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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
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 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (913) 338-7800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of the registrant's Common Stock held by non-
affiliates as of March 21, 1997, was approximately $65,334,951.
As of March 21, 1997, the shares outstanding of the registrant's common stock
was 7,972,251.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENT
On March 5, 1997, Crop Growers Corporation ("Crop Growers" or the
"Company") and Fireman's Fund Insurance Company ("Fireman's Fund") entered into
a definitive agreement by which Fireman's Fund would acquire the Company in a
cash merger at $10.25 per share. Fireman's Fund presently owns convertible
preferred stock of the Company and has exercised its right to purchase an
additional 1,827,477 shares of common stock from former Company executives for
$10.00 per share. The Company consented to such purchases, subject to certain
restrictions. The transaction is subject to, among other things, Company
stockholder approval, regulatory approvals and other customary conditions.
Because of regulatory approvals and clearances, the transaction is not expected
to close until mid-1997.
Through March 28, 1997, the Company had the right to seek alternative
acquisition proposals from certain companies and to receive unsolicited
proposals. After March 28, 1997, the Company may receive unsolicited proposals.
The Company may terminate the Fireman's Fund agreement under certain, limited,
circumstances upon payment of a break-up fee of $2.4 million.
See the Company's Current Report on Form 8-K dated February 28, 1997, for
more information concerning this transaction. See also "Relationships with
Third Party Insurance Companies--Fireman's Fund" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
FORWARD-LOOKING INFORMATION
Except for the historical information contained in this Annual Report on
Form 10-K, 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 federal or state laws or regulations including, without
limitation, changes to the multi-peril crop insurance ("MPCI") program currently
being considered and future changes by the Federal Crop Insurance Corporation
("FCIC") (the federal agency which administers the MPCI program), funding for
the MPCI program, price competition impacting premium levels and agent
commissions, and general economic conditions. Federal regulations governing
aspects of crop insurance are frequently modified, and any such changes may
impact the Company's results of operations. See "The MPCI Program---Recent
Developments" for a discussion of certain changes being proposed to the MPCI
program.
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GENERAL
Crop Growers is one of the nation's leading marketers and servicers of crop
insurance. The Company markets and services federal MPCI, private crop hail
insurance and other insurance products underwritten by third party insurance
companies, as well as its own property and casualty insurance company
subsidiaries. MPCI is a federally regulated and subsidized insurance program
which is available to farmers to reduce the risk of crop loss from adverse
weather, natural disasters and other uncontrollable events. The Company's other
major insurance product marketed and serviced, crop hail insurance, supplements
MPCI or can be written on a stand alone basis.
The Company's revenues consist primarily of fees for servicing policies for
third party insurers relating to the premiums generated through its agency
network. To date, the majority of the Company's service fee revenues have been
derived from the servicing of MPCI policies. The Company's services include
enforcing underwriting guidelines, providing software systems to agents, policy
processing, accounting and statistical reporting, claims administration and
adjusting services and, in the case of crop hail insurance and other insurance
products, rate analysis and filings. In addition, the Company participates in
the formulation of the risk management strategy related to the premiums it
services. Crop Growers' arrangements with third party insurers allow it to
share in underwriting gains, if any, without assuming any underwriting loss
related to the premiums it services. In addition, the Company may have
underwriting gains or losses attributable to underwritten premiums retained by
its insurance company subsidiaries.
Since its inception in 1989, the Company has expanded its rural
distribution network to include over 3,000 agencies in over 40 states. The
Company competes for agents by emphasizing its range of services and support and
a competitive level of commissions. The Company has developed proprietary
software systems that it believes allow it to attract and retain agents for its
distribution network, and to provide such agents with a competitive advantage in
selling crop insurance to customers in the rural marketplace. The Company's
systems assist agents in quoting crop insurance premiums, managing and
processing policies and enforcing underwriting guidelines. Effective computer
systems are particularly important in the crop insurance industry due to the
complexity of and continued revisions to the regulations governing the MPCI
program, the wide variety of crops, coverages and rates, and commodity price
fluctuations. Additionally, because there is essentially no price competition
in MPCI, commissions and services offered to agents are the primary competitive
factors in that business.
The Company also markets and services a farm and ranch product in selected
markets in order to provide its agency network with an additional product for
its customer base. In addition, the Company markets computer generated geo-
referenced color maps which are designed to allow agents and farmers to
reference and update digitized maps to record and report crop and other
agricultural related information. These products are marketed to agents and
farmers to assist them in monitoring and analyzing farm assets, soil types,
weather conditions, chemical applications, yields and other variables. The
Company also markets VisAg-TM- farm management software ("VisAg-TM-"), a map
driven system designed to allow farmers to analyze and record the same
information on a computer.
BUSINESS STRATEGY
The Company focuses primarily on earning recurring service fee revenues
from the distribution of crop insurance underwritten primarily by third party
insurers. Crop Growers also focuses on developing risk management strategies
designed to maximize its share of underwriting gains related to the premiums it
services while retaining a
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relatively small amount of risk on premiums underwritten by its own insurance
company subsidiaries. The Company's strategy is to provide innovative systems
and high quality service to its agency network to maintain and expand its share
of the crop insurance market. Crop Growers also intends to continue to further
develop and enhance its proprietary software systems, as well as to market
complementary software and farm mapping products to its agents and rural
customer base. The Company also seeks to market additional insurance products
through its rural distribution network and will continue to evaluate strategic
acquisitions and alliances to further expand its distribution network and
broaden the range of products it markets and services.
PRODUCTS AND SERVICES
CROP INSURANCE
In the 1996, 1995, 1994 and 1993 MPCI crop years (July 1 through June 30),
the Company serviced approximately 15.9%, 17.7%, 12.5% and 9.4%, respectively,
of MPCI premiums that exceeded the basic catastrophic level of MPCI coverage
("Buy-Up Coverage") in the United States. In the 1995 crop year, the first year
in which a basic level of catastrophic coverage ("Basic Coverage") was offered
under the MPCI program, and the 1996 crop year, the Company serviced
approximately 22.9% and 22.6%, respectively, of the Basic Coverage premiums
written by private insurers. See "Multi-Peril Crop Insurance" below. For the
years ended December 31, 1996, 1995, 1994 and 1993 the Company serviced
approximately 13.2%, 13.3%, 5.0% and 2.0%, respectively, of the total crop hail
premiums written in the United States. The following table presents certain
statistical information relating to the Company's crop insurance business from
1992 through 1996. Statistical data related to MPCI is presented on a July 1 to
June 30 crop year basis (e.g., information for 1996 relates to the July 1, 1995
to June 30, 1996 crop year).
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except number of policies)
<S> <C> <C> <C> <C> <C>
MPCI Buy-Up Coverage(1):
Premiums serviced $222,422 $191,421 $114,576 $ 70,709 $ 45,752
Number of policies 99,389 97,991 53,267 36,050 24,167
MPCI Basic Coverage(1):
Premiums serviced $ 48,525 $ 39,546 -- -- --
Number of policies 49,494 55,375 -- -- --
Crop Hail:
Premiums serviced $ 82,991 $ 69,625 $ 26,164 $ 9,951 $ 9,564
Number of policies 35,479 32,720 12,940 4,942 4,168
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(1) MPCI premiums serviced in the 1995 crop year include $36.2 million of Buy-Up
Coverage and $4.6 million of Basic Coverage serviced by Dawson Hail Insurance
Co. ("Dawson"), which was acquired by the Company in 1995. See "Insurance
Company Operations."
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MULTI-PERIL CROP INSURANCE
To date, the majority of the Company's service fee revenues have been
derived from the servicing of MPCI policies generated through its agency
network. In general, the Company's responsibilities for servicing MPCI policies
include enforcing the FCIC's underwriting guidelines, policy processing,
accounting and statistical reporting, claims administration and adjusting
services. The Company also develops risk management strategy on the premiums it
services for third party insurers as well as its insurance company subsidiaries,
Plains Insurance Company ("Plains") and Dawson.
Under the MPCI program, an insurance company receives an expense
reimbursement allowance for processing and administering MPCI policies, and
shares in any underwriting gains or losses attributable to premiums retained by
the insurer. Under its contracts with Fireman's Fund and Continental Insurance
Company, a subsidiary of CNA Insurance Company ("CNA") (for information
concerning the Company's dissolution of its relationship with CNA, see
"Relationships with Third Party Insurance Companies--CNA"), and on behalf of
Plains and Dawson, the Company receives the expense reimbursement payable by the
FCIC, which for Buy-Up Coverage was 31% of MPCI premiums for both the 1996 and
1995 crop years and which is 29% for the 1997 crop year. For Basic Coverage, the
Company receives up to the first $100 of the administrative fee paid by the
farmer and a loss adjusting expense reimbursement amount regardless of loss
experience. From these amounts, the Company pays a commission to the agent that
produces the premium. In addition, the Company receives any excess loss
adjustment expense reimbursement (up to 4% of premium) for excess loss adjusting
expenses if loss ratios on the Company's total book of MPCI business, by state
and by risk retention fund, are in excess of ratios established by the FCIC. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Under its agreements with Fireman's Fund and CNA, the Company is also
entitled to receive a percentage of MPCI underwriting gains, if any, on premiums
underwritten by Fireman's Fund and CNA. For a crop year in which an
underwriting loss occurs, the Company does not assume any of the loss. The
Company may also have underwriting gains and losses attributable to underwritten
premiums retained by Plains and Dawson, however, the Company does not expect
Plains or Dawson to retain any significant risk on business they underwrite.
THE MPCI PROGRAM
RECENT DEVELOPMENTS. Effective December 31, 1996, the FCIC provided
notice that it intended to revise the Standard Reinsurance Agreement ("SRA")
that governs the relationship between the FCIC and private companies that
participate in the MPCI program. On March 20, 1997, a draft of the SRA
(effective for the 1998 crop year) was released by the FCIC. The draft SRA
proposes to revise the expense reimbursement for Buy-Up Coverage to an amount
equal to a flat $100 per policy plus 18% of the premium related to that
policy (17% in the case of Crop Revenue Coverage policies, a revenue
protection coverage introduced by the FCIC in the 1997 crop year). For Basic
Coverage, private companies would receive a flat $50 per policy plus 4.8% of
the premium related to that policy (based on a 50% production guarantee at a
60% price election). The draft SRA also proposes certain changes to the risk
sharing arrangement (calculation of underwriting gain or loss on premiums
retained by private companies) between private companies and the FCIC. Under
the proposed draft, private companies would receive the expense reimbursement
in one installment at the time acreage reports are reported to and validated
by the FCIC. The draft SRA also proposes certain other changes to the
administration of the MPCI program, including certain compliance and program
integrity issues. Earlier in 1997 and as a part of the Clinton
Administration's budget proposal for the government's 1998 fiscal year,
funding for the expense reimbursement was proposed at 24.5% for the 1998 crop
year.
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The Company is not able to predict whether any or all of the proposed
revisions to the SRA will ultimately be adopted, but believes that the proposed
revisions (particularly the revision to the expense reimbursement), if
implemented as proposed, would have an adverse impact on the Company's results
of operations in the 1998 crop year. The FCIC has requested written comments on
the proposed SRA draft by April 11, 1997. The Company cannot predict what the
final terms of the SRA will ultimately be or what other legislative or
administrative actions may occur as a part of the SRA revision process or the
federal budget process.
GENERAL. MPCI is provided by the federal government to help farmers insure
against damage to their crops due to a number of natural causes and other
uncontrollable events. MPCI is administered by the FCIC, a federal agency under
the United States Department of Agriculture ("USDA"). MPCI policies
automatically renew on the same terms and conditions on the applicable sales
closing date unless the farmer has failed to pay the prior year's premium or has
elected to cancel the coverage.
In October 1994, Congress enacted the Federal Crop Insurance Reform Act of
1994 (the "Reform Act"). Under the Reform Act, the MPCI program was changed
(effective for the 1995 crop year) to provide for, among other things, a new
catastrophic level of mandatory insurance, referred to herein as Basic Coverage.
Under the Reform Act, farmers were required to obtain at least Basic Coverage on
eligible crops in order to participate in many federal farm subsidy programs.
Basic Coverage is available to farmers if they pay an administrative fee of $50
per crop per county, not to exceed $200 per farmer per county up to a maximum of
$600 for all counties in which a farmer has insured crops. In the 1995 crop
year, Basic Coverage was offered by private insurance companies and their agents
and all USDA field service offices.
In 1996, Congress enacted the Federal Agriculture Improvement and Reform
Act of 1996 (the "FAIR Act"). The Fair Act eliminated the mandatory linkage
that required farmers to obtain some form of MPCI insurance in order to
participate in other federal farm subsidy programs. Under the FAIR Act,
farmers may forego MPCI insurance for any given crop without losing
eligibility for such programs, provided they waive all rights to any possible
crop disaster assistance in connection with the particular crop. In
addition, the FAIR Act amended the Reform Act's provisions relating to the
USDA's role in selling and servicing Basic Coverage, by providing that,
effective with the 1997 crop year, the USDA will offer Basic Coverage only if
the Secretary of Agriculture determines there is an insufficient number of
approved insurance providers operating in the particular state or region to
adequately provide Basic Coverage to farmers. Under the FAIR Act, the
Secretary of Agriculture is required to make a determination no later than
April 30 of the year preceding the year in which the crop will be planted, of
whether Basic Coverage in a state or portion of a state is sufficiently
available through private insurance providers. If sufficient, the Secretary
may direct the USDA to discontinue selling Basic Coverage in the state or
region. For the 1997 crop year, the USDA determined not to sell Basic
Coverage at USDA field service offices in 14 states. No determination has
been announced for the 1998 crop year regarding whether the USDA will
discontinue selling Basic Coverage in states in addition to the 14 states in
which the USDA no longer sells Basic Coverage.
Buy-Up Coverage provides a yield guarantee to the farmer by insuring
against production below a specified yield. The lost production is insured at a
price elected by the farmer, subject to strict guidelines imposed by the FCIC.
Basic Coverage provides protection at a 50% yield guarantee and a 60% price
election. In addition, in the 1997 crop year, several MPCI products providing
price/revenue as well as production protections were introduced, including Crop
Revenue Coverage.
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Except for Basic Coverage offered by the USDA, MPCI is written by private
insurance companies under a SRA with the FCIC. A SRA continues in effect from
year to year with an annual renewal date of July 1 of each succeeding year
unless the FCIC or insurance company gives 20 days advance notice that the SRA
will not be renewed. The terms and conditions of the SRA, including the amount
of expense reimbursement and level of reinsurance the FCIC will assume, may vary
from year to year. In connection with entering into and renewing a SRA, an
insurance company submits a Plan of Operation that sets forth the insurance
company's qualifications and business plan relating to the MPCI business it
proposes to write. The Plan of Operation must generally be submitted to the
FCIC by April 1 preceding each crop year. The Plan of Operation sets forth such
things as the net written premium and associated liability that the insurer will
retain and the identities of organizations other than the insurer that will
write MPCI and provide services for the MPCI policies written pursuant to the
SRA.
In accordance with the terms of the SRA and Plan of Operation, an insurance
company generally provides, among other services, marketing, enforcement of MPCI
underwriting guidelines and claims adjusting. As consideration for these
services, the insurance company receives an expense reimbursement allowance from
the FCIC equal to a percentage of premiums written. The FCIC generally pays a
significant portion of the expense reimbursement (currently 22%) related to each
policy, after the policy acreage report is submitted to, and the related premium
is cleared by, the FCIC. The remaining installment relating to each policy is
received by the private insurer, or its designee, when the premium is paid to
the FCIC. On Basic Coverage policies, the private insurer receives the $50
administrative fee paid by the farmer for Basic Coverage up to a maximum of $100
of the administrative fee payable for farmers obtaining Basic Coverage on
multiple crops and/or in multiple counties as consideration for its servicing of
the policy. In addition, the insurance company receives a loss adjustment
expense amount on all Basic Coverage regardless of actual loss experience. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In addition to receiving the expense reimbursement allowance for processing
and administering MPCI policies, an insurer shares, with the FCIC, in any
underwriting gains and losses attributable to premiums written by the insurer.
An insurance company's share of profit or loss on the MPCI business it writes is
determined under a formula established by the FCIC. Under this formula, the
primary factors that determine the MPCI profit or loss share are (i) the gross
premiums the insurer is credited with having written; (ii) the amount of such
credited premiums retained by the insurer after ceding premiums to certain
federal reinsurance funds; and (iii) the loss experience of the insurer's
insureds.
An insurer's share of profit or loss calculated under its SRA depends in
part on the aggregate amount of MPCI premium on which it retains risk after
allocating premiums to the federal reinsurance funds (the "MPCI Retention").
The percentage split between private insurers and the federal government of
any profit or loss which emerges from a MPCI Retention is set by the FCIC and
generally is adjusted from year to year.
FUNDING FOR THE MPCI PROGRAM. Prior to adoption of the Reform Act in
October 1994, the MPCI program was funded through annual Congressional
appropriations. Under the Reform Act, the FCIC is authorized to pay from a FCIC
fund the administrative and operating expenses of private insurance providers
approved for participation in the MPCI program, including sales commissions of
agents.
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If there are insufficient amounts in the FCIC fund, the Reform Act makes it
possible for the Secretary of Agriculture to use the funds of the Commodity
Credit Corporation ("CCC") for payment of administrative and operating expenses
of approved insurance providers and, within the limitations indicated above, for
payment of sales commissions to agents. The partial availability of CCC funds
for the expenses of private insurance providers was a change intended to make
the program less dependent than it had been in the past on annual appropriations
by Congress.
The authorization of appropriations to fund the MPCI program contained in
the Reform Act extends from fiscal years 1995 through 2001. Congress would have
to extend the authorization of the appropriations beyond that date for the MPCI
program to continue. There can be no assurance that Congress will not decide in
the future to reduce or eliminate funding of, or discontinue or otherwise
significantly change, the MPCI program.
An additional factor which may adversely impact participation by farmers in
the MPCI program is a potential decrease in agricultural spending by the federal
government. If Congress cuts spending for farm-related programs in general, the
MPCI program might also be adversely affected.
CROP HAIL INSURANCE
The other principal area of the Company's insurance business involves
providing a wide range of services to insurance companies in the crop hail
business. Crop hail is available to farmers as stand-alone coverage or as a
supplement to MPCI coverage and may be purchased to cover the actual cash value
of a crop on a per-acre basis which allows the farmers to recover a loss on a
small percentage of the farmer's total acres when such a loss may not be
recoverable through MPCI.
The Company's services to companies in the crop hail business include rate
analysis, software support, regulatory assistance, assisting in reinsurance
placement, loss adjustment services, marketing and processing. In 1996, the
Company's crop hail business was conducted under agreements with CNA, five farm
mutual insurance companies and other insurance companies. Plains and Dawson
also underwrite crop hail insurance. Of the $82.9 million of crop hail premiums
serviced in 1996, approximately $35.1 million were written by CNA and $30.0
million were written by Plains and Dawson. In 1996, 75.6% of all crop hail
premiums serviced by the Company were either written or reinsured with CNA. In
1997, the Company will continue to conduct its hail business through its
agreement with the farm mutuals, Plains, Dawson and Fireman's Fund. The Company
will not conduct hail business with CNA in 1997. As a result of a one-year
noncompetition provision in its crop hail agreement with CNA, the Company
expects an approximately 25-30% decline in the volume of crop hail premiums it
services in 1997 as compared to 1996. Given that the principal competitive
factor that affects the crop hail business is the rate filed in each state
(which varies from year to year), the Company cannot predict whether this one-
year noncompetition agreement will impact the Company's crop hail business in
1998 or beyond.
The Company currently has crop hail management contracts with five farm
mutual insurance companies. Under these contracts, which renew annually unless
otherwise terminated, the Company receives a fee based upon costs incurred in
managing premiums written by the mutual companies. The Company believes these
management contacts provide certain marketing and expense advantages in some
instances. In addition, because these farm mutual insurance companies have been
in business for a long time in their respective states, the Company believes
they have a relatively stable client base.
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In addition to earning service fees, the Company also participates in the
underwriting gains and losses on its crop hail book of business. Under its
agreement with Fireman's Fund, the Company is eligible to receive amounts based
on minimum loss ratios incurred related to the premiums it services without
sharing in any of the losses. To the extent that any premiums are retained by
its insurance company subsidiaries, the Company may also experience an
underwriting loss.
FARM AND RANCH
The Company markets and services a farm and ranch product in order to
provide its agency network with an additional product for its client base. In
1996, the Company wrote approximately $1.3 million of farm and ranch premiums
through its insurance company subsidiaries. The Company has quota share
reinsurance on 80% of this business. In 1996, the Company entered into an
agreement with Fireman's Fund, pursuant to which the Company will, in certain
states, market and service farm and ranch premiums underwritten by Fireman's
Fund. As a part of this agreement, the Company will earn service fees and
participate in underwriting gains, if any, based upon agreed upon loss ratios
incurred on the total farm and ranch book of business placed through Fireman's
Fund.
AG MANAGEMENT SYSTEMS AND PRODUCTS
Crop Growers believes that the business of managing agriculture and, in
particular, crop insurance, is increasingly dependent on effective information
management. Accordingly, the Company has developed or is developing products
which it believes will improve its ability to increase market share by enhancing
the sales effectiveness of its agent network in the marketing of crop insurance.
The Company continues to work on developing and marketing a comprehensive farm
management system.
MAPPING PRODUCTS
In order to expand its product offerings and rural customer base, in 1995,
the Company began producing and marketing computer generated geo-referenced
color maps which allow agents and farmers to view an entire agricultural
operation on a single map. These computer generated maps may be referenced and
updated by agents and farmers to more easily record and report crop and other
agricultural related information. These maps are currently being marketed to
assist agents and farmers in monitoring and analyzing farm assets, crop yields,
soil types, weather conditions, chemical and fertilizer applications and other
variables.
To date, most of these maps have been sold to agents, however, the
Company intends to expand its efforts in this area to directly market to
farmers. Individual maps are prepared and sold on an as ordered basis. Based on
information received from agents and farmers, Crop Growers believes the ability
to provide these maps will offer its distribution network an important marketing
tool.
VISAG-TM- SOFTWARE
In December 1995, the Company released the initial version of its VisAg-TM-
farm management software. Designed for use by small family farms to large
corporate operations, the PC-based, map-driven system allows users to manage
planting records, fertilizer and chemical applications, tillage and harvest data
visually by pointing and clicking on the appropriate field. Extensive tracking
and reporting, labor information, equipment costs and other pertinent data are
linked to geo-referenced maps which are the key to the system's functionality.
Crop Growers is currently evaluating marketing options including price,
packaging and distribution for the VisAg-TM- product line.
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For the crop insurance industry, VisAg-TM- can provide benefits in several
areas. To date, it has been primarily used as a value-added component to agents'
marketing efforts. In this manner, the Company hopes to increase agent loyalty.
A newly developing opportunity is in the area of acreage certification and
verification required under the MPCI program. As the USDA decreases its
services in this area, more responsibility will fall to individual insurance
providers. Crop Growers believes this creates an opportunity to apply this
technology to serve not only Company purposes, but perhaps those of the industry
as well.
Direct retail sales of VisAg-TM- continue to be pursued as a separate
contribution to overhead. The Company has used its first year's experience in
software development and marketing to establish pricing points within the
product line and to better ascertain the perceived benefits of the product as
determined by the end user.
AG MANAGEMENT MAPPING SOFTWARE
The Company intends to use its technological resources to include with its
agency management system a feature which will allow an agent to identify a
client's entire farming operation on a computer screen. This will provide the
agent with the information needed to quickly and accurately custom design a risk
management program by selecting coverage options for each specific field and
crop. The system will also be integrated with information from the Company's
rating and underwriting databases. See "Software Systems" below for a discussion
of the Company's software systems used in agency operations.
SOFTWARE SYSTEMS
Crop Growers relies extensively on its proprietary software systems in its
marketing efforts with agents, and to enforce underwriting guidelines, evaluate
risks and ensure proper payment of claims. Over 1,400 agencies currently use
the Company's Agency Management System ("AMS"). In addition to AMS, Crop
Growers has developed a Company Management System ("CMS") for use by the Company
in validating and verifying data previously recorded by agents. AMS and CMS are
personal computer based systems.
AGENCY MANAGEMENT SYSTEM
AMS provides the Company's personnel responsible for enforcing underwriting
guidelines and agents in its network with desktop access to MPCI and crop hail
insurance rates as well as the special underwriting guidelines applicable to
each specific county and crop. AMS allows the Company's agency service
personnel and agents in its network to eliminate the need to search for rate
information using actuarial books. In view of the large number of variables
that must be considered, the Company believes the number of errors is reduced by
quoting and preparing policies with the assistance of AMS. The Company believes
that the ability of AMS to quickly and accurately quote rates and coverages is
an important tool in maintaining existing and attracting new agents.
With respect to MPCI policies, one of the principal features of AMS is its
ability to enforce the FCIC's underwriting guidelines. AMS verifies the
insurability of the applicant's land and crops and is designed to ensure that
FCIC rules governing the calculation of each farm unit's insurable yield (actual
production history or "APH") are followed. APH rules vary depending on crop,
location and farming practice and are modified periodically by the FCIC.
Accordingly, the Company continually updates AMS to incorporate the most current
FCIC rules and procedures, including those regarding APH calculations. The
Company receives MPCI rates from the FCIC in electronic form, formats such rates
into files usable by its software systems, and
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then distributes such rates to its automated agents. The Company believes that
the ability to promptly implement and distribute software containing FCIC rule
changes offers agents in its network a competitive advantage in the MPCI market.
With respect to crop hail policies, AMS provides its agency service
personnel and agents an efficient means to quote and write policies based on
MPCI policy data already in the system. AMS also provides desktop access to
endorsements and policy forms available in each state, coverage limits
applicable to each crop and farming practice and graphical representations
depicting the coverage, cost and loss coverage of comparable policy forms. As
with MPCI, the applicable crop hail premium rate is automatically applied by
accessing AMS's electronic actuarial files.
COMPANY MANAGEMENT SYSTEM
CMS assists Crop Growers in verifying an agent's electronic policy data
submission and reporting to its agency service personnel all significant changes
from previously reported data. In addition, CMS assists the Company in tracking
and properly paying losses. For example, CMS automatically accesses the
original policy data to help ensure that a claim is paid only according to the
provisions of the policy as originally written. Crop Growers believes that CMS's
tracking and claims-prioritizing features assist in providing a high-level of
service to agencies in its network.
With respect to crop hail insurance, the Company maintains various
databases of historical loss costs. These databases allow the Company to develop
various rating strategies based on historical results. In many instances the
Company believes it is able to determine which of the various crops may be more
profitable than others, or which specific townships are more likely to show
underwriting profits or losses. The Company believes these features enable it
to perform rate comparisons more efficiently.
SUPPORT AND MAINTENANCE
The Company has a software development and services staff which provides
software development, installation, training and ongoing support services to
agents in addition to providing network administration and support for the
Company's information networks and all software and actuarial distribution and
support for the Company's agency service personnel.
Crop Growers attempts to protect its proprietary rights to its software
programs with a combination of patent, copyright and trade secret laws, employee
and third-party nondisclosure and employee non-compete agreements. The Company
filed a patent application for its Ag Management Mapping Software in 1994.
While the Company's competitive position could be threatened by its inability to
protect its proprietary information, the Company believes patent, copyright and
trade secret protection are less important to the value of its software products
than other factors, such as knowledge of the crop insurance industry, ability
and experience of the Company's personnel and ongoing product development and
support, particularly relating to updates of the programs necessary to keep pace
with changes made in the MPCI program.
11
<PAGE>
MARKETING AND DISTRIBUTION NETWORK
Crop Growers believes that the unique needs of rural America require
special products and marketing efforts. Accordingly, the Company's strategy
continues to be to develop a strong distribution network capable of delivering
products and services to rural customers. The Company's goal is to increase its
service fee revenues by distributing and servicing additional products for
companies who wish to serve the rural market.
Products serviced by Crop Growers are marketed in over 40 states. The
Company's agency network has been developed from several sources, including
through its relationships with Fireman's Fund, CNA, Cimarron Insurance Company
and certain farm mutual insurance companies, and from marketing efforts by the
Company. In addition, selected acquisitions of agency operations, including
Dawson, have also played an important part of the Company's continued
development of its distribution network.
The Company has production supervisors who are principally responsible for
identifying and recruiting new agencies and agents and servicing existing
relationships. Because the crop insurance industry is a relatively small
segment of the insurance industry, the Company believes its production
supervisors, who are often former farmers or agents themselves, are able to
identify and market to substantially all existing crop insurance agents within a
particular region. Because there is essentially no price competition in MPCI,
the Company competes for agents by emphasizing the range of services and support
it offers to agents and the level of commissions. With respect to crop hail,
competition is based primarily on policy rates.
Due to the highly regionalized nature of the crop insurance industry, the
Company believes it is better able to serve its agency network by organizing its
agency service personnel and underwriting enforcement functions on a regional
basis. The Company has accomplished this by assigning its agency service
personnel to designated regional areas and establishing a regional presence
either through acquisition of existing agency operations or affiliating with
local general agencies. The Company believes that its strategy to allow regional
operations to preserve their local identities has been an effective way to
establish a regional presence while maintaining existing relationships with
farmers.
For the most part, general agencies and independent agents are appointed by
the contracting insurance companies, and have binding authority within the
limits prescribed by the contracting insurance companies. Although agents are
licensed by the policy issuing company, in most aspects of the Company's
business, the principal elements of the agency relationship, commissions and
level of services provided by the Company, are negotiated between Crop Growers
and the individual agencies or agents and the Company has the primary ongoing
contact with agents. As a part of its role as servicer of premiums underwritten
by third party insurance companies, the Company has the authority to negotiate
with agencies and agents regarding, among other things, agent commissions and
the extent of services and support the Company will provide. These agreements
are negotiated on a case-by-case basis with general agencies and independent
agents that produce a large volume of premiums. Agreements with agents that
produce a smaller volume of premiums are relatively standardized. Many agencies
seek to perform themselves some of the services related to the policies in
return for a higher commission.
12
<PAGE>
Crop Growers has developed a program that targets agricultural cooperatives
and food processors and their members. The program offers a risk management
package customized to the needs of each organization and member. In 1995, the
first full year of marketing this program, the Company entered into agreements
with several cooperatives, including Sunkist Growers, Inc., the largest citrus
cooperative in Southern California. In 1996, the Company continued to expand
this program principally in California and the Pacific Northwest.
At December 31, 1996, the Company had established 13 offices, including
regional operation and processing centers. The Company evaluates local offices,
from time to time, in order to establish and maintain the Company's competitive
position in certain regional areas.
UNDERWRITING MANAGEMENT
Because of the highly regulated nature of the MPCI program and the fact
that rates are established by the FCIC, the underwriting functions performed by
the Company's agency service personnel consist primarily of ensuring policies
are underwritten in accordance with FCIC rules. With respect to crop hail
insurance products, the Company's underwriting functions are essentially similar
to those applicable under MPCI policies, except that the underwriting guidelines
are those established by the policy issuing company.
Since many of the factors analyzed in underwriting crop insurance products
are region-specific, the Company's regional offices generally handle the crops
within their regions. Crop Growers believes that its agency service personnel
are thus able to develop a more comprehensive understanding of the regional
variances in the crop insurance business and provide more efficient compliance
with applicable underwriting guidelines than they could if agency service
personnel were centralized. The Company's agency service personnel rely on the
Company's software systems to verify that underwriting guidelines are followed.
The Company's agency service personnel are required to attend training
programs relating to the MPCI program and other aspects of the crop insurance
business. The agency service group's performance is audited internally and by
the Company's contracting insurance companies with respect to MPCI and crop hail
insurance and by the FCIC with respect to MPCI.
CLAIMS ADMINISTRATION
The services provided by the Company in claims administration and adjusting
are to investigate the cause of loss, to examine and approve or deny payments in
accordance with the guidelines established by the FCIC or the underwriting
insurance company, to furnish forms required for reporting and administering
claims, to establish claims files and to issue drafts or checks in payment of
MPCI claims and expenses. Because the administration of MPCI claims is highly
regulated by the FCIC, the primary function of the Company's claims personnel is
to ensure that all such regulations have been complied with in administering
MPCI claims.
Because crop insurance varies based on the type and location of the crop
insured, the Company has assigned loss supervisors to different regions within
the United States to handle claims administration functions. Within each
designated region, the Company has established, on a contract basis, a network
of independent loss adjusters. With respect to claims administration, the
Company has authority to settle claims up to specified dollar limits as set
forth in its respective contracts with third-party insurance companies.
13
<PAGE>
RELATIONSHIPS WITH THIRD PARTY INSURANCE COMPANIES
FIREMAN'S FUND
On March 5, 1997, Fireman's Fund and the Company entered into a definitive
merger agreement by which Fireman's Fund would acquire the Company in a cash
merger at $10.25 per share. See "Recent Development."
On July 10, 1996, as a part of the expansion of the Company's business
relationship with Fireman's Fund, Fireman's Fund purchased 10,000 shares of the
Company's preferred stock for $10 million. See Note 5 of Notes to the Company's
Consolidated Financial Statements.
Effective for the 1995 crop year, the Company and Fireman's Fund entered
into an agreement pursuant to which the Company marketed and serviced MPCI
premiums underwritten by Fireman's Fund. In 1996 and 1995, 21.0% and 9.8%,
respectively, of the Company's service fees were derived from premiums
underwritten by Fireman's Fund. The Company's responsibilities under the
agreement include production, processing, claims administration, accounting and
statistical reporting and risk management strategy. The Company is responsible
for all expenses allocable to the business generated under such agreement,
including claims administration and adjusting services.
Under its agreement with Fireman's Fund, the Company receives as its
compensation the expense reimbursement allowance (including all administrative
fees related to Basic Coverage) and any excess loss adjustment expenses payable
by the FCIC related to premiums serviced. Effective for the 1997 crop year, the
Company does not pay any overwrite fee to Fireman's Fund. In addition, the
Company is entitled to receive a percentage of Fireman's Fund's underwriting
gains on MPCI marketed and serviced by the Company after such gains exceed a
minimum level. For a crop year in which Fireman's Fund has an underwriting
loss, the Company does not assume any of the loss. There is no underwriting
loss carryforward under the agreement and, accordingly, losses do not reduce the
Company's future underwriting gains, if any.
The agreement may be terminated by either party without cause, as of June
30 of 1999 or any June 30 thereafter, upon 12 months prior notice with respect
to new policyholders. With respect to renewal policyholders, the Company may
terminate the agreement without cause as of June 30 of 1999 or any June 30
thereafter, upon 12 months prior notice and Fireman's Fund may terminate the
agreement upon 24 months prior notice. The agreement may be terminated by
Fireman's Fund for cause upon the occurrence of certain enumerated events.
The Company and Fireman's Fund have entered a crop hail agreement effective
for the 1997 crop hail year. Under the terms of the crop hail agreement, the
Company performs all of the marketing and servicing of crop hail premiums
written by Fireman's Fund. The Company receives a commission, including a
percentage for loss adjusting expenses, for premiums serviced. The Company also
participates in underwriting gains, if any, on the crop hail premiums written
under the agreement if loss ratios on the entire book of premiums serviced is
less than an agreed upon loss ratio. The term of the agreement coincides with
the term of the MPCI agreement with Fireman's Fund. The agreement may be
terminated by Fireman's Fund for cause upon the occurrence of certain enumerated
events.
Under the terms of its MPCI and crop hail agreements with Fireman's Fund,
the Company also may receive a profit and growth bonus if the overall
underwriting performance of its MPCI and crop hail businesses and volume of
premiums written meet certain agreed upon targets. Fireman's Fund is currently
assigned an "A" (Excellent) rating by A.M. Best.
14
<PAGE>
CNA
In 1996, 1995 and 1994, 40.2%, 59.9% and 84.5%, respectively, of the
Company's service fees were derived from MPCI and crop hail premiums
underwritten by CNA. As part of the Company's decision to expand its
strategic alliance with Fireman's Fund during 1996, the Company and CNA
agreed to terminate their existing agreements effective for the 1997 crop
year in the case of MPCI, and the 1997 year for crop hail. The Company and
CNA have not yet finalized all of the terms relating to the dissolution of
their relationship, including the terms of certain financial settlements.
For further discussion of dissolution of MPCI agreement with CNA see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Restructuring and Non-Core Expenses."
INSURANCE COMPANY OPERATIONS
Crop Growers acquired Plains in October 1994 and Dawson in July 1995. In
1997, the Company currently intends to reinsure virtually all of the risk
underwritten by its insurance company subsidiaries. The Company is continuing
to evaluate how best to utilize its insurance company subsidiaries to maximize
the profitability of its business.
At December 31, 1996, Dawson had $8.2 million of statutory capital and
surplus. Dawson is currently licensed as a property and casualty insurer in
Iowa, Kansas, Minnesota, North Dakota and South Dakota. Dawson is not currently
rated by A.M. Best.
At December 31, 1996, Plains had $7.1 million of statutory capital and
surplus. Plains is currently licensed as a property and casualty insurer in
Arizona, Colorado, Kansas, Missouri, Nebraska, Nevada, New Mexico, North Dakota,
Oklahoma, South Dakota, Texas, Utah and Wyoming. Plains is not currently rated
by A. M. Best.
COMPETITION
The crop insurance industry is highly competitive. The Company competes
against other private companies and, with respect to Basic Coverage in certain
states, USDA field service offices. Some of the Company's competitors have
greater financial and other resources than the Company, and there can be no
assurance that the Company will be able to compete effectively against such
competitors in the future. The Company competes on the basis of the commissions
paid to agents, the speed with which claims are paid, the quality and extent of
services offered, the reputation and experience of its agency network and, in
the case of private insurance, policy rates. Because the FCIC establishes the
rates that may be offered for MPCI policies, the Company believes that quality
of service and level of commissions offered to agents are the principal factors
on which it competes in the area of MPCI. The Company believes the crop hail
insurance industry is extremely rate-sensitive, and the ability to offer
competitive rate structures to agents is a critical factor in the agents'
ability to write crop hail. Because of the varying state laws regarding the
ability of agents to write crop hail premiums prior to completion of rate and
form filings (and, in some cases, state approval of such filings), a company may
not be able to write its expected premium volume if its rates are not
competitive.
15
<PAGE>
In terms of premium dollars written, the MPCI market is dominated by a few
companies: Rain & Hail Management, Inc. (an affiliate of Cigna Corporation),
Crop Growers, Rural Community Insurance Services, Inc. (which is owned by
Norwest Corporation) and The Redland Group, Inc. (a subsidiary of Acceptance
Insurance Companies, Inc.) serviced approximately 23.5%, 16.6%, 16.4%, and
15.1%, respectively, of the MPCI crop insurance premiums written by private
insurance companies in the United States in the 1996 crop year. As a
consequence, the Company believes that in order to compete successfully in the
crop insurance business it will have to service a volume of premiums
sufficiently large to enable the Company to realize operating efficiencies in
conducting its business.
SEASONALITY
The Company's operating results vary substantially from quarter to quarter
as a result of various factors, including MPCI sales closing dates and crop
insurance cycles. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality."
REGULATION
LICENSING
The activities of the Company and its subsidiaries are subject to licensing
and regulation by the jurisdictions in which they conduct such activities. The
Company's operations depend on the validity of and its continued good standing
under the licenses and approvals pursuant to which it operates. Failure by the
Company or its subsidiaries to obtain or maintain such licenses could have an
adverse effect on the Company's results of operations. Licensing laws and
regulations vary from jurisdiction to jurisdiction. In all jurisdictions, the
applicable licensing laws and regulations are subject to amendment or
interpretation by regulatory authorities, and, generally, such authorities are
vested with relatively broad discretion as to the granting, reviewing and
revoking of licenses and approvals.
Insurance companies that are involved in the MPCI program, including
Fireman's Fund, Plains and Dawson are subject to at least an annual review by
the FCIC for, among other things, the availability of adequate capital and
surplus and compliance with underwriting, loss adjustment and other requirements
of the MPCI program. In addition, as a part of the FCIC's review process, the
Company, as a servicer on behalf of Fireman's Fund, Plains and Dawson, is
periodically reviewed for its compliance with FCIC rules and regulations. A
failure to comply with such rules or regulations could result in the FCIC
choosing not to allow the Company, Plains, Dawson, or Fireman's Fund to
participate in the MPCI program. Based on the results of reviews conducted by
the FCIC, Fireman's Fund and its own internal reviews, the Company believes that
it and Plains and Dawson have complied in all material respects with FCIC rules
and regulations relating to the marketing, servicing and underwriting of MPCI
premiums. No assurance can be given that the FCIC would continue to allow the
Company to service MPCI policies if it were to fail to comply with FCIC rules
and regulations.
INSURANCE INDUSTRY
The Company's insurance operations are subject to a significant degree of
regulatory oversight. This oversight generally is designed to protect the
interests of policyholders, as opposed to shareholders. Such regulation relates
to authorized lines of business, capital and surplus requirements, investment
parameters, underwriting limitations, transactions with affiliates, dividend
limitations, changes in control, and a variety of other financial and
nonfinancial components of an insurance company's business. The Company
believes that more, rather than less,
16
<PAGE>
regulation is likely in the future. In particular, the National Association of
Insurance Commissioners has adopted a system of assessing the adequacy of
statutory capital which is applicable to Plains and Dawson. This system, known
as risk-based capital, establishes statutory capital requirements based on
levels of risk assumed by an insurance company rather than on levels of premiums
written. At December 31, 1996, Plains and Dawson exceed the minimum risk-based
capital requirements. The Company cannot predict with certainty the effect any
other proposed or future legislation may have on the results of operations or
financial condition of the Company.
Most states have insurance laws requiring that property-liability rate
schedules, policy or coverage forms, and other information be filed with the
state's regulatory authority. In many cases, such rates and/or policy forms
must be approved prior to use. Rate and form regulation and supervision were
originally designed primarily to ensure the financial stability of insurance
companies and to protect policyholders and were not designed to protect
shareholders or creditors. A few states have recently considered or enacted
limitations on the ability of insurers to share data. Such restrictions have no
significant impact on the Company's insurance operations. There can be no
assurance that state or federal regulatory requirements will not become more
stringent in the future which may have an adverse effect on the future
operations of Plains or Dawson.
Insurance companies are required to file detailed statutory annual reports
with the state insurance regulators in each of the states in which they do
business, and their business and accounts are subject to examination by such
agencies at any time. In addition, these insurance regulators periodically
examine the insurer's financial condition, adherence to statutory accounting
principles, and compliance with insurance department rules and regulations.
Applicable state insurance laws, rather than federal bankruptcy laws, apply to
the liquidation or reorganization of insurance companies.
HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTIONS
The Company is subject to insurance holding company laws and regulations.
Under Kansas, North Dakota and Texas (Plains, given the volume of business it
writes in the State of Texas in relation to its overall business, may be
considered to be "commercially domiciled" in Texas) law (and, in some cases, the
laws of the states in which the farm mutuals managed by the Company are
located), acquisition of control of the Company, and thereby indirect control of
Plains or Dawson, requires the prior approval of the state insurance
commissioner. "Control," as the term relates to insurance holding companies, is
defined as the direct or indirect power to cause the direction of the management
and policies of a person. Any purchaser of 10% or more of the outstanding
voting stock of a corporation is presumed to have acquired control of the
corporation and its subsidiaries unless the Kansas, North Dakota or Texas
Insurance Commissioner (and, in some cases, the commissioners in states in which
the farm mutuals managed by the Company are located), upon application,
determines otherwise.
The payment of dividends by Plains and Dawson are subject to restrictions
set forth in the Kansas, North Dakota and Texas insurance laws, respectively.
See "Market for the Registrant's Common Equity and Related Stockholder Matters."
17
<PAGE>
GUARANTY FUNDS
All 50 states have separate insurance guaranty fund laws requiring
property-liability insurance companies doing business within their respective
jurisdictions to participate in their guaranty associations, which are organized
to pay covered claims (as defined and limited by the various guaranty
association statutes) under insurance policies issued by insolvent insurance
companies. Generally, such guaranty association laws create post-assessment
associations which make assessments against member insurers to obtain funds to
pay association covered claims after an insurer insolvency occurs. These
associations generally levy assessments (up to prescribed limits) on all member
insurers in a particular state on the basis of the proportionate share of the
premiums written by member insurers in the covered lines of business in that
state.
EMPLOYEES
At March 14, 1997, the Company, including its subsidiaries, employed 408
people. Management believes that its relations with its employees are
satisfactory.
ITEM 2. PROPERTIES
Currently, the Company's accounting, agency service personnel, and
administrative personnel are primarily located in its corporate headquarters in
Overland Park, Kansas, its insurance company relations functions in Fargo, North
Dakota and Overland Park, Kansas and a significant number of its software
development personnel are located in Austin, Texas. In addition to these
offices, the Company also leases or owns space for its local and regional
offices and independent agent operations. At December 31, 1996, the Company had
13 offices. The Company also conducts independent agent operations through its
offices in Prosser, Washington; Modesto, California; and Manlius, New York.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. Neither the
Company nor any of its subsidiaries is a party to any legal proceedings other
than as described below, the adverse outcome of which individually or in the
aggregate, in the Company's opinion, would have a material adverse effect on the
Company's results of operations, financial position or liquidity.
INDEPENDENT COUNSEL INVESTIGATION. On January 21, 1997, the court in the
matter of UNITED STATES OF AMERICA v. CROP GROWERS CORPORATION, JOHN J.
HEMMINGSON AND GARY A. BLACK (Crim. No. 96-0181(GK)) accepted Crop Growers
Corporation's (the "Company") plea of NOLO CONTENDERE to two charges brought
against it by the Independent Counsel ("IC") appointed to investigate former
Secretary of Agriculture Mike Espy. Pursuant to an agreement with the IC, the
Company also agreed to pay a fine of $2.0 million. The settlement concludes
matters between the Company and the IC. The entire amount of the
settlement has been accrued for at December 31, 1996.
By its terms, the Company's agreement with the IC does not compromise or
preclude civil actions by other governmental regulatory authorities, such as the
Federal Election Commission, Securities and Exchange Commission, the USDA, or
state or federal insurance regulatory authorities, or shareholders as a result
of the allegations made by the IC and the Company's NOLO CONTENDERE plea. No
assurance can be given as to what action a regulatory authority might take in
response to the Company's plea and its agreement with the IC.
18
<PAGE>
SECURITIES CLASS ACTION. On February 28, 1997, the Company agreed to a
settlement of the matter entitled IN RE CROP GROWERS SECURITIES LITIGATION (Civ.
No. 95-58-GF-PGH) with members of the class consisting of purchasers of the
Company's common stock during the period from February 15, 1995 to May 16, 1995.
Under the settlement, the Company has agreed to pay $2.5 million, $1.22 million
of which is payable by the Company, with the remainder to be paid out under the
terms of a directors' and officers' insurance policy. The $1.22 million has
been accrued for at December 31, 1996. The settlement is subject to court
approval.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock trades on the NASDAQ Stock Market under the
symbol "CGRO." The following table sets forth the high and low sales price of
the Common Stock as quoted by the NASDAQ Stock Market during the periods set
forth below.
High Low
---- ---
1995 1st Quarter $28.00 $14.00
2nd Quarter 33.00 11.25
3rd Quarter 16.75 13.38
4th Quarter 15.00 11.50
1996 1st Quarter $16.25 $ 6.00
2nd Quarter 11.75 7.00
3rd Quarter 10.50 6.88
4th Quarter 7.50 5.88
The Company, which was formed in April 1994, has not paid any dividends on
its common stock. The Company currently intends to retain earnings to finance
the growth and development of its business and does not currently anticipate
paying cash dividends on its common stock in the foreseeable future. Any
determination to pay cash dividends on the common stock will depend on, among
other things, future earnings, capital requirements and the financial condition
and liquidity of the Company, legal restrictions on the payment of dividends,
and on such other factors as the Company's Board of Directors may consider
relevant. As a holding company, the Company depends on dividends from its
subsidiaries to meet its expenses and other corporate obligations and to pay
dividends to stockholders. In the case of Plains and Dawson, such payments are
restricted by the laws of the States of Kansas and Texas and the State of North
Dakota, respectively, which provide that dividends must be paid out of earned
surplus (earned surplus is calculated after reserving a sum equal to all
liabilities of Plains and Dawson and may include all or part of surplus arising
from unrealized capital gains or revaluation of assets). In addition, Kansas,
North Dakota and Texas law limits an insurance company's ability to pay
extraordinary dividends. In general, the Kansas, North Dakota and Texas laws
relating to such extraordinary dividends limits the aggregate amount of
dividends or other distributions that Plains or Dawson may declare or pay to the
Company within any 12 month period without the permission of the Kansas, North
Dakota or Texas Commissioner of Insurance, and requires that Plains' and
Dawson's statutory surplus following any such dividend or distribution be
reasonable in relation to its outstanding liabilities and adequate to meet its
financial needs. During 1996, Plains and Dawson paid dividends to the Company
of $500,000 and $2.5 million, respectively, from earned surplus. These payments
were not considered extraordinary dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
In 1996, the Company paid $239,000 in dividends on its Series A Convertible
Preferred Stock held by Fireman's Fund. See Note 5 of Notes to Consolidated
Financial Statements.
The approximate number of holders of record of the Company's common stock
as of March 18, 1997 was 107 according to Chase Mellon, the Company's transfer
agent.
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<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31,
------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues:
Service fees $104,602 $85,025 $48,100 $26,733 $19,122
Premiums earned and other income 4,309 701 2,203 524 --
Investment income 2,255 2,163 1,397 587 323
-------- ------- ------- ------- -------
Total revenues 111,166 87,889 51,700 27,844 19,445
Expenses:
Agent commissions and other
direct costs 71,082 52,612 30,475 20,203 14,065
Losses incurred and other
expenses 2,420 (2,013) 1,428 -- --
General and administrative
expenses 33,699 28,886 11,526 5,765 4,882
Restructuring and non-core
expenses 6,510 -- -- -- --
Legal matters 7,458 -- -- -- --
Interest expense 1,478 859 394 431 505
-------- ------- ------- ------- -------
Total expenses 122,647 80,344 43,823 26,399 19,452
(Loss) income before income taxes
and minority interest (11,481) 7,545 7,877 1,445 (7)
Income taxes 3,345 (2,943) (2,274) -- --
Minority interest (67) (307) (279) -- --
-------- ------- ------- ------- -------
Net (loss) income (8,203) 4,295 5,324 1,445 (7)
Redeemable preferred stock
dividend (239) -- -- -- --
-------- ------- ------- ------- -------
Net (loss) income attributable
to common stock $ (8,442) $ 4,295 $ 5,324 $ 1,445 $ (7)
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Pro Forma Data(1):
Historic net (loss) income $ -- $ -- $ 5,324 $ 1,445 $ (7)
Pro forma provision for
income taxes -- -- (281) (542) 3
-------- ------- ------- ------- -------
Pro forma net (loss) income $ -- $ -- $ 5,043 $ 903 $ (4)
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Pro forma net income per
common share $ -- $ -- $ .91 $ .22 $ --
Net (loss) income per
common share $ (1.04) $ .51 $ -- $ -- $ --
Weighted average common shares
outstanding 8,109 8,353 5,562 4,074 --
</TABLE>
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<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except number of policies)
STATISTICAL DATA(2):
<S> <C> <C> <C> <C> <C>
MPCI:
Buy-Up Coverage premiums
serviced(3)(4) $222,422 $155,249 $114,576 $ 70,709 $ 45,752
Market share 15.9% 14.4% 12.5% 9.4% 6.0%
Number of policies 99,389 71,114 53,267 36,050 24,167
Basic Coverage premiums
serviced(4) $ 48,525 $ 34,954 $ -- $ -- $ --
Market share 22.6% 20.2% -- -- --
Number of policies 49,494 42,642 -- -- --
Crop Hail:
Premiums serviced $ 82,991 $ 69,625 $ 26,164 $ 9,951 $ 9,564
Market share 13.2% 13.3% 5.0% 2.0% 2.3%
Number of policies 35,479 32,720 12,940 4,942 4,168
BALANCE SHEET DATA:
Total assets $158,929 $153,465 $ 88,175 $ 35,230 $ 20,337
Long-term debt, excluding
current installments 2,654 3,374 1,978 1,621 618
Redeemable preferred stock 10,000(5) -- -- 3,250 --
Stockholders' equity 33,752 44,342 38,669 1,960 1,176
</TABLE>
______________
(1) Reflects federal and state income taxes as if the Company's subsidiaries
had not been treated as S Corporations during periods prior to the
Company's initial public offering in June 1994.
(2) Statistical data related to MPCI are presented on a July 1 to June 30 crop
year basis (e.g., information for 1996 relates to July 1, 1995 to June 30,
1996 crop year). All crop hail statistics are presented on a calendar year
basis. Market share information for MPCI and crop hail is derived from
industry statistics published by the FCIC and National Crop Insurance
Services, a statistical and rate filing organization ("NCIS"),
respectively. Market share information for Basic Coverage is only based on
the total Basic Coverage premiums written by private insurers.
(3) MPCI premiums represent premiums actually paid by the policyholder plus the
portion of the premium subsidized and actuarially assumed by the FCIC.
(4) MPCI premiums serviced in the 1995 crop year represent actual premiums
serviced by the Company and exclude the effect of the Dawson acquisition.
(5) Represents issuance of redeemable preferred stock to Fireman's Fund in July
1996. See Note 5 to Notes to Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto included elsewhere in the Company's
Annual Report on Form 10-K.
AGENCY OPERATIONS
SERVICE FEES
The Company's agency operations revenues include service fees related to
the servicing of MPCI and crop hail insurance, excess loss adjusting expense
reimbursement related to MPCI premiums serviced and profit sharing amounts, if
any, resulting from underwriting gains, if any, on the premiums it services.
For 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 was 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 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 (based upon a 65% production
guarantee at a 100% price election.)
The expense reimbursement level for the 1998 and 1999 crop years for Buy-Up
coverage is limited under the Reform Act to levels not to exceed 28% and 27.5%,
respectively. See the following paragraph for a discussion of proposed changes
to the expense reimbursement level for the 1998 crop year. Because the
Company's MPCI service fees are directly related to the expense reimbursement
established by the FCIC, the Company's future MPCI service fees will be affected
by reductions in the level of expense reimbursement. Prior to the 1996 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.
On March 20, 1997, a draft of the SRA (effective for the 1998 crop year)
was released by the FCIC. The draft SRA proposes to revise the expense
reimbursement for Buy-Up Coverage to an amount equal to a flat $100 per
policy plus 18% of the premium related to that policy (17% in the case of
Crop Revenue Coverage policies, a revenue protection coverage introduced by
the FCIC in the 1997 crop year). For Basic Coverage, private companies would
receive a flat $50 per policy plus 4.8% of the premium related to that policy
(based on a 50% production guarantee at a 60% price election). The draft SRA
also proposes certain changes to the risk sharing arrangement (calculation of
underwriting gain or loss on premiums retained by private companies) between
private companies and the
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FCIC. Under the proposed draft, private companies would receive the expense
reimbursement in one installment at the time acreage reports are reported to and
validated by the FCIC. The draft SRA also proposes certain other changes to the
administration of the MPCI program, including certain compliance and program
integrity issues. Earlier in 1997 and as a part of the Clinton Administration's
budget proposal for the government's 1998 fiscal year, funding for the expense
reimbursement was proposed at 24.5% for the 1998 crop year.
The Company is not able to predict whether any or all of the proposed
revisions to the SRA will ultimately be adopted, but believes that the proposed
revisions (particularly the revisions to the expense reimbursement), if
implemented as proposed, would have an adverse impact on the Company's results
of operations in the 1998 crop year. The FCIC has requested written comments on
the proposed SRA draft by April 11, 1997. The Company cannot predict what the
final terms of the SRA will ultimately be or what other legislative or
administrative actions may occur as a part of the SRA revision process or the
federal budget process. For the 1998 crop year the Company expects to negotiate
with agents regarding reduced commissions on Buy-Up coverage to offset expense
reimbursement reductions, however, there is no assurance that any reduction will
be able to 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.
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 MPCI premiums 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 MPCI agreements
with third party insurers; and under the Company's MPCI 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.
The Company's service fees related to crop hail insurance are a percentage
of the premiums serviced for third party insurance companies.
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AGENT COMMISSIONS AND OTHER DIRECT COSTS
Agent commissions and other direct costs related to marketing and servicing
MPCI are obligations of the Company under its MPCI agreements 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, 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. Beginning in the 1997 crop
year and as a result of the restructuring of its MPCI agreement with Fireman's
Fund, the Company will no longer pay any overwrite fees on MPCI premiums it
places with Fireman's Fund.
Loss adjustment expenses are based on management's estimate of all Company
adjusting costs to settle claims incurred or to be incurred on policies on which
revenue has been recognized. The estimate is reviewed periodically and
variances, if any, in estimated versus actual amounts are reflected in current
operations. In some instances, agents are responsible for loss adjusting
expenses or other direct costs associated with policies sold by them, and those
agents generally receive higher commissions in return for the assumption of
those direct costs. Bureau fees are fees charged by NCIS for providing rates
and procedures required to be used by the FCIC.
RECOGNITION OF SERVICE FEES AND DIRECT COSTS
Crop Growers recognizes service fees from MPCI policies and the related
direct costs as of the sales closing date for the particular policy. The sales
closing date, which is established by the FCIC, is the date on which coverage
for a crop must be bound or renewed by the policyholder and when substantially
all required services relating to placing the insurance have been rendered by
the Company. Unless canceled by the farmer, policies in place from the prior
year automatically renew on the same terms on the sales closing date.
Since sales closing dates precede the date on which farmers plant their
insured crop, MPCI coverage and related premiums are estimated by the Company
until the farmer subsequently submits his or her report on actual acreage
planted. The effect of changes in such estimated premiums are included in the
results of operations in the period in which the estimates are changed.
For crop hail insurance, service fees are recognized when the insurance
coverage is accepted by the insurance company, which is concurrent with the
completion of substantially all services required to be performed by the
Company. Direct costs such as agent commissions, loss adjusting and premium
taxes are recognized at the time service fees are recognized.
The Company recognizes service fees under the profit sharing provisions of
its agreements with third party insurance companies when a reasonable estimate
can be made. The Company generally recognizes profit sharing, if any, in the
third and fourth quarters.
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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-TM-
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-TM-, mapping products and hardware
are recognized upon shipment to the customer.
Sales of VisAg-TM- and other mapping products have not made a significant
contribution to revenues or earnings since their introduction. Management
continues to assess the VisAg-TM- product marketing and distribution strategy,
does not expect to achieve significant profitability in its software operations
in 1997 and will seek to manage these operations to a break even level. The
Company does, however, continue to believe map based technology is important in
supporting its crop insurance operations and will continue to develop products
or applications for use by its agency distribution network.
INSURANCE OPERATIONS
The Company's insurance operations include premiums earned and losses
incurred on Buy-Up and Basic Coverages, crop hail, and farm and ranch insurance
coverages underwritten and retained by the Company's property and casualty
insurance company subsidiaries.
For the 1996 and 1997 crop years, the Company did not and will not retain
any MPCI premiums underwritten by its insurance company subsidiaries. For the
1996 crop hail season, the Company retained 15% of crop hail premiums
underwritten by Dawson. In 1995, Dawson retained a certain amount of risk on
premiums underwritten and reinsured prior to its acquisition by the Company in
excess of the Company's risk retention strategy.
INVESTMENT INCOME
Historically, the Company has derived 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.
Realized gains and losses on the sale of investments are included in investment
income. Also included in investment income are income and losses on investments
in companies which are 50% or less owned by the Company, which are accounted for
under the equity method.
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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 because the sales closing date for the majority of spring
crops is March 15. 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 services or
underwrites in the third quarter. In the fourth quarter, the Company also
recognizes underwriting gains or losses, if any, on the premiums it services or
underwrites, 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.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
AGENCY OPERATIONS. Service fees in the year ended December 31, 1996
increased $19.6 million to $104.6 million from $85.0 million in the year
ended December 31, 1995. Although overall MPCI premiums serviced increased
during 1996, the increase was primarily the result of the acquisition of
Dawson and FCIC established rate increases on MPCI premiums in the 1996 crop
year. The increase was partially offset by a loss of premiums written by
certain agencies who elected to have their premiums serviced by other
insurance companies, a reduction in the expense reimbursement paid by the
FCIC from 31% in the 1996 crop year to 29% in the 1997 crop year and the
impact of the dissolution of its MPCI agreement with CNA. See ""-- Restructuring
and Non-Core Expenses.'' Management believes the Company's premiums in the first
quarter of 1997 will continue to be adversely impacted by certain factors
including competitive pressures, principally relating to commissions, and the
dissolution of its MPCI agreement with CNA.
Also included in service fees is $10.9 million in profit sharing revenue in
the year ended December 31, 1996 as compared to $9.1 million in the year ended
December 31, 1995. The increase in profit sharing was primarily the result of
the increase in premiums serviced in 1996 compared to 1995. Profit sharing
revenue as a percentage of premiums serviced decreased to 4.9% in 1996 from 5.8%
in 1995. The decrease was primarily attributed to less favorable underwriting
results on the premiums serviced in 1996 as compared with 1995.
In addition to profit sharing, the Company also recorded excess loss
adjusting expense reimbursement of $2.0 million in the year ended December 31,
1996 as compared to $3.3 million in the year ended December 31, 1995. Included
in the $3.3 million of excess loss adjusting expense reimbursement in 1995 was
$1.7 million of excess loss adjusting expense reimbursement associated with hold
harmless provisions on certain prevented planting claims specific to the 1995
crop year.
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Agent commissions and other direct costs in the year ended December 31,
1996 increased by $18.5 million to $71.1 million from $52.6 million in the year
ended December 31, 1995. The increase in agent commissions and other direct
costs was primarily a result of the increased MPCI and crop hail premiums
serviced. Agent commissions increased as a percentage of premiums
serviced in 1996 as compared to 1995 due to competitive pressures which forced
the Company to, in several areas of the country, increase commissions offered to
agents.
Also included in agent commissions and other direct costs in the year ended
December 31, 1996 were $3.2 million in charges related to the Company's
assessment of its adequacy of the allowance for uncollectible receivables. The
Company reviewed the historical collection experience of receivables,
collectability of certain balances, and the growth in the volume of premiums
serviced and other receivables in determining the necessary allowance for
uncollectible receivables at December 31, 1996. In addition to the charges
included in agent commissions and other direct costs, the Company recorded
$655,000 and $697,000, respectively, in 1996 and 1995 to the provision for
uncollectible receivables which is included in general and administrative
expenses.
INSURANCE OPERATIONS. Premiums earned increased to $2.5 million in 1996
from $(182,000) in 1995. Losses incurred increased in 1996 to $1.3 million from
$(2.3) million. The increases were primarily due to crop hail premiums
underwritten and retained by Dawson in 1996. Dawson was not acquired until July
1995 which was after most crop hail premiums had been written for 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 16.6% in the year ended December 31, 1996 to $33.7 million from $28.9
million in the year ended December 31, 1995. The increase was due primarily to
the increase in the number of employees hired to service increased MPCI premium
and crop hail premium volume and additional general and administrative costs
incurred as a result of the acquisitions made by the Company in 1995 as the
operations have now been included for a full year.
Depreciation and amortization expenses increased to $3.3 million in the
year ended December 31, 1996 from $2.4 million in the year ended December 31,
1995. The increase was primarily a result of increased property and equipment
purchased in late 1995 and 1996 and an increase in the amortization of
intangible assets as a result of the acquisitions during 1995.
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RESTRUCTURING AND NON-CORE EXPENSES. In 1996, as a result of management's
assessment of the Company's core operation and focus on improving the
consistency of its financial performance and improving shareholder returns, the
Company recorded costs related to the relocation of the Company's corporate
headquarters and main office to Overland Park, Kansas, of $2.0 million, write
downs and losses on assets to be disposed of consisting of real estate and
software mapping of $1.3 million, losses on the discontinuation of certain non-
core business operations of $2.0 million, and costs accrued as a result of the
cancellation of certain agreements and contracts with third parties of $1.1
million.
Additionally, as a result of the dissolution of its MPCI agreement with
CNA, the Company was required to request 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 offered incentive fees
to agents to compensate them for obtaining the necessary cancellation and
rewrite forms from policyholders. In the year ended December 31, 1996, the
Company agreed to pay approximately $300,000 relating to transferred business.
The Company expects to pay approximately $1.5 million to $1.8 million of
additional incentive fees in the first quarter of 1997 as part of the
cancellation and rewrite process. The Company anticipates accruing these
amounts consistent with the Company's revenue recognition method. The Company
believes these costs are a one-time expenditure.
LEGAL MATTERS. In the year ended December 31, 1996, the Company incurred
approximately $4.0 million in expenses, primarily legal fees, in connection with
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. Included in this amount, are amounts advanced by the
Company pursuant to indemnification agreements between the former officers and
the Company. In January 1997, the Company settled this matter and agreed to pay
$2.0 million. This amount, which is not tax deductible, was accrued as an
expense in 1996. The Independent Counsel matter continues against one former
officer of the Company.
The Company also incurred approximately $200,000 in the year ended December
31, 1996 in connection with defending a shareholder class action lawsuit filed
in May 1995. In February 1997, the Company settled this matter and agreed to
pay $2.5 million, $1.22 million of which is payable by the Company and the
remainder of which is payable under the terms of a directors' and officers'
insurance policy. The $1.22 million was accrued as an expense in 1996.
INTEREST EXPENSE. Interest expense increased to $1.5 million in the year
ended December 31, 1996 from $859,000 in the year ended December 31, 1995. The
increase in interest expense was a result of additional borrowings necessary to
finance operating expenses attributed to the increase in premium volumes as well
as MPCI deferred premiums in the 1996 crop year.
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YEARS ENDED DECEMBER 31, 1995 AND 1994
AGENCY OPERATIONS. Service fees in the year ended December 31, 1995
increased $36.9 million to $85.0 million from $48.1 million in the year ended
December 31, 1994. The increase in service fees was primarily the result of an
increase in MPCI and crop hail premiums serviced, underwriting gains and
revenues from excess loss adjustment expense reimbursement. The increase in
MPCI premiums serviced was due, in part, to the overall increase in the Buy-Up
Coverage market as a result of the Reform Act, and the addition of Basic
Coverage beginning with the 1995 crop year. Actual premiums serviced by the
Company (including Dawson) during the 1995 crop year were $191.4 million and
$39.5 million for Buy-Up and Basic Coverage, respectively. During the 1995 crop
year, the FCIC made a one time change (in large part due to excess moisture
which delayed planting in certain states) to excess loss adjustment expense
reimbursement to allow companies to recover additional loss adjusting expenses
associated with adjusting prevented planting claims. The Company recognized
$3.3 million in excess loss adjustment expense reimbursement from the FCIC
attributable to the 1995 crop year. A significant portion of this was related
to preventive planting claims. Crop hail premiums serviced increased as a
result of growth in the Company's business and as a result of the Dawson
acquisition.
Service fees also increased as the Company recognized $9.1 million of
underwriting gains in the year ended December 31, 1995 compared to $3.1 million
in the year ended December 31, 1994. The increase in the Company's share of
underwriting gains was primarily a result of increased premiums serviced, the
fact that there was no loss carryforward remaining under its MPCI contract with
CNA and favorable underwriting results on premiums retained by Dawson.
Agent commissions and other direct costs increased by $22.1 million to
$52.6 million for the year ended December 31, 1995 compared to $30.5 million for
the year ended December 31, 1994. The increase in agent commissions and other
direct costs was a result of the increased MPCI premiums serviced by the Company
during the year ended December 31, 1995 compared to the same period in 1994 and
as a result of the loss adjusting costs associated with adjusting of claims
incurred in prevented planting. These increases were partially offset by the
agency acquisitions completed during the year which had the effect of moving
direct costs to general and administrative expenses as these agents became
employees. In addition, overwrite fees payable to third party insurance
companies decreased slightly as Plains and Dawson underwrote a larger percentage
of the premiums serviced by the Company in the year ended December 31, 1995
compared to 1994. As a percentage of service fees, related agent commissions
and other direct costs decreased to 62.5% in 1995 from 63.5% in 1994.
INSURANCE OPERATIONS. Premiums earned decreased in 1995 to $(182,000) from
$1.3 million in 1994. Losses incurred decreased in 1995 to $(2.3) million from
$1.3 million in 1994. The decreases were due primarily to the acquisition of
Dawson. 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, 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 of approximately
$2.3 million.
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INVESTMENT INCOME. Investment income increased $766,000 in the year ended
December 31, 1995 to $2.2 million from $1.4 million in the year ended December
31, 1994. The increase in investment income was due primarily to realized gains
on investment securities sold during 1995 to fund the Dawson acquisition.
INTEREST EXPENSE. The increase in interest expense was primarily due to
additional borrowings necessary to finance MPCI deferred premiums and operating
expenses attributed to the increase in premium volume as 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) as well as additional long-term debt incurred
on the permanent financing of the Company's former headquarters in Great Falls,
Montana.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 150.6% to $28.9 million in the year ended December 31, 1995 from $11.5
million in the year ended December 31, 1994. The increase was due primarily to
the increase in the number of employees hired to service the increased MPCI
premium volume and additional general and administrative costs incurred as a
result of the acquisitions made by the Company in 1995. At December 31, 1995 the
Company had 524 employees, 142 of which were hired in 1995 as a result of
acquisitions, compared to 228 at December 31, 1994. The Company also incurred
significant start-up costs including development and marketing costs associated
with the initial release of VisAg-TM- in December 1995.
Depreciation and amortization expenses increased to $2.4 million in the
year ended December 31, 1995 from $1.0 million for the year ended December 31,
1994. The increase was primarily a result of increased property and equipment
purchased to support the growth of the Company and an increase in the
amortization of intangible assets as a result of acquisitions.
INCOME TAXES. For the year ended December 31, 1994, the Company recognized
approximately $264,000 of a rehabilitation tax credit related to the renovation
of the Company's new office building which qualified as a historic structure.
This had the effect of reducing the Company's effective tax rate as compared to
the year ended December 31, 1995.
MINORITY INTEREST. Minority interest represents dividends accrued and the
accretion of discount on preferred stock issued in March of 1995, to fund the
Dawson acquisition. Also included in minority interest are earnings attributed
to minority shareholders.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Net cash provided by operating activities was $12.2 million and $2.9
million during 1996 and 1994, respectively, compared with cash used by operating
activities of $15.3 million in 1995. The increase in cash provided by operating
activities in 1996 was primarily the result of the Company settling with
insurance companies on crop hail and MPCI premiums in the first quarter of 1997
rather than in the fourth quarter of 1996. In addition, in 1995, the FCIC
extended the payment due dates for the 1995 crop year by one month for
policyholders which delayed policyholders payments to the Company for MPCI
premiums due. This had the effect of delaying the Company's receipt of a portion
of the expense reimbursement payable to the Company on MPCI premiums serviced.
This delay, which did not happen in 1994, nor reoccur in 1996, substantially
increased cash used for operations during 1995.
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INVESTING ACTIVITIES
Cash provided by investing activities was $22.4 million and $699,000 for
1996 and 1995, respectively, compared with cash used by investing activities of
$37.3 million in 1994. Historically, most of the Company's cash flow has been
used to pay premiums due to the FCIC in the last quarter of the year on behalf
of policyholders in order to earn the spread between the interest charged to the
policyholders, which is equal to the rate established by the FCIC, and the
Company's cost of funds. The increase in cash provided by investing activities
in 1996 was primarily a result of the Company not financing the premiums payable
to the FCIC on the 1996 crop year. In November 1996, Crop Growers and
Fireman's Fund amended their MPCI agreement pursuant to which Fireman's Fund
financed the premiums on behalf of the policyholders in exchange for the
interest charged on the deferred premiums. The Company continues to administer
the collection of the receivables and is ultimately responsible for the
collection of the balances. The Company receives a fee for administrative costs
related to the premiums financed. Deferred premiums financed at December 31,
1995, were $22.1 million compared to $27.6 million at December 31, 1994. The
portion of deferred premiums financed at December 31, 1995, was less than 1994,
due to less available funds to finance premiums, primarily as a result of the
Company's use of funds to finance the acquisition of Dawson and the delay in
receiving the excess loss adjusting expense reimbursement from the FCIC for
prevented planting until January, 1996.
The remaining investing activities of the Company have been primarily
purchases and sales of investment securities, acquisitions and purchases of
property and equipment needed as a result of the growth of the Company.
During 1996, a portion of the proceeds from the $6.1 million sale of
investment securities were used by the Company to assist in funding
operations during 1996 and early 1997. Additionally, during 1995, the Company
used $9.1 million in proceeds from the sale of investment securities to fund
the acquisition of Dawson. During 1994, the Company invested $13.5 million in
investment securities. This amount represented proceeds from the Company's
two public offerings pending the need for corporate use.
FINANCING ACTIVITIES
Cash used by financing activities was $25.4 million in 1996, compared with
cash provided by financing activities of $18.6 million and $34.1 million for
1995 and 1994, respectively. The primary source of cash during 1996 was $10
million from the issuance of redeemable preferred stock to Fireman's Fund. The
primary use of cash during 1996 was to repay amounts outstanding under the
Company's line of credit of $32.2 million. The primary sources of cash during
1995 and 1994 were from draws on the Company's line of credit to pay the
deferred premiums due to the FCIC on behalf of policyholders and $35.9 million
in 1994 of net proceeds received in the Company's two public offerings. The
Company also redeemed $3.5 million of subsidiary preferred stock during 1994.
In addition, during 1996, the Company repurchased $2.1 million of common
stock from certain former executive officers under separation agreements with
the officers. The Company purchased an additional $85,000 of stock in January
1997 as the last required purchases under these agreements. See Note 8 of
Notes to Consolidated Financial Statements.
The Company paid $239,000 in dividends during 1996 relating to its
preferred stock issued to Fireman's Fund in July 1996. The Company has not paid
dividends on its common stock. The Company currently intends to retain earnings
to finance the growth and development of its business and does not currently
anticipate paying cash dividends on its common stock in the foreseeable future.
32
<PAGE>
CAPITAL RESOURCES
Historically, the Company has maintained lines of credit to finance working
capital needs and premiums on behalf of policyholders who elect not to pay their
MPCI premiums on the FCIC established due date and to fund crop hail losses in
advance of reimbursement from the contracting insurance companies. These lines
of credit expired in October and November 1996 and were not renewed.
In connection with the March 1997 acquisition agreement between the Company
and Fireman's Fund, Fireman's Fund has agreed to provide the Company with a
working capital line of credit of up to $15 million subject to certain borrowing
base limitations in the event that the Company is not able to secure third
party financing. The credit agreement includes restrictive covenants and the
requirement to maintain certain financial ratios and minimum net worth. The
commitment which will expire in March 1998, does not contain any loan or
commitment fees and borrowings bear interest at national bank's base rate. If
the Company were to terminate the acquisition agreement with Fireman's Fund, any
amounts then outstanding under the line of credit would become immediately due
and payable.
In addition, under the crop hail general agency agreement between the
Company and Fireman's Fund, Fireman's Fund will fund crop hail losses.
Accordingly, the Company will not need to finance crop hail losses in 1997.
The Company believes that the cash generated from operations and the
availability of borrowings under the Fireman's Fund commitment to provide
working capital will provide sufficient resources to finance the Company's
current operations and projected working capital needs for the next 12 months.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 35
Consolidated Financial Statements:
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 36
Balance Sheets as of December 31, 1996 and 1995 37
Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 38
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 39
Notes to Consolidated Financial Statements 40
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Crop Growers Corporation:
We have audited the accompanying consolidated balance sheets of Crop Growers
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Crop Growers
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Kansas City, Missouri
March 28, 1997
35
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Service fees $104,602,376 $85,025,204 $48,100,395
Premiums earned and other income 4,308,467 700,910 2,202,499
Investment income 2,255,324 2,162,613 1,396,713
------------ ----------- -----------
Total revenues 111,166,167 87,888,727 51,699,607
Expenses:
Agent commissions and other
direct costs 71,082,490 52,611,960 30,475,468
Losses incurred and other expenses 2,420,666 (2,012,311) 1,427,218
General and administrative expenses 33,698,919 28,885,688 11,525,930
Restructuring and non-core expenses 6,509,628 -- --
Legal matters 7,458,044 -- --
Interest expense 1,477,595 858,640 394,167
------------ ----------- -----------
Total expenses 122,647,342 80,343,977 43,822,783
------------ ----------- -----------
(Loss) income before income taxes
and minority interest (11,481,175) 7,544,750 7,876,824
Income tax benefit (expense) 3,345,732 (2,942,452) (2,273,435)
Minority interest (67,227) (306,987) (279,819)
------------ ----------- -----------
Net (loss) income (8,202,670) 4,295,311 5,323,570
Redeemable preferred stock dividend (238,889) -- --
------------ ----------- -----------
Net (loss) income attributable to
common stock $ (8,441,559) $ 4,295,311 $ 5,323,570
------------ ----------- -----------
------------ ----------- -----------
Pro forma data (see Note 7):
Historic net income $ -- $ -- $ 5,323,570
Pro forma provision for
income taxes -- -- (280,975)
------------ ----------- -----------
Pro forma net income $ -- $ -- $ 5,042,595
------------ ----------- -----------
------------ ----------- -----------
Pro forma net income per common share $ -- $ -- $ 0.91
------------ ----------- -----------
------------ ----------- -----------
Net (loss) income per common share $ (1.04) $ .51 $ --
------------ ----------- -----------
------------ ----------- -----------
Weighted average common shares
outstanding 8,108,600 8,352,837 5,562,374
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
---- ----
Investments:
Fixed maturities, held to maturity $ 1,308,439 $ 2,311,177
Fixed maturities, available for sale 5,199,708 5,838,391
Equity securities, available for sale -- 1,757,540
------------ ------------
Total investments 6,508,147 9,907,108
Cash and cash equivalents 16,132,126 6,980,570
Premiums receivable, net 57,536,838 60,944,012
Underwriting gain receivable 14,317,285 12,926,642
Reinsurance balances recoverable 32,625,869 31,779,006
Property and equipment, net 5,242,447 11,687,066
Intangible assets, net 9,857,238 10,528,630
Income tax recoverable 4,949,064 5,434,737
Deferred tax asset 1,861,640 --
Other assets 9,898,474 3,277,131
------------ ------------
$158,929,128 $153,464,902
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Premiums payable $ 29,504,825 $ 6,336,084
Commissions payable 16,239,692 14,142,811
Underwriting gain payable 1,216,780 4,512,961
Deferred tax liability -- 1,244,852
Accounts payable and accrued liabilities 12,253,886 4,259,312
Reinsurance balances payable 17,010,461 17,787,551
Loss reserves 32,147,342 21,726,157
Deferred service fees 3,513,445 2,678,871
Notes payable to bank -- 32,245,539
Long-term debt 3,290,672 4,188,540
------------ ------------
115,177,103 109,122,678
Redeemable preferred stock 10,000,000 --
Stockholders' equity
Common stock (par value $.01):
40,000,000 shares authorized; 7,970,251 and
8,172,581 shares issued and outstanding at
December 31, 1996 and December 31, 1995,
respectively 79,702 81,726
Paid-in capital 36,729,115 38,244,567
Accumulated (deficit)/retained earnings (3,086,499) 5,881,973
Unrealized appreciation of fixed maturity
and equity investments, net of taxes 54,707 208,958
Unearned compensation (25,000) (75,000)
------------ ------------
Total stockholders' equity 33,752,025 44,342,224
Commitments and contingencies (Notes 11, 13
and 16) ------------ ------------
$158,929,128 $153,464,902
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
37
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
Accumulated
(Deficit)
Common Stock Paid-in Invested Retained
Shares Par Value Capital Capital Earnings
---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1993 -- $ -- $ -- $ 643,191 $ 1,316,812
Net income -- -- -- -- 5,323,570
Net contributions -- -- -- 29,130 --
Reorganization 3,570,000 35,700 5,338,099 (672,321) (4,701,478)
Change in unrealized appreciation
(depreciation) of fixed maturity
investments, net of taxes -- -- -- -- --
Dividends and distributions -- -- (4,140,000) -- --
Issuance of common stock, net of
offering costs of $4,584,618 4,180,748 41,807 35,829,186 -- --
Issuance of restricted stock 20,000 200 149,800 -- --
Restricted stock compensation earned -- -- -- -- --
--------- ----------- ---------- ---------- -----------
Balances, December 31, 1994 7,770,748 77,707 37,177,085 -- 1,938,904
Restatement for immaterial pooling
of interests 316,500 3,166 20,835 -- (352,242)
--------- ----------- ---------- ---------- -----------
Balances, December 31, 1994, as restated 8,087,248 80,873 37,197,920 -- 1,586,662
Net income -- -- -- -- 4,295,311
Issuance of common stock in
conjunction with acquisition 46,933 469 759,031 -- --
Exercise of stock options 38,400 384 287,616 -- --
Restricted stock compensation earned -- -- -- -- --
Change in unrealized appreciation
(depreciation) of fixed maturity
and equity investments, net of taxes -- -- -- -- --
--------- ----------- ---------- ---------- -----------
Balances, December 31, 1995 8,172,581 81,726 38,244,567 -- 5,881,973
Net loss -- -- -- -- (8,202,670)
Exercise of stock options 1,920 19 14,381 -- --
Repurchase of common stock (204,250) (2,043) (1,529,833) -- (526,913)
Dividends paid on preferred stock -- -- -- -- (238,889)
Restricted stock compensation earned -- -- -- -- --
Change in unrealized appreciation
(depreciation) of fixed maturity
and equity investments, net of taxes -- -- -- -- --
--------- ----------- ---------- ---------- -----------
Balances, December 31, 1996 7,970,251 $ 79,702 $36,729,115 $ -- $(3,086,499)
--------- ----------- ---------- ---------- -----------
--------- ----------- ---------- ---------- -----------
Unrealized
Appreciation Total
(Depreciation) Unearned Stockholders'
of Investments Compensation Equity
-------------- ------------ ------
<S> <C> <C> <C>
Balances, December 31, 1993 $ -- $ -- $1,960,003
Net income -- -- 5,323,570
Net contributions -- -- 29,130
Reorganization -- -- --
Change in unrealized appreciation
(depreciation) of fixed maturity
investments, net of taxes (71,734) -- (71,734)
Dividends and distributions -- -- (4,140,000)
Issuance of common stock, net of
offering costs of $4,584,618 -- -- 35,870,993
Issuance of restricted stock -- (150,000) --
Restricted stock compensation earned -- 25,000 25,000
----------- --------- ----------
Balances, December 31, 1994 (71,734) (125,000) 38,996,962
Restatement for immaterial pooling
of interests -- -- (328,241)
----------- --------- ----------
Balances, December 31, 1994, as restated (71,734) (125,000) 38,668,721
Net income -- -- 4,295,311
Issuance of common stock in
conjunction with acquisition -- -- 759,500
Exercise of stock options -- -- 288,000
Restricted stock compensation earned -- 50,000 50,000
Change in unrealized appreciation
(depreciation) of fixed maturity
and equity investments, net of taxes 280,692 -- 280,692
----------- --------- ----------
Balances, December 31, 1995 208,958 (75,000) 44,342,224
Net loss -- -- (8,202,670)
Exercise of stock options -- -- 14,400
Repurchase of common stock -- -- (2,058,789)
Dividends paid on preferred stock -- -- (238,889)
Restricted stock compensation earned -- 50,000 50,000
Change in unrealized appreciation
(depreciation) of fixed maturity
and equity investments, net of taxes (154,251) -- (154,251)
----------- --------- ----------
Balances, December 31, 1996 $ 54,707 $(25,000) $33,752,025
----------- --------- ----------
----------- --------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $(8,202,670) $ 4,295,311 $ 5,323,570
Adjustments to reconcile net (loss) income
to net cash provided (used) by operating
activities:
Depreciation 1,758,218 1,249,632 485,046
Amortization 1,583,216 1,165,840 550,385
Deferred taxes (3,006,769) 835,679 275,534
Gain on sale of securities available for sale (435,557) (371,237) --
Loss on restructuring charges 3,292,217 -- --
Other changes, net of effect from acquisitions:
Premiums receivable, net 3,407,174 59,074,738 (25,564,731)
Premiums payable 2,369,733 (57,518,081) 14,010,143
Underwriting gain receivable/payable (4,686,823) (5,413,681) (3,000,000)
Commissions payable 2,096,881 (5,748,128) 4,261,797
Loss reserves 10,421,185 (35,548,868) 5,609,411
Reinsurance balances recoverable (846,863) 14,485,003 (4,279,105)
Reinsurance balances payable (777,090) 13,508,446 4,279,105
Accounts payable and accrued liabilities 7,994,577 1,194,787 659,361
Income taxes 485,613 (6,643,277) 287,605
Other (3,230,408) 114,835 (2,010)
---------- ----------- -----------
Net cash provided (used) by operating activities 12,222,634 (15,319,001) 2,896,111
INVESTING ACTIVITIES:
Change in company financed premiums 20,799,008 5,504,598 (15,233,082)
Purchase of securities - available for sale (3,653,116) (11,865,698) (11,203,397)
Purchase of securities - held to maturity -- -- (2,313,240)
Proceeds from sales and maturities of
securities - available for sale 6,271,260 19,397,918 35,000
Proceeds from maturities of securities - held
to maturity 1,000,000 -- --
Sale of assets held for sale 1,430,000 -- --
Purchases of intangible assets, including
sales of assets, acquisitions of businesses,
net of cash received (1,124,331) (6,215,541) (2,140,338)
Purchases of property and equipment (2,367,215) (6,122,241) (6,413,749)
---------- ----------- -----------
Net cash provided (used) by investing activities 22,355,606 699,036 (37,268,806)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 14,400 288,000 35,870,993
Repurchase of common stock (2,058,788) -- --
Preferred stock transactions 10,000,000 -- (3,529,819)
Change in notes payable to bank (32,245,539) 18,193,539 5,052,000
Proceeds from issuance of long-term debt 30,264 2,350,864 1,731,511
Repayment of long-term debt (928,132) (2,207,231) (1,053,568)
Dividends and other distributions (238,889) -- (3,957,072)
---------- ----------- -----------
Net cash (used) provided by financing activities (25,426,684) 18,625,172 34,114,045
Net change in cash and cash equivalents 9,151,556 4,005,207 (258,650)
Cash and cash equivalents, beginning in year 6,980,570 2,975,363 3,234,013
---------- ----------- -----------
Cash and cash equivalents, end of year $16,132,126 $ 6,980,570 $ 2,975,363
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
39
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
(1) ORGANIZATION
Crop Growers Corporation and subsidiaries (the Company) markets and
services federal multi-peril crop insurance, crop hail and other insurance
products on behalf of insurance companies, including its wholly-owned
subsidiaries, Plains Insurance Company (Plains) and Dawson Hail Insurance
Co. (Dawson). The Company is also involved in development and marketing of
proprietary software applications for use in the agriculture industry by
insurance agents and farmers.
On March 5, 1997, Fireman's Fund and the Company entered into a definitive
agreement by which Fireman's Fund would acquire the Company in a cash
merger at $10.25 per share. The transaction is subject to, among other
things, Company stockholder approval, regulatory approval and other
customary conditions. Because of regulatory approvals and clearances, the
transaction is not expected to close until mid-1997.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
BASIS OF ACCOUNTING
The accompanying consolidated financial statements have been prepared on
the basis of generally accepted accounting principles ("GAAP") which, as to
the insurance company subsidiaries, vary from statutory accounting
practices prescribed or permitted by insurance regulatory authorities. The
preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
REVENUE RECOGNITION
For multi-peril crop insurance, service fees are recognized based on
estimates of premium as of the sales closing date which is when coverage
for a crop must be applied for or renewed by the policyholder and when
substantially all required services relating to placing the insurance have
been rendered. Actual premiums billed, which are based on actual planted
acreage, may vary from the original estimates made at the sales closing
date. The resulting adjustments are reflected in operations in the periods
in which they are determined. 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
are recognized at the time service fees are recognized.
40
<PAGE>
Premiums associated with the underlying coverage are recognized as due from the
insured or agent and payable to the United States Department of Agriculture's
Federal Crop Insurance Corporation (FCIC), insurance company or reinsurance
company concurrent with the recognition of service fees. Premiums on multi-peril
and crop hail insurance written by Plains and Dawson are considered earned when
written. For multi-peril crop insurance, premiums are written based on estimates
of premium as of the sales closing date.
The Company is entitled to additional income on certain business written for or
reinsured with third-party insurance companies based on specified loss
experience. This additional income is recognized as income when a reasonable
estimate can be made. The Company recognized $10.9 million, $9.1 million and
$3.1 million for the years ended 1996, 1995 and 1994, respectively, under
certain of these profit sharing provisions.
LOSS RESERVES
Loss reserves are based upon estimates for losses reported and estimates for
losses incurred but not yet reported. For multi-peril crop insurance, loss
reserves are recorded at 100% of estimated premiums earned at the sales closing
date. Reinsurance recoverable is recorded at the same time for the portion of
losses not retained by the Company.
The liability for losses and the related estimation methods are continually
reviewed and revised to reflect current conditions and trends. The resulting
adjustments are reflected in operations in the periods in which they are
determined. While management believes the reserves for losses are adequate to
cover the ultimate liability, the actual ultimate loss costs may vary from
amounts provided.
REINSURANCE
Reinsurance recoverable on paid and unpaid losses are reported as assets,
instead of being netted with the related liabilities, since the Company is not
relieved of its legal liability to its policyholders.
DEFERRED SERVICE FEES
Deferred service fees represent management's estimate of such amounts needed for
all Company loss adjusting costs to settle claims incurred or to be incurred on
policies for which revenue has been recognized plus a provision for related
gross profit. The estimated deferred service fees are continuously reviewed and
variances, if any, in estimated versus actual amounts are reflected in current
operations.
41
<PAGE>
ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES
Under its agreements with third-party insurance companies, the Company is
generally responsible for billing and collecting premiums due from the insureds.
To the extent that premiums are not collected, the Company is responsible for
the uncollected balance. An allowance for uncollectible receivables has been
provided based on historical experience and management's best estimate. The
allowance was $3.1 million and $1.3 million at December 31, 1996 and 1995,
respectively.
INVESTMENTS
The Company has classified its investments in fixed maturities as "held to
maturity" and "available for sale," and its marketable equity securities as
"available for sale." Investments classified as "held to maturity" are reported
at amortized cost. Investments classified as "available for sale" are reported
at estimated market value. Unrealized appreciation and depreciation on the
investments classified as "available for sale" are recorded in stockholders'
equity, net of deferred income taxes.
Realized gains or losses on sales of investments are determined on the specific-
identification method and are included in investment income. Investment income
is recognized as earned and includes the accretion of bond discount and
amortization of bond premium.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less accumulated depreciation.
Depreciation is computed primarily on a straight-line basis over the estimated
useful lives of the underlying assets from 3 to 10 years.
INTANGIBLE ASSETS
Intangible assets include contract rights, which represent costs assigned to
agency contracts and policyholder lists obtained in the acquisitions of "books
of business," non-compete agreements, software development costs, management and
services agreements, and insurance licenses. These assets are being amortized
on a straight-line basis over the following periods:
Software development costs. . . . . . . 3 years
Contract rights . . . . . . . . . . . . 3 to 15 years
Non-compete agreements. . . . . . . . . 3 to 5 years
Management and services agreements. . . 15 to 20 years
Insurance licenses. . . . . . . . . . . 20 years
Other . . . . . . . . . . . . . . . . . 5 to 15 years
The Company utilizes various methods to determine the recoverability of its
intangible assets, including discounted cash flows and net future cash flows of
assets acquired. To the extent the carrying value is in excess of the
recoverable value, the assets are written down to their estimated net realizable
value. There have been no significant write-downs of intangible assets during
1996, 1995 or 1994.
42
<PAGE>
LONG-LIVED ASSETS
The Company adopted the Statement of Financial Accounting Standards (SFAS) No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, in the first quarter of 1996. SFAS No. 121 requires
that certain long-lived assets be reviewed for impairment when events or
circumstances indicate that the carrying amounts of the assets may not be
recoverable. If such review indicates that the carrying amount of an asset
exceeds the sum of its expected future cash flows, the asset's carrying value is
written down to fair value. Long-lived assets to be disposed of are reported at
the lower of carrying amount or fair value less cost to sell.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Amounts attributable to the Company's
current year tax return are reflected as current income taxes.
At December 31, 1993, all members of the consolidated group had elected S
Corporation status under Section 1362 of the Internal Revenue Code. Some
members joined the consolidated group as part of the Reorganization (see Note
8). At that date their S Corporation status terminated. Additionally, prior to
that time certain of these members reported taxable income on the cash basis of
accounting. Upon joining the consolidated group, these members had to change
their method of reporting income to the accrual basis and incurred a tax expense
on the outstanding difference in income between the two methods of accounting.
Accordingly, there is no provision for income taxes in the consolidated
financial statements for all income in periods in which certain members of the
group were S Corporations since the income tax liability or benefit accrued to
the stockholders and not to the Company.
As discussed in Note 7, a pro forma provision for income taxes has been
reflected in the accompanying consolidated statement of operations in 1994.
SOFTWARE DEVELOPMENT COSTS
Certain software development costs are capitalized when incurred. Capitalization
of software development costs begins upon the establishment of technological
feasibility. The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software development costs requires
considerable judgment by management with respect to certain external factors,
including, but not limited to, anticipated future revenues, estimated economic
life and changes in software technologies.
43
<PAGE>
All software development costs are amortized on a straight-line basis over the
remaining estimated economic life. To date such costs have resulted from
engineering and development of new and existing products. All other research
and development costs are charged to expense in the period incurred.
STATEMENTS OF CASH FLOWS
The Company considers all highly liquid debt instruments with original
maturities of three months or less as cash equivalents in the statements of cash
flows.
The Company had restricted cash of $7.5 million and $665,000 at December 31,
1996 and 1995, respectively.
The Company may pay premiums which are due in advance of receipt of premium
payments from the policyholder. Such amounts are considered an investing
activity in the statements of cash flows.
The Company paid interest of $1.5 million, $852,000, and $398,000 in 1996, 1995,
and 1994, respectively. The Company received income tax refunds of $4.3 million
and paid income taxes of $3.5 million during 1996, and paid taxes of $8.8
million and $1.8 million in 1995 and 1994, respectively.
MINORITY INTEREST
Minority interest includes dividends accrued on the preferred stock of
subsidiaries and earnings attributed to minority shareholders on the
consolidated statements of operations.
PER SHARE INFORMATION
Net (loss) earnings per common share is computed based on the weighted average
number of common shares outstanding, including the effects of the Reorganization
(see Note 8).
When dilutive, stock options are included as stock equivalents using the
treasury stock method. There is not a material difference between primary and
fully diluted earnings per share.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1995 consolidated
financial statements to conform with the 1996 presentation.
44
<PAGE>
(3) INVESTMENTS
The amortized cost, gross unrealized appreciation and depreciation, and
estimated market value of investments in fixed maturity and equity
investments are as follows:
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Appreciation Depreciation Value
---- ------------ ------------ -----
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities $ 1,308,439 $ 40,158 $ -- $ 1,348,597
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Available for sale:
Obligations of states and
political subdivisions $ 5,110,698 $ 105,116 $ (16,106) $ 5,199,708
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
<CAPTION>
December 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Appreciation Depreciation Value
---- ------------ ------------ -----
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities $ 2,311,177 $ 106,395 $ -- $ 2,417,572
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Available for sale:
Obligations of states and
political subdivisions $ 5,630,639 $ 184,060 $ (887) $ 5,813,812
Corporate securities 24,901 -- (322) 24,579
----------- ------------ ------------ ------------
Total $ 5,655,540 $ 184,060 $ (1,209) $ 5,838,391
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Equity securities $ 1,597,865 $ 159,675 $ -- $ 1,757,540
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
The amortized cost and estimated market value of investments in fixed
maturities are shown below by contractual maturity. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without prepayment penalties.
December 31, 1996
-----------------
Estimated
Amortized Market
Cost Value
---- -----
Held to maturity:
Due in 1 year or less $ -- $ --
Due after 1 year through 5 years 400,209 403,876
Due after 5 years through 10 years -- --
Due after 10 years 908,230 944,721
---------- -----------
$1,308,439 $1,348,597
---------- -----------
---------- -----------
45
<PAGE>
December 31, 1996
-----------------
Estimated
Amortized Market
Cost Value
---- -----
Available for sale:
Due in 1 year or less $ 50,284 $ 50,686
Due after 1 year through 5 years 1,997,337 2,027,157
Due after 5 years through 10 years 1,495,515 1,535,449
Due after 10 years 1,567,562 1,586,416
---------- -----------
$5,110,698 $5,199,708
---------- -----------
---------- -----------
At December 31, 1996, Plains and Dawson had fixed maturities with a
carrying value of $3.5 million on deposit with various regulatory agencies,
as required by law.
The following is a summary of investment income for the years ended
December 31, 1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
Fixed maturity investments $ 492,654 $ 709,922 $ 151,870
Equity investments 32,298 27,681 --
Premium finance 1,134,603 899,347 945,923
Loss on 50% or less owned
companies (257,938) (114,245) --
Other, including realized gains 853,707 639,908 298,920
---------- ---------- ----------
$2,255,324 $2,162,613 $1,396,713
---------- ---------- ----------
---------- ---------- ----------
Proceeds from the sale of available-for-sale securities and gross realized
gains and losses were as follows for the years ended December 31, 1996,
1995, and 1994:
1996 1995 1994
---- ---- ----
Proceeds $6,136,261 $9,227,684 $ --
Gross realized gains 582,925 412,467 --
Gross realized losses (101,111) (41,230) --
(4) INTANGIBLE ASSETS
Intangible assets are summarized as follows:
December 31,
------------
1996 1995
---- ----
Contract rights $ 7,430,952 $ 7,430,952
Software development costs 1,293,363 943,319
Non-compete agreements 590,000 590,000
Management and services agreements 883,982 972,492
Insurance licenses 1,275,000 1,388,529
Other 2,046,755 1,396,880
----------- -----------
13,520,052 12,722,172
Less accumulated amortization 3,662,814 2,193,542
----------- -----------
$ 9,857,238 $10,528,630
----------- -----------
----------- -----------
46
<PAGE>
(5) 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 shareholders on an as-
converted basis. The preferred stock is redeemable at the option of the
Company after July 8, 1997, at $1,000 per share plus all dividends
accumulated and unpaid on the date fixed for redemption; however, the
Company may not redeem the shares prior to July 9, 2001 unless the price of
common stock exceeds a redemption threshold set forth in the certificate of
designation creating the preferred stock. The preferred stock is subject
to mandatory redemption on July 9, 2006.
(6) LONG-TERM DEBT
Long-term debt is summarized as follows: December 31,
------------
1996 1995
---- ----
6.9% notes, payable in aggregate monthly
installments of $14,443, including
interest, through January 2015, secured
by building and office equipment. $1,734,155 $1,780,488
9% note, payable in aggregate monthly
installments of $24,910 through
November 15, 1999, secured by equipment. 754,370 973,497
Bank base rate plus 1% notes, payable in
aggregate annual installments of $223,796,
plus interest, through 1999; secured by
crop insurance agency operations. 671,389 895,186
Various notes with interest rates ranging
from 2.9% to 9.5%, payable on demand or
in aggregate monthly installments of $13,161
including interest, maturing at various
dates through December 15, 1998; secured by
vehicles and office equipment. 130,758 539,369
---------- ----------
$3,290,672 $4,188,540
---------- ----------
---------- ----------
47
<PAGE>
The aggregate maturities of long-term debt for the next five years are
as follows:
Years Ending
December 31,
------------
1997 $636,955
1998 546,063
1999 533,195
2000 60,932
2001 65,296
At December 31, 1995, the Company had two revolving line of credit
agreements for $35,000,000 and $15,000,000, respectively. The
$15,000,000 line of credit was available solely to pay hail losses
with respect to policies issued by or through the Company or its
subsidiaries. This line, which was not utilized during 1996, matured
on October 31, 1996 and was not renewed. Historically, the Company has
utilized the $35,000,000 line of credit to finance working capital
needs as well as MPCI premiums due to the FCIC which have not yet been
paid to the Company by the policyholder. This line matured on November
30, 1996 and was not renewed by the Company. See Note 14 for the
financing of MPCI premiums for 1996.
Fireman's Fund has agreed to provide the Company with a working
capital line of credit of up to $15,000,000 subject to certain
borrowing base limitations. The credit agreement includes restrictive
covenants and the requirement to maintain certain financial ratios and
minimum net worth. The commitment, which will expire in March 1998,
does not contain any loan or commitment fees and borrowings bear
interest at a national bank's base rate. If the Company were to
terminate the acquisition agreement with Fireman's Fund, any amounts
then outstanding under the line of credit would become immediately due
and payable.
(7) INCOME TAXES
Income tax (benefit) expense consists of the following:
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Current:
Federal $ (260,261) $ 1,650,050 $ 1,617,185
State (78,702) 456,723 380,716
Deferred:
Federal (2,325,694) 652,744 224,343
State (681,075) 182,935 51,191
----------- ----------- -----------
$(3,345,732) $ 2,942,452 $ 2,273,435
----------- ----------- -----------
----------- ----------- -----------
48
<PAGE>
The following is a reconciliation between federal income tax (benefit) expense
applicable to (loss) income before income taxes and minority interest and the
amount computed at the statutory federal income tax rate of 34%.
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Federal income tax (benefit) expense
at statutory rate $(3,903,600) $ 2,565,215 $ 2,678,120
S Corporation earnings prior to
reorganization -- -- (424,319)
Change in tax status -- 21,165 172,787
Rehabilitation tax credit -- (52,217) (264,000)
State taxes, net of federal
benefit (501,453) 426,779 288,036
Tax exempt interest and dividends
received (88,010) (170,502) --
Non-deductible payments 760,747 -- --
Other, net 386,584 152,012 (177,189)
----------- ----------- -----------
$(3,345,732) $ 2,942,452 $ 2,273,435
----------- ----------- -----------
----------- ----------- -----------
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are presented below:
December 31,
------------
1996 1995
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 1,215,049 $ 434,392
Asset write downs 717,430 --
Nondeductible reserves 973,683 120,677
Other 172,850 107,230
----------- ----------
3,079,012 662,299
----------- ----------
Deferred tax liabilities:
Differences in depreciation and amortization (1,137,323) (1,294,877)
Unrealized appreciation of investments (33,847) (133,566)
Difference in revenue recognition -- (363,441)
Change in tax status (46,202) (115,267)
----------- ----------
(1,217,372) (1,907,151)
----------- ----------
Net deferred tax asset (liability) $ 1,861,640 $(1,244,852)
----------- ----------
----------- ----------
Based upon all available evidence including taxes paid during the carryback
period, the Company believes that no valuation allowance is necessary for its
deferred tax assets.
The following unaudited pro forma information provides a summary of income taxes
as if the Company had been subject to federal and state income taxes for the
year ended December 31, 1994 prior to the termination of the S Corporation
status:
Federal tax expense $ 251,532
State taxes, net of federal benefit 29,443
---------
$ 280,975
---------
---------
49
<PAGE>
(8) STOCKHOLDERS' EQUITY
During 1996, the Company entered into separation agreements with its former
President and Chief Executive Officer John Hemmingson and its former
Executive Vice President and Chief Financial Officer Gary Black. Under the
agreements, the Company purchased 100,000 and 80,000 shares of its common
stock from Hemmingson and Black, respectively, at prices ranging from
$10.00 to $6.65 during 1996. The Company also purchased 8,000 and 4,000
shares at $6.50 per share from Hemmingson and Black, respectively, in
January 1997.
On June 30, 1994, the Company completed an initial public offering of
2,780,748 shares of common stock at $7.50 per share. The net proceeds from
the offering totaled $18,096,107 and were used to purchase and capitalize
Plains, redeem preferred stock of certain subsidiaries, pay certain
stockholders the remaining contingent purchase price related to the
acquisition of the Company's software development subsidiary, make certain
distributions to former S Corporation stockholders, prepay the remaining
amount owed under the noncompete agreement with a former stockholder,
reduce outstanding short-term borrowings and for general corporate
purposes, including working capital.
Prior to the Reorganization described below, the accompanying consolidated
financial statements represent the historical combined operations of Crop
Growers Insurance, Inc., Prairie Mountain Insurance, Inc., Cimarron Crop
Insurance Services, Inc., Wheat Growers General Agency, Inc., Crop Growers
Software, Inc. (formerly AgriPeril Software, Inc.) and Insurance
Acquisition Corporation, collectively referred to as the Entities.
In anticipation of the Company's initial public offering:
The board of directors of a newly formed Delaware corporation, and the
stockholders of the Entities entered into a Reorganization Agreement
with the Company. Pursuant to the Reorganization Agreement, the
outstanding common stock of the Entities were exchanged for 3,570,000
shares of the Company's common stock and $3,010,000 of promissory
notes with certain stockholders. The transaction was accounted for as
an exchange of interest under common control, similar to a pooling of
interest. All name references in the consolidated financial
statements and the notes thereto, have been changed to reflect this
Reorganization.
The Entities distributed to their stockholders $830,000 as a partial
distribution of accumulated S Corporation earnings. The status of any
of the Entities as S Corporations was terminated upon consummation of
the Reorganization. At the date of Reorganization, any remaining
undistributed earnings were transferred to paid-in capital as though
the Company had distributed such earnings to the stockholders and they
had contributed the amounts back to the Company. During the fourth
quarter of 1994, the Company distributed an additional $300,000 of
dividends to cover tax liabilities of certain former S Corporation
stockholders relating to earnings of certain of the S
50
<PAGE>
Corporations prior to the Reorganization. This amount has been
included in dividends and distributions in the accompanying
consolidated financial statements.
On December 6, 1994, the Company completed a second public
offering of 1,400,000 shares of its common stock at $14.00 per
share. The net proceeds from this offering totaled $17,774,886
and were used to provide additional capital to Plains, support
additional product development efforts relating to software
systems and for general corporate purposes.
(9) STOCK OPTION AND OTHER INCENTIVE PLANS
The Company has a Stock Incentive Plan (Incentive Plan) which permits the
issuance of options, stock appreciation rights, restricted stock,
restricted stock units, performance awards, dividend equivalents and other
stock based awards to employees, officers, consultants or independent
contractors providing service to the Company.
A total of 1,500,000 shares of common stock have been reserved for the
granting of awards under the Incentive Plan. The Incentive Plan is
administered by a Committee of the Board of Directors.
Under the terms of the Incentive Plan, the exercise price determined by the
Committee, of any stock option may not be less than 100% of the fair market
value on the date of grant. The options vest in periods of three to five
years. Following is a summary of the stock option activity:
Number of Option Price
Option Shares Per Share
------------- ---------
Outstanding, January 1, 1994 -- $ --
Granted 743,900 7.50 - 25.00
Forfeited (10,000) 7.50
Exercised -- --
---------- --------------
Outstanding, December 31, 1994 733,900 7.50 - 25.00
Granted 181,750 12.63 - 26.75
Forfeited (5,060) 7.50
Exercised (38,400) 7.50
---------- --------------
Outstanding, December 31, 1995 872,190 7.50 - 26.75
Granted 299,710 8.50 - 11.00
Forfeited (97,899) 7.50 - 19.50
Exercised (1,920) 7.50
---------- --------------
Outstanding, December 31, 1996 1,072,081 7.50 - 19.50
---------- --------------
---------- --------------
Exercisable, December 31, 1996 578,801 7.50 - 26.75
---------- --------------
---------- --------------
In 1994, 20,000 shares of restricted stock were granted under the Incentive
Plan which vest over three years. The shares are considered issued when
awarded, but the recipient does not own and cannot sell the shares while
they are restricted.
51
<PAGE>
At December 31, 1996, 254,640 shares remain eligible for future grant under the
Incentive Plan.
The Company accounts for stock options in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
The per share weighted-average fair value of stock options granted during 1996
and 1995 was $4.23 and $8.43 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 1996 -
expected dividend yield 0%, risk-free interest rate of 8.0%, expected volatility
factor of 30%, and an expected life of 6 years; 1995 - expected dividend yield
0%, risk-free interest rate of 8.0%, expected volatility factor of 30%, and an
expected life of 6 years.
Since the Company applies APB Opinion No. 25 in accounting for its plan, no
compensation cost has been recognized for its stock options in the financial
statements. Had the Company recorded compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, the Company's net
(loss) income and earnings per share for 1996 and 1995 would have been
(increased) reduced by approximately 10.0% and 6.3%, respectively. Pro forma
net income reflects only options granted in 1996 and 1995. Compensation cost
for options granted prior to January 1, 1995 is not considered.
The Company has a Non-Employee Director Stock Option Plan (Director Plan), which
provides for automatic grants of options, which do not qualify as incentive
stock options, to non-employee directors of the Board of Directors. A total of
50,000 shares of Common Stock have been reserved for the granting of awards
under the Director Plan at 100% of the fair market value at the grant date.
Under the terms of the Director Plan, options granted are exercisable in full
six months from the date of grant and expire ten years from such date. At
December 31, 1996, 18,000 options had been granted under the Director Plan at
prices ranging from $7.50 to $27.13 and 32,000 shares remain eligible for future
grants.
52
<PAGE>
In May, 1996, the Board of Directors awarded 75,000 and 65,000 options to
the Chairman and Vice Chairman of the Board, respectively. The options,
with exercise prices of $11.00 per share, vested 30 days after issuance.
In March 1996, a Management Compensation Plan ("Plan") was authorized by
the Board of Directors. The Plan provides annual and long-term incentives
for officers and certain key employees of the Company. Under the annual
plan, for the year ended December 31, 1996, certain required performance
goals under the Plan were achieved and accordingly, the Company recorded
approximately $100,000 in compensation expense. Under the long-term
portion of the plan, performance units for potential cash incentives and 10
year stock options may be awarded. Performance units are earned over a
three-year performance period between 1996 to 1998, based on the degree of
attainment of performance objectives. The cash target value of the
performance units at December 31, 1996 was approximately $151,000. Options
are awarded at the discretion of the board during the three-year
performance period and vest in thirds over the three year period following
the option grant date. As of December 31, 1996, 188,710 options had been
granted; none were exercisable.
The Company has a 401(k) plan covering substantially all of its
employees who have met specific age and service requirements.
Benefits under the plan vest after varying periods of plan
participation. Contributions to the plan are at the sole discretion
of the Board of Directors. Contributions to the plan for 1996, 1995
and 1994 were $381,001, $208,182, and $134,610, respectively.
(10) STATUTORY ACCOUNTING PRACTICES
Plains and Dawson are domiciled in Kansas and North Dakota,
respectively, and prepare their statutory-basis financial statements
in accordance with accounting practices prescribed or permitted by the
Kansas and North Dakota Insurance Departments, respectively.
"Prescribed" statutory accounting practices include state laws,
regulations and general administrative rules, as well as a variety of
publications of the National Association of Insurance Commissioners
("NAIC"). Permitted statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may
differ from state to state, may differ from company to company within
a state, and may change in the future. Plains and Dawson have no
significant permitted accounting practices that vary from prescribed
accounting practices, except as noted below.
53
<PAGE>
Stockholder's equity and net income, as reported to the domiciled state
insurance departments in accordance with its prescribed or permitted
statutory accounting practices, for the Company's insurance subsidiaries,
are summarized as follows:
December 31,
------------
1996 1995
---- ----
Stockholder's equity:
Plains $ 7,134,453 $7,447,433
Dawson 8,180,807 8,204,035
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Net income:
Plains $ 187,020 $ 375,152 $ 262,131
Dawson 1,159,787 2,793,067 --
On a statutory accounting basis, Dawson recognizes premiums earned,
commission income and the related direct costs such as agent commissions,
premium taxes and other underwriting expenses based on the FCIC crop year.
This accounting practice was approved by the North Dakota Insurance
Department as a permitted accounting practice.
The payment of stockholder dividends by insurance companies without the
prior approval of regulators is limited to surplus determined in accordance
with statutory accounting practices, and requires that the capital and
surplus following such dividends be reasonable in relation to its
outstanding liabilities, and adequate to meet its financing needs. The
maximum amount available for the payment of dividends by Plains and Dawson
to the Company during 1997 without prior approval with the regulatory
authorities is $213,000. During 1996, Plains and Dawson paid
dividends, to the Company, of $500,000 and $2.5 million, respectively, from
earned surplus.
The NAIC has adopted minimum risk based capital requirements to evaluate
the adequacy of statutory capital and surplus in relation to an insurance
company's risks. Regulatory compliance of risk based capital requirement
is defined by a ratio of a company's regulatory total adjusted capital to
its to its authorized control level risk based capital, as defined by the
NAIC. At December 31, 1996, Plains and Dawson exceed the minimum risk
based capital requirements.
(11) REINSURANCE
Plains and Dawson are each a party to a Quota Share Standard
Reinsurance Agreement with Fireman's Fund pursuant to which they cede
all multi-peril crop insurance premiums they underwrite to Fireman's
Fund. In 1996, Plains and Dawson entered into reinsurance agreements
with non-affiliated insurance companies under which Plains ceded 100%
and Dawson ceded 85% of the crop hail premiums.
54
<PAGE>
Dawson has entered into a reinsurance agreement with a non-affiliated
insurance company under which Dawson assumed 100% of the multi-peril
crop insurance and losses written by the non-affiliated insurance company
in the State of Kansas. Dawson has currently ceded all of this business
to Fireman's Fund. This agreement was not renewed for the 1997 crop year.
During 1995, Plains entered into a reinsurance agreement with non-
affiliated insurance companies. With respect to this agreement,
additional commissions predicated on loss experience with respect to
MPCI business were $1,249,200 at December 31, 1995. This agreement
was terminated in 1996.
The effect of these reinsurance transactions on premiums earned and
losses incurred are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1996
- ----------------------------
Line of business
----------------
Premiums earned: Multi-peril Crop hail Other Total
----------- --------- ----- -----
<S> <C> <C> <C> <C>
Direct $ 79,090,253 $ 29,909,731 $ 793,820 $ 109,793,804
Assumed 8,624,632 -- -- 8,624,632
Ceded (87,714,885) (27,554,476) (642,377) (115,911,738)
------------ ------------ --------- -------------
Net $ -- $ 2,355,255 $ 151,443 $ 2,506,698
------------ ------------ --------- -------------
------------ ------------ --------- -------------
Line of business
----------------
Losses incurred: Multi-peril Crop hail Other Total
----------- --------- ----- -----
Direct $ 73,829,342 $ 18,325,770 $ 585,158 $ 92,740,270
Assumed 15,157,666 -- -- 15,157,666
Ceded (88,987,008) (17,137,583) (469,401) (106,593,992)
------------ ------------ --------- -------------
Net $ -- $ 1,188,187 $ 115,757 $ 1,303,944
------------ ------------ --------- -------------
------------ ------------ --------- -------------
<CAPTION>
Year ended December 31, 1995
- ----------------------------
Line of business
----------------
Premiums earned: Multi-peril Crop hail Other Total
----------- --------- ----- ------
<S> <C> <C> <C> <C>
Direct $ 20,754,807 $ 7,704,421 $ 204,320 $ 28,663,548
Decrease in estimate
made subsequent to
Dawson acquisition (754,519) -- -- (754,519)
Assumed 6,730,063 6,311,616 -- 13,041,679
Ceded (27,211,238) (13,748,473) (172,837) (41,132,548)
------------ ------------ --------- -------------
Net $ (480,887) $ 267,564 $ 31,483 $ (181,840)
------------ ------------ --------- -------------
------------ ------------ --------- -------------
Line of business
----------------
Losses incurred: Multi-peril Crop hail Other Total
----------- --------- ----- -----
Direct $ 16,818,192 $ 3,333,423 $ 78,752 $ 20,230,367
Decrease in estimate
made subsequent to
Dawson acquisition (3,829,691) -- -- (3,829,691)
Assumed 6,730,063 3,996,560 -- 10,726,623
Ceded (21,990,215) (7,395,354) (63,171) (29,448,740)
------------ ------------ --------- -------------
Net $ (2,271,651) $ (65,371) $ 15,581 $ (2,321,441)
------------ ------------ --------- -------------
------------ ------------ --------- -------------
</TABLE>
55
<PAGE>
Year ended December 31, 1994
-----------------------------------------------
Line of business
----------------
Premiums earned: Multi-peril Crop hail Other Total
----------- --------- ----- -----
Direct $ 4,529,509 $ 5,905,422 $ 438 $10,435,369
Ceded 3,199,208 5,905,422 350 9,104,980
----------- ----------- ------ -----------
Net $ 1,330,301 $ -- $ 88 $ 1,330,389
----------- ----------- ------ -----------
----------- ----------- ------ -----------
Line of business
----------------
Losses incurred: Multi-peril Crop hail Other Total
----------- --------- ----- -----
Direct $ 4,529,509 $ 3,206,714 $ -- $ 7,736,223
Ceded 3,199,208 3,206,714 -- 6,405,922
----------- ----------- ------ -----------
Net $ 1,330,301 $ -- $ -- $ 1,330,301
----------- ----------- ------ -----------
----------- ----------- ------ -----------
During 1996, 1995 and 1994, Plains and Dawson underwrote approximately
$40.4 million, $12.4 million and $3.3 million, respectively, of imputed
premium for basic catastrophic and buy up coverage which is included in
direct and ceded multi-peril premiums earned. These premiums are fully
subsidized by the FCIC and any related losses are fully recoverable from
the FCIC, except to the extent Plains and Dawson elect to participate in
the overall underwriting gain or loss relating to such business.
The Company continuously reviews and monitors the financial condition of
its reinsurers. To the extent that a reinsurer does not meet the
obligations under its reinsurance agreement, Plains and Dawson remain
liable.
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.
Subsequent to the acquisition, 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.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of financial instruments presented in the applicable
notes to the Company's consolidated financial statements are estimates
of the fair values at a specific point in time using available market
information and appropriation valuation methodologies. These
estimates are subjective in nature and involve uncertainties and
significant judgment in the interpretation of current market data.
Therefore, the fair values presented are not necessarily indicative of
amounts the Company could realize or settle currently. The Company
does not necessarily intend to dispose of or liquidate such
instruments prior to maturity. Fair values of these financial
instruments have been determined as follows:
Cash, short-term investments and accrued investment income
and notes payable to bank - these financial instruments are
short-term in nature; therefore, the carrying value and fair
value are approximately the same.
56
<PAGE>
Fixed maturity and equity securities - fair value for fixed
maturity and equity securities are based on quoted market
prices from major pricing services, where available; for
securities that are not actively traded, estimated fair
values are based on values of issues of comparable yield and
quality.
Debt - the fair values are based on the interest rates that
are currently available to the Company for issuance of debt
with similar terms and remaining maturities.
The following are the estimated fair values of the Company's
financial instruments:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturity securities $ 6,508,147 $ 6,548,305 $ 8,149,568 $ 8,255,963
Equity securities -- -- 1,757,540 1,757,540
Cash and cash equivalents 16,132,126 16,132,126 6,980,570 6,980,570
Financial liabilities:
Notes payable to bank -- -- 32,245,539 32,245,539
Debt 3,290,672 3,187,694 4,188,540 4,019,315
</TABLE>
The Company does not have derivative financial instruments.
(13) COMMITMENTS
The Company has several operating leases for office space that expire at
various dates over the next five years. Total rental expense was
$1,079,042, $767,253, and $391,818 for the years ended December 31, 1996,
1995, and 1994, respectively.
Future minimum lease payments under noncancelable operating leases for the
next five years are as follows:
Aggregate Net
Years ending Minimum Sublease Minimum
December 31, Lease Payments Payments Lease Payments
------------ -------------- -------- --------------
1997 $1,280,555 $ (92,145) $ 1,118,410
1998 1,163,476 (83,520) 1,079,956
1999 985,608 (20,880) 964,728
2000 911,370 -- 911,370
2001 721,591 -- 721,591
57
<PAGE>
(14) SIGNIFICANT RELATIONSHIPS
FEDERAL MPCI PROGRAM
The majority of the Company's revenues since inception have been derived
from servicing multi-peril crop insurance. The Company expects that at
least a majority of its revenue will continue to be derived from its multi-
peril crop insurance business for the foreseeable future. Therefore, the
Company's results of operations and financial condition are substantially
dependent upon the multi-peril crop insurance program.
Insurance companies that are involved in the multi-peril crop insurance
program, including Fireman's Fund, Plains, and Dawson, are subject to
periodic review by the FCIC for, among other things, the availability of
adequate capital and surplus and compliance with underwriting, loss
adjustment, and other requirements of the multi-peril crop insurance
program. In addition, as a part of the FCIC's review process, the Company,
as a servicer on behalf of Fireman's Fund, Plains and Dawson, is
periodically reviewed for its compliance with FCIC rules and regulations. A
failure to comply with such rules could result in the FCIC choosing not to
allow the Company, Fireman's Fund, Plains or Dawson to participate in the
MPCI program.
INSURANCE COMPANIES
In connection with the marketing and servicing of multi-peril crop
insurance, crop hail and other named peril insurance, a significant amount
of the premiums serviced are underwritten by CNA and Fireman's Fund.
During 1996, 1995 and 1994, 40.2%, 59.9%, and 84.5% respectively, of the
Company's service fee revenues were derived from premiums underwritten by
CNA and 21.0% and 9.8% of the Company's service fee revenues were derived
from premiums underwritten by Fireman's Fund. No premiums were serviced by
the Company for Fireman's Fund in 1994.
The Company and CNA terminated their existing agreements effective for the
1997 crop year in the case of multi-peril crop insurance and the 1997 year
for crop hail insurance.
The Company and Fireman's Fund entered into an agreement in November 1996,
whereby Fireman's Fund agreed to finance the premiums due to the FCIC in
exchange for the interest charged on the deferred premiums. The Company
continues to administer the collection of the receivables and is ultimately
responsible for the collection of the balances. The Company receives an
administrative fee from Fireman's Fund for administrative costs related to
the premiums financed. This financing arrangement has been reflected as
premiums payable in the accompanying consolidated balance sheet.
58
<PAGE>
(15) ACQUISITIONS
On March 14, 1995, the Company acquired the agency operations of Dawson and
on July 14, 1995, the Company acquired all of the outstanding common stock
of Dawson. The purchase price for Dawson was approximately $7,900,000 in
cash and a contingent payment of up to $3,400,000, payable over up to 12
years (subject to an annual cap of $700,000), based on a percentage of the
Company's future net profit sharing, if any, on its crop insurance book of
business. In connection with the recognition of underwriting gains in 1996
and 1995, the Company recognized contingent consideration of $700,000 in
both of those years (which is reflected as an additional acquisition cost
of Dawson). The Company also contributed $1,500,000 to the capital of
Dawson to repay a surplus note.
The Dawson transactions have been accounted for as purchases and,
accordingly, the purchase prices have been allocated to the assets and
liabilities of the agency operations and Dawson based on their
relative fair values at the dates of acquisition. The Company's
results of operations include the results of the agency operations and
Dawson from the respective dates of acquisition.
In conjunction with the Dawson acquisitions, the allocation of the
purchase price consisted of the following:
Fair value of assets acquired, excluding
intangible assets $118,968,335
Intangible assets 4,431,940
Liabilities assumed 115,549,195
------------
Total purchase price $ 7,851,080
------------
------------
The following unaudited pro forma information represents the
consolidated results of operations as if the acquisitions had occurred
at the beginning of the periods presented below after giving effect to
certain adjustments, including amortization of intangible assets
acquired and related income tax effects.
Year Ended
December 31,
------------
1995 1994
---- ----
Total revenues $97,932,000 $68,255,000
Net income 6,124,000 5,417,000
Net income per common share .73 .97
Weighted average common shares outstanding 8,352,837 5,562,374
The pro forma information above does not purport to be indicative of the
results of operations that would have occurred had the transactions taken
place at the beginning of 1994 or of future results of operations.
59
<PAGE>
During 1995, the Company also acquired several additional crop insurance
agency operations. Certain acquisitions were accounted for on the pooling-
of-interests method of accounting. The consolidated financial statements
were not restated, as the acquisitions were not material. The remaining
acquisitions were accounted for on the purchase method of accounting. The
consolidated results of operations would not have been materially different
had these acquisitions been completed on January 1, 1995.
On October 14, 1994, the Company acquired Plains. The purchase price was
approximately $3,800,000 of which $975,000 represented the value of Plains'
licenses and $2,800,000 represented Plains' statutory capital and surplus
at the date of closing. The acquisition was accounted for as a purchase
and, accordingly, the consolidated statements of operations include Plains'
results of operations since the date of acquisition. The consolidated
results of operations would not have been materially different had this
acquisition been completed on January 1, 1994.
(16) LEGAL MATTERS
From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. Neither the
Company nor any of its subsidiaries is a party to any legal proceedings
other than as described below, the adverse outcome of which individually or
in the aggregate, in the Company's opinion, would have a material adverse
effect on the Company's results of operations, financial position or
liquidity.
For the year ended December 31, 1996, the Company incurred approximately
$4.0 million in expenses, primarily legal fees, in connection with
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. On January 21, 1997, the court
accepted the Company's plea of NOLO CONTENDERE to two charges. Pursuant to
an agreement with the Independent Counsel, the Company also agreed to pay a
fine of $2.0 million. The settlement concludes matters between the
Company and the IC. The entire amount of the settlement which is not
deductible for tax purposes has been accrued at December 31, 1996.
By its terms, the Company's agreement with the IC does not compromise or
preclude civil actions by other governmental regulatory authorities, such
as the Federal Election Commission, Securities and Exchange Commission, the
USDA, or state or federal regulatory authorities, or shareholders as a
result of the allegations made by the IC and the Company's NOLO CONTENDERE
plea. No assurance can be given as to what action a regulatory authority
might take in response to the Company's plea and its agreement with the IC.
60
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994
The Company also incurred approximately $200,000 in the year ended December
31, 1996 in connection with defending a shareholder class action lawsuit
filed in May 1995. In February 1997, the Company settled this matter and
agreed to pay $2.5 million, $1.22 million of which is payable by the
Company and the remainder is to be paid out under the terms of a directors'
and officers' insurance policy. The $1.22 million was accrued as an
expense in 1996. The terms of the settlement are subject to court
approval.
(17) RESTRUCTURING AND NON-CORE EXPENSES
Included in restructuring and non-core expenses are costs related to the
relocation of the Company's corporate headquarters and main office to
Overland Park, Kansas in 1996, write downs and losses on assets to be
disposed of consisting primarily of real estate and software mapping
inventory, losses on the discontinuation of certain non-core business
operations, and costs accrued as a result of the cancellation of certain
agreements and contracts with third parties.
The following table provides a summary of these costs for the year
ended December 31, 1996.
Relocation Costs $1,994,853
Write down on assets to be disposed of 1,306,517
Loss on discontinuation of non-core operations 2,037,830
Contract termination costs 1,076,427
Other 94,001
----------
$6,509,628
----------
----------
Included in the loss on discontinuation of non-core operations is $1.0
million in write offs representing the Company's investment in and advances
to Coelho Associates LLC, a joint venture between the Company, a former
director of the Company, and other parties.
At December 31, 1996, the Company had $6.4 million recorded as assets
to be disposed of which are included in other assets. The Company had
recorded a valuation allowance of $1.8 million on the assets to be
disposed of. The Company anticipates selling these assets over the
next twelve months.
61
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994
(18) QUARTERLY RESULTS
In the fourth quarter of 1996, the Company recorded several
adjustments as a result of its review of certain estimates made on
MPCI premiums and the related revenues and direct costs and its
assessment of the adequacy of certain reserves and allowances. These
adjustments are summarized in the table below and are included in
service fees or agent commissions and other direct costs for the year
ended December 31, 1996.
Adjustments to service fees:
Profit sharing revenue $ 4,214,000
Excess loss adjusting reimbursement 1,283,000
Reductions for late acreage reporting (753,000)
Change in MPCI revenue estimate (427,000)
------------
Total increase to service fees $ 4,317,000
------------
------------
Adjustments to agent commissions
and other direct costs:
Change in MPCI commission estimate $ 1,916,000
Roll bonuses on MPCI premiums 1,040,000
Additional allowance for uncollectible
receivables 2,025,000
Additional deferred service fees 1,222,000
-----------
Total increase to agent commissions
and other direct costs $ 6,203,000
-----------
-----------
In the fourth quarter the Company recorded $4.6 million of costs
associated with settling legal matters as discussed in Note 16. In the
fourth quarter the Company recorded $2.0 million of restructuring and
non-core expenses, $1.5 million of which was related to the loss on
discontinuation of non-core operations as discussed in Note 17.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the directors
and executive officers of the Company.
BUSINESS EXPERIENCE DURING
NAME AGE THE PAST FIVE YEARS
---- --- --------------------
Lawrence T. Martinez 34 Chief Executive Officer and Director of the
Company since August 1996 (term expires in
1997); Acting Chief Executive Officer from
June 1996 to August 1996; with the law firm
of Dorsey & Whitney LLP from November 1990 to
June 1996.
Tony Cid 35 Senior Vice President of the Company since
April 1994; held various positions with
Continental from March 1989 to February 1994.
Raford S. Hargrove, Jr. 28 President of Crop Growers Software since
October 1994; General Manager of Crop Growers
Software from January 1991 to October 1994.
Director of the Company from October 1994 to
July 1996.
David E. Hill 34 Chief Financial Officer since December 1995;
Secretary and Treasurer since May 1996; Chief
Accounting Officer from March 1995 to
December 1995; Vice President and Controller
of Insurance Company Operations of the
Company from September 1994 to March 1995;
with the accounting firm of KPMG Peat Marwick
LLP from 1985 to September 1994.
Robert N. Rousey 42 Chief Administrative Officer of the Company
since August 1996; Director of Investor
Relations of the Company from October 1995 to
August 1996; Vice President of Marketing and
Investor Relations with First Federal Savings
Bank from November 1989 to October 1995.
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<PAGE>
Paul T. Horn 53 Chairman of the Board of Directors since the
end of March 1996. Chief Operating Officer
of R.D. Offutt Company, which provides a
variety of agribusiness services and products
to rural communities, since 1985; President,
Chief Operating Officer and a Director of RDO
Equipment Corp., which owns and operates John
Deere industrial and agricultural stores in
the U.S. since August 1996; Director of
Northern Grain Company, a regional grain
elevator; Director since June 1994 (term
expires 1999). (1)
John M. Meuschke 51 Senior Vice President of Fireman's Fund
Insurance Company; has held various positions
at Fireman's Fund since 1968. Director since
July 1996 (term expires 1999). (2)
Manuel Sanchez 52 Chief Executive Officer of Tower Health, a
health maintenance organization, since
February 1997; private law practice from May
1996 to February 1997; President and Chief
Executive Officer of Gulf Atlantic Life
Insurance Company from 1991 to May 1996;
Director since June 1994 (term expires 1998).
(3)
Thomas M. Vertin 50 Vice Chairman of the Board of Directors since
the end of March 1996. Owner and operator of
Vertin Company, a business management firm
with a variety of commercial business and
real estate interests, primarily involving
multi-state funeral homes, since its
inception in 1981; Partner in The Coveda
Company, a management firm that operates
Hardee's restaurants in Minnesota, North
Dakota and South Dakota. Director since
October 1994 (term expires 1997). (1)
___________
(1) Member of the Audit and Compensation Committee.
(2) Mr. Meuschke is a member of the Audit Committee. Mr. Meuschke was
appointed to the board under the terms of an agreement between Fireman's Fund
and the Company relating to Fireman's Fund purchase of $10 million of preferred
stock in July 1996. See "Certain Relationships and Related Transactions."
(3) Member of the Stock Option Committee.
64
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities and Exchange Act of 1934, as amended,
requires the Company's directors and executive officers and all persons who
beneficially own more than 10 percent of the outstanding shares of the Company's
Common Stock to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes in ownership of such Common Stock.
Officers, directors and greater than 10 percent beneficial owners are also
required to furnish the Company with copies of all Section 16(a) forms they
file. To the Company's knowledge, based upon a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1996 all
Section 16(a) filing requirements applicable to the Company's directors,
executive officers and greater than 10 percent beneficial owners were satisfied.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and noncash compensation for each
of the last three fiscal years awarded to or earned by the Chief Executive
Officer of the Company, the four other highest paid executive officers of the
Company in 1996, and the Company's former chief executive officer and executive
vice president.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
NAME AND RESTRICTED SECURITIES (2)ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS UNDERLYING OPTIONS CONTRIBUTIONS
- ------------------ ---- ------ ----- ------------ ------------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence T. Martinez(2) 1996 $139,411 $ -- -- 100,000 --
Chief Executive
Officer
David E. Hill 1996 119,724 -- -- 10,888 $4,750
Chief Financial 1995 96,531 -- -- -- 2,154
Officer, Secretary 1994 20,458 30,000 -- 10,000 --
and Treasurer
Tony Cid 1996 116,923 -- -- 10,888 4,240
Senior Vice 1995 97,370 -- -- -- 2,000
President 1994 68,358 55,000 150,000(3) -- --
Richard A. Bartlett(4) 1996 125,586 -- -- 10,888 4,750
President of Crop 1995 87,564 -- -- -- 2,184
Growers Insurance,
Inc. 1994 65,000 30,000 -- 10,000 --
Raford S. Hargrove, Jr. 1996 119,615 -- -- 7,150 4,750
President of Crop 1995 103,675 -- -- 10,000 3,962
Growers Software, Inc. 1994 83,681 45,000 -- 10,000 3,096
John J. Hemmingson(5) 1996 156,923 -- -- 27,638 4,750
Former Chief Executive 1995 298,919 -- -- -- 4,620
Officer 1994 219,379 145,000 -- 375,000 4,620
Gary A. Black(5) 1996 130,096 -- -- 9,422 4,750
Former Executive 1995 210,008 -- -- -- 4,620
Vice President 1994 202,359 95,000 -- 56,250 4,620
</TABLE>
_____________________
(1) These amounts represent the Company's contributions to its 401(k) plan.
(2) Mr. Martinez was hired on May 31, 1996. See "Employment Agreements."
(3) Market value of shares of restricted stock as of the date of grant. The
shares
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<PAGE>
vest in equal annual installments of 33-1/3% commencing on June 23, 1995.
At December 31, 1996, Mr. Cid had 6,666 shares of restricted stock that
had not yet vested. At December 31, 1996, the market value of these shares
was $46,662. No dividends have been paid by the Company with respect to
these shares.
(4) Effective in March 1997, Mr. Bartlett's employment relationship with the
Company ended.
(5) Messrs. Hemmingson and Black, resigned from the Company effective May 9 and
May 30, 1996, respectively. Messrs. Hemmingson and Black were paid
salaries through June 30, 1996 under the terms of their respective
employment agreements, as amended. See Note 8 of Notes to the Company's
Consolidated Financial Statements included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 and the Company's
Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30,
and September 30, 1996.
EMPLOYMENT AGREEMENTS
In connection with the hiring of Mr. Martinez as Chief Executive Officer
on May 31, 1996, the Company entered into a three-year employment agreement
with Mr. Martinez ending in May 1999. Mr. Martinez was paid an annual base
salary of $225,000 for the period from May 31, 1996 to August 7, 1996 (during
which time he served as Acting Chief Executive Officer) and an annual base
salary of $275,000 thereafter (when he was named Chief Executive Officer).
Under the terms of his agreement, Mr. Martinez's base salary is subject to
annual increases at the discretion of the compensation committee or board of
directors. Under the agreement, Mr. Martinez also participates in executive
incentive plans established by the board of directors or the compensation
committee.
In connection with the Company's initial public offering in June 1994, the
Company entered into an employment agreement with Tony Cid, for a three-year
period ending in June 1997. Under the terms of the agreement, Mr. Cid's base
salary was contractually established at $100,000 and $120,000 for 1995 and 1996,
respectively. The agreement also provides that Mr. Cid will have the opportunity
to earn incentive compensation under plans established by the compensation
committee or board of directors.
Messrs. Martinez's and Cid's employment agreements also provide severance
benefits in the event of termination of employment under certain circumstances.
In the event of termination of employment other than for "cause" (as such term
is defined in the agreements), by the voluntary resignation of the individual
other than for "good reason" (as such term is defined in the agreements) or upon
certain "change in controls" (as defined) of the Company, in addition to
compensation and benefits already earned, Mr. Martinez or Mr. Cid would be
entitled to receive: (i) a cash payment equal to his then current base salary
for the remainder of the contract term, or if greater, 12 months, (ii) immediate
vesting of all outstanding options and (iii) continuation of health and life
insurance benefits for the remainder of the contract term or, if greater, 12
months. On March 5, 1997, Fireman's Fund and the Company entered into a
definitive agreement by which Fireman's Fund would acquire the Company in a cash
merger at $10.25 per share (the "Fireman's Fund Transaction").
66
<PAGE>
STOCK OPTION GRANTS
The following table sets forth stock option information for named
executives in 1996.
<TABLE>
<CAPTION>
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1996
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF
SECURITIES GRANTED TO EXERCISE STOCK PRICE
UNDERLYING EMPLOYEES OR BASE APPRECIATION
OPTIONS IN FISCAL PRICE EXPIRATION FOR OPTION TERM (2)
NAME GRANTED (1) YEAR 1996 ($/SHARE) DATE 5% 10%
---- ----------- --------- --------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Lawrence T. Martinez 100,000 33.4% $10.375 5/31/06 $1,689,978 $2,691,008
David E. Hill 10,888 3.6% 9.0625 3/26/06 160,727 255,931
Tony Cid 10,888 3.6% 9.0625 3/26/06 160,727 255,931
Richard A. Bartlett 10,888 3.6% 9.0625 3/26/06 160,727 255,931
Raford S. Hargrove, Jr. 7,150 2.4% 9.0625 3/26/06 105,547 168,066
John J. Hemmingson 27,638 9.2% 9.0625 3/26/06 407,987 649,651
Gary A. Black 9,422 3.2% 9.0625 3/26/06 139,086 221,471
</TABLE>
____________________
(1) Upon the occurrence of certain defined acceleration events, including the
closing of the Fireman's Fund Transaction, these options would become
immediately exercisable. The exercise price of all options was the closing
price of Common Stock on the NASDAQ Stock Market on the date of grant. Mr.
Martinez's options are exercisable as follows: 20% on May 31, 1996; 40% on
May 31, 1997; 60% on May 31, 1998; 80% on May 31, 1999; and 100% of such
option shares on May 31, 2001. Messrs. Hill's, Cid's, Bartlett's and
Hargrove's options are exercisable as follows: 33 1/3% on March 26, 1997;
66 2/3% on March 26, 1998; and 100% of such option shares on March 26,
1999.
(2) These amounts represent certain assumed rates of appreciation only.
Potential realizable value is calculated assuming 5% and 10% appreciation
in the price of the Common Stock from the date of grant. ACTUAL GAINS, IF
ANY, ON STOCK OPTION EXERCISES ARE DEPENDENT ON THE FUTURE PERFORMANCE OF
THE COMMON STOCK, AND OVERALL STOCK MARKET CONDITIONS. THE AMOUNTS
REFLECTED IN THIS TABLE MAY NOT NECESSARILY BE ACHIEVED.
The following table summarizes option exercises during the year ended
December 31, 1996 by the executive officers named in the Summary
Compensation Table above, and the values of the options held by such
persons at December 31, 1996.
AGGREGATED OPTION EXERCISES DURING YEAR ENDED DECEMBER 31, 1996
AND VALUE OF OPTIONS HELD AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED (1)VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE DECEMBER 31, 1996 HELD AT DECEMBER 31, 1996
NAME ON EXERCISE REALIZED (EXERCISABLE/UNEXERCISABLE) EXERCISABLE/UNEXERCISABLE)
---- ----------- -------- --------------------------- --------------------------
<S> <C> <C> <C> <C>
Lawrence T. Martinez - $ - 20,000/ 80,000 - / -
David E. Hill - $ - 5,000/ 15,888 - / -
Tony Cid - $ - -/ 10,888 - / -
Richard A. Bartlett - $ - 4,000/ 16,888 - / -
Raford S. Hargrove, Jr. - $ - 7,000/ 20,150 - / -
John J. Hemmingson - $ - 237,500/165,138 - / -
Gary A. Black - $ - 28,125/ 37,547 - / -
</TABLE>
________________
(1)At December 31, 1996, no unexercised options were in the money. The market
value of the Common Stock at December 31, 1996 was $7.00 per share.
67
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 21, 1997, certain information
with respect to beneficial ownership of the Common Stock by (i) each person or
entity known by the Company to own beneficially more than 5% of the Company's
Common Stock; (ii) each director of the Company; (iii) each executive officer of
the Company named in the Summary Compensation Table; and (iv) all executive
officers and directors as a group. For purposes of this table, beneficial
ownership of securities is defined in accordance with the rules of the
Securities and Exchange Commission and means generally the power to vote or
dispose of securities, regardless of any economic interest therein. Except as
otherwise indicated, the stockholders listed in the table have sole voting and
investment powers with respect to the shares indicated. For the purpose of
determining "Percent of Outstanding Shares," the number of shares of Common
Stock outstanding at March 21, 1997 was 8,726,968, including 754,717 shares of
Common Stock issuable upon conversion of 10,000 shares of the Company's Series A
Convertible Preferred Stock (which currently votes with the Common Stock on an
as converted basis).
NAME OF NUMBER OF SHARES PERCENT OF
BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING SHARES
- ---------------- ------------------ ------------------
Firstar Bank of Minnesota, N.A.(1) 1,392,416 15.5%
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Fireman's Fund Insurance Company(2) 754,717 8.6%
777 San Marin Drive
Novato, California 94998
Gary A. Black(3) 713,040 8.1%
3325 15th Avenue South
Great Falls, Montana 59405
Thomas Vetter(4) 457,735 5.3%
955 West Chandler Blvd., Suite 15
Chandler, Arizona 84244
Richard A. Bartlett(4) 13,679 *
Tony Cid(4)(5) 16,963 *
David E. Hill(4) 9,029 *
Raford S. Hargrove, Jr.(4) 12,983 *
Paul T. Horn(4)(6) 78,500 *
Lawrence T. Martinez(4) 20,635 *
John M. Meuschke(4) 2,500 *
Manuel Sanchez(4) 4,500 *
Thomas M. Vertin(4)(7) 129,779 1.5%
All executive officers and
directors as a group
(9 individuals)(4)(5)(6)(7) 286,568 3.3%
_________________________________
* Less than 1%.
(1) Firstar Bank of Minnesota, N.A. holds an irrevocable proxy to vote
1,392,416 shares of Common Stock (which includes 246,713 shares of Common
Stock which
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<PAGE>
could be acquired within 60 days of March 21, 1997 through the exercise of
stock options) of John Hemmingson. Firstar Bank of Minnesota has no power
to dispose of, or direct the disposition of, and no pecuniary interest in,
any of such shares of Common Stock. Firstar Corporation, as the parent
holding company of Firstar Bank of Minnesota, N.A., may be deemed to
beneficially own such shares. This disclosure is made in reliance upon a
statement on Schedule 13G dated March 7, 1997 filed with the Securities
and Exchange Commission. See footnote (2) below regarding Fireman's Fund's
agreement to purchase all of Mr. Hemmingson's shares.
(2) Represents 754,717 shares of Common Stock issuable upon conversion of
10,000 shares of the Company's Series A Convertible Preferred Stock held by
Fireman's Fund (the Preferred Stock currently votes with the Common Stock
on an as converted basis). Does not include 1,827,447 shares which
Fireman's Fund has agreed to purchase, as set forth in the following
sentence. On March 5, 1997, Fireman's Fund notified each of John
Hemmingson and Gary Black that it would exercise its rights under certain
right of first refusal agreements and/or accept the offer made by Black and
purchase 1,145,703 and 681,774 shares of Common Stock from Hemmingson and
Black, respectively. The purchases are subject to regulatory approval.
Pending receipt of applicable regulatory approvals, Hemmingson and Black
retain sole voting power with respect to such shares (subject to footnote
(1) above in the case of Hemmingson). This disclosure is made in reliance
upon a statement on Schedule 13D dated March 10, 1997 filed with the
Securities and Exchange Commission.
(3) Includes 31,266 shares of Common Stock which could be acquired within 60
days of March 21, 1997 through the exercise of stock options. See footnote
(2) above.
(4) Includes the following number of shares of Common Stock which could be
acquired within 60 days of March 21, 1997 through the exercise of stock
options: Mr. Vetter, 837 shares; Mr. Bartlett, 8,629 shares; Mr. Cid,
3,629 shares; Mr. Hill, 8,629 shares; Mr. Hargrove, 9,383 shares; Mr.
Martinez, 20,000 shares; Mr. Horn, 74,500 shares; Mr. Meuschke, 1,500
shares; Mr. Sanchez, 4,500 shares; Mr. Vertin, 69,500 shares; and all
directors and executive officers as a group, 196,607 shares.
(5) Includes 6,667 shares of restricted stock, which will vest on June 23,
1997.
(6) Includes 2,000 shares of Common Stock beneficially owned by Mr. Horn's
spouse.
(7) Includes 5,000 shares of Common Stock held jointly with another individual
(2,500 shares of which Mr. Vertin disclaims beneficial ownership of), 3,750
shares of which are held by a corporation owned by Mr. Vertin, and 1,125
shares are held by Mr. Vertin's wife and daughters, all of which Mr. Vertin
is deemed to beneficially own. With respect to 6,225 shares of Common
Stock, Mr. Vertin shares investment power with another individual or
individuals.
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH FIREMAN'S FUND
In 1996 and 1995, 21% and 9.8%, respectively, of the Company's service
fees were derived from premiums underwritten by Fireman's Fund, pursuant to a
multi-peril crop insurance general agency agreement. The agreement with
Fireman's Fund was negotiated prior to John Meuschke's, who serves as
Fireman's Fund's designee on the Company's board of directors, service on the
Company's board of directors. See "Executive Officers and Directors." On
March 5, 1997, Fireman's Fund and the Company entered into a definitive
agreement by which Fireman's Fund would acquire the Company in a cash merger
at $10.25 per share. For a further description of the Company's business
relationship with Fireman's Fund, see the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
TRANSACTIONS WITH TONY COELHO
Tony Coelho served as a director of the Company from April 1995 to January
1997. Mr. Coelho resigned as a director of the Company on January 24, 1997 in
order to pursue other opportunities, which he believed the Company neither had
any interest nor ability to pursue. The Company has had business relationships
with Mr. Coelho from time to time, both before, during and after his term of
service as a director.
COELHO ASSOCIATES LLC. In November 1995, the Company, Mr. Coelho and other
individuals formed Coelho Associates LLC, a Delaware limited company ("Coelho
Associates"). Mr. Coelho is the Chairman and Chief Executive Officer of Coelho
Associates. Coelho Associates was formed to engage in the investment advisory
or financial intermediation business. The Company has a 40% ownership interest
and Mr. Coelho has a 20% ownership interest in Coelho Associates. The Company
and Mr. Coelho each made initial capital contributions in the amounts of
$200,000 and $100,000, respectively.
As part of the formation of Coelho Associates, the Company entered into a
lease of office space in New York City (with rental payments of approximately
$12,355 per month), which space is subleased to Coelho Associates. In addition,
the Company made available to Coelho Associates a $1 million line of credit
under the terms of a promissory note due June 30, 1997 (secured by the assets of
Coelho Associates). The note bears interest at a bank prime rate plus 1%. In
May 1996, the Company increased the amount available for borrowing under the
line of credit to $3 million. At December 31, 1996, approximately $1.3 million
had been advanced under the promissory note.
In late 1996, the Company and Mr. Coelho entered into discussions
relating to the Company's desire to terminate its interest in Coelho
Associates in view of the Company's desire to focus on its core operations
and the business prospects for Coelho Associates. Accordingly, the Company
and Coelho Associates agreed to terminate further advances under the line of
credit in December 1996. In 1996, the Company wrote off $1.0 million,
representing its investment in Coelho Associates and the amounts outstanding
under the line of credit. In addition, during 1996 and 1995, the Company
recognized $201,000 and $89,000, respectively, as the Company's share of the
operating losses of Coelho Associates. The Company, Mr. Coelho and the other
members of Coelho Associates continue to discuss the terms of the dissolution
of this relationship, including recovery by the Company of its investment in,
and loans, to Coelho Associates. No assurance can be given that such
discussions will result in a favorable outcome for the Company.
70
<PAGE>
CALIFORNIA CROP GROWERS LLC. In February 1995, the Company and a
limited liability company of which Mr. Coelho is a 50% member ("Togar")
agreed that Togar would receive 20% of the net profits derived from the
Company's sale of insurance products and agricultural software and related
products in the State of California in return for Togar's services on behalf
of the Company in California. The Company and Togar have had negotiations
regarding the formation of California Crop Growers, L.L.C., a Montana limited
liability company ("CCG"), in which the Company would have an 80% interest
and Togar would have a 20% interest. For business done in the State of
California in 1995 Togar received $154,000. No amounts were payable for
1996. As a part of the Company's dissolution of its relationship with Coelho
Associates, the Company and Mr. Coelho have engaged in discussions regarding
Mr. Coelho's ongoing role in the Company's California business. The Company
believes that any interest Togar may have in the California business should
be offset against amounts owed the Company by Coelho Associates. Mr. Coelho
has taken the position that he is not personally liable for the debts or
obligations of Coelho Associates and, accordingly, such offsets may not be
appropriate.
71
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements.
The Consolidated Financial Statements are contained herein as listed
in the Index to Consolidated Financial Statements on page 34.
2. Financial Statement Schedules.
All schedules are omitted because they are not applicable, not
required, or the information is included elsewhere in the Consolidated
Financial Statements or Notes thereto.
3. Exhibits.
2.1 Acquisition Agreement dated March 5, 1997, between Crop Growers
Corporation and Fireman's Fund Insurance Company (Incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form
8-K, dated February 28, 1997).
2.2 Consent Agreement dated March 5, 1997, between Crop Growers
Corporation and Fireman's Fund Insurance Company (Incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form
8-K, dated February 28, 1997).
2.3 Letter of Intent re Revolving Credit Working Capital Facility
dated March 5, 1997 between Crop Growers Corporation and
Fireman's Fund Insurance Company (Incorporated by reference to
Exhibit 2.3 to the Company's Current Report on Form 8-K, dated
February 28, 1997).
3.1 Certificate of Incorporation of the Company (Incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).
3.2 Bylaws of the Company (Incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-1 (File No. 33-
77548)).
4 Form of Certificate for Common Stock (Incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form S-
1 (File No. 33-77548)).
10.1 Amended Managing Agency Agreement between Continental Insurance
Companies and Crop Growers Insurance, Inc., a wholly-owned
subsidiary of the Company, effective as of September 1, 1990, as
amended (Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (File No. 33-77548).
(Confidential treatment of certain portions of this document has
previously been granted by the Securities and Exchange Commission
(the "Commission")).
*10.2 Employment Agreement with John J. Hemmingson (Incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement
in Form S-1 (File No. 33-85808)).
72
<PAGE>
*10.3 Employment Agreement with Gary A. Black (Incorporated by
reference to Exhibit 10.6 to the Company's Registration Statement
in Form S-1 (File No. 33-85808)).
*10.4 Employment Agreement with Tony Cid (Incorporated by reference to
Exhibit 10.8 to the Company's Registration Statement in Form S-1
(File No. 33-85808)).
*10.5 1994 Stock Incentive Plan (Incorporated by reference to Exhibit
10.9 to the Company's Registration Statement in Form S-1 (File
No. 33-85808)).
*10.6 Form of Director and Executive Officer Indemnification Agreement
(Incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (File No. 33-77548)).
*10.7 Non-Employee Director Stock Option Plan (Incorporated by
reference to Exhibit 10.11 to the Company's Registration
Statement in Form S-1 (File No. 33-85808)).
10.8 General Agency Agreement dated January 1, 1994 by and between
Crop Growers Insurance, Inc. and CNA Insurance Company
(Incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1 (File No. 33-77548)
(Confidential treatment of certain portions of this document have
previously been granted by the Commission.)).
10.9 Administrative Services and Facilities Agreement dated as of June
1, 1994 between Crop Growers Insurance, Inc. and Texas Crop
Growers Insurance Services, Inc. (Incorporated by reference to
Exhibit 10.21 to the Company's registration statement on Form S-1
(File No. 33-85808)).
10.10 Stock Purchase Agreement dated as of March 14, 1994, among the
Company, Dawson Hail Insurance Co. and the shareholders of Dawson
Hail Insurance Co. (Incorporated by reference to Exhibit 2(1) to
the Company's Current Report on Form 8-K, dated March 14, 1995).
10.11 Agreement dated as of March 14, 1995, among the Company, Dawson
Hail Insurance Co. and Crop Growers of North Dakota, Inc.
(Incorporated by reference to Exhibit 2(2) to the Company's
Current Report on Form 8-K, dated March 14, 1995).
10.12 MPCI General Agency Agreement dated July 10, 1996 by and between
Crop Growers Insurance, Inc. and Fireman's Fund Insurance Company
as amended. (Confidential treatment of certain portions of this
document has been requested ) (Incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996.)).
10.13 Coelho Associates LLC Limited Liability Company Agreement dated
as of November 16, 1995 between Crop Growers Employer
Organization, Inc., Togar LLC and Robert Bruno. (Incorporated by
reference to Exhibit 10.18 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995, as amended.)
10.14 Security Agreement dated November 17, 1995 between the Company
and Coelho Associates LLC. (Incorporated by reference to Exhibit
10.19 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, as amended.)
73
<PAGE>
10.15 Amended Promissory Note dated May 31, 1996 from Coelho Associates
LLC. (Incorporated by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, as amended.)
10.16 License Agreement entered into as of September 6, 1995 between
the Company and Coelho Associates LLC (Incorporated by reference
to Exhibit 10.21 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, as amended).
10.17 Crop Growers Corporation Securities Litigation - Memorandum of
Understanding dated February 28, 1997 (Incorporated by reference
to Exhibit 99(2) to the Company's Current Report on Form 8-K,
dated February 28, 1997).
10.18 Letter Agreement dated January 17, 1997 between Crop Growers
Corporation and the Office of Independent Counsel (Incorporated
by reference to Exhibit 99(2) to the Company's Current Report on
Form 8-K, dated January 21, 1997).
*10.19 Separation Agreement dated September 23, 1996 between John
Hemmingson and the Company (Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, as amended).
10.20 Right of First Offer and First Refusal Agreement dated September
23, 1996 between Fireman's Fund Insurance Company, John
Hemmingson, and the Company (Incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, as amended).
*10.21 Separation Agreement dated September 23, 1996 between Gary Black
and the Company (Incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, as amended).
10.22 Right of First Offer and First Refusal Agreement dated September
23, 1996 between Fireman's Fund Insurance Company, Gary Black,
and the Company (Incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, as amended).
10.23 Preferred Stock Purchase Agreement dated July 10, 1996 between
the Company and Fireman's Fund Insurance Company (Incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).
*10.24 Amendment to Employment Agreement Providing for a Leave of
Absence dated May 9, 1996 between John Hemmingson and the Company
(Incorporated by reference to Exhibit 6.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1996).
*10.25 Amendment to Employment Agreement Providing for a Leave of
Absence dated May 9, 1996 between Gary Black and the Company
(Incorporated by reference to Exhibit 6.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1996).
10.26 Agreement Granting Irrevocable Proxy relating to John Hemmingson.
74
<PAGE>
10.27 Crop Hail/Named Peril Insurance General Agency Agreement
effective as of January 1, 1997, by and between Crop Growers
Insurance, Inc. and Fireman's Fund Insurance Company.
*10.28 Employment Agreement with Lawrence T. Martinez.
10.29 Amendment No. 1 to MPCI General Agency Agreement effective as of
November 27, 1996, by and between Crop Growers Insurance, Inc.
and Fireman's Fund Insurance Company.
21 List of Subsidiaries.
23 Consent of KPMG Peat Marwick LLP.
24 Powers of Attorney.
__________
*Items that are management contracts or compensatory plans or arrangements
required to be filed as an exhibit to this form pursuant to Item 14(a) of this
Form 10-K.
(b) Reports on Form 8-K
None
75
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 31, 1997 CROP GROWERS CORPORATION
By /s/ David E. Hill
--------------------------------------------
David E. Hill
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Position Date
---- -------- ----
* Chief Executive Officer March 31, 1997
- ----------------------- (principal executive officer)
Lawrence T. Martinez and Director
/s/ David E. Hill Chief Financial Officer (principal March 31, 1997
- ----------------------- financial and accounting officer)
David E. Hill
* Director March 31, 1997
- -----------------------
Paul T. Horn
* Director March 31, 1997
- -----------------------
John M. Meuschke
* Director March 31, 1997
- -----------------------
Manuel Sanchez
* Director March 31, 1997
- -----------------------
Thomas M. Vertin
/s/ David E. Hill Attorney-in-Fact March 31, 1997
- -----------------------
*By: David E. Hill
<PAGE>
EXHIBIT INDEX
Page
----
2.1 Acquisition Agreement dated March 5, 1997, between Crop Growers
Corporation and Fireman's Fund Insurance Company (Incorporated by
reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K, dated February 28, 1997).
2.2 Consent Agreement dated March 5, 1997, between Crop Growers
Corporation and Fireman's Fund Insurance Company (Incorporated by
reference to Exhibit 2.2 to the Company's Current Report on
Form 8-K, dated February 28, 1997).
2.3 Letter of Intent re Revolving Credit Working Capital Facility
dated March 5, 1997 between Crop Growers Corporation and
Fireman's Fund Insurance Company (Incorporated by reference to
Exhibit 2.3 to the Company's Current Report on Form 8-K, dated
February 28, 1997).
3.1 Certificate of Incorporation of the Company (Incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996.
3.2 Bylaws of the Company (Incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-1 (File No.
33-77548)).
4 Form of Certificate for Common Stock (Incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (File No. 33-77548)).
10.1 Amended Managing Agency Agreement between Continental Insurance
Companies and Crop Growers Insurance, Inc., a wholly-owned
subsidiary of the Company, effective as of September 1, 1990, as
amended (Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (File No. 33-77548).
(Confidential treatment of certain portions of this document has
previously been granted by the Securities and Exchange Commission
(the "Commission")).
*10.2 Employment Agreement with John J. Hemmingson (Incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement
in Form S-1 (File No. 33-85808)).
*10.3 Employment Agreement with Gary A. Black (Incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement in Form S-1
(File No. 33-85808)).
*10.4 Employment Agreement with Tony Cid (Incorporated by reference to
Exhibit 10.8 to the Company's Registration Statement in Form S-1
(File No. 33-85808)).
77
<PAGE>
*10.5 1994 Stock Incentive Plan (Incorporated by reference to Exhibit
10.9 to the Company's Registration Statement in Form S-1 (File No.
33-85808)).
*10.6 Form of Director and Executive Officer Indemnification Agreement
(Incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (File No. 33-77548)).
*10.7 Non-Employee Director Stock Option Plan (Incorporated by
reference to Exhibit 10.11 to the Company's Registration
Statement in Form S-1 (File No. 33-85808)).
10.8 General Agency Agreement dated January 1, 1994 by and between Crop
Growers Insurance, Inc. and CNA Insurance Company (Incorporated by
reference to Exhibit 10.19 to the Company's Registration Statement
on Form S-1 (File No. 33-77548) (Confidential treatment of certain
portions of this document have previously been granted by the
Commission.)).
10.9 Administrative Services and Facilities Agreement dated as of
June 1, 1994 between Crop Growers Insurance, Inc. and Texas Crop
Growers Insurance Services, Inc. (Incorporated by reference to
Exhibit 10.21 to the Company's registration statement on Form
S-1 (File No. 33-85808)).
10.10 Stock Purchase Agreement dated as of March 14, 1994, among
the Company, Dawson Hail Insurance Co. and the shareholders of
Dawson Hail Insurance Co. (Incorporated by reference to
Exhibit 2(1) to the Company's Current Report on Form 8-K,
dated March 14, 1995).
10.11 Agreement dated as of March 14, 1995, among the Company, Dawson
Hail Insurance Co. and Crop Growers of North Dakota, Inc.
(Incorporated by reference to Exhibit 2(2) to the Company's
Current Report on Form 8-K, dated March 14, 1995).
10.12 MPCI General Agency Agreement dated July 10, 1996 by and between
Crop Growers Insurance, Inc. and Fireman's Fund Insurance
Company as amended. (Confidential treatment of certain portions
of this document has been requested) (Incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996.)).
10.13 Coelho Associates LLC Limited Liability Company Agreement dated
as of November 16, 1995 between Crop Growers Employer
Organization, Inc., Togar LLC and Robert Bruno. (Incorporated
by reference to Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, as amended).
78
<PAGE>
10.14 Security Agreement dated November 17, 1995 between the Company
and Coelho Associates LLC. (Incorporated by reference to
Exhibit 10.16 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, as amended).
10.15 Amended Promissory Note dated May 31, 1996 from Coelho
Associates LLC. (Incorporated by reference to Exhibit 10.5 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, as amended.)
10.16 License Agreement entered into as of September 6, 1995 between
the Company and Coelho Associates LLC. (Incorporated by
reference to Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, as amended).
10.17 Crop Growers Corporation Securities Litigation - Memorandum of
Understanding dated February 28, 1997 (Incorporated by
reference to Exhibit 99(2) to the Company's Current Report on
Form 8-K, dated February 28, 1997).
10.18 Letter Agreement dated January 17, 1997 between Crop Growers
Corporation and the office of Independent Counsel (Incorporated
by reference to Exhibit 99(2) to the Company's Current Report
on Form 8-K, dated January 21, 1997).
*10.19 Separation Agreement dated September 23, 1996 between John
Hemmingson and the Company (Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30,1996, as amended).
10.20 Right of First Offer and First Refusal Agreement dated
September 23, 1996 between Fireman's Fund Insurance Company,
John Hemmingson, and the Company (Incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996, as amended).
*10.21 Separation Agreement dated September 23, 1996 between Gary
Black and the Company (Incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30,1996, as amended).
10.22 Right of First Offer and First Refusal Agreement dated
September 23, 1996 between Fireman's Fund Insurance Company,
Gary Black, and the Company (Incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, as amended).
10.23 Preferred Stock Purchase Agreement dated July 10, 1996
between the Company and Fireman's Fund Insurance Company
(Incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996).
79
<PAGE>
*10.24 Amendment to Employment Agreement Providing for a Leave of
Absence dated May 9, 1996 between John Hemmingson and the
Company (Incorporated by reference to Exhibit 6.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996).
10.25 Agreement Granting Irrevocable Proxy relating to John
Hemmingson.
*10.26 Amendment to Employment Agreement Providing for a Leave of
Absence dated May 9, 1996 between Gary Black and the Company
(Incorporated by reference to Exhibit 6.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996).
10.27 Crop Hail/Named Peril Insurance General Agency Agreement
effective as of January 1, 1997, by and between Crop
Growers Insurance, Inc. and Fireman's Fund Insurance
Company.
*10.28 Employment Agreement with Lawrence T. Martinez.
10.29 Amendment No. 1 to MPCI General Agency Agreement effective
as of November 27, 1996, by and between Crop Growers
Insurance, Inc. and Fireman's Fund Insurance Company.
21 List of Subsidiaries.
23 Consent of KPMG Peat Marwick LLP.
24 Powers of Attorney.
80
<PAGE>
AGREEMENT GRANTING IRREVOCABLE PROXY
THIS AGREEMENT GRANTING IRREVOCABLE PROXY (the "Agreement") is effective as
of the 20TH day of FEBRUARY, 1997, by and between John J. Hemmingson at 912
RIVER CIRUS, POST FALLS, IDAHO (hereinafter "Grantor"), and Firstar Bank of
Minnesota, N.A., a national banking association with offices at 101 East Fifth
Street, St. Paul, Minnesota (hereinafter "Proxy Holder"),
W I T N E S S E T H:
WHEREAS, Grantor is a stockholder and former employee of Crop Growers
Corporation, a Delaware corporation (the "Corporation"); and
WHEREAS, on September 23, 1996, Grantor and the Corporation entered into a
Separation Agreement which (the "Separation Agreement") included, INTER ALIA, an
agreement by Grantor to grant an irrevocable proxy with respect to his stock in
the Corporation; and
WHEREAS, Firstar Bank of Minnesota, N.A. has agreed to serve as Proxy
Holder for Grantor; and
WHEREAS, Grantor and Proxy Holder desire to reduce to writing the
understanding and agreement of the parties with respect to the irrevocable
proxy;
NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual covenants and
promises contained herein and other good and valuable consideration, the receipt
and sufficiency of which is hereby duly acknowledged, Grantor and Proxy Holder
agree as follows:
1. IRREVOCABLE PROXY. Concurrent with the execution of this Agreement,
Grantor is granting an irrevocable proxy to Proxy Holder in
<PAGE>
the form of Exhibit "A" attached hereto and made a part hereof (the "Proxy").
The certificates representing the shares to which this Proxy applies as of the
date hereof, as well as options to purchase shares, are listed on Exhibit "B,"
attached hereto, which is likewise made part hereof (collectively, the
"Shares"). From the date hereof until the termination of this Agreement, only
Proxy Holder or Proxy Holder's designated proxy may vote the Shares or execute
and deliver consents in respect of any and all matters as to which approval by
or consent of the Corporation's shareholders are sought. From and after the
date hereof until termination of this Agreement, all notices of shareholders
meetings, proxy statements and other related solicitation matters shall be sent
to Proxy Holder and the Corporation shall only recognize votes cast or consents
given by Proxy Holder or Proxy Holder's designated proxy.
2. CHANGES IN COMMON STOCK. In the event that subsequent to the date of
this Agreement Grantor acquires any shares or other securities of the
Corporation or any subsidiary of the Corporation or any other shares are issued
with respect to or in exchange for any of the Shares held by Grantor, by reason
of any stock dividend, stock split, consolidation of shares, reclassification,
consolidation involving the Corporation, all such shares or securities shall be
deemed to be "Shares" for all purposes of this Agreement.
3. APPLICATION OF THIS AGREEMENT TO SHARES TRANSFERRED. This Agreement
and the Proxy pertain only to Shares from time to time owned, beneficially or of
record, by Grantor. Nothing in this Agreement or in the Proxy shall limit the
right of Grantor to gift all or any part of the Shares to a spouse, child or
other relative or to a trust created
<PAGE>
for the benefit of any such persons so long as all Shares so gifted shall
continue to be subject to this Agreement and to the Proxy and the transferee so
agrees in a written addendum to this Agreement delivered to Proxy Holder prior
to or promptly following such transfer. Furthermore, except as otherwise
provided in the proviso to this sentence, nothing in this Agreement or in the
Proxy shall limit the right of Grantor to sell, gift, pledge, encumber or
otherwise transfer all or part of the Shares to persons who are not affiliates
of Grantor and with respect to which Grantor retains no beneficial ownership,
and any Shares sold, gifted or otherwise transferred, after September 23, 1996,
the date of the Separation Agreement, to persons other than affiliates, and with
respect to which Grantor retains no beneficial ownership, are expressly excluded
from the scope and application of this Agreement; provided, however, that, prior
to or promptly following any pledge or encumbrance of the Shares, Grantor shall
deliver to Proxy Holder the written agreement of the pledgee of, or holder of an
encumbrance on, such Shares acknowledging that the Proxy Holder has the sole
power to exercise all voting rights respecting such Shares prior to the time
that sole investment power with respect to such Shares becomes vested in a
person other than Grantor or an affiliate of Grantor. Grantor shall give
written notice to Proxy Holder prior to or promptly following any transfer of
Shares stating the number of Shares to be transferred and describing the nature
of such transfer and identifying the transferee if known to Grantor. For the
purposes of this Agreement and the Proxy, the terms "beneficial ownership" and
"investment power" shall have the meanings set forth in Rule 13d-3(a) under the
Securities
<PAGE>
Exchange Act of 1934 and the term "affiliate" shall have the meaning set forth
in Rule 405 under the Securities Act of 1933.
4. RESPONSIBILITIES OF PROXY HOLDER. In voting the Shares, Proxy Holder
agrees to exercise and discharge in good faith the voting power granted by the
Proxy consistent with how a reasonably prudent shareholder having a similar
level of stock ownership would exercise and discharge such voting power. In
exercising the Proxy, Proxy Holder shall not be responsible for ascertaining, or
voting in accordance with, the intentions or desires of Grantor or any other
persons, but subject to the immediately preceding sentence hereof, shall
exercise the Proxy in its sole and absolute discretion. Proxy Holder shall
incur no liability or responsibility by reason of any error in law, mistake of
judgment or any matter or thing done or suffered or admitted to be done in
connection with exercising such power except for its own gross negligence or
willful misconduct. Proxy Holder shall not be responsible for the custody of
the Shares or the certificates or other written evidence representing the
Shares. Proxy Holder's sole responsibility under this Agreement shall be to
vote the Proxy granted hereby in conformance with the standard established by
this Section 4 and rules of the Comptroller of the Currency governing the
fiduciary relationship created hereby (12 C.F.R. Part 9). Proxy Holder may, in
connection with discharging its responsibilities under this Agreement, employ,
upon such terms as Proxy Holder may reasonably approve, an investment advisor to
provide investment advice with respect to matters relating to the voting of the
Shares and the Proxy Holder may act without independent investigation upon the
recommendations of such investment advisor.
<PAGE>
5. RESPONSIBILITIES OF GRANTOR. Grantor expressly covenants and agrees
that he will not contact or in any way attempt to influence Proxy Holder's
decision on how to vote the Shares nor will Grantor have any independent contact
with Proxy Holder or his representatives, save and except contact related to the
sale or transfer of any Shares.
6. COMPENSATION TO PROXY HOLDER. In exchange for Proxy Holder's
agreement to accept, and act upon, the Proxy granted by Grantor, Proxy Holder
shall be compensated by the Corporation and Grantor pursuant to a separate fee
agreement with the Corporation.
7. LIABILITY AND INDEMNIFICATION. Proxy Holder shall not be liable to
any person with respect to any action taken or omitted to be taken by the Proxy
Holder pursuant to this Agreement and the Proxy or any matter arising out of or
in connection with this Agreement and the Proxy except to the extent that, with
respect to claims or actions asserted or initiated against Proxy Holder by such
person, a court having competent jurisdiction shall have determined by final
judgment (not subject to further appeal) that such liability resulted from the
gross negligence or wilful misconduct of Proxy Holder. Grantor shall indemnify
and hold harmless and reimburse Proxy Holder, its affiliates and their
respective directors, officers, employees and agents from, against and for any
and all losses, liabilities, claims, damages and expenses, including, without
limitation, reasonable attorneys' fees and disbursements, arising out of or in
connection with this Agreement or the Proxy, including any amount paid in
settlement of any litigation or other action (commenced or threatened) to which
Grantor shall have consented in writing (such consent not to be unreasonably
withheld); provided, however, that Grantor shall not be liable hereunder in
respect
<PAGE>
of any loss, liability, claim, damage or expense to the extent that a court
having competent jurisdiction shall have determined by final judgment (not
subject to further appeal) that such loss, liability, claim, damage or expense
resulted from the gross negligence or wilful misconduct of Proxy Holder.
8. TERMINATION. This Agreement shall remain in effect until the earliest
of:
(i) The acquittal of Grantor of the criminal charges brought against
Grantor in the Indictment filed against Grantor in the United States District
Court for the District of Columbia being cause number CR 96-0181 on the docket
of said court and in the Indictment filed against Grantor in the United States
District Court Eastern District of Louisiana being criminal docket number 96-198
(the "Indictments"); or
(ii) The withdrawal or dismissal of those criminal charges referenced
in the Indictments (without any plea arrangement or plea bargain entered into by
Grantor); 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) The sale or disposition of all or substantially all of the
property, assets or business of the Corporation to a third party in a
transaction in which the shares of the Corporation are not exchanged for shares
of the third party; or
(v) The merger of the Corporation with any other person or entity
(wherein the Corporation is not the surviving entity) as a result of which
shares held by Grantor upon the effective date of such merger
<PAGE>
represent less than five percent (5%) of all outstanding shares of the common
stock of the entity which is created by virtue of the merger; or
(vi) Death of Grantor.
Following the occurrence of any of these events, either Grantor or the
Corporation will promptly notify Proxy Holder of the same.
9. SUCCESSORS. Proxy Holder may resign its appointment hereunder by
mailing to Grantor at his last known address, with a copy concurrently furnished
to the Corporation, a resignation in writing, which resignation may not be
effective until the receipt by the successor Proxy Holder of any necessary
approvals by the Insurance Commissioners of the States of Kansas and North
Dakota or any other regulatory body of competent jurisdiction relating to the
appointment of a successor Proxy Holder. Upon the Proxy Holder's resignation,
Grantor shall promptly appoint a successor Proxy Holder, subject to the consent
of any applicable regulatory body.
10. MISCELLANEOUS PROVISIONS.
a. All of the covenants and agreements contained in this Agreement
shall be binding upon the parties hereto, and inure to the benefit of the
Grantor, Proxy Holder and (except with respect to the obligations of Proxy
Holder under Section 4 of this Agreement) the Corporation and their successors,
assigns, heirs, executors, administrators and other legal representatives, as
the case may be, and no other person shall be deemed a third party beneficiary
of this Agreement.
b. This Agreement, and the rights of the parties hereto, shall be
governed by and construed in accordance with the laws of the
<PAGE>
State of Delaware, without giving effect to the conflict of law provisions
thereof.
c. If any provision of this Agreement shall be declared void and
unenforceable by any court or any administrative board of competent
jurisdiction, such provisions shall be deemed to have been severed for the
remainder of this Agreement, and this Agreement shall continue in all respects
to be valid and enforceable.
d. No waivers of any breach of this Agreement extended by any party
hereto to any other party shall be construed as a waiver of any rights or
remedies of any other party hereto or with respect to any subsequent breach.
e. Wherever the context of this Agreement shall so require, the use
of the singular shall include the plural, and the use of any gender shall
include all genders.
f. If this Agreement is amended in any way, Grantor and Proxy Holder
agree to provide to the Corporation, upon execution, copies of such amendment
and any amendments to the Proxy granted pursuant hereto. Grantor and Proxy
Holder understand and agree that all amendments to this Agreement are subject to
applicable regulatory approval.
g. This Agreement contains the entire agreement among the parties
hereto with respect to the voting of the Shares pursuant to the Proxy and
supersede all prior agreements and understandings among the parties relating to
the subject matter hereof but does not supersede the separate fee agreement
referred to in Section 6 of this Agreement. The Proxy Holder is not a party to
nor is it responsible in any manner for compliance by any party with the terms
of the Separation Agreement.
<PAGE>
h. Any recitations of fact contained herein are not to be deemed
representations or warranties of Proxy Holder, and Proxy Holder shall not be
deemed to make any representation or warranty of any nature respecting this
Agreement or the Proxy.
IN WITNESS WHEREOF, Grantor and Proxy Holder have executed this Agreement
as of the date first written above.
/s/ John J. Hemmingson
--------------------------------
GRANTOR
-------------------------------
Firstar Bank of Minnesota, N.A.
By /s/ Karen M. Jefferson, V.P.
-------------------------------
By
-------------------------------
In consideration of the Grantor and Proxy Holder entering into the
foregoing agreement, the undersigned agrees to be bound by the provisions
contained in the last sentence of paragraph 1 and 8.
CROP GROWERS CORPORATION
By /s/ L.T. Martinez
-------------------------------
<PAGE>
IRREVOCABLE PROXY
Pursuant to the provisions of Section 212 of the General Corporation Law of
the State of Delaware, the undersigned hereby irrevocably appoints Firstar Bank
of Minnesota, N.A. as his attorney and proxy, to attend meetings, to vote in
person or by proxy, and to execute and deliver written proxies or consents (or
withhold written consents or the power to vote pursuant to this proxy) with
respect to all shares of capital stock (the "Shares") of CROP GROWERS
CORPORATION (the "Corporation") now owned or hereafter acquired by the
undersigned, to the same extent as if it was the absolute owner of such Shares
in its own right. Without limiting the generality of the foregoing, Firstar
Bank of Minnesota, N.A is specifically authorized in the exercise of its sole
and absolute discretion in respect of the Shares to vote for or consent to
(a) The election of directors of the Corporation;
(b) Any increase, reduction or reclassification of the capital stock
of the Corporation;
(c) Any changes or amendments in or to the certificate of
incorporation or the Bylaws of the Corporation;
(d) The sale or disposal in any manner of any part or parts of the
property, assets or business of the Corporation; and
(e) The sale or disposal in any manner of all or any substantial part
of the property, assets or business of the Corporation and any
merger, consolidation or dissolution of the Corporation.
This proxy applies only to Shares of the Corporation beneficially owned by
the undersigned as of the record date for determination of shareholders of
record of the Corporation, fixed in accordance with the Corporation's Bylaws.
This proxy is made pursuant to an Agreement Granting Irrevocable Proxy,
dated FEB. 20, 1997, between the undersigned and Firstar Bank of Minnesota, N.A
(the "Agreement") and shall extend to all "Shares" as defined in the Agreement.
The undersigned hereby affirms that his proxy is given as an integral part of
the Agreement and as such is coupled with an interest and is, until termination
of said Agreement, irrevocable.
This proxy shall terminate on termination of said Agreement.
Dated: February 20, 1997 By /s/ John J. Hemmingson
----------------- -----------------------
<PAGE>
CROP GROWERS CROP HAIL/NAMED PERIL INSURANCE GENERAL AGENCY
AGREEMENT
(hereinafter referred to as the "Agreement")
entered into by and between
FIREMAN'S FUND INSURANCE COMPANY
Novato, California
(hereinafter referred to as the "Company")
and
CROP GROWERS INSURANCE, INC.
Overland Park, Kansas
(hereinafter referred to as the "General Agent")
SECTION 1 - APPOINTMENT OF GENERAL AGENT
1.1 The Company hereby appoints the General Agent to conduct and supervise
the writing of Crop Hail and certain Named Peril Insurance ("CH/NP Insurance")
commencing January 1, 1997.
1.2 The General Agent hereby accepts the Company's appointment, and agrees
to perform the duties and discharge the responsibilities described herein, as
well as follow the Company's rules and regulations pursuant to Section 2.2
hereof, to the best of its ability, knowledge, skill and judgment while at all
times complying with all applicable federal, state and local statutes, rules,
regulations, and requirements.
SECTION 2 - GENERAL AUTHORITY, DUTIES AND RESPONSIBILITIES,
LIMITATIONS AND PROHIBITED ACTS
2.1 The General Agent is authorized, subject to the terms, conditions and
limitations stipulated herein, to:
a. solicit, receive and evaluate proposals and applications for CH/NP
Insurance. The Named Perils for which the General Agent may write
insurance shall include those Perils listed in Schedule 2.1 of this
Agreement;
b. accept and bind CH/NP Insurance in those territories and jurisdictions
authorized under this Agreement, consistent with the Underwriting
Authority granted in section 7 of this Agreement. The territories
and jurisdictions authorized under
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<PAGE>
this Agreement are listed in Schedule 2.1 of this Agreement;
c. issue policies of insurance and endorsements thereto for CH/NP
Insurance, and cancel or nonrenew such policies where legally
permitted, it being understood that nothing herein shall impair
the Company's independent right legally to cancel or nonrenew any
such policies;
d. accept CH/NP Insurance business from other producers who are properly
licensed and appointed to write such business in the states having
jurisdiction over such producers or the states in which such CH/NP
Insurance business is located;
e. appoint local agents and/or brokers ("Producers") who are lawfully
licensed to solicit CH/NP Insurance business consistent with
applicable laws and to suspend and terminate such appointments as
necessary; and
f. appoint sub-general agents to the extent permitted by law in limited
jurisdictions with the consent of the Company.
2.2 The General Agent shall, in all cases and at all times, observe and
obey all rules, instructions and directives consistent with the terms of this
Agreement as the Company may, from time to time and at any time, reasonably
promulgate and provide notice to the General Agent, and shall not bind the
Company in contravention of any such rules, instructions or directives.
2.3 The General Agent shall comply with all laws and regulations governing
the Company and the General Agent with respect to the insurance business written
within the scope of this Agreement, and shall file for approval all documents as
may be required by the applicable regulatory authorities. The General Agent
shall promptly report all appointments of local agents or sub-agents to the
Company and prepare, handle and process all filings regarding such appointments.
Such appointments shall be accomplished consistent with all applicable State
laws and all rules, instructions and directives regarding such appointment
process consistent with Section 2.2.
2.4 Except as otherwise provided in this Agreement, the General Agent
shall maintain all records, including, but not limited to, statistical and
accounting records, that an insurance company would maintain with respect to
the insurance business subject hereto so as to allow the Company
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<PAGE>
to make only general ledger entries in its books and records, with all other
data maintained by the General Agent and provided by the General Agent to the
Company as necessary to enable the Company to prepare its annual convention
statement and any other reports required by any governmental agency, and to
submit the data required by the various reporting bureaus. The General Agent
shall retain the records pertaining to the business subject hereto for as long
as applicable statutes require.
2.5 The General Agent's authority under this Agreement is subject to the
following limitations:
a. no policy of insurance shall either directly or indirectly be
solicited, sold, issued or delivered at any modification from the
rate(s) specified by the Company unless prior written
authority is obtained from the Company;
b. each policy of insurance, including any endorsement to such
contract(s) executed by the General Agent under the power and
authority conferred upon the General Agent by this Agreement, shall
be in the form specified by the Company or supplied to the General
Agent by the Company for such purpose;
c. the General Agent must keep the Company informed; at the Company's
request the General Agent shall send to the Company evidences of
insurance, including endorsements, and report in writing or by
electronic data transmission all insurance accepted, issued and
bound, canceled or nonrenewed; at the Company's request the General
Agent shall report all insurance accepted, issued and bound no
later that thirty (30) days following either: (i) the effective
date of the insurance, or (ii) the date the insurance is accepted,
whichever occurs first; at the Company's request the General Agent
shall report all insurance canceled no more than thirty (30) days
following the effective date of cancellation;
d. no policy of insurance shall either directly or indirectly be
solicited, sold, issued or delivered at any modification from the
limits of liability specified in Schedule 2.5 (which Schedule may be
amended by the Company from time to time in its sole discretion
after consultation with the General Agent) unless prior written
authority is obtained from the Company.
Page 3
<PAGE>
2.6 The General Agent shall not:
a. commit the Company to participate in any insurance or reinsurance
syndicate;
b. bind reinsurance or retrocessions on the Company's behalf;
c. knowingly accept business from any Producer without assuring
that the Producer is lawfully licensed to transact the type of
insurance which he is soliciting;
d. appoint any sub-general agent in conformity with applicable state
requirements without the Company's consent, consistent with any
restrictions required by the Company;
e. knowingly appoint as a local agent of the Company any person who
serves on the Company's board of directors;
f. knowingly employ any individual who is also employed by the
Company;
g. knowingly allow any person to participate in the business of
insurance in violation of 18 U.S.C. Section 1033 et seq.;
h. use or distribute any advertising or promotional material bearing
the Company's name without first obtaining the written approval of
the Company;
i. assign this Agreement in whole or in part; or
j. assign, contract with others for, or "outsource" the General
Agent's duties and responsibilities regarding the appointment of
local agents or subagents, except loss adjustment services to Crop
Loss Adjusting Services, Inc., without the Company's written
consent.
SECTION 3 - POLICY FORMS, SUPPLIES AND LICENSES
3.1 The General Agent shall be responsible for all policy forms entrusted
to it, whether issued or not.
3.2 All supplies furnished by the Company to the General Agent, as well as
any policy forms, guidelines, manuals or other supplies on which the Company's
name appears, whether supplied by the Company or not, shall be
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<PAGE>
and remain the property of the Company and shall be turned over to the Company
promptly upon demand. In the event that any such supplies shall contain
information that is proprietary to the General Agent at the time of such demand
for return by the Company, the General Agent may, in lieu of returning such
supplies, destroy all copies of such supplies containing such proprietary
information. All licenses and other material relating to governmental licensing
or authorization of the Company with respect to this Agreement shall be and
remain the property of the Company and shall be turned over to the Company by
the General Agent promptly upon demand.
3.3 The General Agent shall be responsible for issuing the Company's
policies for CH/NP Insurance. All policies issued by the General Agent shall
match and comply with the rules, rates, form, content and terms developed and
promulgated by National Crop Insurance Services and adopted by the Company, all
as provided by the Company to the General Agent in writing ("Fireman's Fund
CH/NP Insurance Program"). The General Agent acknowledges receipt of and
accepts the rules, rates, and policy requirements of the Fireman's Fund CH/NP
Insurance Program and agrees not to deviate from such rules, rates, and policy
requirements, as modified and amended by the Company from time to time in the
Company's sole discretion after consultation with the General Agent, consistent
with the terms of this Agreement.
SECTION 4 - BILLING & PREMIUM
4.1 The General Agent is responsible for billing and collecting all
premiums for all CH/NP Insurance written pursuant to this Agreement. The
General Agent is responsible for the collection and remittance of all earned
premiums on business the General Agent places with the Company, less the General
Agent's Total Expense Amount as defined in Section 5.3 below, even if the
General Agent is unable to collect such earned premiums. "Earned premium" as
used in this Agreement shall refer to the total premium earned on any particular
policy or policies as established by the rates filed with the appropriate State
Insurance Departments without regard to any possible non-filed discount or
reduction in the premium actually charged that may be legally negotiated by the
General Agent, or their agent, with any particular insured or insureds.
4.2 The General Agent is authorized to pay premiums on behalf of insureds.
If the General Agent pays premium on behalf of any insured, the premium
subsequently collected from the insured on whose behalf the General Agent has
paid
Page 5
<PAGE>
premium shall belong to the General Agent and the Company shall have no further
interest therein.
4.3 All premiums received by the General Agent, either before or after
termination of this Agreement, shall be held by the General Agent in trust in a
fiduciary capacity in a bank(s) that is a member of the Federal Reserve System
and whose accounts are insured by the Federal Deposit Insurance Corporation
pursuant to Section 40-2,132 of the Kansas Insurance Code (hereinafter referred
to as the "Premium Trust Accounts"). Such Premium Trust Account shall be
maintained separately by the General Agent from any other premium trust accounts
of the General Agent and shall be denominated as "Crop Growers' Fireman's Fund
Crop Hail Premium Trust Account(s)". The General Agent shall deposit only
premiums due to or from the Company and not commingle the funds of any other
insurer or the operating funds of the General Agent with premiums maintained in
the Premium Trust Accounts. The General Agent may withdraw funds from the
Premium Trust Accounts for the purpose of paying the General Agent's Total
Expense Amount then due the General Agent on premiums remitted by the insureds
and/or remitted to the Company through the settlement process described in
Section 8 and to make Loss Payments (as defined in Section 6.6) to insureds.
4.4 Premiums held by the General Agent for and on behalf of the Company in
the Premium Trust Accounts may be invested by the General Agent in Authorized
Investments until paid to the Company. "Authorized Investments" shall consist
of (a) deposits in deposit accounts or certificates of deposit with maturities
not exceeding one (1) year held in or issued by banks or savings and loan
associations insured by the United States Government and approved by the
Company, or (b) United States government bonds and treasury certificates or
other obligations for which the full faith and credit of the United States are
pledged for payment of principal and interest maturities of not more than one
(1) year, but not contracts or options for the sale and purchase thereof, or
securities indexed thereto. Notwithstanding anything in the Agreement to the
contrary, the Company, in its sole discretion, may direct the investment of
funds in the Premium Trust Accounts. It shall be the responsibility of the
General Agent to maintain sufficient liquidity in the Premium Trust Accounts to
make timely payment of all amounts due to the Company and the length of maturity
of any investment in the Premium Trust Account shall not excuse any late payment
or remittance, except that if the Company exercises investment authority over
funds in the Premium Trust Accounts the General Agent may raise such exercise of
investment authority by the Company as a defense to timely payment to the extent
such investment decisions actually
Page 6
<PAGE>
create such liquidity or late payment problems. Any interest and/or dividends
paid on such Authorized Investments shall be for the benefit of and shall be the
property of the Company. At the Company's request, the General Agent shall
supply the Company with all account records relating to the Premium Trust
Accounts within a week of receipt of such records for purposes of auditing the
operation of the Premium Trust Accounts.
4.5 The characterization of an account with the General Agent on the
Company's books in the form of a debtor-creditor account shall be deemed merely
a record of business transacted. Neither the keeping of an account in such
form, nor the rendering of same, nor failure to enforce prompt remittance, nor
alteration in compensation rate, nor compromise or settlement, shall be held to
waive assertion of the fiduciary relationship as to premiums collected by the
General Agent.
4.6 It is understood that all premiums on business written with the
Company, which are paid to the General Agent, belong to the Company.
Commissions and/or fees the Company pays to the General Agent are debts the
Company owes the General Agent. The privilege of deducting the General Agent's
Total Expense Amount and/or Loss Payments from premiums due the Company shall
not be construed as a waiver by the Company of the Company's exclusive ownership
of all premiums due. Should any dispute arise, all such premiums shall be paid
to the Company net of the Total Expense Amount, including any amounts in
dispute, with full reservations of the General Agent's rights.
4.7 The General Agent must establish and maintain internal controls and
record keeping mechanisms for the safekeeping and full accounting of all cash
receipts, cash disbursements, premium billings, collections and policyholder
records relating to policies or evidences of insurance issued by the Company or
reasonably required for the fulfillment of the General Agent's duties.
SECTION 5 - COMMISSIONS/COMPENSATION/EXPENSES
5.1 Generally, the General Agent earns commission on CH/NP Insurance when
written, but such commissions are not paid until either remittance of premium by
the insured and/or during the settlement process. The General Agent is solely
responsible for payment of all commissions, including countersigning commissions
to other producers which bring business to the General Agent, where applicable.
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<PAGE>
5.2 The rates and terms of the General Agent's commissions are set forth
in the actual rates filed with the various States and appear in Schedule 5.2,
the Schedule of Commissions, forming part of this Agreement. The Company may
change these rates annually as part of a change of a particular State rate
filings. If such changes are made, the Company shall provide the General Agent
with an Amended Schedule 5.2 setting forth either the new approved rates or the
proposed but not yet approved rates to the General Agent not later than
September 30 of the year prior to the effective year of the new Schedule of
Commissions. Notwithstanding the foregoing, if for any reason beyond the
Company's control, including but not limited to rejected rate filings, delay in
the availability of loss cost data from National Crop Insurance Services, etc.,
it is not possible for the Company to provide the Amended Schedule 5.2 by
September 30, the Company shall have such additional reasonable time to provide
the Amended Schedule 5.2 as may be necessary once the reason causing the delay
is rectified. The General Agent has no right to commissions if the General
Agent is replaced as agent of record, provided, however, that if the General
Agent is replaced as agent of record as a result of any improper action on the
part of the Company that is inconsistent with the terms of this Agreement, the
General Agent shall be entitled to commissions.
5.3 The General Agent shall be entitled to receive an amount equal to
28.50% of the total earned premium for CH/NP Insurance written in 1997 pursuant
to this Agreement ("Total Expense Amount"). Subsequent years' Total Expense
Amount shall be negotiated each year pursuant to Section 5.2.
Paqe 8
<PAGE>
5.4 The General Agent will also receive profit and growth ("PAG") profit
sharing based upon the combined MPCI, as that term is defined in that certain
MPCI General Agency Agreement by and between the Company and the General Agent
executed July 10, 1996, as may be amended from time to time, and CH/NP Insurance
results. The PAG profit sharing will be calculated as set forth in Schedule 5.4
to this Agreement and will be paid consistent with the terms of Section 9.4
hereof. Additionally, if the actual Loss Payments for the CH/NP Insurance
written for any calendar year 60% or less of the total CH/NP earned premium for
such calendar year, the General Agent will receive an additional payment equal
to 1% of the total earned premium for such CH/NP Insurance written during that
calendar year ("Additional Payment").
SECTION 6 - CLAIMS
6.1 The General Agent shall adjust, compromise, settle, deny and/or pay
all losses incurred under policies issued pursuant hereto, and maintain usual
and customary records with respect to such loss handling in accordance with the
appropriate legal requirements of the various states, and in accordance with any
reasonable requirements made by the Company. The Company reserves the right to
make final decisions with respect to any matter involving payment, adjustment,
compromise, settlement or denial of any disputed claim or claim expense.
6.2 The Company shall adjust, compromise, settle, deny and/or pay all
losses or claims that are not so adjusted, compromised, settled, denied or paid
by the General Agent pursuant to section 6.1, above. Notwithstanding whether a
claim is paid pursuant to Section 6.1 or 6.2, the General Agent shall be
responsible for the payment of all Loss Payments on the Company's behalf (as
defined in Section 6.6) and the Company shall be entitled to reimbursement from
the General Agent for any Loss Payment that the Company actually pays.
6.3 Notwithstanding section 6.1 above, the General Agent shall secure the
approval of the Company prior to paying or committing the Company to pay any
claim which exceeds $50,000 or an amount set by the insurance commissioner of
any state purporting to exercise regulatory jurisdiction over the Company, as
set forth in a written notice delivered by the Company to the General Agent,
whichever is less.
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<PAGE>
6.4 The General Agent shall send the Company a copy of the claim file upon
request or whenever a claim:
a. has the potential, in the reasonable judgment of the General
Agent, to exceed or is closed by payment of an amount which exceeds
$50,000 or an amount set by the insurance commissioner of any state
purporting to exercise regulatory jurisdiction, as set forth in a
written notice delivered by the Company to the General Agent,
whichever is less;
b. exceeds $50,000 or an amount set by the insurance commissioner
of any state purporting to exercise regulatory jurisdiction, as set
forth in a written notice delivered by the Company to the General
Agent, whichever is less;
c. involves a coverage dispute; or
d. is open for more than six months.
6.5 All claim files handled by the General Agent shall be the joint
property of the Company and the General Agent unless the Company is ordered into
liquidation, in which case the claim files shall become the sole property of the
Company's estate. All claim files handled by the Company shall be the sole
property of the Company. In the event of the Company's insolvency, the claim
files shall be delivered by the General Agent to any authorized representative
of the Company's estate upon demand, after which the General Agent shall have
reasonable access to and the right to copy the files on a timely basis. To the
extent that electronic claims files are in existence, any data contained in such
files will be timely transmitted to Company in accordance with applicable
policies and procedure.
6.6 If at any time the total losses paid on CH/NP Insurance during any
calendar year ("Loss Payments") exceed 71.5% ("Loss Ratio Threshold") of the
actual collected premium for such CH/NP Insurance ("Excess Loss Amount"), the
General Agent may request that the Company pay the amount that the Excess Loss
Amount (less any prior Cash Calls) exceeds the Loss Ratio Threshold ("Cash
Call"). The Company will pay such Cash Call by the following Friday after the
Cash Call or within two (2) business days, whichever is later. The General
Agent may continue to make such Cash Calls every two (2) weeks thereafter, as
necessary, until all Loss Payments are made. The Company shall deposit all Cash
Calls via wire transfer directly into a Premium Trust Account established
pursuant to section 4.3 of this Agreement.
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<PAGE>
SECTION 7 - UNDERWRITING AUTHORITY
7.1 The General Agent is granted underwriting authority consistent with
the rights, responsibilities and obligations set forth in this Agreement and
consistent with written underwriting directives or guidelines provided to the
General Agent by the Company from time to time. The Company will also supply
the General Agent with revisions and amendments to any such written underwriting
directives and guidelines as such revisions and amendments are adopted from time
to time. It shall be the responsibility of the General Agent to maintain such
written underwriting directives and guidelines, including any revisions and
amendments, so that the General Agent will be operating pursuant to a current
set of underwriting directives and guidelines. All underwriting decisions will
be thoroughly and timely documented. The General Agent shall allow the Company
to review and/or audit the General Agent's copies of written underwriting
directives and guidelines and underwriting files upon request during normal
business hours.
SECTION 8 - EXPENSES & SETTLEMENTS
8.1 The General Agent agrees to pay, and/or reimburse the Company within
14 days after receipt of the Company's invoice, all expenses (other than the
Company's overhead) related to conducting and supervising the writing of
business pursuant to this Agreement. Such expenses shall include, but shall not
be limited to, agent licenses for agents not presently appointed by the Company
or one of its affiliated insurance companies for CH/NP, local agent commissions,
agency supplies (such as application and policy forms, daily reports, adjuster
supplies and loss drafts), premium taxes, advertising, local board and
association fees and assessments.
8.2 On December 15 of each calendar year, the Company and the General
Agent shall provisionally settle the payment of all amounts then due (the
"Provisional Settlement"). At the Provisional Settlement the General Agent
shall pay any net amount then due the Company under the following "Provisional
Settlement Calculation":
Estimated Earned Premium for the current calendar year
LESS
Estimated Total Expense Amount for the current calendar
year
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PLUS
Total of all Cash Calls paid to date by the Company, if any
LESS
Amount of the total Loss Payments made to date, if any
PLUS
Any reimbursement amounts due the Company pursuant to Section 8.1
and any Loss Payments actually made by the Company that are not
accounted for elsewhere in this calculation
PLUS
Any interest or investment income that has accrued and been credited
to the Premium Trust Accounts through December 15.
8.3 On February 1 following the end of each calendar year, the
Company and the General Agent shall finally settle the payment of all
amounts due (the "Final Settlement"). At the Final Settlement the
Company and the General Agent shall calculate the following "Final
Settlement Calculation":
Actual Earned Premium for the prior calendar year
LESS
Total Expense Amount for the prior calendar year
PLUS
Total of all Cash Calls paid to date by the Company, if
any
LESS
The sum of
(i) the total Loss Payments made to date and
(ii) any future loss reserve for future payment of
losses that the Company and the General Agent agree should
be established,
if any
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LESS
Any Additional Payment that may be due for the prior calendar year
PLUS
Any reimbursement amounts due the Company pursuant to Section 8.1 and
any Loss Payments actually made by the Company that are not accounted
for elsewhere in this calculation
PLUS
Any interest or investment income that has accrued and been credited
to the Premium Trust Accounts through February 1.
The Company or the General Agent shall pay the other, as appropriate,
to reconcile the Final Settlement Calculation with the Provisional
Settlement Calculation.
SECTION 9 - REPORTS
9.1 In addition to other reports that the Company may require the General
Agent to supply to it, the General Agent shall provide a "Monthly Exposure
Report" by the fifteenth (15th) day of each month that lists for the prior
month, together with a cumulative total for all prior months for the immediately
preceding year, the gross premium written and liabilities issued by county and
by township and by month.
9.2 At the Company's request, upon three (3) months notice, the General
Agent in their best efforts will maintain an electronic interface at all times
that allows the Company dial-up access to policy and underwriting information
residing within the General Agent's computer system and programs. Such dial-up
access shall be limited to "view-only" capability for any CH/NP Insurance Policy
issued by or for the Company pursuant to this Agreement. It is the intent of
the parties that initially such access will be limited to a single dial-up
terminal at the Company's Kansas City or Overland Park office. However, at the
Company's request, such dial-up access shall be made available at other
locations requested by the Company.
9.3 For so long as Crop Growers Corporation has the obligation to prepare
and file 10K and 10Q Reports with the Securities and Exchange Commission, the
General Agent shall supply the Company with copies of such 10K and 10Q Reports
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within 15 days of their filing due date with the Securities and Exchange
Commission. In the event Crop Growers Corporation no longer is obligated to
prepare and file such 10K and/or 10Q Reports, or ceases to file such reports
for whatever reason, the General Agent shall:
a. supply to the Company within one hundred twenty (120) days of the
close of each of Crop Growers Corporation's fiscal years, a copy of
the audited consolidated financial statements of Crop Growers
Corporation and its subsidiaries, including the General Agent, as of
the end of such fiscal year, consisting of balance sheets,
statements of income and expense, retained earnings, paid-in
capital, and changes in cash flow, prepared in accordance with
United States generally accepted accounting principles; and
b. at the request of the Company, supply to the Company within sixty
(60) days of the close of each of Crop Growers Corporation's first
three quarters of any fiscal year, a copy of financial statements of
Crop Growers Corporation containing similar detail as provided in
Section 9.3a for the quarter, prepared in accordance with United
States generally accepted accounting principles and certified as to
accuracy by Crop Growers Corporation's Chief Financial Officer.
9.4 Within 5 business days after receipt by the General Agent of payment
with respect to the Federal Crop Insurance Corporation's final settlement for
each crop year, the General Agent shall render to the Company a complete
account of the General Agent's PAG profit sharing entitlement.
SECTION 10 - INSURANCE REQUIREMENTS
10.1 The General Agent currently maintains an errors and omissions
insurance policy. The aggregate limit of liability under such policy is
$2,000,000, with a limit of $2,000,000 per occurrence. The General Agent
currently maintains a general liability insurance policy. The aggregate limit
of liability under such policy is $2,000,000, with a limit of $2,000,000 per
occurrence. The General Agent will maintain its errors and omissions and
general liability insurance policies unless it becomes commercially unreasonable
for the General Agent to do so.
10.2 The General Agent currently maintains a fidelity bond. The
aggregate limit of liability under such bond is
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$5,000,000, with a limit of $5,000,000 per occurrence. The General Agent
will maintain its fidelity bond unless it becomes commercially unreasonable
for the General Agent to do so.
10.3 The General Agent currently maintains a workers' compensation
insurance policy. The aggregate limit of liability and per occurrence limit
of liability under such policy is in accordance with applicable statutory
requirements. The General Agent will maintain workers' compensation
insurance as required by applicable law.
10.4 The General Agent shall supply the Company with copies of
any and all certificates of insurance, policies and bonds reflecting the
above coverage within thirty (30) days after they have been received by
the General Agent.
10.5 In the event that the General Agent shall receive a cancellation,
nonrenewal, or rescission notice with respect to any of the coverages
specified in Sections 10.1 through 10.3 above, or if any such coverages are
otherwise modified or discontinued, the General Agent shall immediately
notify the Company of such fact.
SECTION 11 - INDEMNIFICATION
11.1 The General Agent agrees to hold harmless and indemnify
the Company from and against all losses (including so-called compliance
losses), costs, damages and expenses, including court costs and attorney
fees, incurred by the Company as a direct or indirect result of the
negligent or intentional acts, errors or omissions of the General Agent,
its directors, officers, employees or agents, or other parties operating
under the direction or control of the General Agent, regardless of
whether said acts, errors or omissions occur before or after termination
of this Agreement.
11.2 The Company agrees to hold harmless and indemnify the General Agent
from and against all losses (including so-called compliance losses), costs,
damages and expenses, including court costs and attorney fees, incurred by the
General Agent as a direct or indirect result of the negligent or intentional
acts, errors or omissions of the Company, its directors, officers, employees or
agents, or other parties operating under the direction or control of the
Company, other than the General Agent, regardless of whether said acts, errors
or omissions occur before or after termination of this Agreement.
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<PAGE>
SECTION 12 - RECORDS
12.1 The General Agent shall maintain separate records of business written
by the General Agent on the Company's behalf. The General Agent's records and
its expiration rights, ("Expiration Rights and Records") are the General Agent's
property. The General Agent has the right to use and control such Expiration
Rights and Records. The Company shall have access and the right to copy all
accounts and records related to the Company's business, including the right to
inspect and audit the General Agent's financial and accounting records for the
purpose of verifying compliance with this Agreement. All such records shall be
retained for the minimum time periods required by Kansas law, or for such longer
time periods if so required by the state law of a state having jurisdiction over
a particular insured.
12.2 The Company and the insurance commissioner of the Company's state of
domicile or any other insurance commissioner having jurisdiction over the
transaction covered by this Agreement shall have the right at any reasonable
time to examine and copy all accounts and records in the possession of the
General Agent referring to business effected hereunder.
12.3 The General Agent hereby grants the Company a security interest in the
General Agent's Expiration Rights and Records. The General Agent hereby grants
the Company a power of attorney to act as the General Agent's attorney-in-fact
for the SOLE purpose of executing any appropriate UCC-1 or other similar
financing statement, and any extensions or amendments thereto, as the Company
deems necessary for the purpose of perfecting the Company's security interest in
such Expiration Rights and Records, provided that such security interest
shall be subordinate to the security interest of any party providing
financing on a secured basis to Crop Growers Corporation, the General Agent,
or their respective subsidiaries, currently or in the future, such as Crop
Growers Corporation's former line of credit with First Interstate Bank of
Montana.
SECTION 13 - STATUS OF GENERAL AGENT, ITS EMPLOYEES AND AGENTS
13.1 While performing its duties and responsibilities hereunder, the
General Agent shall be deemed an independent contractor, as the Company reserves
no authority or right to control the General Agent's method of performance. No
employees of the General Agent shall be regarded as employees of the Company,
and all agents appointed by the General Agent shall be regarded as agents of the
General
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<PAGE>
Agent and not of the Company, except as may be required by applicable statutes.
SECTION 14 - ARBITRATION
14.1 As a condition precedent to any right of action hereunder, in the
event of any dispute or difference of opinion hereafter arising with respect to
this Agreement, it is hereby mutually agreed that such dispute or difference of
opinion shall be submitted to arbitration. One Arbiter shall be chosen by the
Company, the other by the General Agent, and an Umpire shall be chosen by the
Two Arbiters before they enter upon arbitration. All of the arbiters and the
Umpire shall be active or retired, disinterested executive officers of insurance
or reinsurance companies, Underwriters at Lloyd's, London or managing general
agencies. In the event either party should fail to choose an Arbiter within 30
days following a written request by the other party to do so, the requesting
party may choose two Arbiters who shall in turn choose an Umpire before entering
upon arbitration. If the two Arbiters fail to agree upon the selection of an
Umpire within 30 days following their appointment, the Umpire shall be selected
by the American Arbitration Association.
14.2 Each party shall present its case to the Arbiters within 30 days
following the date of appointment of the Umpire. The Arbiters shall consider
this Agreement as an honorable engagement rather than merely as a legal
obligation and they are relieved of all judicial formalities and may abstain
from following the strict rules of law. The decision of the Arbiters shall
be final and binding on both parties; but failing to agree, they shall call
in the Umpire and the decision of the majority shall be final and binding
upon both parties. Judgment upon the final decision of the Arbiters may be
entered in any court of competent jurisdiction.
14.3 Each party shall bear the expense of its own Arbiter, and shall
jointly and equally bear with the other the expense of the Umpire and of the
arbitration. In the event that the two Arbiters are chosen by one party, as
above provided, the expense of the Arbiters, the Umpire and the arbitration
shall be divided equally between the two parties.
14.4 Any arbitration proceedings shall take place at a location mutually
agreed upon by the parties to this Agreement, but notwithstanding the location
of the arbitration, all proceedings pursuant thereto shall be
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governed by the law of the state in which the Company has its principal office.
SECTION 15 - COMMENCEMENT AND TERMINATION
15.1 This Agreement shall become effective on January 1, 1997, and shall
remain in force thereafter until terminated.
15.2 This Agreement may be terminated as of December 31, 1999, and each
December 31, thereafter, by either party giving to the other not less than three
(3) months prior written notice of its desire to terminate the Agreement.
In the event of termination of this Agreement as provided by this section
15, the Company agrees to allow the General Agent to effect a bulk transfer of
the business written hereunder to, or the cancellation of such business and the
issuance of replacement policies by, one or more other insurance companies
qualified to do business where the General Agent is doing business, except to
the extent the Company elects to exercise its rights under section 15.5.
Notwithstanding anything else to the contrary in this Agreement, this
Agreement shall terminate concurrently with the termination of that certain MPCI
General Agency Agreement dated July 10, 1996, as may be amended from time to
time between the Company and the General Agent, regardless the reason for such
termination.
15.3 a. The Company may terminate this Agreement immediately without notice
to the General Agent, with respect to any and all states in which
the General Agent is authorized to act as the Company's managing
general agent pursuant to this Agreement, in the event that the
General Agent loses its license or authorization to engage in the
insurance business as contemplated and required by this Agreement,
whether through revocation, suspension, nonrenewal or otherwise if
such license termination is due to any of the reasons stated in
Kansas Insurance Laws Section 40-242, or similar statute under
another State's law. In any state in which the General Agent's
license is terminated, the General Agent's authority under this
Agreement shall cease immediately without notice until such license
is restored.
b. In the event of fraud or intentional misappropriation of funds by the
General Agent,
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the Company may terminate this Agreement by written notice effective
immediately. This Agreement may be terminated immediately upon 30
days written notice by the Company to the General Agent in the event
the General Agent fails to pay premiums or meet other financial
obligations to the Company when due or otherwise violates the terms
of this Agreement, which failure or violation is not cured within
such 30 day period.
c. The Company acknowledges that Crop Growers is a publicly owned
company the common stock of which is traded on a national securities
exchange. In the event that:
(1) there shall be consummated any consolidation or merger of
Crop Growers pursuant to which the stockholders of Crop Growers
immediately prior to the merger or consolidation do not represent,
immediately after the merger or consolidation, the beneficial owners
(within the meaning of Rule 13d-3 under the Securities Exchange Act
of 1934 (the "Exchange Act")) of 50% or more of the combined voting
power of Crop Growers, (or the surviving entity's) then outstanding
securities ordinarily (and apart from rights occurring in special
circumstances) having the right to vote in the election of
directors;
(2) there shall be consummated any sale, lease, exchange or
transfer (in any single transaction or series of related
transactions) of all or substantially all of the assets or business
of Crop Growers or any of its material Subsidiaries (as defined
below); or
(3) any "person" (as such term is used in Sections 13(d)(3) and
14(d)(2) of the Exchange Act), other than (A) Crop Growers or a
Subsidiary thereof, or (B) any employee benefit plan sponsored by
Crop Growers or a Subsidiary thereof, shall become the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act) of
securities of Crop Growers representing more than 50% of the
combined voting power of Crop Growers' then outstanding securities
ordinarily (and apart from rights accruing in special circumstances)
having the right to vote in the election of directors, as a result
of a tender, leveraged buyout or exchange offer, open market
purchases, privately negotiated purchases, other arrangements or
understandings or otherwise;
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<PAGE>
the General Agent shall give the Company notice of any such
transaction within ten (10) days after such transaction is
consummated.
Following receipt of such notice, the Company may terminate this
Agreement upon thirty (30) days notice given no later than the 30th
day after receipt of such notice. For purposes of this Section, the
term "Subsidiary" shall mean (i) a corporation of which shares of
stock having ordinary voting power (other than stock having such
power only by reason of the happening of a contingency) to elect a
majority of the board of directors or other managers of such
corporation are at the time owned, directly or indirectly, through
one or more intermediaries, by Crop Growers, or (ii) in the case of
unincorporated entities, any such entity with respect to which Crop
Growers has the power, directly or indirectly, to designate more
than 50% of the individuals exercising functions similar to a board
of directors.
d. This Agreement may also be terminated immediately in the event the
General Agent becomes insolvent or makes any general assignment for
the benefit of creditors. In such an event, the right of the
Company to the use and profit of the agent plant shall be conceded
and held inviolate, it being further understood that should the
Company, at its option, effect the collection of monies from agents,
policyholders or others from whom monies may be due on account of
the Company's policies issued through the General Agent, the Company
shall give the General Agent credit for such sums to the same extent
the General Agent would receive such credit had the insolvency not
occurred.
15.4 In the event of the termination of this Agreement, should the
General Agent be in any way indebted to the Company at such time, for premium
or any other obligations under this Agreement, such debt or debts shall
immediately become due and payable. The Company shall have the right to
suspend the General Agent's underwriting and/or claims settlement authority
during the pendency of any dispute regarding the cause for termination.
Minor accounting discrepancies shall not be considered grounds for
termination.
15.5 In the event of termination of this Agreement, and provided the
General Agent (and/or the local agents appointed by the General Agent under
authority of this
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<PAGE>
Agreement) has in accordance with the terms of this Agreement, accounted
for and paid to the Company all premiums and other monies due and owing
the Company, the records of the General Agent and of the local agents,
together with use and control of the Expiration Rights and Records,
shall remain the property of the General Agent and local agents, as
their interests may appear, and be left in their undisputed possession.
Notwithstanding the ownership and possession of such Expiration Rights
and Records by the General Agent, the Company shall have the undisputed
right to copy all records necessary to satisfy insurance department
record keeping requirements, including but not limited to all
underwriting files, claims files, billing information, etc. If there
has not been such an accounting and payment by the General Agent (and/or
local agent appointed by the General Agent under authority of this
Agreement), the Company shall have the right to assume control of the
General Agent's Expiration Rights and Records and may:
a. keep all commissions payable on such expirations or their renewals
and apply such commissions against what the General Agent owes the
Company; and/or
b. sell such portion of the Expiration Rights and Records that the
Company reasonably believes is necessary to satisfy the General
Agent's obligations to the Company pursuant to this Agreement.
In the event that such retained commissions or sale proceeds are
insufficient to satisfy the General Agent's obligations to the Company under
this Agreement, the General Agent shall still be responsible for such unpaid
sums. In the event that such retained commissions or sale proceeds are more
than necessary to satisfy the General Agent's obligations to the Company,
the Company shall return such excess to the General Agent.
Any sale of the Expiration Rights and Records must be made in a
commercially reasonable manner pursuant to the Uniform Commercial Code. The
Company shall have the right to appoint any buyer of such expiration rights and
records as a Managing General Agent for such business.
To the extent that the General Agent has not satisfied its financial
obligations to the Company within any prescribed time period, including any cure
period, and the Agreement is terminated, the Company shall notify the General
Agent of the amount the Company reasonably believes the General Agent owes to
the Company. If the parties
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cannot agree within 10 days of such notice as to the amount of premiums, amounts
or other obligations due ("Disputed Obligations"), the General Agent shall
deposit, in a trust account acceptable to the Company, an amount equal to the
Disputed Obligations claimed by the Company to be due until such time as the
dispute is resolved. To the extent that the Company subsequently reasonably
believes additional amounts may be due the Company by the General Agent under
this Agreement, the Company shall give notice of such additional amounts. If
the parties cannot agree within 10 days of such notice as to the amount of such
additional owed Disputed Obligations, the General Agent shall deposit such
additional amount in the trust account. Upon deposit by the General Agent in
the trust account of the amounts of such Disputed Obligations, the Company shall
suspend any efforts to pursue the sale of the Expiration Rights and Records or
capture of commissions. Nothing in this Section shall preclude the Company from
proceeding with the mechanics of a public or private sale of the Expiration
Rights and Records, including giving notice of the time, place and manner of any
proposed public or private sale, except that, if the provisions regarding the
Disputed Obligations above are not yet concluded, no sale may actually occur.
SECTION 16 - MISCELLANEOUS
16.1 This Agreement, and all the rights and interests arising herefrom,
shall be binding upon, and shall inure to the benefit of, the parties hereto,
their representatives, successors and assigns; however, none of the
authorities, duties or responsibilities of the General Agent or the Company
may be assigned by either of them without the written consent of the other.
16.2 This Agreement may not be modified verbally, nor may it be modified by
any subsequent practice or course of dealing by the parties, or in any manner
other than in writing signed by the parties hereto. No forbearance or neglect
on the part of the Company to enforce any of the provisions of this Agreement
shall be construed as a waiver of any of its rights or privileges hereunder,
unless in each instance a written memorandum specifically expressing such waiver
be made and subscribed by any officer of the Company. No such waiver shall
modify this Agreement or affect the rights of the Company with respect to any
subsequent default of failure of performance by the General Agent.
16.3 This Agreement supersedes all previous agreements, either oral or
written between the parties hereto regarding CH/NP Insurance.
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16.4 This Agreement shall, except as otherwise expressly set forth therein,
be governed by and construed in accordance with the internal laws of the State
of Kansas.
16.5 All notices and other communications required or permitted to be given
under this Agreement shall be in writing and shall be deemed to have been given
when delivered personally or upon receipt when sent by certified or registered
mail, Federal Express, DHL or other similar nationally recognized service, or
telecopier (with request for confirmation of receipt) to the other party to this
Agreement at the addresses specified in this section 16.5, for both the General
Agent and the Company, or to such other address as the General Agent or the
Company may from time to time specify in writing.
Notices to the General Agent:
Crop Growers Insurance, Inc.
Executive Centre II
10895 Lowell Street, Suite 300
Overland Park, Kansas 66210
Attention: Tony Cid, Senior Vice President
Fax No.: (913) 323-5745
Notices to the Company:
Fireman's Fund Insurance Company
Executive Centre II
10895 Lowell Street, Suite 300
Overland Park, Kansas 66210
Attention: Keith Curry, Vice President
Fax No.: (913) 323-5735
16.6 This Agreement may be signed in any number of counterparts and each
such counterpart shall be deemed an
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original instrument, but all such executed counterparts together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives at:
St. Louis, Missouri, this 24th day of February, 1997.
FIREMAN'S FUND INSURANCE COMPANY
/s/ John M. Meuschke
- --------------------------------------------
By: John M, Meuschke
Title: Vice President
Overland Park, Kansas, this day of February, 1997.
CROP GROWERS INSURANCE, INC.
- --------------------------------------------
By:
-----------------------------------------
Title:
--------------------------------------
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<PAGE>
original instrument, but all such executed counterparts together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives at:
St. Louis, Missouri, this day of February, 1997.
FIREMAN'S FUND INSURANCE COMPANY
- --------------------------------------------
By: John M, Meuschke
Title: Vice President
Overland Park, Kansas, this day of February, 1997.
CROP GROWERS INSURANCE, INC.
/S/ David Hill
- --------------------------------------------
By: David Hill
-----------------------------------------
Title: Chief Financial Officer & Treasurer
--------------------------------------
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<PAGE>
SCHEDULE 2.1
Authorized Named Perils and Authorized Territories
Stand Alone Policies
Tomatoes - Excess Moisture CA
Grapes - Excess Moisture CA
Pima Cotton - Excess Moisture CA
Raisins - Reconditioning CA
Raisins - Reconditioning,
plus extra expense CA
Citrus - Freeze CA
Crop Hail Endorsements
Corn - Wind NM
Cotton - Wind AL, AR, GA, LA, MS, NC, SC, VA
Tobacco - Wind GA, NC, SC, VA
Sugar Cane - Freeze LA
Winter Wheat - Replant WA
Grain - Fire AZ, CA, CO, ID, KS, NE, OK,
OR, UT, WA
Hay - Fire OR, WA
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
May 31, 1996, by and between Crop Growers Corporation, a Delaware corporation
(hereinafter referred to as the "Company") whose address is 201 Crop Growers
Drive, Great Falls, Montana 59401, and Lawrence T. Martinez whose address is 216
Third Avenue North, Great Falls, Montana 59401 (the "Employee").
RECITALS
The Company desires to employ the Employee, and the Employee desires
to be employed by the Company, as Chief Executive Officer. The Company is
willing to provide Employee with compensation and incentives to become its Chief
Executive Officer and Employee is willing to accept such employment. The
parties desire to reduce to writing the terms and conditions of their agreement
for such employment.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the
respective covenants and agreements of the parties herein contained, the
parties agree as follows:
1. EMPLOYMENT.
(a) The Employee will be employed as Chief Executive Officer of
the Company. As Chief Executive Officer, the Employee shall have all such
authority, powers, duties and responsibilities customarily afforded to the
office of Chief Executive Officer. The Employee shall devote his best efforts
and substantially all his business time and attention to the business and
affairs of the Company and its subsidiaries and affiliated companies. The
Employee shall not, during the term of this Agreement, engage in any other
business activity without the Company's prior written consent.
(b) Nothing in the preceding paragraph shall preclude the
Employee from (i) serving on the boards of directors of other for-profit or of
non-profit corporations, as long as service on the same does not conflict with
the Employee's obligations to provide his full-time, best efforts employment to
the Company, and (ii) devoting time to "passive investments" not related to
service performed on behalf of the Company. "Passive investments" shall mean
investments which do not require any substantial services on behalf of the
Employee to the entity which constitutes the investment, which will not detract
from the Employee's performance under this Agreement and in which the Employee
will invest only his personal funds or those of his family.
2. COMPENSATION.
<PAGE>
(a) BASE SALARY. The Company agrees to pay the Employee a base
salary of $275,000 per year during the term of this Agreement subject to any
increases as provided below ("Base Salary"). Base Salary shall be payable not
less frequently than monthly and shall be subject to the customary withholding
and other employee taxes as required with respect to compensation paid by an
employer to an employee. The Compensation Committee (the "Committee") of the
Company's Board of Directors (the "Board") shall annually review Employee's Base
Salary and may, in its discretion, increase the Base Salary, but the Committee
shall not decrease such Base Salary. All adjustments to Base Salary shall be
permanent.
(b) BONUSES. The Employee shall be entitled to participate in
such executive officer bonus or other similar plans as shall be established from
time to time by the Committee or the Company.
(c) STOCK OPTIONS. The Company grants Employee, subject to the
vesting schedule provided hereinafter, Incentive Stock Options (to the maximum
extent permitted under Section 422 of the Internal Revenue Code of 1986, as
amended) and Non-Incentive Stock Options (for the remainder) to purchase 100,000
shares of the common stock of the Company at the market price established at the
close of trading May 31, 1996 (the"Stock Options"). The options granted herein
shall vest according to the following schedule:
Shares Vesting Date
------ ------------
20,000 fully vested
27,000 May 31, 1997
26,500 May 31, 1998
26,500 May 31, 1999
------
100,000
The Stock Options shall be adjusted upon any change in the capitalization of the
Company as set forth in the Stock Option Agreement.
(d) EXPENSES. During the term of his employment hereunder, the
Employee shall be entitled to receive prompt reimbursement of all reasonable
expenses incurred by him (in accordance with policies and procedures at least as
favorable to the Employee as those presently applicable to the Company's other
executive officers) in performing services hereunder; PROVIDED, the Employee
shall properly account for all expenses to be reimbursed in accordance with
Company policy.
3. BENEFITS.
-2-
<PAGE>
(a) PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS. The
Employee shall be entitled while employed hereunder to participate equitably in,
and receive benefits under, all plans relating to stock (in addition to Stock
Options provided herein), purchases, pension, salary deferral, thrift,
profit-sharing, group life insurance, medical coverage, tuition reimbursement,
annual bonus, disability, and other retirement or employee benefits or
combinations thereof, that are now or hereafter maintained for the benefit of
the Company's executive officers or for its employees generally.
(b) FRINGE BENEFITS. The Employee shall be eligible while
employed hereunder to participate in, and receive benefits under, any other
fringe benefit plans which are or may become applicable to the Company's
executive officers or to its employees generally.
(c) VACATIONS. The Employee shall be entitled, without loss of
pay, to absent himself voluntarily from the performance of his employment under
this Agreement, all such voluntary absences to count as vacation time, PROVIDED
that:
(i) The Employee shall be entitled to an annual vacation of
not less than four weeks per year; and
(ii) The timing of vacations shall be scheduled in a
reasonable manner by the Employee.
4. TERM. The term of employment under this Agreement shall be a
period of three (3) years commencing on the date set forth above, subject to
earlier termination as provided herein. The term of employment under this
Agreement shall be extended under the same terms for a period of one year unless
at least six months prior to the expiration of the initial term or any renewal
term, either the Employee gives written notice to the Chairman or Secretary of
the Board, or the Board gives notice to the Employee, that it intends to
terminate the Agreement at the end of its initial term or renewal thereof. Such
notice shall be in writing. Reference herein to the term of employment under
this Agreement shall refer to both such initial term and any extensions thereof.
-3-
<PAGE>
5. TERMINATION OF EMPLOYMENT.
(a) DEFINITIONS. For purposes of this Agreement,
(i) The terms "Cause" or "termination for Cause" shall mean
termination by the Company because of (a) the Employee's commission of a felony;
(b) the Employee's gross misconduct resulting in substantial financial loss to
the Company or the Employee's willful and continued failure or refusal (other
than because of incapacity due to physical or mental illness or disability),
after written notice thereof and without legal or moral justification, to
substantially perform specific good faith directives of the Board, when such
directives are consistent with the scope and nature of the Employee's duties and
responsibilities set forth in Section 1 of this Agreement; PROVIDED, HOWEVER,
that no act or omission by the Employee shall be deemed gross or willful
misconduct unless such act or omission was done, or omitted to be done, in bad
faith or without reason to believe that such act or omission was in, or not
opposed to, the best interests of the Company; (c) the Employee's direct or
indirect acceptance or solicitation of any business of the type conducted by the
Company during the term of this Agreement on behalf of any party other than the
Company, without prior authorization of the Board; or (d) the Employee's willful
and material breach of this Agreement if such breach is not cured within ten
(10) days after receipt by the Employee of written notice regarding the same;
(ii) The term "Change-in-Control" shall mean any of the
following:
(1) The "acquisition" by any "Person" (as
the term "Person" is used for purposes of Section 13(d) or 14(d)
of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) of "Beneficial Ownership" (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of any
securities of the Company which generally entitle the holder
thereof to vote for the election of directors of the Company (the
"Voting Securities") which, when added to the Voting Securities
then Beneficially Owned by such Person, would result in such
Person Beneficially Owning fifty percent (50%) or more of the
combined voting power of the Company then outstanding Voting
Securities; PROVIDED, HOWEVER, that for purposes of this
paragraph no Change-in-Control shall have occurred if (1) a
Person: (A) acquires the Voting Securities as a result of a
stock split, stock dividend or other corporate restructuring in
which all stockholders of the class of such Voting Securities are
treated on a pro rata basis; (B) becomes the Beneficial Owner of
more than the permitted percentage of Voting Securities solely as
a result of the acquisition of Voting Securities by the Company
which, by reducing the number of Voting Securities outstanding,
increases the
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proportional number of shares Beneficially Owned by such Person;
(C) is the Company or any corporation or other Person of which a
majority of its voting power or its equity securities or equity
interest is owned directly or indirectly by the Company (a
"Controlled Entity"); or (D) acquires Voting Securities in
connection with a "non-Control Transaction" (as defined in
paragraph (3) below);
(2) The individuals who, as of the date of
the Agreement were members of the Board (the "Incumbent Board"),
cease for any reason to constitute at least a majority of the
Board; PROVIDED, HOWEVER, that if either the election of any new
director or the nomination for election of any new director by
the Company's stockholders was approved by a vote of at least a
majority of the Incumbent Board, such new director shall be
considered as a member of the Incumbent Board; PROVIDED, FURTHER,
HOWEVER, that no individual shall be considered a member of the
Incumbent Board if such individual initially assumed office as a
result of either an actual or threatened "Election Contest" (as
described in Rule 14a-11 promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Incumbent Board (a "Proxy
Contest") including by reason of any agreement intended to avoid
or settle any Election Contest or Proxy Contest;
(3) The consummation or effectiveness of:
(A) A merger, consolidation
or reorganization involving the Company (a "Business
Combination"), unless:
(x) the stockholders of the
Company, immediately before the Business Combination,
own, directly or indirectly immediately following the
Business Combination, at least fifty-one percent (51%)
of the combined voting power of the outstanding voting
securities of the corporation resulting from the
Business Combination (the "Surviving Corporation") in
substantially the same proportion as their ownership of
the Voting Securities immediately before the Business
Combination;
(y) all or a portion of the
individuals who were members of the Incumbent Board
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immediately prior to the execution of the agreement
providing for the Business Combination constitute at
least a majority of the members of the Board of the
Surviving Corporation; and
(z) no Person (other than the
Company or any Controlled Entity, a trustee or other
fiduciary holding securities under one or more employee
benefit plans or arrangements (or any trust forming a
part thereof) maintained by the Company, the Surviving
Corporation or any Controlled Entity, or any Person
who, immediately prior to the Business Combination, had
Beneficial Ownership of fifty percent (50%) or more of
the then outstanding Voting Securities) has Beneficial
Ownership of fifty percent (50%) or more of the
combined voting power of the Surviving Corporation's
then outstanding voting securities (a transaction
described in this subparagraph (A) shall be referred to
as a "Non-Control Transaction");
(B) A complete liquidation or dissolution of the
Company;
or
(C) The sale or other disposition of all or
substantially all of the assets of the Company to any
Person (other than a transfer to a Controlled Entity).
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
solely because fifty percent (50%) or more of the then outstanding Voting
Securities is Beneficially Owned by (x) a trustee or other fiduciary holding
securities under one or more employee benefit plans or arrangements (or any
trust forming a part thereof) maintained by the Company or any Controlled Entity
or (y) any corporation which, immediately prior to its acquisition of such
interest, is owned directly or indirectly by the stockholders of the Company in
the same proportion as their ownership of stock in the Company immediately prior
to such acquisition;
(iii) The term "Good Reason" or "resignation for Good
Reason" shall mean the Employee's voluntary termination of employment because of
any one or more of the following events which occurs without the consent of the
Employee: (1) a material diminution of or interference with the Employee's
duties, powers, authority, responsibilities or benefits, including, but not
limited to, those events constituting a Loss of Status; (2) the occurrence of a
Change in Control; or (3) any material breach by the Company of any term of
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this Agreement which the Company does not cure within thirty (30) days after
receipt of written notice of such breach;
(iv) The terms "Involuntary Termination" or "Involuntarily
Terminated" shall mean termination of the employment of the Employee without his
express written consent;
(v) The term "Loss of Status" shall include, but not be
limited to: (1) a material demotion of the Employee, a material reduction in the
number or seniority of other company personnel reporting to the Employee, or a
material reduction in the frequency with which, or in the nature of the matters
with respect to which, such personnel are to report to the Employee, other than
as part of any Company reduction in staff (provided, however, in the event of
any injury or illness which disables the Employee from performing his duties,
the Company may reassign the Employee's duties to one or more other employee's
until the Employee is able to perform his duties); or (2) a material reduction
or adverse change in the salary, perquisites, benefits, contingent benefits or
vacation time which had theretofore been provided to the Employee, other than as
part of an overall program applied uniformly and with equitable effect to all
members of the senior management of the Company; and
(vi) The term "Date of Termination" shall mean the earlier
of (x) the date upon which the Company gives notice to the Employee of the
termination of his employment with the Company or (y) the date upon which the
Employee ceases to serve as an employee of the Company.
(b) TERMINATION BY THE BOARD.
(i) INVOLUNTARY TERMINATION NOT FOR CAUSE. The Board may
terminate the Employee's employment at any time by written notice, but any
termination by the Board, other than termination for Cause, shall not prejudice
the Employee's right to compensation or other benefits under the Agreement. If
the employment of the Employee is Involuntarily Terminated, other than for
Cause, the Employee shall be entitled to receive, (1) his Base Salary for the
then-remaining term of the Agreement as determined in accordance with Section 4
hereof, or for a period of twelve months, whichever is greater, payable in such
manner and at such times as Base Salary would have been payable to the Employee
under Section 2(a) had he remained in the Company's employ; (2) his then
existing executive officer bonus plan; (3) his then-current health and life
insurance benefits under all Company-sponsored plans for the remaining term of
the Agreement as calculated in accordance with Section 4 hereof or, if greater,
twelve months; (4) all Stock Options granted in Section 2(c) fully vested and
executory notwithstanding the vesting schedule provided in Section 2(c); and (5)
all benefits granted pursuant to Section 3(a) of this Agreement fully vested and
executory.
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(ii) INVOLUNTARY TERMINATION FOR CAUSE. In case of
Involuntary Termination of the Employee's employment for Cause, the Company
shall pay the Employee his Base Salary through the date upon which the Employee
ceases to be an Employee of the Company. The Employee shall not be entitled to
any bonus for the fiscal year in which his employment was Involuntarily
Terminated for Cause or to any Stock Options not then vested. In the event the
Company purports to terminate the Employee for Cause, but it is determined by a
court of competent jurisdiction that Cause did not exist for such termination,
or if in any event it is determined by any such court that the Company has
failed to make timely payment of any amounts owed to the Employee under this
Agreement, the Employee shall be entitled to reimbursement for all reasonable
costs, including attorneys fees, incurred in challenging such termination or
collecting such amounts. Such reimbursement shall be in addition to all rights
to which the Employee is otherwise entitled under this Agreement.
Notwithstanding the foregoing, the Employee shall not be deemed to
have been terminated for Cause unless and until there shall have been delivered
to the Employee a copy of a resolution, duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Board of the Company at
a meeting of the Board called and held for such purpose (after reasonable notice
to the Employee and an opportunity for the Employee, together with the
Employee's counsel, to be heard before the Board), stating that in the good
faith opinion of the Board the Employee was guilty of conduct constituting Cause
for termination as set forth above and specifying the particulars thereof. The
Employee cannot force the Company to terminate him for Cause.
(c) TERMINATION BY EMPLOYEE.
(i) VOLUNTARY RESIGNATION. The Employee's employment may
be voluntarily terminated by the Employee at any time upon 90 days written
notice to the Company or upon such shorter period as may be agreed upon between
the Employee and the Board. In the event of such voluntary termination, other
than a resignation for Good Reason, the Company shall pay the Employee the
following:
(1) his Base Salary through the last day of employment;
(2) any bonus, pro rated for the number of days in the
Company's fiscal year which fell within the period ending on his last
day of employment.
Following completion of such payments, the Company shall have no further
obligation to the Employee under this Agreement, except payment or delivery of
benefits which have become vested under any retirement, benefit or other plan of
the Company, including without limitation Stock Options vested prior to the
Employee's voluntary termination.
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<PAGE>
(ii) RESIGNATION FOR GOOD REASON. If the Employee resigns
for Good Reason, the Employee shall be entitled to receive the same payments and
benefits as the Employee would receive under Section 5(b)(i) of this Agreement
as if his employment were involuntarily terminated "Not For Cause".
(d) TERMINATION DUE TO DEATH. In the event of the death of the
Employee during the term of his employment under this Agreement and prior to any
termination hereunder, the Employee's estate, or such person as the Employee may
have previously designated in writing, shall be entitled to receive from the
Company the following: (i) the Base Salary of the Employee for a period of six
months following the month in which his death shall have occurred; (ii) a
ratable portion of any annual bonus under Section 2(b) with respect to the
fiscal year during which the Employee's death occurred pro rated based upon the
number of days he was employed in that fiscal year; and (iii) full vesting and
full entitlement to exercise of the Stock Options, notwithstanding the vesting
schedule provided in Section 2(c), and all other benefits previously granted to
the Employee pursuant to Section 3(a) of this Agreement.
6. DISABILITY. If during the term of employment hereunder, the
Employee shall become disabled or incapacitated to the extent that he is unable
to perform the duties of his office for a period of more than 120 consecutive
days, he shall be entitled to receive disability benefits of the type provided
for other executive employees of the Company. In addition, the Company shall
(i) pay the Employee his Base Salary for a period of twelve months following the
occurrence which rendered him disabled; (ii) pay him his annual bonus under
Section 2(b) annualized with respect to the fiscal year during which his
disability occurred and pro rated for the remaining portion of the period of
twelve months following the occurrence in the subsequent fiscal year; (iii)
continue to provide the Employee with his then-current health and life insurance
benefits for the twelve month period following the occurrence which rendered him
disabled; and (iv) deem the Employee fully vested and entitled to exercise of
the Stock Options, notwithstanding the vesting schedule provided in Section
2(c), and all other benefits previously granted to Employee pursuant to Section
3(a) of this Agreement. Any disability benefit payments he receives under any
policy of disability insurance provided and fully paid for by the Company shall
reduce payments of Base Salary required during this period by the amount of such
disability insurance payments.
7. PAYMENT OF TAXES. In the event it is determined that any payment
or distribution by the Company to or for the benefit of the Employee (whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise) would be non-deductible (in whole or in part) by the
Company for federal income tax purposes as a result of the application of
Section 280G of the Internal Revenue Code, the Company shall nonetheless pay the
full amount of such payment to the Employee under the terms of this Agreement.
In addition, the Company shall pay to the Employee the amount of any excise
taxes, interest, and penalties, if any, imposed by the Internal Revenue Code or
state law upon the Employee with regard to any
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<PAGE>
payments made under this Agreement which are deemed to be excess parachute
payments as defined in Internal Revenue Code Section 280G or temporary or final
regulations issued thereunder, and such additional amounts as are necessary
(taking into account all federal, state, and local taxes, including income and
excise taxes, interest and penalties, payable by the Employee as a result of the
receipt of such additional compensation) to place the Employee in the same
after-tax position he would have been in had no such excise tax (and any
interest and penalties) been paid or incurred. The Company shall make such
payment in full within 90 days of the Date of Termination.
8. COVENANT NOT TO COMPETE. The Employee covenants and agrees that
in the event the Company terminates his employment for Cause under Section
5(b)(ii) or the Employee voluntarily terminates his employment under Section
5(c)(i) hereof, for a period commencing at the Date of Termination and
continuing for a period of twelve months thereafter, the Employee will not (a)
disclose any trade secrets owned by the Company and learned by the Employee as a
result of such employment, (b) solicit any customers who were customers of the
Company within the 12 months immediately preceding the Date of Termination for
the benefit of any company or business described in (c) below, or (c) own any
part of a Competitor (other than a public company as to which Employee owns five
percent or less of the outstanding common stock) 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.
For purposes of this Agreement, the Employee's obligations of nonuse and
nondisclosure set forth in this Section 8 shall not apply to any information
which: (a) is or becomes part of the public domain otherwise than as a
consequence of a breach by the Employee of his obligations under this Agreement;
(b) was already known to the Employee prior to receipt from the Company; (c) is
lawfully disclosed by the Company to any third party without restriction; or (d)
is disclosed by a third party to the Employee without restriction. This
covenant not to compete shall not apply to the Employee either if his employment
is terminated by the Company under Section 5(b)(i) hereof or if he terminates
his employment "for Good Reason" under Section 5(c)(ii) For purposes of this
Section 8, "Competitor" shall be defined as 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 Termination generated 10% or
more of the Company's total revenues as reflected in the Company's most recent
annual audited financial statements.
9. NO SETOFF; MITIGATION; ATTORNEYS' FEES. The Company's obligation
to make the payments provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any set-off, counterclaim,
recoupment, defense or other claim, right or action which the Company may have
against the Employee or others. In no event shall the Employee be obligated to
seek other employment or take any other action by way of mitigation of the
amounts payable to the Employee under any of the provisions of this Agreement.
The Company agrees to pay, to the full extent permitted by law, all legal fees
and
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expenses which the Employee may reasonably incur as a result of any contest by
the Company or others of the validity or enforceability of, or liability under,
any provision of this Agreement or any guarantee of performance thereunder
(including as a result of any payment pursuant to Section 5(b)(ii) of this
Agreement), plus in each case interest at the applicable Federal rate provided
for in Section 7872(f)(2) of the Code, unless a court shall determine the
Employee's claim or defense to be invalid, incorrect or inapplicable.
10. NO ASSIGNMENTS.
(a) Except as provided in Section 2(c), this Agreement is
personal to each of the parties hereto, and neither party may assign or delegate
any of its rights or obligations hereunder without first obtaining the written
consent of the other party; PROVIDED, HOWEVER, that the Company will require any
successor or assign (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, by an assumption agreement in form and substance
satisfactory to the Employee in his sole discretion, to expressly assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession or assignment
had taken place. Failure of the Company to obtain such an assumption agreement
prior to the effective date of any such succession or assignment shall be a
breach of this Agreement and shall entitle the Employee at any time thereafter
to resign for Good Reason and the Employee shall be entitled to receive the
benefits set forth in Sections 5(b)(i) and 5(c)(ii).
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee or, if there is no such designee, to the Employee's
estate.
11. NOTICE. For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (PROVIDED, that all
notices to the Company shall be directed to the attention of the Chairman of the
Board of the Company with a copy to the Secretary of the Company), or to such
other address as either party may have furnished to the other in writing in
accordance herewith. Notices shall be effective upon receipt.
12. AMENDMENTS. No amendments or additions to this Agreement shall
be binding unless in writing and signed by both parties, except as herein
otherwise provided.
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13. PARAGRAPH HEADINGS. The paragraph headings used in this
Agreement are included solely for convenience and shall not affect, or be used
in connection with, the interpretation of this Agreement.
14. ENTIRE AGREEMENT/WAIVERS. This Agreement represents the entire
agreement between the parties and supersedes all previous communications,
representations, understandings and agreements, either oral or written, between
the Company and the Employee with respect to the employment of the Employee by
the Company. No waiver of the terms of this Agreement shall be binding upon
either party unless in writing, signed by both parties. The waiver or failure
of either party to enforce the terms of this Agreement in one instance shall not
constitute a waiver of that party's rights under this Agreement with respect to
other violations.
15. INDEMNIFICATION. The Company shall indemnify the Employee in
accordance with the terms of the Crop Growers Indemnification Agreement with
Employee entered into as of May 31, 1996, which Agreement is incorporated herein
by reference.
16. SURVIVAL. The provisions of Sections 5, 6, 7, 8, 9, 10, 11, 14,
and any other provisions of this Agreement which by their terms are intended to
survive the termination of this Agreement, shall survive the termination of this
Agreement and remain in full force and effect thereafter.
17. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
18. GOVERNING LAW. This Agreement shall be governed by the laws of
the United States to the extent applicable and otherwise by the laws of the
State of Delaware, without giving effect to the conflicts of law provisions
thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
CROP GROWERS CORPORATION
By /s/ Tom Vertin
-----------------------------
Chairman or Vice Chairman
of the Board of Directors
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EMPLOYEE
/s/ Lawrence Martinez
---------------------------
Lawrence T. Martinez
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AMENDMENT NO. 1 TO MPCI GENERAL AGENCY AGREEMENT
(hereinafter referred to as the "Amendment")
entered into by and between
FIREMAN'S FUND INSURANCE COMPANY
Novato, California
(hereinafter referred to as the "Company")
and
CROP GROWERS INSURANCE, INC.
Overland Park, Kansas
(hereinafter referred to as the "General Agent")
WHEREAS, Company and General Agent entered into a MPCI General Agency Agreement
on or about March 29, 1995 in which the General Agent agreed to act as the
Managing General Agent for the Company in the writing of federally reinsured
MultiPeril Crop Insurance ("MPCI") that was to be written through a federally
approved Standard Reinsurance Agreement (the "1996 SRA"), then between Plains
Insurance Company ("Plains"), an insurance affiliate of the General Agent, and
the Federal Crop Insurance Corporation ("FCIC") (such MPCI General Agency
Agreement shall be hereinafter referred to as the "1996 MPCI Agreement");
WHEREAS, on or about July 10, 1996 Company and General Agent entered into a new
MPCI General Agency Agreement that governed MPCI written to cover crops that
were planted during the 1997 Crop Year (July 1, 1996 to July 1, 1997) and
subsequent Crop Years (the "1997 MPCI Agreement");
WHEREAS, the 1997 MPCI Agreement expressly provides that the 1996 MPCI Agreement
shall continue in full force and effect and continue to apply to the MPCI
insurance insuring crops planted during the crop year from July 1, 1995 to July
1, 1996 (the "1996 Crop Year");
WHEREAS, the Company assumed the obligations of Plains under the 1996 SRA on or
about July 15, 1996;
WHEREAS, under the 1996 SRA the Company is responsible for the payment of
premium to the FCIC for MPCI written through the 1996 SRA, including all premium
declared for policies by the appropriate reporting date in the spring of 1996,
including premium written by all policy issuing companies listed in the 1996 SRA
Plan of Operation that is attached to and forms a part of the 1996 SRA
(hereinafter referred to singularly or collectively as the "Policy Issuing
Companies") regardless of whether such premium is collected or not;
WHEREAS, pursuant to federal regulations issued by the Department of Agriculture
payment of premiums for spring crops that are reinsured under the 1996 SRA are
due on November 29, 1996 (the "November Due Date"), December 31, 1996 (the
"December Due Date"), and February 28, 1997 (the "February Due Date"). The
insureds must pay such premiums by the first day of the month in which the Due
Date occurs (the "Insured Due Date"). If the insureds do not make payment by the
Insured Due Date, pursuant to federal regulations the insured may be charged
simple interest at the rate of 1.25% per month until payment is made;
WHEREAS, pursuant to the terms of the MPCI policies issued by the Policy Issuing
Companies to the insureds, if the insureds do not pay the premium by the
appropriate Insured Due Date, the insureds must pay simple interest on the
outstanding premium at the rate of 1.25% per month until payment is made (the
"Contract Interest");
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WHEREAS, the General Agent is responsible for the collection of all premium for
policies issued by the Company pursuant to this Agreement and for policies
issued by other Policy Issuing Companies pursuant to other agency agreements
between the General Agent and such Policy Issuing Companies;
WHEREAS, in prior years, the General Agent has advanced through bank borrowings
premium due from insureds and not yet collected by the applicable due date
pursuant to the policies to the FCIC on behalf of the Policy Issuing Companies
and the holder of the SRA;
WHEREAS, as a result of such premium advancement the General Agent concurrently
succeeded to the rights to collect such advanced premium due from the insureds
and charged the insureds the Contract Interest until such premium was paid by
the insured;
WHEREAS, the General Agent and the Company have agreed that the Company, as the
SRA holder and in its capacity as a party to the 1996 SRA that has the ultimate
premium responsibility for the MPCI that is written pursuant to the 1996 SRA,
will advance such premium to the FCIC on the applicable due date on behalf of
such insureds that have not yet paid such premium;
WHEREAS, the Company shall, as a result, become the party entitled to collect
such advanced premium due from the insureds and to collect the Contract Interest
due under the policies as provided herein until such premium is paid by the
insureds; and
WHEREAS, the amount to be advanced by the Company on behalf of insureds shall
not exceed fifty million dollars ($50,000,000.00) and is currently estimated to
be approximately twenty-nine million dollars ($29,000,000.00) on the November
Due Date, fifteen million dollars ($15,000,000.00) on the December Due Date and
five hundred thousand dollars ($500,000.00) on the February Due Date;
NOW THEREFORE, the Company and the General Agent hereby enter into this
Amendment in order to facilitate and document the terms and conditions of this
agreement.
Section 5.1 is hereby amended and restated to read in its entirety:
5.1 The General Agent shall bill, collect, receive and receipt for premiums
as they become due. All premiums for business produced under this Agreement
shall be handled by the General Agent in strict accordance with FCIC rules. The
General Agent, due to the Company's assumption of the obligations of Plains
under the 1996 SRA, is also collecting premium on behalf of other Policy Issuing
Companies pursuant to agency agreements between the General Agent and such
Policy Issuing Companies. The General Agent represents and warrants that it is
handling such business produced under those agency agreements in strict
accordance with FCIC rules.
Section 5.2 is hereby amended and restated to read in its entirety:
5.2 The General Agent is authorized to pay premiums on behalf of insureds.
If the General Agent pays premium on behalf of any insured, the premium
subsequently collected from the insured on whose behalf the General Agent has
paid premium shall belong to the General Agent and the Company shall have no
further interest therein. The General Agent is also authorized by the other
Policy Issuing Companies to advance premium on behalf of any insured under such
policies issued by such Policy Issuing Companies. The General Agent has
received similar acknowledgements and/or assignments of the right to advance
premium on behalf of the other Policy Issuing Companies, with the General Agent
therefore acceding to all rights
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in any of the subsequently paid premium. The General Agent further recognizes
and acknowledges that pursuant to Section 5.6 of this 1996 MPCI Agreement, all
such rights to such advanced premium shall be assigned to the Company.
Section 5.3 is hereby amended and restated to read in its entirely:
5.3 All premiums, including any Assigned Premiums as defined in Section 5.6
of this Amendment, received by the General Agent, either before or after
termination of this Agreement, and Contract Interest shall be held by the
General Agent in trust in a fiduciary capacity in a bank that is a member of the
Federal Reserve System and whose accounts are insured by the Federal Deposit
Insurance Corporation pursuant to Section 40-2,132 of the Kansas Insurance Code
(hereinafter referred to as the "Premium Trust Account"). Such Premium Trust
Account shall be maintained separately from any other premium trust account and
the General Agent shall deposit only premiums due to or from the Company, other
Policy Issuing Companies, and insureds and not commingle operating funds of the
General Agent with premiums maintained in the Premium Trust Account.
Section 5.4 is hereby amended and restated to read in its entirely:
5.4 Premiums held by the General Agent for and on behalf of the Company in
the Premium Trust Account may be invested by the General Agent in Authorized
Investments until paid to the Company or the FCIC. "Authorized Investments"
shall consist of (a) deposits in deposit accounts or certificates of deposit
with maturities not exceeding one (1) year held in or issued by banks or savings
and loan associations insured by the United States Government and approved by
the Company, or (b) United States government bonds and treasury certificates or
other obligations for which the full faith and credit of the United States are
pledged for payment of principal and interest maturities of not more than one
(1) year, but not contracts or options for the sale and purchase thereof, or
securities indexed thereto. It shall be the responsibility of the General Agent
to maintain sufficient liquidity in the Premium Trust Account to make timely
payment of all amounts due to the Company. The length of maturity of any
investment in the Premium Trust Account shall not excuse any late payment or
remittance. Any interest and/or dividends paid on such Authorized Investments
shall be for the benefit of and shall be the property of the General Agent,
except that such interest and/or dividends shall not be deemed to include the
Contract Interest.
Section 5 shall be amended to add the following Sections 5.6 through 5.10:
5.6 The General Agent is also authorized to pay premiums on behalf of
insureds by the other Policy Issuing Companies. If and when the General Agent
makes such payment of premiums on such other Policy Issuing Company's behalf,
the General Agent accedes to all rights in any such subsequently collected
premium. Pursuant to Section 5A, the Company is agreeing to advance the
payment of such premiums due under policies issued by the other Policy Issuing
Companies to the FCIC on the November, December and February Due Dates. The
Company is actually advancing such premiums due from insureds covered by the
1996 SRA. Such advance shall also hereby be on behalf of the General Agent
pursuant to its rights to advance premiums on behalf of the Policy Issuing
Companies consistent with the General Agent's agency agreements with such Policy
Issuing Companies. In exchange for the Company's agreement to advance such
premiums advanced by the General Agent, the General Agent hereby assigns to the
Company all of the General Agent's right, title and interest pursuant to its
agency agreements with the Policy Issuing Companies in any such premiums (the
"Assigned Premiums"). The General Agent hereby expressly grants a security
interest to the Company in the Assigned Premiums to the extent
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General Agent should be deemed for whatever reason to retain any interest in
such Assigned Premiums. The General Agent hereby grants the Company a power of
attorney to act as the General Agent's attorney-in-fact for the SOLE purpose of
executing any appropriate UCC-1 or other similar financing statement, and any
extensions or amendments thereto, as the Company deems necessary for the purpose
of perfecting the Company's security interest in such Assigned Premiums.
5.7 Pursuant to the terms of the 1996 SRA, the Company is responsible to the
FCIC for any premiums for policies reinsured under the 1996 SRA, regardless of
whether any such premium is actually collected or which Crop Year is covered.
The General Agent under this Agreement and pursuant to its other agency
agreements with the other Policy Issuing Companies has responsibility to both
report policies to be included under the 1996 SRA and to collect premium for
such policies. The General Agent hereby agrees that it shall be responsible to
the Company for all such premium for which the Company is responsible to pay to
the FCIC under the 1996 SRA, regardless of whether the General Agent is able to
collect such premium or not ("Earned Premium Responsibility"). This Earned
Premium Responsibility shall apply to premiums due on all policies which are
covered under the 1996 SRA, regardless of whether such policies are issued by
the Company or by the other Policy Issuing Companies or which Crop Year is
covered. All such premium shall be due to the Company no later than the Premium
Advance Due Date, as defined in Section 5A.7, below.
5.8 It is understood that all premiums, including Assigned Premiums, on MPCI
written under the 1996 SRA, which are paid to the General Agent, belong to the
Company, as provided herein. Additionally, all Contract Interest belongs to the
Company, until and unless assigned or reassigned to the General Agent.
Commissions and/or fees the Company pays to the General Agent are debts the
Company owes the General Agent. The privilege of deducting the General Agent's
commissions and/or fees from such premiums and/or Contract Interest due the
Company shall not be construed as a waiver by the Company of the Company's
exclusive ownership of all such premiums and Contract Interest due. Should any
dispute arise, all such premiums and Contract Interest shall be paid to the
Company, including any amounts in dispute, with full reservations of the Agent's
rights.
5.9 The General Agent shall establish and maintain internal controls and
record keeping mechanisms for the safekeeping and full accounting of all cash
receipts, cash disbursements, premium billings, collections and policyholder
records relating to policies or evidences of insurance issued by the Company or
reasonably required for the fulfillment of the General Agent's duties.
5.10 The General Agent and the Company shall settle and pay premiums,
commissions, fees and credits on a monthly basis, except as provided in Sections
5A.6 and 5A.7, below.
The 1996 MPCI Agreement is hereby amended to add the following Section 5A and
Section 5B:
SECTION 5A - PREMIUM ADVANCES
5A.1 The Company agrees to advance to the FCIC premiums due under MPCI
policies issued under the 1996 SRA ("Premium Advances"). Such Premium Advances
shall be made on behalf of insureds insured under such policies. The policies
for which Premium Advances will be made will be selected by the General Agent.
Included within such Premium Advances will be advances previously made for
April, May and July 1996 on behalf of insureds by the General Agent that have
not yet been repaid by the
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insureds (the "Refinanced Spring Advances"). The amount of the Refinanced
Spring Advances as of the November Due Date is one million five hundred thirty-
eight thousand six hundred thirty-seven dollars ($1,538,637.00). The Company's
obligation to make Premium Advances in the aggregate for all insureds shall not
exceed fifty million dollars ($50,000,000.00) at any time. It is anticipated
that the aggregate net Premium Advances to be made on the November Due Date
shall be approximately twenty-nine million dollars ($29,000,000.00), the net
Premium Advances to be made on the December Due Date shall be approximately
fifteen million dollars ($15,000,000.00) and the net Premium Advances to be made
on the February Due Date shall be approximately five hundred thousand dollars
($500,000.00). At no time shall the total outstanding aggregate net Premium
Advance total exceed fifty million dollars ($50,000,000.00).
5A.2 As a condition precedent to the Company's obligation to make such Premium
Advances the Company shall be permitted to perform an audit and review of the
General Agent's accounting and internal controls for processing of premium
billings, remittance processing and related accounting. Such audit and review
shall be of a scope and depth satisfactory to the Company in the Company's sole
discretion and the Company shall have the right to determine in the Company's
sole discretion that such controls and related accounting processes and
procedures are satisfactory to the Company.
5A.3 The General Agent shall supply the Company in form and detail
satisfactory to the Company in the Company's sole discretion, no later than
November 25, 1996, the amount of net Premium Advances to be made by the Company
on the November Due Date. Such information shall include, but not be limited to
the amount of total premiums to be paid, total premiums to be advanced, total
premiums collected on policies for which payments on the November Due Date are
to be made, and total loss credits that shall be applied against premiums for
which payments on the November Due Date are to be made. Similar information
regarding premiums due on the December and February Due Dates shall be supplied
to the Company by the General Agent no later than December 23, 1996 and February
21, 1997, respectively, with respect to net Premium Advances to be made by the
Company on the respective December and February Due Dates.
5A.4 No later than 1:00 p.m. P.S.T. on November 27, 1996, the General Agent
shall pay to the Company by wire transfer the total premiums collected for which
payments are to be made on the November Due Date ("Collected November
Premiums"). Such Collected November Premiums shall include both premiums
collected by the reporting cut-off date for that month established by the FCIC
for reporting the amount of such monthly collections (the "Monthly Reported
Collections") and all additional collected premiums collected between such
monthly cut-off date and date the General Agent transfers such funds to the
Company (the "Additional Collections"). On the November Due Date the Company
shall pay the FCIC by wire transfer the total premiums to be paid on the
November Due Date, less appropriate loss credits and other amounts due to or
from the FCIC pursuant to the terms of the 1996 SRA ("Net November Premiums").
To the extent the General Agent has not yet remitted the total premiums
collected for which payments are to be made on the December Due Date, the
General Agent shall pay to the Company by wire transfer such remaining
collections no later than 1:00 p.m. P.S.T. on December 30, 1996. The total of
all premiums collected for which payments are to be made on the December Due
Date shall constitute the "Collected December Premiums". Such Collected December
Premiums shall include both Monthly Reported Collections and Additional
Collections. On the December Due Date the Company shall pay the FCIC by wire
transfer the total premiums to be paid on the December Due Date, less
appropriate loss credits and other amounts
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due to or from the FCIC pursuant to the terms of the 1996 SRA ("Net December
Premiums").
To the extent the General Agent has not yet remitted the total premiums
collected for which payments are to be made on the February Due Date, the
General Agent shall pay to the Company by wire transfer such remaining collected
February premiums no later than 1:00 p.m. P.S.T. on February 27, 1997. The
total of all premiums collected for which payments are to be made on the
February Due Date shall constitute the "Collected February Premiums". Such
Collected February Premiums shall include both Monthly Reported Collections and
Additional Collections. To the extent necessary, on the February Due Date the
Company shall pay the FCIC by wire transfer the total premiums to be paid on the
February Due Date, less appropriate loss credits and other amounts
due to or from the FCIC pursuant to the terms of the 1996 SRA ("Net February
Premiums").
5A.5 Contract Interest shall be calculated by applying the simple interest
rate of 1.25% per month to all outstanding Premium Advances for the period of
time such Premium Advances are actually outstanding, without regard for the
actual interest paid by the insureds. November 29, 1996 shall be used for the
purpose of calculating the commencement of Contract Interest on the Refinanced
Spring Advances. The General Agent shall be responsible to the Company for any
and all such Contract Interest regardless of whether the General Agent is able
to collect such Contract Interest.
5A.6 Commencing December 9 and each subsequent Monday, or following business
day, if Monday is a holiday, the General Agent shall pay to the Company by wire
transfer an amount equal to all collections received from insureds for which
Premium Advances have previously been made ("Weekly Premium Collections"),
together with all Contract Interest (net of the Premium Advance Service Fee
described in Section 5A.8, below) ("Weekly Net Contract Interest") due from the
General Agent through the previous Friday. All such Weekly Premium Collections
shall be applied to reduce the outstanding amount of the aggregate Premium
Advance balance. Additionally, once a month, as received by the General Agent
from the FCIC, the General Agent shall pay to the Company by wire transfer the
total amount received from the FCIC for loss payments against premiums that have
previously been the subject of a Premium Advance ("Loss Payments"). Such Loss
Payments shall also be applied to reduce the outstanding amount of the aggregate
Premium Advance balance. Notwithstanding the foregoing, any payments made under
this section shall be applied first toward outstanding Contract Interest and
then toward outstanding Premium Advances.
5A.7 Notwithstanding anything else in the Agreement to the contrary, on March
31, 1997 (the "Premium Advance Due Date"), or on an earlier date at the sole
option of the General Agent, the General Agent shall pay to the Company the
total aggregate outstanding Premium Advance balance, together with all
outstanding Contract Interest. Once that payment is made and the Premium
Advances have been repaid to the Company, the Company shall be entitled to no
further Contract Interest and the General Agent shall be entitled to no further
Premium Advance Service Fee for Advanced Premiums paid by insureds after that
date. Further, upon full satisfaction of the outstanding Premium Advance
balance and all outstanding Contract Interest, the Company hereby reassigns all
Assigned Premiums to the General Agent, assigns all rights the Company has to
receive Contract Interest to the General Agent, and agrees to execute and file
termination statements with respect to its security interests in the Assigned
Premiums and Profit Sharing provided in sections 5.6 and 5A.9, hereof. Any
prepayment by the General Agent of all of its financial
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obligations under this Agreement in advance of the Premium Advance Due Date
shall be without penalty.
5A.8 To compensate the General Agent for performing their duties to collect
the premiums that are the subject of the Premium Advances, the Company agrees
that the General Agent shall receive a fee equal to thirty-three and a third
percent (33 1/3%) of the total Contract Interest ("Premium Advance Service
Fee").
5A.9 The General Agent hereby grants to the Company a security interest in all
underwriting gain and/or profit sharing that would otherwise be due the General
Agent pursuant to section 10 of this 1996 MPCI Agreement, as well as any similar
underwriting gain and/or profit sharing that would otherwise be due the General
Agent pursuant to the General Agent's agreement with Continental Insurance
Company with respect to the 1996 Crop Year ("Profit Sharing"). The General
Agent hereby grants the Company a power of attorney to act as the General
Agent's attorney-in-fact for the SOLE purpose of executing any appropriate UCC-1
or other similar financing statement, and any extensions or amendments thereto,
as the Company deems necessary for the purpose of perfecting the Company's
security interest in such Profit Sharing.
SECTION 5B - FINANCIAL COVENANTS
5B.1 So long as any Premium Advances and Contract Interest remains unpaid and
outstanding the General Agent shall not without the Company's prior written
consent:
a. Create, incur, assume, or suffer to exist or permit any
subsidiary or affiliate (excluding the Company to the extent it should
be deemed an affiliate of the General Agent for any purpose) to
create, incur, assume, or suffer to exist, any debt, except:
(i) Debt of the General Agent under this Agreement;
(ii) Accounts payable to trade creditors for goods or services
incurred in the ordinary course of business, and paid within the
specified time, which are not delinquent or which are being contested
in good faith and by appropriate proceedings;
(iii) Debt for current taxes, assessments, governmental charges, or
levies, which are not delinquent or which are being contested in good
faith by appropriate proceedings;
(iv) Capitalized lease obligations not in excess of $100,000 in
the aggregate in any calendar year;
(v) Any other debt, singularly or in the aggregate, not in
excess of $100,000 in any one fiscal year of the General Agent; or
(vi) Any other debt existing on the date hereof (except as
otherwise disclosed in Crop Growers Corporation's '34 Act filings,
there is no debt in excess of $100,000 to any one party);
b. Make, assume or incur any obligations for capital expenditures if
by reason thereof the aggregate of all such expenditures payable by
the General Agent and all its
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subsidiaries during the then current or during any subsequent fiscal
year would exceed $500,000.00;
c. Pay any dividends and/or retire, redeem or purchase any stock of
the General Agent;
d. Make any advances or capital contributions to any subsidiary or
affiliate of the General Agent, except in the ordinary course of
business and consistent with past practices to the extent such
advances or contributions do not exceed $25,000 to total, and for
payroll paid by Crop Growers Employers Organization, Inc.
Section 14 is hereby amended and restated to read in its entirety:
SECTION 14 - RECORDS
14.1 The General Agent shall maintain separate records of business written by
the General Agent on the Company's behalf. The General Agent's records and its
expiration rights, ("Expiration Rights and Records") are the General Agent's
property. The General Agent has the right to use and control such Expiration
Rights and Records. The Company shall have access and the right to copy all
accounts and records related to the Company's business, including the right to
inspect and audit the General Agent's financial and accounting records for the
purpose of verifying compliance with this Agreement. All such records shall be
retained for the minimum time periods required by Kansas law, or for such longer
time periods if so required by the state law of a state having jurisdiction over
a particular insured.
14.2 The Company and the insurance commissioner of the Company's state of
domicile or any other insurance commissioner having jurisdiction over the
business covered by this Agreement shall have the right at any reasonable
time to examine and copy all accounts and records in the possession of the
General Agent referring to business effected hereunder.
14.3 The General Agent hereby grants the Company a security interest in the
General Agent's Expiration Rights and Records. The General Agent hereby grants
the Company a power of attorney to act as the General Agent's attorney-in-fact
for the SOLE purpose of executing any appropriate UCC-1 or other similar
financing statement, and any extensions or amendments thereto, as the Company
deems necessary for the purpose of perfecting the Company's security interest in
such Expiration Rights and Records, provided that such security interest shall
be subordinate to the security interest of any party providing financing on a
secured basis to Crop Growers Corporation, the General Agent, or their
respective subsidiaries, currently or in the future, such as Crop Growers
Corporation's current line of credit with First Interstate Bank of Montana.
Sections 17.4 through 17.6 are hereby amended and restated to read in their
entirely and the following Sections 17.7 through 17.10 added:
17.4 The Company may terminate this Agreement immediately without notice to the
General Agent, with respect to any and all states in which the General Agent is
authorized to act as the Company's managing general agent pursuant to this
Agreement, in the event that the General Agent loses its license or
authorization to engage in the insurance business as contemplated and required
by this Agreement, whether through revocation, suspension, nonrenewal or
otherwise if such license termination is due to any of the reasons stated in
Kansas Insurance Laws Section 40-242, or
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similar statute under another state's law. In any state in which the General
Agent's license is terminated, the General Agent's authority under this
Agreement shall cease immediately without notice until such license is restored.
17.5 In the event of fraud or intentional misappropriation of funds by the
General Agent, the Company may terminate this Agreement by written notice
effective immediately. This Agreement may be terminated immediately upon 30
days written notice by the Company to the General Agent in the event the General
Agent fails to pay premiums or meet other financial obligations to the Company
when due or otherwise violates the terms of this Agreement, which failure or
violation is not cured within such 30 day period, except that any failure to pay
when due any repayment of Premium Advances, or payment of Contract Interest,
Weekly Premium Collections or Loss Payments, or breach of the General Agent's
obligations under Section 5B must be cured within 2 business days.
17.6 The Company acknowledges that Crop Growers is a publicly owned company the
common stock of which is traded on a national securities exchange. In the event
that:
a. there shall be consummated any consolidation or merger of Crop
Growers pursuant to which the stockholders of Crop Growers immediately
prior to the merger or consolidation do not represent, immediately
after the merger or consolidation, the beneficial owners (within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934 (the
"Exchange Act")) of 50% or more of the combined voting power of Crop
Growers (or the surviving entity's) then outstanding securities
ordinarily (and apart from rights occurring in special circumstances)
having the right to vote in the election of directors;
b. there shall be consummated any sale, lease, exchange or transfer
(in any single transaction or series of related transactions) of all
or substantially all of the assets or business of Crop Growers or any
of its material Subsidiaries (as defined below); or
c. any "person" (as such term is used in Sections 13(d)(3) and
14(d)(2) of the Exchange Act), other than (A) Crop Growers or a
Subsidiary thereof, or (B) any employee benefit plan sponsored by Crop
Growers or a Subsidiary thereof, shall become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of
securities of Crop Growers representing more than 50% of the combined
voting power of Crop Growers' then outstanding securities ordinarily
(and apart from rights accruing in special circumstances) having the
right to vote in the election of directors, as a result of a tender,
leveraged buyout or exchange offer, open market purchases, privately
negotiated purchases, other arrangements or understandings or
otherwise;
the General Agent shall give the Company notice of any such
transaction within ten (10) days after such transaction is consummated.
Following receipt of such notice, the Company may terminate this
Agreement upon thirty (30) days notice given no later than the 30th day after
receipt of such notice. For purposes of this Section, the term "Subsidiary"
shall mean (i) a corporation of which shares of stock having ordinary voting
power (other than stock having such power only by reason of the happening of a
contingency) to elect a majority of the board of directors or other managers of
such corporation are at the time owned,
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directly or indirectly, through one or more intermediaries, by Crop Growers, or
(ii) in the case of unincorporated entities, any such entity with respect to
which Crop Growers has the power, directly or indirectly, to designate more than
50% of the individuals exercising functions similar to a board of directors.
17.7 This Agreement may be terminated immediately in the event the General
Agent becomes insolvent or makes any general assignment for the benefit of
creditors.
17.8 In the event of termination of this Agreement, should the General Agent be
in any way indebted to the Company at such time, for premium, Premium Advances,
Contract Interest, Weekly Premium Collections, Loss Payments or any other
obligations under this Agreement, such debt or debts shall immediately become
due and payable. The Company shall have the right to suspend the General
Agent's underwriting and/or claims settlement authority during the pendency or
any dispute regarding the cause for termination. Minor accounting discrepancies
shall not be considered grounds for termination.
17.9 In the event of termination of this Agreement, and provided the General
Agent (and/or the local agents appointed by the General Agent under authority of
this Agreement) has, in accordance with the terms of this Agreement, within 15
days of such termination, accounted for and paid to the Company all premiums and
other monies due and owing the Company, the records of the General Agent and
local agents, together with use and control of the Expiration Rights and
Records, shall remain the property of the General Agent and of the local agents,
as their interests may appear, and be left in their undisputed possession.
Notwithstanding the ownership and possession of such Expiration Rights and
Records by the General Agent, the Company shall have the undisputed right to
copy all records necessary to satisfy insurance department record keeping
requirements, including but not limited to all underwriting files, claims files,
billing information, etc. If there has not been such an accounting and payment
by the General Agent (and/or local agents appointed by the General Agent under
authority of this Agreement within) 15 days of termination of this Agreement,
the Company shall have the right to assume control of the General Agent's
Expiration Rights and Records and may:
a. keep all commissions payable on such expirations or their renewals
and apply such commissions against what the General Agent owes the
Company; and/or
b. sell such portion of the Expiration Rights and Records that the
Company reasonably believes is necessary to satisfy the General
Agent's obligations to the Company pursuant to this Agreement.
In the event that such retained commissions or sale proceeds are
insufficient to satisfy the General Agent's obligations to the Company
under this Agreement, the General Agent shall still be responsible for
such unpaid sums. In the event that such retained commissions or sale
proceeds are more than necessary to satisfy the General Agent's
obligations to the Company, the Company shall return such excess to
the General Agent.
Any sale of the Expiration Rights and Records must be made in a
commercially reasonable manner pursuant to the Uniform Commercial
Code. The Company shall have the right to appoint any buyer of such
Expiration Rights and Records as a Managing General Agent for such
business.
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To the extent that the General Agent has not satisfied its financial
obligations to the Company within any prescribed time period, including
any cure period, and the Agreement is terminated, the Company shall
notify the General Agent of the amount the Company reasonably believes
the General Agent owes to the Company. If the parties cannot agree
within 10 days of such notice as to the amount of premiums, amounts or
other obligations due ("Disputed Obligations"), the General Agent shall
deposit, in a trust account acceptable to the Company, an amount equal to
the Disputed Obligations claimed by the Company to be due until such time
as the dispute is resolved. To the extent that the Company subsequently
reasonably believes additional amounts may be due the Company by the
General Agent under this Agreement, The Company shall give notice of such
additional amounts. If the parties cannot agree within 10 days of such
notice as to the amount of such additional amounts. If the parties
cannot agree within 10 days of such notice as to the amount of such
additional owed Disputed Obligations, the General Agent shall deposit
such additional amount in the trust account. Upon deposit by the General
Agent in the trust account of the amounts of such Disputed Obligations,
the Company shall suspend any efforts to pursue the sale of the
Expiration Rights and Records or capture of commissions. Nothing in this
Section shall preclude the Company from proceeding with the mechanics of
a public or private sale of the Expiration Rights and Records, including
giving notice of the time, place and manner of any proposed public or
private sale, except that, if the provisions regarding the Disputed
Obligations above are not yet concluded, no sale may actually occur.
17.10 The Company shall also have all rights of a secured creditor under the
Uniform Commercial Code with respect to all other collateral or security pledged
by the General Agent to the Company under this 1996 MPCI Agreement.
The Agreement is hereby amended to add the following Section 19, Section 20 and
Section 21:
SECTION 19 - SUSPENSION OR DEBARMENT UNDER AN SRA
19.1 The General Agent acknowledges that if the FCIC should suspend or debar
the General Agent under 7 C.F.R. Section 3017, which suspension or debarment
prevents the General Agent from performing its obligations under this Agreement,
the Company, in accordance with the terms and conditions of the SRA, will remain
ultimately liable to provide services to policyholders then being served under
the SRA. As such, and recognizing that under the terms of this Agreement the
General Agent performs, on behalf of the Company, substantially all such
services to policyholders, the General Agent agrees that in the event of a
suspension or debarment as contemplated under this Section 19.1, the General
Agent shall take all such actions as shall be reasonably requested by the
Company to ensure that service to policyholders continues without
interruption and in accordance with MPCI Program Requirements (as hereinafter
defined). In addition to suspension or debarment, other actions might be
taken by either the Federal or a state government that could similarly
substantially hinder, interfere or prevent the General Agent from performing,
on the Company's behalf, substantially all such services to policyholders
then being served under the SRA. In such event, to the extent necessary, the
General Agent shall take all such actions as shall be reasonably requested by
the Company to ensure that service to
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policyholders continues without interruption and in accordance with MPCI
Program Requirements.
19.2 In order to ensure the continuation of service to policyholders in the
event of an event contemplated by Section 19.1, the General Agent and the
Company agree, subject to any approval by the FCIC, as the case may be, that
they will (during the 90 days following execution of this Agreement) discuss and
agree upon plans to provide such continuation of services. If the General Agent
and the Company are unable to agree to any such plans, in the event of a
suspension or debarment as described in Section 19.1 hereof, they shall agree to
the following:
a. The General Agent shall (i) sell its MPCI Business (as defined
below) to a third party (which third party may include the Company and
shall be acceptable to the FCIC and the Company, which acceptance by
the Company shall not be unreasonably withheld) or (ii) Crop Growers
or the General Agent shall merge, consolidate, or sell, lease,
exchange or transfer all or substantially all the assets or business
of Crop Growers or the General Agent, including the MPCI Business, to
a third party (which third party may include the Company and shall be
acceptable to the FCIC); provided, however, that until the earlier of
(A) the sale under this Section 19(a) or (B) the General Agent becomes
obligated to proceed under Section 19.2(b) below (the "Transition
Period"), the General Agent shall make available on a non-exclusive
basis the assets described in (i) - (ii) and the General Agent shall
make available to the Company on a non-exclusive basis and on
commercially reasonable terms the employees, subagents and local
agents described in (iii) and (iv) of paragraph (b) below, in all
cases only to the extent reasonably necessary for the Company to
continue servicing, during the Transition Period, policyholders then
being serviced under the SRA; or
b. If the General Agent shall not complete a transaction contemplated
by Section 19.2(a) within 90 days of any such suspension or debarment,
or such shorter period of time as may be reasonably necessary for the
Company to meet the Company's obligations under the SRA in accordance
with MPCI Program Requirements, then:
(i) the General Agent would supply the Company with copies of
all records necessary for the Company to meet all of the
Company's obligations under the SRA and any policy of insurance
issued pursuant to this Agreement (the "Company Obligations");
provided, however, that supplying such copies shall not in any
way affect the use and ownership of the Expiration Rights and
Records as otherwise set forth in this Agreement;
(ii) the General Agent would make available on a non-exclusive
basis, either by lease, license, management agreement, purchase
or other commercially reasonable method, all computers (including
hardware and software), computer records, and other data
processing equipment used by the General Agent to process
information used by the Company, or on the Company's behalf, that
is reasonably necessary for the Company to meet the Company
Obligations (the "Computer Equipment"),
(iii) the Company shall have the right, in its discretion, to
solicit for employment and/or employ any
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current or future employee of the General Agent or its affiliates
as may be reasonably necessary for the Company to meet the
Company obligations;
(iv) the Company and the General Agent each shall have the right
to continue to use any and all subagents or local agents who have
placed business with the Company pursuant to this Agreement. The
General Agent shall cooperate with the Company to the extent
necessary to accomplish this result by executing any and all
agreements necessary to transfer to the Company any requisite
rights under any then existing agreements;
(v) as a part of implementing items (i) - (iv) above, the
parties agree that the Expiration Rights and Records, Computer
Equipment, the right to hire employees (as provided in (iii)
above), use of sub-agents or local agents (as provided in (iv)
above) and such other related assets (together defined as the
"MPCI Business") shall be purchased by the Company. In such
case, the Company and the General Agent shall in good faith
attempt to agree on the appropriate purchase price to be paid by
the Company to the General Agent for the MPCI Business. In
valuing the MPCI Business, due consideration shall be given to
its value as a going concern, as appropriate. In the event that
the Company and the General Agent cannot reach agreement on a
purchase price, they shall seek an independent valuation of the
MPCI Business from a mutually agreed upon investment banking
firm, again giving due consideration to its value as a going
concern, as appropriate. In the event that the parties do not
agree upon an investment banking firm to value the MPCI Business
within 110 days of any such suspension or debarment, or if the
parties do not agree upon a purchase price within 30 days after
delivery to them of a valuation by the investment banking firm
chosen by them, the issue of such purchase price shall be
submitted to binding arbitration pursuant to Section 16 of this
Agreement (provided that the arbiters shall be representatives of
investment banking firms and not insurance industry persons).
Notwithstanding any disagreements over the amount of the purchase
price, if the MPCI Business is to be sold to the Company, the
General Agent shall immediately transfer the assets constituting
the MPCI Business to the Company. Such transfer of the MPCI
Business shall not await the determination or payment of the
purchase price.
SECTION 20 - COMPLIANCE
20.1 The Company shall oversee compliance by the General Agent with the MPCI
Program Requirements, the laws and regulations of the United States and the laws
and regulations of the state in which the Company and General Agent are
conducting business under this contract. For purposes of this Agreement, the
term "MPCI Program Requirements" means all requirements of the SRA and FCIC
rules, laws, regulations, bulletins, directives, instructions, court and agency
rulings, and other written requirements with respect to the sale and
administration of MPCI policies issued by the FCIC applicable to the General
Agent's performance of its obligations under this Agreement.
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20.2 The General Agent shall cooperate with the Company in the review of the
General Agent's operations which are designed to assure policyholders are
properly serviced, that monies are distributed in accordance with the MPCI
Program Requirements, and FCIC policies and procedures are being followed.
20.3 The General Agent acknowledges that, between the General Agent on one hand
and the Company and other insurers writing MPCI under the SRA on the other hand,
the General Agent is responsible for compliance with the MPCI Program
Requirements. The General Agent shall, in all cases and at all times, observe
and obey the MPCI Program Requirements, and shall not bind the Company or any
other policy writing company designated in the SRA in contravention of the MPCI
Program Requirements, this Agreement, or the Company's written instructions
consistent with the terms hereof. In the event of a conflict between the
requirements of this Agreement and the MPCI Program Requirements, the MPCI
Program Requirements shall control and take precedence and the Company and the
General Agent agree to reform this Agreement to eliminate such conflict, and
shall negotiate in good faith any equitable adjustment to the terms hereof that
is necessary as a result of such conflict.
a. The General Agent has developed a plan to monitor the
quality of service provided by the sales, underwriting, and
claims processing functions of the General Agent's MPCI
business operations. The General Agent shall provide the
Company with a copy of the schedule of the activities under
the internal monitoring plan, which shall include, but not
be limited to, the dates, locations and types of review to
be conducted. The General Agent agrees to provide the
Company with a copy of any changes that are adopted to the
schedule within the (10) business days of the schedule
change.
b. the General Agent shall promptly provide the Company
with a copy of each report generated from the review and a
copy of any correction plan to be adopted to remedy any
problems discovered by the review.
20.4 The Company and the General Agent shall form a joint task force
(hereinafter referred to as the "Compliance Review Group") to identify and
analyze compliance issues and to recommend actions or procedures to improve the
MPCI compliance process by the Company and the General Agent. The Compliance
Review Group shall identify not less than three nor more than six quality of
service or compliance issues to be the subject of the Compliance Review Group's
monitoring activities during each six month period. The Company and the General
Agent shall consider in good faith the implementation of any recommendations of
the Compliance Review Group.
20.5 If the Company finds that the General Agent has not complied with the
provisions of Section 20.2 and 20.3 above, and the General Agent has not taken
appropriate steps to correct the non-compliance, the Company may, at its option,
require, in writing, that the General Agent take corrective action within 45
days of the date of such finding. The notice shall describe each contract
violation or occurrence of non-compliance. The General Agent will provide the
Company within ten days of such a notice with a correction action plan and, on
or before the 45th day following such notice, the General Agent will provide the
Company with a description of the correction action taken to address the non-
compliance
14
<PAGE>
or reported violation and provided the Company with the opportunity to verify
the correction action taken.
SECTION 21 - COUNTERPARTS
21.1 This Amendment may be signed in any number of counterparts and each such
counterpart shall be deemed an original instrument, but all such executed
counterparts together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their duly authorized representatives at:
Novato, California, this 27th day of November, 1996.
FIREMAN'S FUND INSURANCE COMPANY
/s/ John M. Meuschke
- ---------------------------------
By: John M. Meuschke
Title: Vice President
Overland Park, Kansas, this 27th day of November, 1996.
CROP GROWERS INSURANCE, INC.
/s/ David E. Hill
- ---------------------------------
By: David E. Hill
------------------------------
Title: Chief Financial Officer
---------------------------
15
<PAGE>
LIST OF SUBSIDIARIES
NAME STATE OF INCORPORATION
Crop Growers Insurance, Inc. Montana
Crop Growers Employer Organization, Inc. Montana
Crop Growers Software, Inc. Texas
Crop Loss Adjusting Services, Inc. Montana
California Crop Growers Insurance Services, Inc. California
Dawson Hail Insurance Co. North Dakota
Insurance Acquisition Corporation Kansas
Wheat Growers General Agency, Inc. Montana
United Agents Crop Insurance Agency, Inc. Mississippi
Farmers All-Risk Crop Insurance Agency, Inc. Texas
Cimarron Crop Insurance Services, Inc. Kansas
Crop Growers of North Dakota, Inc. North Dakota
Plains Insurance Company Kansas
Chapman Lampson, Inc. Washington
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Crop Growers Corporation:
We consent to incorporation by reference in the registration statement (No. 33-
85880) on Form S-8 of Crop Growers Corporation of our report dated March 28,
1997, relating to the consolidated balance sheets of Crop Growers Corporation
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1996, which report appears in
the December 31, 1996, annual report on Form 10-K of Crop Growers Corporation.
KPMG Peat Marwick LLP
Kansas City, Missouri
March 31, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints each of Lawrence Martinez and David E. Hill, with full
power to each to act without the other, his true and lawful attorney-in-fact and
agent with full power of substitution, for him and in his name, place and stead,
in any and all capacities, to sign the Crop Growers Corporation Annual Report on
Form 10-K for the year ended December 31, 1996, and any or all amendments
thereto, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, and to file
the same with such state commissions and other agencies as necessary, granting
unto each attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each such attorney-in-fact and
agent, or his substitute, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on this 25th day
of March, 1997, by the following persons.
/s/ Paul T. Horn /s/ David E. Hill
- -------------------- -------------------------
Paul T. Horn David E. Hill
/s/ Lawrence Martinez /s/ Manuel Sanchez
- --------------------- -------------------------
Lawrence Martinez Manuel Sanchez
/s/ John M. Meuschke /s/ Thomas M. Vertin
- --------------------- -------------------------
John M. Meuschke Thomas M. Vertin
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,132,126
<SECURITIES> 6,508,147
<RECEIVABLES> 57,536,838
<ALLOWANCES> 3,200,000
<INVENTORY> 0
<CURRENT-ASSETS> 141,962,803
<PP&E> 9,705,584
<DEPRECIATION> 4,463,137
<TOTAL-ASSETS> 158,929,128
<CURRENT-LIABILITIES> 112,463,386
<BONDS> 0
0
10,000,000
<COMMON> 79,702
<OTHER-SE> 33,672,323
<TOTAL-LIABILITY-AND-EQUITY> 158,929,128
<SALES> 0
<TOTAL-REVENUES> 111,166,167
<CGS> 0
<TOTAL-COSTS> 73,503,156
<OTHER-EXPENSES> 47,010,810
<LOSS-PROVISION> 655,781
<INTEREST-EXPENSE> 1,477,595
<INCOME-PRETAX> (11,481,175)
<INCOME-TAX> (3,345,732)
<INCOME-CONTINUING> (8,202,670)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,202,670)
<EPS-PRIMARY> (1.04)
<EPS-DILUTED> 0
</TABLE>
