<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 SEPTEMBER 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.)
10895 LOWELL, SUITE 300
OVERLAND PARK, KANSAS 66210
(Address of principal executive offices) (zip code)
(913) 338-7800
(Registrant's telephone number, including area code)
201 CROP GROWERS DRIVE, GREAT FALLS, MONTANA, 59401
(Former name, former address and former fiscal year,
if changed since last report)
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 November 1,
1996 was 7,994,251 shares.
<PAGE>
CROP GROWERS CORPORATION
FORM 10-Q
Quarter ended September 30, 1996
INDEX
Page
-----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996
(unaudited) and December 31, 1995 3
Consolidated Statements of Income (Loss) (unaudited) for the
Three and Nine Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 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 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CROP GROWERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
(UNAUDITED)
ASSETS ----------- ------------
Investments:
Fixed maturities, held to maturity $ 2,309,335 $ 2,311,177
Fixed maturities, available for sale 5,860,577 5,838,391
Equity securities, available for sale 1,923,613 1,757,540
------------ ------------
Total investments 10,093,525 9,907,108
Cash and cash equivalents 4,136,565 6,980,570
Premiums receivable, net 220,058,231 73,870,654
Prepaids and other assets 12,996,836 8,556,765
Reinsurance balances receivable 109,692,949 31,779,006
Property and equipment, net 5,363,711 11,687,066
Intangible assets, net 8,304,249 9,264,662
------------ ------------
$370,646,066 152,045,831
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Premiums and commissions payable $ 79,635,400 $23,572,783
Accounts payable and other liabilities 8,577,179 8,183,036
Loss reserves 108,911,186 21,726,157
Reinsurance balances payable 108,961,418 17,787,552
Note payable to bank 7,580,000 32,245,539
Long-term debt 3,393,299 4,188,540
------------ ------------
317,058,482 107,703,607
Redeemable preferred stock 10,000,000 --
Stockholders' equity:
Common stock (par value $.01):
40,000,000 shares authorized;
8,006,251 and 8,172,581 shares issued and
outstanding at September 30, 1996 and
December 31, 1995, respectively 80,063 81,726
Paid-in capital 36,884,866 38,244,567
Retained earnings 6,427,549 5,881,973
Unrealized appreciation of fixed maturity
and equity investments, net of taxes 232,606 208,958
Unearned compensation (37,500) (75,000)
------------ ------------
Total stockholders' equity 43,587,584 44,342,224
Contingencies
------------ ------------
$370,646,066 $152,045,831
------------ ------------
------------ ------------
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Service fees $17,419,027 $16,492,215 $ 96,737,736 $79,069,394
Software and hardware sales 184,209 62,845 1,117,015 702,154
Premiums earned and other income 422,143 46,325 2,850,640 381,136
Investment income 363,571 669,079 1,077,882 1,383,350
---------- ---------- ---------- ----------
Total revenues 18,388,950 17,270,464 101,783,273 81,536,034
Expenses:
Agent commissions and other direct costs 6,928,570 6,938,947 62,255,866 49,887,534
Cost of software and hardware sold 166,172 82,764 878,524 100,564
Losses incurred and other expenses 31,387 (3,219,306) 2,415,879 (2,871,826)
General and administrative expenses 7,369,876 6,798,317 22,927,862 17,502,945
Restructuring and non-core expenses 4,791,404 -- 7,438,106 --
Depreciation expense 432,082 310,972 1,302,368 876,301
Amortization expense 382,413 234,026 1,216,142 663,292
Interest expense 251,077 276,121 1,381,826 791,077
---------- ---------- ---------- ----------
Total expenses 20,352,981 11,421,841 99,816,573 66,949,887
---------- ---------- ---------- ----------
Income (loss) before income taxes (1,964,031) 5,848,623 1,966,700 14,586,147
Income tax benefit (expense) 662,649 (2,416,370) (881,237) (5,764,556)
---------- ---------- ---------- ----------
Net income (loss) $(1,301,382) $ 3,432,253 $ 1,085,463 $ 8,821,591
Redeemable preferred stock dividend $ (113,889) $ -- $ (113,889) $ --
---------- ---------- ---------- ----------
Net income (loss) attributable to
common stock $(1,415,271) $ 3,432,253 $ 971,574 $ 8,821,591
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) per common share $ (.17) $ .41 $ .12 $ 1.06
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares
outstanding 8,150,251 8,351,239 8,251,664 8,358,225
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
---------- ----------
<S> <C> <C>
Operating activities:
Net income $ 1,085,463 $ 8,821,591
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation 1,302,368 876,301
Amortization 1,216,142 663,292
Gain on sale of securities - available for sale (61,736) (426,879)
Other changes:
Premiums receivable (146,187,577) (146,026,044)
Premiums and commissions payable 38,208,102 48,889,840
Accounts payable and other liabilities 376,005 6,798,349
Loss reserves 87,185,029 64,987,281
Reinsurance balances receivable (77,913,943) (53,834,108)
Reinsurance balances payable 91,173,866 58,959,982
Other 1,982,074 435,419
------------- ------------
Net cash used by operating activities (330,207) (9,854,976)
Investing activities:
Decrease in company financed premiums 17,854,515 24,780,160
Purchases of equity securities - available for sale (1,177,987) --
Purchases of fixed maturity securities -
available for sale (214,612) (10,047,852)
Proceeds from sale of equity securities -
available for sale 1,186,525 --
Proceeds from sale and maturities of fixed
maturity securities - available for sale 115,000 19,131,051
Acquisition of Dawson, net of cash received -- (5,571,421)
Capitalization of intangible assets, including
acquisitions of businesses (391,964) (6,432,132)
Proceeds from sale of property and equipment 166,975 --
Purchases of property and equipment (2,043,219) (4,713,996)
------------ -----------
Net cash provided by investing activities 15,495,233 17,145,810
Financing activities:
Net repayments of note payable to bank (24,665,539) (13,052,000)
Proceeds from issuance of long-term debt 30,903 4,120,937
Issuance of redeemable preferred stock 10,000,000 --
Redeemable preferred stock issuance costs (647,000) --
Payment of dividend on redeemable preferred stock (113,889) --
Repayments on long-term debt (826,144) (696,525)
Repurchase of common stock (1,801,762) --
Issuance of common stock 14,400 284,850
------------ -----------
Net cash used by financing activities (18,009,031) (9,342,738)
------------ -----------
Net decrease in cash and cash equivalents (2,844,005) (2,051,904)
Cash and cash equivalents, beginning of year 6,980,570 2,975,363
------------- ------------
Cash and cash equivalents, end of period $ 4,136,565 $ 923,459
------------- ------------
------------- ------------
</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 September 30,
1996 and December 31, 1995, and the results of its operations for the three
and nine months ended September 30, 1996 and 1995, and its cash flows for
the nine months ended September 30, 1996 and 1995.
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform to the presentation in 1996.
2. RECONCILIATION OF STOCKHOLDERS' EQUITY 1996 1995
Balance at January 1, $44,342,224 $38,668,720
Net income 1,085,463 8,821,591
Change in unrealized appreciation of
fixed maturity and equity investments,
net of taxes 23,648 371,309
Restricted stock compensation earned 37,500 37,500
Exercise of stock options 14,400 284,850
Redeemable preferred stock dividend paid (113,889) --
Issuance of common stock -- 759,500
Repurchase of common stock (1,801,762) --
----------- -----------
Balance at September 30, $43,587,584 $48,943,470
----------- -----------
----------- -----------
Included in the repurchase of common stock is the purchase of 76,000 and
68,000 shares of the Company's common stock from its former President and
Chief Executive Officer John Hemmingson and its former Executive Vice
President Gary Black, respectively. See footnote 5, "Separation
Agreements" for further discussion on the repurchase of common stock.
3. LINE OF CREDIT
The Company had two secured revolving line of credit agreements in the
amount of $35 and $15 million which matured on October 15, 1996. The $35
million facility has been extended through November 25, 1996. The $15
million facility was available solely to pay crop hail losses with
respect to policies issued, serviced or managed by or through the
company or its subsidiaries. No amounts were drawn on this line during
1996 and the Company does not anticipate needing to renew this line in
1997. The $7.6 million outstanding under the $35 million facility at
September 30, 1996 was repaid during October. Since then, the Company
has not borrowed any additional amounts under the line of credit.
Historically, the Company has utilized the line of credit during the 4th
quarter to finance premiums due to the Federal Crop Insurance Corporation
"FCIC" which have not yet been paid to the Company by the policyholder.
Under the Standard Reinsurance Agreement "SRA", 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
6
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
for such payments to the FCIC and, therefore, receives interest payments
made by policyholders on deferred premiums. The Company and Fireman's
Fund Insurance Company are currently negotiating an agreement whereby
Fireman's Fund would finance the premiums and the Company would receive a
service fee as its compensation for administering the ultimate collection of
premium payments by policy holders. The Company has and is also
discussing financing these premiums using a line of credit.
The FCIC provides an expense reimbursement advance to the Company once
the premium due from a policyholder has been calculated and accepted
by the FCIC which is in advance of when the premium is paid. The Company
also uses the line of credit to finance working capital needs prior to
receiving this advance from the FCIC. The Company generally utilizes
the line of credit for this purpose from April through September. The
Company has and is currently in the process of negotiating with lenders to
secure additional working capital financing. If the Company were unable
to secure a credit facility, it would be required to seek additional
sources of financing for its working capital needs. Such sources could
include dividends from its insurance subsidiaries, issuance of debt or
equity securities, or the sale of assets.
4. LEGAL MATTERS
INDEPENDENT COUNSEL INVESTIGATION. On May 30, 1996, the Company, 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 being conducted by the Independent Counsel
appointed to investigate matters relating to former Secretary of
Agriculture, Mike Espy. (UNITED STATES OF AMERICA V. CROP GROWERS
CORPORATION, JOHN J. HEMMINGSON, AND GARY A. BLACK (CRIMINAL ACTION NO.
96-0181 (6K))) The indictment alleges conspiracy to violate federal
election laws, false statements to a government agency, falsification of
books and records, false statements to auditors, various securities law
violations and other matters. The trial is scheduled to begin on
January 23, 1997 in federal court in Washington D.C. The Company formed
a special committee (the "Special Committee"), consisting of outside
directors of the Board of Directors, which had the authority and discretion
to take any and all appropriate actions relating to the investigation to
review matters related to the investigation. In August 1996, the
Company announced that 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 federal indictment in New
Orleans of Henry Espy, Alvarez Ferrouillet and other entities. The
charges against Mr. Hemmingson involve money laundering and other matters
being investigated by the Independent Counsel. The trial is scheduled to
begin on December 2, 1996 in federal court in New Orleans. The Company
believes that Mr. Hemmingson intends to defend the New Orleans matter
vigorously. It is not possible to predict what adverse consequences, if
any, would flow to the Company from an outcome unfavorable to Mr.
Hemmingson in that proceeding.
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 effect the
ability of the Company to participate in the MPCI program or could
result in state insurance regulatory issues. Any such result would
likely have a material adverse effect on the Company, its results of
operations, financial position and liquidity. No provision for any
liability that may result from events relating to the charges or
convictions 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
7
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
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 primarily involved
the answering of written questions and production of documents. Deposition
discovery has just commenced.
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.
5. SEPARATION AGREEMENTS
On September 23, 1996, the Company entered into separation agreements with
its former President and Chief Executive Officer John Hemmingson and its
former Executive Vice President Gary Black. These agreements terminated
the existing leave of absence agreements between the Company and each of
Messrs. Hemmingson and Black as of June 30, 1996. As part of the
arrangement, Messrs. Hemmingson and Black no longer receive any
compensation or benefits from the Company and the Company agreed to
purchase 68,000 and 64,000 shares of its common stock from Messrs.
Hemmingson and Black, respectively, at a price of $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 Messrs. Hemmingson and Black).
Additionally, the Company agreed to purchase up to an additional 8,000
and 4,000 shares of common stock monthly from each of Messrs. Hemmingson
and Black on the first day of September through January of 1997 at
prices related to the then bid and asked price of the stock.
Additionally, Mr. Hemmingson agreed 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, Messrs.
Hemmingson and Black have also agreed to 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 Messrs. Hemmingson or Black are entitled to
vote. The proxy arrangements will not be effective until receipt of
necessary insurance regulatory approvals from the state insurance
commissioners of the states in which the Company's insurance companies
are domiciled. Messrs. Hemmingson and Black will, subject to certain
conditions, be able to dispose of their shares during the period that
the proxy agreements remain in effect. Under certain circumstances,
Fireman's Fund Insurance Company has a first right of refusal on shares
sold by either Messrs. Hemmingson or Black. The proxies will 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.
At September 30, 1996, the Company had purchased 76,000 and 68,000 shares
from Messrs. Hemmingson and Black, respectively at an average price of
$9.78 per share.
8
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
6. RESTRUCTURING AND NON-CORE EXPENSES
The following is a breakdown of restructuring and non-core expenses.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1996 September 30, 1996
------------------ ------------------
<S> <C> <C>
Write down and losses on assets to be disposed
and elimination of non-core operations $ 1,654,000 $ 1,847,000
Other restructuring charges 761,000 761,000
----------- -----------
Total restructuring charges 2,415,000 2,608,000
----------- -----------
Shareholder litigation - defense costs 33,000 168,000
Independent counsel matters - defense costs 1,313,000 2,732,000
----------- -----------
Total defense costs 1,346,000 2,900,000
----------- -----------
Relocation costs 1,030,000 1,930,000
----------- -----------
Total restructuring and
non-core expenses $ 4,791,000 $ 7,438,000
----------- -----------
----------- -----------
</TABLE>
As part of the Company's consolidation efforts, the Company has recorded
write downs and losses on assets to be disposed consisting of real estate
and software mapping inventory. The Company has also recorded expenses
related to the elimination of certain business operations including
travel agency and employee leasing ventures. These amounts were written
off or down to net realizable value in the three months ended September
30, 1996. At September 30, 1996, the Company had $7.2 million recorded as
assets to be disposed which are included in prepaids and other assets.
The Company anticipates selling these assets over the next twelve months.
The Company continues to vigorously defend the Independent Counsel
indictment and the shareholder litigation. Those costs incurred in
defending these actions, including the advancement of costs under the
indemnification agreements with Messrs. Hemmingson and Black, have been
recorded as defense costs.
On March 28, 1996, the Company announced that it was relocating its
headquarters and main office to Overland Park, Kansas. Since then, the
Company has substantially completed relocation efforts and anticipates
completion of these efforts by the end of 1996.
7. ISSUANCE OF REDEEMABLE 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 on or after July 9, 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. Subsequent to
the issuance of preferred stock, the Company has 10,000,000 shares
authorized (par value $.01) and 10,000 shares issued and outstanding.
9
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD-LOOKING INFORMATION
Except for the historical information contained in this Quarterly Report on Form
10-Q, matters discussed herein may constitute forward-looking information. Such
forward-looking information reflects the Company's current best estimates
regarding future operations, but, since they are only estimates, actual results
may differ materially from such estimates.
A variety of events, most of which are outside the Company's control, cannot
be accurately predicted and may materially impact estimates of future
operations. Important among such factors are weather conditions, natural
disasters, changes in state or federal laws or regulations, price competition
impacting premium levels and agent commissions, issues related to the
indictments brought by the Independent Counsel, and general economic
conditions. In addition, and more specifically, federal regulations
governing aspects of crop insurance are frequently modified, and any such
changes may impact the Company's 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.
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.
AGENCY OPERATIONS
SERVICE FEES
The Company's agency operations revenues include service fees related to
the servicing of MPCI and crop hail insurance 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 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 1997 crop year,
beginning July 1, 1996, the expense reimbursement for buy-up coverage has been
established by the FCIC at 29%. 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), which 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 fee paid by the insured and the loss adjusting expense
reimbursement which is equal to 4.7% of an imputed premium.
The expense reimbursement level for the 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 28% and 27.5%, respectively. Because the
Company's MPCI service fees
10
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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. Prior to the 1997 crop year, the impact
of FCIC expense reimbursement level reductions on the Company's net earnings
had been minimized because the Company had 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 believes, based on
competitive factors within the industry, that it will have to absorb a
significant portion of the expense reimbursement reduction in the 1997 crop
year. For the 1998 crop year the Company will negotiate with agents
regarding reduced commissions on buy-up coverage to offset the expense
reimbursement reduction, however, there is no assurance that any reduction
will be passed through to agents as a result of competitive or other factors.
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. 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.
As a result of the Fireman's Fund alliance, the Company will no longer pay
any overwrite fees on MPCI 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
11
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
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 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.
Sales of VisAg and other mapping products have not made a
significant contribution to revenues or earnings since their introduction.
Management continues to assess the VisAg product marketing and distribution
strategy and does not expect to achieve significant profitability in its
software operations over the next nine to fifteen 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, or profit sharing, 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. 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.
For the 1996 and 1997 crop years, the Company did not retain any MPCI
premiums underwritten by its insurance companies. 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
12
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
whereby the reinsurers indemnify the Company for significantly all of the
aggregate net losses in excess of 80% of net earned premiums retained by the
Company. The reinsurers are not obligated for aggregate net losses in excess
of 180% of net earned premiums.
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. For the three and nine months ended September 30, 1996,
losses on investments in less than 50% owned companies were $138,000 and
$382,000, respectively.
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 and 1996 crop years have been adjusted to
reflect actual premiums serviced by quarter.
<TABLE>
<CAPTION>
Three months ended Three months ended Three months ended Nine months ended
March 31, June 30, September 30, September 30,
1996 1995 1996 1995 1996 1995 1996 1995
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums serviced
(in millions)
MPCI Buy-up $183.1 $126.4 $ -- $ -- $ 24.3 $ 32.6 $207.4 $159.0
Basic 34.5 28.5 -- -- 5.8 6.6 40.3 35.1
----- ----- ----- ----- ----- ----- ----- -----
Total $217.6 154.9 $ -- $ -- $ 30.1 $ 39.2 $247.7 $194.1
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
Crop Hail $ -- $ -- $ 76.4 $ 63.3 $ 6.7 $ 6.8 $ 83.1 $ 70.1
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
</TABLE>
13
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
AGENCY OPERATIONS. Service fees were $17.4 million for the three months
ended September 30, 1996 compared to $16.5 million in the three months ended
September 30, 1995. In the three months ended September 30, 1995, service
fees were reduced by $5.2 million attributed to premium estimate revisions
related to the 1995 crop year. There were no such premium estimate revisions
made in the three months ended September 30, 1996. Without giving effect to
this adjustment, service fees decreased $4.3 million for the three months
ended September 30, 1996 from the comparable period in 1995. Total MPCI
premiums serviced in the three months ended September 30, 1996 were $30.1
million as compared to $39.2 million in the three months ended September 30,
1995. The premium decrease was attributed primarily to the loss of premium
from the Kansas Farm Bureau, which is now performing its own servicing in
house, of approximately $6.4 million. Also contributing to the decrease was
the loss of of premium written by other agencies who elected to have their
premiums serviced by other insurance companies. Management believes that the
company's premiums in the fourth quarter 1996 and the first quarter 1997 will
continue to be negatively inpacted by certain factors including the
dissolution of its MPCI agreement with CNA Insurance Company "CNA." See
"Restructuring and Non-Core Expenses."
Also contributing to the decrease was the effect of the reduction of the
expense reimbursement from 31% in the 1996 crop year to 29% in the 1997 crop
year. This resulted in a reduction of approximately $500,000 in service fee
revenues on the premiums serviced in the three months ended September 30,
1996.
The Company also recorded $6.8 million in profit sharing revenue
in the three months ended September 30, 1996 as compared to $5.2 million in
the three months ended September 30, 1995. The increase in profit
sharing was primarily a result of increased premiums serviced in the 1996
crop year.
In addition to profit sharing, the Company also recorded excess loss
adjusting expense revenue of $702,000 in the three months ended September 30,
1996 as compared to $2.6 million in the three months ended September 30,
1995. Included in the $2.6 million of excess loss adjusting expense revenue
in the three months ended September 30, 1995 was $1.7 million of excess loss
adjusting expense revenue associated with hold harmless provisions on certain
prevented planting claims. No similar amounts have been recorded relating
to prevented planting claims in the three months ended September 30, 1996.
Agent commissions and other direct costs were $6.9 million for both the
three months ended September 30, 1996 and 1995. In the three months ended
September 30, 1995, agent commissions and other direct costs were reduced by
$2.6 million attributed to premium estimate revisions related to the 1995
crop year. Without giving effect to this adjustment, agent commissions and
other direct costs decreased by $2.6 million in the three months ended
September 30, 1996 from the comparable period in 1995. This decrease was
primarily the result of the reductions in premiums serviced in the three
months ended September 30, 1996. Also contributing to the decrease was the
elimination of the majority of the overwrite fees in the 1997 crop year.
SOFTWARE OPERATIONS. Software and hardware sales increased $121,000 to
$184,000 for the three months ended September 30, 1996 compared to $63,000 in
the three months ended September 30, 1995. Cost of software sold increased
$83,000 in the three months ended September 30, 1996 to $166,000 from $83,000
in three months ended September 30, 1995. The increases were attributed to
sales of VisAg which was introduced in December 1995, and increased sales of
mapping products.
INSURANCE OPERATIONS. During the third 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
September 30, 1996, Dawson wrote $2.3 million in crop hail premiums. These
premiums have been reflected in the accompanying financial statements
assuming an approximate 40.0% loss ratio. Dawson was not acquired until July
14, 1995, which was after most crop hail premiums were written. Virtually all
14
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
other premiums underwritten by the Company's property and casualty insurance
subsidiaries are reinsured with third party insurance companies.
Included in the three months ended September 30, 1995, was $3.2 million
in underwriting gains. In connection with the purchase of Dawson, at July
14, 1995, initial estimates were made of premiums and losses related to the
MPCI and crop hail business underwritten by Dawson prior to the acquisition.
The Company's practice is to estimate a breakeven underwriting result until
late in the third quarter, when more information is available on the
underwriting results of its premiums serviced. Subsequent to the acquisition
of Dawson, the FCIC changed the MPCI program to provide insurance companies
relief for most of the prevented planting losses, and as a result the level
of loss reserves estimated at the acquisition date was higher than the amount
ultimately necessary. This reduction of loss reserves along with other
changes in estimates made as of the acquisition date, resulted in the
business acquired having an underwriting gain.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 8.4% in the three months ended September 30, 1996 to $7.4 million from
$6.8 million in the three months ended September 30, 1995. The increase was due
primarily to increased costs incurred in servicing the year to year increase
in MPCI and crop hail premium volumes serviced by the Company. General and
administrative expenses increased $600,000 in the three months ended September
30, 1996 as compared to the same period last year, but were down $1.0 million
from the three months ended June 30, 1996. For the fourth quarter of 1996,
the Company expects general and administrative expenses to be significantly
lower than the same period last year.
RESTRUCTURING AND NON-CORE EXPENSES. As a result of managements assessment
of the Company's core operation and focus on improving the consistency of its
financial performance and improving shareholder returns, the Company has
recorded write downs and losses on assets to be disposed consisting of
real estate and software mapping. The Company has also recorded expenses
related to the elimination of certain business operations including travel
agency and employee payroll leasing ventures.
As a result of the dissolution of its MPCI agreement with CNA, the
Company is in the process of transferring or requesting agents to cancel and
rewrite MPCI policies previously written on CNA paper to Fireman's Fund, or
one of its insurance subsidiaries' paper. For other competitive factors,
including significant incentive fees being offered to agents by competitors
to induce agents to transfer their books of business, the Company has offered
incentive fees to agents to compensate them for obtaining the necessary
cancellation and rewrite forms from policyholders. In the three months ended
September 30, 1996, the Company agreed to pay approximately $200,000 in such
incentive fees. The Company expects to pay approximately $1.0 to $1.3 million
of additional incentive fees during the next six months as a part of the
cancellation and rewrite process. The Company anticipates accruing these
amounts in the fourth quarter 1996 and first quarter 1997 consistent with the
company's revenue recognition method. The Company believes these costs are a
one time expenditure and will not be incurred after the first quarter 1997.
In the three months ended September 30, 1996, the Company incurred
approximately $1.3 million in expenses, primarily legal fees, in connection
with the indictments of the Company and certain of its former officers by the
Independent Counsel appointed to investigate matters relating to former
Secretary of Agriculture, Mike Espy. The Company is currently advancing
expenses for Messrs. Hemmingson and Black pursuant to the advancement
provisions of the indemnification agreements with the Company. The Company
also incurred approximately $33,000 in the three months ended September 30,
1996 in connection with defending a shareholder class action lawsuit filed in
May 1995. The Company expects these legal expenses to continue to be
significant for the foreseeable future. See Note 4 and 6 of Notes to Unaudited
Consolidated Financial Statements.
The Company also incurred approximately $1.0 million in relocation costs as
part of the relocation of the Company's main office to Overland Park, Kansas.
The Company expects the relocation to be substantially completed by December
1996. The Company expects to offset the relocation costs through the reduction
in its workforce occurring as a part of the relocation and other administrative
cost savings over the next year.
15
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expenses increased to $815,000 in the three months ended September 30, 1996 from
$545,000 for the three months ended September 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.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
AGENCY OPERATIONS. Service fees increased 22.4% to $96.7 million for the
nine months ended September 30, 1996 compared to $79.1 million in the nine
months ended September 30, 1995. The 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 nine months ended September 30, 1996 were $207.4
million and $40.3 million, respectively, as compared to $159.0 million and
$35.1 million in the nine months ended September 30, 1995. Crop hail
premiums serviced in the nine months ended September 30, 1996 were $83.1
million as compared to $70.1 million in the nine months ended September 30,
1995.
Agent commissions and other direct costs increased 24.8% to $62.3
million for the nine months ended September 30, 1996 compared to $49.9
million for the nine months ended September 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 31.0% in the nine months ended September 30, 1996 to $22.9 million
from $17.5 million in the nine months ended September 30, 1995. The increase
was due primarily to increased costs incurred in servicing the year to year
increase in the MPCI and crop hail premium volumes serviced by the Company.
RESTRUCTURING AND NON-CORE EXPENSES. As part of managements assessment
of the Company's core operation and focus on the improvement of its financial
performance and improved shareholder returns, the Company has recorded write
downs and losses on assets to be disposed consisting of real estate and
software mapping. The Company has also recorded expenses related to the
elimination of certain business operations including travel agency and
employee payroll leasing ventures. For a discussion of incentive fees paid to
agents in connection with the cancellation/rewrite process, see the Three
Months discussion.
In the nine months ended September 30, 1996, the Company incurred
approximately $2.7 million in expenses, primarily legal fees, in connection
with the indictments of the Company and certain of its former officers by the
Independent Counsel appointed to investigate matters relating to former
Secretary of Agriculture, Mike Espy. The Company also incurred approximately
$168,000 in the nine months ended September 30, 1996 in connection with
defending a shareholder class action lawsuit filed in May 1995.
The Company also incurred approximately $1.9 million in relocation costs
as part of the relocation of the Company's main office to Overland Park,
Kansas.
16
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expenses increased to $2.5 million in the nine months ended September 30,
1996 from $1.5 million for the nine months ended September 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 74.7% to $1.4 million in the
nine months ended September 30, 1996 from $791,000 in the nine months ended
September 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
Cash flows for the Company's MPCI and crop hail businesses differ in
certain respects from cash flows associated with more traditional property
and casualty lines. MPCI premiums are generally not received from the farmer
until the covered crops have been harvested, and when received, are remitted
monthly by the Company in full to the FCIC. In the crop hail business,
premiums are generally not received until after the harvest, while losses and
other expenses are paid throughout the year.
OPERATING ACTIVITIES
Cash used by operating activities was $330,000 in the nine months ended
September 30, 1996 and $9.9 million in the nine months ended September 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. The primary reason
for cash used from operating activities in the nine months ended September
30, 1995 was a result of the extension by the FCIC of reporting deadlines for
the 1995 crop year (which delayed the Company's receipt of a portion of the
expense reimbursement payable to the Company on MPCI premiums.) There were no
such delays for the 1996 crop year.
INVESTING ACTIVITIES
Cash provided by investing activities was $15.5 million in the nine
months ended September 30, 1996 and $17.1 million in the nine months ended
September 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.
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
Cash used by financing activities was $18.0 million in the nine months
ended September 30, 1996 and $9.3 million in the nine months ended September 30,
1995. The primary uses of cash were to repay borrowings of $24.7 and $13.1
million under its lines of credit in the nine months ended September 30, 1996
and 1995, respectively. The primary source of cash in the nine months ended
September 30, 1996 was the issuance of $10.0 million of redeemable preferred
stock to Fireman's Fund, the proceeds of which were used to pay down short
term borrowings.
CAPITAL RESOURCES
The Company had two secured revolving line of credit agreements in the
amount of $35 and $15 million which matured on October 15, 1996. The $35
million facility has been extended through November 25, 1996. The $15 million
facility was available solely to pay crop hail losses with respect to
policies issued, serviced or managed by or through the company or its
subsidiaries. No amounts were drawn on this line during 1996 and the Company
does not anticipate needing to renew this line in 1997. The $7.6 million
outstanding under the $35 million facility at September 30,1996 was repaid
during October. Since then, the Company has not borrowed any additional
amounts under the line of credit.
17
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Historically, the Company had utilized the line of credit during the
fourth quarter to finance premiums due to the FCIC which have not yet been
paid to the Company by the policyholder. Under an SRA, 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. The Company and Fireman's Fund are
currently negotiating an agreement whereby Fireman's Fund would finance the
premiums and the Company would receive a service fee as its compensation for
administering the ultimate collection of premium payments by policy holders.
The Company has and is also discussing financing these premiums using a line of
credit.
The FCIC provides an expense reimbursement advance to the Company once
the premium due from a policyholder has been calculated and accepted by the
FCIC which is in advance of when the premium is paid. The Company also uses
the line of credit to finance the working capital needs prior to receiving
this advance from the FCIC. The Company generally utilizes the line of
credit for this purposes from April through September. The Company has and
is currently in the process of negotiating with lenders to secure additional
working capital financing. If the Company were unable to secure a credit
facility, it would be required to seek additional sources of financing for
its working capital needs. Such sources could include, among other things,
dividends from its insurance subsidiaries, issuance of debt or equity
securities, or the sale of assets.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 4 (Legal Matters) of the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996 and the Company's Current
Report on Form 8-K dated June 10, 1996. See also 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.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1. Separation Agreement dated September 23, 1996 between John
Hemmingson and the Company
10.2. Right of First Offer and First Refusal Agreement dated
September 23, 1996 between Fireman's Fund Insurance Company,
John Hemmingson, and the Company
10.3. Separation Agreement dated September 23, 1996 between Gary
Black and the Company
10.4. Right of First Offer and First Refusal Agreement dated
September 23, 1996 between Fireman's Fund Insurance Company,
Gary Black, and the Company
10.5. Coehlo Associates Amended Promissory Note dated May 31, 1996
(b) Reports on Form 8-K
None
19
<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
November 14, 1996 ________________________
David E. Hill
Chief Financial Officer
20
<PAGE>
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT is made and entered into the 23rd day of
September, 1996, by and between Crop Growers Corporation, a Delaware corporation
(the "Company"), and John J. Hemmingson (the "Executive"),
W I T N E S S E T H:
WHEREAS, the Executive previously served as an executive, officer and
director of the Company and was employed by the Company under an Employment
Agreement dated June 22, 1994, as amended March 29, 1996 (the "Employment
Agreement"), and an Amendment To Employment Agreement Providing For A Leave of
Absence dated on or about May 9, 1996 (the "Leave of Absence Agreement"); and
WHEREAS, the parties have negotiated a mutual consent separation and
termination of the Employment Agreement and Leave of Absence Agreement; and
WHEREAS, the parties desire to reduce to writing their agreement with
respect to the separation of the Executive from the affairs of the Company and
the termination of the Employment Agreement and the Leave of Absence Agreement;
NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual covenants and
agreements contained herein, the receipt and sufficiency of which is hereby duly
acknowledged, the Executive
<PAGE>
and the Company covenant and agree as follows:
1.0 IRREVOCABLE PROXY. Concurrently with the execution of this Separation
Agreement, the Executive will sign the Agreement Granting Irrevocable
Proxy as well as the Irrevocable Proxy which are attached hereto as
Exhibit "A" (the "Proxy Agreement") and Exhibit "B" (the "Irrevocable
Proxy") and will deliver the signed Proxy Agreement and Irrevocable
Proxy to the Great Falls, Montana, office of Dorsey & Whitney, to be
held in escrow by that law firm until receipt of necessary approvals
under the applicable insurance laws of the States of Kansas and North
Dakota. Once approved by the Insurance Commissioners of those states,
the Irrevocable Proxy and Proxy Agreement will be delivered to an
institutional Proxy Holder (the "Proxy Holder") for execution and
delivery and shall thereafter be effective. With respect to the Proxy
Agreement and the Irrevocable Proxy, the parties specifically agree
that:
a. All shares (the "Shares") of capital stock of the Company,
including common stock, owned beneficially or of record by the
Executive, including any shares or other voting securities
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that may be acquired by the Executive in the future, shall be
subject to the Proxy Agreement and the Irrevocable Proxy as set
forth therein, and the Executive shall not have any voting rights
with respect to the Shares prior to the termination of the
Irrevocable Proxy.
b. During the term of this Separation Agreement, the Executive may
not sell, gift, pledge, encumber or otherwise transfer the Shares
to a spouse, child or to any other person who is an affiliate of
the Executive or in circumstances where the Executive retains any
beneficial ownership of the Shares transferred. However, if
concurrently with such transfer, the transferee agrees in writing
that the Shares being transferred remain subject to this
Separation Agreement, the Proxy Agreement and the Irrevocable
Proxy, then the Executive may make such transfer. Nothing in
this Separation Agreement, the Proxy Agreement or the Irrevocable
Proxy, however, shall limit the right of the Executive to sell,
gift, pledge, encumber or otherwise transfer all or part of the
Shares to
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persons who are not affiliates of the Executive and with respect
to which the Executive retains no beneficial ownership, and any
Shares sold, gifted or otherwise transferred after the date
hereof to persons other than affiliates and with respect to which
the Executive retains no beneficial ownership, are expressly
excluded from the scope and application of this Separation
Agreement. The Company acknowledges that stock sales made by the
Executive pursuant to Rule 144 or Rule 144(f) promulgated under
the Securities Act of 1933, as amended, may be made without
violation of the transfer restrictions of this Section 1.0.b.
Certificate evidencing the Shares will have the following legend
affixed to them:
"The shares represented by this
certificate may not be transferred
without compliance with the transfer
restrictions contained in the Separation
Agreement dated September 23, 1996,
between the Corporation and John
Hemmingson.
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Copies of such agreement may be
obtained upon written request to
the Secretary of the Corporation."
Upon receipt from the Executive and his brokerage firm of all documentation
and information reasonably required by the Company, the Company will
promptly cause its transfer agent to remove the above legend from all
shares sold by the Executive pursuant to Rule 144 and Rule 144(f). For the
purposes of this Separation Agreement, the Proxy Agreement and the
Irrevocable Proxy, the term "beneficial ownership" shall have the meaning
set forth in Rule 13d-3(a) under the Securities and Exchange Act of 1934.
c. The costs and expenses of the Proxy Holder under the Proxy
Agreement shall be paid by the Company, up to $25,000 per twelve
(12) month period, in accordance with a fee arrangement to be
entered between the Proxy Holder and the Company. The Executive
and Gary Black shall each pay his proportionate share of any
remaining costs, and expenses of the Proxy Holder.
2.0 EMPLOYMENT AGREEMENT AND LEAVE OF ABSENCE AGREEMENT.
The Employment Agreement and the Leave of Absence
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Agreement are hereby terminated, effective as of the close of business
on June 30, 1996.
2.1 In conjunction with the termination of the Employment Agreement
and the Leave of Absence Agreement, the Executive will be
entitled to receive all compensation, benefits and reimbursements
of business expenses (in accordance with the Company's policy) to
which he was entitled under these Agreements through June 30,
1996, except as otherwise provided by Section 7.0 hereof.
Thereafter, the Executive will not be entitled to any
compensation, benefits and/or reimbursements except as noted in
Section 2.2 and 3 of this Separation Agreement. All such
expenses (which do not include any expenses under the
indemnification agreement described in section 3.0) shall have
been submitted to the Company.
2.2 The Executive shall be entitled to all post employment benefit
relationships required by law to be made available to the
terminated employees under the Employee Retirement Income
Security Act of 1974 (e.g., the Executive has certain rights
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with respect to amounts in the Company's 401(k) plan and health
benefit rights under COBRA) and under Section 6 (Stock Options)
hereof, but shall not be entitled to any other benefits under the
Employment Agreement and Leave of Absence Agreement.
2.3 The Executive covenants and agrees that for a period commencing
on June 30, 1996, and continuing for a period of six (6) months
thereafter, the Executive will not:
a. Solicit any customers who were customers of the Company
within the twelve (12) months immediately preceding June 30,
1996, for the benefit of any company or business described
in sub-part b., below; or
b. Own any part of a competitor; [i.e., a business enterprise
which competes with the Company in offering the same
products or services which in the Company's fiscal year
ended prior to the date of this Separation Agreement
generated ten percent (10%) or more of the Company's total
revenues as reflected
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in the Company's most recent annual audited financial
statements], or work on a full time, part time or consulting
basis for any corporation, partnership, sole proprietorship
or any other legal entity which is a competitor
(irrespective of the actual location of the competitor)
within the continental United States. Excepted from this
restriction is ownership of a public company as to which the
Executive owns five percent (5%) or less of the outstanding
common stock of such company.
2.4 The Executive acknowledges and accepts that the Company has
terminated its business relationship and ceased all business
dealings with the Executive, either directly or indirectly, as an
employee, director, officer, voting shareholder or consultant
with the Company and acknowledges that the Company has so
certified to the United States Department of Agriculture, Federal
Crop Insurance Corporation ("FCIC"). As such, and except as
stated otherwise in this Separation Agreement, the
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<PAGE>
Executive understands and agrees that he will not have access to
the offices of or property owned or leased by the Company (for
the purposes of this Section 2.0 of the Separation Agreement,
"Company" shall refer to Crop Growers Corporation or any of the
entities affiliated with Crop Growers Corporation) or use of or
access to any of the Company's employees, facilities, properties,
chattels, services and/or other assets. Further, the Executive
agrees that he will not have contact with any employee or
director of the Company for any purpose related to the business
of the Company. The foregoing, however, is not intended to
prohibit limited contact or communications between the Executive
and the Company (a) initiated by the Company, (b) relating to
personal affairs of the Executive, including without limitation
inquiries relating to health insurance, 401(k), stock option
matters or matters relating to this Separation Agreement or (c)
relating to the access described below in this Section. This
Section 2.4 shall terminate and be of no further
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<PAGE>
force or effect upon the expiration or termination of any period
of suspension or debarment imposed by the FCIC pursuant to 7
C.F.R. Section 3017.320(a)(i).
Notwithstanding the above restrictions, the Executive and
his counsel shall have reasonable access to the Company's
employees and to records (including the right to copy the same),
for the purpose of preparing or presenting the Executive's
position, defense or response in connection with any criminal,
civil or administrative matters involving the Executive. The
following procedures shall apply with respect to that access:
a. The Executive and his counsel shall use reasonable efforts
to access information and employees through counsel to the
Company;
b. Reasonable prior notice to review Company books and records
and to interview Company employees shall be submitted to the
Company's CEO, or his designee;
c. Company books, records or files may not be removed from the
Company's offices without the written consent of the Company
or
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<PAGE>
pursuant to a subpoena obtained by the Executive.
2.5 The Executive shall continue to be subject to all obligations
with respect to confidentiality existing prior to June 30, 1996.
3.0 INDEMNIFICATION AGREEMENT. The Indemnification Agreement dated June
22, 1994, between the Company and the Executive remains in full force
and effect and the Company will continue to advance expenses to the
Executive in accordance with the terms of the Indemnification
Agreement. The Executive or his counsel will submit requests for such
advances to the Chief Financial Officer of the Company as soon as
reasonably practical after expenses are incurred.
4.0 DISPOSAL OF SHARES. The Executive will prepare a plan to dispose of
such number of shares of the capital stock of the Company owned by the
Executive as is necessary to reduce the Executive's ownership of all
of the capital stock of the Company to less than ten percent (10%) of
all outstanding shares of the capital stock of the Company, on a fully
diluted basis, during the 24 month period ending on June 30, 1998.
For
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purposes of this Separation Agreement, the term "fully diluted basis"
means all outstanding shares together with all shares issuable upon
the conversion of all securities convertible (at that time) into the
voting securities of the Company and the exercise of all vested and
currently exercisable (at that time) outstanding warrants, options or
other rights to purchase shares of voting securities of the Company.
4.1 The Company will purchase 76,000 shares of the common stock of
the Company from the Executive at a price of $9.71667 per share,
without the deduction of any costs or commissions. The closing
of this purchase will occur upon execution and delivery of this
Separation Agreement. The purchase price will be paid to the
Executive by certified check at the closing.
4.2 If and to the extent requested by the Executive, the Company will
purchase up to 8,000 shares of the common stock of the Company
from the Executive on the last business day of each month (the
"Monthly Closing Date") during the four month period from
September 1, 1996, through December
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<PAGE>
31, 1996. The purchase price for any shares sold by the
Executive to the Company under this provision will be the average
of the closing bid and ask prices for the Company's common stock
during the thirty (30) calendar day period preceding the
applicable Monthly Closing Date. The full amount of the purchase
price will be paid by the Company by certified check on the
applicable Monthly Closing Date upon delivery by the Executive of
certificates representing the Shares being purchased. Notice by
the Executive to sell shares shall be given at least one (1)
business day prior to the Monthly Closing Date. The Company
reserves the right to postpone the purchase of such shares if the
Company reasonably believes, based upon advice of counsel, that
purchase at such time would create significant securities
concerns or issues (such as under Rules 10b-5 of 10b-6) for it,
provided that this postponement shall not relieve the Company
from its obligation to purchase shares for which purchase was
postponed under this sentence. Any
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<PAGE>
such postponed purchase shall be concluded promptly after any
such securities concerns or issues are reasonably resolved based
on advice of counsel, and the purchase price shall remain the
same as if that purchase had closed on the applicable Monthly
Closing Date.
4.3 During the 18 month period from January 1, 1997, through June 30,
1998, the Executive will sell or otherwise dispose of a
sufficient number of shares of the capital stock of the Company
so that, at the expiration of this 18 month period, the number of
shares of the capital stock of the Company beneficially owned by
the Executive will be less than ten percent (10%) of the then
outstanding shares of the capital stock of the Company, on a
fully diluted basis. During each 6 month period during this 18
month period, without the written consent of the Company, the
Executive will not dispose of more than approximately one-third
of the aggregate number of shares which the Executive must
dispose of during this 18 month period required to be disposed of
by this Section 4.3.
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<PAGE>
4.4 The Executive warrants and represents that on the date of each
closing, he will have good and marketable title to all such
shares of Company stock which the Company purchases from him
under this Section 4 and that those shares upon delivery to the
Company will be free of all liens, encumbrances, claims or other
transfer restrictions.
5.0 TERMINATION DATE. Sections 1.0 (excluding only 1.0(c)) 4.0 and 4.3 of
this Separation Agreement shall terminate and the Executive will have
no further obligations under those sections, effective as of the
earliest to occur of:
(i) The acquittal of the Executive of the criminal charges brought
against the Executive in the Indictments now pending against the
Executive in the United States District Court for the District of
Columbia, being number 96-0181 on the docket of said court and
in the United States District Court for the Eastern District of
Louisiana, being number 96-198 on the docket of said court (the
"Indictments");
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<PAGE>
(ii) The withdrawal or dismissal of those criminal charges referenced
in the Indictments (without any plea arrangement or plea bargain
entered into by the Executive); or
(iii) The expiration or termination of any period of suspension or
debarment imposed by the FCIC pursuant to 7 C.F.R. Section
3017.320(a)(i); or
(iv) Death of the Executive.
For purposes of this Separation Agreement, the earliest of the events
described in the (i) through (iv) are referred to as the "Termination
Date."
6.0 STOCK OPTIONS. All options previously granted the Executive for the
purchase of shares of common stock of the Company shall be amended,
and are hereby amended, so as to remain in effect, and continue to
vest with the passage of time, until the end of the original term of
the applicable option agreement, even though the terms of such option
agreement (or the plan under which the option is granted) may provide
for an earlier termination of the option upon the Executive ceasing to
be an employee of the Company. The Company's committee of
disinterested directors responsible for
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<PAGE>
administering the Company's plan pursuant to which the Executive's
stock options were granted has authorized the actions and amendments
contemplated by this Section 6.0.
6.1 The Executive acknowledges and understands that the provisions in
this Section 6 will disqualify any applicable incentive stock
options and make them non-incentive stock options. The Executive
agrees to pay whatever withholding taxes may be payable with
respect to the exercise of any stock option and to give
reasonable assurance thereof to the Company prior to the issuance
of any option shares.
7.0 MISCELLANEOUS OBLIGATIONS. As part of this Separation Agreement, the
Company will forgive any amounts owed by the Executive to the Company
under the note dated May 1, 1996, in the principal amount of $21,000
relating to the Company Ford Explorer automobile purchased by the
Executive, and forgive any amounts owed by the Executive to the
Company relating to Company furniture and equipment previously
provided to the Executive and
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<PAGE>
as set forth in Exhibit "C." Further, with respect to the Mercedes
automobile owned by the Executive, the Executive agrees that he is
responsible for any and all payments relating to that vehicle and the
Company agrees it has no right, title or interest in such vehicle.
Finally, Executive agrees that he will relinquish and forego all
rights to any and all payments by the Company related to any and all
accrued vacation or sick day time as of June 30, 1996.
8.0 AUTHORIZATION. The Company warrants and represents that the
execution, delivery and performance of this Separation Agreement has
been duly authorized by its Board of Directors, or any applicable
Committee(s) of the Board of Directors having responsibility for the
particular subject matter, is legally enforceable against the Company
in accordance with its terms and does not conflict with or contravene
the Company's certificate of incorporation, by-laws or any agreement
to which the Company is a party or by which the Company is bound. The
Executive warrants and represents that he has full right, power and
authority to enter into this Separation Agreement.
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<PAGE>
9.0 CONSTRUCTION. Nothing in this Separation Agreement shall be construed
or interpreted as evidence or acknowledgment by the Executive or the
Company of any wrongdoing or any impropriety of any nature.
10.0 GOVERNING LAW. This Separation Agreement shall be governed by the
laws of the State of Delaware without giving effect to the conflict of
laws provision thereof.
11.0 COUNTERPARTS. This Separation Agreement may be executed in one or
more counterparts, including by facsimile transmission, each of which
shall be considered to be an original for purposes of the signature of
this Separation Agreement.
12.0 REGULATORY APPROVAL. The parties acknowledge that should the FCIC or
another regulatory body with competent jurisdiction later require the
Company or the Executive to take actions which would require the
amendment of this Separation Agreement, the Company and the Executive
shall meet in an attempt to satisfy such requirements.
13.0 COMPLETE AGREEMENT. This Separation Agreement evidences the complete
agreement by and between the
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Executive and the Company and no modification of this Separation
Agreement save those made in writing and executed by both parties
shall be binding.
EXECUTIVE
--------------------------
JOHN J. HEMMINGSON
CROP GROWERS CORPORATION
By:
--------------------------------
Its:
-------------------------------
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RIGHT OF FIRST OFFER AND FIRST REFUSAL AGREEMENT
This Right of First Offer and First Refusal Agreement (the "AGREEMENT"),
dated as of September 23, 1996, is entered into by and among FIREMAN'S FUND
INSURANCE COMPANY, a California corporation ("FFIC"), JOHN J. HEMMINGSON, an
individual ("HEMMINGSON") and CROP GROWERS CORPORATION, a Delaware corporation
(the "COMPANY").
RECITALS
A. FFIC and the Company are parties to that certain Stock Purchase
Agreement dated as of July 10, 1996, whereby FFIC is purchasing shares of the
Company's Series A Convertible Preferred Stock (the "SHARES").
B. In fulfillment of a condition to the purchase of the Shares by FFIC,
Hemmingson desires to grant FFIC the right of first offer and first refusal to
purchase certain shares of the Company's Common Stock which might otherwise be
transferred, offered for sale or sold by Hemmingson to third parties in certain
circumstances, upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained in this
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
Section 1. DEFINITIONS
1.1 "FIRST REFUSAL STOCK" shall mean all shares of the Common Stock (as
defined below) now or hereafter beneficially owned by Hemmingson. The number of
shares of First Refusal Stock currently owned by Hemmingson, as well as all
currently outstanding options and warrants to purchase shares of First Refusal
Stock, is set forth on EXHIBIT A hereto, which Exhibit shall automatically be
amended from time to time to reflect the changes in the number of shares
beneficially owned by Hemmingson, including dispositions of Common Stock not
subject to the rights generated hereunder or dispositions which occur after
complying with the notice provisions of Section 2 herein.
1.2 "COMMON STOCK" shall mean the Company's Common Stock and shares of the
Company's Common Stock issued or issuable upon exercise of options or warrants
to purchase shares of the Company's Common Stock.
<PAGE>
Section 2. RIGHT OF FIRST OFFER AND RIGHT OF FIRST REFUSAL
2.1 RIGHT OF FIRST OFFER.
(a) Hemmingson may, if he desires to sell, transfer, assign or otherwise
dispose of any shares of First Refusal Stock to any person other than the
Company and does not have a particular transaction or a particular buyer in
mind, make a written offer (the "OFFER") to FFIC (pursuant to the terms of
Section 7.1 of this Agreement) to sell all or part of his First Refusal Stock at
a stated price (the "OFFER PRICE");
(b) If FFIC does not agree to pay the Offer Price, it must within 15 days
after it receives the Offer (the "RESPONSE DUE DATE") either state a price (in a
notice pursuant to the terms of Section 7.1 of this Agreement) at which it is
willing to purchase the shares (the "COUNTER-OFFER PRICE") or state that it is
not interested in purchasing the shares which are the subject of the Offer in a
notice pursuant to the terms of Section 7.1 of this Agreement;
(c) If Hemmingson is unwilling to accept the Counter-Offer Price,
Hemmingson shall be free for a period of 180 days after the Response Due Date to
sell the shares which are the subject of the Offer to any third party at any
price which exceeds 105% of the Counter-Offer Price free and clear of any
further obligations under Sections 2 and 3 of this Agreement;
(d) If FFIC declines to state a Counter-Offer Price, Hemmingson may for a
period of 180 days after the Response Due Date sell the shares which are the
subject of the Offer to a third party at 95% or more of the Offer Price free and
clear of any further obligations under Sections 2 and 3 of this Agreement;
(e) If FFIC does not respond by the Response Due Date to the Offer, such
silence shall be deemed the same as a statement that FFIC is unwilling to
purchase the subject shares at the Offer Price, thereby freeing Hemmingson for a
period of 180 days after the Response Date to sell the shares which are the
subject of the Offer at 95% or more of the Offer Price.
2.2 RIGHT OF FIRST REFUSAL. In the event that Hemmingson desires, at any
time, to enter into a sale, transfer, assignment or other disposition of any
shares of First Refusal Stock, or any shares of First Refusal Stock are subject
to any involuntary transfer, other than (in each case) a sale to the Company, a
sale to a third party after Hemmingson has complied with the terms of Section
2.1 above, or sales which satisfy any of the conditions in Section 2.3 below,
Hemmingson shall deliver a notice (the "NOTICE") to FFIC (with a copy to the
Company) at least twenty (20) days prior to the closing date of such sale,
pursuant to the provisions set forth in Section 7.1 of this Agreement. The
Notice shall describe in reasonable detail the proposed sale including, without
limitation, the number of shares of First Refusal Stock to be sold, the terms of
such sale, the consideration to be paid, and the name and address of each
prospective purchaser. For purposes of this Section 2.2, in the case of any
involuntary transfer of First Refusal Stock by Hemmingson (including, without
limitation, transfers as the result of any bankruptcy action), the First Refusal
Stock to be transferred shall be valued at fair market value, to be determined
by an appraiser mutually agreeable to the parties, if necessary.
2.3 EXEMPTIONS. The offer procedure and notice requirements specified in
Sections 2.1 and 2.2 and the provisions of Section 3 shall be inapplicable in
the following sales of First Refusal Stock:
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<PAGE>
(a) Any sales of First Refusal Stock in open market transactions made in
accordance with the manner of sale provisions set forth in Rule 144(f) ("RULE
144(f)") under the Securities Act of 1933, as amended from time to time (the
"SECURITIES ACT") which are within the volume limitations set forth in
Rule 144(e)(1) under the Securities Act, as amended from time to time
("RULE 144(e)(1)"), PROVIDED THAT, Hemmingson confirms to the Company in writing
concurrent with any particular sale that such sale is not part of a negotiated
transaction and Hemmingson is unaware of the identity of the prospective
purchaser;
(b) Any sales of First Refusal Stock in open market transactions made in
accordance with the manner of sale provisions set forth in Rule 144(f) in an
amount greater than the limits imposed by Rule 144(e)(1); PROVIDED THAT,
Hemmingson shall provide FFIC with a certificate at the time of the transaction,
stating that (i) such sale is not part of a negotiated transaction,
(ii) Hemmingson is unaware of the identity of the prospective purchaser, and
(iii) Hemmingson is not aware of any active purchaser of the Company's stock
whose participation in such sale would exceed the FFIC Total (defined below), or
which, when combined with shares of Common Stock beneficially owned by such
party and its affiliates, would give such party and its affiliates beneficial
ownership of a number of shares of Common Stock which is equal to or greater
than the FFIC Total;
(c) Any sales or other dispositions of First Refusal Stock in a
transaction, or a series of transactions with the same party or its affiliates,
in an amount which neither (i) exceeds the FFIC Total, nor (ii) when combined
with the shares of Common Stock beneficially owned by such party and its
affiliates, would give such party and its affiliates beneficial ownership of a
number of shares of Common Stock which is equal to or greater than the FFIC
Total; or
(d) Any transfers of First Refusal Stock to any spouse, child or immediate
family member of Hemmingson, or to a trust established for the sole benefit of
any of the foregoing or any combination of the foregoing, so long as the
recipient thereof continues to be obligated under this Agreement to the same
extent as Hemmingson is obligated.
2.4 APPLICATION OF THIS AGREEMENT TO PARTICULAR TRANSACTIONS. In
determining whether or not a particular transaction or series of transactions is
exempt under Section 2.3(c), Hemmingson shall be obligated only to conduct a
review of publicly available information with regard to the prospective buyer
and obtain a certification from the prospective buyer addressed to FFIC that the
transaction or series of transactions will not result in the prospective buyer
beneficially owning more than 754,717 shares of Common Stock, such number of
shares representing FFIC's current beneficial ownership of the Company's Common
Stock on an as-converted basis (the "FFIC TOTAL"). FFIC hereby undertakes to
notify Hemmingson promptly in the event of any change in the FFIC Total. Until
Hemmingson receives notice of such change, he is entitled to rely on information
previously given him by FFIC.
Section 3. PURCHASE RIGHT
3.1 PURCHASE OF FIRST REFUSAL STOCK.
(a) Hemmingson hereby grants FFIC the right, and FFIC shall have the
right, exercisable upon written notice to Hemmingson in accordance with Section
7.1 of this Agreement within twenty (20) days after receipt by FFIC of the
Notice, to purchase all, but not less than all, of the shares of
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<PAGE>
First Refusal Stock which are the subject of the Notice at the price and upon
the terms specified in the Notice.
(b) Whenever Hemmingson and FFIC agree to a sale of First Refusal Stock
pursuant to Section 2.1 above or FFIC exercises its right of first refusal under
Section 3.1(a) above, the closing of such purchase shall occur within fifteen
(15) days thereafter, subject to the receipt of regulatory approval, if any is
needed (including, without limitation, expiration or early termination of the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended), at the offices of the Company in Overland Park, Kansas or
at such other date or place as the parties shall mutually determine; PROVIDED,
HOWEVER, that if such required regulatory approval is not received within
fifteen (15) days after Hemmingson and FFIC agree to a sale of First Refusal
Stock, FFIC will pay simple interest to Hemmingson on the total purchase price
at a rate equivalent to the prime rate established from time to time by Bank of
America NT & SA for the period from the fifteenth day after Hemmingson and FFIC
agree to a sale until the closing of such purchase and PROVIDED FURTHER that if
such regulatory approval is not obtained prior to 90 days after Hemmingson and
FFIC agree to a sale of First Refusal Stock, Hemmingson shall, at any time
thereafter, be permitted to sell the subject shares of First Refusal Stock
without restriction, and FFIC shall pay interest to Hemmingson in the amount
described in this sentence for the period ending on such 90th day.
3.2 SUBSEQUENT SALES. The exercise or non-exercise of the rights of FFIC
under this Agreement to purchase shares of First Refusal Stock offered by
Hemmingson shall not adversely affect its rights to purchase shares of First
Refusal Stock in subsequent offerings by Hemmingson pursuant to Sections 2 and 3
of this Agreement.
3.3 MECHANICS OF SALE UNDER SECTION 2.2. With respect to transactions
covered by Section 2.2 of this Agreement, if FFIC elects not to purchase the
shares of First Refusal Stock subject to the Notice, Hemmingson may, not later
than ninety (90) days following delivery to FFIC of the Notice, consummate a
sale of the First Refusal Stock covered by the Notice on the terms and
conditions described in the Notice. Any proposed transfer on terms and
conditions materially more favorable to the proposed buyer from those described
in the Notice, as well as any subsequent proposed sale of any of the First
Refusal Stock by Hemmingson, shall again be subject to the first refusal rights
of FFIC and shall require compliance by Hemmingson with the procedures described
in Sections 2 and 3 of this Agreement.
Section 4. LEGENDS; TRANSFER PROCEDURES
4.1 LEGENDS. Each certificate representing shares of the Company now or
hereafter beneficially owned by Hemmingson shall be endorsed with the following
legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
FIRST OFFER AND FIRST REFUSAL RIGHTS AS SET FORTH IN A CERTAIN RIGHT
OF FIRST OFFER AND FIRST REFUSAL AGREEMENT DATED SEPTEMBER 23, 1996 BY
AND BETWEEN JOHN J. HEMMINGSON, FIREMAN'S FUND INSURANCE COMPANY AND
CROP GROWERS CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED
UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION."
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<PAGE>
4.2 TRANSFER PROCEDURES. Transfers of First Refusal Stock in accordance
with Sections 2.3(a) and 2.3(b) of this Agreement are subject to the procedures
set forth in that certain General Letter to Brokers, a copy of which is attached
hereto as EXHIBIT B. The Company is hereby authorized and directed to cause the
removal of the legend described in Section 4.1 and permit the transfer of all
shares of First Refusal Stock which are sold in accordance with Sections 2.3(a)
or 2.3(b) upon compliance with the applicable procedure described in Exhibit B.
Section 5. RECAPITALIZATION
In the event that, as the result of a stock split or stock dividend or
combination of shares or any other change, or exchange for other securities, by
reclassification, or recapitalization of the shares, the parties hereto shall be
entitled to new or additional or different shares of stock or securities, such
new or additional or different shares or securities shall be subject to all of
the provisions of this Agreement.
Section 6. TERMINATION OF AGREEMENT
The rights and obligations of the parties hereunder shall terminate upon
the earliest to occur of:
(a) the acquittal of Hemmingson of the criminal charges brought against
Hemmingson in the Indictments now pending against Hemmingson in the United
States District Court for the District of Columbia, being number 96-0181 on the
docket of said court and in the United States District Court for the Eastern
District of Louisiana, being number 96-198 on the docket of said court
(collectively, the "Indictments");
(b) the withdrawal or dismissal of those criminal charges referenced in
each of the Indictments (without any plea arrangement or plea bargain entered
into by Hemmingson);
(c) one year after the expiration or termination of any period of
suspension or debarment imposed on Hemmingson by the Federal Crop Insurance
Corporation pursuant to 7 C.F.R. Section 3017.320(a)(i);
(d) the death of Hemmingson;
(e) January 1, 2000;
(f) FFIC's beneficial ownership of the Company's common stock on an as-
converted basis shall fall below 5% of all outstanding shares on a fully diluted
basis; or
(g) Hemmingson's beneficial ownership of the Company's common stock shall
be 4% or less of all issued and outstanding shares of the Company's common
stock.
Section 7. MISCELLANEOUS
7.1 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, delivered via reputable
overnight courier or given by telefax with receipt verified by printout of the
transmitting machine (or otherwise confirmed in writing, in which case the
5
<PAGE>
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 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 FFIC:
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
(b) If to Hemmingson:
P.O. Box 145
Spokane, Washington
with a copy to:
Robert E. Woods, Esq.
Briggs and Morgan
2400 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
Fax: (612) 334-8650
(c) if to the Company:
Crop Growers Corporation
10895 Lowell, 3rd Floor
P.O. Box 25951
Overland Park, KS 66225-5951
Attn: Chief Executive Officer
Fax: (406) 791-9594
6
<PAGE>
with a copy to:
Jack Manning, Esq.
Dorsey & Whitney
507 Davidson Building
8 Third Street North
Great Falls, MT 59401
Fax: (406) 727-3638
7.2 ASSIGNMENT. Neither Hemmingson nor FFIC may assign its rights and
obligations under this Agreement to any party without the prior written consent
of the other party.
7.3 SEVERABILITY. In the event one or more of the provisions of this
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
7.4 AMENDMENTS AND WAIVERS. Any amendment or modification of this
Agreement shall be effective only if evidenced by a written instrument executed
by duly authorized representatives of the parties hereto. Any party may waive
its individual rights hereunder, which shall be effective only if evidenced by a
written instrument executed by a duly authorized representative of such party.
In no event shall such waiver of any rights hereunder constitute the waiver of
such rights in any future instance unless the waiver so specifies in writing.
7.5 GOVERNING LAW. This Agreement is being executed and delivered and
shall be governed by and construed in accordance with the laws of the state of
Delaware.
7.6 BEST EFFORTS. The Company agrees to use its best efforts to comply
with the terms of this agreement, to inform the parties hereto of any known
breach hereof and to assist the parties hereto in the exercise of their rights
and performance of their obligations hereof.
7.7 ATTORNEYS' FEES. If any party shall bring an action in law or equity
against any other party to enforce or interpret any of the terms, covenants and
provisions of this agreement, the prevailing party in such action shall be
entitled to reasonable attorneys' fees, which the other party hereby agrees to
pay.
7.8 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties pertaining to its subject matter and supersedes all prior
written or oral agreements and understandings of the parties with respect to
such subject matter.
7.9 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be an original but all of which together shall constitute one
instrument.
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7.10 SINGULAR AND PLURAL, ETC. Whenever the singular number is used
herein and where required by the context, the same shall include the plural, and
the neuter gender shall include the masculine and feminine genders and vice
versa.
IN WITNESS WHEREOF, the parties have executed this agreement as of the day
and year indicated above.
FFIC: FIREMAN'S FUND INSURANCE COMPANY
By ___________________________________
Name:
Title:
HEMMINGSON: ___________________________________
John J. Hemmingson
COMPANY: CROP GROWERS CORPORATION
By __________________________________
Name:
Title:
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<PAGE>
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT is made and entered into the 23rd day of
September, 1996, by and between Crop Growers Corporation, a Delaware corporation
(the "Company"), and Gary A. Black (the "Executive"),
W I T N E S S E T H:
WHEREAS, the Executive previously served as an executive, officer and
director of the Company and was employed by the Company under an Employment
Agreement dated June 22, 1994, as amended March 29, 1996 (the "Employment
Agreement"), and an Amendment To Employment Agreement Providing For A Leave of
Absence dated on or about May 9, 1996 (the "Leave of Absence Agreement"); and
WHEREAS, the parties have negotiated a mutual consent separation and
termination of the Employment Agreement and Leave of Absence Agreement; and
WHEREAS, the parties desire to reduce to writing their agreement with
respect to the separation of the Executive from the affairs of the Company and
the termination of the Employment Agreement and the Leave of Absence Agreement;
NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual covenants and
agreements contained herein, the receipt and sufficiency of which is hereby duly
acknowledged, the Executive
<PAGE>
and the Company covenant and agree as follows:
1.0 IRREVOCABLE PROXY. Concurrently with the execution of this
Separation Agreement, the Executive will sign the Agreement Granting
Irrevocable Proxy as well as the Irrevocable Proxy which are attached
hereto as Exhibit "A" (the "Proxy Agreement") and Exhibit "B" (the
"Irrevocable Proxy") and will deliver the signed Proxy Agreement and
Irrevocable Proxy to the Great Falls, Montana, office of Dorsey &
Whitney, to be held in escrow by that law firm until receipt of
necessary approvals under the applicable insurance laws of the States
of Kansas and North Dakota. Once approved by the Insurance
Commissioners of those states, the Irrevocable Proxy and Proxy
Agreement will be delivered to an institutional Proxy Holder (the
"Proxy Holder") for execution and delivery and shall thereafter be
effective. With respect to the Proxy Agreement and the Irrevocable
Proxy, the parties specifically agree that:
a. All shares (the "Shares") of capital stock of the Company,
including common stock, owned beneficially or of record by the
Executive, including any shares or other voting securities
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that may be acquired by the Executive in the future, shall be
subject to the Proxy Agreement and the Irrevocable Proxy as set
forth therein, and the Executive shall not have any voting rights
with respect to the Shares prior to the termination of the
Irrevocable Proxy.
b. During the term of this Separation Agreement, the Executive may
not sell, gift, pledge, encumber or otherwise transfer the Shares
to a spouse, child or to any other person who is an affiliate of
the Executive or in circumstances where the Executive retains any
beneficial ownership of the Shares transferred. However, if
concurrently with such transfer, the transferee agrees in writing
that the Shares being transferred remain subject to this
Separation Agreement, the Proxy Agreement and the Irrevocable
Proxy, then the Executive may make such transfer. Nothing in
this Separation Agreement, the Proxy Agreement or the Irrevocable
Proxy, however, shall limit the right of the Executive to sell,
gift, pledge, encumber or otherwise transfer all or part of the
Shares to
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<PAGE>
persons who are not affiliates of the Executive and with respect
to which the Executive retains no beneficial ownership, and any
Shares sold, gifted or otherwise transferred after the date
hereof to persons other than affiliates and with respect to which
the Executive retains no beneficial ownership, are expressly
excluded from the scope and application of this Separation
Agreement, the Proxy Agreement and the Irrevocable Proxy. The
Company acknowledges that stock sales made by the Executive
pursuant to Rule 144 or Rule 144(f) promulgated under the
Securities Act of 1933, as amended, may be made without violation
of the transfer restrictions of this Section 1.0.b. Certificate
evidencing the Shares will have the following legend affixed to
them:
"The shares represented by this certificate may not be
transferred without compliance with the transfer restrictions
contained in the Separation Agreement dated September 23, 1996,
between the
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<PAGE>
Corporation and Gary Black. Copies of such agreement may be
obtained upon written request to the Secretary of the
Corporation."
Upon receipt from the Executive and his brokerage firm of all documentation
and information reasonably required by the Company, the Company will
promptly cause its transfer agent to remove the above legend from all
shares sold by the Executive pursuant to Rule 144 and Rule 144(f). For the
purposes of this Separation Agreement, the Proxy Agreement and the
Irrevocable Proxy, the term "beneficial ownership" shall have the meaning
set forth in Rule 13d-3(a) under the Securities and Exchange Act of 1934.
c. The costs and expenses of the Proxy Holder under the Proxy
Agreement shall be paid by the Company, up to $25,000 per twelve
(12) month period, in accordance with a fee arrangement to be
entered between the Proxy Holder and the Company. The Executive
and John Hemmingson shall each pay his proportionate share of any
remaining costs and expenses of the Proxy Holder.
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<PAGE>
2.0 EMPLOYMENT AGREEMENT AND LEAVE OF ABSENCE AGREEMENT. The Employment
Agreement and the Leave of Absence Agreement are hereby terminated,
effective as of the close of business on June 30, 1996.
2.1 In conjunction with the termination of the Employment Agreement
and the Leave of Absence Agreement, the Executive will be
entitled to receive all compensation, benefits and reimbursements
of business expenses (in accordance with the Company's policy) to
which he was entitled under these Agreements through June 30,
1996, except as otherwise provided by Section 7.0 hereof.
Thereafter, the Executive will not be entitled to any
compensation, benefits and/or reimbursements except as noted in
Section 2.2 and 3 of this Separation Agreement. All such
expenses (which do not include any expenses under the
indemnification agreement described in section 3.0) have been
submitted to the Company.
2.2 The Executive shall be entitled to all post employment benefit
relationships required by law to be made available to the
terminated employees
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<PAGE>
under the Employee Retirement Income Security Act of 1974 (e.g.,
the Executive has certain rights with respect to amounts in the
Company's 401(k) plan and health benefit rights under COBRA) and
under Section 6 (Stock Options) hereof, but shall not be entitled
to any other benefits under the Employment Agreement and Leave of
Absence Agreement.
2.3 The Executive covenants and agrees that for a period commencing
on June 30, 1996, and continuing for a period of six (6) months
thereafter, the Executive will not:
a. Solicit any customers who were customers of the Company
within the twelve (12) months immediately preceding June 30,
1996, for the benefit of any company or business described
in sub-part b., below; or
b. Own any part of a competitor; [i.e., a business enterprise
which competes with the Company in offering the same
products or services which in the Company's fiscal year
ended prior to the date of this Separation
-7-
<PAGE>
Agreement generated ten percent (10%) or more of the
Company's total revenues as reflected in the Company's most
recent annual audited financial statements], or work on a
full time, part time or consulting basis for any
corporation, partnership, sole proprietorship or any other
legal entity which is a competitor (irrespective of the
actual location of the competitor) within the continental
United States. Excepted from this restriction is ownership
of a public company as to which the Executive owns five
percent (5%) or less of the outstanding common stock of such
company.
2.4 The Executive acknowledges and accepts that the Company has
terminated its business relationship and ceased all business
dealings with the Executive, either directly or indirectly, as an
employee, director, officer, voting shareholder or consultant
with the Company and acknowledges that the Company has so
certified to the United States Department of Agriculture, Federal
Crop Insurance
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<PAGE>
Corporation ("FCIC"). As such, and except as stated otherwise in
this Separation Agreement, the Executive understands and agrees
that he will not have access to the offices of or property owned
or leased by the Company (for the purposes of this Section 2.0 of
the Separation Agreement, "Company" shall refer to Crop Growers
Corporation or any of the entities affiliated with Crop Growers
Corporation) or use of or access to any of the Company's
employees, facilities, properties, chattels, services and/or
other assets. Further, the Executive agrees that he will not
have contact with any employee or director of the Company for any
purpose related to the business of the Company. The foregoing,
however, is not intended to prohibit limited contact or
communications between the Executive and the Company (a)
initiated by the Company, (b) relating to personal affairs of the
Executive, including without limitation inquiries relating to
health insurance, 401(k), stock option matters or matters
relating to this Separation Agreement or (c) relating to
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<PAGE>
the access described below in this Section. This Section 2.4
shall terminate and be of no further force or effect upon the
expiration or termination of any period of suspension or
debarment imposed by the FCIC pursuant to 7 C.F.R. Section
3017.320(a)(i).
Notwithstanding the above restrictions, the Executive and
his counsel shall have reasonable access to the Company's
employees and to records (including the right to copy the same),
for the purpose of preparing or presenting the Executive's
position, defense or response in connection with any criminal,
civil or administrative matters involving the Executive. The
following procedures shall apply with respect to that access:
a. The Executive and his counsel shall use reasonable efforts
to access information and employees through counsel to the
Company;
b. Reasonable prior notice to review Company books and records
and to interview Company employees shall be submitted to the
Company's CEO, or his designee;
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<PAGE>
c. Company books, records or files may not be removed from the
Company's offices without the written consent of the Company
or pursuant to a subpoena obtained by the Executive.
2.5 The Executive shall continue to be subject to all obligations
with respect to confidentiality existing prior to June 30, 1996.
3.0 INDEMNIFICATION AGREEMENT. The Indemnification Agreement dated June 22,
1994, between the Company and the Executive remains in full force and
effect and the Company will continue to advance expenses to the Executive
in accordance with the terms of the Indemnification Agreement. The
Executive or his counsel will submit requests for such advances to the
Chief Financial Officer of the Company as soon as reasonably practical
after expenses are incurred.
4.0 DISPOSAL OF SHARES. UNLESS ALREADY BELOW TEN PERCENT (10%), the Executive
will prepare a plan to dispose of such number of shares of the capital
stock of the Company owned by the Executive as is necessary to reduce the
Executive's ownership of all of the capital
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<PAGE>
stock of the Company to less than ten percent (10%) of all outstanding
shares of the capital stock of the Company, on a fully diluted basis,
during the 24 month period ending on June 30, 1998. For purposes of this
Separation Agreement, the term "fully diluted basis" means all outstanding
shares together with all shares issuable upon the conversion of all
securities convertible (at that time) into the voting securities of the
Company and the exercise of all vested and currently exercisable (at that
time) outstanding warrants, options or other rights to purchase shares of
voting securities of the Company.
4.1 The Company will purchase 68,000 shares of the common stock of the
Company from the Executive at a price of $9.841667 per share, without
the deduction of any costs or commissions. The closing of this
purchase will occur upon execution and delivery of this Separation
Agreement. The purchase price will be paid to the Executive by
certified check at the closing.
4.2 If and to the extent requested by the Executive, the Company will
purchase up to 4,000 shares of
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<PAGE>
the common stock of the Company from the Executive on the last
business day of each month (the "Monthly Closing Date") during the
four month period from September 1, 1996, through December 31, 1996.
The purchase price for any shares sold by the Executive to the Company
under this provision will be the average of the closing bid and ask
prices for the Company's common stock during the thirty (30) calendar
day period preceding the applicable Monthly Closing Date. The full
amount of the purchase price will be paid by the Company by certified
check on the applicable Monthly Closing Date upon delivery by the
Executive of certificates representing the Shares being purchased.
Notice by the Executive to sell shares shall be given at least one (1)
business day prior to the Monthly Closing Date. The Company reserves
the right to postpone the purchase of such shares if the Company
reasonably believes, based upon advice of counsel, that purchase at
such time would create significant securities concerns or issues (such
as under Rules
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<PAGE>
10b-5 of 10b-6) for it, provided that this postponement shall not
relieve the Company from its obligation to purchase shares for which
purchase was postponed under this sentence. Any such postponed
purchase shall be concluded promptly after any such securities
concerns or issues are reasonably resolved based on advice of counsel,
and the purchase price shall remain the same as if that purchase had
closed on the applicable Monthly Closing Date.
4.3 If after the buy back of the Shares referenced in 4.1 of this
Separation Agreement the Executive still beneficially owns more than
ten percent (10%) of the outstanding shares of the capital stock of
the Company on a fully diluted basis, then during the 18 month period
from January 1, 1997, through June 30, 1998, the Executive will sell
or otherwise dispose of a sufficient number of shares of the capital
stock of the Company so that, at the expiration of this 18 month
period, the number of shares of the capital stock of the Company
beneficially owned by the Executive will
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<PAGE>
be less than ten percent (10%) of the then outstanding shares of the
capital stock of the Company, on a fully diluted basis.
4.4 The Executive warrants and represents that on the date of each
closing, he will have good and marketable title to all such shares of
Company stock which the Company purchases from him under this Section
4 and that those shares upon delivery to the Company will be free of
all liens, encumbrances, claims or other transfer restrictions.
5.0 TERMINATION DATE. Sections 1.0 (excluding only 1.0(c)) 4.0 and 4.3 of this
Separation Agreement shall terminate and the Executive will have no further
obligations under those sections, effective as of the earliest to occur of:
(i) The acquittal of the Executive of the criminal charges brought against
the Executive in the Indictment now pending against the Executive in
the United States District Court for the District of Columbia, being
number 96-0181 on the docket of said court (the "Indictment");
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<PAGE>
(ii) The withdrawal or dismissal of those criminal charges referenced in
the Indictment (without any plea arrangement or plea bargain entered
into by the Executive); or
(iii)The expiration or termination of any period of suspension or debarment
imposed by the FCIC pursuant to 7 C.F.R. Section 3017.320(a)(i); or
(iv) Death of the Executive.
For purposes of this Separation Agreement, the earliest of the events
described in the (i) through (iv) are referred to as the "Termination
Date."
6.0 STOCK OPTIONS. All options previously granted the Executive for the
purchase of shares of common stock of the Company shall be amended, and are
hereby amended, so as to remain in effect, and continue to vest with the
passage of time, until the end of the original term of the applicable
option agreement, even though the terms of such option agreement (or the
plan under which the option is granted) may provide for an earlier
termination of the option upon the Executive ceasing to be an employee of
the Company. The Company's committee of disinterested directors
responsible for
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<PAGE>
administering the Company's plan pursuant to which the Executive's stock
options were granted has authorized the actions and amendments contemplated
by this Section 6.0.
6.1 The Executive acknowledges and understands that the provisions in this
Section 6 will disqualify any applicable incentive stock options and
make them non-incentive stock options. The Executive agrees to pay
whatever withholding taxes may be payable with respect to the exercise
of any stock option and to give reasonable assurance thereof to the
Company prior to the issuance of any option shares.
7.0 AUTHORIZATION. The Company warrants and represents that the execution,
delivery and performance of this Separation Agreement has been duly
authorized by its Board of Directors, or any applicable Committee(s) of the
Board of Directors having responsibility for the particular subject matter,
is legally enforceable against the Company in accordance with its terms and
does not conflict with or contravene the Company's
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<PAGE>
certificate of incorporation, by-laws or any agreement to which the Company
is a party or by which the Company is bound. The Executive warrants and
represents that he has full right, power and authority to enter into this
Separation Agreement.
8.0 CONSTRUCTION. Nothing in this Separation Agreement shall be construed or
interpreted as evidence or acknowledgment by the Executive or the Company
of any wrongdoing or any impropriety of any nature.
9.0 GOVERNING LAW. This Separation Agreement shall be governed by the laws of
the State of Delaware without giving effect to the conflict of laws
provision thereof.
10.0 COUNTERPARTS. This Separation Agreement may be executed in one or
more counterparts, including by facsimile transmission, each of
which shall be considered to be an original for purposes of the
signature of this Separation Agreement.
11. REGULATORY APPROVAL. The parties acknowledge that should the FCIC or
another regulatory body with competent jurisdiction later require the
Company or the Executive to take actions which would require the
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<PAGE>
amendment of this Separation Agreement, the Company and the Executive shall
meet in an attempt to satisfy such requirements.
12.0 COMPLETE AGREEMENT. This Separation Agreement evidences the complete
agreement by and between the Executive and the Company and no modification
of this Separation Agreement save those made in writing and executed by
both parties shall be binding.
EXECUTIVE
------------------------------------
GARY A. BLACK
CROP GROWERS CORPORATION
By:
---------------------------------
Its:
---------------------------------
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RIGHT OF FIRST OFFER AND FIRST REFUSAL AGREEMENT
This Right of First Offer and First Refusal Agreement (the "AGREEMENT"),
dated as of September 23, 1996, is entered into by and among FIREMAN'S FUND
INSURANCE COMPANY, a California corporation ("FFIC"), GARY A. BLACK, an
individual ("BLACK") and CROP GROWERS CORPORATION, a Delaware corporation (the
"COMPANY").
RECITALS
A. FFIC and the Company are parties to that certain Stock Purchase
Agreement dated as of July 10, 1996, whereby FFIC is purchasing shares of the
Company's Series A Convertible Preferred Stock (the "SHARES").
B. In fulfillment of a condition to the purchase of the Shares by FFIC,
Black desires to grant FFIC the right of first offer and first refusal to
purchase certain shares of the Company's Common Stock which might otherwise be
transferred, offered for sale or sold by Black to third parties in certain
circumstances, upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained in this
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
SECTION 1. DEFINITIONS
1.1 "FIRST REFUSAL STOCK" shall mean all shares of the Common Stock (as
defined below) now or hereafter beneficially owned by Black. The number of
shares of First Refusal Stock currently owned by Black, as well as all currently
outstanding options and warrants to purchase shares of First Refusal Stock, is
set forth on EXHIBIT A hereto, which Exhibit shall automatically be amended from
time to time to reflect the changes in the number of shares beneficially owned
by Black, including dispositions of Common Stock not subject to the rights
generated hereunder or dispositions which occur after complying with the notice
provisions of Section 2 herein.
1.2 "COMMON STOCK" shall mean the Company's Common Stock and shares of the
Company's Common Stock issued or issuable upon exercise of options or warrants
to purchase shares of the Company's Common Stock.
SECTION 2. RIGHT OF FIRST OFFER AND RIGHT OF FIRST REFUSAL
2.1 RIGHT OF FIRST OFFER.
(a) Black may, if he desires to sell, transfer, assign or otherwise
dispose of any shares of First Refusal Stock to any person other than the
Company and does not have a particular transaction
<PAGE>
or a particular buyer in mind, make a written offer (the "OFFER") to FFIC
(pursuant to the terms of Section 7.1 of this Agreement) to sell all or part of
his First Refusal Stock at a stated price (the "OFFER PRICE");
(b) If FFIC does not agree to pay the Offer Price, it must within 15 days
after it receives the Offer (the "RESPONSE DUE DATE") either state a price (in a
notice pursuant to the terms of Section 7.1 of this Agreement) at which it is
willing to purchase the shares (the "COUNTER-OFFER PRICE") or state that it is
not interested in purchasing the shares which are the subject of the Offer in a
notice pursuant to the terms of Section 7.1 of this Agreement;
(c) If Black is unwilling to accept the Counter-Offer Price, Black shall
be free for a period of 180 days after the Response Due Date to sell the shares
which are the subject of the Offer to any third party at any price which exceeds
105% of the Counter-Offer Price free and clear of any further obligations under
Sections 2 and 3 of this Agreement;
(d) If FFIC declines to state a Counter-Offer Price, Black may for a
period of 180 days after the Response Due Date sell the shares which are the
subject of the Offer to a third party at 95% or more of the Offer Price free and
clear of any further obligations under Sections 2 and 3 of this Agreement;
(e) If FFIC does not respond by the Response Due Date to the Offer, such
silence shall be deemed the same as a statement that FFIC is unwilling to
purchase the subject shares at the Offer Price, thereby freeing Black for a
period of 180 days after the Response Date to sell the shares which are the
subject of the Offer at 95% or more of the Offer Price.
2.2 RIGHT OF FIRST REFUSAL. In the event that Black desires, at any
time, to enter into a sale, transfer, assignment or other disposition of any
shares of First Refusal Stock, or any shares of First Refusal Stock are subject
to any involuntary transfer, other than (in each case) a sale to the Company, a
sale to a third party after Black has complied with the terms of Section 2.1
above, or sales which satisfy any of the conditions in Section 2.3 below, Black
shall deliver a notice (the "NOTICE") to FFIC (with a copy to the Company) at
least twenty (20) days prior to the closing date of such sale, pursuant to the
provisions set forth in Section 7.1 of this Agreement. The Notice shall
describe in reasonable detail the proposed sale including, without limitation,
the number of shares of First Refusal Stock to be sold, the terms of such sale,
the consideration to be paid, and the name and address of each prospective
purchaser. For purposes of this Section 2.2, in the case of any involuntary
transfer of First Refusal Stock by Black (including, without limitation,
transfers as the result of any bankruptcy action), the First Refusal Stock to be
transferred shall be valued at fair market value, to be determined by an
appraiser mutually agreeable to the parties, if necessary.
2.3 EXEMPTIONS. The offer procedure and notice requirements specified in
Sections 2.1 and 2.2 and the provisions of Section 3 shall be inapplicable in
the following sales of First Refusal Stock:
(a) Any sales of First Refusal Stock in open market transactions made in
accordance with the manner of sale provisions set forth in Rule 144(f) ("RULE
144(F)") under the Securities Act of 1933, as amended from time to time (the
"SECURITIES ACT") which are within the volume limitations set forth in
Rule 144(e)(1) under the Securities Act, as amended from time to time
("RULE 144(e)(1)"), PROVIDED THAT, Black confirms to the Company in writing
concurrent with any particular sale that
2
<PAGE>
such sale is not part of a negotiated transaction and Black is unaware of the
identity of the prospective purchaser;
(b) Any sales of First Refusal Stock in open market transactions made in
accordance with the manner of sale provisions set forth in Rule 144(f) in an
amount greater than the limits imposed by Rule 144(e)(1); PROVIDED THAT, Black
shall provide FFIC with a certificate at the time of the transaction, stating
that (i) such sale is not part of a negotiated transaction, (ii) Black is
unaware of the identity of the prospective purchaser, and (iii) Black is not
aware of any active purchaser of the Company's stock whose participation in such
sale would exceed the FFIC Total (defined below), or which, when combined with
shares of Common Stock beneficially owned by such party and its affiliates,
would give such party and its affiliates beneficial ownership of a number of
shares of Common Stock which is equal to or greater than the FFIC Total;
(c) Any sales or other dispositions of First Refusal Stock in a
transaction, or a series of transactions with the same party or its affiliates,
in an amount which neither (i) exceeds the FFIC Total, nor (ii) when combined
with the shares of Common Stock beneficially owned by such party and its
affiliates, would give such party and its affiliates beneficial ownership of a
number of shares of Common Stock which is equal to or greater than the FFIC
Total; or
(d) Any transfers of First Refusal Stock to any spouse, child or immediate
family member of Black, or to a trust established for the sole benefit of any of
the foregoing or any combination of the foregoing, so long as the recipient
thereof continues to be obligated under this Agreement to the same extent as
Black is obligated.
2.4 APPLICATION OF THIS AGREEMENT TO PARTICULAR TRANSACTIONS. In
determining whether or not a particular transaction or series of transactions is
exempt under Section 2.3(c), Black shall be obligated only to conduct a review
of publicly available information with regard to the prospective buyer and
obtain a certification from the prospective buyer addressed to FFIC that the
transaction or series of transactions will not result in the prospective buyer
beneficially owning more than 754,717 shares of Common Stock, such number of
shares representing FFIC's current beneficial ownership of the Company's Common
Stock on an as-converted basis (the "FFIC TOTAL"). FFIC hereby undertakes to
notify Black promptly in the event of any change in the FFIC Total. Until Black
receives notice of such change, he is entitled to rely on information previously
given him by FFIC.
SECTION 3. PURCHASE RIGHT
3.1 PURCHASE OF FIRST REFUSAL STOCK.
(a) Black hereby grants FFIC the right, and FFIC shall have the right,
exercisable upon written notice to Black in accordance with Section 7.1 of this
Agreement within twenty (20) days after receipt by FFIC of the Notice, to
purchase all, but not less than all, of the shares of First Refusal Stock which
are the subject of the Notice at the price and upon the terms specified in the
Notice.
(b) Whenever Black and FFIC agree to a sale of First Refusal Stock
pursuant to Section 2.1 above or FFIC exercises its right of first refusal under
Section 3.1(a) above, the closing of such purchase shall occur within fifteen
(15) days thereafter, subject to the receipt of regulatory approval, if any is
needed (including, without limitation, expiration or early termination of the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended), at
3
<PAGE>
the offices of the Company in Overland Park, Kansas or at such other date or
place as the parties shall mutually determine; PROVIDED, HOWEVER, that if such
required regulatory approval is not received within fifteen (15) days after
Black and FFIC agree to a sale of First Refusal Stock, FFIC will pay simple
interest to Black on the total purchase price at a rate equivalent to the prime
rate established from time to time by Bank of America NT & SA for the period
from the fifteenth day after Black and FFIC agree to a sale until the closing of
such purchase and PROVIDED FURTHER that if such regulatory approval is not
obtained prior to 90 days after Black and FFIC agree to a sale of First Refusal
Stock, Black shall, at any time thereafter, be permitted to sell the subject
shares of First Refusal Stock without restriction, and FFIC shall pay interest
to Black in the amount described in this sentence for the period ending on such
90th day.
3.2 SUBSEQUENT SALES. The exercise or non-exercise of the rights of FFIC
under this Agreement to purchase shares of First Refusal Stock offered by Black
shall not adversely affect its rights to purchase shares of First Refusal Stock
in subsequent offerings by Black pursuant to Sections 2 and 3 of this Agreement.
3.3 MECHANICS OF SALE UNDER SECTION 2.2. With respect to transactions
covered by Section 2.2 of this Agreement, if FFIC elects not to purchase the
shares of First Refusal Stock subject to the Notice, Black may, not later than
ninety (90) days following delivery to FFIC of the Notice, consummate a sale of
the First Refusal Stock covered by the Notice on the terms and conditions
described in the Notice. Any proposed transfer on terms and conditions
materially more favorable to the proposed buyer from those described in the
Notice, as well as any subsequent proposed sale of any of the First Refusal
Stock by Black, shall again be subject to the first refusal rights of FFIC and
shall require compliance by Black with the procedures described in Sections 2
and 3 of this Agreement.
SECTION 4. LEGENDS; TRANSFER PROCEDURES
4.1 LEGENDS. Each certificate representing shares of the Company now or
hereafter beneficially owned by Black shall be endorsed with the following
legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN FIRST OFFER AND FIRST REFUSAL RIGHTS AS SET FORTH IN
A CERTAIN RIGHT OF FIRST OFFER AND FIRST REFUSAL AGREEMENT
DATED SEPTEMBER 23, 1996 BY AND BETWEEN GARY A. BLACK,
FIREMAN'S FUND INSURANCE COMPANY AND CROP GROWERS
CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON
WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION."
4.2 TRANSFER PROCEDURES. Transfers of First Refusal Stock in accordance
with Sections 2.3(a) and 2.3(b) of this Agreement are subject to the procedures
set forth in that certain General Letter to Brokers, a copy of which is attached
hereto as EXHIBIT B. The Company is hereby authorized and directed to cause the
removal of the legend described in Section 4.1 and permit the transfer of all
shares of First Refusal Stock which are sold in accordance with Sections 2.3(a)
or 2.3(b) upon compliance with the applicable procedure described in Exhibit B.
4
<PAGE>
SECTION 5. RECAPITALIZATION
In the event that, as the result of a stock split or stock dividend or
combination of shares or any other change, or exchange for other securities, by
reclassification, or recapitalization of the shares, the parties hereto shall be
entitled to new or additional or different shares of stock or securities, such
new or additional or different shares or securities shall be subject to all of
the provisions of this Agreement.
SECTION 6. TERMINATION OF AGREEMENT
The rights and obligations of the parties hereunder shall terminate upon
the earliest to occur of:
(a) the acquittal of Black of the criminal charges brought against Black
in the Indictment now pending against Black in the United States District Court
for the District of Columbia, being number 96-0181 on the docket of said court
(the "Indictment");
(b) the withdrawal or dismissal of those criminal charges referenced in
the Indictment (without any plea arrangement or plea bargain entered into by
Black);
(c) one year after the expiration or termination of any period of
suspension or debarment imposed on Black by the Federal Crop Insurance
Corporation pursuant to 7 C.F.R. Section 3017.320(a)(i);
(d) the death of Black;
(e) January 1, 2000;
(f) FFIC's beneficial ownership of the Company's common stock on an as-
converted basis shall fall below 5% of all outstanding shares on a fully diluted
basis; or
(g) Black's beneficial ownership of the Company's common stock shall be 4%
or less of all issued and outstanding shares of the Company's common stock.
SECTION 7. MISCELLANEOUS
7.1 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, delivered via reputable
overnight courier 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 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:
5
<PAGE>
(A) If to FFIC:
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
(B) If to Black:
3325 - 15th Avenue South
Great Falls, Mt 59405
Fax: (406) 454-1245
With a copy to:
Ronald G. Vantine, Esq.
Lindquist & Vennum P.l.l.p.
4200 Ids Center
Minneapolis, Mn 55402
Fax: (612) 371-3207
(C) If to the Company:
Crop Growers Corporation
10895 Lowell, 3rd Floor
P.o. Box 25951
Overland Park, Ks 66225-5951
Attn: Chief Executive Officer
Fax: (406) 791-9594
With a copy to:
Jack Manning, Esq.
Dorsey & Whitney
507 Davidson Building
8 Third Street North
Great Falls, Mt 59401
Fax: (406) 727-3638
6
<PAGE>
7.2 ASSIGNMENT. Neither Black nor FFIC may assign its rights and
obligations under this Agreement to any party without the prior written consent
of the other party.
7.3 SEVERABILITY. In the event one or more of the provisions of this
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
7.4 AMENDMENTS AND WAIVERS. Any amendment or modification of this
Agreement shall be effective only if evidenced by a written instrument executed
by duly authorized representatives of the parties hereto. Any party may waive
its individual rights hereunder, which shall be effective only if evidenced by a
written instrument executed by a duly authorized representative of such party.
In no event shall such waiver of any rights hereunder constitute the waiver of
such rights in any future instance unless the waiver so specifies in writing.
7.5 GOVERNING LAW. This Agreement is being executed and delivered and
shall be governed by and construed in accordance with the laws of the state of
Delaware.
7.6 BEST EFFORTS. The company agrees to use its best efforts to comply
with the terms of this agreement, to inform the parties hereto of any known
breach hereof and to assist the parties hereto in the exercise of their rights
and performance of their obligations hereof.
7.7 ATTORNEYS' FEES. If any party shall bring an action in law or equity
against any other party to enforce or interpret any of the terms, covenants and
provisions of this Agreement, the prevailing party in such action shall be
entitled to reasonable attorneys' fees, which the other party hereby agrees to
pay.
7.8 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties pertaining to its subject matter and supersedes all prior
written or oral agreements and understandings of the parties with respect to
such subject matter.
7.9 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be an original but all of which together shall constitute one
instrument.
7
<PAGE>
7.10 SINGULAR AND PLURAL, ETC. Whenever the singular number is
used herein and where required by the context, the same shall include the
plural, and the neuter gender shall include the masculine and feminine genders
and vice versa.
IN WITNESS WHEREOF, THE PARTIES HAVE EXECUTED THIS AGREEMENT AS OF THE
DAY AND YEAR INDICATED ABOVE.
FFIC: FIREMAN'S FUND INSURANCE COMPANY
By ___________________________________
Name:
Title:
BLACK: ___________________________________
Gary A. Black
COMPANY: CROP GROWERS CORPORATION
By __________________________________
Name:
Title:
8
<PAGE>
AMENDMENT TO PROMISSORY NOTE
WHEREAS, COELHO ASSOCIATES LLC (the "Maker") made a Promissory Note to
the order of CROP GROWERS CORPORATION (the "Payee") dated November 17, 1995 (the
"Note"), agreeing to repay all principal amounts advanced under the Note up to
ONE MILLION DOLLARS ($1,000,000); and
WHEREAS, pursuant to the terms of the Note, the aggregate principal
amount to be advanced was never to exceed $1,000,000 at any time; and
WHEREAS, the Maker and the Payee desire to have the maximum principal
amount that may be advanced pursuant to the Note increased to $3,000,000; and
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the Maker and Payee hereby agree to amend the Note as follows:
1. The stated principal amount of the Note is amended to read
$3,000,000.
2. Paragraph one of the Note shall be amended to read in its
entirety as follows:
"FOR VALUE RECEIVED, the undersigned, COELHO ASSOCIATES LLC (the
"Maker"), hereby promises to pay to the order of CROP GROWERS CORPORATION
(the "Payee", which term includes any subsequent holder hereof) at Great
Falls, Montana or at such other place as the Payee may from time to time
hereafter designate to the Maker in writing the principal sum of Three
MILLION DOLLARS ($3,000,000) or, if less, the unpaid principal of all
amounts advanced hereunder by the Payee to the Maker."
3. The first sentence in paragraph two of the Note is hereby amended
to read in its entirety as follows:
"Until the final maturity of this Note, the Maker may from time to
time request an advance (an "Advance") hereunder and repay and, upon
repayment, reborrow, provided that the aggregate unpaid principal amount of
all Advances hereunder shall never exceed $3,000,000 at any time."
All remaining terms and conditions of the Note not amended hereby
shall remain in effect and are incorporated by reference as if fully set forth
herein.
DATED as of May 30, 1996.
COELHO ASSOCIATES LLC
_________________________
Name:
Title:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,137,000
<SECURITIES> 10,093,000
<RECEIVABLES> 329,751,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 373,587,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 370,646,000
<CURRENT-LIABILITIES> 306,085,000
<BONDS> 20,973,000
0
0
<COMMON> 80,000
<OTHER-SE> 43,508,000
<TOTAL-LIABILITY-AND-EQUITY> 370,646,000
<SALES> 100,705,000
<TOTAL-REVENUES> 101,783,000
<CGS> 65,550,000
<TOTAL-COSTS> 65,550,000
<OTHER-EXPENSES> 32,884,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,382,000
<INCOME-PRETAX> 1,967,000
<INCOME-TAX> 882,000
<INCOME-CONTINUING> 1,085,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,085,000
<EPS-PRIMARY> .12
<EPS-DILUTED> 0
</TABLE>
