor any Affiliate of the Purchaser will, without the prior approval
of the Company:
(a) acquire or seek to acquire shares of the Company's Common Stock or
securities convertible into or rights to acquire shares of the Company's Common
Stock if, as a result thereof, the aggregate Common Stock beneficially owned by
the Purchaser and its Affiliates, assuming exercise or conversion of all rights
to acquire Common Stock of the Company beneficially owned by any of them, would
exceed 20% of the outstanding Common Stock, assuming exercise or conversion of
all rights to acquire Common Stock of the Company then outstanding which have
conversion or exercise prices below the then current market value of such Common
Stock;
(b) initiate or participate in concert with any Person who initiates a
tender offer for Common Stock of the Company pursuant to Section 14(d) of the
Securities Exchange Act; or
(c) initiate or participate in concert with any Person who initiates a
proxy contest with respect to the election of directors of the Company.
The restrictions of this Section 5.2 will expire on the earlier of (i) the 10th
anniversary of the date hereof and (ii) the date, if ever, when the Purchaser
and its Affiliates collectively beneficially own fewer than 150,000 shares (as
constituted on the date hereof, as adjusted for stock splits, reverse stock
splits, and other actions affecting the Common Stock generally) of Common Stock
issued on conversion of Shares, assuming conversion of all Shares beneficially
owned by them, provided that the restrictions of this Section 5.2 shall in no
event expire before the 2d anniversary of the date hereof. The Company will
report to the Purchaser from time to time as reasonably requested on changes in
the Company's outstanding capital stock for purposes of compliance with this
Section 5.2. The restrictions of this Section 5.2 shall be binding upon (i) any
transferee to whom, prior to the 2d anniversary of the date hereof, the
Purchaser transfers Shares (and/or Common Stock issued upon conversion of the
Shares) aggregating at least 377,359 shares (as constituted on the date hereof,
as adjusted for stock splits, reverse stock splits, and other actions affecting
the Common Stock generally) of Common Stock and (ii) any Affiliate of the
Purchaser to whom any Shares (or Common Stock issued upon conversion of the
Shares) are transferred, but not upon any other transferee of the Shares (or
Common Stock issued upon conversion of the Shares).
5.3 RESALE OF SECURITIES.
(a) The Purchaser covenants that it will not sell or otherwise transfer
the Shares (or any shares of Common Stock acquired upon conversion of the
Shares) except pursuant to an effective registration under the Securities Act or
in a transaction which, in the opinion of counsel reasonably satisfactory to the
Company, qualifies as an exempt transaction under the Securities Act and the
rules and regulations promulgated thereunder.
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(b) The certificates evidencing the Shares and shares of Common Stock
issuable upon conversion of the Shares will bear the following legend reflecting
the foregoing restrictions on the transfer of such securities:
"The securities evidenced hereby have not been registered under
the Securities Act of 1933, as amended (the "Act") and may not be
transferred except pursuant to an effective registration under the Act
or in a transaction which, in the opinion of counsel reasonably
satisfactory to the Company, qualifies as an exempt transaction under
the Act and the rules and regulations promulgated thereunder."
SECTION 6. REGISTRATION RIGHTS
6.1 REQUESTED REGISTRATION.
(a) If at any time after June 30, 1999, the Purchaser shall request
that the Company effect the registration of shares of Common Stock issued or
issuable upon conversion of the Shares (such registration to be effectuated
by use of Form S-3 under the Securities Act if available to the Company;
otherwise than on Form S-1 or S-2 as available to the Company), the Company
shall use its best efforts to effect the requested registration. Once a sale
requested to be registered under this Section 6.1 is consummated, the Company
will have no further obligations to register under this Section 6.1. The
Purchaser's rights under this Section 6.1 may be transferred by the Purchaser
to (i) a transferee to whom the Purchaser transfers Shares (and/or Common
Stock issued upon conversion of the Shares) aggregating at least 377,359
shares (as constituted on the date hereof) of Common Stock and (ii) any
Affiliate of the Purchaser to whom any Shares (or Common Stock issued upon
conversion of the Shares) are transferred, but not to any other transferee of
the Shares (or Common Stock issued upon conversion of the Shares), provided
that such transferee agrees in writing to be bound by the terms of this
Section 6. The Company may include in the registration under this Section
6.1 any other shares of Common Stock (including issued and outstanding shares
of Common Stock as to which the holders thereof have contracted with the
Company for "piggyback" registration rights) so long as the inclusion in such
registration of such shares will not, in the opinion of the managing
underwriter, if any, or the Purchaser, if there is no managing underwriter,
interfere with the successful marketing in accordance with the intended
method of sale or other disposition of all the shares sought to be registered
by the Purchaser pursuant to this Section 6.1. If it is determined as
provided above that there will be such interference, the other shares of
Common Stock sought to be included shall be excluded to the extent deemed
appropriate by the managing underwriter or the Purchaser, as the case may be.
If the requested registration is an underwriting, the managing and other
underwriters will be selected by the Purchaser and shall be acceptable to the
Company.
(b) The Purchaser may not exercise its rights under this Section 6.1
prior to 120 days following the delivery of a notice by Purchaser under
Section 6.2 whereby the Purchaser could have included and sold in the
registration under Section 6.2 all Shares proposed to be sold under this
Section 6.1.
6.2 "PIGGYBACK" REGISTRATION. If at any time the Company proposes
to register any of its Common Stock under the Securities Act either for its
own account or for the account of a security holder or security holders
(except with respect to registrations relating to employee, director, or
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agent stock benefit programs of the Company and/or its Subsidiaries or to an
acquisition or reorganization by the Company or to a dividend reinvestment
program or to an employee stock purchase program or to a standby underwriting in
connection with the redemption of convertible securities or warrants), it will
at each such time give written notice to the Purchaser and, upon the written
request of the Purchaser, given within 20 days after its receipt of the
Company's notice, the Company will use its best efforts to cause such shares of
Common Stock issued or issuable upon conversion of the Shares as to which
registration shall have been so requested, to be included in the securities to
be covered by the registration statement proposed to be filed by the Company,
all to the extent requisite to permit the sale or other disposition by the
Purchaser. Notwithstanding any other provision of this Section 6.2, in the case
of a firm commitment underwritten offering of shares to be issued by the
Company, if the managing underwriter determines that the marketing factors
require a limitation of the number of shares to be sold, the underwriter may
exclude the necessary number of shares held by the Purchaser from such
registration and underwriting. In such event, the shares of Common Stock held
by the Purchaser shall be reduced or excluded on a pro rata basis with shares
held by other selling stockholders. In the case of a firm commitment
underwritten offering, any request by the Purchaser pursuant to this Section 6.2
to register shares of Common Stock must specify that such shares are to be
included in the underwriting on the same terms and conditions as the shares of
Common Stock otherwise being sold through underwriters under such registration.
6.3 REGISTRATION PROCEDURES AND EXPENSES. If and whenever the
Company is required by the provisions contained herein to use its best
efforts to effect the registration of any shares of Common Stock under the
Securities Act, the Purchaser will furnish in writing such information as is
reasonably requested by the Company for inclusion in the registration
statement relating to such offering and such other information and
documentation as the Company shall reasonably request, and the Company will,
as expeditiously as possible:
(a) Prepare and file with the SEC a registration statement
(including a prospectus therein) with respect to such securities and use its
best efforts to cause such registration statement to become and remain
effective for such period as may be necessary to permit the successful
marketing of such securities but not exceeding 90 days for an offering
pursuant to Section 6.1 hereof; or, with regard to an offering pursuant to
Section 6.2 hereof, for the period associated with the offering which gave
rise to rights under Section 6.2; provided, in each case, that the Company's
Board of Directors may request the Purchaser to delay the time for the filing
of the offering for up to 120 days in the aggregate (or, if later, to June 1,
1997) due to material damage that would result to the Company from
registration without the requested delay on account of specific pending
transactions or developments designated by the Board.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith
as may be necessary to comply with the provisions of the Securities Act; and
to keep such registration statement effective for that period of time
specified in Section 6.3(a);
(c) Furnish to the Purchaser such number of prospectuses and
preliminary prospectuses in conformity with the requirements of the
Securities Act, and such other documents as the Purchaser may reasonably
request in order to facilitate the public sale or other disposition of the
shares being sold by the Purchaser;
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(d) If requested by the Purchaser, furnish an opinion of counsel in
the form and content customarily rendered to underwriters in firm commitment
underwritten offerings, addressed to the Purchaser;
(e) If requested by any underwriter of the offering and permitted by
applicable rules and guidelines, furnish the Purchaser a letter from the
independent certified public accountants of the Company in the form customarily
furnished to underwriters in firm commitment underwritten offerings, addressed
to the Purchaser, providing substantially that such accountants are independent
certified public accountants within the meaning of the Securities Act and that
in the opinion of such accountants, the financial statements and other financial
data of the Company included in the registration statement and the prospectus,
and any amendment or supplement thereto, comply as to form in all material
respects with the applicable accounting requirements of the Securities Act.
Such letter shall additionally cover such other financial matters (including
information as of the date of such letter) with respect to the registration in
respect of which such letter is being given as the Purchaser may reasonably
request; and
(f) Use its best efforts to register or qualify the shares covered
by such registration statement under such other securities or blue sky laws
of such jurisdictions as the Purchaser shall reasonably request and do any
and all other acts and things which may be necessary or desirable to enable
the Purchaser to consummate the public sale or other disposition in such
jurisdiction of the shares owned by the Purchaser, except that the Company
shall not for any such purpose be required to qualify generally to do
business as a foreign corporation in any jurisdiction wherein it is not so
qualified, or to consent to general service of process in any such
jurisdiction.
All expenses incurred by the Company in complying with Sections 6.1,
6.2 and 6.3 hereof, including without limitation, all registration,
qualification and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for the Company, blue sky fees and expenses, and the
expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the
Company which shall be paid in any event by the Company) are herein called
"REGISTRATION EXPENSES"; and all underwriting discounts and selling
commissions applicable to the sales are herein called "SELLING EXPENSES."
The Company will pay all Registration Expenses in connection with the
registrations pursuant to Sections 6.1 and 6.2, except as may be required to
update any registration statement kept effective for more than the period of
time required by Section 6.3(a). All Selling Expenses in connection with
each registration pursuant to Section 6.1 or 6.2 shall be borne by the seller
of the securities on which they are imposed. Each selling stockholder in a
registration pursuant to Sections 6.1 and 6.2 shall bear the fees and costs
of its own counsel.
6.4 INDEMNIFICATION. In the event of a registration of any shares
of Common Stock under the Securities Act pursuant to Section 6.1 or 6.2, the
Company will hold harmless the Purchaser and each underwriter of such shares
and each other Person, if any, who controls the Purchaser or such underwriter
within the meaning of Section 15 of the Securities Act, and each officer,
director, employee and advisor of each of the foregoing, against any
expenses, losses, claims, damages or liabilities, joint or several, to which
the Purchaser or such underwriter or controlling Person may become subject
under the Securities Act, any state securities law or otherwise, including
any of the foregoing incurred in settlement of any litigation, commenced or
threatened, insofar as such expenses, losses, claims, damages or liabilities
(or actions in respect
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<PAGE>
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained, on the effective date thereof, in any
registration statement under which such shares are registered under the
Securities Act, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein in light of the
circumstances under which they were made not misleading; and will pay when due
or (at the election of the incurring party) reimburse for, any legal or any
other expenses reasonably incurred by the Purchaser and each such underwriter
and each such controlling Person in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such expense,
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement, said preliminary prospectus or said prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished in writing to the Company by or on behalf of the Purchaser
or such underwriter specifically for use in the preparation thereof; and
provided, further, that if any expenses, losses, claims, damages or liabilities
arise out of or are based upon an untrue statement, alleged untrue statement,
omission or alleged omission contained in any preliminary prospectus which did
not appear in the final prospectus, the Company shall not have any liability
with respect thereto to (i) the Purchaser or any Person who controls the
Purchaser within the meaning of Section 15 of the Securities Act, if the
Purchaser delivered a copy of the preliminary prospectus to the Person alleging
such expenses, losses, claims, damages or liabilities and failed to deliver a
copy of the final prospectus, as amended or supplemented if it has been amended
or supplemented, to such Person at or prior to the written confirmation of the
sale to such Person or (ii) any underwriter or any Person who controls such
underwriter within the meaning of Section 15 of the Securities Act, if such
underwriter delivered a copy of the preliminary prospectus to the Person
alleging such expenses, losses, claims, damages or liabilities and failed to
deliver a copy of the final prospectus, as amended or supplemented if it has
been amended or supplemented, to such Person at or prior to the written
confirmation of the sale to such Person.
In the event of any registration of any shares of Common Stock under the
Securities Act pursuant to Section 6.1 or 6.2, the Purchaser will indemnify and
hold harmless the Company and each Person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act, each officer of the
Company who signs the registration statement, each director of the Company and
each underwriter and each Person who controls any underwriter within the meaning
of Section 15 of the Securities Act, against any and all such expenses, losses,
claims, damages or liabilities referred to in the first paragraph of this
Section 6.4, if the statement, alleged statement, omission or alleged omission
in respect of which such expense, loss, claim, damage or liability is asserted
was made in reliance upon and in conformity with information furnished in
writing to the Company by or on behalf of the Purchaser specifically for use in
connection with the preparation of such registration statement, preliminary
prospectus, prospectus, amendment or supplement; provided, however, that if any
expenses, losses, claims, damages or liabilities arise out of or are based upon
an untrue statement, alleged untrue statement, omission or alleged omission
contained in any preliminary prospectus which did not appear in the final
prospectus, the Purchaser shall not have any such liability with respect thereto
to (i) the Company, any Person who controls the Company within the meaning of
Section 15 of the Securities Act, any officer of the Company who signed the
registration statement or any director of the Company, if the Company delivered
a copy of the preliminary prospectus to the Person alleging such expenses,
losses, claims, damages or liabilities
15
<PAGE>
and failed to deliver a copy of the final prospectus, as amended or supplemented
if it has been amended or supplemented, to such Person at or prior to the
written confirmation of the sale to such Person or (ii) any underwriter or any
Person controlling such underwriter within the meaning of Section 15 of the
Securities Act, if such underwriter delivered a copy of the preliminary
prospectus to the Person alleging such expenses, losses, claims, damages or
liabilities and failed to deliver a copy of the final prospectus, as amended or
supplemented, if it has been amended or supplemented, to such Person at or prior
to the written confirmation of the sale to such Person.
Each party entitled to indemnification under this Section 6.4 (the
"INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting thereon, provided that counsel for the Indemnifying Party,
who shall conduct the defense of such claim or litigation, shall be approved by
the Indemnified Party (whose approval shall not unreasonably be withheld), and
the Indemnified Party may participate in such defense at its own expense, and
provided further that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 6.4 except to the extent such failure resulted in actual
detriment to the Indemnifying Party. No Indemnifying Party, in the defense of
any such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. Each Indemnified Party shall furnish such
information regarding itself or the claim in question as an Indemnifying Party
may reasonably request in writing and as shall be reasonably required in
connection with defense of such claim and litigation resulting therefrom.
6.5 REGISTRATION NOT REQUIRED. Notwithstanding anything in this
Section 6, the Company shall have no obligation to register shares of Common
Stock requested to be registered hereunder if, in the opinion of counsel to the
Company, reasonably satisfactory in form and substance to counsel for the
Purchaser, all of the shares of Common Stock requested to be registered can be
sold without compliance with the registration requirements of the Securities Act
or all shares of Common Stock entitled to registration rights hereunder can be
sold during a single three-month period under Rule 144.
6.6 REPORTING REQUIREMENTS. The Company shall file in a timely
manner all reports required to be filed by it under the Securities Act and
the Exchange Act and the rules and regulations adopted by the SEC thereunder
(or, if the Company is not required to file such reports, it will, upon the
request of the Purchaser, make publicly available other information so long
as necessary to permit sales under Rule 144), and it will take such further
action as the Purchaser shall reasonably request, all to the extent required
from time to time to enable the Purchaser to sell shares of Common Stock
without registration under the Securities Act within the limitation of the
exemptions provided by Rule 144. Upon the request of the Purchaser, the
Company will deliver to the Purchaser a written statement as to whether it
has complied with such requirements.
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SECTION 7. MISCELLANEOUS
7.1 TRANSACTIONAL EXPENSES. Whether or not the transactions
contemplated by this agreement are consummated, each party shall pay its own
fees and expenses incident to the negotiation, preparation, execution,
delivery and performance hereof and thereof, including, without limitation,
the fees and expenses of its counsel, accountants and other experts.
7.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made in or pursuant to this Agreement shall survive the
consummation of this Agreement and any investigation made by the Purchaser
with respect thereto.
7.3 OTHER AGREEMENTS SUPERSEDED; WAIVER AND MODIFICATION, ETC. This
Agreement supersedes all prior agreements or understandings written or oral,
between the Company and the Purchaser, relating to the acquisition of shares of
the Company, and incorporates the entire understanding of the parties with
respect thereto.
This Agreement may be amended or supplemented only by a written
instrument signed by the party against whom the amendment or supplement is
sought to be enforced. The party benefited by any condition or obligation
may waive the same, but such waiver shall not be enforceable by another party
unless made by written instrument signed by the waiving party.
7.4 NOTICES. Any notice or other communication under or relating to
this Agreement shall be given in writing and shall be deemed sufficiently
given and served for all purposes when personally delivered or given by
telefax with receipt verified by printout of the transmitting machine (or
otherwise confirmed in writing, in which case the notice shall be deemed
given when such written confirmation is received). All communications shall
be sent to the party to be notified at the address as set forth below or at
such other address as such party may designate by ten (10) days advance
written notice to the other parties hereto:
(a) If to the Purchaser:
Fireman's Fund Insurance Company
777 San Marin Drive
Novato, California 94998
Attn: Bruce F. Friedberg
Fax: (415) 899-2627
with a copy to:
Fireman's Fund Insurance Company
777 San Marin Drive
Novato, California 94998
Attn: General Counsel's Office
Fax: (415) 899-2852
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(b) If to the Company:
Crop Growers Corporation
201 Crop Growers Drive
Great Falls, Montana 59401
Attn: Larry Martinez
Fax: (406) 791-9594
with a copy to:
Dorsey & Whitney LLP
8 Third Street North
Great Falls, Montana 59401
Attn: Jack Manning
Fax: (406) 727-3638
7.5 INTEREST. Any amounts due under Sections 4.2 and 6.4 shall bear
interest at an interest rate equal to 2% per year over the rate announced by
Bank of America National Trust and Savings Association as its then-current
reference rate or the maximum lawful rate, whichever is less, from the time
payment is due to the time of payment.
7.6 LAW GOVERNING; FEDERAL FORUM. This Agreement shall be construed
in accordance with and governed by the laws of the State of New York. If any
action is brought under or relating to this Agreement and the federal trial
courts have jurisdiction over the subject matter of such action, such action
may be brought only in such federal courts.
7.7 SUCCESSORS; ASSIGNABILITY. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns. Except as expressly provided herein,
neither this Agreement nor any right, remedy, obligation or liability
hereunder may be assigned by either of the parties hereto without the prior
written consent of the other parties hereto with the exception of any
assignment by the Purchaser to an Affiliate. (Any such assignment to another
the Purchaser or such Affiliate will not, however, relieve the Purchaser of
its obligations hereunder.)
7.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and each such executed counterpart shall be deemed to be an
original instrument, but all such executed counterparts together shall
constitute one and the same instrument.
7.9 PARTIES IN INTEREST. Nothing in this Agreement, express or
implied, is intended to confer any rights or remedies under or by reason of
this Agreement on any Person other than the parties hereto and their
respective permitted successors and assigns, nor is anything in this
Agreement intended to relieve or discharge any obligation of any third Person
to any party hereto or give any third Person any right of subrogation or
action over against any party hereto.
7.10 REFERENCES; DATE. Unless expressly indicated to the contrary,
all references herein to Sections and Exhibits refer to the specified part of
this Agreement and all references to Schedules refer to the specified
Schedule of the Disclosure Memorandum. All terms such as "herein,"
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<PAGE>
"hereby" or "hereunder" refer to this Agreement as a whole. The date of this
Agreement is for reference only, and is not necessarily the date on which it was
entered into.
7.11 HEADINGS. The headings used in this Agreement are provided for
convenience only and this Agreement shall be interpreted as though they did not
appear herein.
7.12 FAIR CONSTRUCTION. This Agreement shall be given fair and
reasonable construction in accordance with the intention of the parties.
This Agreement shall not be construed against the party preparing it, and
shall be construed without regard to the identity of the Person who drafted
it or the party who caused it to be drafted and shall be construed as if all
parties had jointly prepared this Agreement. It shall be deemed their joint
work product, and each and every provision of this Agreement shall be
construed as though all of the parties hereto participated equally in the
drafting hereof; and any uncertainty or ambiguity shall not be interpreted
against any one party. As a result of the foregoing, any rule of
construction that a document is to be construed against the drafting party
shall not be applicable.
7.13 BUSINESS DAYS. If the date on or by which any act is required
to be performed hereunder is not a Business Day, such date shall be extended
to the next Business Day.
7.14 SECURITIES VALUATION OFFICE. The Company covenants and agrees
to use its best efforts to assist the Purchaser in obtaining, at Purchaser's
cost and expense, a rating for the Shares from the Securities Valuation
Office of the National Association of Insurance Commissioners.
SECTION 8. GLOSSARY
As used in this Agreement, the following terms have the meanings set
forth below or in the location indicated:
AFFILIATE - any Person that directly, or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control with,
another Person.
AGREEMENT - this Stock Purchase Agreement, including the Exhibits hereto
and the Disclosure Memorandum, as it or they may be amended from time to time in
accordance with its terms.
ANNUAL FINANCIAL STATEMENTS - Section 2.7.
BUSINESS DAY - any day which is not a Saturday, Sunday or a bank holiday
in the State of California or Montana.
CERTIFICATE OF DESIGNATIONS - Section 2.18.
COMMON STOCK - Section 1.1.
COMPANY - introductory paragraphs.
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DISCLOSURE MEMORANDUM - the disclosure memorandum of even date
herewith executed by the parties hereto, containing the Schedules referred to
in Section 2 and any exceptions to the representations and warranties made in
Section 2.
EMPLOYEE PLAN - (i) each pension plan as defined in Section 3(2) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
which is qualified (or states in the plan document or any government filing
that it is qualified) under Section 401 of the Code and which the Company
sponsors or contributes to or with respect to which the Company has or could
incur any obligation or liability; (ii) each pro plan, stock option,
restricted stock, stock purchase, pension, severance, retirement or incentive
compensation plan and any other benefit plan or program and (iii) each
welfare plan as defined in Section 3(1) of ERISA.
ESPY MATTERS -- any grand jury indictments relating to political
contributions to the campaign of Henry Espy and all other matters, including
but not limited to litigation, governmental investigations, shareholder
claims, indemnities, contractual violations, or any other actual or potential
liability or obligation arising therefrom or directly or indirectly related
thereto.
GAAP - Section 2.7.
GOVERNMENTAL AGENCY - any federal, state, local or foreign government
or any political subdivision thereof (including without limitation the
executive and legislative branches thereof) or any department, commission,
board, bureau, agency, court, panel or other instrumentality of any kind of
any of the foregoing.
GOVERNMENTAL REQUIREMENT - any federal, state, local or foreign
statute, law, order, judgment, decree, regulation or permit or any
requirement of any Governmental Agency.
INDEMNIFIED PARTIES - Section 6.4.
INDEMNIFYING PARTIES - Section 6.4.
INTELLECTUAL PROPERTY RIGHTS - Section 2.10.
INTERIM FINANCIAL STATEMENTS - Section 2.7.
KNOWLEDGE - actually known to the chief executive officer or the
principal financial officer or the principal accounting officer or the
principal human resources officer of the entity making the representation
without any additional investigation.
LOSSES - any and all losses, costs, claims, demands, actions, suits,
proceedings, assessments, expenses, liabilities, damages and judgments
(including without limitation interest, penalties and reasonable attorneys'
fees and reasonable out-of-pocket costs).
MATERIAL ADVERSE EFFECT - with respect to the Company, a material adverse
effect, singly or cumulatively, on the business, Properties, financial
condition, results of operations or business prospects of the Company and the
Subsidiaries taken as a whole. With respect to the Purchaser, a material
adverse effect on the business, Properties, financial conditions, results of
operations or business prospects of the Purchaser.
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PERSON - an individual, partnership, corporation, trust or
unincorporated organization or a Governmental Agency.
PROPERTY - any interest in any kind of property or asset of any kind,
whether real, personal or mixed, tangible or intangible, and wherever located.
PURCHASE PRICE - Section 1.1.
PURCHASER - introductory paragraphs.
PURCHASER PARTY - Section 4.2.
REGISTRATION EXPENSES - Section 6.3.
REGULATED MATERIAL - any substance, material or solid or other waste
that is, or whose release or disposal is, subject to any Governmental
Requirement or regulated by any Governmental Agency with jurisdiction or
whose release or disposal is actionable under applicable law.
RULE 144 - Rule 144 promulgated under the Securities Act, as amended
from time to time, or any successor rule to similar effect.
SEC - United States Securities and Exchange Commission.
SECURITIES ACT - the Securities Act of 1933, as amended.
SECURITIES EXCHANGE ACT - the Securities Exchange Act of 1934, as
amended.
SELLING EXPENSES - Section 6.3.
SHAREHOLDER - a shareholder of the Company.
SHARES - introductory paragraphs.
SIGNIFICANT SUBSIDIARY - any Subsidiary of the Company constituting a
"significant subsidiary" as defined in Rule 1-02 of Regulation S-X promulgated
by the SEC.
STOCK RIGHTS - Section 2.6.
SUBSIDIARIES - Section 2.5.
TAXES/TAX - any and all federal, state, county, local or foreign
taxes, charges, levies, fees, imposts or other assessments of any nature
whatsoever, including, without limitation, income tax, profits tax, gross
receipts tax, corporation tax, capital transfer tax, stamp duty and value
added tax, payroll tax, sales tax, employment tax, use tax, property tax,
excise tax, withholding taxes, environmental or superfund taxes, development
gains tax, national insurance and earnings-related contributions, income tax
payable by way of pay-as-you-earn deductions, and all costs, charges,
interest, penalties, surcharges and expenses related thereto or to any
disallowance of any claim with respect thereto.
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THIRD-PARTY INSURER - any "insurance company" (as defined in Section
2(13) of the Securities Act) other than the Purchaser, or any Affiliate of
any such insurance company.
IN WITNESS WHEREOF, the parties have signed this Stock Purchase
Agreement.
CROP GROWERS CORPORATION
By /s/ Larry T. Martinez
--------------------------------------
Name: Larry T. Martinez
Title: Chief Executive Officer
FIREMAN'S FUND INSURANCE COMPANY
By /s/ Bruce F. Friedberg
--------------------------------------
Name: Bruce F. Friedberg
Title: Senior Vice President
EXHIBITS
A Certificate of Designations
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MPCI GENERAL AGENCY AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
FIREMAN'S FUND INSURANCE COMPANY
Novato, California
(hereinafter referred to as the "Company")
and
CROP GROWERS INSURANCE, INC.
Overland Park, Kansas
(hereinafter referred to as the "General Agent")
SECTION 1 - APPOINTMENT OF GENERAL AGENT
1.1 The Company hereby appoints the General Agent to conduct and
supervise the writing of Multiple Peril Crop Insurance ("MPCI") beginning
with the 1997 crop year and for the subsequent crop years during which this
Agreement continues in force. The initial term of this Agreement shall be
three crop years, subject to the provisions of Section 16.1 of this Agreement.
1.2 The General Agent hereby accepts the Company's appointment, and
agrees to perform the duties and discharge the responsibilities described
herein, as well as follow the Company's rules and regulations pursuant to
Section 2.3 hereof, to the best of its ability, knowledge, skill and judgment
while at all times complying in all material respects with the applicable
rules and regulations of the Federal Crop Insurance Corporation (referred to
herein as the "FCIC") and all other applicable federal, state and local
statutes, rules, regulations, and requirements.
1.3 "crop year" as used herein means each 12 month period from July 1
through June 30.
1.4 For purposes of this Agreement, the term "SRA" shall mean the
Standard Reinsurance Agreement and Plan of Operations between the Company and
the FCIC for the 1997 and subsequent crop years.
1.5 The Company and the General Agent are parties to a certain MPCI
General Agency Agreement, dated March 29, 1995, as amended to date (the "1996
MPCI General Agency
<PAGE>
Agreement"). The 1996 MPCI General Agency Agreement shall continue to apply with
respect to the 1996 crop year.
SECTION 2 -GENERAL AUTHORITY, DUTIES AND RESPONSIBILITIES, LIMITATIONS AND
PROHIBITED ACTS
2.1 The General Agent's appointment is limited to MPCI insurance business
on risks located in those states in which the Company has advised the General
Agent it is legally authorized to write MPCI, subject to the limits of
liability approved by the FCIC in the SRA for the crop year under
consideration.
Specifically excluded from this Agreement are all policies written on crops
located in Texas. The Company shall enter into a separate agreement,
substantially similar to this Agreement, with Texas Crop Growers Insurance
Services, Inc., regarding the management of MPCI policies written in Texas.
However, premiums written under the separate agreement between Texas Crop
Growers Insurance Services, Inc. and the Company shall be taken into account in
determining underwriting loss or gain under Section 9 hereof.
2.2 The General Agent is authorized, subject to the terms, conditions and
limitations stipulated herein, to:
a. solicit, receive and evaluate applications for MPCI;
b. accept and bind MPCI;
c. issue policies of MPCI and endorsements thereto, and cancel or
nonrenew such policies where legally permitted, it being understood that
nothing herein shall impair the Company's right to legally cancel or
nonrenew policies;
d. subject to Section 5.2 of this Agreement, settle MPCI claims on
behalf of the Company; and
e. appoint local agents and/or brokers ("Producers") who are lawfully
licensed to solicit the MPCI business subject hereto consistent with
applicable laws, and to suspend and terminate such appointments as
necessary.
2.3 The General Agent shall, in all cases and at all times, observe and
obey all rules, instructions and directives consistent with the terms of this
Agreement as the Company may, from time to time and at any time, reasonably
promulgate and the rules, instructions and directions of the FCIC, and shall
not bind the Company in contravention of any such rules, instructions or
directives.
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2.4 The General Agent shall comply with all laws and regulations
governing the obligations of the General Agent on behalf of the Company
hereunder and all instructions and directives of the FCIC with respect to the
insurance business written within the scope of this Agreement, and shall file
for approval all documents as may be required by the applicable regulatory
authorities. The General Agent shall promptly report all appointments of
local agents or sub-agents to the Company and prepare, handle and process all
filings regarding such appointments. Such appointments shall be accomplished
consistent with all applicable state laws and all rules, instructions and
directives regarding such appointment process consistent with Section 2.3.
2.5 Except as otherwise provided in this Agreement, the General Agent
shall maintain all records, including, but not limited to, statistical and
accounting records, that an insurance company would maintain with respect to
the insurance business subject hereto so as to allow the Company to make only
general ledger entries in its books and records, with all other data
maintained by the General Agent and provided by the General Agent to the
Company as necessary to enable the Company to prepare its annual convention
statement and any other reports required by any governmental agency, and to
submit the data required by the various reporting bureaus. The General Agent
shall retain the records pertaining to the business subject hereto for as
long as applicable statutes require.
2.6 The General Agent's authority under this Agreement is subject to the
rules and regulations of the FCIC.
2.7 The General Agent shall not:
a. accept applications for, bind or issue any insurance which is
ineligible for reinsurance under the SRA in effect for the crop year
under consideration;
b. issue policies covering more than one crop year unless such
policies can be cancelled or nonrenewed at least annually;
c. commit the Company to participate in any insurance or reinsurance
syndicate;
d. bind reinsurance or retrocessions on the Company's behalf except
pursuant to Section 8 hereof;
e. accept business from any Producer without assuring that the
Producer is lawfully licensed to transact the type of insurance which
he is soliciting;
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f. knowingly appoint as a local agent of the Company any person who
serves on the Company's board of directors;
g. knowingly employ any individual who is also employed by the
Company;
h. knowingly allow any person to participate in the business of
insurance in violation of 18 U.S.C. Section 1033 et seq.;
i. settle any claim except consistent with the authority granted
under Section 5 of this Agreement;
j. use or distribute any advertising or promotional material bearing
the Company's name without first obtaining the written approval of the
Company;
k. assign its obligations under this Agreement in whole or in part,
except as permitted under Section 19.1 hereof;
l. assign, contract with others for, or "outsource" the General
Agent's duties and responsibilities regarding the appointment of local
agents or subagents without the Company's written consent, except as
permitted under Section 19.1 hereof.
SECTION 3 - POLICY FORMS, SUPPLIES AND LICENSES
3.1 The General Agent shall be responsible for all policy forms entrusted
to it, whether issued or not.
3.2 All supplies furnished by the Company to the General Agent, as well
as any policy forms or other supplies on which the Company's name appears,
whether supplied by the Company or not, shall be and remain the property of
the Company and shall be turned over to the Company promptly upon demand.
All licenses and other material relating to governmental licensing or
authorization of the Company with respect to this Agreement shall be and
remain the property of the Company and shall be turned over to the Company by
the General Agent promptly upon demand.
SECTION 4 - PREMIUM
4.1 The Company agrees to cede to the General Agent's insurance company
affiliates a percentage, specified by the General Agent, of the MPCI net
retained premium produced by the General Agent for the 1997 crop year up to a
maximum of *, provided the General Agent's insurance company affiliates
retain no more than * of the MPCI net retained premium. For the 1998 crop
year, the Company agrees to cede
* The Company has requested confidential treatment of this information
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.
Accordingly, this information has been redacted from this filing.
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to the General Agent's insurance company affiliates a percentage, specified by
the General Agent, of the MPCI net retained premium produced by the General
Agent up to a maximum of *. For all subsequent crop years during the term of
this Agreement, the Company agrees to cede to the General Agent's insurance
company affiliates a percentage, specified by the General Agent, of the MPCI net
retained premium produced by the General Agent up to a maximum of *.
4.2 The General Agent shall bill, collect, receive and receipt for
premiums as they become due. All premiums for business produced under this
Agreement shall be handled by the General Agent in accordance with FCIC rules.
4.3 The General Agent is authorized to pay premiums on behalf of
insureds. If the General Agent pays premiums on behalf of an insured, the
premium subsequently collected from the insured on whose behalf the General
Agent has paid premium shall belong to the General Agent and the Company
shall have no further interest therein.
4.4 All premiums received by the General Agent on behalf of the Company,
either before or after termination of this Agreement, shall be held by the
General Agent in trust in a fiduciary capacity in a bank which is a member of
the Federal Reserve System and whose accounts are insured by the Federal
Deposit Insurance Corporation pursuant to Section 40-2,132 of the Kansas
Insurance Laws (hereinafter referred to as the "Premium Trust Account").
4.5 Premiums held by the General Agent for and on behalf of the Company
in the Premium Trust Account may be invested by the General Agent in
Authorized Investments. "Authorized Investments" shall consist of (a)
deposits in deposit accounts or certificates of deposit with maturities not
exceeding one (1) year held in or issued by banks or savings and loan
associations insured by the United States Government and approved by the
Company, or (b) United States government bonds and treasury certificates or
other obligations for which the full faith and credit of the United States
are pledged for payment of principal and interest maturities of not more than
one (1) year, but not contracts or options for the sale and purchase thereof,
or securities indexed thereto. It shall be the responsibility of the General
Agent to maintain sufficient liquidity in the Premium Trust Account to make
timely payment of all amounts due to the FCIC. The length of maturity of any
investment in the Premium Trust Account shall not excuse any late payment or
remittance. Any interest and/or dividends paid on such Authorized
Investments shall be for the benefit of and shall be the property of the
General Agent.
* The Company has requested confidential treatment of this information
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.
Accordingly, this information has been redacted from this filing.
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4.6 The characterization of an account with the General Agent on the
Company's books in the form of a debtor-creditor account shall be deemed
merely a record of business transacted. Neither the keeping of an account in
such form, nor the rendering of same, nor failure to enforce prompt
remittance, nor alteration in compensation rate, nor compromise or
settlement, shall be held to waive assertion of the fiduciary relationship as
to premiums collected by the General Agent.
4.7 The General Agent must establish and maintain internal controls and
record keeping mechanisms for the safekeeping and full accounting of all cash
receipts, cash disbursements, premium billings, collections and policyholder
records relating to policies or evidences of insurance issued by the Company
or reasonably required for the fulfillment of the General Agent's duties.
SECTION 5 - CLAIMS
5.1 The General Agent shall adjust, compromise, settle, deny and/or pay
all losses incurred under policies issued pursuant hereto, and maintain usual
and customary records with respect to such loss handling in accordance with
the legal requirements of the FCIC and the various states, and in accordance
with any reasonable requirements made by the Company. The Company reserves
the right to make final decisions with respect to any matter involving
payment, adjustment, compromise, settlement or denial of any disputed claim
or claim expense.
5.2 Notwithstanding Section 5.1 above, the General Agent shall secure the
approval of the Company prior to paying or committing the Company to pay any
claim which exceeds $200,000 or an amount set by the insurance commissioner
of the Company's state of domicile, as set forth in a written notice
delivered by the Company to the General Agent, whichever is less.
5.3 The General Agent shall send the Company a copy of the claim file
upon request or whenever a claim:
a. has the potential, in the reasonable judgment of the General Agent,
to exceed or is closed by payment of an amount which exceeds $200,000
or an amount set by the insurance commissioner of the Company's state of
domicile, as set forth in a written notice delivered by the Company to
the General Agent, whichever is less;
b. exceeds $200,000 or an amount set by the insurance commissioner of
the Company's state of domicile, as set forth in a written notice
delivered by the Company to the General Agent, whichever is less;
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c. involves a coverage dispute; or
d. is open for more than six months.
5.4 All claim files shall be the joint property of the Company and the
General Agent unless the Company is ordered into liquidation, in which case
the claim files shall become the sole property of the Company's estate. In
the event of the Company's insolvency, the claim files shall be delivered by
the General Agent to any authorized representative of the Company's estate
upon demand, after which the General Agent shall have reasonable access to
and the right to copy the files on a timely basis. To the extent that
electronic claims files are in existence, any data contained in such files
will be timely transmitted to the Company and the FCIC in accordance with
applicable policies and procedures.
SECTION 6 - EXPENSES
The General Agent agrees to pay, and/or reimburse the Company within 14 days
after receipt of the Company's invoice with respect thereto, all expenses (other
than the Company's overhead) related to conducting and supervising the writing
of business pursuant to this Agreement. Such expenses shall include, but shall
not be limited to, agent licenses, local agent commissions, agency supplies
(such as application and policy forms, daily reports, adjuster supplies and loss
drafts), premium taxes, advertising, local board and association fees and
assessments.
SECTION 7 - COMPENSATION
The Company agrees to allow the General Agent an expense reimbursement allowance
equal to the expense reimbursement and any similar fee or allowance (including
reimbursement for excess loss adjustment expense) paid or allowed by the FCIC
under the SRA covering the business written hereunder. In addition, the General
Agent shall be entitled to all administrative fees and reimbursements for loss
adjustment expenses (including reimbursements for excess loss adjustment
expenses) collected by the General Agent or the Company for Catastrophic Risk
Protection Plan ("CAT") business written pursuant to the terms of this
Agreement.
SECTION 8 - REINSURANCE
The General Agent, under and at the direction of the Company, shall arrange
reinsurance with the FCIC on all the business written under the terms of this
Agreement for each crop year and perform all such related acts and duties under
the SRA. Further, the Company agrees, if required by the FCIC, to obtain
additional outside commercial reinsurance
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necessary to satisfy the financial requirements contained in 7 C.F.R. 400,
subpart I.
SECTION 9 - UNDERWRITING GAIN OR LOSS
9.1 Effective with the 1997 MPCI crop year, after the distribution by the
FCIC to the Company of the first * points of underwriting gains, as a
percent of net retained premium, with respect to all retained MPCI business
of the Company underwritten by the General Agent, the General Agent will be
entitled to receive a profit sharing payment of * of the underwriting gains
distributed by the FCIC under the SRA and the Company will be entitled to *
of the underwriting gains distributed by the FCIC under the SRA. The Company
will assume all underwriting losses. The General Agent's profit sharing
percentage will not be reduced in a year following a loss year. Attached
hereto as Schedule 9.1 is an example of a profit sharing calculation under
this Section 9.1.
In the event that the Company shall pay any assessments, pursuant to state
insurance guaranty or state insolvency fund laws, which are attributable to the
Company's MPCI premiums produced by the General Agent pursuant to this
Agreement, the amount of such assessments shall be offset against, and shall
reduce, all future profit sharing amounts which become due the General Agent
pursuant hereto; provided that the General Agent shall not be required to pay
to the Company any amounts with respect to such assessments which are in excess
of its profit sharing entitlements.
9.2 Since the Company's distributable underwriting gain for a crop year
is limited under the SRA to the greater of 15% of net retained premiums, or
the percentage established by the then applicable SRA as the limit on the
maximum percentage of underwriting gain to be credited in a given crop year
(the "Maximum Underwriting Gain"), the General Agents's profit sharing
interest* in the amount in excess of the Maximum Underwriting Gain (the
"credit carryforward") shall be credited by the Company to the General Agent
and paid to the General Agent when distributed to the Company as provided in
Section 9.3.
9.3 If the Company sustains an underwriting loss in a subsequent crop
year or realizes distributable underwriting gain for a subsequent crop year
which is less than the Maximum Underwriting Gain (the "Gain Shortfall"), any
credit carryforward from preceding crop years shall be applied to reduce any
such underwriting loss and/or Gain Shortfall. The Company will pay to the
General Agent an amount equal to the General Agent's profit sharing interest*
of such credit carryforward applied to the underwriting loss and/or Gain
Shortfall.
- ------------------
*The Company has requested confidential treatment of this information pursuant
to Rule 24b-2 under the Securities Exchange Act of 1934. Accordingly, this
information has been redacted from this filing.
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9.4 In the event the Company terminates this Agreement for reasons other
than fraud on the part of the General Agent relating to business effected
hereunder, material breach by the General Agent of any of the conditions or
provisions of this Agreement, insolvency on the part of the General Agent or
pursuant to Sections 16.4, 16.5, 16.6, 16.7 or 17 of this Agreement, the
Company's equity in any credit carryforward shall be terminated and the
Company shall remit 100% of the credit carryforward to the General Agent
within five (5) days after the Company receives it from the FCIC.
9.5 In the event of any termination of this Agreement as a result of
fraud on the part of the General Agent relating to business effected
hereunder, material breach by the General Agent of any of the conditions or
provisions of this Agreement, insolvency on the part of the General Agent, or
pursuant to Sections 16.4, 16.5, 16.6, 16.7 or 17 of this Agreement, the
Company's equity in the credit carryforward shall survive termination and the
Company shall remit to the General Agent its share of the credit carryforward
within five (5) days after the Company receives it from the FCIC.
9.6 The General Agent will receive profit and growth ("PAG") profit
sharing based upon the combined MPCI and Crop Hail results. The PAG profit
sharing will be calculated as set forth in Schedule 9.6 to this Agreement and
will be paid consistent with the terms of Section 10.2 hereof.
SECTION 10 - REPORTS AND REMITTANCES
10.1 On November 30 of each crop year and monthly thereafter, the General
Agent shall provide a report to the Company, on forms mutually acceptable,
showing on a by state, by fund basis:
a. estimated premiums;
b. gross liability;
c. paid losses; and
d. projected underwriting loss or gain.
10.2 Within 5 business days after receipt by the General Agent of payment
with respect to the FCIC's final settlement for each crop year, the General
Agent shall render to the Company a complete account of premiums, gross
liability and paid losses for the crop year, by state, by fund, along with
the underwriting loss or gain for the crop year and the Company's share
thereof as well as a calculation of the General Agent's PAG profit sharing
entitlement. The Company's share of any underwriting loss, less any prior
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payments, shall be paid by the Company upon receipt and verification of the
General Agent's report. The Company's share of any underwriting gain, less
profit sharing and PAG profit sharing thereon, shall be paid by the General
Agent with its report. If the underwriting gain or loss is adjusted after a
report has been submitted and after payment by the General Agent, the General
Agent shall submit an adjusted report and the Company shall reimburse the
General Agent for any overpayments within 14 days thereafter (or such
overpayments may be withheld from other amounts owed by the General Agent to the
Company hereunder).
10.3 In the event of an underwriting loss reported in the General Agent's
monthly account report, the Company shall, within 10 days of delivery of such
report, remit to the General Agent funds necessary to pay such loss.
10.4 For so long as Crop Growers Corporation ("Crop Growers") has the
obligation to prepare and file 10-K and 10-Q Reports with the Securities and
Exchange Commission, the General Agent shall supply the Company with copies of
such 10-K and 10-Q Reports within 15 days after their filing due date with the
Securities and Exchange Commission. In the event Crop Growers no longer is
obligated to prepare and file such 10-K and/or 10-Q Reports, or ceases to file
such reports for whatever reason, the General Agent shall:
a. supply to the Company within one hundred twenty (120) days of the
close of each of Crop Growers' fiscal years, a copy of the audited
consolidated financial statements of Crop Growers and its
subsidiaries, including the General Agent, as of the end of such
fiscal year, consisting of balance sheets, statements of income and
expense, retained earnings, paid-in capital, and changes in cash flow,
prepared in accordance with United States generally accepted
accounting principles; and
b. at the request of the Company, supply to the Company within sixty
(60) days of the close of each of Crop Growers' first three quarters
of any fiscal year, a copy of financial statements of Crop Growers
containing similar detail as provided in Section 10.4a for the
quarter, prepared in accordance with United States generally accepted
accounting principles and certified as to accuracy by Crop Growers'
Chief Financial Officer.
SECTION 11 - INSURANCE REQUIREMENTS
11.1 The General Agent currently maintains an errors and omissions insurance
policy. The aggregate limit of liability under such policy is $2,000,000, with
a limit of
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$2,000,000 per occurrence. The General Agent currently maintains a general
liability insurance policy. The aggregate limit of liability under such policy
is $2,000,000, with a limit of $2,000,000 per occurrence. The General Agent
will maintain its errors and omissions and general liability insurance policies
unless it becomes commercially unreasonable for the General Agent to do so.
11.2 The General Agent currently maintains a fidelity bond. The aggregate
limit of liability under such bond is $5,000,000, with a limit of $5,000,000 per
occurrence. The General Agent will maintain its fidelity bond unless it becomes
commercially unreasonable for the General Agent to do so.
11.3 The General Agent currently maintains a workers' compensation insurance
policy. The aggregate limit of liability and per occurrence limit of liability
under such policy is in accordance with applicable statutory requirements. The
General Agent will maintain workers' compensation insurance as required by
applicable law.
11.4 The General Agent shall supply the Company with copies of any and all
certificates of insurance, policies and bonds reflecting the above coverage
within thirty (30) days after they have been received by the General Agent.
11.5 In the event that the General Agent shall receive a cancellation,
nonrenewal, or rescission notice with respect to any of the coverages specified
in Sections 11.1 through 11.3 above, or if any such coverages are otherwise
modified or discontinued, the General Agent shall immediately notify the Company
of such fact.
SECTION 12 - INDEMNIFICATION
12.1 The General Agent agrees to hold harmless and indemnify the Company from
and against all losses (including so-called compliance losses), costs, damages
and expenses, including court costs and attorney fees, incurred by the Company
as a direct or indirect result of the negligent or intentional acts, errors or
omissions of the General Agent, its directors, officers, employees or agents, or
other parties operating under the direction or control of the General Agent,
regardless of whether said acts, errors or omissions occur before or after
termination of this Agreement.
12.2 The Company agrees to hold harmless and indemnify the General Agent from
and against all losses (including so-called compliance losses), costs, damages
and expenses, including court costs and attorney fees, incurred by the General
Agent as a direct or indirect result of the
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negligent or intentional acts, errors or omissions of the Company, its
directors, officers, employees or agents, or other parties operating under the
direction or control of the Company, regardless of whether said acts, errors or
omissions occur before or after termination of this Agreement.
SECTION 13 - RECORDS
13.1 The General Agent shall maintain separate records of business written by
the General Agent on the Company's behalf. The General Agent's records,
including its expiration rights, ("Expiration Rights and Records") are the
General Agent's property. The General Agent has the right to use and control
such Expiration Rights and Records. The Company shall have access and the right
to copy all accounts and records related to the Company's business, including
the right to inspect and audit the General Agent's financial and accounting
records for the purpose of verifying compliance with this Agreement. All such
records shall be retained for the minimum time periods required by Kansas law,
or for such longer time periods if so required by the law of a state having
jurisdiction over a particular insured.
13.2 The Company and the insurance commissioner of the Company's state of
domicile or any other insurance commissioner having jurisdiction over the
business covered by this Agreement shall have the right at any reasonable time
to examine and copy all accounts and records in the possession of the General
Agent referring to business effected hereunder.
13.3 The General Agent hereby grants the Company a security interest in the
General Agent's Expiration Rights and Records. The General Agent hereby grants
the Company a power of attorney to act as the General Agent's attorney-in-fact
for the SOLE purpose of executing any appropriate UCC-1 or other similar
financing statement, and any extensions or amendments thereto, as the Company
deems necessary for the purpose of perfecting the Company's security interest in
such Expiration Rights and Records, provided that such security interest shall
be subordinate to the security interest of any party providing financing on a
secured basis to Crop Growers, the General Agent, or their respective
subsidiaries, currently or in the future, such as Crop Growers' current line of
credit with First Interstate Bank of Montana.
SECTION 14 - STATUS OF GENERAL AGENT, ITS EMPLOYEES AND AGENTS
While performing its duties and responsibilities hereunder, the General Agent
shall be deemed an independent contractor,
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as the Company reserves no authority or right to control the General Agent's
method of performance. No employees of the General Agent shall be regarded as
employees of the Company, and all agents appointed by the General Agent shall be
regarded as agents of the General Agent and not of the Company, except as may be
required by applicable statutes.
SECTION 15 - ARBITRATION
15.1 As a condition precedent to any right of action hereunder, in the
event of any dispute or difference of opinion hereafter arising with respect
to this Agreement, it is hereby mutually agreed that such dispute or
difference of opinion shall be submitted to arbitration. One Arbiter shall
be chosen by the Company, the other by the General Agent, and an Umpire shall
be chosen by the two Arbiters before they enter upon arbitration. All of the
Arbiters and the Umpire shall be active or retired, disinterested executive
officers of insurance or reinsurance companies, Underwriters at Lloyd's,
London or managing general agencies. In the event that either party should
fail to choose an Arbiter within 30 days following a written request by the
other party to do so, the requesting party may choose two Arbiters who shall
in turn choose an Umpire before entering upon arbitration. If the two
Arbiters fail to agree upon the selection of an Umpire within 30 days
following their appointment, an Umpire shall be appointed by the American
Arbitration Association.
15.2 Each party shall present its case to the Arbiters within 30 days
following the date of appointment of the Umpire. The Arbiters shall consider
this Agreement as an honorable engagement rather than merely as a legal
obligation and they are relieved of all judicial formalities and may abstain
from following the strict rules of law. The decision of the Arbiters shall
be final and binding on both parties; but failing to agree, they shall call
in the Umpire and the decision of the majority shall be final and binding
upon both parties. Judgment upon the final decision of the Arbiters may be
entered in any court of competent jurisdiction.
15.3 Each party shall bear the expense of its own Arbiter, and shall jointly
and equally bear with the other the expense of the Umpire and of the
arbitration. In the event that the two Arbiters are chosen by one party, as
above provided, the expense of the Arbiters, the Umpire and the arbitration
shall be divided equally between the two parties.
15.4 Any arbitration proceedings shall take place at a location mutually
agreed upon by the parties to this Agreement, but notwithstanding the
location of the
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arbitration, all proceedings pursuant hereto shall be governed by the law of the
state in which the Company has its principal office.
SECTION 16 - COMMENCEMENT AND TERMINATION
16.1 This Agreement shall become effective on July 1, 1996, with respect to
business produced for the 1997 crop year and subsequent crop years, and shall
remain in force thereafter until terminated. In the event there are material
changes in the MPCI program after the date of this Agreement or that the FCIC
does not grant the Company an SRA for the 1998 crop year or any subsequent crop
year, the Company and the General Agent agree to renegotiate this Agreement in
good faith. However, the above agreement to renegotiate shall not be deemed a
waiver or modification of the termination provisions outlined elsewhere in this
Section. This Agreement shall run concurrently with the Multiple Peril Crop
Insurance Quota Share Reinsurance Agreement and the Multiple Peril Crop
Insurance Retrocession Agreement entered into between the Company, on the one
hand, and insurance company affiliates of the General Agency on the other.
16.2 This Agreement may be terminated as of June 30, 1999 or any June 30
thereafter with respect to new policyholders by either party sending to the
other not less than 12 months' prior notice of its desire to terminate.
16.3 This Agreement may be terminated as of June 30, 1999 or any June 30
thereafter with respect to renewal policyholders as follows:
a. by the General Agent sending to the Company not less than 12
months' prior notice of its desire to terminate;
b. by the Company sending to the General Agent not less than 24
months' prior notice of its desire to terminate.
Upon termination of this Agreement, the General Agent shall have no further
authority to bind or issue policies on behalf of the Company, and the other
duties and obligations of the General Agent and the Company under this Agreement
shall continue to be performed on a run-off basis with respect to the policies
bound or issued by the General Agent prior to the date of termination, including
but not limited to the collection and remittance of premium and loss funds,
maintenance of the appropriate books, records and accounts, preparation and
submittal of the requisite accounts and reports and investigation, handling and
administration of claims and losses, except that the General Agent shall have no
premium collection authority if termination is
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accomplished under Sections 16.4, 16.5, 16.7 or 17 of this Agreement.
Upon termination of the Texas Agreement referred to in Section 2.1, this
Agreement shall terminate automatically at the same time and on the same basis.
In the event of termination of the Agreement, the Company agrees to allow the
General Agent to effect a bulk transfer of the business written hereunder to
another insurance company which is qualified to do business where the General
Agent is doing business and is otherwise acceptable to the FCIC. This provision
is subject to the terms and conditions of transfer as provided by applicable
FCIC regulations at the time of transfer.
16.4 The Company may terminate this Agreement immediately without notice
to the General Agent, with respect to any and all states in which the General
Agent is authorized to act as the Company's managing general agent pursuant
to this Agreement, in the event that the General Agent loses its license or
authorization to engage in the insurance business as contemplated and
required by this Agreement, whether through revocation, suspension,
nonrenewal or otherwise if such license termination is due to any of the
reasons stated in Kansas Insurance Laws Section 40-242, or similar statute
under another state's law. In any state in which the General Agent's license
is terminated, the General Agent's authority under this Agreement shall cease
immediately without notice until such license is restored.
16.5 In the event of fraud or intentional misappropriation of funds by the
General Agent, the Company may terminate this Agreement by written notice
effective immediately. This Agreement may be terminated immediately upon 30
days written notice by the Company to the General Agent in the event the General
Agent fails to pay premiums or meet other financial obligations to the Company
when due or otherwise violates the terms of this Agreement, which failure or
violation is not cured within such 30 day period.
16.6 The Company acknowledges that Crop Growers is a publicly owned
company the common stock of which is traded on a national securities
exchange. In the event that:
a. there shall be consummated any consolidation or merger of Crop
Growers pursuant to which the stockholders of Crop Growers immediately
prior to the merger or consolidation do not represent, immediately
after the merger or consolidation, the beneficial owners (within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934 (the
"Exchange Act")) of 50% or more of the combined voting power of Crop
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Growers (or the surviving entity's) then outstanding securities
ordinarily (and apart from rights occurring in special circumstances)
having the right to vote in the election of directors;
b. there shall be consummated any sale, lease, exchange or transfer
(in any single transaction or series of related transactions) of all
or substantially all of the assets or business of Crop Growers or any
of its material Subsidiaries (as defined below); or
c. any "person" (as such term is used in Sections 13(d)(3) and
14(d)(2) of the Exchange Act), other than (A) Crop Growers or a
Subsidiary thereof, or (B) any employee benefit plan sponsored by Crop
Growers or a Subsidiary thereof, shall become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of
securities of Crop Growers representing more than 50% of the combined
voting power of Crop Growers' then outstanding securities ordinarily
(and apart from rights accruing in special circumstances) having the
right to vote in the election of directors, as a result of a tender,
leveraged buyout or exchange offer, open market purchases, privately
negotiated purchases, other arrangements or understandings or
otherwise;
the General Agent shall give the Company notice of any such transaction
within ten (10) days after such transaction is consummated.
Following receipt of such notice, the Company may terminate this
Agreement upon thirty (30) days notice given no later than the 30th day after
receipt of such notice. For purposes of this Section, the term "Subsidiary"
shall mean (i) a corporation of which shares of stock having ordinary voting
power (other than stock having such power only by reason of the happening of
a contingency) to elect a majority of the board of directors or other
managers of such corporation are at the time owned, directly or indirectly,
through one or more intermediaries, by Crop Growers, or (ii) in the case of
unincorporated entities, any such entity with respect to which Crop Growers
has the power, directly or indirectly, to designate more than 50% of the
individuals exercising functions similar to a board of directors.
16.7 This Agreement may be terminated immediately in the event the General
Agent becomes insolvent or makes any general assignment for the benefit of
creditors.
16.8 In the event of termination of this Agreement, should the General Agent
be in any way indebted to the Company at
16
<PAGE>
such time, for premium or any other obligations under this Agreement, such debt
or debts shall immediately become due and payable. The Company shall have the
right to suspend the General Agent's underwriting and/or claims settlement
authority during the pendency of any dispute regarding the cause for
termination. Minor accounting discrepancies shall not be considered grounds for
termination.
16.9 In the event of termination of this Agreement, and provided the
General Agent (and/or the local agents appointed by the General Agent under
authority of this Agreement) has, in accordance with the terms of this
Agreement, within 15 days of such termination, accounted for and paid to the
Company all premiums and other monies due and owing the Company, the records
of the General Agent and the local agents, together with use and control of
the Expiration Rights and Records, shall remain the property of the General
Agent and of the local agents, as their interests may appear, and be left in
their undisputed possession. Notwithstanding the ownership and possession of
such Expiration Rights and Records by the General Agent, the Company shall
have the undisputed right to copy all records necessary to satisfy insurance
department record keeping requirements, including but not limited to all
underwriting files, claims files, billing information, etc. If there has not
been such an accounting and payment by the General Agent (and/or local agents
appointed by the General Agent under authority of this Agreement) within 15
days of termination of this Agreement, the Company shall have the right to
assume control of the General Agent's Expiration Rights and Records and may:
a. keep all commissions payable on such expirations or their
renewals and apply such commissions against what the General Agent
owes the Company; and/or
b. sell such portion of the Expiration Rights and Records that the
Company reasonably believes is necessary to satisfy the General
Agent's obligations to the Company pursuant to this Agreement.
In the event that such retained commissions or sale proceeds are
insufficient to satisfy the General Agent's obligations to the Company
under this Agreement, the General Agent shall still be responsible for
such unpaid sums. In the event that such retained commissions or sale
proceeds are more than necessary to satisfy the General Agent's
obligations to the Company, the Company shall return such excess to
the General Agent.
Any sale of the Expiration Rights and Records must be made in a
commercially reasonable manner pursuant to
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<PAGE>
the Uniform Commercial Code. The Company shall have the right to
appoint any buyer of such Expiration Rights and Records as a Managing
General Agent for such business.
To the extent that the General Agent has not satisfied its financial
obligations to the Company within any prescribed time period,
including any cure period, and the Agreement is terminated, the
Company shall notify the General Agent of the amount the Company
reasonably believes the General Agent owes to the Company. If the
parties cannot agree within 10 days of such notice as to the amount of
premiums, amounts or other obligations due ("Disputed Obligations"),
the General Agent shall deposit, in a trust account acceptable to the
Company, an amount equal to the Disputed Obligations claimed by the
Company to be due until such time as the dispute is resolved. To the
extent that the Company subsequently reasonably believes additional
amounts may be due the Company by the General Agent under this
Agreement, the Company shall give notice of such additional amounts.
If the parties cannot agree within 10 days of such notice as to the
amount of such additional owed Disputed Obligations, the General Agent
shall deposit such additional amount in the trust account. Upon
deposit by the General Agent in the trust account of the amounts of
such Disputed Obligations, the Company shall suspend any efforts to
pursue the sale of the Expiration Rights and Records or capture of
commissions. Nothing in this Section shall preclude the Company from
proceeding with the mechanics of a public or private sale of the
Expiration Rights and Records, including giving notice of the time,
place and manner of any proposed public or private sale, except that,
if the provisions regarding the Disputed Obligations above are not yet
concluded, no sale may actually occur.
SECTION 17 - SUSPENSION OR DEBARMENT UNDER AN SRA
17.1 The General Agent acknowledges that if the FCIC should suspend or debar
the General Agent under 7 C.F.R. 3017, which suspension or debarment prevents
the General Agent from performing its obligations under this Agreement, the
Company, in accordance with the terms and conditions of the SRA, will remain
ultimately liable to provide services to policyholders then being served under
the SRA. As such, and recognizing that under the terms of this Agreement the
General Agent performs, on behalf of the Company, substantially all such
services to policyholders, the General Agent agrees that in the event of a
suspension or debarment as contemplated under this Section 17.1, the
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<PAGE>
General Agent shall take all such actions as shall be reasonably requested by
the Company to ensure that service to policyholders continues without
interruption and in accordance with MPCI Program Requirements (as hereinafter
defined). In addition to suspension or debarment, other actions might be taken
by either the Federal or a state government that could similarly substantially
hinder, interfere or prevent the General Agent from performing, on the Company's
behalf, substantially all such services to policyholders then being served under
the SRA. In such event, to the extent necessary, the General Agent shall take
all such actions as shall be reasonably requested by the Company to ensure that
service to policyholders continues without interruption and in accordance with
MPCI Program Requirements.
17.2 In order to ensure the continuation of service to policyholders in the
event of an event contemplated by Section 17.1, the General Agent and the
Company agree, subject to any approval by the FCIC, as the case may be, that
they will (during the 90 days following execution of this Agreement) discuss and
agree upon plans to provide such continuation of services. If the General Agent
and the Company are unable to agree to any such plans, in the event of a
suspension or debarment as described in Section 17.1 hereof, they shall agree to
the following:
a. The General Agent shall (i) sell its MPCI Business (as defined
below) to a third party (which third party may include the Company and
shall be acceptable to the FCIC and the Company, which acceptance by
the Company shall not be unreasonably withheld) or (ii) Crop Growers
or the General Agent shall merge, consolidate, or sell, lease,
exchange or transfer all or substantially all of the assets or
business of Crop Growers or the General Agent, including the MPCI
Business, to a third party (which third party may include the Company
and shall be acceptable to the FCIC); provided, however, that until
the earlier of (A) the sale under this Section 17(a) or (B) the
General Agent becomes obligated to proceed under Section 17.2(b) below
(the "Transition Period"), the General Agent shall make available on a
non-exclusive basis the assets described in (i) - (ii) of paragraph
(b) below and the General Agent shall make available to the Company on
a non-exclusive basis and on commercially reasonable terms the
employees, sub-agents and local agents described in (iii) and (iv) of
paragraph (b) below, in all cases only to the extent reasonably
necessary for the Company to continue servicing, during the Transition
Period, policyholders then being serviced under the SRA; or
19
<PAGE>
b. If the General Agent shall not complete a transaction
contemplated by Section 17.2(a) within 90 days of any such suspension
or debarment, or such shorter period of time as may be reasonably
necessary for the Company to meet the Company's obligations under the
SRA in accordance with MPCI Program Requirements, then:
(i) the General Agent would supply the Company with
copies of all records necessary for the Company to meet all of the
Company's obligations under the SRA and any policy of insurance
issued pursuant to this Agreement (the "Company Obligations");
provided, however, that supplying such copies shall not in any way
affect the use and ownership of the Expiration Rights and Records
as otherwise set forth in this Agreement;
(ii) the General Agent would make available on a non-exclusive
basis, either by lease, license, management agreement, purchase or
other commercially reasonable method, all computers (including
hardware and software), computer records, and other data
processing equipment used by the General Agent to process
information used by the Company, or on the Company's behalf, that
is reasonably necessary for the Company to meet the Company
Obligations (the "Computer Equipment");
(iii) the Company shall have the right, in its discretion, to
solicit for employment and/or employ any current or future
employee of the General Agent or its affiliates as may be
reasonably necessary for the Company to meet the Company
obligations;
(iv) the Company and the General Agent each shall have the right
to continue to use any and all sub-agents or local agents who have
placed business with the Company pursuant to this Agreement. The
General Agent shall cooperate with the Company to the extent
necessary to accomplish this result by executing any and all
agreements necessary to transfer to the Company any requisite
rights under any then existing agreements;
(v) as a part of implementing items (i) - (iv) above, the
parties agree that the Expiration Rights and Records, Computer
Equipment, the right to hire employees (as provided in (iii)
above), use of sub-agents or local agents (as provided in (iv)
above) and such other related assets
20
<PAGE>
(together defined as the "MPCI Business") shall be purchased by
the Company. In such case, the Company and the General Agent
shall in good faith attempt to agree on the appropriate purchase
price to be paid by the Company to the General Agent for the MPCI
Business. In valuing the MPCI Business, due consideration shall
be given to its value as a going concern, as appropriate. In the
event that the Company and the General Agent cannot reach
agreement on a purchase price, they shall seek an independent
valuation of the MPCI Business from a mutually agreed upon
investment banking firm, again giving due consideration to its
value as a going concern, as appropriate. In the event that the
parties do not agree upon an investment banking firm to value the
MPCI Business within 110 days of any such suspension or debarment,
or if the parties do not agree upon a purchase price within 30
days after delivery to them of a valuation by the investment
banking firm chosen by them, the issue of such purchase price
shall be submitted to binding arbitration pursuant to Section 15
of this Agreement (provided that the arbiters shall be
representatives of investment banking firms and not insurance
industry persons). Notwithstanding any disagreements over the
amount of the purchase price, if the MPCI Business is to be sold
to the Company, the General Agent shall immediately transfer the
assets constituting the MPCI Business to the Company. Such
transfer of the MPCI Business shall not await the determination or
payment of the purchase price.
SECTION 18 - COMPLIANCE
18.1 The Company shall oversee compliance by the General Agent with the MPCI
Program Requirements, the laws and regulations of the United States and the laws
and regulations of the state in which the Company and General Agent are
conducting business under this contract. For purposes of this Agreement, the
term "MPCI Program Requirements" means comply with all requirements of the SRA
and FCIC rules, laws, regulations, bulletins, directives, instructions, court
and agency rulings, and other written requirements with respect to the sale and
administration of MPCI policies issued by the FCIC applicable to the General
Agent's performance of its obligations under this Agreement.
18.2 The General Agent shall cooperate with the Company in the review of the
General Agent's operations which are designed to assure policyholders are
properly serviced, that monies are distributed in accordance with the MPCI
Program
21
<PAGE>
Requirements, and FCIC policies and procedures are being followed.
18.3 The General Agent acknowledges that, between the General Agent on one
hand and the Company and other insurers writing MPCI under the SRA on the
other hand, the General Agent is responsible for compliance with the MPCI
Program Requirements. The General Agent shall, in all cases and at all
times, observe and obey the MPCI Program Requirements, and shall not bind the
Company or any other policy writing company designated in the SRA in
contravention of the MPCI Program Requirements, this Agreement, or the
Company's written instructions consistent with Section 2.3 hereof. In the
event of a conflict between the requirements of this Agreement and the MPCI
Program Requirements, the MPCI Program Requirements shall control and take
precedence and the Company and the General Agent agree to reform this
Agreement to eliminate such conflict, and shall negotiate in good faith any
equitable adjustment to the terms hereof that is necessary as a result of
such conflict.
a. The General Agent has developed a plan to monitor the quality of
service provided by the sales, underwriting, and claims processing
functions of the General Agent's MPCI business operations. The
General Agent shall provide the Company with a copy of the schedule of
the activities under the internal monitoring plan, which shall
include, but not be limited to, the dates, locations and types of
review to be conducted. The General Agent agrees to provide the
Company with a copy of any changes that are adopted to the schedule
within ten (10) business days of the schedule change.
b. The General Agent shall promptly provide the Company with a copy
of each report generated from the review and a copy of any correction
plan to be adopted to remedy any problems discovered by the review.
18.4 The Company and the General Agent shall form a joint task force
(hereinafter referred to as the "Compliance Review Group") to identify and
analyze compliance issues and to recommend actions or procedures to improve the
MPCI compliance process by the Company and the General Agent. The Compliance
Review Group shall identify not less than three nor more than six quality of
service or compliance issues to be the subject of the Compliance Review Group's
monitoring activities during each six month period. The Company and the General
Agent shall consider in good faith the implementation of any recommendations of
the Compliance Review Group.
22
<PAGE>
18.5 If the Company finds that the General Agent has not complied with the
provisions of Sections 18.2 and 18.3 above, and the General Agent has not taken
appropriate steps to correct the non-compliance, the Company may, at its option,
require, in writing, that the General Agent take corrective action within 45
days of the date of such finding. The notice shall describe each contract
violation or occurrence of non-compliance. The General Agent will provide the
Company within ten days of such a notice with a correction action plan and, on
or before the 45th day following such notice, the General Agent will provide the
Company with a description of the correction action taken to address the non-
compliance or reported violation and provide the Company with the opportunity to
verify the correction action taken.
SECTION 19 - MISCELLANEOUS
19.1 This Agreement, and all the rights and interests arising herefrom, shall
be binding upon, and shall inure to the benefit of, the parties hereto, their
representatives, successors and assigns; however, none of the authorities,
duties or responsibilities of the General Agent or the Company may be assigned
by either of them without the written consent of the other, except for loss
adjusting which will be assigned to Crop Loss Adjusting Service, Inc., a wholly
owned Subsidiary of Crop Growers.
19.2 This Agreement may not be modified verbally, nor may it be modified
by any subsequent practice or course of dealing by the parties, or in any
manner other than in writing signed by the parties hereto. No forbearance or
neglect on the part of one party to enforce any of the provisions of this
Agreement shall be construed as a waiver of any of its rights or privileges
hereunder, unless in each instance a written memorandum specifically
expressing such waiver be made and subscribed by an officer of the other
party. No such waiver shall modify this Agreement or affect the rights of
one party with respect to any subsequent default or failure of performance by
the other party.
19.3 In the event that any part of this Agreement is determined to be
unenforceable by reason of violation of federal or applicable state law, such
determination shall not affect the validity or enforceability of the remaining
terms and provisions.
19.4 This Agreement supersedes all previous agreements, either oral or
written, between the parties hereto concerning the subject matter hereof,
except the 1996 MPCI General Agency Agreement.
23
<PAGE>
19.5 This Agreement shall, except as otherwise expressly set forth
therein, be governed by and construed in accordance with the internal laws of
the State of Kansas.
19.6 All notices and other communications required or permitted to be given
under this Agreement shall be in writing and shall be deemed to have been given
when delivered personally or upon receipt when sent by certified or registered
mail, Federal Express, DHL or other similar nationally recognized service, or
telecopier (with request for confirmation of receipt) to the other party to this
Agreement at the addresses specified in this Section 19.6, for both the General
Agent and the Company, or to such other address as the General Agent or the
Company may from time to time specify in writing.
Notices to the General Agent:
Crop Growers Insurance, Inc.
7500 College Boulevard, Suite 1170
Overland Park, Kansas 66210
Attention: Tony Cid, Senior Vice President
Fax No.: (913) 338-3448
Notices to the Company:
Fireman's Fund Insurance Company
727 Craig Road
St. Louis, Missouri 63141
Attention: John M. Meuschke, Senior Vice President
Fax No.: (314) 569-7335
19.7 This Agreement may be signed in any number of counterparts and each such
counterpart shall be deemed an original instrument, but all such executed
counterparts together shall constitute one and the same instrument.
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives at:
St. Louis, Missouri, this 10th day of July, 1996.
FIREMAN'S FUND INSURANCE COMPANY
By: /s/ JOHN MEUSCHKE
------------------------------------
Overland Park, Kansas, this 10th day of July, 1996.
CROP GROWERS INSURANCE, INC.
By: /s/ RICHARD A. BARTLETT
------------------------------------
25
<PAGE>
SCHEDULE 9.1
*
- ------------------
*The Company has requested confidential treatment of this information pursuant
to Rule 24b-2 under the Securities Exchange Act of 1934. Accordingly, this
information has been redacted from this filing.
26
<PAGE>
SCHEDULE 9.6
PROFIT AND GROWTH
The Profit and Growth (PAG) profit sharing will be calculated annually based on
the following factors: (i) PAG premium; (ii) Return on Sales; and (iii) the PAG
profit sharing grid. The General Agent will be entitled to PAG profit sharing
equal to the percentage indicated on the PAG profit sharing grid times the PAG
premium, subject to the following constraints: (i) if, in any year, the PAG
premium is less than * million, the General Agent will not be entitled to PAG
profit sharing for that year; (ii) if, in any year, the Company's Return is less
than *, the General Agent will not be entitled to PAG profit sharing for that
year; and (iii) since the Company's distributable underwriting gain for a crop
year is limited under the SRA to the greater of 15% of net retained premiums, or
the percentage established by the then applicable SRA on the limit on the
maximum percentage of underwriting gain to be credited in a given crop year,
then the General Agent's PAG profit sharing payment shall be limited to the
distributable underwriting gain and the PAG profit sharing credited in excess of
the payment shall be credited by the Company to the General Agent.
The following definitions shall apply to the calculation of the PAG profit
sharing:
PAG PREMIUM: Total MPCI and Crop Hail premium, net of premium ceded to the
government, which the General Agent delivers to the Company.
COMPANY'S RETURN: The sum of (i) MPCI underwriting gain or loss from the FCIC's
final settlement less profit sharing paid to the General Agent less * of MPCI
net premiums, (ii) (* less Crop Hail loss ratio) times Crop Hail premiums less
Crop Hail profit sharing paid to the General Agent, and (iii) the Loss
Carryforward.
LOSS CARRYFORWARD: (i) If the Company's return is less than $0 for any year,
then the Loss Carryforward will be the Company's return for the current year.
RETURN ON SALES: The Company's return divided by PAG premium.
- ------------------
*The Company has requested confidential treatment of this information pursuant
to Rule 24b-2 under the Securities Exchange Act of 1934. Accordingly, this
information has been redacted from this filing.
27
<PAGE>
PAG PROFIT SHARE GRID
*
- ------------------
*The Company has requested confidential treatment of this information pursuant
to Rule 24b-2 under the Securities Exchange Act of 1934. Accordingly, this
information has been redacted from this filing.
28
<PAGE>
ATTACHMENT TO SCHEDULE 9.6
*
- ------------------
*The Company has requested confidential treatment of this information pursuant
to Rule 24b-2 under the Securities Exchange Act of 1934. Accordingly, this
information has been redacted from this filing.
29
<PAGE>
SAMPLE CALCULATION 4:
*
- ------------------
*The Company has requested confidential treatment of this information pursuant
to Rule 24b-2 under the Securities Exchange Act of 1934. Accordingly, this
information has been redacted from this filing.
30
<PAGE>
CROP GROWERS CORPORATION
------------
CERTIFICATE OF DESIGNATIONS
FOR
SERIES A CONVERTIBLE PREFERRED STOCK
------------
The undersigned, being respectively the Chief Executive Officer and the
Secretary of Crop Growers Corporation (the "Corporation"), a corporation
organized and existing under the Delaware General Corporation Law, in accordance
with the provisions of the Delaware General Corporation Law, Section 151(g), do
hereby certify that:
Pursuant to the authority vested in the Board of Directors of the
Corporation by the Certificate of Incorporation of the Corporation, the
preferred stock committee of the Board of Directors on July 9, 1996, in
accordance with the Delaware General Corporation Law, Section 151, duly adopted
the following resolution establishing a series of 10,000 shares of the
Corporation's Preferred Stock, to be designated as its Series A Convertible
Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Corporation (the "Board of Directors") by the Certificate of
Incorporation of the Corporation, the Board of Directors, acting through its
duly authorized preferred stock committee, hereby establishes a Series A
Convertible Preferred Stock of the Corporation and hereby states the number of
shares, and fixes the powers, designations, preferences and relative,
participating, optional and other rights, and the qualifications, limitations
and restrictions thereof, of such series of shares as follows:
SERIES A CONVERTIBLE PREFERRED STOCK
SECTION 1. DESIGNATION; NUMBER OF SHARES. The shares of such series
shall be designated as "Series A Convertible Preferred Stock" (the
"Convertible Preferred Stock"), and the number of shares constituting the
Convertible Preferred Stock shall be 10,000. Such number of shares may be
decreased by resolution of the Board of Directors adopted and filed pursuant to
the Delaware General Corporation Law, Section 151(g), or any successor
provision; provided, that no such decrease shall reduce the number of authorized
shares of Convertible Preferred Stock to a number less than the number of shares
then outstanding plus the number of shares reserved for issuance upon the
exercise of outstanding options, warrants, convertible or exchangeable
securities or other rights to acquire shares of Convertible Preferred Stock.
<PAGE>
SECTION 2. STATED CAPITAL. The amount to be represented in the stated
capital of the Corporation for each share of Convertible Preferred Stock shall
be $.01.
SECTION 3. RANK. The Convertible Preferred Stock shall rank prior to all
of the Corporation's Common Stock, par value $.01 per share (the "Common
Stock"), now outstanding or hereafter issued, both as to payment of dividends
and as to distributions of assets upon the liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary.
SECTION 4. DIVIDENDS AND DISTRIBUTIONS. The holders of shares of
Convertible Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for such
purpose, dividends at the rate of $50 per annum per share, and no more. Such
dividends shall be fully cumulative, whether or not earned or declared, shall
accumulate without interest (except as specifically provided in the next
paragraph of this Section 4) from the date of original issuance of the
Convertible Preferred Stock and shall be payable quarterly in arrears in cash on
each January 1, April 1, July 1 and October 1 commencing October 1, 1996
(provided, that if any such date is a Saturday, Sunday or legal holiday in the
place where such dividend is to be paid, then such dividend shall be payable
without interest on the next day that is not a Saturday, Sunday or legal
holiday) to holders of record as they appear on the stock books of the
Corporation on such record dates as shall be fixed by the Board of Directors.
Such record dates shall be not more than 60 nor less than 10 days preceding the
respective dividend payment dates. The amount of dividends payable per share of
Convertible Preferred Stock for each full quarterly dividend period shall be
computed by dividing the annual dividend amount by four. The amount of
dividends payable for the initial dividend period and for any other period
shorter than a full quarterly dividend period shall be computed on the basis of
a 360-day year of twelve 30-day months. No dividends or other distributions,
other than dividends payable solely in shares of Common Stock or other capital
stock of the Corporation ranking junior as to payment of dividends to the
Convertible Preferred Stock (such Common Stock and other capital stock being
referred to herein collectively as "Junior Dividend Stock"), shall be paid or
set apart for payment on, and no purchase, redemption or other acquisition shall
be made by the Corporation of, any shares of Junior Dividend Stock unless and
until all accumulated and unpaid dividends on the Convertible Preferred Stock
shall have been paid or declared.
Dividends whose payment is not made on a timely basis as specified above
for any reason (whether or not earned or declared) shall accumulate together
with an amount computed at the rate of 5% per annum thereon from the date 30
days after
2
<PAGE>
such dividends were payable until paid in full, compounded annually on January 1
of each year, which additional accrued amounts shall be paid, and treated for
all purposes of this Certificate of Designations, as additional accumulated
dividends hereunder.
If at any time any dividend on any capital stock of the Corporation ranking
senior as to payment of dividends to the Convertible Preferred Stock (such
capital stock being referred to herein as "Senior Dividend Stock") shall be in
default, in whole or in part, no dividend shall be paid or declared and set
apart for payment on the Convertible Preferred Stock unless and until all
accumulated and unpaid dividends with respect to the Senior Dividend Stock,
including the full dividend for the then-current dividend period, shall have
been paid or declared and set apart for payment, without interest. No full
dividends shall be paid or declared and set apart for payment on any capital
stock of the Corporation ranking, as to payment of dividends, on a parity with
the Convertible Preferred Stock (such capital stock being referred to herein as
"Parity Dividend Stock") for any period unless full cumulative dividends have
been, or contemporaneously are, paid or declared and set apart for payment on
the Convertible Preferred Stock for all dividend periods terminating on or prior
to the date of payment of such full cumulative dividends. No full dividends
shall be paid or declared and set apart for payment on the Convertible Preferred
Stock for any period unless full cumulative dividends have been, or
contemporaneously are, paid or declared and set apart for payment on any Parity
Dividend Stock for all dividend periods terminating on or prior to the date of
payment of such full cumulative dividends. When dividends are not paid in full
upon the Convertible Preferred Stock and any Parity Dividend Stock, all
dividends paid or declared and set apart for payment upon shares of Convertible
Preferred Stock and Parity Dividend Stock shall be paid or declared and set
apart for payment pro rata, so that the amount of dividends paid or declared and
set apart for payment per share on the Convertible Preferred Stock and the
Parity Dividend Stock shall in all cases bear to each other the same ratio that
accumulated and unpaid dividends per share on the shares of Convertible
Preferred Stock and Parity Preferred Stock bear to each other.
Any reference to "distribution" contained in this Section 4 shall not be
deemed to include any distribution made in connection with a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary.
SECTION 5. LIQUIDATION PREFERENCE. In the event of a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the holders of Convertible Preferred Stock shall be entitled to receive out of
the assets of the Corporation, whether such assets constitute stated capital or
surplus of any nature,
3
<PAGE>
an amount equal to the dividends accumulated and unpaid thereon to the date of
final distribution to such holders, whether or not declared, without interest
(except as specifically provided in Section 4 hereof), plus a sum equal to
$1,000 per share, and no more, before any payment shall be made or any assets
distributed to the holders of Common Stock or any other capital stock of the
Corporation ranking junior as to liquidation rights to the Convertible Preferred
Stock (such Common Stock and other capital stock being referred to herein
collectively as "Junior Liquidation Stock"); provided, that such rights shall
accrue to the holders of Convertible Preferred Stock only in the event that the
Corporation's payments with respect to the liquidation preferences of the
holders of capital stock of the Corporation ranking senior as to liquidation
rights to the Convertible Preferred Stock (such capital stock being referred to
herein as "Senior Liquidation Stock") are fully met. If the assets of the
Corporation are not sufficient to pay the foregoing liquidation preference
amount, the entire assets of the Corporation available for distribution after
the liquidation preferences of any Senior Liquidation Stock are fully met shall
be distributed ratably among the holders of the Convertible Preferred Stock and
any other capital stock of the Corporation which ranks on a parity as to
liquidation rights with the Convertible Preferred Stock in proportion to the
respective preferential amounts to which each is entitled (but only to the
extent of such preferential amounts). After payment in full of the liquidation
preference of the shares of the Convertible Preferred Stock, the holders of such
shares shall not be entitled to any further participation in any distribution of
assets by the Corporation.
At any time, in the event of any transaction (in whatever form, whether a
sale of assets, merger, sale of stock by the Corporation (not including bona
fide offerings of stock not undertaken for the purpose of conferring control on
any single shareholder or "group" of shareholders within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934), sale of stock by shareholders
in a transaction to which the Corporation is a party or otherwise) after which
the Corporation's pre-transaction shareholders no longer hold a majority of the
then outstanding voting securities of the Corporation or the Corporation no
longer owns, directly or indirectly, a majority of the properties and assets
(measured by fair market value, as determined in good faith by the Board of
Directors) held before the transaction (any of the preceding, a "Sale"), then,
subject to the provisions of this paragraph, such Sale shall be deemed, solely
for purposes of determining the amounts to be received by the holders of the
Convertible Preferred Stock in such Sale and for purposes of determining the
priority of receipt of such amounts as between the holders of the Convertible
Preferred Stock and the other holders of capital stock of the Corporation, to be
a liquidation, dissolution and winding up of the Corporation if the holders of a
majority of the outstanding shares of the Convertible Preferred Stock so elect
by giving written notice thereof to the Corporation at least 10 days
4
<PAGE>
before the effective date of such Sale. If no such notice is given, the
provisions of Section 7(b)(iii) hereof shall apply. The Corporation shall give
each holder of record of Convertible Preferred Stock written notice of such
impending Sale not later than 20 days prior to the stockholders' meeting of the
Corporation called to approve such Sale, or 20 days prior to the closing of such
Sale, whichever is earlier, and shall also notify such holders in writing of the
final approval of such Sale. If such election is made, then, to the extent the
holders of Convertible Preferred Stock do not receive the full liquidation
preference amount specified in this Section 5 in connection with such Sale, the
Corporation will redeem all the Convertible Preferred Stock for an amount equal
to the difference between the amount so received (if any) and such liquidation
preference amount within 10 days after the consummation of the Sale.
SECTION 6. REDEMPTION
(a) AT OPTION OF THE CORPORATION. The Corporation may not redeem the
Convertible Preferred Stock prior to July 9, 1997. The Corporation, at its
option, may, on or after July 9, 1997, redeem at any time all, or from time to
time any portion, of the Convertible Preferred Stock on any date set by the
Board of Directors, at a cash redemption price per share equal to $1,000 plus
all dividends on the Convertible Preferred Stock accumulated and unpaid on such
share, whether or not earned or declared, to the date fixed for redemption
(such sum being hereinafter referred to as the "Redemption Price"); provided,
that the Corporation may not so redeem any shares of Convertible Preferred Stock
prior to July 9, 2001 unless the Closing Price (as hereinafter defined) of a
share of Common Stock of the Corporation has been equal to or greater than the
Redemption Threshold (as hereinafter defined) on each of the 60 most recent
trading days prior to the date on which the Corporation gives notice of such
redemption. The "Closing Price" for each day shall be the last reported sale
price regular way or, in case no sale takes place on such day, the average of
the closing bid and asked prices regular way on such day, in either case as
reported on the New York Stock Exchange Composite Tape, or, if the Common Stock
is not listed or admitted to trading on such Exchange, on the principal national
securities exchange on which the Common Stock is listed or admitted to trading,
or, if the Common Stock is not listed or admitted to trading on any national
securities exchange, on the NASDAQ National Market, or, if the Common Stock is
not admitted for quotation on the NASDAQ National Market, the average of the
high bid and low asked prices on such day as recorded by the National
Association of Securities Dealers, Inc. through NASDAQ. The "Redemption
Threshold" is the Conversion Price (as defined in and as adjusted under the
terms of Section 7 hereof) in effect as of the first day of the Corporation's
fiscal quarter in which the redemption date occurs plus an amount computed at
the rate of 10% per annum thereon from the date of first issue of the
Convertible Preferred Stock to the
5
<PAGE>
first day of such fiscal quarter, compounded annually on the anniversary of the
date of first issue of the Convertible Preferred Stock.
In case of the redemption of less than all of the then outstanding
Convertible Preferred Stock, the Corporation shall designate by lot, or in such
other manner as the Board of Directors may determine, the shares to be redeemed,
or shall effect such redemption pro rata. Notwithstanding the foregoing, the
Corporation shall not redeem less than all of the Convertible Preferred Stock at
any time outstanding until all dividends accumulated and in arrears upon all
Convertible Preferred Stock then outstanding shall have been paid for all past
dividend periods.
(b) MANDATORY. The Corporation shall, to the extent of funds legally
available therefor under the Delaware General Corporation Law, redeem all shares
of the Convertible Preferred Stock then remaining outstanding on July 9, 2006
(the "Mandatory Redemption Date") at the Redemption Price.
If funds legally available for such mandatory redemption shall be
insufficient to redeem all shares of Convertible Preferred Stock remaining
outstanding on the Mandatory Redemption Date, the Corporation shall effect
redemptions on such date on a pro rata basis among the holders of the
Convertible Preferred Stock to the extent funds are then legally available for
such redemptions. Thereafter, as and to the extent legally available funds for
the redemption of the Convertible Preferred Stock exist from time to time, the
Corporation shall promptly redeem additional shares of Convertible Preferred
Stock on a pro rata basis among the holders thereof until all outstanding shares
of Convertible Preferred Stock have been redeemed.
(c) NOTICE OF REDEMPTION. Not more than 60 nor less than 30 days prior to
any redemption date under Section 6(a) or 6(b) hereof, notice by first class
mail, postage prepaid, shall be given to the holders of record of the
Convertible Preferred Stock to be redeemed, addressed to such shareholders at
their last addresses as shown on the stock books of the Corporation. Each such
notice of redemption shall specify the date fixed for redemption; the Redemption
Price; the place or places of payment; the then-effective Conversion Price (as
defined in Section 7); that the right of holders of Convertible Preferred Stock
called for redemption to exercise their conversion right pursuant to Section 7
shall expire as to such shares at the close of business on the date five
business days before the date fixed for redemption (provided that there is no
default in payment of the Redemption Price); that payment of the Redemption
Price will be made upon presentation and surrender of certificates representing
the shares of Convertible Preferred Stock; that accumulated but unpaid dividends
to the date fixed
6
<PAGE>
for redemption will be paid on the date fixed for redemption; and that on and
after the redemption date, dividends will cease to accumulate on such shares.
Any notice which is mailed as herein provided shall be conclusively
presumed to have been duly given, whether or not a holder of the Convertible
Preferred Stock receives such notice; and failure so to give such notice, or any
defect in such notice, to the holders of any shares designated for redemption
shall not affect the validity of the proceedings for the redemption of any other
shares of Convertible Preferred Stock. On or after the date fixed for
redemption as stated in such notice, each holder of the shares called for
redemption (other than shares which have been duly surrendered for conversion at
or before the close of business on the date fixed for redemption) shall
surrender the certificate or certificates evidencing such shares to the
Corporation at the place designated in such notice and shall thereupon be
entitled to receive payment of the Redemption Price. If fewer than all the
shares represented by any such surrendered certificate or certificates are
redeemed, a new certificate shall be issued representing the unredeemed shares.
If, on the date fixed for redemption, funds necessary for the redemption shall
be available therefor and shall have been irrevocably deposited or set aside,
then, notwithstanding that the certificates evidencing any shares so called for
redemption shall not have been surrendered, the dividends with respect to the
shares so called shall cease to accumulate on and after the date fixed for
redemption, such shares shall no longer be deemed outstanding, the holders
thereof shall cease to be shareholders, and all rights whatsoever with respect
to such shares (except the right of the holders thereof to receive the
Redemption Price without interest upon surrender of their certificates) shall
terminate.
(d) CONVERTIBLE PREFERRED STOCK NOT REDEEMABLE AT OPTION OF HOLDERS OR
EXCHANGEABLE; NO SINKING FUND. The Convertible Preferred Stock shall not be
redeemable upon the request of holders thereof or exchangeable for other capital
stock or indebtedness of the Corporation or other property. The shares of
Convertible Preferred Stock shall not be subject to the operation of a purchase,
retirement or sinking fund, except as specifically provided in Section 6(b)
hereof with respect to the continuing obligation to redeem the Convertible
Preferred Stock after the Mandatory Redemption Date.
7. CONVERSION
(a) GENERAL. Holders of Convertible Preferred Stock may, at their option
upon surrender of the certificates therefor, convert any or all of their shares
of Convertible Preferred Stock into fully paid and nonassessable shares of
Common Stock (and such other securities and property as they may be entitled to,
as
7
<PAGE>
hereinafter provided) at any time after issuance thereof; provided, that such
conversion right shall expire at the close of business on the date five business
days before the date, if any, fixed for the redemption of Convertible Preferred
Stock in any notice of redemption given pursuant to Section 6 hereof if there is
no default in payment of the Redemption Price.
Each share of Convertible Preferred Stock shall be convertible at the
office of any transfer agent for the Convertible Preferred Stock, and at such
other office or offices, if any, as the Board of Directors may designate, into
the number of shares of Common Stock obtained by dividing (i) an amount equal to
$1,000 plus any Accrued Dividend Conversion Credit (as hereinafter defined) that
the Corporation does not at its election pay in cash at or before the time of
conversion, by (ii) the conversion price computed as hereinafter set forth (the
"Conversion Price") in effect at the time of conversion. The "Accrued Dividend
Conversion Credit" with respect to a share of Convertible Preferred Stock is the
amount of dividends accumulated and unpaid on such share, whether or not earned
or declared, if (but only if) either (i) conversion of such share occurs after a
notice of optional redemption has been given by the Corporation pursuant to
Section 6(a) hereof, or (ii) dividends on the Convertible Preferred Stock are in
arrears in an amount equal to at least four quarterly dividends (whether or not
consecutive). Upon conversion, no adjustment, credit or payment shall be made
in respect of accumulated and unpaid dividends on the Convertible Preferred
Stock surrendered for conversion, except as specifically provided in this
paragraph with respect to the Accrued Dividend Conversion Credit.
The initial Conversion Price is $13.25 per share. The Conversion Price and
shares of Common Stock (and other securities or property) to which a holder of
Convertible Preferred Stock may be entitled upon conversion are subject to
adjustment from time to time as hereinafter provided.
The right of holders of Convertible Preferred Stock to convert their shares
shall be exercised by surrendering for such purpose to the Corporation or its
agent, as provided above, certificates representing shares to be converted, duly
endorsed in blank or accompanied by proper instruments of transfer. The
Corporation shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issue and delivery of Common Stock or other
securities or property upon conversion of Convertible Preferred Stock in a name
other than that of the holder of the shares of Convertible Preferred Stock being
converted, nor shall the Corporation be required to issue or deliver any such
shares or other securities or property unless and until the person or persons
requesting the issuance thereof shall have paid to
8
<PAGE>
the Corporation the amount of any such tax or shall have established to the
satisfaction of the Corporation that any such tax has been paid.
A number of shares of the authorized but unissued Common Stock sufficient
to provide for the conversion of the Convertible Preferred Stock outstanding
upon the basis hereinbefore provided shall at all times be reserved by the
Corporation, free from preemptive rights, for such conversion, subject to the
provisions of the next paragraph. If the Corporation shall issue any securities
or make any change in its capital structure which would change the number of
shares of Common Stock into which each share of the Convertible Preferred Stock
shall be convertible as herein provided, the Corporation shall at the same time
also make proper provision so that thereafter there shall be a sufficient number
of shares of Common Stock authorized and reserved, free from preemptive rights,
for conversion of the outstanding Convertible Preferred Stock on the new basis.
The Corporation shall comply with all securities laws regulating the offer and
delivery of shares of Common Stock upon conversion of the Convertible Preferred
Stock and shall use its best efforts to list such shares on each national
securities exchange on which the Common Stock is listed or to have such shares
admitted for quotation on the NASDAQ National Market if the Common Stock is
admitted for quotation thereon.
Upon the surrender of certificates representing shares of Convertible
Preferred Stock to be converted, duly endorsed or accompanied by proper
instruments of transfer as provided above, the person converting such shares
shall be deemed to be the holder of record of the Common Stock issuable upon
such conversion, and all rights with respect to the shares surrendered shall
forthwith terminate except the right to receive the Common Stock or other
securities, cash or other assets as herein provided.
No fractional shares of Common Stock shall be issued upon conversion of
Convertible Preferred Stock but, in lieu of any fraction of a share of Common
Stock which would otherwise be issuable in respect of the aggregate number of
such shares surrendered for conversion at one time by the same holder, the
Corporation shall pay in cash an amount equal to the product of (a) the Closing
Price (as defined in Section 6 hereof) of a share of Common Stock on the last
trading day before the conversion date and (b) such fraction of a share.
(b) ADJUSTMENT TO CONVERSION PRICE AND RELATED MATTERS. The Conversion
Price and shares of Common Stock (and other securities or property) to which a
holder of Convertible Preferred Stock may be entitled upon conversion are
subject to adjustment from time to time as follows:
9
<PAGE>
(i) DIVIDENDS. In case the Corporation shall declare a dividend upon
its shares of Common Stock payable otherwise than in cash out of earnings or
surplus (including a dividend payable in shares of Common Stock or obligations
or shares of stock of the Corporation which are convertible into, or
exchangeable for, Common Stock or other shares of capital stock of the
Corporation ("Convertible Securities") or rights or options to purchase
Convertible Securities), then thereafter each holder of shares of Convertible
Preferred Stock upon the conversion thereof will be entitled to receive the
number of shares of Common Stock into which such Convertible Preferred Stock
shall be converted and, in addition and without payment therefor, the cash,
stock or other securities and other property (including Common Stock and
Convertible Securities) which such holder would have received by way of
dividends or distributions (otherwise than out of earnings or surplus) if (A)
continuously since the record date for any such dividend or distribution such
holder had been the record holder of the number of shares of Common Stock into
which such shares of Convertible Preferred Stock shall be convertible and (B)
continuously since such holder became the record holder of such shares of
Preferred Stock such holder had retained all dividends or distributions in stock
or securities or Convertible Securities payable in respect of such Common Stock
or in respect of any stock or securities paid as dividends or distributions and
originating directly or indirectly from such Common Stock. For the purposes of
the foregoing, a dividend or distribution other than in cash shall be considered
payable out of earnings or earned surplus only to the extent that such earnings
or earned surplus are charged an amount equal to the fair value of such dividend
or distribution as determined by the Board of Directors of the Corporation.
(ii) SUBDIVISIONS AND COMBINATIONS. In case the Corporation shall at
any time subdivide or split its outstanding shares of Common Stock into a
greater number of shares, the Conversion Price in effect immediately prior to
such subdivision or split shall be proportionately reduced, and conversely, in
case the outstanding shares of Common Stock of the corporation shall be combined
into a smaller number of shares, the Conversion Price in effect immediately
prior to such combination shall be proportionately increased.
(iii) REORGANIZATIONS. In case any capital reorganization or
reclassification of the capital stock of the Corporation, or merger or
consolidation of the Corporation with another corporation, or the sale of all or
substantially all of its assets to another corporation shall be effected in such
a way that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for shares of Common Stock,
then, as a condition of such reorganization, reclassification, consolidation,
merger or sale (collectively, a "Reorganization"), and subject to the deemed
liquidation provisions of Section 5
10
<PAGE>
hereof, lawful and adequate provision shall be made whereby the holders of the
Convertible Preferred Stock shall thereafter have the right to receive, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock of the corporation immediately theretofore receivable
upon the conversion of the Convertible Preferred Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of Common Stock equal to the number of shares
of Common Stock immediately theretofore receivable upon the conversion of the
Convertible Preferred Stock had such Reorganization not taken place, plus all
dividends unpaid and accumulated or accrued thereon to the date of such
Reorganization, and in any such case appropriate provision shall be made with
respect to the rights and interests of the holders of the Convertible Preferred
Stock to the end that the provisions hereof (including without limitation
provisions for adjustments of the Conversion Price and of the number of shares
receivable upon the conversion of the Convertible Preferred Stock) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter receivable upon the conversion of the
Convertible Preferred Stock. The Corporation shall not effect any such
Reorganization unless prior to the consummation thereof the surviving
corporation (if other than this Corporation), the corporation resulting from
such consolidation or the corporation purchasing such assets shall assume by
written instrument executed and mailed to the registered holders of the
Convertible Preferred Stock at the last address of such holders appearing on the
books of the Corporation, the obligation to deliver to such holders such shares
of stock, securities or assets as, in accordance with the foregoing provisions,
such holders may be entitled to receive.
(iv) ISSUANCE OF SHARES OR RIGHTS TO PURCHASE SHARES. Except for
issuance or sale of any shares of Common Stock or Convertible Securities or any
right or option to purchase Common Stock or Convertible Securities (A) in an
Excluded Compensatory Transaction (as hereinafter defined) or (B) pursuant to
any shareholder rights plan, if and whenever the Corporation shall issue or sell
any shares of its Common Stock or Convertible Securities or any right or option
to purchase Common Stock or Convertible Securities for a consideration per share
(in the case of the sale of any rights, options or Convertible Securities, the
amount, if any, payable upon the exercise or conversion of such right, option or
Convertible Security for each share of Common Stock receivable thereby shall be
included in determining such consideration per share) less than the Conversion
Price in effect immediately prior to the time of such issuance or sale, then,
forthwith upon such issuance or sale, the Conversion Price shall be reduced to
the price (calculated to the nearest tenth of a cent) determined by dividing (A)
an amount equal to the sum of (x) the number of shares of Common Stock
outstanding immediately prior to such
11
<PAGE>
issuance or sale multiplied by the then existing Conversion Price to be
adjusted, and (y) the consideration, if any, received by the corporation upon
such issuance or sale, by (B) an amount equal to the sum of (x) the number of
shares of Common Stock outstanding immediately prior to such issuance or sale
and (y) the number of shares of Common Stock thus issued or sold or issuable
upon conversion of the Convertible Securities (or upon exercise of rights or
options to purchase Common Stock or any Convertible Securities) thus issued or
sold. Solely for the purposes of subclauses (A) and (B) above, the term "Common
Stock outstanding" shall include those shares of Common Stock issuable upon
conversion of outstanding shares of any series of preferred stock.
An "Excluded Compensatory Transaction" means any issuance or sale of
shares of Common Stock or Convertible Securities or any right or option to
purchase Common Stock or Convertible Securities to any employee, officer,
director or consultant of the Corporation or its affiliates pursuant to any
employee benefit plan or compensatory arrangement (a "Compensatory Transaction")
if, after giving effect to such Compensatory Transaction, the percentage derived
by dividing (AA) the number of shares of Common Stock which have been issued or
sold in all Compensatory Transactions since the date of first issue of the
Convertible Preferred Stock plus the number of shares of Common Stock issuable
upon exercise or conversion of all then outstanding Convertible Securities or
options or rights to purchase Common Stock or Convertible Securities issued or
sold in Compensatory Transactions, by (BB) the number of shares of Common Stock
then outstanding plus the number of shares of Common Stock issuable upon
exercise or conversion of all then outstanding Convertible Securities (other
than the Convertible Preferred Stock) or options or rights to purchase Common
Stock or Convertible Securities, does not exceed 23%.
(c) NOTICE REGARDING CONVERSION PRICE ADJUSTMENT. Upon any adjustment of
the Conversion Price then and in each such case the Corporation shall give
written notice thereof, by first-class mail, postage prepaid, addressed to the
registered holders of the Convertible Preferred Stock at the addresses of such
holders as shown on the books of the Corporation, which notice shall state the
Conversion Price resulting from such adjustment and the increase or decrease, if
any, in the number of shares receivable at such price upon the conversion of the
Convertible Preferred Stock, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
12
<PAGE>
(d) OTHER NOTICES. In case at any time:
(i) the Corporation shall pay any dividend payable in stock upon its
Common Stock or make any distribution (other than regular cash dividends) to the
holders of its Common Stock;
(ii) the Corporation shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or other
rights;
(iii) there shall be any capital reorganization, reclassification of
the capital stock of the Corporation, or merger or consolidation of the
Corporation with, or sale of all or substantially all of its assets to, another
corporation;
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation; or
(v) the Corporation shall declare any cash dividend on its Common
Stock at a rate in excess of the rate of the last cash dividend theretofore
paid;
then, in any one or more of such cases (such events being herein referred to as
"Notice Events"), the Corporation shall give written notice, by first-class
mail, postage prepaid, addressed to the holders of the Convertible Preferred
Stock at the addresses of such holders as shown on the books of the corporation,
of the date on which (A) the books of the corporation shall close or a record
shall be taken for such dividend, distribution or subscription rights, or (B)
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up shall take place, as the case may be. Such notice
shall also specify the date as of which the holders of Common Stock of record
shall participate in such dividend, distribution or subscription rights, or
shall be entitled to exchange their shares of Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the case
may be. Such written notice shall be given at least 20 days prior to the Notice
Event in question and not less than 20 days prior to the record date or the date
on which the Corporation's transfer books are closed in respect thereto.
SECTION 8. VOTING RIGHTS
(a) GENERAL. Each holder of Convertible Preferred Stock shall have one
vote on all matters submitted to the shareholders of the Corporation for each
share of Common Stock which such holder of Convertible Preferred Stock would be
entitled
13
<PAGE>
to receive upon the conversion of his Convertible Preferred Stock pursuant to
the provisions of Section 7 hereof (without including, solely for purposes of
calculating votes under this Section 8, any Accrued Dividend Conversion Credit
(as defined in Section 7 hereof)) and shall vote on such matters as one class
with the holders of Common Stock of the Corporation. In addition, each holder
of Convertible Preferred Stock shall have the special voting rights which are
described in Sections 8(b) and 8(c) hereof.
(b) SPECIAL RIGHT TO ELECT DIRECTOR. Whenever either (i) dividends on the
Convertible Preferred Stock shall be in arrears in an amount equal to at least
four quarterly dividends (whether or not consecutive) or (ii) the Corporation
fails, for any reason, to make a mandatory redemption required under Section
6(b) hereof (whether or not there are funds legally available therefore), the
holders of the Convertible Preferred Stock (voting separately as a single class
with all other affected classes or series of Parity Dividend Stock upon which
like voting rights have been conferred and are then exercisable) will be
entitled to vote for and elect one director (in addition to any director of the
Corporation designated by the holders of Convertible Preferred Stock for
nomination pursuant to contractual right and elected by the holders of capital
stock other than pursuant to this Section 8(b)). Such right of the holders of
Convertible Preferred Stock to vote for the election of such a director may be
exercised at any annual meeting or at any special meeting called for such
purpose as hereinafter provided or at any adjournment thereof, until both (i)
dividends on the Convertible Preferred Stock are no longer in arrears in an
amount equal to at least four quarterly dividends and (ii) all mandatory
redemptions required under Section 6(b) hereof have been made, at which time the
term of office of the director so elected pursuant to this Section 8(b) shall
terminate automatically (subject to revesting in the event of each and every
subsequent default of the character specified in the preceding sentence and to
any continuing rights of holders of such Parity Dividend Stock). So long as
such right to vote continues, the Secretary of the Corporation shall call, upon
the written request of the holders of record of at least 10% of the outstanding
shares of Convertible Preferred Stock addressed to him or her at the principal
office of the Corporation or, if such a request is not made, upon his or her own
motion, a special meeting of the holders of such shares (and of such Parity
Dividend
14
<PAGE>
Stock, if any) for the election of such director, as provided herein. Such
meeting shall be held not less than 45 or more than 90 days after the accrual of
such right, at the place and upon the notice provided by law and in the by-laws
of the Corporation for the holding of meetings of shareholders. No such special
meeting or adjournment thereof shall be held on a date less than 30 days before
an annual meeting of shareholders or any special meeting in lieu thereof;
provided, that at such annual meeting appropriate provisions are made to allow
the holders of the Convertible Preferred Stock (and of such Parity Dividend
Stock, if any) to exercise such right at such meeting. If at any such annual or
special meeting or any adjournment thereof the holders of a majority of the then
outstanding shares of Convertible Preferred Stock (and of such Parity Dividend
Stock, if any) entitled to vote in such election shall be present or represented
by proxy, then the authorized number of directors of the Corporation shall be
increased if necessary, and the holders of Convertible Preferred Stock (voting
separately as a single class with all such Parity Dividend Stock, if any) shall
be entitled to elect such director. Any director so elected shall serve until
the next annual meeting or until his or her successor shall be elected and shall
qualify, unless the term of office of the person so elected as director shall
have terminated by virtue of the payment of dividends in arrears or the
effectuation of mandatory redemption as described above. If the director so
elected by the holders of Convertible Preferred Stock (and of such Parity
Dividend Stock, if any) shall cease to serve as director before his or her term
shall expire, the holders of Convertible Preferred Stock (and of such Parity
Dividend Stock, if any) then outstanding and entitled to vote for such director
may, at a special meeting of such holders called as provided above, elect a
successor to hold office for the unexpired term of the director. This Section
8(b) shall entitle holders of Convertible Preferred Stock to elect only one
director to serve on the Board of Directors of the Corporation at a time, even
if both triggering conditions described in the first sentence of this Section
8(b) are occurring simultaneously.
(c) ADDITIONAL SPECIAL VOTING RIGHTS. Without the consent or affirmative
vote of the holders of at least a majority of the outstanding shares of
Convertible Preferred Stock, voting separately as a class, the Corporation shall
not:
(i) authorize or issue any (A) additional shares of Convertible
Preferred Stock or (B) shares of stock having priority over Convertible
Preferred Stock or ranking on a parity therewith as to the payment of dividends
or as to the payment or distribution of assets upon the liquidation, dissolution
or winding up, voluntary or involuntary, of the Corporation; or
(ii) alter or amend the rights or preferences of the Convertible
Preferred Stock as stated in this Certificate of Designations.
SECTION 9. OUTSTANDING SHARES. For purposes of this Certificate of
Designations, all shares of Convertible Preferred Stock shall be deemed
outstanding except for (a) shares of Convertible Preferred Stock held of record
or beneficially by the Corporation or any subsidiary of the Corporation; (b)
from the date of surrender of certificates representing Convertible Preferred
Stock for conversion pursuant to Section 7, all shares of Convertible Preferred
Stock which have been converted into Common Stock or other securities or
property pursuant to Section 7; and (c) from
15
<PAGE>
the date fixed for redemption pursuant to Section 6, all shares of Convertible
Preferred Stock which have been called for redemption, provided that funds
necessary for such redemption are available therefor and have been irrevocably
deposited or set aside for such purpose.
SECTION 10. STATUS OF CONVERTIBLE PREFERRED STOCK UPON RETIREMENT. Shares
of Convertible Preferred Stock which are acquired or redeemed by the Corporation
or converted pursuant to Section 7 shall be retired pursuant to the Delaware
General Corporation Law, Section 243, or any successor provision, and thereupon
shall return to the status of authorized and unissued shares of Preferred Stock
of the Corporation without designation as to series. Upon the acquisition or
redemption by the Corporation or conversion pursuant to Section 7 of all
outstanding shares of Convertible Preferred stock, all provisions of this
Certificate of Designations shall cease to be of further effect. Upon the
occurrence of such event, the Board of Directors of the Corporation shall have
the power, pursuant to the Delaware General Corporation Law, Section 151(g), or
any successor provision and without shareholder action, to cause this
Certificate of Designations to be eliminated from the Corporation's Certificate
of Incorporation.
IN WITNESS WHEREOF, Crop Growers Corporation has caused this certificate
to be signed by Lawrence T. Martinez, its Chief Executive Officer, and
attested by David E. Hill, its Secretary, this 9th day of July, 1996.
CROP GROWERS CORPORATION
By /s/ Lawrence T. Martinez
------------------------------
Lawrence T. Martinez
Chief Executive Officer
Attest:
By /s/ David E. Hill
-----------------------------
David E. Hill
Secretary
16
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<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
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<SECURITIES> 9,960,000
<RECEIVABLES> 260,479,000
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0
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<INCOME-TAX> 1,544,000
<INCOME-CONTINUING> 2,386,844
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,387,000
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
