FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
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 (NO FEE REQUIRED)
For the transition period from to
Commission file number 33-83116
ASSOCIATED BUSINESS & COMMERCE
INSURANCE CORPORATION
(Exact name of Registrant as specified in its charter)
FLORIDA 65-0496132
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
4700 N.W. BOCA RATON BOULEVARD, SUITE 400, BOCA RATON, FL 33431
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (561) 997-0708
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Preferred Stock, Series A None
6% Cumulative Convertible
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(b) 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 [ ]
Indicated 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. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
PART I
<S> <C>
ITEM 1 - BUSINESS 1
General Description and Business Developments during 1996 1
Financial Information about Industry Segments 3
Narrative Description of Business 4
Background 4
Strategy 5
Products 5
Management Agreement 6
Sales and Marketing 6
Managed Care 6
Underwriting 7
Loss Control 8
Reinsurance 8
Claims Management 9
Competition 10
Government Regulation 10
Reserves for Losses and Loss Adjustment Expenses (LAE) 11
Investments 12
Employees 12
ITEM 2 - PROPERTIES 12
Facilities 12
ITEM 3 - LEGAL PROCEEDINGS 13
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 16
Market Information 16
Number of Security Holders 16
Dividend History and Restrictions 16
ITEM 6 - SELECTED FINANCIAL DATA 16
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 17
Organization 17
Results of Operations 18
Prospective Financial Information 20
Reserves for Loss and Loss Adjustment Expense (LAE) 21
Excess of Loss Reinsurance 22
Proportional Quota-share Reinsurance 23
Special Disabilities Trust Fund 23
Managed Care 24
Investments 25
Liquidity and Capital Resources 25
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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 29
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
29
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 34
Executive Officers and Directors 34
ITEM 11 - EXECUTIVE COMPENSATION 36
Compensation of Directors 36
Executive Compensation 36
Equity Compensation Plan 36
Holding's Stock Option Plan 38
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 38
Shareholder's Agreement 38
Investment by Holdings and TIG Loan and Security Purchase 39
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 42
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 45
</TABLE>
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PART I
ITEM 1 - BUSINESS
GENERAL DESCRIPTION AND BUSINESS DEVELOPMENTS DURING 1996
Associated Business & Commerce Insurance Corporation (the "Company) is a
property and casualty insurance company organized on May 13, 1994. The Company
commenced operations upon issuance to it of a Certificate of Authority by the
Florida Department of Insurance in December, 1995.
In a transaction approved by the Florida Department of Insurance, the Company
assumed the insurance related assets and liabilities of the Associated Business
and Commerce Workers' Compensation Self-Insurance Fund (the "Fund") by virtue of
a loss portfolio reinsurance treaty. The Fund was a workers' compensation
insurance trust organized in 1991 under the Workers' Compensation Act of the
State of Florida. By agreement with the Fund, the effective date of the
transaction was November 30, 1995. Accordingly, premiums earned on the Fund's
policies then in effect, and losses and underwriting expenses incurred
subsequent to that date are reported by the Company in its financial statements.
The Company did not assume liabilities of the Fund not related to insurance.
The Company is regulated by the Florida Department of Insurance and is subject
to laws and related rules of the Florida Insurance Code (the "Code"). Such laws
and rules required the Company to have initial minimum capital of $5.3 million
as a condition precedent to the issuance of a Certificate of Authority and the
approval of the loss portfolio reinsurance treaty with the Fund. However,
subsequent to the issuance of the Certificate of Authority, the minimum capital
required under the Code is $4 million. In addition, companies writing workers'
compensation insurance cannot have annualized net writings in excess of 3.2
times their statutory surplus. The Company satisfied the initial conditions
precedent through the sale of 221,805 shares of its registered Series A, 6%
Cumulative Convertible Preferred Stock at a price of $10.00 per share and the
sale of 3,200,000 shares of its unregistered Series B Convertible Preferred
Stock at a price of $1.00 per share.
The Series A Preferred Stock was sold to members of the Fund and to Fund agents
and vendors. The Series B Preferred Stock was sold to Associated Business &
Commerce Holdings, Inc. ("Holdings") which also owns 100% of the Company's
common stock. Holdings was organized for the purpose of providing financing for
the Company and performing certain management services for the Company under a
management agreement. Holdings obtained the funds for the purchase of the Series
B Preferred by entering into a term loan agreement with Underwriters Reinsurance
Company ("Underwriters") in December, 1995. The loan bore interest at 12.75% per
annum and, if not earlier prepaid, was due on September 30, 2000.
Holdings pledged as collateral for the loan, among other things, all of the
Common and Series B Preferred Stock of the Company held by Holdings. In
addition, Holdings granted Underwriters options to purchase shares of Holdings'
common stock in an amount, after issuance, up to a maximum of 49% of the number
of shares and options held by the founders, shareholders, officers, directors
and employees of Holdings. The number of shares subject to the option was based
upon the date on which the final payment to Underwriters under the loan
agreement was made.
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In addition to the loan, the Company entered into a proportional quota share
reinsurance agreement with Underwriters. Under the terms of the agreement
(effective throughout 1996), the Company ceded 70% of its net written premium to
Underwriters which assumed 70% of the Company's retained losses. The agreement
provided for reimbursements to the Company for expenses associated with other
reinsurance and other underwriting expenses through direct reimbursement and
through a provisional ceding commission calculated at the rate of 27% of ceded
premiums. The agreement also provided for certain incentives and/or additional
costs depending upon claims loss history.
In order to relieve the debt service burden created by the Underwriters loan,
improve the financing terms, increase the quota share reinsurance ceding
commission and generate more capital available to the Company, Holdings, on
December 4, 1996, entered into a Term Loan Agreement and Securities Purchase
Agreement with TIG Reinsurance Company (hereinafter "TIG" or the "TIG Loan").
Because the voting securities purchase aspect of the entire TIG transaction
required prior approval by the Florida Department of Insurance, closing occurred
in two phases.
The first closing occurred on December 4, 1996. At this first closing, Holdings
entered into a loan agreement with TIG evidenced by two promissory notes (Note A
and Note B). Note A is in the principal amount of $3 million, bears interest at
10% per annum, payable interest only and, if not earlier prepaid, is due
December 4, 2003. Note B was in the principal amount of $912,908, bears interest
at 6% per annum, payable interest only and, if not earlier prepaid, was due
December 4, 2003, provided however, that upon approval of the proposed
securities purchase by the Florida Department of Insurance Note B was to be
canceled and returned to Holdings. The principal amount of the B Note would then
be credited by Holdings toward the acquisition by TIG of 2,912,908 shares of
Holdings Series I Preferred Stock. Upon approval by the Department of Insurance,
TIG was also required to complete its purchase of 2,912,908 shares of Series I
Preferred by the payment to Holdings of an additional $2 million (the "second"
closing).
In addition to the foregoing, at the first closing Holdings sold and TIG
purchased 87,092 shares of Holdings Series B Common Stock. The Series B Common
Stock was non-voting but carried all other features of common stock. The
purchase price of Series B Common was $1.00 per share. Upon approval by the
Department of Insurance, Holdings agreed to exchange voting common stock for the
Series B Common.
The proceeds of the TIG loan from the first closing were used by Holdings to
retire in full the Underwriters' loan (approximately $3.6 million) and to
purchase an additional 400,000 shares of the Company's Series B Convertible
Preferred Stock. This refinance and payment in full to Underwriters served to
reduce the Underwriters quota share to 20% of net written premium and limited
Underwriters' options to approximately 5%.
The second closing occurred on March 31, 1997, after receipt of approval of the
entire transaction by the Department of Insurance. At the second closing, TIG
surrendered the B Note and the Series B Common Stock and paid the $2 million due
for the purchase of Holdings' Series I Preferred. Holdings cancelled the B Note
and Series B Common Stock and issued to TIG 87,092 shares of Holdings' Common
Stock and 2,912,908 shares of Holdings' Series I Preferred Stock. The $2 million
proceeds of the second closing were used by Holdings to purchase an additional
1.5 million shares of the Company's Series B Preferred Stock and $500,000 was
advanced to the Company as working capital.
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Therefore, as of March 31, 1997, TIG owns 87,092 shares of common stock and
2,912,908 of Series I Preferred Stock of Holdings. TIG, as holder of the Series
I Preferred Stock, is entitled to receive, when, as and if declared by the Board
of Directors of Holdings, cumulative dividends at the rate of 6% per annum.
The Series I Preferred Stock is redeemable by Holdings upon payment of the
stated value ($1.00 per share) together with all accrued and unpaid dividends
provided that Holdings shall redeem on or before December 4, 2003 and the TIG
Loan is repaid. On and after that date, if not earlier redeemed, the Series I
Preferred Stock is convertible to common stock at the option of the holder and
is similarly convertible in the event of default under the TIG Loan.
The Common Stock purchased under the Agreement represents an approximate 44%
stake in Holdings, provided, however, that in the event Underwriters shall
decline to exercise its options TIG may, in its discretion, increase its stake,
at the same price, to 49% of the number of shares and options held by the
founders, shareholders, officers, directors and employees of Holdings.
In addition to the Loan and Agreement, the Company entered into a proportional
quota share reinsurance agreement with TIG, for the period January 1, 1997
through December 31, 1997. The quota share arrangement is renewable annually, at
the option of TIG, for so long as the Loan remains outstanding and the Series I
Preferred has not been redeemed. Under the terms of this quota share treaty, the
Company cedes 50% of its net written premium to TIG which assumes 50% of the
Company's retained losses. The treaty provides for reimbursements to the Company
for expenses associated with other reinsurance and other underwriting expenses
through direct reimbursement and through a provisional ceding commission
calculated at the rate of 28% of ceded premiums. The ceding commission may
decrease depending upon the Company's loss ratio performance to a minimum of
23%. The treaty also provides for certain incentives and additional costs
depending upon claims loss history.
The Company has also renegotiated its quota share reinsurance arrangement with
Underwriters. Effective January 1, 1997, the Company cedes 20% of its net
written premium to Underwriters which assumes 20% of the Company's retained
losses. This treaty also provides for reimbursements to the Company for expenses
associated with other reinsurance and other underwriting expenses through direct
reimbursement and through a provisional ceding commission calculated at the rate
of 29% of ceded premiums. The agreement also provides for certain incentives
and/or additional costs depending upon claims loss history.
The development of the Company's business over the last five years, which
includes the period of operations of the Fund is summarized in Table #1 on page
14.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company currently offers only workers' compensation insurance in the state
of Florida, and accordingly, has no identifiable industry segments as defined in
FASB Statement 14.
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NARRATIVE DESCRIPTION OF BUSINESS
BACKGROUND
In a November, 1993 Special Session of the Florida Legislature, certain changes
were instituted that required management to reevaluate the workers' compensation
regulatory landscape. The Legislature provided for the establishment of a Self
Insurance Fund Guarantee Association. This new guarantee association exposes the
assets of self insurance funds to assessments to support other financially
insolvent self insurance funds. Guarantee fund assessments could potentially
diminish surplus funds. Another legislative change was the creation of a joint
underwriting association (the "JUA") for workers' compensation. Stock insurance
companies are no longer required to subsidize the JUA as they had been required
to subsidize the JUA's predecessor, the assigned risk pool. Stock insurance
companies are, however, subject to assessment by the Florida Insurance Guaranty
Association to support financially insolvent insurance companies. The Company
believes that the failure rate of stock insurance companies is lower than that
of self-insurance funds due to greater regulation of capital, surplus and
premium volume. Therefore, the likelihood of assessment is believed to be lower
for stock insurance companies; and, additionally, under Florida Statutes any
such assessments are limited in any one year to no more than two (2) percent of
direct written premium. Further, according to the authors of this legislation,
the substantive impact of other legislative reforms instituted included
significant cost savings to the system and a return to the system's original
design of establishing a self-executing, return-to-work system. The legislative
changes clearly made it more beneficial for policyholders to be insured by a
stock insurance company rather than a self insurance fund.
Only those members of the Fund who elected to be insured by the Company were
retained by the Company. The Company did not assume any contingent assessment
liabilities for members who left the Fund or who choose not to be insured by the
Company. The Fund will maintain its legal existence until such time as the
Florida Department of Insurance permits otherwise; however, the Fund no longer
offers workers' compensation insurance coverage.
The Company is pursuing its goal of providing superior service with the use of
managed care plans, loss control analysis, aggressive claims adjusting and
premium credits, among other things. The Company believes that insureds benefit
from managed care through management of medical costs, utilization review and
more effective monitoring of claims and services. Cost savings are being offered
to insureds through allowed premium credits for a drug-free workplace and
retrospective rating plans based on claims experience in prior years. Further,
loss control engineers are working with insureds to decrease the incidence of
injury in the workplace and claims adjusters are seeking efficient and effective
settlements of claims for those who are injured. In addition, the company
believes that its focus on a single, specialized area of insurance coverage
increases its effectiveness, efficiency, and service to its insureds.
Holdings employs all personnel required to service the policyholders, except for
claims adjusting which is handled by Claims Capabilities, Inc., Orlando,
Florida, and a variety of firms which specialize in policyholder premium audits.
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STRATEGY
The Company is marketing its products to the general public through Florida's
independent agent network as an insurance company specializing in workers'
compensation. It is the goal of the Company to provide superior service and
minimize the cost of workers' compensation insurance for its insureds. This
focus on a single line of business is expected to give the Company the
opportunity to position itself as a focused company in a service-intensive line
of insurance.
As of the date hereof, there are approximately 222 agencies representing the
Company throughout the state of Florida, spanning from Key West to Pensacola.
The Company intends to increase the number of agencies by which it is
represented to approximately 265 by the end of 1997. Prospective new agencies
are contacted by a marketing representative of the Company who completes a
profile for such agency. The Vice President, Marketing, reviews the profiles for
all agencies in a geographic area in which the Company desires additional
representation. No agency is accepted by the Company unless it has errors and
omissions insurance coverage and a valid State of Florida insurance agent's
license. All agencies are required to commit to the Company for a certain
minimum volume of new business.
The Company is committed to assisting its agents by, among other things,
providing current information, advertising, public relations, competitive
commission structures, responsive account underwriting, careful management of
claims and training seminars. All agents operate as independent contractors and
are required to execute an agency agreement with the Company.
The Company's primary marketing strategy is to preserve existing business
relationships and establish new relationships with agents, thus creating a
network of high-quality, high-volume producers for the Company. The Company
intends to employ seven field marketing representatives in addition to its vice
president of marketing. The Company anticipates adding additional marketing
personnel if needed to balance the Company's growth. The Company also employs
loss control personnel who work in the field to help control and prevent losses,
suggest and sometimes require safety improvements and assist claims adjusters.
PRODUCTS
Policies of workers' compensation insurance protect the insured against the
costs of medical care, rehabilitation and wage loss for workers who are injured
in the course of their employment duties. The Company offers a number of
workers' compensation insurance products. Standard coverage, which includes
employer's liability, typically offers the following discounts: (i) stock
premium volume discount of .1% to 14.4%; (ii) drug-free workplace credits of 5%;
and (iii) Florida Construction Classification Premium Adjustment Program
("FCCPAP") credits of 1% to 25%.
The Company also offers various loss sensitive, sliding scale and
retrospectively rated programs for the larger insureds who qualify. These
programs allow for a return of premium based on paid or incurred claims and the
ratio of these claims to earned premium. These particular products are typically
restricted to insureds generating certain levels of standard premium annually.
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MANAGEMENT AGREEMENT
The Management Agreement entered into between the Company and Holdings in 1994
remains in effect. Pursuant to the Management Agreement, Holdings is responsible
for the day to day operations of the Company, including, but not limited to,
marketing, loss control, safety engineering and continuing service, billing and
premium collection, claims administration, books and records keeping and
underwriting. The Management Agreement has an initial term of five years and
provides for the payment by the Company to Holdings of fees equal to 14.1% of
gross written premiums up to $50 million, less allowed discounts, collected by
the Company. Fees paid for gross written premiums in excess of $50 million are
paid according to premium levels and range from 14.5% to 13.1%.
SALES AND MARKETING
The Company's sales are conducted by approximately 222 sales agencies. The
agencies each have a non-exclusive contract with the Company for the brokerage
of the Company's products and are compensated monthly with commissions for
premiums written. Each agency is required to commit to a minimum of $250,000 in
annualized premium production for the first year. Agents are encouraged to
direct their marketing efforts on accounts between $25,000 and $250,000 in
annual premium, although the Company does write accounts starting from
approximately $1,500 in annual premiums. The Company has special programs for
accounts in excess of $250,000 but is selective in its underwriting standards
with regard to coverage. The Marketing department manages the commission
structure and may, depending on production levels, arrange special commission
agreements with certain agents. The Company also conducts a sales incentive
contest periodically for the benefit of its agents to provide greater incentive
for increased sales production. Periodic production reviews of each agency are
conducted to determine whether the Company should continue the relationship with
the agency or replace the agency.
The Company's marketing efforts are managed by the Vice President, Marketing and
seven Field Marketing Representatives. Each of the Company's marketing
executives are experienced in workers' compensation insurance. The marketing
executives are expected to call on agencies approximately once every six weeks
and assist agents on their sales calls, hold agency seminars and conduct normal
company business. Loss control seminars for insureds and agents are conducted
periodically, the primary focus of which is determined by loss control and
claims experts and are directed by the needs of the Company's insureds.
MANAGED CARE
In the November 1993 Special Session of the Florida Legislature, an amendment to
Chapter 440 was also adopted, which created Section 440.134-Worker's
Compensation Managed Care Arrangement. The essence of this legislation
contemplates that an insurer in Florida may transfer a portion of the medical
risk assumed by that insurer under a policy of workers' compensation insurance
by virtue of a "capitated" contract to a health care provider, a health care
facility, a health maintenance organization, a health insurer, or such similar
arrangement (exclusive of capitation) with a preferred provider organization
("PPO"). This arrangement contemplates that injured workers of a covered
employer will have their injuries treated and receive medical care by virtue of
a network of providers, such as an HMO or PPO. The goal is to provide more
professional, efficient and cost-effective administration of health care to
injured employees.
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The Fund entered into an agreement in 1994 with Humana to provide a managed care
arrangement on behalf of the Fund. The agreement was assigned to the Company and
contemplates that the Company transfers to Humana the risk of providing medical
services to injured workers for a period of three years from the date of injury.
The agreement was renewed in September, 1996 for two (2) years. The agreement
further contemplates that Humana provides these services for a premium
determined by actuarial calculations discounted based upon the time value of
money. Humana is expected to have networks in place in substantially all of the
populated areas of the State of Florida. Throughout 1996, a policyholder of the
Company could voluntarily participate in the managed care program and direct its
injured employees to a provider of medical services within the Humana network.
The Company remains the primary insurer, although Humana applies its managed
care experience to the management of the medical component of the Company's
claims. A policyholder choosing to participate in the managed care arrangement
was able in 1996 to receive up to a 10% premium discount.
Effective January 1, 1997, the managed care premium discount of 10% was
eliminated by act of the Florida Legislature. Furthermore, participation by all
Florida employers in a managed care arrangement became mandatory on that same
date. In consequence, the Company's ability to offer managed care is no longer a
matter of enhancing a competitive product but is now essential. As a result of
anticipated mandatory managed care, the cost to the Company of maintaining its
capitated program increased by 14% as a result of negotiations with Humana in
September 1996. This increase (equivalent to 3% of participating premium) will
have a direct impact upon the Company by increasing the Company's claims loss
ratio to earned premium.
In addition to the foregoing, in January, 1996, the Company entered into a
managed care arrangement with Vincam/HIP and the Company anticipates continuing
this contractual relationship through 1997. Vincam/HIP offers a PPO network
alternative to the Humana HMO arrangement. The Company encountered some market
resistance to an HMO provider by potential policyholders and sought therefore
this additional arrangement to provide an alternative to policyholders. The
Vincam/HIP agreement does not contemplate a "capitated" contract but is a fee
for services arrangement. Vincam/HIP has been approved to offer managed care
services in all 67 counties of Florida.
UNDERWRITING
The Company utilizes a network of independent insurance agents to solicit
workers' compensation coverage for prospective insureds. The agent submits the
insured's application to the Company for consideration to provide workers'
compensation coverage and employer's liability. The Company employs various
experienced and qualified underwriters to review these submissions to determine
proper classifications, rule compliance, and overall acceptability. The
financial solvency of the proposed insured may be examined depending upon the
nature and size of the risk. The underwriting department of the Company either
quotes coverage to the agent or refers the application to higher management for
approval. In a significant number of submissions, the underwriting department
requests the Company's loss control and safety engineering representatives to
visit on-site with the prospective insured to evaluate the risk and ascertain
their ability to comply with the Company's established safety and claims
procedure guidelines. This evaluation determines if the applicant falls within
the Company's pre-established underwriting guidelines. In the event that
management requires additional information in order to determine if the risk
should be accepted, management may refer the application to the underwriting
executive committee. The underwriting executive committee is composed of
department heads, including claims services. The committee seeks to reach a
consensus on acceptability and
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premium pricing of the individual risk submitted for consideration. If the
underwriting executive committee is unable to reach a consensus as to a
particular risk, the application for coverage is submitted to the Board of
Directors, whose decision is final. Underwriting standards are strictly enforced
to avoid adverse loss experiences. For the year ended December 31, 1996, the
Company received new applications requesting a quote for coverage representing
premium of approximately $88.1 million. Of such applications, 697 were bound for
a total premium of $10.8 million.
Once an application is approved for coverage, a quote is issued by the Company.
If the quote is accepted by the proposed insured, the underwriting department
binds coverage conditional upon receipt of Company requirements and a signed
application for coverage by the insured. Periodically, the underwriting
department reviews the insured's loss history to determine the continued
acceptability of the risk. Additionally, each policy is evaluated annually for
continued acceptability of the coverage or for competitive pricing review.
During the period that the policy is in force, the loss control representative
or safety engineer periodically visits with the insured to inspect its
operations and provide assistance with its employees' safety efforts. Such
visits are aimed at reducing claims costs and frequency of injury. The
underwriting department is updated periodically with the results of these loss
control visits. Failure of the insured to comply with safety recommendations or
factors that otherwise cause the insured to become an undesirable risk may cause
the Company to cancel the coverage.
The Company has retained the services of Milliman & Robertson, Inc., a qualified
actuarial firm with offices in Minneapolis, Minnesota. One of the services
rendered by the actuarial firm is to provide the Company's management with
annual results of the Company's underwriting operations. The actuaries evaluate
claims and classes of business, as well as earned insurance premiums, to
determine ultimate claims expenses for each year. The actuary report contains a
range which assists management in determining the Company's loss ratio for the
year and ultimately the overall underwriting profit or loss for the year.
LOSS CONTROL
The Company's loss control efforts are managed by the Vice President of Loss
Control and performed by Loss Control Field Counselors employed by the Company.
The Loss Control Field Counselors are safety professionals and work directly
with the insured to develop safe workplaces and reduce the expenses resulting
from work related injuries. The Loss Control Department also acts as an arm of
the Underwriting Department. The Underwriting Department requests a Loss Control
Evaluation on prospective members who have marginal loss history or come from
industries of higher than normal loss problems. The Loss Control Department is
also expected to alert the Underwriting Department when an insured undergoes a
major change in the nature of its operations.
REINSURANCE
Through ceded reinsurance, other insurers and reinsurers agree to share certain
risks that the Company has underwritten. The purpose of reinsurance is to limit
the Company's maximum net loss arising from large risks or catastrophes.
Reinsurance also serves to increase the direct writing capacity of the Company
which may otherwise be restricted by regulatory rules which limit writings to a
multiple of statutory surplus.
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The Company strives to achieve the following objectives with respect to ceded
reinsurance:
(1) Protect its assets from large individual risk and occurrence losses by
purchasing reinsurance from financially secure reinsurance companies
at a reasonable cost.
(2) Provide underwriting operations with the capacity necessary to write
large limits on accounts by purchasing reinsurance from financially
secure reinsurance companies at a reasonable cost.
(3) Provide the Company the opportunity for growth in total writings by
purchasing proportional quota share reinsurance from financially
secure reinsurance companies under reasonable terms, such that the
Company's ratio of net written premium to surplus is below regulatory
maximums.
The collectibility of reinsurance is subject to the solvency of reinsurers. The
Company has had no uncollected reinsurance recoverables since inception.
The Company retains the first $350,000 of liability on each claim. Reinsurance
contracts attach thereafter, with Allstate RE (now SCOR RE) providing coverage
for up to $2,000,000 and CNA providing coverage for up to the maximum statutory
benefits.
Commencing January 1, 1996 through December 31, 1996, the Company entered into a
reinsurance treaty with Allstate RE for "Aggregate" reinsurance for coverage of
up to 70% of 15% excess 75% of Earned Standard Premium subject to a $4,500,000
maximum limit. While aggregate reinsurance was not contemplated by the Company
as part of its business plan, the securing of this aggregate cover was a
condition precedent to the Underwriters' loan to the Company. The proceeds of
the aggregate cover (if any) has been assigned to Underwriters' and
Underwriters' reimburses the Company for 100% of the premium due for the
aggregate cover.
Commencing January 1, 1997, the Company has renewed the SCOR RE aggregate treaty
under substantially similar terms. However, this cover has now been purchased by
the Company for its own account and the proceeds have not been assigned.
The Company pays premiums to its reinsurers on a quarterly basis and expects to
continue such coverage with these reinsurance companies. The Company expects to
also enter proportional reinsurance treaties or loss portfolio transfers, or a
combination of both, as premium growth and reserves may require.
Effective January 1, 1997 through December 31, 1997, the Company has entered
into proportional quota share reinsurance treaties with TIG Reinsurance Company
and Underwriters for 50% and 20% respectively (See Business Developments above).
The Company has also entered into an agreement with Humana (see "Managed Care"
above) which transfers the risk of providing medical services to injured workers
for a period of three years in exchange for a prepaid premium. Amounts
recoverable from Humana (medical services yet to be rendered) are secured by an
irrevocable letter of credit issued in favor of the Company.
CLAIMS MANAGEMENT
Claims administration, management and adjusting is administered on behalf of the
Company by Claims Capabilities, Inc., whose principal headquarters are in
Orlando, Florida. Claims Capabilities, Inc. was
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formed in 1989 by a group of experienced workers' compensation insurance claims
professionals. Claims Capabilities, Inc. currently handles claims for three
insurers in Florida, including the Company, representing over $75,000,000 of
workers' compensation premium, and processes over 5,500 claims annually. Claims
Capabilities, Inc. has developed state-wide claims representation with field
adjusters located in all populated regions in the state of Florida. Its
expertise lies in handling of claims, employee/employer incentives for early
return to work and the recovery of monies on behalf of the insurers from the
Florida Special Disability Trust Fund and third party subrogation claims.
Clients serviced by Claims Capabilities, Inc. have experienced more special
disability fund recoveries than from any other individual or organization within
the State of Florida. Claims Capabilities, Inc. employs various key individuals
with many years of workers' compensation claims handling experience. Claims
Capabilities, Inc. administers claims for the Company under a five year contract
which commenced in 1995 with fees for services negotiated annually.
COMPETITION
As a provider of workers' compensation insurance, the Company operates within
the property and casualty insurance industry. This industry is highly
competitive on a regional and national level. The principal competitive factors
in offering workers' compensation insurance are the types and amounts of
coverage, price, service, name recognition and financial strength. The Company
competes with large, well-established insurance companies doing business in the
Florida workers' compensation insurance market, including ITT Hartford, Riscorp,
FCCI and Liberty Mutual. Such competitors generally have greater financial
resources, larger agency networks and greater name recognition than the Company.
Larger carriers, however, tend to focus on larger risks than those targeted by
the Company and spread their resources over a broader range of products. In
addition, the Company competes with other specialty insurers in its field.
The Company believes that its focus on one distinct line of insurance creates an
ability to service its customers in an efficient manner, and allows the Company
to continue to compete in the workers' compensation market, as the Fund has in
prior years. In addition, the Company believes that its management is well-known
to the independent agency network and is recognized by such network for
possessing the knowledge and experience of the larger competitors. The Company
anticipates that the property and casualty insurance industry will continue to
be highly competitive as providers look to introduce new and innovative products
to the market.
GOVERNMENT REGULATION
The principal regulations governing the Company are Florida laws and regulations
of the Florida Department of Insurance. As of the date of this filing, the
Company expects to do business only in the State of Florida. However, should the
Company decide to do business in other states at some time in the future, the
Company also is subject to regulation of those states. Laws and regulations
govern significant aspects of the Company's business, including, but not limited
to, licensing, reserve adequacy, solvency, premium rates and changes in control.
Generally, such laws and regulations are designed and administered to protect
the interests of policyholders rather than an insurance company's shareholders.
There can be no assurance that these laws would not adversely affect the ability
of the Company to earn a profit on its underwriting operations.
- 10 -
<PAGE>
As a provider of workers' compensation insurance, the Company is affected by
workers' compensation laws governing such insurance in Florida. The Company may
be required by the appropriate State of Florida agency, under solvency or
guaranty laws, to pay assessments for policyholder losses or liabilities of
other Florida insurance companies if they become insolvent. These assessments
may be deferred or forgiven if they would threaten the Company's financial
strength and, in certain instances, may be offset against future premium taxes.
The Company cannot determine the likelihood or amount of any future assessments,
and such assessments are beyond the control of the Company and its management.
A number of states have proposed workers' compensation reform initiatives. Such
initiatives, if adopted in the state of Florida, or another state in which the
company operates in the future, could have an affect on the financial condition
or results of operations of the Company. The Company does not expect, however,
to begin doing business in any state if management believes that its regulatory
environment is not conducive to the operations of the Company.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE)
When claims are made by or against policyholders, any amounts that the Company
pays or expects to pay to the claimant are referred to as losses. The costs of
investigating, resolving and processing these claims are referred to as loss
adjustment expenses (LAE). Reserves are established that reflect the estimated
unpaid total cost of these two items. The reserves for unpaid losses and LAE
cover claims that have already been reported but not yet settled, and those that
have been incurred but not yet reported. Loss reserves are established on an
undiscounted basis, and are reduced for deductibles recoverable from
policyholders and estimates of salvage and subrogation and recoveries from
reinsurers. Provisions for increased costs due to inflation are implicit in the
reserving assumption.
Management continually reviews loss reserves, using a variety of statistical and
actuarial techniques to analyze claim costs, frequency and severity data, and
social and economic factors. Based upon these reviews and the reports of the
Company's independent actuaries, management believes that the reserves currently
established for losses and LAE are adequate to cover their eventual costs.
However, final claim payments may differ from these reserves, particularly when
these payments may not take place for several years. Adjustments to previously
estimated reserves are reflected in results in the year in which they are made.
Table #2 on Page 15 presents a development of net loss and LAE reserve
liabilities and payments since the inception of the Fund through 1996, prepared
in accordance with generally accepted accounting principles ("GAAP"). The top
line of the table shows the estimated reserves for unpaid claim and claim
settlement expenses recorded at each year end date. Each amount in the top line
represents the estimated amount of claim and claim settlement expenses for the
claims occurring in that year as well as future payments on claims occurring in
prior years. The upper (cumulative amount paid) portion of the table presents
the amounts paid as of subsequent years on those claims for which reserves were
carried as of each specific year. The lower (liability re-estimated) portion
shows the re-estimated amounts of the previously recorded reserves based on
experience as of the end of each succeeding year. The estimate changes as more
information becomes known about the actual claims for which the initial reserves
were carried. An adjustment to the carrying value of unpaid claims for a prior
year will also be reflected in the adjustments for each subsequent year. For
example, an adjustment made in 1996 for 1992 loss reserves will be reflected in
the re-estimated ultimate net loss for each of the years 1992 through 1995. The
cumulative (deficiency) redundancy line presents the cumulative change in
estimates since the initial
- 11 -
<PAGE>
reserve was established. It is equal to the differences between the initial
reserve and the latest liability re-estimated amount.
Table #2 presents calendar year data. The anniversary date of all policies
written by the Fund through November of 1995 was December 31. The Company's
policies written subsequent to that date will have staggered anniversary dates
depending upon the inception date of the policy.
Other than the loss portfolio transfer between the Fund and the Company, there
have been no reserve swaps or transfers since the inception of the Fund and no
significant changes in reserving assumptions. In addition, there have been no
changes in the mix of business, changes in anticipated payout patterns, or
unusually large gains or losses.
INVESTMENTS
Investments since inception have consisted solely of fixed maturity U.S.
Treasury Notes, Treasury Strips, U.S. Government agency notes and
mortgage-backed securities and certificates of deposit. The Company's board of
directors approves the annual investment plan which includes investments of
funds reserved for loss and loss adjustment expenses and investment of capital
resources in support of statutory surplus. The primary objectives of those plans
are as follows:
(1) To maintain a diversified fixed maturities portfolio structured to
maximize investment income while minimizing credit risk through
investments in high-quality instruments.
(2) To manage the mix of portfolio maturities to complement anticipated
insurance loss pay-out patterns.
Table #3 on Page 15 presents information about the fixed maturities portfolio
for the last five years.
The fixed maturity portfolio is managed conservatively to provide a reasonable
return while limiting exposure to risks. All investments carry ratings of AA or
better.
More information about the Company's investments is contained in the notes to
the Company's financial statements and in management's discussion of financial
position and results of operations contained elsewhere in this filing.
EMPLOYEES
The Company, through its management agreement with Holdings, has approximately
38 employees, none of which are represented by a union. The Company considers
its relations with its employees to be good.
ITEM 2 - PROPERTIES
FACILITIES
The Company maintains offices in leased premises at 4700 N.W. Boca Raton
Boulevard, Boca Raton, FL 33431. In September of 1996, the Company added an
additional 2,500 square feet of space to its existing facilities to accommodate
growth. As of September, 1996, the lease covers 10,000 square feet of office
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<PAGE>
space for a monthly rental of $12,878. The Company may enter into a lease for
larger space at competitive rates within the South Florida area as growth may
require.
ITEM 3 - LEGAL PROCEEDINGS
From time to time, the Company may be involved in workers' compensation
proceedings relating to claims arising out of its operations in the normal
course of business. As of the date of this filing, the Company is not a party to
any legal proceedings, other than those initiated by the Company relating to the
recovery of accounts receivable.
In July, 1992, the Fund filed a lawsuit in the State Circuit Court of Palm Beach
County, Florida, for breach of contract against Advanced Risk Management
Incorporated ("ARMI") claiming damages for excess fees and advances collected by
ARMI, the former service company of the Fund. A counterclaim was filed by ARMI
alleging breach of contract, breach of fiduciary duty and fraud. On January 2,
1994, the court granted summary judgment in favor of the Fund with respect to
all of the counterclaims made by ARMI. The Summary judgment was appealed by ARMI
and reversed by the Fourth District Court of Appeal, which remanded the matter
back to the trial court to resolve specific issues. On December 15, 1995, the
trial court granted the Fund's renewed motion for summary judgment. ARMI filed
an appeal as to this judgment as well. On or about April 10, 1997, the Fourth
District Court of Appeal rendered its decision affirming the final judgment of
the Trial Court. The appellate decision is not final until the time period (15
days) for filing motions to rehear has passed. Although ARMI may appeal this
decision to the Florida Supreme Court, it is unlikely that the Supreme Court
will assume jurisdiction. The Fund intends to continue to defend this claim, in
the event further proceedings occur, on its own behalf. There can be no
assurance however, that, in the event of an unfavorable ruling against the Fund,
recovery would not be sought from the Company. In the event there is an
unfavorable outcome, which management believes at this time to be extremely
unlikely, the Fund's liability is estimated at less than $1,000,000.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
- 13 -
<PAGE>
<TABLE>
<CAPTION>
TABLE 1
FIVE YEAR HISTORY OF BUSINESS DEVELOPMENT
THE COMPANY COMBINED THE FUND
- -----------------------------------------------------------------------------------------------------
($ IN THOUSANDS) 1996 1995 (1) 1994 1993 1992 (3)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statutory Data:
Direct premium earned $ 27,737 27,919 $ 24,704 $ 21,822 $ 8,865
Less: Premium ceded to
reinsurers(2) 19,587 6,979 2,186 1,969 1,084
---------- ------------ ----------- ----------- -----------
Net premium earned $ 8,150 $ 20,940 $ 22,518 $ 19,853 $ 7,781
---------- ------------ ----------- ----------- -----------
Losses and LAE (4) $ 5,657 $ 14,886 $ 13,724 $ 14,723 $ 6,378
Ratio of losses and LAE to
net premiums earned 69.41% 71.09% 60.95% 74.16% 81.97%
Statutory surplus(deficit)(5) $ 4,300 $ 4,669 $ (552) $ (1,995) $ (269)
GAAP Data(6) :
Total assets $ 42,282 $ 40,701 $ 25,092 $ 20,120 $ 7,663
Total equity (deficit) $ 5,144 $ 5,499 $ 1,075 $ (354) $ (108)
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the sum of Associated Business & Commerce Workers' Compensation
Self Insurance Fund's results for the eleven months ended November 30,
1995, and the Company's results for the one month ended December 31, 1995.
The loss portfolio transfer between the companies has been eliminated and
the combined sum has been presented for comparison of significant operating
data.
(2) Gives effect to $17.7 million paid to quota share reinsurer in 1996 and
$4.5 million paid in 1995 under agreement effective October 1, 1995.
(3) Represents the sum of Associated Business & Commerce Workers' Compensation
Self Insurance Fund's results for the fifteen months October, 1991
(inception) through December 31, 1992, the Fund's first statutory loss
year.
(4) Gives effect to loss and loss adjustment expense development of previous
years as reported in Table 2. See the discussion under "Reserves for Losses
and Loss Adjustment Expenses (LAE)".
(5) Calculated in accordance with statutory accounting practices applicable to
stock insurance companies, on a pro-forma basis for the Fund through
November 30, 1995.
(6) Calculated in accordance with Generally Accepted Accounting Principles.
-14-
<PAGE>
<TABLE>
<CAPTION>
TABLE 2
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE (LAE) DEVELOPMENT
($ IN THOUSANDS)
- --------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1992 1993 1994 1995 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net liability for unpaid
losses and LAE $ 4,627 $ 12,411 $ 12,360 $ 13,835 $ 10,376
=========== ============ ============ ============ ============
Cumulative amount of net
liability paid through:
One year later 2,507 7,874 8,659 7,909
Two years later 4,139 10,018 11,813
Three years later 4,315 10,701
Four years later 4,370
Liability re-estimated as of:
One year later 4,497 11,028 12,684 12,603
Two years later 4,138 11,036 12,849
Three years later 4,464 11,538
Four years later 4,545
Cumulative redundancy
(deficiency) $ 82 $ 873 $ (489) $ 1,232
=========== ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
TABLE 3
FIXED MATURITY PORTFOLIO
($ IN THOUSANDS)
- ----------------------------------------------------------------------------------------------
AMORTIZED MARKET PRETAX NET
COST AT VALUE AT INVESTMENT PRETAX AFTER-TAX
YEAR YEAR-END YEAR-END INCOME YIELD YIELD
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 $ 8,709 $ 8,586 $ 860 6.5% 4.3%
1995 $ 14,439 $ 14,412 $ 858 6.3% 4.2%
1994 $ 12,631 $ 12,016 $ 575 5.0% 3.3%
1993 $ 10,566 $ 10,567 $ 286 3.9% 2.6%
1992 $ 3,975 $ 3,941 $ 144 4.6% 3.0%
- ----------------------------------------------------------------------------------------------
</TABLE>
-15-
<PAGE>
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
There is no established public trading market for any of the Company's stock.
NUMBER OF SECURITY HOLDERS
All of the Company's common stock is owned by Associated Business & Commerce
Holdings, Inc.
DIVIDEND HISTORY AND RESTRICTIONS
The Company has not declared or paid any dividends on its common stock since its
commencement of business in December, 1995. As a stock insurance company, the
Company is permitted to pay stock dividends, at the discretion of the Board of
Directors, only out of surplus derived from net income and is otherwise
restricted from paying dividends in excess of a statutory formula without prior
approval of the Florida Department of Insurance. In general, the formula permits
the payment of stock dividends in amounts not exceeding the larger of net income
(excluding capital gains) or 10% of accumulated surplus, provided that, after
payment of the dividend, surplus will equal at least 115% of the minimum
required statutory surplus. No dividends may be paid on the Common Stock until
all of the accumulated and unpaid dividends on the Company's registered Series A
Preferred have been paid in full.
Notwithstanding the foregoing, the Company has agreed, as a condition to
obtaining its certificate of authority, to not pay dividends on any class of
stock until December 7, 2000 without prior written approval of the Department of
Insurance.
In addition, as a part of the term loan agreement between TIG and Holdings, the
Company has agreed to pay no dividends on any class of stock for so long as
Holdings remains indebted to TIG without TIG's approval. Moreover, if any
dividends are approved, declared and paid on the common stock, such dividends
are required to be used to retire any then remaining indebtedness to TIG.
The Company received the required approvals and paid all dividends due to Series
A Preferred shareholders on April 1, 1996 and October 1, 1996.
ITEM 6 - SELECTED FINANCIAL DATA
Set forth in Table #4 On Page 30 are five years of selected financial
information. Financial information is presented for Associated Business &
Commerce Workers Compensation Self-Insurance Fund (the "Fund") for the years
ended December 31, 1992 through November, 1995 and for the Company for the
period December, 1995 (inception of principal operations) through December 31,
1996. The GAAP information was derived from the audited financial statements and
related notes of the Fund and the Company. The statutory data has been derived
from statutory financial statements. Such
- 16 -
<PAGE>
statutory financial statements are prepared in accordance with statutory
accounting principles, which differ from GAAP. For additional information, see
the Financial Statements of the Company, the Financial Statements of the Fund,
and the related notes thereto included elsewhere in this filing.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This discussion should be read in conjunction with the information contained in
the Financial Statements and notes thereto included elsewhere in this filing.
ORGANIZATION
Associated Business & Commerce Insurance Corporation (the "Company") commenced
business as a stock insurance company in December 1995 upon receipt from the
Florida Department of Insurance (the "Department of Insurance") of a Certificate
of Authority. Concurrently with the commencement of business, the Company
assumed substantially all of the assets and liabilities of the Associated
Business and Commerce Workers' Compensation Self-Insurance Fund (the "Fund"). As
of December 31, 1996, the Company had approximately 1,300 policyholders and $28
million in annual written premiums. The Company offers a full range of workers'
compensation coverage, including a managed care plan. See "Business--Products"
and "Business--Managed Care".
The Company's business is regulated by the Department of Insurance. The Company
is subject to assessments by the Florida guarantee association for insurance
carriers. Policies issued by the Company to its insureds, however, are
non-assessable, in contrast to the assessable policies issued by self-insurance
funds. A stock insurance company cannot assess its policyholders for losses of
the company and is required to satisfy statutory capital and surplus
requirements. Therefore, stock insurance companies afford their policyholders
greater financial certainty and security.
It is the goal of the Company to provide superior service and minimize the cost
of workers' compensation insurance for its insureds. This focus on a single line
of business is expected to give the Company a unique opportunity to position
itself as a focused company in a service-intensive line of insurance. The
Company's primary marketing strategy is to preserve existing business
relationships and establish new relationships with agents, thus creating a
network of high-quality, high-volume producers for the Company.
Upon acquisition of the Fund's assets and liabilities by the Company, the
Company assumed claims liabilities and assessable provisions of existing
insurance coverage of past members of the Fund who chose to be insured by the
Company.
The Company is a wholly owned subsidiary of Associated Business & Commerce
Holdings, Inc. ("Holdings"). Holdings was organized solely for the purpose of
providing financing for the Company and performing certain management services
for the Company under a Management Agreement between the Company and Holdings
(the "Management Agreement"). Holdings does not carry on any other business
activities. The employees of Holdings devote their full business time to the
business and affairs of the Company pursuant to the terms of the Management
Agreement.
- 17 -
<PAGE>
As of December 31, 1996, Holdings had invested $3,702,501 in the Company through
the purchase of 3,600,000 shares of the Company's Convertible Preferred Stock,
Series B (the "Series B Preferred") and 102,501 shares of the Company's Common
Stock. On March 31, 1997, Holdings increased its investment in the Series B
Preferred to $5,100,000 funded by part of the proceeds of the "second" closing
with TIG (see "Business Developments").
RESULTS OF OPERATIONS
For the year ended December 31, 1996, the Company is reporting an after-tax net
loss of $923,000 determined under GAAP. Although the Company's net loss ratio
decreased from 1995, the ratio of net underwriting expenses to earned premium
increased significantly. Anticipated increases in premium volume over 1995
amounts did not materialize causing the relationship between increased
underwriting costs and premium to deteriorate.
Table #4 on Page 30 sets forth the operating results of the Fund since January
1, 1992 through November 30, 1995, the effective date of the loss portfolio
transfer and assumption of the business by the Company and of the Company from
December 1, 1995 through December 31, 1996. The data in this table has been
adjusted to eliminate the loss portfolio transaction, and the operations of the
Fund during 1995 have been combined with the Company's operations for the month
of December, 1995 in order to allow comparison of 1995 operating results with
that of the prior years and with 1996 results. The data for the Fund and the
Company gives effect to the 70% proportional quota-share arrangements with
Underwriters which became effective October 1, 1995, but which terminated at the
70% level December 31, 1996.
Gross earned premium for 1996 amounted to $27.7 million compared to $27.9
million for 1995 and $24.7 million for 1994. Net earned premium amounted to $8.2
million for 1996 compared to $20.9 million for 1995 and $22.5 million for 1994.
Quota-share premium ceded (which was effective October 1, 1995) for 1996
amounted to approximately $17.7 as compared to approximately $4.5 million for
1995. Net losses and loss adjustment expenses decreased by $9.2 million over
1995 (primarily the result of quota-share ceding) and the loss ratio (losses
over net earned premium) decreased from 71.1% in 1995 to 69.4% in 1996.
1996 underwriting expenses decreased by $3.1 million from 1995, net of expense
reimbursements and ceding commissions of approximately $5.65 million. However,
as discussed below, as a percentage of net earned premium, underwriting expenses
increased by 19.1% over the prior year. The overall impact of these factors upon
the Company's underwriting operations produced an underwriting loss of $2.0
million for 1996, compared to an underwriting loss for 1995 of $1.5 million, and
an underwriting gain of $1.5 million in 1994. The GAAP combined ratio for 1996
was 124.7% compared to 107.3% for 1995 and 93.5% for 1994.
The underwriting expense ratio increased from 36.2% in 1995 to 55.3% in 1996 due
primarily to personnel additions and related costs, increases in facilities
costs, and increases in systems investments planned as a part of the Company's
anticipated growth. With the additions to personnel combined with ongoing
enhancements to data processing systems, management believes that the Company
can increase its premium writings without a corresponding increase in the fixed
component of underwriting expenses which would have the effect of decreasing the
expense ratio in future periods. As discussed under liquidity and capital
resources, the Company can double its net writings without an increase in
capital.
- 18 -
<PAGE>
Management believes the Company is appropriately staffed for this potential
currently and, if realized, the Company's operating ratios should improve.
Investment incomes, including realized capital gains and losses, amounts to
$832,000 for 1996 compared to $960,000 for 1995 and $605,981 for 1994. Depending
on premium growth, management anticipates that investment income will be less
for 1997 than 1996 and 1995 due to anticipated negative cash flows attributable
to the quota-share treaty, as discussed under liquidity and capital resources.
The Fund concluded more than four years of operations in December, 1995 with
annualized writings of $28 million. Of this amount, $23.5 million of insurance
was renewed by the Company with the issuance of non-assessable policies during
December of 1995 and January of 1996. (See "prospective Financial Information"
below).
Over the four year period, the Fund (which commenced business only with its
trustees as insureds) wrote more than $80 million of premium and realized GAAP
after-tax profits of $835,000. Of the total 7,300 claims reported as of December
31, 1996, 6,300 have been settled and closed. In dollar terms, of the $52.8
million total of net losses and LAE incurred and reserved, $49 million have been
paid as of December 31 with an ending reserve of $3.8 million (net of
recoverables).
In a study conducted by the Fund in 1995 which was based upon an analysis of the
statutory financial filings of all Florida funds by the Bureau of
Self-Insurance, Florida Department of Insurance, the Fund ranked #1 in the
settling and payment of claims, confirming the Fund's philosophy of fair and
prompt settlement of claims incurred by the employees of insureds. Management of
the Fund (and the Company) believe that this philosophy limits the possibility
of reserve deficiency development and reduces the overall cost of claims. The
history of the Fund's and the Company's reserve development since inception
through December 31, 1996, is displayed in Table #2 on Page 15.
During the period of its existence, the Fund incurred extraordinary costs
associated with its own start-up, legal fees in defense of its claims against a
former service company (see "Legal Proceedings" under Part I), and fees and
costs related to research and evaluation of methods proposed to limit the
exposure of members to assessments including the use of retrospective loss
portfolio transfer reinsurance, annualizing of claims liabilities,
reorganization as a mutual assessable fund and, finally, a loss portfolio
transfer transaction with an approved stock insurance carrier.
Under statutory accounting practices ("SAP") applicable to stock insurance
companies, the Fund concluded its operations with a deficit of $445,000. SAP
differs from Generally Accepted Accounting Principals (GAAP) by reducing net
assets to those that can be used to pay claims. For instance, GAAP assets such
as prepaid expenses and deferred income taxes are not recognized as assets under
SAP. Table #5 on Page 31 reconciles the Fund's and the Company's ending GAAP
surplus with the surplus or deficit accounted for under SAP.
By agreement with the Department of Insurance, the Company will maintain
separate financial records for the reserves of the Fund which were transferred
to the Company as a part of the loss portfolio transfer. Such accounting will
facilitate the Department's later review (projected to occur in 1999) of the
Company's possible request to refund premium to certain former members of the
Fund participating in the Fund's merit plan program. In making such a request,
the Company will consider the financial position of the Company, the development
of the Fund's loss reserves and the likelihood of collection of Fund
recoverables still due.
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<PAGE>
PROSPECTIVE FINANCIAL INFORMATION
The historical operations of the Company cannot be used to predict the future
results of operations of the Company. The factors affecting future operations
and their probable favorable and unfavorable impacts upon the Company's
operations in 1997 include the following:
The Company's quota-share arrangements with TIG and Underwriters will have the
effect of ceding 70% of the Company's underwriting income to TIG & Underwriters
and investment earnings will be reduced attributable to reserves held by TIG &
Underwriters.
The Company has entered into a management agreement with Holdings. The fees
payable to Holdings under this arrangement include amounts necessary to service
the debt related to Holdings term loan agreement with TIG, the proceeds of which
were used by Holdings to refinance the Underwriters loan and to add additional
capital to the Company. The portion of fees reserved for this debt service
equates to approximately 2.3% of the Company's written premium.
The capitalization of the Company, through the sale of its Series A and B
preferred stock increases the investment base of the Company, mitigating to some
extent the cost of the management agreement described above and the loss of
investment income of premium ceded through the quota-share agreements.
The financial plan of the company included as a part of its business plan gave
effect to these differences and assumed that direct premium writings would
increase by 50% (or approximately $15 million) during the Company's initial year
of operations (1996) with increases thereafter approximating $10 million per
year through December 31, 2000. The source of this anticipated growth was
customers of assessable self-insurance funds, and, at the levels of writings
projected, operating results and cash flows were sufficient to meet the
Company's obligations, including the payment of dividends to holders of the
Series A Preferred Stock.
The Company failed to achieve its goal of $15 million of direct new premium in
1996; however, $10.8 million of direct new premium was added (which offset a
similar amount of premium losses due to cancellations and other factors) which
resulted in no net premium growth. The Company's inability to attain the
projected level of new premium was due to increased competition generated by
favorable legislative changes as well as rate adequacy during 1996. Management
initially adjusted budgeted expenditures to account for the premium reduction
and additionally has (effective December 4, 1996) refinanced its debt structure
and generated an additional $1.9 million of capital through the TIG
transactions. The financial and business plan of the Company has been adjusted
accordingly and the additional capital shall be used for, among other things:
expansion of marketing staff from three (3) to seven (7); increase in marketing
budget to accommodate more agent incentive plans; increase in utilization of
retrospective policy products; implementation of 24 hour coverage; expansion of
underwriting staff; offset of Applied Systems computer implementation costs and
general mobilization costs associated with staff increases necessary to
accommodate an aggressive marketing and management philosophy. The Company's
ability to achieve the planned increase of $10 million per year in premium
writings subsequent to 1996 appears attainable (new premium written as of April
7, 1997 equals approximately $7.9 million) and the number of submissions
received from the Company's agents continues to exceed those experienced by the
Fund. However, the Company remains dedicated to accelerated growth in new
premium writings consistent with adherence to the Company's long standing and
conservative underwriting philosophy.
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<PAGE>
The Florida workers' compensation insurance market has become increasingly
competitive since the elimination of the Florida Workers' Compensation Assigned
Risk Plan in 1994. These competitive pressures have required the Company to
increase its insurance agent commissions and incentive programs and to hire
additional marketing staff--there are now seven employees in this department--in
order to better attract new business. These competitive pressures have also
reduced the market standards for advance premiums on new accounts. In the past,
the Company was able to obtain 20% advance premium. Now, many customers are able
to find competitors willing to offer coverage for 10% advance premium or lower.
Despite the positive impact of system reforms, some system costs continue to
increase. Significant expenses have been incurred by the Company to comply with
SEC requirements for filing and reporting financial results and these costs are
anticipated to continue. Furthermore, the Company has made a large investment in
policy management system software. The staff time used for testing, training and
implementing the improved system also affected the efficiency and cost of
operating the company in 1996 and such costs are continuing during the first
part of 1997.
During 1996 and 1997, the Company has responded to the increased competition in
this line of business by improving the quality and quantity of the underwriting
staff by attracting more experienced underwriters and a vice president of
underwriting. These staff changes increased costs to the Company.
Finally, pressure on profits was exerted by increased fees from our managed care
contract with Humana, Inc. These costs increased by 13.6% beginning in
September, 1996. The estimated recoveries from the Florida Special Disability
Trust Fund also decreased from previous years even though the assessment
remained at 4.52% of premium.
The Company's statutory capital (policyholders' surplus) as of December 31,
1996, was $4.3 million or $300,000 above the statutory minimum of $4,000,000.
However, the final funding of the TIG transaction did not occur until March 31,
1997 due to delays incurred in awaiting necessary approvals from the Florida
Department of Insurance. Had the closing occurred as planned (December 4, 1996)
then statutory capital would have been $5.8 million or $1.8 million in excess of
the statutory minimum (see "Liquidity and Capital Resources"). The final closing
and its impact on the Company's financial position will be reflected in the
first quarter, 1997 unaudited financial reports (Form 10-Q). Although the
Company may remain solvent under GAAP and Statutory accounting practices during
the soft market, its continuation as a going concern will be dependent upon
maintaining statutory surplus above the minimum level.
RESERVES FOR LOSS AND LOSS ADJUSTMENT EXPENSE (LAE)
Loss reserves constitute 86% of the Company's liabilities as of December 31,
1996. The Company establishes reserves that reflect management's estimates of
the total losses and loss adjustment expenses the Company will ultimately have
to pay under insurance policies. These include losses that have been reported
but not settled and losses that have been incurred but not yet reported to the
Company (IBNR). Loss reserves are established on an undiscounted basis after
reductions for deductibles, estimates of salvage and subrogation, and
reinsurance recoverables. These reductions totaled $21.5 million, $14.5 million,
and $6.8 million at the end of 1996, 1995, and 1994, respectively.
- 21 -
<PAGE>
For reported losses, the Company establishes reserves on a "case" basis within
the parameters of coverage provided in the related policy. For IBNR losses, the
Company estimates reserves using established actuarial methods, which are
reviewed and reported upon by the Company's independent actuaries. The case and
IBNR loss reserve estimates reflect such variables as past loss experience,
social trends in damage awards, changes in judicial interpretation of legal
liability and policy provisions.
Due to the nature of workers' compensation insurance, which may involve claims
that may not be settled for many years after they are incurred, subjective
judgments as to the company's ultimate exposure to losses are an integral and
necessary component of the loss reserving process. Management continually
reviews the Company's reserves, using a variety of statistical and actuarial
techniques to analyze current claim costs, frequency and severity data, and
prevailing economic, social and legal factors. The Company adjusts reserves
established in prior years as loss experience develops and new information
becomes available. Adjustments to previously estimated reserves are reflected in
the Company's financial results in the periods in which they are made.
Table #6 on Page 31 presents a reconciliation of beginning and ending loss
reserves for the last three years.
In 1994, the Fund recorded reductions in the loss provision for claims incurred
in prior years. These reductions resulted primarily from reevaluation of claims
reserves established during the two years following the Fund's inception where
the lack of a reserving history and experience suggested reserving at industry
norms. As claims were reported and settled, the Company's independent actuaries
were able to develop a history for the Fund and the Company which led to
significant reductions in reserved losses for 1992 and 1993.
In 1995, the Company recorded increases in the provisions for losses and LAE in
prior years related primarily to reduced anticipated recoveries from the Special
Disabilities Trust Fund (see below).
For 1996, the Company has recorded a net decrease in the provisions for losses
and LAE of $75,000.
For statutory purposes, the Company has reported its loss reserves at $7.8
million for the year ended December 31, 1996. The difference between this amount
and the gross reserve of $31.9 million appearing in Table #6 is attributable to
the reporting of recoveries due from reinsurance and the SDTF as reductions to
gross reserves with $3.1 million of prepaid fees for managed care also
classified as reductions to net reserves for statutory purposes. In addition,
for statutory purposes, the Company is required to reserve for unallocated loss
adjustment expenses (even though such costs have already been paid pursuant to
the contract with CCI) which serves to increase statutory reserves by
approximately $460,000.
EXCESS OF LOSS REINSURANCE
The Company retains the first $350,000 of liability on each claim. Reinsurance
contracts attach thereafter, with SCOR RE providing coverage for up to
$2,000,000 and CNA providing coverage for up to the maximum statutory benefits.
For 1996 the Company entered into a reinsurance treaty with Allstate RE (now
SCOR RE) for "aggregate" reinsurance for coverage of 70% of 15% excess 75% of
Earned Standard Premium subject to a $4,500,000 maximum limit. The Company has
assigned any recoveries on the aggregate reinsurance treaty to Underwriters
which is reimbursing all of the cost of this reinsurance to the Company (see
Proportional Quota-share Reinsurance below).
- 22 -
<PAGE>
Commencing January 1, 1997, the Company has entered into a substantially similar
aggregate reinsurance treaty with Scor Re (the successor company to Allstate
Re). However, the Company has secured this cover for its own account and
therefore no recoveries have been assigned and the cost will be borne by the
Company.
The Company pays premiums to its excess of loss reinsurers on a quarterly basis
and invoices reinsurers for recoveries as claim payments in excess of the
Company's retention are paid. These amounts are classified as "paid
recoverables" in the Company's financial statements and amounted to $0, $95,000,
and $204,000 for 1996, 1995, and 1994, respectively.
PROPORTIONAL QUOTA-SHARE REINSURANCE
Effective October 1, 1995, the Fund entered into a 70% proportional quota-share
reinsurance treaty with Underwriters which was assigned to the Company in
December, 1995. Under the terms of the agreement, the Company cedes 70% of its
net written premium to Underwriters with Underwriters assuming 70% of the
Company's retained losses and loss adjustment expenses. To cover the costs of
underwriting, Underwriters reimburses the Company for certain direct expenses
incurred and pays the Company a ceding commission to cover other general
expenses. Premium ceded for the three months ended December 31, 1995 amounted to
approximately $4.5 million. Expense reimbursements and commissions amounted to
approximately $1.4 million.
For 1996, premium ceded amounted to approximately $17.7 million and expense
reimbursements and commissions amounted to approximately $5.65 million.
The effect of these arrangements is a transfer of 70% of the net results of
underwriting operations to Underwriters, which reduces the Company's net
writings reported to the Department. This allows the Company to increase its
direct writings through leveraging of its capital resources (see "Liquidity and
Capital Resources" in this section). Premium ceded to Underwriters creates
recoverables for Underwriters' share of unpaid losses and loss adjustment
expenses. As claims are paid, the Company reduces amounts remitted to
Underwriters proportional to Underwriters' liability. In addition, Underwriters'
share of reimbursable expenses and amounts due the Company for the ceding
commission are deducted from ceded premium amounts otherwise due Underwriters.
Commencing January 1, 1997, the Company has entered into a quota share treaty
with Underwriters for the 1997 calendar year. The treaty is substantially
similar to the 1996 treaty explained above with the exception of the percentage
of quota share, which has been reduced to 20%, and the provisional ceding
commission due the Company, which has been increased to 29% of ceded premium.
For the 1997 calendar year, the Company has entered into a 50% proportional
quota share reinsurance treaty with TIG Reinsurance Company. The treaty is
substantially similar to the 1996 Underwriters treaty with the exception that
the provisional ceding commission has been increased to 28% of ceded premium.
SPECIAL DISABILITIES TRUST FUND
The Special Disabilities Trust Fund of the Bureau of Workers Compensation makes
assessments upon all Florida workers compensation insurers at a current rate of
4.52% of premium collected and distributes
- 23 -
<PAGE>
such sums among insurers whose policyholders have employed individuals with
previously determined workers' compensation-related disabilities, and such
individuals have filed a claim. The Company has included, as recoverables
against losses and LAE, amounts submitted and to be submitted to the Bureau.
Table #7 on Page 32 summarizes the history of the Company's recordings of SDTF
recoverables and Table #8 on Page 32 summarizes remaining recoverables due from
reinsurers and the SDTF by loss year.
The Special Disability Trust Fund was created in 1955 to provide a financial
incentive for employers to hire previously injured workers. If the worker was
injured a second time and the employer (or insurance carrier) could prove that
the two injuries were related, the Trust Fund will reinburse the insurer for
claims paid regarding the second or subsequent injuries.
It has been reported that the Trust Fund is financially impaired with claims
exceeding the Trust Fund's ability to pay. The Florida Legislature is
considering legislation to deal with the issue but no definite laws have yet
been adopted. Proposals range from increased assessments to carriers to
terminating the Trust Fund at a date certain as a means of dealing with the
problem.
The Company is unable to ascertain with any certainty what, if any, legislation
will be adopted regarding the Trust Fund. If terminated at a date certain or if
assessments are increased, such actions could adversely impact the Company.
MANAGED CARE
In September, 1996, the Company extended its contract with Humana for a 2 year
period to provide a managed care arrangement under which Humana provides medical
services to injured workers whose employers were participating in the managed
care arrangement. The terms of the agreement with Humana provide for the payment
of a capitated fee in exchange for which Humana covers all the medical cost
associated with a claim for a period of three years after the date the claim is
reported.
The Company records amounts paid to Humana as a prepaid expense with adjustments
recorded as medical services are rendered. The recorded prepaid expense at
December 31, 1996 of $3.1 million equals the amount of covered medical losses
recorded as unpaid and included in reserves.
As of December 31, 1996, approximately 68% of the company's customers were
covered by the Humana managed care program. Participation in a managed care
program is mandatory under Florida law effective January 1, 1997. In January,
1996, the Company complimented its managed care alternatives by entering into an
agreement with Vincam/HIP to provide case management services for covered
medical claims for a fee under a preferred provider-type arrangement. These
arrangements do not transfer risk to Vincam/HIP and the Company will continue to
pay the costs of covered claims. However, the arrangement does qualify as a
managed care arrangement under Florida law. The Vincam/HIP agreement is a three
year contract terminable with 90 days notice.
Although the Company has no immediate plans for termination of this agreement,
additional companies are now offering identical services as Vincam/HIP and are
competitively pricing their services in light of the mandatory nature of managed
care in Florida. The Company is exploring these alternatives with a view toward
cost savings and may, at some point in 1997, avail itself of the more
competitive nature of the PPO market.
- 24 -
<PAGE>
INVESTMENTS
The Company follows a conservative investment strategy that emphasizes
maintaining a high-quality investment portfolio and maximizing after-tax current
income. Investments since the inception of the Company have consisted solely of
fixed maturity U.S. Treasury Notes, Treasury Strips, U.S. Government agency
notes and mortgage-backed securities and certificates of deposit, all with
ratings of AA or better.
As of December 31, 1996, total financial statement investments and cash under
GAAP (pursuant to which certain assets are stated at amortized cost) decreased
to $10.9 million, a decrease of 35% over the year ended December 31, 1995, total
of $16.7 million. The 1996 amount includes $8.7 million of fixed maturity
investments carried at amortized cost as held to maturity securities and $0
million carried at fair value as available for sale securities. The net decrease
in financial statement investments and cash reflects the net proceeds (total
proceeds less assigned security deposits) of the Company's continuing sale of
its registered Series A preferred stock and the sale of its unregistered Series
B preferred stock to Holdings, and underwriting results including net premium
ceded to reinsurers.
Table #9 on Page 33 reflects investment results for the three year period ended
December 31, 1996.
The increase in effective yield for 1996 and 1995 is primarily due to higher
yielding securities in the Company's investment portfolio, which included
purchases of U.S. Government agency bonds and mortgage-backed securities in
1994, pursuant to a planned restructuring of the portfolio brought about by the
changes in rules of the Department of Insurance governing allowed investments
which became effective July 1, 1994.
The average maturity of all investments is approximately 3.5 years. The Company
continues to seek opportunities to enhance investment yield through a
conservative, primarily fixed maturity investment strategy. Its current
investment strategy does not contemplate material investments in non-investment
grade securities, real estate, commercial mortgages, or equity securities.
More information concerning the Company's investments is contained in the notes
to the Company's financial statements included in this filing.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the Company's ability to generate sufficient cash flows to
meet the short- and long-term cash requirements of business operations. The
short-term cash needs of underwriting primarily consist of funding insurance
loss and loss adjustment expense payments and day-to-day operating expenses.
Those needs are met through cash receipts from operations, which consist
primarily of insurance premiums collected and investment income. The Company's
investment portfolio is also a source of liquidity, in the form of readily
marketable fixed maturities and short-term investments. Underwriting's net
positive cash flows from operations are used to build the investment portfolio
and thereby increase future investment income.
As security for an insured's contractual premium obligation, the Company
previously required that each insured pay an advanced deposit premium, generally
equal to 20% of the insureds estimated annual premium. During 1996, the
competitive pressures of the market drove the average deposit below 10%
- 25 -
<PAGE>
although the Company strives to maintain higher deposits whenever possible. The
balance of premium is invoiced by the Company over a period of 12 months. Under
these typical arrangements, the Company does not extend credit to any insured
for premium which has been earned by the Company, and, in the event an insured
is past due in installment payments, the underlying policy can be canceled for
non-payment prior to the Company incurring bad debt losses on premium earned but
not collected. The advanced deposit premiums provide an additional source of
liquidity to operations and such funds are also used to build the Company's
investment portfolio.
Because of the nature of an insurance company's underwriting operations, where
premiums are generally collected and invested before related losses are paid,
liquidity requirements are customarily funded by operational cash flows. Cash
flows from operations for 1996 totaled a negative $6.2 million, compared to cash
flows from the combined operations of the Fund and the Company for 1995 of a
negative $1.5 million and the Fund's operating cash flows of $1.1 million in
1994. Operating cash flows for 1997 are expected to continue negative because of
the Company's quota-share arrangements with Underwriters and TIG (see "Results
of Operations" above). The payment of claims on reserves assumed by the Company
from the Fund will require the liquidation of investments held for this purpose.
It is anticipated that such liquidations (and maturities) will exceed investment
purchases funded by cash flows from the Company's retained underwriting
operations.
Invested assets and cash as of December 31, 1996 amounted to $10.9 million with
approximately $2.4 million of such amount consisting of investments with
maturities of less than one year or cash. Even with the impact of quota-share
arrangements, it is not anticipated that negative operating cash flows will
require liquidations of investments in advance of their fixed maturities.
The Company's capital resources represent funds deployed or available to be
deployed to support business operations and consist of common and preferred
shareholders' equity. Table #10 on Page 33 summarizes the Company's GAAP
capitalization as of December 31, 1996 and December 31, 1995 compared to the
Fund's GAAP surplus as of December 31, 1994.
The Company's Series A preferred stock was sold to former member/insureds of the
Fund and sales agents and vendors pursuant to a Form S-1 registration with the
Securities and Exchange commission. The unregistered Series B preferred stock
was sold to Holdings which also owns all of the Company's common stock. The
Company's capital is regulated by the Department of Insurance with certain
minimum levels of capital required depending upon net writings of the Company.
For purposes of these calculations, capital (surplus as to policyholders) is
calculated under statutory accounting practices ("SAP") which, generally,
reduces capital to liquidation amounts.
The insurance code of Florida requires a stock insurance carrier to maintain
capital of no less than $4 million. In addition, companies writing workers'
compensation insurance cannot have annualized net writings in excess of 3.2
times their statutory surplus, calculated and reviewed on a quarterly basis. As
of December 31, 1996, the Company's statutory surplus approximates $4.3 million
or approximately $300,000 above the statutory minimum. The TIG transaction (see
Business Developments 1996), was originally scheduled to close December 4, 1996.
Due to delays suffered while awaiting Florida Department of Insurance approval
only the TIG Loan portion of the transaction closed on December 4, 1996 (the
first closing). The proceeds of the first closing were used to pay in full the
Underwriters loan (approximately $3.6 million) and the balance was used by
Holdings to purchase an additional 400,000 shares of the Company's Series B
Preferred. The Securities Purchase Agreement closed March 31, 1997
- 26 -
<PAGE>
(the second closing) and generated an additional approximate $2 million
available to Holdings. The proceeds of this transaction were used by Holdings to
purchase an additional 1.5 million shares of the Company's Series B Preferred
Stock at $1.00 per share and $500,000 was advanced to the Company by Holdings as
additional working capital. This additional capital (combined with the
quota-share) has increased the Company's direct writing capacity to $65 million
which is more than double the Company's current writings.
The Company's business plan (see "Prospective Financial Information")
contemplates the continuing sale of Series A preferred stock to insureds, agents
and vendors to provide a cushion to surplus and to facilitate further growth in
writings. The Company intends to file additional registration statements and
amendments thereto, as necessary, with the SEC to accomplish this objective.
As previously discussed, all of the Company's common stock and the Series B
preferred stock is owned by Holdings. As discussed in Part 1 of this filing,
Holdings has pledged all of its stock in the Company, among other things, as
collateral for a loan from TIG. The Company entered into a management agreement
with Holdings wherein Holdings shall be responsible for managing the day to day
operations of the Company, including, but not limited to, marketing, loss
control, safety engineering and continuing service, billing and premium
collection, claims administration, maintenance of books and records, and
underwriting. The fees payable by the Company to Holdings pursuant to the
agreement are currently 14.1% of written premium. The note to TIG is otherwise
due on December 4, 2003.
In connection with the financing and securities purchase arrangements, the
Company and Holdings have provided these and additional covenants and entered
into other agreements with TIG, Underwriters and the Department of Insurance.
The nature of these arrangements, their possible effects upon the Company, and
management's opinion related thereto are summarized below.
DESCRIPTION:
Holdings has pledged all of the Company's common stock and Series B preferred
stock as collateral for the TIG loan.
POSSIBLE EFFECTS UPON THE COMPANY:
If Holdings defaults on the loan, and fails to cure the default, then TIG would
own and control the operations of the Company.
DESCRIPTION:
Holdings and the Company have agreed not to declare or pay any dividends on any
class of stock without the approval of TIG for so long as Holdings is indebted
to TIG.
POSSIBLE EFFECTS UPON THE COMPANY:
The Company expects to continue to offer for sale its Series A preferred stock
in order to expand its premium writing capacity. The inability to pay a
dividend, even though dividends accumulate, may nevertheless adversely affect
these plans.
DESCRIPTION:
As a condition to the acquisition of the Fund's assets and approval of the TIG
transaction, the Company has agreed to not pay a dividend on any class of stock
without the written approval of the Department for a period of five years.
POSSIBLE EFFECTS UPON THE COMPANY:
The Department's determination of the Company's capacity to pay a dividend may
be biased in favor of policyholders, with a possible further adverse effect upon
the Company's continuing sale of its preferred stock.
DESCRIPTION:
The Company has agreed to not pay any form of premium refund to the Fund's
former insureds without the approval of the Department.
DESCRIPTION:
POSSIBLE EFFECTS UPON THE COMPANY:
The Company's continued retention of former Fund insureds as customers of the
Company may be jeopardized if refunds are not paid.
- 27 -
<PAGE>
DESCRIPTION:
The Company has entered into a total 70% proportional quota share reinsurance
contract with TIG and Underwriters and has granted TIG and Underwriters a
continuing interest in such arrangements for so long as Holdings' debt is unpaid
and for a lesser period in the case of Underwriters, respectively.
POSSIBLE EFFECTS UPON THE COMPANY:
The quota share arrangements serve to reduce the Company's required capital thus
increasing the Company's writing capacity. However, underwriting and investment
incomes related to ceded premium are eliminated.
DESCRIPTION:
Holdings has granted Underwriters options to purchase the equivalent of up to an
approximate 5% interest in Holdings common stock and has sold approximately 44%
of its common stock to TIG.
POSSIBLE EFFECTS UPON THE COMPANY:
Even though the loan by TIG to Holdings may be paid, TIG and Underwriters may
still exercise significant influence over operations of the Company in the
future.
DESCRIPTION:
Holdings has sold TIG 2,912,908 shares of its Series I Preferred Stock.
POSSIBLE EFFECTS UPON THE COMPANY:
If Holdings fails to redeem this stock on or before December 4, 2003, TIG will
be in a position to control the Company.
DESCRIPTION:
Holdings and the Company have agreed to use the proceeds of any sale of
securities or financing (other than the sale of Series A preferred) to retire
Holdings indebtedness to TIG.
POSSIBLE EFFECTS UPON THE COMPANY:
Opportunities for expansion in writing capacity or acquisitions of other
business could be adversely affected in favor of this requirement.
Management of the Company and Holdings considers the relationship with TIG and
Underwriters a mutually beneficial alliance. Through its loan to Holdings, TIG
provided the financing necessary to complete a restructuring of debt and the
addition of further capitalization to the Company; and, through the quota-share
arrangements, TIG and Underwriters assist the Company in reducing the amount of
required capital. Both TIG and Underwriters are major reinsurers with high AM
Best Ratings. Management is of the opinion that its alignment with TIG is
significant to the Company and its plans for the future.
Quota-share arrangements are a necessary feature in the Company's business plan
with a continuing need for such arrangements forecasted in the Company's five
year financial plan. In order for the Company to write new business, the Company
must satisfy the writing ratio requirements of the Florida Insurance Code. The
quota-share arrangements facilitate growth in the Company by maintaining these
ratios above statutory minimums.
The Company considers its relationship with the Department of Insurance to be
good. In January of 1996, the Company was advised by the Department that the
Department's audit of the Fund's financial statements covering the three year
period ended December 31, 1994 resulted in no changes. The Department has worked
with the Company's management since inception of the Company's business plan,
providing interpretations of rules relating to capitalization and operations.
Management understands that the Department has recognized the potential for
adverse development of the Fund's loss reserves (assumed by the Company) and,
therefore, has restricted the Company's payment of premium refunds (if any such
refunds may be payable and approved) pending an ultimate accounting of the
actual losses sustained by the Fund. Management considers these restrictions to
be reasonable and in the best interests of policyholders.
- 28 -
<PAGE>
Management considers the Company's indemnification of the former members of the
Fund (who transferred coverage to the Company) against assessment for possible
deficiencies in losses to be significant to the Fund's former members and that
such indemnification will mitigate the consequences of the required delay in the
payment of premium refunds, if any.
The Company's Series A preferred stock accumulates dividends at a rate of 6% of
stated value. Any dividends not paid at each semi-annual payment date are
accrued. The Company cannot pay a dividend on its common stock until all accrued
dividends on the Series A preferred stock are paid in full. If the underwriting
operations of the company continue profitable, excess earnings may accumulate
sufficient to pay dividends, including a dividend on the common stock. Inasmuch
as any dividends paid on the common stock must be used to retire any then
remaining indebtedness by Holdings to TIG, management is of the opinion that TIG
would approve such payments.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index included on Page F-1 and the Financial Statements which begin on
Page F-2.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
- 29 -
<PAGE>
<TABLE>
<CAPTION>
TABLE 4
SELECTED FINANCIAL DATA
THE COMPANY COMBINED THE FUND
- ---------------------------------------------------------------------------------------------------------------
($ IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS) 1996 1995 (1) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Data
(GAAP):
Gross premium earnes $ 27,737 $ 27,919 $ 24,704 $ 21,822 $ 8,766
Net premium earned 8,150 20,940 22,517 19,852 7,713
Losses and LAE 5,657 14,887 13,724 14,723 6,299
Underwriting expenses 4,503 7,587 7,320 5,703 1,854
Underwriting gain (loss) (2,010) (1,533) 1,473 (574) (440)
Net investment income 860 846 606 284 133
Net realized capital gains (losses) (28) 115 (31) 2 11
Income (loss) before income taxes (1,178) (572) 2,049 (287) (296)
Income taxes (benefits) (255) (322) 620 (41) (212)
Net income(loss) $ (923) $ (250) $ 1,429 $ (246) $ (84)
Primary Earnings Per Share (loss) $ (10.12) $ (0.11) $ n/a $ n/a $ n/a
Other GAAP Operating Data (2):
Losses and LAE ratio 69.4% 71.1% 61.0% 74.2% 81.7%
Underwriting expense ratio 55.3% 36.2% 32.5% 28.7% 24.0%
-------- -------- ------- -------- --------
Combined ratio 124.7% 107.3% 93.5% 102.9% 105.7%
Balance Sheet Data-GAAP (at end of period):
Total investments and cash $ 10,864 $ 16,681 $ 12,979 $ 12,111 $ 4,592
Total assets (3) 42,282 40,701 25,092 20,120 7,663
Losses and LAE reserves (3) 31,982 28,306 19,185 16,653 6,172
Total equity (Deficit) $ 5,144 $ 5,499 $ 1,075 $ (354) $ (108)
(Deficit)
Statutory Data (4):
Policyholders' surplus (Deficity) $ 4,300 $ 4,669 $ (552) $ (1,995) $ (269)
Losses and LAE ratio 75.1% 71.1% 61.0% 74.2% 82.0%
Underwriting expense ratio 55.3% 36.8% 32.5% 30.0% 26.1%
-------- -------- ------- -------- --------
Combined ratio 130.4% 107.9% 93.5% 104.2% 108.1%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the sum of Associated Business & Commerce Workers' Compensation
Self Insurance Fund's results for the eleven months ended November 30,
1995, and the Company's results for the one month ended December 31, 1995.
The loss portfolio transfer between the companies has been eliminated and
the combined sum has been presented for comparison of significant operating
data.
(2) GAAP losses and LAE ratio represents the sum of losses and LAE as a
percentage of net premiums earned. GAAP combined ratio represents the sum
of the GAAP loss and LAE ratio and GAAP underwriting expense ratio. See
"Management's Discussion and Analysis of the Company's Results of
Operations and Financial Condition".
(3) Stated in accordance with the gross financial reporting requirements as
prescribed by Financial Accounting Standard No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts."
(4) Statutory loss and LAE ratio represents the sum of statutory losses and LAE
as a percentage of statutory net premiums earned. Statutory underwriting
expense ratio represents statutory underwriting expenses as a percentage of
statutory net premiums written. Statutory combined ratio represents the sum
of the statutory loss and LAE ratio and the statutory underwriting expense
ratio. The Fund's first statutory loss year covered the fifteen month
period ended December 31, 1992. Therefore, no statutory data is presented
for 1991. See "Management's Discussion and Analysis of the Company's
Results of Operations and Financial Condition".
-30-
<PAGE>
<TABLE>
<CAPTION>
TABLE 5
RECONCILATION OF GAAP SURPLUS TO STATUTORY SURPLUS (DEFICIT)
THE COMPANY THE FUND (1)
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
($ IN THOUSANDS) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total equity (deficit) under GAAP $ 5,144 $ 5,499 $ 1,075 $ (354) $ (108)
Non-admitted assets:
Deferred policy acquisition costs (260) (390) (331) (304) (106)
Prepaid expenses (198) (101) (37) (65) (11)
Deferred income taxes (715) (1,084) (1,227) (1,227)
Property and equipment (79) (16) (32) (45) (45)
Other adjustments:
ULAE contingency reserve (464)
Deferred ceding revenue 228
Deferred gain on LPT transaction 644 761 -0- -0- -0-
------ -------- ------- ------- ------
Total equity (deficit) under SAP $ 4,300 $ 4,669 $ (552) $(1,995) $ (270)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated on a pro-forma basis for the Fund through December 31, 1994.
<TABLE>
<CAPTION>
TABLE 6
RECONCILATION OF LOSS RESERVES
($ IN THOUSANDS)
- -------------------------------------------------------------------------------------------
DECEMBER DECEMBER DECEMBER
31, 31, 31,
(INCLUDES RESERVE TRANSACTIONS OF THE FUND THROUGH 1996 1995 1994
NOVEMBER 30, 1995)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss and LAE reserves at beginning of year $ 28,306 $ 19,185 $ 16,653
as reported
Less reinsurance and other recoverables on unpaid losses
at beginning of year 14,471 6,825 4,242
---------- ---------- ----------
Net loss and LAE reserves at 13,835 12,360 12,411
beginning of year
Provision for losses and LAE for claims incurred:
Current year 5,732 14,341 15,107
Prior years (75) 324 (1,383)
---------- ---------- ----------
Total incurred 5,657 14,665 13,724
---------- ---------- ----------
Losses and LAE payments for claims incurred:
Current year 1,170 2,209 5,871
Prior years 7,857 10,981 7,904
---------- ---------- ----------
Total paid 9,027 13,190 13,775
---------- ---------- ----------
Net Loss and LAE reserves at end of year 10,465 13,835 12,360
Plus reinsurance and other
recoverables on unpaid losses
at end of year 21,517 14,471 6,825
---------- ---------- ----------
Loss and LAE reserves at end of year, $ 31,982 $ 28,306 $ 19,185
as reported
- -------------------------------------------------------------------------------------------
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
TABLE 7
SPECIAL DISABILITIES TRUST FUND RECOVERIES
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
($ IN THOUSANDS) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earned premium for the year $ 27,737 $ 27,919 $ 24,704 $ 21,822 $ 8,766
--------------- --------------- --------------- ------------ ------------
Assessments paid $ 1,254 $ 1,262 $ 1,117 $ 986 $ 396
--------------- --------------- --------------- ------------ ------------
Estimated total recoverables as of
December 31, 1996 (1) $ 1,028 $ 1,028 $ 565 $ 1,961 $ 1,041
Recoveries received through
December 31, 1996 0 0 14 1,011 774
--------------- --------------- --------------- ------------ ------------
STDF Recoverables $ 1,028 $ 1,028 $ 551 $ 950 $ 267
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes estimated amounts receivable on claims incurred but not
reported (IBNR).
<TABLE>
<CAPTION>
TABLE 8
RECOVERIES AND RECOVERABLES DUE BY LOSS YEAR
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31.
($ IN THOUSANDS) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reimbursements due from and estimated
additional recoveries from excess of
loss reinsurers by loss year:
1992 $ 246 $ 1,155 $ 747 $ 652 $ 950
1993 1,211 1,828 1,013 1,450
1994 1,738 2,420 150
1995 2,780 2,766
1996 2,780
- -------------------------------------------------------------------------------------------------------------------------
Reimbursements due from and estimated
additional recoveries from quota-share
reinsurer
1995 1,074 2,421
1996 7,864
- -------------------------------------------------------------------------------------------------------------------------
Estimated recoveries from claims submitted
and to be submitted to SDTF and other
non-reinsurance recoverables
1992 267 280 909 629 595
1993 950 1,402 1,746 1,541
1994 551 994 2,259
1995 1,028 1,205
1996 1,028
- -------------------------------------------------------------------------------------------------------------------------
Total reinsurance and related receivables $ 21,517 $ 14,471 $ 6,824 $ 4,272 $ 1,545
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
TABLE 9
INVESTMENT RESULTS
- -----------------------------------------------------------------------------------------------------
PRE-TAX
NET PRE-TAX REALIZED NET
AVERAGE INVESTMENT EFFECTIVE CAPITAL GAINS
($ IN THOUSANDS) INVESTMENTS (1) INCOME (2) YIELD (3) (LOSSES)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended
December 31, 1996 $ 11,574 $ 860 7.4% $ (28)
December 31, 1995 $ 14,386 $ 846 5.9% $ 115
December 31, 1994 $ 11,772 $ 605 5.2% $ (31)
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Simple average of beginning-of-period and end-of-period financial statement
investments and cash for applicable periods.
(2) After investment expenses, excluding net realized capital gains (losses).
(3) Net pre-tax investment income for the period divided by average investments
for the same period. In calculating effective yield, the net pre-tax
investment income for the eleven-month period ended November 30, 1995, and
for the one-month period ended December 31, 1995, have been annualized.
<TABLE>
<CAPTION>
TABLE 10
CAPITALIZATION
DECEMBER 31, DECEMBER 31, DECEMBER 31,
($ IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C>
THE COMPANY:
Common shareholders' equity (deficit):
Common stock, 102,501 shares
issued, $1 par value $ 103 $ 103 $ 103
Retained earnings (deficit) (1,059) (22) (10)
------------ ------------- ------------
Total common shareholders' equity (deficit) (956) 81 93
------------ ------------- ------------
Preferred stock, Series A:
Preferred shares, 248,885 (1996), 221,805 (1995)
shares issued, $1 par value 249 222 -0-
Additional paid-in capital, preferred stock 2,252 1,996 -0-
------------ ------------- ------------
Total Preferred stock, Series A 2,501 2,218 -0-
------------ ------------- ------------
Preferred stock, Series B:
Preferred shares, 3,600,000 (1996), 3,200,000 (1995)
shares issued, $1 par value 3,600 3,200 -0-
------------ ------------- ------------
Total Preferred stock, Series B 3,600 3,200 -0-
------------ ------------- ------------
Total capitalization $ 5,145 $ 5,499 $ 93
------------ ------------- ------------
THE FUND: (1)
Undistributed surplus $ 1,075
------------
Total capitalization $ 1,075
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) The Fund's GAAP surplus as of November 30, 1995, the effective date of the
loss portfolio transfer, was $835,000. The Company has deferred the
recognition of any gain on the transaction to later periods as the loss
reserves of the Fund are reduced through claim payments.
-33-
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the executive
officers and directors of the Company:
NAME AGE POSITION
---- --- --------
Lawrence J. Marchbanks (2) 50 Chairman of the Board and Director
James R. Nau 45 President
Errol Bader (1) (2) 50 Executive Vice President and Director
Frederick R. Prout (1) (2) 49 Secretary and Director
Daniel J. Webber (2) 57 Director
James L. Wilson (1) 52 Director
James R. Harris (3) 46 Vice President, Loss Control
Clifford G. Merritt 41 Vice President, Finance
R. James Wiggins (3) 56 Vice President, Marketing and
Field Operations
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Officers of Holdings only
Errol Bader has been Executive Vice President and a director of the Company
since March, 1994. He was the President of Bader Management & Consulting, Inc.,
the Administrator of the Fund, from 1991 through 1995. From 1979 to 1991, Mr.
Bader was Executive Vice President of the Associated Builders & Contractors
Trade Association of South Florida. At various times between 1989 and 1990, Mr.
Bader served as the Vice Chairman and the Chairman of the Florida Workers'
Compensation Oversight Board. He was a contributor to the 1990 Workers'
Compensation Reform Legislation and served on the Governor's Workers'
Compensation Task Force in 1989. In 1983, Mr. Bader founded the Preferred
Builders Warranty Corp., a company which engages in the homeowners' warranty
business. Mr. Bader attended Temple University.
James R. Harris is Vice President, Loss Control. He has held this position since
May, 1995. He is responsible for loss control, safety and inspection activities.
Mr. Harris has been employed by the Fund and by Holdings since 1994. Prior to
joining ABC, Mr. Harris was employed as a loss control representative by CIGNA
Insurance Corporation, a major property/casualty insurer, and was risk manager
at a Jacksonville, Florida hospital.
Lawrence J. Marchbanks, since 1974, has been the majority shareholder and
President of Marchbanks, Daiello & Leider, P.A.. law firm with offices in Boca
Raton, Florida. Mr. Marchbanks has served as Chairman of the Board of Directors
and a Director of the Company since March, 1994. Mr. Marchbanks holds a Juris
Doctor degree from Florida State University College of Law and is a member of
the Florida and Palm Beach County Bar Associations.
- 34 -
<PAGE>
Clifford G. Merritt has been Vice President of Finance since August, 1995. From
June, 1978 to August, 1995, Mr. Merritt held various financial positions with
the National Council on Compensation Insurance ("NCCI"), including Director of
Residual Market Financial Operations from 1985 to 1995, with responsibility for
financial management and reporting for workers' compensation assigned risk plans
operating in 32 states. Mr. Merritt holds a Bachelor degree in Accounting from
William Paterson College.
James R. Nau has been President of the Fund and of the Company since June, 1995.
From May, 1974 to June, 1995, Mr. Nau held various positions with the National
Council on Compensation Insurance ("NCCI"), including Senior Vice President from
1992 to 1995. Mr. Nau holds a Bachelor of Science Degree in Business
Administration from Butler University. He also holds designations of Chartered
Property Casualty Underwriter and Associate in Risk Management.
Frederick R. Prout is the President of Prout Realty, Inc. He attended Palm Beach
Community College, and has been a state licensed general contractor since 1972
and a state licensed real estate broker since 1980. Mr. Prout has served as an
executive officer of numerous construction, development and real estate
companies over the last twenty years. He served on the Board of Directors of the
Gold Coast Chapter of Associated Builders and Contractors from 1981 through
1988, the State Board of Directors from 1984 through 1988, and the National
Board of Directors from 1985 through 1987. Mr. Prout has served as a Trustee of
the Fund since its inception in 1991 and has been Secretary and a Director of
the Company since March, 1994.
Daniel J. Webber has been President of Webber, Scollon & Paris & Associates,
Inc., an insurance brokerage agency, since 1980. Mr. Webber has served as a
Trustee of the Fund since its inception in 1991 and as a Director of the Company
since March, 1994. He is licensed as a life and health insurance agent and as a
securities broker in the state of Florida. Mr. Webber attended Hardin-Simmons
University and Oklahoma University.
James R. Wiggins is Vice President, Underwriting/Marketing. Mr. Wiggins joined
Holdings in this capacity in September, 1996. Mr. Wiggins was formerly an
underwriter at Hartford Insurance Company from 1964 to 1992. Mr. Wiggins was
also Chief Workers Compensation Underwriter for Reliance Insurance Company from
1992 until joining Holdings.
James L. Wilson has been President, Chief Operating Officer and a Director of
Southern Security Bank Corp. since 1992 and serves on the Executive Committee of
its Board of Directors. He has been Chairman of the Audit Committee of the Board
of Trustees of the Fund since 1993 and a Director of the Company since March,
1994. From 1990 to 1992, Mr. Wilson was Executive Vice President and Senior
Lending Officer of Boca Bank, a commercial bank. From 1984 to 1990, he was a
principal in Bayshore Investments, a company engaged in the management of income
producing real estate. Mr. Wilson holds a Bachelor of Arts and Sciences degree
from Union College.
The Board of Directors of Holdings is identical to the Board of the Company with
the exception that by agreement with TIG, Mr. Allen B. Binder was added to the
Board of Directors of Holdings in December, 1996. Mr. Binder is Senior Vice
President of TIG Reinsurance Company.
There are no family relationships among any of the directors or executive
officers of the Company.
- 35 -
<PAGE>
The Board of Directors is classified into three classes, each with a three year
term. One class of directors are eligible for election each year. The term of
the Class A director, Lawrence J. Marchbanks, will expire in July, 1998. The
terms of the Class B directors, Errol Bader and James L. Wilson, will expire in
July, 1999. The terms of the Class C directors, Frederick R. Prout and Daniel J.
Webber, will expire in July, 1997. Officers are elected annually by the Board of
Directors and serve at the discretion of the directors. The Company is not
currently a party to any employment agreements.
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee reviews the scope and results of the audit and
other services performed by the Company's independent accountants. The
Compensation Committee sets compensation to be paid to executive officers and
other key employees and is charged with the administration of the Company's
Equity Compensation Plan.
ITEM 11 - EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company does not pay any director's compensation. All directors'
compensation is paid by Holdings. Outside directors of Holdings receive an
annual retainer of $24,000, plus $500 per board meeting attended.
EXECUTIVE COMPENSATION
Commencing December 1, 1995, all of the Company's executive officers are paid by
Holdings, from fees received by Holdings under the management agreement. Prior
to that time, no compensation had been paid to the officers by the Company or
Holdings.
James R. Nau, the Company's President is paid a base salary of $220,000; an
annual performance bonus of up to $30,000; an automobile allowance; health
insurance and is reimbursed for expenses incurred on Company business.
Errol Bader, the Company's Executive Vice President and a Director who also
serves as President of Holdings, is paid a salary of $250,000; an automobile
allowance; health insurance and is reimbursed for expenses incurred on Company
business. In addition, through March 31, 1997, Mr. Bader has been granted
options to purchase 114,000 shares of Holding's common stock.
No other officers of the Company received salaries and bonuses totaling $100,000
or more.
Table #11 on Page 43 sets forth the cash and non-cash compensation for 1996
awarded to or earned by the Company's President and Executive Vice President.
EQUITY COMPENSATION PLAN
The Company's Equity Compensation Plan (the "Equity Plan") was approved by the
Board of Directors on July 6, 1994, and adopted by the shareholders of the
Company on the same date. The Equity Plan permits the granting to officers, key
employees, eligible directors and eligible independent contractors of
- 36 -
<PAGE>
certain of the following types of awards (i) stock options, including incentive
stock options and non-qualified stock options (ii) stock appreciation rights;
and/or (iii) restricted stock. The Equity Plan is currently administered by a
Committee of the Board of Directors (the "Committee") appointed by the Board.
The Board has reserved 2,000,000 shares of Common Stock for issuance under the
Equity Plan. No stock options have been issued under the plan.
Generally, awards under the Equity Plan are granted for no consideration other
than prior or future services. Awards granted under the Equity Plan may, in the
discretion of the Committee, be granted along or in addition to, in tandem with
or in substitution for any other aware under the Equity Plan or other Plan of
the Company. The exercise price for options granted under the Equity Plan may
not be less than 100% of the fair market value of the Common Stock on the date
of grant and the term of such options may not be greater than ten years.
However, incentive stock options granted to an optionee who owns more than 10%
of the voting power of the Company or its subsidiaries shall have an exercise
price of not less than 110% of the fair market value of the Common Stock on the
date of grant and shall have a term not greater than five years. Stock
appreciation rights may be granted under the Equity Plan to officers, key
employees and eligible independent contractors only in conjunction with a
related option (with an exercise price at least equal to the related option).
Stock appreciate rights generally provide for the payment of cash or Common
Stock (subject to Committee approval of the form of payment) equal in value to
the excess of the fair market value of one share of Common Stock over the
exercise price multiplied by the number of shares for which the stock
appreciation right shall have been exercised (the "Spread"). Restricted stock
may only be awarded to officers and key employees. The shares of Common Stock
subject to a restricted stock award may be released to the award recipient upon
the lapse of applicable restrictions concerning such award without the payment
of any cash consideration.
The Committee is authorized to determine, from time to time, the persons to whom
awards are granted and types of awards. The Committee has the power to establish
and waive, in its discretion, vesting provisions for awards; permit optionees to
exercise options through the delivery of Common Stock with a fair market value
equal to the exercise price of such options ("Stock Delivery"); and amend the
terms of an outstanding award with the consent of the Equity Plan participant.
At the time of grant, the Committee may authorize the grant of replacement
options covering shares of Common Stock equal to the number of shares that the
optionee may tender in any future exercise of options through Stock Delivery
("Replacement Options"). Replacement Options shall have a per share exercise
price equal to the fair market value of one remaining term of the original
options. At the time of grant, the Committee may reserve the right to cash out
an option (as of the date the optionee delivers a notice of exercise) by paying
an amount of cash or Common Stock equal to the Spread. No options have been
granted with the cash out or Replacement Option feature.
In the event of a Change in Control, unless otherwise determined by the
Committee or the Board, or Potential Change in Control, if determined by the
Committee or the Board, any stock appreciation rights outstanding for at least
six months and all outstanding options would become fully vested and immediately
exercisable, and the restrictions on any restricted stock awards would lapse
with such awards becoming fully vested, and the value of all outstanding awards
may be cashed out by the Company on the basis of the highest price paid for
Common Stock during the 60 days preceding the actual or potential Change in
Control. A Potential Change of Control is defined in the Equity Plan as the
execution by the Company of an agreement that would result in a Change in
Control or certain acquisitions of 5% or more of the voting power of the
Company's outstanding securities, as determined by the Committee or the Board.
- 37 -
<PAGE>
The Board may amend, alter or discontinue the Equity Plan at any time and from
time to time, subject to the terms and conditions of the Equity Plan. The right
to grant awards under the Equity Plan terminates on the tenth anniversary of the
approval of the Equity Plan by the shareholders, unless otherwise terminated
sooner or extended with the approval of the shareholders.
HOLDING'S STOCK OPTION PLAN
Under grants dated March, 1994, and September, 1995, the founding shareholders
were issued options totaling 540,000 shares of common stock of Holdings. The
issued Holdings' options have been granted in varying amounts and can be
exercised at a purchase price of $1 per share during the first three years of
the company's existence and $1.50 per share during years four and five of the
Company's existence. These options vest in equal annual proportions during the
first five years of the Company's existence and must be exercised within five
years of vesting.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Associated Business & Commerce Holdings, Inc. ("Holdings") owns all of the
issued and outstanding shares of Common Stock of the Company. Holdings' address
is Suite 400, 4700 N.W. Boca Raton Boulevard, Boca Raton, Florida 33431.
Table #12 on Page 44 sets forth, at March 31, 1997, certain information with
respect to beneficial ownership of the Common Stock of Holdings by (i) each
shareholder known by the Company to be the beneficial owner of more than 5% of
the Common Stock of Holdings, (ii) each director of the Company, (iii) each
executive officer of the Company, and (iv) all directors and executive officers
of the Company as a group. Except as otherwise indicated, each of the persons
listed on the table has sole voting and sole investment power with respect to
all shares beneficially owned, subject to community property laws, where
applicable.
All of the Company's issued and outstanding Series B Convertible Preferred Stock
is owned by Holdings, consisting of 3,600,000 shares issued at a price of par
value of $1 per share. On March 31, 1997, an additional 1,500,000 shares were
purchased bringing Holdings' total holdings to 5,100,000 shares. These shares
are convertible by Holdings to common stock of the Company at any time. Such
conversion would have no effect upon the beneficial ownership interests
appearing on Table #12.
SHAREHOLDER'S AGREEMENT
Each of the current holders of the Holdings' Common Stock (the "Founding
Shareholders") is a party to an Exchange and Shareholders Agreement dated March
23, 1995, and amended November 27, 1996 (the "Shareholder Agreement"), among the
Founding Shareholders and the Company. The Shareholder Agreement provides, among
other things, for certain rights of first refusal with respect to sales or
transfers of the shares of Common Stock, transfers of the shares upon the death
of a Founding Shareholder and certain voting agreements with respect to the
shares.
The Shareholders Agreement provides that in the event a Founding Shareholder
proposes to sell any of his shares the Company has the right and option to
purchase all, but not less than all, of the shares proposed to be sold at a
price equal to the proposed sale price. The Company may exercise its right to
- 38 -
<PAGE>
purchase the shares at any time within 14 days of the date the Company is given
notice of the shareholder's proposed sale. In the event the Company does not
exercise this option, or waives its option, then the remaining Founding
Shareholders have the right and option, within 21 days thereof, to purchase the
shares on the same terms. Should more than one Founding Shareholder exercise
this right, then the shares are to be purchased pro rata by the electing
Founding Shareholders. All shares so purchased by Founding Shareholders remain
subject to the Shareholders Agreement. If neither the Company nor any of the
other Founding Shareholders exercise their option, then the selling shareholder
may, within 90 days, sell those shares to the proposed purchaser at the stated
purchase price.
In the event of the death of a Founding Shareholder, his shares may be
transferred by will or intestate succession. However, the transferees of such
shares must continue to be bound by the terms of the Shareholders Agreement.
The Shareholders Agreement also provides that the Founding Shareholders will
vote all shares of Common Stock held by them in favor of the election to the
Board of Directors of the current Board of Directors.
The Shareholders Agreement will terminate on the earlier of (i) the written
consent of the holders of at least 80% of the shares of Common Stock subject to
the Shareholders Agreement (ii) a public offering of the Common Stock for which
a registration statement under the Securities Act of 1993 is filed, or (iii)
December 31, 2003.
INVESTMENT BY HOLDINGS AND TIG LOAN AND SECURITY PURCHASE
The Company is a wholly owned subsidiary of Holdings. Holdings was organized for
the purpose of providing financing for the Company and performing certain
management services for the Company under the Management Agreement. The
employees of Holdings devote their full business time to the business and
affairs of the Company pursuant to the terms of the Management Agreement. See
"Business-Management Agreement".
As of March 31, 1997, Holdings has invested $5,100,000 in the Company through
the purchase of 5,100,000 shares of Company Series B Preferred. Holdings entered
into a term loan agreement (the "Loan") with TIG Reinsurance Company ("TIG")
pursuant to which (often giving effect to the first and second closing) TIG has
loaned Holdings $3,000,000 for use by Holdings to repay outstanding amounts
under the Underwriters loan. The loan bears interest at 10% per annum. If not
earlier prepaid, the loan is due on December 4, 2003. Holdings has pledged as
collateral for the loan, among other things, all of the Common and Series B
Preferred Stock of the Company held by Holdings. Holdings expects to repay the
loan from fees it receives under the Management Agreement.
As of March 31, 1997, pursuant to the Securities Purchase Agreement (the
"Agreement"), Holdings (after giving effect to the first and second closing) has
sold and TIG has purchased 87,092 shares of Common Stock and 2,912,908 shares of
Series I Preferred Stock at a purchase price of $1.00 per share. TIG, as holder
of the Series I Preferred Stock, is entitled to receive, when, as and if
declared by the Board of Directors of Holdings cumulative dividends at the rate
of 6% per annum. The Series I Preferred Stock is redeemable by Holdings upon
payment of the stated value ($1.00 per share) together with all accrued and
unpaid dividends provided that Holdings shall redeem on or before December 4,
2003 and the TIG Loan is repaid. On and after that date, if not earlier
redeemed, the Series I Preferred Stock is
- 39 -
<PAGE>
convertible to common stock at the option of the holder and is similarly
convertible in the event of default under the TIG Loan.
The Common Stock purchased under the Agreement represents an approximate 44%
stake in Holdings, provided, however, that in the event Underwriters shall
decline to exercise its options TIG may, in its discretion, increase its stake,
at the same price, to 49% of the number of shares and options held by the
founders, shareholders, officers, directors and employees of Holdings.
As a result of the securities purchased by TIG, it is the largest shareholder of
Holdings and will be able to significantly influence the business and affairs of
the Company.
The proceeds from the sale of the Common and Series I Preferred Stock may solely
be used by Holdings for (i) the repayment of indebtedness owing by Holdings to
Underwriters, (ii) the purchase of equivalent amounts of Convertible Preferred
Stock, Series B, of the Company, when necessary to increase the capital of the
Company, (iii) loan repayment or prepayment to TIG, (iv) redemption of Series I
Preferred Stock, and (v) reasonable operating expenses of the Company.
Holdings has agreed not to permit the Company to pay any dividends or repurchase
any of its stock without the prior consent of TIG. The Company does not expect
TIG to permit the Company to pay dividends until the TIG loan to Holdings is
repaid.
Until the TIG loan to Holdings is repaid in full, Holdings and its shareholders
have agreed to cause one designee of TIG to be elected to the board of directors
of Holdings. As of the date hereof, Holdings has been advised that such designee
will be Mr. Allen B. Binder, Senior Vice President, TIG Reinsurance Company. Mr.
Binder does not have any prior relationship with Holdings or the Company and
will not be a director of the Company.
Holdings expects to repay TIG through fees received by it pursuant to the
Management Agreement (see "Business-Management Agreement"). In the event
Holdings is unable to repay the loan in accordance with its terms, it is
expected that TIG would foreclose its lien on the shares of Common Stock pledged
to it by Holdings, and thereby become the sole holder of the Company's Common
Stock. As sole common shareholder, TIG would be able to elect all of the
directors of the Company and thereby control the Company's business and affairs.
TIG may also foreclose its lien on the pledged shares of the Company's Common
Stock in the event that the Loan Agreement is breached. In addition to customary
loan agreement events of default, the Loan Agreement will be in default if the
following covenants are not met:
CONSOLIDATED NET WORTH. Holdings and its consolidated subsidiary shall have at
all times consolidated net worth of not less than $2 million.
THE COMPANY'S STATUTORY SURPLUS. Holdings will not permit the statutory surplus
of the Company at any time to be less than the greater of (1) $4 million, or (2)
the minimum statutory surplus required by the Florida Insurance Department PLUS
$500,000.
- 40 -
<PAGE>
LOSS RESERVES. On each quarterly date, commencing with December 31, 1996,
Holdings will not permit the loss reserves of the Company to be outside the
actuarial range determined annually by an independent actuary. To illustrate, if
the loss reserve is determined by the independent actuary for December 31, 1996,
then such reserve will be used to determine compliance with this provision as of
December 31, 1996. If such loss reserve is not redetermined by the independent
actuary until December 31, 1997, then the loss reserve for December 31, 1996
will be used to determine compliance with this covenant for the quarterly dates
of March 31, 1997, June 30, 1997 and September 30, 1997.
RISK BASED CAPITAL RATIO. Holdings will not permit the risk-based capital ratio
of the Company at any time to be less than one hundred twenty percent (120%) of
the Company action level risk based capital ratio as determined by the Florida
Department of Insurance.
WRITING RATIO. During each quarterly period, commencing with the quarterly
period from January 1, 1997 to March 31, 1997, Holdings will not permit the
result of the Company's annualized net premiums written during such period to
exceed three hundred twenty percent (320%) of the statutory surplus of the
Company as of the last day of such quarterly period.
DEBT TO EQUITY RATIO. Holdings will maintain the ratio of (x) outstanding debt
to TIG hereunder to (y) consolidated net worth PLUS outstanding debt to TIG
hereunder at no greater than the respective amounts for the periods set forth
below:
From the closing date 3:7.00
to December 31, 1998
From January 1, 1999 to 3:8.04
December 31, 1999
From January 1, 2000 to 3:8.33
December 31, 2000
From January 1, 2001 and 3:9.23
all years thereafter
As of the date of this filing, the Company and Holdings are in compliance with
such financial covenants.
The Loan Agreement also provides that, to the extent permitted by law, the
proceeds of future sales of securities by the Company and Holdings shall be used
to repay the loan, other than proceeds of sales of the Series A Preferred.
Before any proceeds of sales of securities by the Company could be permitted to
be paid to Holdings to repay the loan, all accrued dividends on the Series A
Preferred would have to be paid and the permission of the Florida Department of
Insurance would have to be obtained.
In connection with the loan, Holdings has also agreed to cause TIG to provide
the Company with proportional quota share reinsurance until the loan is repaid
and the Series 1 Preferred Stock is redeemed. If the rate of profit made by TIG
on the reinsurance agreement exceeds an agreed upon amount, the excess will
reduce the loan balance, on a dollar for dollar basis. If the loan is repaid
prior to its due date and the Series 1 Preferred Stock is redeemed, Holdings has
agreed to cause the Company to
- 41 -
<PAGE>
obtain quota share reinsurance from TIG at cession levels selected by the
Company in its sole discretion, through December 4, 2003. These quota share
reinsurance obligations were a material inducement to TIG to agree to make the
loan to Holdings and to purchase the Series I Preferred Stock of Holdings.
Holdings has also pledged to TIG as additional collateral all of Holdings'
rights in the Management Agreement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Marchbanks, Daiello & Leider, P.A., a law firm of which Lawrence J. Marchbanks
is a majority shareholder, President and Director, has provided legal services
to the Company. Fees paid by the Fund and the Company for 1996 were $233,000.
The fees for such services may exceed 5% of that law firm's consolidated gross
revenues.
The Company has entered into a Management Agreement with Holdings, effective
upon the Company's receipt of a Certificate of Authority (December 7, 1995).
Pursuant to the Management Agreement, Holdings is responsible for the day to day
operations of the Company, including but not limited to, marketing, loss
control, safety engineering and continuing service, billing and premium
collection, claims administration, books and records and underwriting. The
Management Agreement has an initial term of five years and provides for the
payment by the Company to Holdings of fees equal to 14.1% of gross written
premiums up to $50 million, less allowed discounts, collected by the Company.
Fees paid for gross written premiums in excess of $50 million are to be paid
according to gross written premium levels and range from 14.5% to 13.1% of gross
written premium. Fees paid during 1996 were $3.8 million.
- 42 -
<PAGE>
<TABLE>
<CAPTION>
TABLE 11
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
- --------------------------------------------------------------------------------------------------------------------------
AWARDS PAYOUTS
------------------------- -------------------------------
(G)
(F) SECURITIES (H)
(A) (E) RESTRICTED UNDERLYING LONG-TERM (I)
NAME AND (C) (D) OTHER ANNUAL STOCK OPTIONS/ INCENTIVE ALL OTHER
PRINCIPAL (B) SALARY BONUS COMPENSATION AWARDS SARS PLAN PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#)(1) ($) ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jim Nau,
President 1996 220,000
Errol Bader,
Executive
Vice-President 1996 250,000
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Bader has been granted options to purchase shares of Holdings common
stock. As any exercise of those options would not impact the Company's
common shareholders' equities, they are not included in the summary
compensation table.
-43-
<PAGE>
<TABLE>
<CAPTION>
TABLE 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SHARES BENEFICIALLY OWNED
-----------------------------
NUMBER PERCENT
----------- ----------
<S> <C> <C>
Errol Bader........................................................ 133,700 (1) 70.52%
Suite 400
4700 N.W. Boca Raton Blvd.
Boca Raton, Fl 33431
James R. Harris .................................................. -- --
Lawrence J. Marchbanks ........................................... 131,034 (1) 69.11%
Suite 400
4700 N.W. Boca Raton Blvd.
Boca Raton, Fl 33431
Clifford G. Merritt ............................................. -- --
James R. Nau .................................................... -- --
Frederick R. Prout .............................................. 105,367 (1) 55.58%
Suite 400
4700 N.W. Boca Raton Blvd.
Boca Raton, Fl 33431
TIG Reinsurance Company......................................... 87,092 (2) 45.94%
Underwriters Reinsurance Co..................................... 11,389 (3) 5.67%
Daniel J. Webber ............................................... 105,367 (1) 55.58%
Suite 400
4700 N.W. Boca Raton Blvd.
Boca Raton, Fl 33431
R. James Wiggins................................................ -- --
James L. Wilson ................................................ 59,033 (1) 31.14%
Directors and executive officers as a group 534,501 84.44%
</TABLE>
(1) Under Holdings Stock Option Plan, the named executive officers and
directors have the right to acquire beneficial ownership of the following
number of shares within 60 calendar days: Mr. Bader - 91,200 shs.; Mr.
Marchbanks - 101,867 shs.; Mr. Prout - 91,200 shs.; Mr. Webber - 91,200
shs.; Mr. Wilson - 56,533 shs.; and all directors and executive officers as
a group - 432,000. These shares are included in the totals shown for each
individual and the group of all directors and executive officers.
(2) TIG Reinsurance currently owns 87,092 shares and has the option to purchase
such additional shares as may be necessary in order to own up to 49% of all
issued shares, subject to Underwriters' option.
(3) Underwriters' has the option to acquire 10% of the shares held by the
Company's Founders and Directors.
-44-
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Amendments to Articles of Incorporation*
3.2 Bylaws*
3.3 Amendment to Articles of Incorporation
4.1 Series A Preferred certificate*
10.1 Associated Business & Commerce Insurance Corporation Equity Compensation
Plan*
10.2 Exchange and Shareholders Agreement, dated as of March 23, 1995, among
Holdings and its shareholders*
10.3 Florida Workers' Compensation Managed Care Agreement, effective as of
August 4, 1994, between Associated Business and Commerce Workers'
Compensation Self-Insurance Trust Fund and Humana Medical Plan, Inc.*
10.4 Form of Associated Business & Commerce Insurance Corporation
Agency-Company Agreement*
10.7 Management Agreement, dated as of March 23, 1995, by and between
Associated Business & Commerce Insurance Corporation and Associated
Business & Commerce Holdings, Inc.*
10.8 Permit, dated May 5, 1994, issued by the Florida Department of Insurance*
10.9 Consent Order, dated October 19, 1995, issued by the Florida Department of
Insurance*
10.10 Amendment to Escrow and Subscription Agent Agreement, dated as of November
9, 1995, between Associated Business & Commerce Insurance Corporation and
Southern Security Bank of Hollywood*
10.11 Form of Subscription Agreement*
10.15 Form of Agreement as to Reinsurance by and between Associated Business &
Commerce Insurance Corporation and Underwriters Reinsurance Company*
10.16 Form of Option Agreement by and among Associated Business & Commerce
Holdings, Inc., Underwriters Reinsurance Company, Errol Bader, Lawrence J.
Marchbanks, Frederick R. Prout, Daniel J. Webber and James L. Wilson*
10.17 Amendment to Exchange and Shareholders' Agreement, dated November 27, 1996
10.18 Letter Agreement, dated August 9, 1996, extending Humana Managed Care
contract for two years
10.19 Securities Purchase Agreement, dated as of December 4, 1996, by and among
Associated Business and Commerce Holdings, Inc., Errol Bader, Lawrence J.
Marchbanks, Frederick R. Prout, Daniel J. Webber and James L. Wilson and
TIG Reinsurance Company
10.20 Term Loan Agreement, dated as of December 4, 1996, between Associated
Business and Commerce Holdings, Inc. and TIG Reinsurance Company together
with amendments dated February 24, 1997 and March 19, 1997, respectively
10.21 Pledge Agreement between Associated Business and Commerce Holdings, Inc.
and TIG Reinsurance Company
10.22 Security Agreement between Associated Business and Commerce Holdings, Inc.
and TIG Reinsurance Company
10.23 Agreement as to Reinsurance between Associated Business and Commerce
Holdings, Inc. and TIG Reinsurance Company
23.1 Consent of Independent Accounts
27.1 Financial Data Schedule
28.1 Schedule P from the Statutory Annual Statement for 1996 - Analysis of
Losses and Loss Expense
* Incorporated by reference herein to Form S-1, Commission File No. 33-83116
- 45 -
<PAGE>
FINANCIAL STATEMENTS
See the index included on page F-1 and the Financial Statements which being of
page F-2.
FINANCIAL SCHEDULES
All schedules are omitted because they are not applicable, not required, or the
information is included elsewhere in the financial statements or notes thereto.
REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K with the Commission
during the fourth quarter of 1996.
REPORTS TO SECURITY HOLDERS
The Company has not prepared or sent an Annual Report or proxy materials to
security holders.
- 46 -
<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.
ASSOCIATED BUSINESS & COMMERCE
INSURANCE CORPORATION
/S/ LAWRENCE J. MARCHBANKS
---------------------------------
Name: Lawrence J. Marchbanks
Title: Chairman of the Board
Date: April 14, 1997
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 date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ERROL BADER
- -------------------------------- Executive Vice President of April 14, 1997
Errol Bader Governmental Affairs and Director
/s/ LAWRENCE J. MARCHBANKS
- -------------------------------- Chairman of the Board and Director April 14, 1997
Lawrence J. Marchbanks
/s/ CLIFFORD G. MERRITT
- -------------------------------- Vice President, Finance (Principal April 14, 1997
Clifford G. Merritt Financial And Accounting Officer)
/s/ JAMES R. NAU
- -------------------------------- President April 14, 1997
James R. Nau (Principal Executive Officer)
/s/ FREDERICK R. PROUT
- -------------------------------- Secretary and Director April 14, 1997
Frederick R. Prout
/s/ JAMES L. WILSON
- -------------------------------- Director April 14, 1997
James L. Wilson
</TABLE>
-47-
<PAGE>
<TABLE>
<CAPTION>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
----
<S> <C>
THE COMPANY
Independent Accountants' Report F-2
Balance Sheets at December 31, 1996 and 1995 F-3
Statement of Operations for the Years Ended December 31, 1996 and 1995 and for
the period May 13, 1994 through December 31, 1994 F-4
Statement of Changes in Stockholders' Equity for the Years Ended December 31,
1996 and 1995 and for the Period May 13, 1994 through December 31, 1994 F-5
Statements of Cash Flows for the Years Ended December 31, 1996 and 1995 and for
the period May 13, 1994 through December 31, 1994. F-6
Notes to Financial Statements F-8
THE FUND
Independent Accountants' Report F-28
Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 F-29
Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 F-30
Notes to Financial Statements F-32
</TABLE>
F-1
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Directors
Associated Business & Commerce Insurance Corporation
Boca Raton, Florida
We have audited the accompanying balance sheets of Associated Business &
Commerce Insurance Corporation as of December 31, 1996 and 1995 and the related
statements of operations, changes in stockholders' equity and cash flows for the
years ended December 31, 1996 and 1995 and the period May 13, 1994 (inception)
through December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of Associated Business & Commerce
Insurance Corporation as of December 31, 1996 and 1995 and the results of its
operations, and its cash flows for the years ended December 31, 1996 and 1995
and the period May 13, 1994 (inception) through December 31, 1994 in conformity
with generally accepted accounting principles.
SCHMIDT, RAINES, TRIESTE,
DICKENSON & ADAMS, P.L.
Boca Raton, Florida
April 11, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
BALANCE SHEETS
DECEMBER 31,1996 AND 1995
ASSETS
1996 1995
------------- -----------
<S> <C> <C> <C>
Investments with fixed maturities
(Note 2)
8,708,519 14,439,231
Cash and cash equivalents (Note 12) 2,155,583 2,242,245
Premiums receivable, less allowance for doubtful
accounts 1996 $1,247,602; 1995 $613,125 4,078,520 4,849,556
Reinsurance and related recoverables (Note 4)
Paid loss recoverable -0- 94,598
Loss and loss ad ustment expenses 21,516,000 14,471,111
Prepaid reinsurance premiums 49,782 530,957
Advances receivable (Note 8) -0- 175,832
Accrued investment income 122,318 211,277
Prepaid expenses (Note 5) 3,200,485 1,821,000
Deferred and refundable income taxes (Note 6) 1,474,093 1,084,000
Deferred policy acquisition costs 260,004 389,737
Equipment, less accumulated depreciation
1996 $102,709; 1995 $47,465 640,202 289,871
Other assets, net 76,948 101,202
------------- -----------
42,282,454 40,700,617
============= ===========
RESERVES, LIABILITIES AND STOCKHOLDERS'EOUITY
Reserve for losses and loss ad ustinent expenses
31,982,392 28,306,416
Liabilities:
Accounts payable (Note 8) 417,445 459,929
Accrued expenses and other liabilities 1,682,234 2,249,540
Unearned premium 2,411,708 2,346,983
Deferred gain on loss portfolio 644,209 760,878
transfer
Accrued income taxes and special tax deposits (Note 6) -0- 1,078,200
------------- -----------
Total reserves and liabilities 37,137,988 35,201,946
============= ===========
Commitments and contingencies (Notes 4, 10 and 12)
Stockholders' equity (Note 7):
Convertible preferred stock series A, 6% cumulative,
$1 par value, authorized shares 1,900,000; issued and
outstanding 248,885 shares (aggregate liquidation
preference of $2,488,850 at December 31,1996) 248,885 221,805
Additional paid-in capital, preferred series A 2,251,816 1,996,245
Convertible preferred stock series B, $1 par value,
authorized, issued and outstanding 3,600,000 shares 3,600,000 3,200,000
Common stock, $1 par value, authorized 15,000,000
shares; 102,501 shares issued and outstanding 102,501 102,501
Retained earnings (deficit) (1,058,736) (21,880)
------------- -----------
5,144,466 5,498,671
------------- -----------
42,282,454 40,700,617
============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,1996 AND 1995 AND THE
PERIOD MAY 13,1994 (INCEPTION) THROUGH DECEMBER 31,1994
1996 1995 1994
----------- ----------- ---------
<S> <C> <C> <C>
Revenues:
Standard premium earned, net of
discounts 27,737,366 16,877,344 -0-
Less premium ceded for reinsurance 19,587,560 1,741,757 -0-
----------- ----------- ---------
Net premium earned 8,149,806 15,135,587 -0-
----------- ----------- ---------
Less loss and loss adjustment expenses 5,656,627 14,886,606 -O-
----------- ----------- ---------
Premiums available for operations 2,493,179 248,981 -0-
Interest earnings (860,171) 73,455 -0-
Net realized gains (losses) (27,740) (404) -0-
----------- ----------- ---------
3,325,610 322,032 -0-
----------- ----------- ---------
Expenses:
Policy acquisition and other
underwriting expense 4,392,125 333,315 10,245
Other expenses 111,105 6,152 -0-
----------- ----------- ---------
4,503,230 339,467 10,245
----------- ----------- ---------
Income (loss) before income taxes (1,177,620) (17,435) (l0,245)
Income taxes (Note 6) (254,991) (5,800) -0-
----------- ----------- ---------
Net income (loss) ($922,629) ($11,635) (10,245)
=========== =========== =========
Earnings (loss) per common share and
common share equivalent (10.12) (0.11) (0.10)
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS'EQUITY
FOR THE YEARS ENDED DECEMBER 31,1996 AND 1995 AND THE
PERIOD MAY 13,1994 (INCEPTION) THROUGH DECEMBER 31,1994
ADDITIONAL
PAID-IN
CAPITAL RETAINED
PREFERRED STOCK COMMON EARNINGS
SERIES A SERIES B SERIES A STOCK- (DEFICIT)
------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $ -0- $ -0- $ -0- $ -0- $ -0-
Common stock issued
for cash 102,501
Net (loss) (10,245)
Balance, December 31, 1994 -0- -0- -0- 102,501 (10,245)
------------ ----------- ------------ ----------- -----------
Preferred stock issued 221,805 3,200,000 1,996,245
for cash
Net income (loss) 11,635
------------ ----------- ------------ ----------- -----------
Balance, December 31, 1995 221,805 3,200,000 1,996,245 102,501 21,880
Preferred stock issued
for cash 55,972 400,000 503,748
Preferred stock cancelled (28,892) 248,177
Preferred dividends paid (114,227)
Net income (loss) (922,629)
------------ ----------- ------------ ----------- -----------
Balance, December 31, 1996 $ 248,885 $ 3,600,000 $ 2,251,816 $ 102,501 $ 1,058,736
------------ ----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,1996 AND 1995 AND FOR
THE PERIOD MAY 13,1994 (INCEPTION) THROUGH DECEMBER 31,1994
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
OPERATING ACTITIVIES
Cash received for premiums 27,679,531 1,341,812
Cash received from reinsurers 5,225,080 298,994
Cash paid to reinsurers (19,961,034) (2,213,424)
Cash paid for claims (15,452,872) (1,380,808)
Cash (paid) reimbursed for operating (3,465,898) 227,355 (10,245)
expenses
Income taxes paid (1,213,052)
Investment income collected 986,220 61,961
----------- ---------- ---------
Net cash and cash equivalents
(used in) operating activities (6,202,025) (1,664,110) (10,245)
----------- ---------- ---------
INVESTING ACTIVITIES
Purchase of investments (99,328) (3,921,036)
Sale of investments 4,080,210 2,538,365
Proceeds from investment maturities 1,685,000 28,237
Purchase of equipment (455,382) -0-
(Receipts of) Payments for other assets 18,200 (31,790) (41,895)
Collections (Payments) of advances, net 175,832 (175,832)
----------- ---------- ---------
Net cash and cash equivalents
(used in) investing activities 5,404,532 (1,562,056) (41,895)
----------- ---------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of preferred 959,720 5,418,050 -0-
stock
Repurchases of preferred stock (134,662) -0- -0-
Proceeds from issuance of common stock -0- -0- 102,501
Preferred dividends paid (114,227) -0- -0-
----------- ---------- ---------
Net cash and cash equivalents provided
by financing activities 710,831 5,418,050 102,501
----------- ---------- ---------
Net increase in cash and cash equivalents (86,662) 2,191,884 50,361
Cash and cash equivalents, beginning of period 2,242,245 50,361 -0-
----------- ---------- ---------
Cash and cash equivalanet, end of period 2,155,583 2,242,245 50,361
=========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,1996 AND 1995 AND FOR
THE PERIOD MAY 13,1994 (INCEPTION) THROUGH DECEMBER 31,1994
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH AND
CASH EOUIVALENTS (USED IN) OPERATING ACTI"TIES
1996 1995 1994
------------- ---------- -----------
<S> <C> <C> <C>
Net income (loss)
(922,629) (11,635) (10,245)
Adjustments to reconcile net income (loss) to net cash
and cash equivalents (used in) operating activities:
Depreciation 105,051 4,837 -0-
Amortization 6,054 1,315 -0-
Loss on sale of investments (27,740) 404 -0-
Net amortization of bond 37,090 4,230 -0-
discounts/premiums
Amortization of defeffed gain (116,669) (75,070) -0-
(Increase) decrease, netted for effects
of assets assumed, in:
Premiums receivable 628,629 197,712 -0-
Reinsurance and related recoverables (6,469,116) (6,981,217) -0-
Accrued interest receivables 88,959 (15,724) -0-
Prepaid expenses (1,379,485) (122,342) -0-
Defeffed and refundable income taxes (390,093) (1,084,000) -0-
Defeffed policy acquisitions costs 129,733 86,921 -0-
Increase (decrease), netted for effects of
liabilities assumed, in:
Reserves for claims 3,675,976 6,057,569 -0-
Accounts payable and accrued expenses (609,790) 342,846 -0-
Advance premiums 64,725 (1,148,156) -0-
Accrued income tax and special tax deposits (1,078,200) 1,078,200 -0-
------------- ---------- -----------
Net cash and cash equivalents
(used in) operating activities $(6,202,025) $(1,664,110) (10,245)
============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Associated Business & Commerce Insurance Corporation (the Company) was
incorporated on May 13, 1994 under the provisions of Florida law. The
Company's activities through November 29, 1995 were limited to
organization, licensing and other activities to enable it to become an
insurance company specializing in workers' compensation insurance
regulated by the Florida Department of Insurance (the "Department"). On
December 7, 1995, the Department issued a certificate of authority
after the Company successfully completed a plan of capitalization.
Activity and operations then immediately commenced.
In a transaction approved by the Florida Department of Insurance, the
Company assumed the assets and liabilities of Associated Business &
Commerce Workers' Compensation Self - Insurance Fund (the Fund) by
virtue of a loss portfolio reinsurance transaction. By agreement with
the Fund, the effective date of the transaction was November 30, 1995.
Accordingly, premiums earned on the Fund's policies then in effect, and
losses and underwriting expenses incurred subsequent to that date are
reported by the Company. However, the Fund did not transfer liabilities
not related to insurance.
The transaction described above together with other transactions and
contractual arrangements between the Fund, the Company and other
parties were contemplated by the Company in its long - term business
plan with the primary objective of offering non - assessable policies
of insurance to members of the Fund and to the general public.
Employers insuring their worker's compensation risks with the Fund were
assessable for any losses and related expenses not ultimately paid by
the Fund. Such assessability created a contingent liability to the
employers, which management considered detrimental to the continuing
growth of the business. As part of the loss portfolio transfer, the
Company indemnified the members of the Fund who elected to be insured
by the Company against such assessments. Policies of insurance written
by the Company, including renewals of coverage to former members of the
Fund are non assessable.
Only those members of the Fund who elected to be insured by the Company
were retained by the Company. The Company did not assume any contingent
assessment liabilities for members who left the Fund or who chose not
to be insured by the Company.
F-8
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP).
The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company
considers all highly - liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
RECOGNITION OF PREMIUM REVENUES AND UNEARNED PREMIUM
Workers compensation and employers liability insurance premiums
are recognized evenly over the life of the related policies
(generally one year), including estimates of retrospectively -
rated premiums based upon experience incurred under those
contracts to date, with a liability for unearned premiums
established for the premiums collected on the unexpired portion of
those policies. It is the general policy of the Company to bill an
amount approximating 10% to 20% of annual premium in advance of
the effective date of insurance coverage which is held by the
Company to insure performance of each insureds' annual premium
obligation.
Unearned premium also includes any return premium due the insured
as a result of premium audits. Standard premium is computed on
payroll and modified by an experience factor approved by the State
of Florida via the National Council on Compensation Insurance
(NCCI). Payroll and payroll classifications are subject to
verification and revision after year end. Additional premiums
based on payroll audits are recognized as revenue in the loss year
for which coverage is provided.
F-9
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring insurance that vary with
and are primarily related to the production of new and renewal
business are deferred and amortized over the terms of the policies
to which they relate. It is the Company's policy to calculate and
record deferred policy acquisition costs on a quarterly basis.
Amortization expense for the year ended December 31, 1996
approximated $1,371,000. There was no amortization for the year
ended December 31, 1995.
INVESTMENTS
Investments consist of U.S. Treasury notes, federal government
sponsored mortgage pools, and other U.S. government agency notes
and are carried at cost plus or minus the unamortized portion of
premiums or discounts paid to acquire such investments. The
Financial Accounting Standards Board has issued SFAS 115
"Accounting for Certain Investments in Debt and Equity
Securities", which became effective with the fiscal year which
began January 1, 1994, and has been implemented in the
accompanying financial statements. This SFAS addresses the
accounting and reporting for investments in equity securities that
have readily determinable market values and for all investments in
debt securities. Debt securities are to be classified as trading
securities (reported at market value) and available - for - sale
securities (reported at fair value with unrealized market gains
and losses reported as a separate component of stockholders'
equity).
Fixed maturity investments are securities that mature at a
specified future date more than one year after being issued. Fixed
maturity securities that the Company intends to hold until
maturity are classified as "fixed maturities held to maturity" and
are carried at amortized cost. Amortized cost is based upon the
purchase price and is adjusted periodically in order that the
carrying value will equal the face or par value at maturity. Fixed
maturity securities that may be sold prior to maturity due to
changes in interest rates, prepayment risks, liquidity needs, tax
planning purposes or other similar factors, have been classified
as "available for sale", and are carried at fair value. The
difference between aggregate carrying value for fixed maturities
available for sale and the aggregate amortized cost of such
securities is reported, net of related deferred income taxes, as a
separate component of stockholders' equity.
At December 31, 1996 and 1995, all of the Company's investments
were in fixed maturity securities. At December 31, 1996 all
investments are classified as held-to-maturity. At December 31,
1995 investments were classified as available-for-sale and
held-to-maturity. At December 31, 1995, aggregate carrying value
approximated market for those securities classified as
available-for-sale, therefore, there was no balance carried as a
separate component of stockholders' equity.
F-10
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains and losses on sales of investments are recognized
on the specific identification basis.
EQUIPMENT
Equipment is recorded at cost and is depreciated using accelerated
and straight - line methods over the respective assets' estimated
useful lives which range from five to seven years.
DIVIDEND PAYMENT RESTRICTIONS
The Company is restricted from paying dividends in excess of a
statutory formula on either common or preferred stock. No
dividends on common stock may be paid until all of the accumulated
and unpaid dividends, if any, on the Company's registered Series A
Preferred stock have been paid in full.
Notwithstanding the forgoing, the Company has agreed, as a
condition of obtaining its certificate of authority, not to pay
dividends on any class of stock until December 7, 2000 without
prior written consent of the Florida Department of Insurance.
In addition, as part of a term loan agreement of the Company's
parent Corporation (Note 7), the Company has agreed to pay no
dividends on any class of stock for so long as the parent remains
indebted without the creditors approval. Moreover, if any
dividends are approved, declared and paid on the common stock,
such dividends are required to be used to retire any then
remaining indebtedness of the parent under the term loan.
INSURANCE LIABILITIES
The liability for losses and loss adjustment expenses includes an
amount determined from loss reports and individual cases and an
amount, based on past and industry experience, for losses incurred
but not reported and future development of existing cases. In
establishing its liability for losses and loss adjustment
expenses, the Company utilizes the findings of an independent
actuary. Such liabilities are necessarily based on estimates and,
while management believes that the amount is adequate, the
ultimate liability may be in excess of or less than the amounts
provided. The methods for making such estimates and for
establishing the resulting liability are continually reviewed, and
any adjustments are reflected in earnings currently. Although the
Company believes that the estimate of the reserve for losses and
loss adjustment expenses is reasonable in the circumstances, the
Company's absence of a substantial period of loss experience to
support the assumptions inherent in establishing the estimated
reserves results in uncertainty as to the ultimate amount that
will be required for the settlement of losses and claims.
F-11
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accordingly, the ultimate settlement of losses and the related
loss adjustment expenses may vary, perhaps significantly, from the
estimated amounts included in the accompanying financial
statements.
The "Reserves for Losses and Loss Adjustment Expenses (LAE)"
section on pages 11-12 and Tables 2, 6, 7, and 8 include schedules
of the development of the Company's loss reserves for the last
three years and further discussion relating to the Company's
reinsurance and related recoveries.
Statutory reserves differ from GAAP reserves by inclusion of a
reserve for unpaid unallocated loss adjustment expenses which
approximated $464,000 at December 31, 1996.
ORGANIZATION COSTS
Included in other assets are organization costs consisting of
certain costs associated with initial incorporation, registration
and licensing activities. These costs are amortized by the
straight line method over five years. Amortization expense totaled
$6,504 and $1,315 for the years ended December 31, 1996and 1995,
respectively.
REINSURANCE
Reinsurance premiums, commissions, and expense reimbursements
related to reinsured business are accounted for on bases
consistent with those used in accounting for the original policies
issued and the terms of the reinsurance contracts. Premiums ceded
to other companies have been reported as a reduction of premium
income. The Company maintains specific and aggregate excess loss
reinsurance with unaffiliated insurance companies. For 1996 and
1995 the Company retained the first $350,000 of each loss under
its specific reinsurance policies. For 1996, the Company entered
into an aggregate excess loss policy for coverage of up to 70% of
15% excess 75% of earned standard premium subject to a $4,500,000
maximum limit.
With the exception of the assumption of insurance liabilities and
assets from the Fund in a one time only transaction, the Company
does not assume reinsurance from other insurance funds or
companies in the ordinary course of business. The Company has
entered into a 70% proportional quota - share agreement with
Underwriters Reinsurance Company ("Underwriters") (Note 4).
F-12
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement of Financial Standards No.
109, "Accounting for Income Taxes" (SFAS109). Income taxes are
provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis
of premiums receivable, reinsurance and related receivables and
insurance liabilities for financial and income tax reporting. The
deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will be either
taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for
operating losses that are available to offset future taxable
income and tax credits that may be available to offset future
federal income taxes.
EARNINGS PER SHARE
Earnings per common share and common share equivalent were
computed by dividing net income by the weighted average number of
shares of common stock and common stock equivalents outstanding
during the year. There was no change in the number of common
shares outstanding during 1996. Also, no dilution of earnings per
share is calculated because the Series A preferred stock is not
convertible to common shares before January 1, 2000 and the
Preferred series B preferred stock are not included in the
calculation because of an anti - dilutive effect at December 31,
1996 and 1995. Therefore, the basis for determining earnings per
share at December 31, 1996 and 1995 was as follows:
1996 1995
------------- -----------
Net income (loss) $ (922,629) $ (11,635)
less preferred dividends (114,227) -0-
============= ===========
Net income (loss), as adjusted $ (1,036,856) $ (11,635)
============= ===========
ALLOWANCE FOR BAD DEBTS
The bad debt allowance is based upon the Company's and the Fund's
experience with uncollectible accounts receivable and represents
the Company's estimate of the uncollectible amounts incurred
through each year end. The following table summarizes the activity
in the bad debt allowance for the years ended December 31, 1996
and 1995 and the period ended December 31, 1994:
F-13
<PAGE>
<TABLE>
<CAPTION>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1996 1995 1994
----------------- ---------------- ----------------
<S> <C> <C> <C>
Balance, beginning of period $ 613,125 $ ---- $ ----
Allowance assumed from the Fund -0- 560,094 ----
Additions to the allowance 634,477 53,031 ----
Write-offs against the allowance -0- -0-
----------------- ---------------- ----------------
Balance, end of period $ 1,247,602 $ 613,125 $ ----
================= ================ ================
</TABLE>
NOTE 2 - INVESTMENTS IN SECURITIES
Gross investment income for the periods ended December 31, 1996, 1995
and 1994 totaled $860,171, $73,455 and none, respectively. There were
no investment expenses for the same periods.
Investments included in the accompanying balance sheet at December 31, 1996
and 1995 are summarized as follows (there were no investments in securities
at December 31, 1994):
F-14
<PAGE>
<TABLE>
<CAPTION>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 2 - INVESTMENTS IN SECURITIES (CONTINUED)
1996
------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED EST. MARKET
COST APPRECIATION DEPRECIATION VALUE
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Held to maturity:
Fixed Maturities:
U.S. Treasury Notes $ 2,452,739 $ -0- $ ---- $ 2,452,739
U.S. Government agency
notes, various maturities
and interest rates 2.503,278 -0- (23,034) 2,480,244
GNMA and FNMA Mortgage
pools, various maturities
and interest rates 3,752,502 -0- (99,929) 3,652,573
---------------- ---------------- ---------------- ----------------
Total held to maturity
8,708,519 -0- (119,713) 8,585,556
================ ================ ================ ================
F-15
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 2 - INVESTMENTS IN SECURITIES (CONTINUED)
1995
------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED EST. MARKET
COST APPRECIATION DEPRECIATION VALUE
---------------- ---------------- ---------------- ----------------
Held to maturity:
Fixed Maturities:
U.S. Treasury Notes $ 500,224 $ 711 $ ---- $ 500,935
U.S. Government agency
notes, various maturities
and interest rates 1,996,310 13,190 ---- 2,009,500
GNMA and FNMA Mortgage
pools, various maturities
and interest rates 7,712,198 16,192 (57,865) 7,670,525
---------------- ---------------- ---------------- ----------------
Total held to
maturity 10,208,732 30,093 (57,865) 10,180,960
---------------- ---------------- ---------------- ----------------
Available for sale:
Fixed Maturities:
U.S. Treasury notes 4,230,499 ---- ---- 4,230,499
---------------- ---------------- ---------------- ----------------
Total investments $ 14,439,231 $ 30,093 $ (57,865) $ 14,411,459
================ ================ ================ ================
</TABLE>
The fair value of investments was determined using outside pricing services.
Estimated fair value of investments at January 31, 1997, the most recently
available date, approximated $8,571,000.
F-16
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 2 - INVESTMENTS IN SECURITIES (CONTINUED)
Following is a summary of investment purchases, sales and maturities for
the years ended December 31, 1996 and 1995:
PURCHASES: 1996 1995
---------- ----------------- -----------------
Fixed maturities $ 99,328 $ -0-
================= =================
<TABLE>
<CAPTION>
1996
SALES: -----------------------------------------------
FIXED MATURITIES AVAILABLE FOR SALE PROCEEDS COST GAIN (LOSS)
---------------- --------------- ------------
<S> <C> <C> <C>
Sales $ 657,031 $ 658,539 $ (1,508)
Maturities 1,685,000 1,685,000 -0-
---------------- --------------- -------------
2,342,031 2,343,539 (1,508)
---------------- --------------- -------------
FIXED MATURITIES HELD-TO-MATURITY
Sales 3,333,859 3,360,091 (26,232)
Maturities 89,320 89,320 -0-
---------------- --------------- -------------
3,423,179 3,449,411 (26,262)
---------------- --------------- -------------
Totals $ 5,765,210 $ 5,792,950 $ (27,740)
================ =============== =============
</TABLE>
Sale of held-to-maturity securities during 1996 was the result of the
non-recurring and unanticipated rapid funding of liabilities arising from
the quota share arrangement with Underwriters Reinsurance. As of December
31, 1996, as a result of additional equity financing (Note 7), management
has the positive intent to hold all investments to their respective
maturities.
During December 1995, the Company sold U.S. Treasury securities classified
as available for sale with a carrying value of $2,539,173 for gross
realized gains (losses) of $2,615 and $(3,019), respectively, for a net
loss of $404.
F-17
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 2- INVESTMENTS IN SECURITIES (CONTINUED)
The carrying value and estimated market value of debt securities at
December 31, 1996 by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because certain borrowers
have the right to call or prepay obligations without call or prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
CARRYING MARKET
VALUE VALUE
------------------ -----------------
<S> <C> <C>
Due in one year or less $ 2,353,230 $ 2,353,230
Due after one year through five years 1,596,050 1,586,333
Due after five years through ten years 1,006,737 993,993
------------------ -----------------
4,956,017 4,933,556
GNMA and FNMA Mortgage pools 3,752,502 3,652,000
------------------ -----------------
$ 8,708,519 $ 8,585,556
================== =================
</TABLE>
The Company does not have any material concentrations of credit risk in its
portfolio as it consists entirely of U.S. Treasury and other federal
government agency notes, GNMA's and FNMA's.
The carrying value of securities on deposit with various governmental
agencies at December 31, 1996 was $2,353,231.
NOTE 3 - STATE OF FLORIDA SPECIAL DISABILITY TRUST FUND
The State of Florida operates and manages the Special Disabilities Trust
Fund (SDTF) and reimburses employers and insurers for certain workers
compensation benefits paid to employees when the employee is injured on the
job and the resulting disability is as a result of or was related to a
prior work related injury. The SDTF is funded through assessments upon all
Florida workers' compensation insurers at a current level of 4.52% of
premium written and distributes such sums among insurers whose policy
holders have employed individuals with previously determined worker's
compensation - related disabilities, and such individuals have filed a
claim. The Company has included, as recoverables against losses and loss
adjustment expenses, amounts submitted and to be submitted to SDTF. See
also Note 4.
F-18
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 4 - REINSURANCE AND RELATED RECOVERABLES
Reinsurance contracts do not relieve the Company from its obligation to pay
claims. However, the Company limits the maximum net loss that can arise
from risks in its concentrated area of exposure by reinsuring (ceding)
certain levels of risks with other insurers or reinsurers, on an automatic
basis under general reinsurance contracts known as "treaties" or by
negotiation on large individual risks. Ceded reinsurance is treated as the
risk and liability of the assuming companies.
Effective October 1, 1995, the Fund entered into a 70% proportional quota -
share reinsurance treaty with Underwriters Reinsurance Company
(Underwriters), which was assigned to the Company effective November 30,
1995. Under the terms of the agreement, the Company cedes 70% of its net
written premium to Underwriters with Underwriters assuming 70% of the
Company's retained losses and loss adjustment expenses. To cover the costs
of underwriting, Underwriters reimbursed the Company for certain direct
expenses, including other reinsurance and managed care fees incurred, and
paid the Company a ceding commission ultimately based on the Company's loss
ratio, subject to certain adjustments and limits. Ceding commissions earned
for the periods ended December 31, 1996, 1995 and 1994 approximated
$4,786,000, $416,000 and none, respectively.
The following table summarizes the effect of reinsurance on premiums earned
and written for the periods ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995(a) 1994
----------------------------------- ---------------- ----------------
WRITTEN EARNED
-----------------------------------
<S> <C> <C> <C> <C>
Direct $ 27,685,422 $ 27,620,697 $ 2,420,743 $ ----
Assumed 116,669 116,669 14,456,601
Ceded (19,629,696) (19,587,560) (1,741,757)
----------------------------------- ---------------- ----------------
Net $ 8,172,395 $ 8,149,806 $ 15,135,587 $ ----
=================================== ================ ================
</TABLE>
The assumed premium is comprised entirely of the premium assumed from the
Fund as a result of the loss portfolio transfer described in Note 1. The
losses assumed by the Company of $14,456,601 were less than total premium
on this transaction, which totaled $15,292,549. A deferred gain has
therefore been recorded in the amount of $835,948. This gain is being
amortized in proportion to the reduction in reserve for assumed losses.
(a) For 1995, because of the common anniversary date of December 31, 1995
of substantially all policies in force during 1995, earned and written
premiums are not materially different.
At December 31, 1996, 1995 and 1994, reinsurance and related recoverables
consisted of none, $94,598 and none, respectively, of recoverables on paid
claim and claim settlement expenses and
F-19
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 4 - REINSURANCE AND RELATED RECOVERABLES (CONTINUED)
$21,516,000, $14,471,111 and none, respectively, of estimated recoverables
on unpaid claim and claim settlement expenses.
Approximately $8,525,000 of the reinsurance and related recoverables at
December 31, 1995 are from Score RE (formerly Allstate Reinsurance
Company). Also, included in reinsurance and related recoverables at
December 31, 1996 is approximately $8,937,000 related to the Company's
quota share agreement with Underwriters. In addition, estimated
undiscounted recoveries from the SDTF approximated $3,824,000 December 31,
1996.
The Special Disability Trust Fund was created in 1955 to provide a
financial incentive for employers to hire previously injured workers. If
the worker was injured a second time and the employer (or insurance
carrier) could prove that the two injuries were related, the Trust Fund
will reinburse the insurer for claims paid regarding the second or
subsequent injuries.
It has been reported that the Trust Fund is financially impaired with
claims exceeding the Fund's ability to pay. The Florida Legislature is
considering legislation to deal with the issue but no definite laws have
yet been adopted. Proposals range from increased assessments to carriers to
terminating the Fund at a date certain as a means of dealing with the
problem.
The Company is unable to ascertain with any certainty what, if any,
legislation will be adopted regarding the Trust Fund. If terminated at a
date certain or if assessments are increased, such actions could adversely
impact the Company.
In the event that all or any of the reinsuring companies or the SDTF might
be unable to meet their obligations under existing reinsurance agreements
or law, the Company would be liable for such defaulted amounts. The
Company's management believes that all reinsurers are in sound financial
condition, and include Score RE (formerly Allstate Reinsurance Company,
Continental Casualty Company, and Underwriters Reinsurance Company, all "A"
rated by A.M. Best.
NOTE 5 - MANAGED CARE
During 1994, the Fund entered into a managed care arrangement with Humana
under which Humana is to provide medical services to workers whose
employers were participating in the voluntary managed care arrangement. The
terms of the agreement with Humana, which was assigned to the Company
effective November 30, 1995, provide for the payment of a capitation fee in
exchange for which Humana covers all the medical cost associated with a
claim for a period of three years after the date the claim is reported.
Fees paid to Humana are recognized as prepaid expenses and unpaid claim and
claim settlement expenses to the extent that unpaid claims and claim
settlement expenses exist for managed care covered claims. Prepaid expenses
at December 31, 1996 and 1995 includes $3,129,000
F-20
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 5 - MANAGED CARE (CONTINUED)
and $1,821,000, respectively, of fees paid to Humana under this agreement,
including amounts assumed from the Fund in the loss portfolio transfer.
To the extent that Humana is unable to meet their contractual obligation
under the agreement, the Company is liable for unpaid claim and claim
settlement expenses. However, as part of the agreement, Humana has issued a
letter of credit to the benefit of the Company in the amount of $3,500,000,
which expires December 15, 1997.
NOTE 6 - INCOME TAXES
Temporary differences giving rise to deferred tax assets consist primarily
of a discount on the reserve for loss and loss adjustment expenses for tax
purposes and on reinsurance and related receivables, accounting for earned
premiums differently for tax purposes than for financial reporting
purposes, expensing for tax purposes internal underwriting costs
attributable to policy acquisitions, accounting for other policy
acquisition costs differently for tax purposes than for financial reporting
purposes, and the recording of an allowance for uncollectible premiums
receivable for financial reporting purposes but not for tax purposes.
The provision for income taxes are as follows for the periods ended
December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- -----------
<S> <C> <C> <C>
Current $ (304,991) $ 1,078,200 $ ----
Deferred 50,000 (1,084,000)
--------------- --------------- -----------
$ (254,991) $ (5,800) $ ----
=============== =============== ===========
</TABLE>
The effective tax rate of 21.7% for 1996 differs from the statutory income
tax rate of 34% due to the effects during 1996 of underestimated 1995
income taxes approximating $135,000.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996,
1995 and 1994 are as follows:
F-21
<PAGE>
<TABLE>
<CAPTION>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 6 - INCOME TAXES (CONTINUED)
1996 1995 1994
---------------- --------------- ---------------
<S> <C> <C> <C>
Deferred tax assets:
Discount on net loss reserves $ 515,000 706,000 $ ----
Deferred charge 219,000 259,000
Unearned premium 227,000 159,000
Net operating loss 319,000 -0-
Other -0- 12,000
---------------- --------------- ---------------
Total deferred tax assets 1,280,000 1,136,000 ----
Deferred tax liabilities:
Loss reserves 158,000 -0-
Policy acquisition costs 88,000 52,000
---------------- --------------- ---------------
246,000 52,000 ----
---------------- --------------- ---------------
$ 1,034,000 1,084,000 $ ----
================ =============== ===============
</TABLE>
Management believes it is more likely than not that the deferred tax assets
will be realized due to the Company's tax planning strategies and future
taxable income. Accordingly, no valuation allowance has been established.
NOTE 7 - STOCKHOLDERS' EQUITY AND SUBSEQUENT EVENT
The Company has authorized a total of 10,000,000 shares of preferred stock,
available to be issued in any series as determined by the board of
directors. During 1996, the board increased the authorized series A 6%
cumulative Convertible Preferred Series A shares from 900,000 to 1,900,000.
At December 31, 1996 and 1995, 248,885 and 221,805 shares, respectively,
have been issued and have been registered with the U.S. Securities and
Exchange Commission. At December 31, 1996 and 1995, 3,600,000 and 3,200,000
shares, respectively are authorized and have been issued of Convertible
Preferred Series B, which are unregistered. Accordingly, a total of
6,151,115 shares of preferred stock are authorized and unissued.
Each share of the 6% Cumulative Convertible Series A Preferred Stock is
convertible to 2 shares of common stock after December 31, 2000. The
Company may, after December 31, 1998, and upon thirty days written notice,
redeem the Series A preferred shares at $10 per share plus unpaid and
accrued dividends. The Series A preferred shares also carry a liquidation
value of $10 per share. Accordingly, at December 31, 1996 the aggregate
liquidation preference is $2,488,850.
F-22
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 7 - STOCKHOLDERS' EQUITY AND SUBSEQUENT EVENT (CONTINUED)
The Company's originally filed articles of incorporation provided for
5,000,000 shares of authorized common stock. During November, 1994, the
articles of incorporation were amended to allow for an additional
10,000,000 shares of common stock to bring the total authorized common
stock to 15,000,000 shares.
During March 1995, the founding stockholders of the Company entered into a
stock exchange agreement with Associated Business & Commerce Holdings, Inc.
(Holdings) whereby they exchanged all outstanding common stock of the
Company for an equal number of shares of Holdings, in direct proportion to
the existing stock ownership of common stock in the Company. As a result,
the Company became a wholly owned subsidiary of Holdings. Holdings was
organized solely for the purpose of providing financing for the Company and
performing certain management services for the Company under a Management
Agreement between the Company and Holdings (the "Management Agreement").
Holdings does not carry on any other business activities. The employees of
Holdings devote their full business time to the business and affairs of the
Company pursuant to the terms of the Management Agreement.
Holdings obtained the funds for the funds for the initial purchase of the
3,200,000 shares of Series B preferred stock by entering into a term loan
agreement with one of the Company's quota share reinsurers, Underwriters
Reinsurance Company ("Underwriters"). The loan bore interest at 12.75% per
annum, and, if not earlier prepaid, was due on September 30, 2000. Holdings
pledged as collateral for the loan, among other things, all the Common and
Series B Preferred Stock of the Company held by Holdings. Holdings has also
granted Underwriters options to purchase common stock of Holdings in an
amount, after issuance, up to a maximum of 49% of the number of outstanding
common shares of Holdings. The number of shares subject to option is based
upon the date on which the final payment to Underwriters was made.
In order to relieve the debt service burden created by the Underwriters
loan, improve the financing terms, increase the quota share reinsurance
ceding commission and generate more capital available to the Company,
Holdings, on December 4, 1996, entered into a Term Loan Agreement and
Securities Purchase Agreement with TIG Reinsurance Company (hereinafter
"TIG" or the "TIG Loan").
Because the voting securities purchase aspect of the entire TIG transaction
required prior approval by the Florida Department of Insurance, closing
occurred in two phases.
The first closing occurred on December 4, 1996. At this first closing,
Holdings entered into a loan agreement with TIG evidenced by two promissory
notes (Note A and Note B). Note A is in the principal amount of $3 million,
bears interest at 10% per annum, payable interest only and, if not earlier
prepaid, is due December 4, 2003. Note B was in the principal amount of
$912,908, bears interest at 6% per annum, payable interest only and, if not
earlier prepaid, was due December 4, 2003,
F-23
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 7 - STOCKHOLDERS' EQUITY AND SUBSEQUENT EVENT (CONTINUED)
provided however, that upon approval of the proposed securities purchase by
the Florida Department of Insurance Note B was to be canceled and returned
to Holdings. The principal amount of the B Note would then be credited by
Holdings toward the acquisition by TIG of 2,912,908 shares of Holdings
Series I Preferred Stock. Upon approval by the Department of Insurance, TIG
was also required to complete its purchase of 2,912,908 shares of Series I
Preferred by the payment to Holdings of an additional $2 million (the
"second" closing).
The proceeds of the TIG loan from the first closing were used by Holdings
to retire in full the Underwriters' loan (approximately $3.6 million) and
to purchase an additional 400,000 shares of the Company's Series B
Convertible Preferred Stock. This refinance and payment in full to
Underwriters served to reduce the Underwriters quota share to 20% of net
written premium and limited Underwriters' options to approximately 5%.
The second closing occurred on March 31, 1997, after receipt of approval of
the entire transaction by the Department of Insurance. At the second
closing, TIG surrendered the B Note and paid the $2 million due for the
purchase of Holdings' Series I Preferred. Holdings canceled the B Note and
issued to TIG 87,092 shares of Holdings' Common Stock and 2,912,908 shares
of Holdings' Series I Preferred Stock. The $2 million proceeds of the
second closing were used by Holdings to purchase an additional 1.5 million
shares of the Company's Series B Preferred Stock and $500,000 was advanced
to the Company as working capital.
Unaudited statutory policyholders' surplus as of December 31, 1996 and 1995
and unaudited statutory net income (loss) for the periods ended December
31, 1996 and 1995 are $4,300,000 and $4,800,000 and $(430,000) and
$(375,000), respectively. Statutory minimum surplus is $4,000,000.
In order to enhance the regulation of insurer solvency, the National
Association of Insurance Commissioners (NAIC) issued a model law to
implement risk - based capital (RBC) requirements for property and casualty
insurers, which are designed to assess capital adequacy and raise the level
of protection that statutory surplus provides for policyholder obligations.
Under the model law, insurers who have less statutory surplus than is
required by the RBC calculations will be subject to varying degrees of
regulatory action, depending on the level of capital inadequacy. Since the
Company is domiciled and issues policies exclusively in the state of
Florida, and Florida has not yet adopted the model RBC law, the Company has
not calculated the RBC statutory surplus. However, management believes that
it has statutory surplus in excess of the RBC amounts.
F-24
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company receives legal services from a firm which employs a director.
Fees paid to this firm for the periods ended December 31, 1996, 1995 and
1994approximated $233,000, $21,000 and none, respectively. At December 31,
1996 and 1995 accounts payable includes the $59,000 and $21,000 of legal
fees payable.
The Company is affiliated with the Fund through common management and some
common directors. During 1995 and 1994, the Fund paid $58,000 and $76,000
of organization costs of the Company of which $12,000 was reimbursed during
1994. The Fund is not seeking reimbursement from the Company for the
organizational costs incurred by the Fund on behalf of the Company.
Included in premiums receivable at December 31, 1995 is approximately
$1,900,000 due from the Fund in connection with the loss portfolio
transaction.
The Fund repaid the Company the balance of the $1,900,000 immediately upon
its receipt of an expected income tax refund during 1996.
All of the Company's' outstanding common stock as well as all of the
outstanding Series B preferred stock are owned by Holdings. Holdings
performs certain administrative functions and pays certain costs for the
Company under a management agreement. The management agreement calls for
the Company to pay up to 14.1% of written premium to Holdings. Management
fee expense incurred by the Company under the terms of this agreement
approximated $3,847,000 and $345,000 for the years ended December 31, 1996
and 1995, respectively. The advances receivable at December 31, 1995 of
$175,832 represents working capital advances to Holdings which are non -
interest bearing and will be repaid as cash flow of Holdings permits.
NOTE 9 - STOCK OPTION PLAN
The Company has established a compensatory stock option plan called the
Equity Compensation Plan (the Plan). The Plan allows for the granting to
officers, key employees, eligible directors and independent contractors the
incentive stock options, non - qualified stock options, stock appreciation
rights, and restricted stock. The exercise price of the stock options may
not be less than 100% of the fair market value of the common stock on the
date of the grant of the stock option. The term of the option may not be
greater than ten years. Incentive stock options granted to a greater than
10% owner shall have an option exercise price of not less than 110% of the
fair market value of the stock on the date of the grant and the exercise
period will not be greater than five years. Stock appreciation rights may
only be granted in conjunction with a related stock option. Stock
appreciation rights call for the payment of cash or common stock equal in
value to the excess of the fair market value of the common stock over the
stock option exercise price.
The Board has reserved 2,000,000 shares of common stock for issuance under
the Plan. There are no outstanding options at December 31, 1996.
F-25
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 10 - LEGAL PROCEEDINGS
From time to time, the Company may be involved in workers' compensation
proceedings relating to claims arising out of its operations in the normal
course of business. As of the date of the accountants' report, the Company
is not a party to any legal proceedings, other than those initiated by the
Company relating to the recovery of accounts receivable, with the exception
of the matter described below.
In July, 1992, the Fund filed a lawsuit in the State Circuit Court of Palm
Beach County, Florida, for breach of contract against Advanced Risk
Management Incorporated ("ARMI") claiming damages for excess fees and
advances collected by ARMI, the former service company of the Fund. A
counterclaim was filed by ARMI alleging breach of contract, breach of
fiduciary duty and fraud. On January 2, 1994, the court granted summary
judgment in favor of the Fund with respect to all of the counterclaims made
by ARMI. The Summary judgment was appealed by ARMI and reversed by the
Fourth District Court of Appeal, which remanded the matter back to the
trial court to resolve specific issues. On December 15, 1995, the trial
court granted the Fund's renewed motion for summary judgment. ARMI filed an
appeal as to this judgment as well. On or about April 10, 1997, the Fourth
District Court of Appeal rendered its decision affirming the final judgment
of the Trial Court. The appellate decision is not final until the time
period (15 days) for filing motions to rehear has passed. Although ARMI may
appeal this decision to the Florida Supreme Court, it is unlikely that the
Supreme Court will assume jurisdiction. The Fund intends to continue to
defend this claim, in the event further proceedings occur, on its own
behalf. There can be no assurance however, that, in the event of an
unfavorable ruling against the Fund, recovery would not be sought from the
Company. In the event there is an unfavorable outcome, which management
believes at this time to be extremely unlikely, the Fund's liability is
estimated at less than $1,000,000.
NOTE 11 - NON - CASH INVESTING AND FINANCING ACTIVITIES
During 1996, the Company foreclosed $142,000 of Series A Preferred Stock
and applied the balance to unpaid premiums receivable.
Effective November 30, 1995, the Company received all of the insurance
related assets and assumed all of the insurance related liabilities from
the Fund by virtue of a loss portfolio reinsurance arrangement. Non cash
investing activities associated with this transaction are as follows:
Investments received $ 13,089,432
=================
Equipment received $ 294,707
=================
Other assets received $ 28,834
=================
F-26
<PAGE>
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 12 - CONCENTRATIONS AND CASH RESTRICTION
The Company routinely maintains cash balances in excess of the federally
insured limit of $100,000 at its financial institutions. Uninsured balances
at December 31, 1996 approximated $1,706,000. In addition, the Company had
$250,000 cash on deposit with a governmental agency.
All of the Company's revenues are derived from within the state of Florida.
Accordingly, the Company could be adversely affected by economic downturns,
significant unemployment, and other conditions that may occur from time to
time in Florida, which may not have as much of an impact on more
geographically diversified competitors.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and cash equivalents: The carrying amount is a reasonable estimate of
fair value.
Investments in securities: Fair values are based upon quoted market prices
or dealer quotes, if available.
NOTE 14- COMMITTMENTS
During 1996, the Company entered into an agreement for new operating,
policy, and claims administration software for a total contract amount
approximating $525,000. As of December 31, 1996, approximately $130,000 of
the contract is still outstanding.
F-27
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Trustees
Associated Business and Commerce Workers' Compensation
Self-Insurance Fund
Boca Raton, Florida
We have audited the accompanying statements of operations and cash flows
of Associated Business and Commerce Workers' Compensation Self-Insurance Fund
for the years ended December 31, 1995, 1994 and 1993. These financial
statements are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these 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 audits 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 financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
Associated Business and Commerce Workers' Compensation Self-Insurance Fund
for the years ended December 31, 1995, 1994 and 1993 in conformity with
generally accepted accounting principles.
SCHMIDT, RAINES, TRIESTE,
DICKENSON & ADAMS, P.L.
Boca Raton, Florida
March 20, 1996
F-28
<PAGE>
ASSOCIATED BUSINESS AND COMMERCE
WORKERS' COMPENSATION SELF-INSURANCE FUND
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Standard premium earned, net of discounts ............ $25,498,312 $24,703,624 $21,821,933
Less premium ceded for reinsurance ................... 20,529,657 2,186,254 1,969,437
--------------- -------------- --------------
Net premium earned .................................. 4,968,655 22,517,370 19,852,496
--------------- -------------- --------------
Less loss and loss adjustment expenses ............... -- 13,724,001 14,722,513
--------------- -------------- --------------
Premiums available for operations ................... 4,968,655 8,793,369 5,129,983
--------------- -------------- --------------
Interest earnings .................................... 772,424 605,901 283,535
--------------- -------------- --------------
Net realized gains (losses) on investment
transactions ....................................... 115,019 (30,911) 2,113
--------------- -------------- --------------
5,856,098 9,368,359 5,415,631
--------------- -------------- --------------
Expenses:
Policy acquisition and other underwriting expenses .. 7,143,265 7,249,750 5,657,381
Depreciation and amortization ........................ 103,790 70,100 45,235
--------------- -------------- --------------
7,247,055 7,319,850 5,702,616
--------------- -------------- --------------
Income (loss) before income taxes .................. (1,390,957) 2,048,509 (286,985)
--------------- -------------- --------------
Income taxes (Note 7) ................................. (316,407) 619,997 (40,605)
--------------- -------------- --------------
Net income (loss) ................................... $(1,074,550) $ 1,428,512 $ (246,380)
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
ASSOCIATED BUSINESS AND COMMERCE
WORKERS' COMPENSATION SELF-INSURANCE FUND
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Cash received for premiums and other income .... $ 26,275,001 $ 24,327,795 $22,119,355
Cash paid to reinsurers ......................... (6,404,993) (2,238,406) (2,471,887)
Cash received from reinsurers ................... 567,590 379,760 297,721
Cash paid for claims ............................ (11,850,932) (13,589,168) (6,738,547)
Cash paid for operating expenses ................ (8,427,586) (7,602,237) (5,510,092)
Investment income collected ..................... 713,418 586,579 341,905
Income taxes and special tax deposits paid ..... (735,500) (800,000) (371,528)
--------------- --------------- --------------
Net cash and cash equivalents provided by
operating activities ......................... 136,998 1,064,323 7,666,927
--------------- --------------- --------------
INVESTING ACTIVITIES
Purchase of investments ......................... (2,647,840) (6,110,754) (8,064,795)
Sale of investments ............................. 1,792,081 2,721,518 1,400,705
Proceeds from investment maturities ............. 561,304 1,265,849 --
Purchase of equipment ........................... (212,956) (125,080) (69,349)
Proceeds from life insurance and annuity deposit 41,296 -- --
Payments for other assets ....................... (19,206) (12,990) (4,573)
--------------- --------------- --------------
Net cash and cash equivalents (used in)
investing activities ......................... (485,321) (2,261,457) (6,738,012)
--------------- --------------- --------------
Net increase (decrease) in cash and
cash equivalents ................................. (348,323) (1,197,134) 928,915
--------------- --------------- --------------
Cash and cash equivalents, beginning of year .... 348,323 1,545,457 616,542
--------------- --------------- --------------
$
Cash and cash equivalents, end of year ........... -- $ 348,323 $ 1,545,457
=============== =============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
ASSOCIATED BUSINESS AND COMMERCE
WORKERS' COMPENSATION SELF-INSURANCE FUND
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------------- -------------- --------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH AND CASH
EQUIVALENTS PROVIDED BY OPERATING ACTIVITIES
Net income (loss) .................................. $ (1,074,550) $ 1,428,512 $ (246,380)
Adjustments to reconcile net income (loss) to net
cash and cash equivalents provided by operating
activities:
Depreciation ..................................... 93,196 64,046 39,181
Amortization ........................................ 10,594 6,054 6,054
Loss (gain) on sale of investments .................. (115,019) 30,911 (2,112)
Net amortization of bond discounts/premiums ........ (48,963) 27,123 75,984
Advances repaid through expense recognition ........ -- -- 107,582
(Increase) decrease in:
Premiums receivable ................................ 7,231,708 (878,909) (900,112)
Reinsurance and related recoverables ............... 17,839,221 (2,807,870) (2,958,251)
Accrued investment and other recoverables ......... (10,043) (68,865) (55,263)
Refundable income taxes and prepaid expenses ...... (1,902,907) 27,586 (50,829)
Deferred income taxes .............................. 1,227,000 -- (854,000)
Deferred policy acquisition costs .................. 330,693 (26,738) (198,008)
Prepaid and other assets ........................... 297,614 (260,759) --
Increase (decrease) in:
Reserves for claims ................................ (19,184,520) 2,531,779 10,481,137
Accounts payable and accrued expenses .............. 2,587,522 575,706 (83,978)
Advance premiums ................................... (6,768,548) 595,747 1,863,514
Accrued income tax and special tax deposits ....... (376,000) (180,000) 442,408
--------------- -------------- --------------
Net cash and cash equivalents provided by
operating activities ............................ $ 136,998 $ 1,064,323 $ 7,666,927
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
ASSOCIATED BUSINESS AND COMMERCE
WORKERS' COMPENSATION SELF-INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Associated Business and Commerce Worker's Compensation Self-Insurance Fund
(the Fund) was created in 1991 under the provisions of Florida law. The Fund
is regulated by the Florida Department of Labor and Employment Security
(DLES) and provides worker's compensation insurance to its members. Through
June 30, 1994, the Fund was regulated by the DLES. Effective July 1, 1994,
monitoring of regulatory matters was transferred to the Florida Department of
Insurance (DOI). However, the Fund is still subject to rules and regulations
promulgated by DLES.
LOSS PORTFOLIO TRANSFER
In a transaction approved by the Florida Department of Insurance, the Fund
entered into a loss portfolio reinsurance treaty with Associated Business &
Commerce Insurance Corporation (ABCIC). Under the terms of the treaty, the
premium paid by the Fund to ABCIC consisted of all of the net assets of the
Fund (assets less liabilities, excluding loss reserves) in exchange for the
assumption, by the ABCIC, of the Fund's unpaid claims liabilities (loss
reserves). By agreement with ABCIC, the effective date of the transaction was
November 30, 1995. Accordingly, premiums earned on the Fund's policies then
in effect, and losses and underwriting expenses incurred subsequent to that
date are reported by ABCIC. However, the Fund did not transfer liabilities
not related to insurance.
The transaction described above together with other transactions and
contractual arrangements between the Fund, ABCIC and other parties were
contemplated by the Fund in its long-term business plan with the primary
objective of offering non-assessable policies of insurance to members of the
Fund and to the general public. Employers insuring their worker's
compensation risks with the Fund were assessable for any losses and related
expenses not ultimately paid by the Fund. Such assessability created a
contingent liability to the employers, which management considered
detrimental to the continuing growth of the business. As part of the loss
portfolio transfer, ABCIC indemnified the members of the Fund who elected to
be insured by the Company against such assessments. Policies of insurance
written by ABCIC, including renewals of coverage to former members of the
Fund are non-assessable.
Only those members of the Fund who elected to be insured by ABCIC were
retained by ABCIC. ABCIC did not assume any contingent assessment liabilities
for members who left the Fund or who chose not to be insured by ABCIC. The
Fund will maintain its legal existence until such time as the Florida
Department of Insurance permits otherwise, however, the Fund no longer offers
workers compensation insurance coverage.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles (GAAP). The preparation of
financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-32
<PAGE>
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Fund considers all
highly-liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
RECOGNITION OF PREMIUM REVENUES AND MEMBER PREMIUM DEPOSITS
Insurance premiums are recognized evenly over the life of the related
policies (generally one year) with a liability for unearned premiums
established for the premiums collected on the unexpired portion of those
policies. It is the policy of the Fund to bill a deposit equal to two months
of annual premium in advance of the effective date of insurance coverage
which is held by the Fund to insure performance of each member's annual
premium obligation. Member premium deposits also include any return premium
due the insured as a result of premium audits. Standard premium is computed
on payroll and modified by an experience factor provided by the State of
Florida via the National Council on Compensation Insurance (NCCI). Payroll
and payroll classifications are subject to verification and revision after
year end. Deferred expenses for self-insurer's assessments, administrator
fees and commissions to agents have been accrued, based upon premium
collected. Additional premiums based on payroll audits are recognized as
revenue in the Fund year for which coverage is provided.
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring insurance that vary with and are
primarily related to the production of new and renewal business are deferred
and amortized over the terms of the policies to which they relate. It is the
Fund's policy to calculate and record deferred policy acquisition costs on a
quarterly basis.
Amortization expense for the years ended December 31, 1995, 1994 and 1993
approximated $1,900,000, $833,000 and $762,000, respectively.
INVESTMENTS
Investments consist of U.S. Treasury notes, U. S. Treasury Strips, GNMA
mortgage pools, and other U.S. government notes and are carried at cost plus
or minus the unamortized portion of premiums or discounts paid to acquire
such investments. The Financial Accounting Standards Board has issued SFAS
115 "Accounting for Certain Investments in Debt and Equity Securities", which
became effective with the fiscal year which began January 1, 1994, and has
been implemented in the accompanying financial statements. This SFAS
addresses the accounting and reporting for investments in equity securities
that have readily determinable market values and for all investments in debt
securities. Debt securities are to be classified as trading securities
(reported at market value), available-for-sale securities (reported at fair
value with unrealized market gains and losses reported as a separate
component of surplus) and held to maturity (reported at amortized cost).
Realized gains and losses on sales of investments are recognized on the
specific identification basis.
EQUIPMENT
Equipment is recorded at cost and is depreciated using accelerated methods
over the respective assets' estimated useful lives which range from five to
seven years.
F-33
<PAGE>
DIVIDEND PAYMENT RESTRICTIONS
The Fund must obtain approval from DLES prior to the declaration and
payment of dividends to members.
INSURANCE LIABILITIES
The liability for losses and loss adjustment expenses includes an amount
determined from loss reports and individual cases and an amount, based on
past and industry experience, for losses incurred but not reported and future
development of existing cases. In establishing its liability for losses and
loss adjustment expenses, the Fund utilizes the findings of an independent
actuary. Such liabilities are necessarily based on estimates and, while
management believes that the amount is adequate, the ultimate liability may
be in excess of or less than the amounts provided. The methods for making
such estimates and for establishing the resulting liability are continually
reviewed, and any adjustments are reflected in earnings currently.
Although the Fund believes that the estimate of the reserve for losses and
loss adjustment expenses is reasonable in the circumstances, the Fund's
absence of a substantial period of loss experience to support the assumptions
inherent in establishing the estimated reserves results in uncertainty as to
the ultimate amount that will be required for the settlement of losses and
claims. Accordingly, the ultimate settlement of losses and the related loss
adjustment expenses may vary, perhaps significantly, from the estimated
amounts included in the accompanying financial statements.
The Fund has accounted for loss and loss adjustment expenses on an
undiscounted basis for the years ended December 31, 1995, 1994 and 1993. For
all prior years, including its annual report for the year ended December 31,
1993 issued to its members and others, the Fund discounted its insurance
liabilities to give effect to the anticipated investment income on loss and
loss adjustment expenses. The Fund made this accounting change to be
consistent with the accounting treatment adopted by ABCIC for accounting for
loss and loss adjustment expenses in ABCIC's financial statements filed with
the federal Securities and Exchange Commission.
REINSURANCE
Reinsurance premiums, commissions, and expense reimbursements related to
reinsured business are accounted for on bases consistent with those used in
accounting for the original policies issued and the terms of the reinsurance
contracts. Premiums ceded to other companies have been reported as a
reduction of premium income. The Fund maintains specific excess loss
reinsurance with unaffiliated insurance companies. For the 1995, 1994 and
1993 fund years, the Fund retained the first $350,000 of each loss.
The Fund does not assume reinsurance from other insurance funds or
companies. Effective October 1, 1995, the Fund entered into a 70%
proportional quota-share agreement with Underwriters Reinsurance Company
("Underwriters") (Note 5).
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the basis
F-34
<PAGE>
of premiums receivable, reinsurance and related receivables and insurance
liabilities for financial and income tax reporting. The deferred tax assets
and liabilities represent the future tax return consequences of those
differences, which will be either taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes also are recognized for
operating losses that are available to offset future taxable income and tax
credits that may be available to offset future federal income taxes.
Effective January 1, 1992, the Fund adopted Statement of Financial Accounting
Standards Number 109, Accounting for Income Taxes.
ALLOWANCE FOR BAD DEBTS
The bad debt allowance is based upon the Fund's experience with
uncollectible accounts receivable and represent the Fund's estimate of the
uncollectible amounts incurred through each fund year end.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the 1995 presentation.
NOTE 2--MEMBER INDEMNIFICATION
As is required of every fund regulated by DLES, the members of the Fund
have jointly and severally agreed to assume and discharge the obligations of
the Fund in the event any claims or expenses may remain unpaid after
available reserves and reinsurance have been exhausted. Given the nature of
the Fund's reinsurance arrangements, the Board of Trustees believes the
likelihood of additional assessments upon members relating to this indemnity
to be remote.
NOTE 3--INVESTMENT EARNINGS
Gross investment income for the years ended December 31, 1995, 1994 and
1993 totaled $772,424, $615,938 and $317,010 respectively. Investment
expenses for the same periods totaled $0, $10,037 and $33,475, respectively.
During September, 1994, the Fund sold U.S. Treasury securities classified
as held-to-maturity with an amortized cost of $2,752,429 for a realized loss
of $30,911. The decision to sell these securities was based upon a change in
statutory requirements significantly modifying permissible investments of the
Fund.
NOTE 4--STATE OF FLORIDA SPECIAL DISABILITY TRUST FUND
The Special Disabilities Trust Fund of the Bureau of Workers Compensation
makes assessments upon all Florida workers compensation insurers at a current
level of 4.52% of premium collected and distributes such sums among insurers
whose policy holders have employed individuals with previously determined
worker's compensation-related disabilities, and such individuals have filed a
claim. The Fund has included, as recoverables against losses and loss
adjustment expenses, amounts submitted and to be submitted to the Bureau.
F-35
<PAGE>
NOTE 5--REINSURANCE AND RELATED RECOVERABLES
Reinsurance contracts do not relieve the Fund from its obligation to pay
claims. However, the Fund limits the maximum net loss that can arise from
risks in its concentrated area of exposure by reinsuring (ceding) certain
levels of risks with other insurers or reinsurers, on an automatic basis
under general reinsurance contracts known as "treaties" or by negotiation on
large individual risks. Ceded reinsurance is treated as the risk and
liability of the assuming companies.
Effective October 1, 1995, the Fund entered into a 70% proportional
quota-share reinsurance treaty with Underwriters Reinsurance Company
("Underwriters"), which was assigned to ABCIC effective November 30, 1995.
Under the terms of the agreement, the Fund ceded 70% of its net written
premium to Underwriters with Underwriters assuming 70% of the Fund's retained
losses and loss adjustment expenses. To cover the costs of underwriting,
Underwriters reimbursed the Fund for certain direct expenses incurred and
paid the Fund a ceding commission totaling $810,072 during the year ended
December 31, 1995 to cover other general expenses. This amount is reported on
the statement of operations for the year ended December 31, 1995 as a
reduction of policy acquisition and other underwriting expenses. Underwriters
is rated A+ by A.M. Best.
In the event that all or any of the reinsuring companies might be unable
to meet their obligations under existing reinsurance agreements, the Fund
would be liable for such defaulted amounts. The Fund's Trustees believe that
all reinsurers are in sound financial condition, and include (in addition to
Underwriters) Allstate Insurance Company and Continental Casualty Company,
both "A" rated by A.M. Best. In addition, all of the Fund's reinsurers have
been approved by DLES.
NOTE 6--MANAGED CARE
In August, 1994, the Fund entered into a managed care arrangement with
Humana to provide medical services to workers whose employers were
participating in the voluntary managed care arrangement. The terms of the
agreement with Humana, which was assigned to ABCIC effective November 30,
1995, provide for the payment of a capitation fee in exchange for which
Humana covers all the medical cost associated with a claim for a period of
three years after the date the claim is reported.
NOTE 7--INCOME TAXES
Temporary differences giving rise to deferred tax assets consist primarily
of a discount on the reserve for loss and loss-adjustment expenses for tax
purposes and on reinsurance and related receivables, accounting for earned
premiums differently for tax purposes than for financial reporting purposes,
expensing for tax purposes internal underwriting costs attributable to policy
acquisitions, accounting for other policy acquisition costs differently for
tax purposes than for financial reporting purposes, and the recording of an
allowance for uncollectible premiums receivable for financial reporting
purposes but not for tax purposes.
In addition, certain provisions of the Internal Revenue Code allow the
Fund to deduct from taxable income the difference between the required
discounted reserve for claims and the undiscounted reserve for claims
provided, however, that the Fund pay a special estimated tax deposit. The
special tax deposit payable with the Funds income tax return is accounted for
as current income tax expense. However, the special tax deposit will be
applied to regular income taxes resulting from the inclusion in gross income
of any future reduction of the initial difference between the income tax
basis discounted
F-36
<PAGE>
and undiscounted reserves for claims. Any special tax deposits not utilized
within 15 years will be applied to any regular income tax liability. The
special tax deposit method is subject to an annual election on the Fund's
Federal income tax return. The Fund elected the special tax method for 1995,
1994 and 1993.
As a result of the loss portfolio transfer, the reserves for losses which
gave rise to the Fund's special tax deposit requirement were eliminated. The
Fund made application to the Internal Revenue Service for refund of the
special tax deposits in the amount of $1,376,561.
The provision for income taxes are as follows for the years ended December
31, 1995, 1994 and 1993:
1995 1994 1993
--------------- ----------- ------------
Current .. $(1,543,407) $619,997 $ 823,336
Deferred . 1,227,000 -0- (863,941)
--------------- ----------- ------------
$ (316,407) $619,997 $ (40,605)
=============== =========== ============
The differences between taxes at the statutory rate and the recorded
current tax expense (benefit) are as follows for the years ended December 31,
1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ----------- ------------
<S> <C> <C> <C>
Tax at statutory rate .......................... $(472,925) $695,263 $(97,575)
Underestimated current income tax of prior year 130,000 -0- 37,095
State taxes under Federal benefit .............. -0- (23,760) -0-
Other .......................................... 26,518 (51,506) 19,875
------------- ----------- ------------
Income tax expense (benefit) .................. $(316,407) $619,997 $(40,605)
============= =========== ============
</TABLE>
NOTE 8--LEASE COMMITMENT AND TOTAL RENTAL EXPENSE
The Fund leased its office space on a month-to-month basis for $9,973 per
month including sales tax, its pro rata share of the property taxes,
utilities, normal maintenance, and specified percentages of common-area
expenses. This lease was assigned to the Company effective December 1, 1995.
During 1994 and 1993, the Fund subleased one-twelfth of this office space
to its administrator on a month-to-month basis for one-twelfth of the total
cost to the Fund. Sublease income totaled $10,174 for each of the years ended
December 31, 1994 and 1993.
The total rental expense included in the statement of operations for the
years ended December 31, 1995, 1994 and 1993 totaled $119,845, $119,671 and
$111,072, respectively. Net rental expense, after deducting sub-lease income
was $119,845, $109,497 and $100,898 for the years ended December 31, 1995,
1994 and 1993, respectively.
NOTE 9--OTHER COMMITMENTS
The Fund employed an administrator to manage the day-to-day affairs of the
Fund under a 5-year agreement which became effective October 1, 1991. The
agreement is automatically renewable every
F-37
<PAGE>
five years thereafter but can be terminated by the trustees in accordance
with various provisions in the agreement. Under a revision to this agreement
effective April 1, 1993, as compensation for these services, the
administrator is to receive monthly four percent of the audited standard
premium, less any allowed discounts, collected by the Fund. From this fee,
throughout the entirety of the agreement, the administrator is required to
pay certain expenses of the Fund, including accounting and actuarial
expenses, trustees fees, dues and convention expenses, incentive fees and
bonuses, and other miscellaneous expenses. Effective January 1, 1995, this
agreement was terminated by mutual agreement and the Administrator became an
employee of the Fund.
To process claims on behalf of the Fund, a servicing agreement has been
executed with an unrelated company. For the claims management services, the
Fund pays the claims processor 2.5% of earned premium plus 25% of recoveries
collected from the SDTF. As part of the loss portfolio transfer, this
agreement was assigned to ABCIC.
NOTE 10--RELATED-PARTY TRANSACTIONS
The Fund receives legal services from a firm which employs a trustee. Fees
paid to this firm for the years ended December 31, 1995, 1994 and 1993
totaled $481,932, $443,441 and $140,080, respectively. In addition, during
1995 the Fund incurred $12,971 for consulting services provided by a trustee.
Included in the allowance for doubtful accounts at December 31, 1993 was
$204,747 due from a member which has entered bankruptcy proceedings and
formerly employed a trustee.
NOTE 11--LEGAL PROCEEDINGS
In July, 1992, the Fund filed a lawsuit in the State Circuit Court of Palm
Beach County, Florida, for breach of contract against Advanced Risk
Management Incorporated ("ARMI") claiming damages for excess fees and
advances collected by ARMI, the former service company of the Fund. A
counterclaim was filed by ARMI alleging breach of contact, breach of
fiduciary duty and fraud. On January 2, 1994, the court granted summary
judgment in favor of the Fund with respect to all of the counterclaims made
by ARMI. The summary judgment was appealed by ARMI and reversed by the Fourth
District Court of Appeal, which remanded the matter back to the trial court
to resolve specific issues. On December 15, 1995 the trial court granted the
Fund's renewed motion for summary judgment. ARMI has filed an appeal as to
this judgment as well. The Fund intends to continue to pursue and defend this
claim on its own behalf. There can be no assurance however, that, in the
event of an unfavorable ruling against the Fund, recovery would not be sought
from ABCIC. In the event there is an unfavorable outcome, which management
believes to be unlikely, the Fund's liability is estimated at less than
$1,000,000.
F-38
<PAGE>
NOTE 12--NON-CASH INVESTING ACTIVITIES
Effective November 30, 1995, the Fund transferred all of its insurance
related assets and liabilities to ABCIC by virtue of a loss portfolio
reinsurance treaty. Non-cash investing activities associated with this
transaction are as follows:
Investments transferred $13,089,432
==============
Equipment transferred .. $ 294,707
==============
Other assets transferred $ 28,834
==============
NOTE 13--STATUTORY INCOME (LOSS) AND SURPLUS (DEFICIT)
Through December 31, 1993, the Fund's GAAP and statutory accounting
principles (SAP) were the same with the exception of recording future
investment income on the liability for loss and loss adjustment expenses for
SAP. Due to legislative changes effective January 1, 1994, additional
variances between GAAP and SAP include deferred income taxes, deferred
acquisition costs and certain other assets of the Fund.
Net income (loss) of the Fund for the years ended December 31, 1995, 1994
and 1993 under SAP are as follows:
1995 (UNAUDITED) $(1,368,811)
===============
1994 ............ $ 1,090,325
===============
1993 ............ $ (246,380)
===============
F-39
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.3 Amendment to Articles of Incorporation
10.17 Amendment to Exchange and Shareholders' Agreement, dated November
27, 1996
10.18 Letter Agreement, dated August 9, 1996, extending Humana Managed
Care contract for two years
10.19 Securities Purchase Agreement, dated as of December 4, 1996 by
and among Associated Business and Commerce Holdings, Inc., Errol
Bader, Lawrence J. Marchbanks, Frederick R. Prout, Daniel J.
Webber and James L. Wilson and TIG Reinsurance Company
10.20 Term Loan Agreement, dated as of December 4, 1996, between
Associated Business and Commerce Holdings, Inc. and TIG
Reinsurance Company together with amendments dated February 24,
1997 and March 19, 1997, respectively
10.21 Pledge Agreement between Associated Business and Commerce
Holdings, Inc. and TIG Reinsurance Company
10.22 Security Agreement between Associated Business and Commerce
Holdings, Inc. and TIG Reinsurance Company
10.23 Agreement as to Reinsurance between Associated Business and
Commerce Holdings, Inc. and TIG Reinsurance Company
23.1 Consent of Independent Accounts
27.1 Financial Data Schedule
28.1 Schedule P from the Statutory Annual Statement for 1996 -
Analysis of Losses and Loss Expense
EXHIBIT 3.3
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
Pursuant to the provisions of Section 607.0602(4) of the Florida Business
Corporation Act, the undersigned, Associated Business & Commerce Insurance
Corporation, a Florida corporation, by its Chairman of the Board, does hereby
make and execute these Articles of Amendment to its Articles of Incorporation:
1. The name of the corporation is Associated Business & Commerce
Insurance Corporation.
2. The first sentence of Section III(5) of the Articles of
Incorporation is hereby amended by increasing the number of shares from "900,000
shares" to "1,900,000 shares" so that the first sentence of Section III(5) in
its entirety reads as follows:
The 6% Cumulative Convertible Preferred Stock, Series A (the "Series A
Preferred Stock"), shall consist of 1,900,000 shares having a stated value
of $10.00 per share (the "Stated Value").
3. The date of the adoption of the amendment was May 2, 1996.
4. The amendment was duly adopted by the Board of Directors, without
shareholder action, in accordance with Section 607.0602 of the Florida Business
Corporation Act.
IN WITNESS WHEREOF, these Articles of Amendment to Articles of
Incorporation of Associated Business & Commerce Insurance Corporation have been
executed by Associated Business & Commerce Insurance Corporation, by its
Chairman of the Board, this 6th day of June, 1996.
ASSOCIATED BUSINESS & COMMERCE
INSURANCE CORPORATION
By /s/ LAWRENCE J. MARCHBANKS
----------------------------
Lawrence J. Marchbanks,
Chairman of the Board
EXHIBIT 10.17
AMENDMENT TO
EXCHANGE AND SHAREHOLDERS AGREEMENT
THIS AMENDMENT TO EXCHANGE AND SHAREHOLDERS AGREEMENT is made and entered
this 27th day of November, 1996, by and among ASSOCIATED BUSINESS & COMMERCE
HOLDINGS, INC., Florida corporation (the"Company"), and ERROL BADER, LAWRENCE J.
MARCHBANKS, FREDERICK R. PROUT, DANIEL J. WEBBER and JAMES L. WILSON (the
"Shareholders").
WITNESSETH:
WHEREAS, the Shareholders and Company entered into an Exchange and
Shareholders Agreement bearing date of March 23, 1995 (the "Agreement"); and
WHEREAS, Peter Anderson and Dale McCall, named as Shareholders in the
Agreement, have heretofore sold their shares of common stock in the Company and
Lawrence J. Marchbanks purchased additional shares from the Company in a like
amount, which sale and purchase was approved by all of the Shareholders and the
Company; and
WHEREAS, the Shareholders and Company desire to amend the Agreement to
reflect the shares owned by each Shareholder, the options granted to each
Shareholder, and to the extend the Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual promises
and covenants set forth herein, the parties hereto do hereby agree that the
Agreement is amended as follows:
1. The list of names and number of shares of common stock appearing in
Paragraph 1 at the top of Page 2 of the Agreement is hereby deleted in its
entirety and the following list is substituted in Paragraph 1 at the top of Page
2 thereof, as follows:
"NUMBER OF
SHARES OF
NAME COMMON STOCK
---- ------------
Errol Bader 42,500
Lawrence J. Marchbanks 29,167
Frederick P. Prout 14,167
Daniel J. Webber 14,167
James L. Wilson 2,500
------
Total 102,501"
-1-
<PAGE>
2. Paragraph 1 of the Agreement is hereby amended by the addition of the
following paragraph at the end of Paragraph 1 on Page 2, as follows:
"In addition to the foregoing, the options previously held by
Peter Anderson and Dale McCall have been reallocated among the remaining
Shareholders and in consequence the total of all options held by each
Shareholder is set forth hereinafter adjacent to the Shareholder's name.
All options are exercisable in the same amounts and at the same exercise
price as the options terminated by the Exchange Agreement
NAME STOCK OPTIONS GRANTED
---- ---------------------
Errol Bader 114,000
Lawrence J. Marchbanks 127,333
Frederick R. Prout 114,000
Daniel J. Webber 114,000
James L. Wilson 70,667
-------
Total: 540,000"
3. Paragraph 11 of the Agreement is hereby deleted in its entirety and
the following Paragraph 11 is substituted in lieu and place thereof, as follows:
"11. TERMINATION. This Agreement shall terminate upon the earlier
to occur of (i) the written consent of the holders of at least 80% of
the shares of Common Stock subject to this Agreement, (ii) the public
offering of shares of Common Stock of the Company for which is
registration statement is required to be filed under the Act, or (iii)
December 31, 2003."
Except as herein amended, the Agreement is hereby ratified and
confirmed as of the day and year hereinabove written.
ASSOCIATED BUSINESS 7
COMMERCE HOLDING, INC.
BY: /s/ LAWRENCE J. MARCHBANKS /s/ ERROL BADER
--------------------------- ---------------------------
Lawrence J. Marchbanks, Errol Bader
Chairman Of the Board
/s/ LAWRENCE J. MARCHBANKS /s/ FREDERICK R. PROUT
- ------------------------------ ----------------------------
Lawrence J. Marchbanks Frederick R. Prout
/s/ DANIEL J. WEBBER /s/ JAMES L. WILSON
- ------------------------------ ----------------------------
Daniel J. Webber James L. Wilson
-2-
EXHIBIT 10.18
(LETTERHEAD)
Mr. D. Gene Roberts
Director, WC Services
Humana Inc. - Workers
Compensation Services
500 West Main Street, 7th Floor
Louisville, KY 40201-1438
Re: ABCIC-Humana Contract Renewal
Dear Gene:
This letter shall confirm our agreement reached yesterday to extend the
existing contract between Humana Medical Plan, Inc. (Humana) and Associated
Business and Commerce Insurance Corp. (ABCIC). The contract shall be amended to
reflect the following revised provisions with the balance of the contract deemed
ratified and confirmed:
1. The Plan and Administrative Services Fee Exhibit shall be amended to
reflect a "Capitation Payment" of twenty-five (25%) percent.
2. The service areas for the capitation rate shall consist of all service
areas approved by FAHCA for Humana as of September 1, 1996. Any additional
service areas shall be added by mutual consent under separate financial
arrangements.
3. We agree to present Humana first to our potential policyholders and will
provide your named representative a 24 hour "window" to talk with any
policyholders who indicate to ABCIC staff that they prefer another provider.
However, because of the serveral reasons we have discussed, the contract must
remain nonexclusive.
4. Retrospective rated policies issued by us shall not be a part of our
managed care arrangement.
5. Our existing agreement gives Humana the option to obtain reinsurance
coverage under our policies provided we mutually agree on an appropriate
prorated portion of premium to be paid by Humana. If we cannot agree as to
premium, Humana then has the right to secure its reinsurance coverage from any
source of Humana's choice. We agree to amend this provision by adding a right of
first refusal in ABCIC to meet another reinsurance quote, presuming that we
cannot get together on a price.
<PAGE>
Mr. D. Gene Roberts
Humana, Inc. - Workers
Compensation Services
August 9, 1996
Page 2
6. The term of this contract extension shall be two (2) years.
7. The reimbursement procedure on existing retrospectively rated accounts
shall be adjusted as follows: ABCIC will reimburse Humana for the difference
between Humana's actual medical costs plus ten percent of such medical costs
and the capitation payments previously paid to Humana on such accounts, subject
to a total maximum reimbursement of $100,000. The actual medical costs shall be
valued as of July, 1998 and shall be paid on or before July 1, 1999.
8. We agree that we will jointly negotiate an idemnity bonus plan. The plan
shall be subject to agreement by acturaries for ABCIC and Humana. The 1996
idemnity and medical-legal expense (as defined in Paragraph 1.20 of our
agreement) loss ratio, as calculated and determined, shall be the benchmark for
1997. An average of the 1996 and 1997 ratios shall be used as the benchmark for
1998. An initial calculation will be made six (6) months following the
expiration of each contract year with a final accounting at twenty-four (24)
months. If the loss ratio decreases, Humana shall share twenty-five (25%)
percent of such savings, however, if it increases, Humana shall pay twenty-five
(25%) percent of the increase.
I have informed the staff at ABCIC that our agreement has been renewed and
we are presently enrolling new policyholders in our managed care arrangement.
Gene, your efforts in correcting the initial problems we encountered are
appreciated and I look forward to our continuing relationship.
Very truly yours,
/s/ LAWRENCE J. MARCHBANKS
--------------------------
Lawrence J. Marchbanks
LJM/lkm
cc: Mr. Jim Nau, President, ABCIC
Mr. Joe Keene, President, CCI
Mr. Cliff Merit, Vice President, ABCIC
EXHIBIT 10.19
SECURITIES PURCHASE AGREEMENT
BY AND AMONG
ASSOCIATED BUSINESS & COMMERCE HOLDINGS, INC.,
ERROL BADER, LAWRENCE J. MARCHBANKS, FREDERICK R. PROUT,
DANIEL J. WEBBER AND JAMES L. WILSON
AND
TIG REINSURANCE COMPANY
DATED AS OF DECEMBER 4, 1996
<PAGE>
TABLE OF CONTENTS
This Table of Contents is not part of the Agreement to which it is
attached but is inserted for convenience only.
ARTICLE I
AUTHORIZATION;
PURCHASE AND SALE; CLOSING Page
No.
----
1.01 Authorization.......................................... 1
1.02 Purchase and Sale...................................... 2
1.03 First Closing.......................................... 2
1.04 Second Closing......................................... 2
1.05 Optional Repurchase.................................... 4
1.06 Further Assurances..................................... 4
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE FOUNDERS
2.01 Corporate Organization and Qualification; Charter
Documents...................................... 5
2.02 Capital Stock; Series I Preferred Shares............... 5
2.03 Authority.............................................. 7
2.04 Non-Contravention; Approvals and Consents.............. 8
2.05 Offering of Purchased Shares........................... 9
2.06 Brokers ............................................... 9
2.07 Other Representations and Warranties................... 9
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TIG
3.01 Organization........................................... 10
3.02 Corporate Authority.................................... 10
3.03 Non-Contravention; Approvals and Consents.............. 10
3.04 Nature of Purchase..................................... 11
3.05 Brokers ............................................... 11
ARTICLE IV
AGREEMENTS OF THE PARTIES
4.01 Restrictions on Certain Transfers; Rights of
First Refusal; Participation Rights............ 11
4.02 Preemptive Rights...................................... 15
- i -
<PAGE>
Page
No.
----
4.03 Designee Director...................................... 15
4.04 Indemnification and Expenses........................... 16
4.05 Access ............................................... 17
4.06 Lost Securities........................................ 17
4.07 Issuance of Capital Stock.............................. 17
4.08 Public Offering........................................ 18
4.09 Use of Proceeds........................................ 18
4.10 Charter and By-Law Amendments.......................... 18
4.11 Legend on Certificates................................. 18
4.12 URC Options............................................ 19
ARTICLE V
ADDITIONAL COVENANTS OF THE COMPANY
5.01 Affirmative Covenants.................................. 19
5.02 Negative Covenants..................................... 19
5.03 Financial Covenants.................................... 20
ARTICLE VI
GENERAL PROVISIONS
6.01 Survival of Representations, Warranties,
Covenants and Agreements....................... 20
6.02 Amendment and Waiver................................... 20
6.03 Notices................................................ 20
6.04 Entire Agreement....................................... 21
6.05 Public Announcements................................... 22
6.06 No Third Party Beneficiary............................. 22
6.07 No Assignment; Binding Effect.......................... 22
6.08 Headings............................................... 22
6.09 Invalid Provisions..................................... 22
6.10 Governing Law.......................................... 23
6.11 Consent to Jurisdiction and Service of Process......... 23
6.12 Counterparts........................................... 23
EXHIBITS
EXHIBIT A Secretary's Certificate
EXHIBIT B Opinion of Counsel to the Company
EXHIBIT C Amendment to Articles of Incorporation
- ii -
<PAGE>
SECURITIES PURCHASE AGREEMENT
Securities Purchase Agreement (this "AGREEMENT")made and entered into
this 4th day of December, 1996, by and among ASSOCIATED BUSINESS & COMMERCE
HOLDINGS, INC., a Florida corporation (the "COMPANY"), ERROL BADER, LAWRENCE J.
MARCHBANKS, FREDERICK R. PROUT, DANIEL J. WEBBER and JAMES L. WILSON (such
individuals being referred to herein individually as a "FOUNDER" and
collectively as the "FOUNDERS") and TIG REINSURANCE COMPANY, a Connecticut
corporation ("TIG").
RECITALS
WHEREAS, the Company desires to sell, and TIG desires to purchase,
shares of Class B Common Stock, par value $.01 per share, of the Company (the
"CLASS B COMMON STOCK") and shares of Cumulative Convertible Preferred Stock,
Series I, par value $.01 per share, of the Company (the "SERIES I PREFERRED
STOCK"), all on the terms and subject to the conditions set forth in this
Agreement; and
WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Company and TIG are entering into (i) a Registration Rights
Agreement (the "REGISTRATION RIGHTS AGREEMENT") providing for the registration
for sale by the Company under certain circumstances of TIG's shares of common
stock, par value $.01 per share, of the Company (the "COMMON STOCK"), (ii) a
Term Loan Agreement pursuant to which TIG is lending $3,912,908 to the Company,
upon the terms and conditions described therein (the "TERM LOAN AGREEMENT"), and
(iii) an Agreement as to Reinsurance pursuant to which the Company will reinsure
with TIG certain insurance policies issued by the Company, upon the terms and
conditions described therein (the "REINSURANCE AGREEMENT");
NOW, THEREFORE, for and in consideration of the mutual representations,
warranties, covenants and agreements contained herein, and intending to be
legally bound hereby, the parties hereto agree as follows:
ARTICLE I
AUTHORIZATION;
PURCHASE AND SALE; CLOSING
1.01 AUTHORIZATION. The Company has duly authorized in accordance with
the applicable provisions of the Florida Business Corporation Act (the "FBCA")
and the Articles of Incorporation of the Company (the "ARTICLES OF
INCORPORATION") the issuance and sale to TIG of 87,092 shares of Class B Common
Stock and 2,912,908 shares of Series I Preferred Stock pursuant to this
Agreement. The Series I Preferred Stock has the rights,
- 1 -
<PAGE>
restrictions, privileges and preferences set forth in the articles of amendment
to the Articles of Incorporation relating to the Series I Preferred Stock (the
"ARTICLES OF AMENDMENT"). The Company has adopted and filed the Articles of
Amendment with the Secretary of State of the State of Florida in accordance with
the applicable provisions of the FBCA.
1.02 PURCHASE AND SALE. On the basis of the representations,
warranties, covenants and agreements contained in this Agreement, simultaneously
with the execution and delivery of this Agreement the Company is issuing and
selling to TIG, and TIG is purchasing from the Company, 87,092 shares of Class B
Common Stock (the "CLASS B SHARES") at a purchase price of $1.00 per share.
1.03 FIRST CLOSING. At the closing of the purchase and sale of the
Class B Shares under this Agreement (the "FIRST CLOSING"), the Company is
delivering to TIG a certificate or certificates representing the Class B Shares
registered in the name of TIG, against payment to the Company of an aggregate
purchase price for the Class B Shares of $87,092 by wire transfer in immediately
available United States funds to an account designated by the Company. In
addition, at the First Closing, the Company is (a) causing to be delivered to
TIG (i) a certificate, dated the date of this Agreement and executed by the
Secretary of the Company, substantially in the form and to the effect of EXHIBIT
A hereto and (ii) an opinion of Morgan, Lewis & Bockius LLP, counsel to the
Company, dated the date of this Agreement, substantially in the form and to the
effect of EXHIBIT B hereto, and (b) causing a nominee of TIG to be elected as a
director of the Company, in the manner contemplated by SECTION 4.03(A). The date
of the First Closing is referred to herein as the "FIRST CLOSING DATE."
1.04 SECOND CLOSING. (a) Subject to the satisfaction of each of the
conditions set forth in PARAGRAPH (C) below, on a date and at a place mutually
acceptable to the Company and TIG but in no event more than three (3) business
days following satisfaction of the condition set forth in clause (i) of
PARAGRAPH (C) below, the Company will issue and sell to TIG, and TIG will
purchase from the Company, 2,912,908 shares of Series I Preferred Stock (the
"SERIES I PREFERRED SHARES" and, together with the Class B Shares, the
"PURCHASED SHARES"), at a purchase price of $1.00 per share. At the closing of
the purchase and sale of the Series I Preferred Shares under this Section (the
"SECOND CLOSING"), the Company shall deliver to TIG a certificate or
certificates representing the Series I Preferred Shares registered in the name
of TIG, and TIG shall pay the aggregate purchase for the Series A Preferred
Shares by (i) paying to the Company $2,000,000 by wire transfer in immediately
available United States funds to an account designated by the Company and (ii)
delivering to the Company for cancellation the B Note (as defined in the Term
Loan Agreement). The Company shall
- 2 -
<PAGE>
cancel the B Note upon receipt thereof and the B Note shall be deemed discharged
in full. In addition, at the Second Closing, the Company shall exchange, on a
share for share basis, all of the Class B Shares held by TIG for shares of
Common Stock (the "EXCHANGE"). TIG shall deliver to the Company the certificate
or certificates representing the Class B Shares and the Company shall deliver to
TIG a certificate or certificates representing the shares of Common Stock issued
in exchange therefore.
(b) Following the First Closing, TIG and the Company shall cooperate
with each other in seeking to obtain all approvals from the Florida Department
of Insurance (the "FDOI") necessary or required in order to consummate the sale
of the Series I Preferred Shares and to effect the Exchange, and each of TIG and
the Company shall agree to any reasonable conditions imposed on it by the FDOI
in order to obtain such approvals.
(c) The obligation of TIG to consummate the purchase and sale of the
Series I Preferred Shares shall be subject to the satisfaction of each of the
following conditions: (i) TIG shall have determined, in its sole discretion,
that all regulatory approvals necessary or required in order to consummate the
purchase and sale of the Series I Preferred Shares and to effect the Exchange
(including all necessary approvals of the FDOI) have been obtained; (ii) no
court of competent jurisdiction or other competent Governmental or Regulatory
Authority (as defined in SECTION 2.04(A)) shall have enacted, issued,
promulgated, enforced or entered any Law or Order which has the effect of making
illegal or otherwise restricting, preventing or prohibiting consummation of the
purchase and sale of the Series I Preferred Shares or the Exchange; (iii) the
representations and warranties made by the Company in this Agreement shall be
true and correct in all material respects as of the date of the Second Closing
or, in the case of representations and warranties made as of a specified date
earlier than the date of the Second Closing, on and as of such earlier date;
(iv) no Default or Event of Default (each as defined in the Term Loan Agreement)
shall have occurred and be continuing; PROVIDED, that for purposes of satisfying
this condition, the transactions contemplated by PARAGRAPH (A) above will be
deemed to have been effected on the First Closing Date; (v) the Company shall
have amended the Articles of Incorporation as provided in EXHIBIT C hereto; and
(vi) all corporate proceedings to be taken on the part of the Company in
connection with the issuance and the sale of the Series I Preferred Shares to
TIG and the Exchange and all documents incident thereto shall be reasonably
satisfactory in form and substance to TIG and the Company, and TIG shall have
received copies of all such documents and other evidence as TIG may reasonably
request in connection with such proceedings, including a certificate executed on
behalf of the Company by a duly authorized officer stating that the conditions
set forth in clauses (iii), (iv) and (v) above have been satisfied.
- 3 -
<PAGE>
(d) Notwithstanding anything in this SECTION 1.04 to the contrary, the
obligation of TIG to purchase the Series I Preferred Shares and effect the
Exchange shall terminate, without liability on the part of either party under
this SECTION 1.04 other than by reason of its breach of any provision hereof, on
the earlier to occur of (i) the date of issuance of a final nonappealable order
of the FDOI denying approval of the transactions contemplated by PARAGRAPH (A)
above and (ii) March 4, 1997 (such earlier date, the "REPURCHASE DATE").
(e) On the business day next following the Repurchase Date, at the
offices of the Company unless otherwise agreed, TIG will sell to the Company, at
a purchase price of $1.00 per share, a number of shares of Class B Common Stock
such that immediately following such sale, TIG will own 28.89% of the total
number of shares of Common Stock and Class B Common Stock outstanding on a fully
diluted basis (excluding shares issuable upon conversion of the loan outstanding
under the Term Loan Agreement), by delivering to the Company a certificate or
certificates representing such shares. In consideration for such sale, the
principal amount of the B Loan Note (as defined in the Term Loan Agreement)
shall be increased by an amount equal to the aggregate purchase price for such
shares.
1.05 OPTIONAL REPURCHASE. From and after the Repurchase Date and the
purchase of shares of Class B Common Stock by the Company pursuant to SECTION
1.04(E), the Company shall have the right, at its sole option, to purchase all,
but not less than all, of the shares of Class B Common Stock owned by TIG, at a
purchase price of $1.00 per share, so long as simultaneously therewith the
Company prepays all amounts outstanding under the Term Loan Agreement. Any
purchase by the Company pursuant to the preceding sentence shall occur on the
date designated in a written notice to TIG by the Company, which date shall in
no event be less than three (3) business days following receipt of such notice,
at the principal offices of the Company unless otherwise agreed.
1.06 FURTHER ASSURANCES. From and after the date hereof, the Company
and the Founders will execute such further documents and instruments and take
such further actions as may reasonably be requested by TIG to consummate the
purchase of the Purchased Shares, to effect the Exchange and to effect the other
purposes of this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE FOUNDERS
The Company and each of the Founders hereby represents and warrants to
TIG as follows:
- 4 -
<PAGE>
2.01 CORPORATE ORGANIZATION AND QUALIFICATION; CHARTER DOCUMENTS.
(a) Each of the Company and its Subsidiaries (as defined below) is a
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of incorporation, and has full corporate power and
authority to conduct its business as and to the extent now conducted and to own,
use and lease its assets and properties. Each of the Company and its
Subsidiaries is duly qualified, licensed or admitted to do business and is in
good standing in each jurisdiction in which the ownership, use or leasing of its
assets and properties, or the conduct or nature of its business, makes such
qualification, licensing or admission necessary. SECTION 2.01 of the letter
dated the date hereof and delivered to TIG by the Company concurrently with the
execution and delivery of this Agreement (the "COMPANY DISCLOSURE LETTER") sets
forth the name and jurisdiction of incorporation of the Company and each
Subsidiary of the Company and each jurisdiction in which the Company and each
such Subsidiary is qualified, licensed or admitted to do business. Except as
disclosed in SECTION 2.01 OF THE COMPANY DISCLOSURE LETTER, the Company does not
directly or indirectly own any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for, any equity or similar
interest in, any corporation, partnership, joint venture or other business
association or entity. As used in this Agreement, "SUBSIDIARY" means, with
respect to any party, any corporation or other organization, whether
incorporated or unincorporated, of which more than 50% of either the equity
interests in, or the voting control of, such corporation or other organization
is, directly or indirectly through Subsidiaries or otherwise, beneficially owned
by such party.
(b) The minute books, stock ledgers and other corporate documents of the
Company and its Subsidiaries made available to TIG prior to the execution and
delivery of this Agreement were true, complete and accurate records of the
information set forth therein.
2.02 CAPITAL STOCK; SERIES I PREFERRED SHARES.
(a) The authorized capital stock of the Company consists, on the date
hereof, of an aggregate of 26,000,000 shares consisting of (i) 15,000,000 shares
of Common Stock, of which 102,501 shares are duly and validly issued and
outstanding (and no shares of which are held in treasury), each of which shares
is fully paid and nonassessable, (ii) 1,000,000 shares of Class B Common Stock,
none of which has ever been issued and (iii) 10,000,000 shares of preferred
stock, par value $.01 per share ("PREFERRED STOCK"), 2,912,908 shares of which
have been designated Series I Preferred Stock, and none of which has ever been
issued. Except as set forth in SECTION 2.02 OF THE COMPANY DISCLOSURE LETTER and
other than the shares of Common Stock
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reserved for issuance as provided in PARAGRAPH (C) below, as of the date hereof
the Company has no shares of Common Stock or Preferred Stock reserved for
issuance. All shares of Common Stock reserved for issuance will be, upon
issuance in accordance with the terms specified in the instruments or agreements
pursuant to which they are issuable, duly authorized, validly issued, fully paid
and nonassessable. Except pursuant to this Agreement and except as set forth in
SECTION 2.02 OF THE COMPANY DISCLOSURE LETTER, there are no (i) outstanding
subscriptions, options, warrants, rights (including "phantom" stock rights),
preemptive rights or other contracts, commitments, understandings or
arrangements, including any right of conversion or exchange under any
outstanding security, instrument or agreement (together, "OPTIONS"), obligating
the Company or any of its Subsidiaries to issue, or obligating the Company, any
of its Subsidiaries or any of the Founders to sell, any shares of capital stock
of the Company or to grant, extend or enter into any Option with respect thereto
or (ii) voting trusts, proxies or other commitments, understandings,
restrictions or arrangements to which the Company or any of the Founders is a
party in favor of any Person (as defined below) with respect to the voting of or
the right to participate in dividends or other earnings on any capital stock of
the Company. As used in this Agreement, "PERSON" means any natural person,
corporation, general partnership, limited partnership, proprietorship, other
business organization, trust, union or association.
(b) The Class B Shares have been duly authorized by all necessary
corporate action on the part of the Company and, when issued in accordance with
the terms of this Agreement, will be validly issued, fully paid and
nonassessable. The Series I Preferred Shares have been duly authorized by all
necessary corporate action on the part of the Company, are effective to grant
the preferences, limitations and relative rights contemplated by the Articles of
Amendment and this Agreement to the holders thereof from time to time and, when
issued in accordance with the terms of this Agreement, will be validly issued,
fully paid and nonassessable. The issuance of the Purchased Shares is not
subject to any preemptive rights or rights of first refusal created by the
Company or otherwise existing.
(c) The shares of Common Stock issuable upon conversion of the Series I
Preferred Shares, upon the occurrence of the Exchange and upon conversion of the
loan under the Term Loan Agreement have been duly and validly reserved and are
not subject to any preemptive rights or rights of first refusal created by the
Company or otherwise existing, except as provided hereunder, and when so issued,
such shares will be duly authorized, validly issued, fully paid and
nonassessable.
(d) Except as disclosed in SECTION 2.02 OF THE COMPANY DISCLOSURE
LETTER, all of the outstanding shares of
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capital stock of each Subsidiary of the Company are duly authorized, validly
issued, fully paid and nonassessable and are owned, beneficially and of record,
by the Company or a Subsidiary wholly owned, directly or indirectly, by the
Company, free and clear of any liens, claims, mortgages, encumbrances, pledges,
security interests, equities and charges of any kind (each a "LIEN"). Except as
disclosed in SECTION 2.02 OF THE COMPANY DISCLOSURE LETTER, there are no (i)
outstanding Options obligating the Company or any of its Subsidiaries to issue
or sell any shares of capital stock of any Subsidiary of the Company or to
grant, extend or enter into any such Option or (ii) voting trusts, proxies or
other commitments, understandings, restrictions or arrangements in favor of any
Person other than the Company or a Subsidiary wholly owned, directly or
indirectly, by the Company with respect to the voting of or the right to
participate in dividends or other earnings on any capital stock of any
Subsidiary of the Company.
(e) Except as provided in this Agreement, in the Articles of Amendment
or as disclosed in SECTION 2.02 OF THE COMPANY DISCLOSURE LETTER, there are no
outstanding contractual obligations of the Company or any Subsidiary of the
Company to repurchase, redeem or otherwise acquire shares of any capital stock
of the Company or any Subsidiary of the Company or to provide funds to, or make
any investment (in the form of a loan, capital contribution or otherwise) in,
any Subsidiary of the Company or any other Person.
2.03 AUTHORITY. (a) The Company has full corporate power and authority
to enter into this Agreement and to perform its obligations hereunder and to
consummate the transactions contemplated hereby and by the Articles of
Amendment, including, without limitation, the issuance and sale of the Purchased
Shares to TIG and the Exchange. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby and by the Articles of Amendment have been duly and validly
approved by the Board of Directors of the Company (the "BOARD OF DIRECTORS"),
and no other corporate proceedings on the part of the Company or its
shareholders are necessary to authorize the execution, delivery and performance
of this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby and by the Articles of Amendment, including,
without limitation, under the FBCA, the Articles of Incorporation or the By-Laws
of the Company (the "BYLAWS"). This Agreement has been duly and validly executed
and delivered by the Company and constitutes a legal, valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (regardless of
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whether such enforceability is considered in a proceeding in equity or at law).
(b) Each of the Founders has full power and authority to enter into this
Agreement, to perform his obligations hereunder and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by each Founder and constitutes a legal, valid and
binding obligation of each Founder enforceable against each Founder in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
2.04 NON-CONTRAVENTION; APPROVALS AND CONSENTS.
(a) The execution and delivery of this Agreement by the Company and
each Founder do not, and the performance by the Company and each Founder of
their respective obligations hereunder and the consummation of the transactions
contemplated hereby will not, conflict with, result in a violation or breach of,
constitute (with or without notice or lapse of time or both) a default under,
result in or give to any Person any right of payment or reimbursement,
termination, cancellation, modification or acceleration of, or result in the
creation or imposition of any Lien upon any of the assets or properties of the
Company or any of its Subsidiaries or any Founder under, any of the terms,
conditions or provisions of (i) the certificates or articles of incorporation or
by-laws (or other comparable charter documents) of the Company or any of its
Subsidiaries, (ii) any statute, law, rule, regulation or ordinance (together,
"LAWS"), or any judgment, decree, order, writ, permit or license (together,
"ORDERS"), of any court, tribunal, arbitrator, authority, agency, commission,
official or other instrumentality of the United States or any state, county,
city or other political subdivision (a "GOVERNMENTAL OR REGULATORY AUTHORITY"),
applicable to the Company, any of its Subsidiaries or any Founder or any of
their respective assets or properties, or (iii) any note, bond, mortgage,
security agreement, indenture, license, franchise, permit, concession, contract,
lease or other instrument, obligation or agreement of any kind (together,
"CONTRACTS") to which the Company, any of its Subsidiaries or any Founder is a
party or by which the Company, any of its Subsidiaries or any Founder or any of
their respective assets or properties is bound.
(b) Except for (i) the filing of the Articles of Amendment with the
Secretary of State of the State of Florida (which filing has been made prior to
the execution of this Agreement) and (ii) with respect to the transactions
contemplated to take place at the Second Closing, compliance with the applicable
sections of the Florida Statutes, no consent, approval
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or action of, filing with or notice to any Governmental or Regulatory Authority
or other public or private third party is necessary or required on the part of
the Company or any Founder under any of the terms, conditions or provisions of
any Law or Order of any Governmental or Regulatory Authority or any Contract to
which the Company or any of its Subsidiaries or any Founder is a party or by
which the Company or any of its Subsidiaries or any Founder or any of their
respective assets or properties is bound for the execution and delivery of this
Agreement by the Company or any Founder, the performance by the Company or any
Founder of their respective obligations hereunder or the consummation of the
transactions contemplated hereby.
2.05 OFFERING OF PURCHASED SHARES. Neither the Company, directly or
indirectly, nor any agent on its behalf has offered any shares to be sold to TIG
hereunder or any similar securities or has solicited an offer to acquire any
such shares or any similar securities from any Person so as to require
registration of the issuance and sale of any such shares to TIG under the
circumstances contemplated by this Agreement under the provisions of Section 5
of the Securities Act of 1933, as amended (the "SECURITIES ACT").
2.06 BROKERS. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by the Company and the
Founders directly with TIG without the intervention of any Person on behalf of
the Company or the Founders (other than Pegasus Advisors, Inc., which acted
solely as a reinsurance intermediary) in such manner as to give rise to any
claim for a finder's fee, brokerage commission or similar payment.
2.07 OTHER REPRESENTATIONS AND WARRANTIES. Each of the representations
and warranties of the Company set forth in Sections 4.04 through 4.19,
inclusive, of the Term Loan Agreement is true and correct; PROVIDED, HOWEVER,
that with respect to any such representation or warranty which is modified by
the term "Material Adverse Change", for the purposes of this SECTION 2.07 such
term shall mean (i) a material adverse change in the status of the business,
assets, liabilities, results of operations, condition (financial or otherwise),
property or prospects of the Company or any of its Subsidiaries, or (ii) any
event or occurrence of whatever nature which could have a material adverse
effect on the Company's or any Founder's ability to perform their respective
obligations under this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TIG
TIG hereby represents and warrants to the Company and each of the
Founders as follows:
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3.01 ORGANIZATION. TIG is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Connecticut.
3.02 CORPORATE AUTHORITY. TIG has full corporate power and authority to
enter into this Agreement and to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution, delivery and
performance of this Agreement by TIG and the consummation by TIG of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of TIG, and no other corporate proceedings on the part of TIG
or its shareholders are necessary to authorize the execution, delivery and
performance of this Agreement by TIG and the consummation by TIG of the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by TIG and constitutes a legal, valid and binding
obligation enforceable against TIG in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
3.03 NON-CONTRAVENTION; APPROVALS AND CONSENTS.
(a) The execution and delivery of this Agreement by TIG do not and the
performance by TIG of its obligations hereunder and the consummation of the
transactions contemplated hereby will not, conflict with, result in a violation
or breach of, constitute (with or without notice or lapse of time or both) a
default under, result in or give to any Person any right of termination,
cancellation, modification or acceleration of, or result in the creation or
imposition of any Lien upon any of its assets or properties under, any of the
terms, conditions or provisions of (i) the certificate of incorporation or
by-laws of TIG, (ii) any Law or Order of any Governmental or Regulatory
Authority applicable to TIG or any of its assets or properties, or (iii) any
Contract to which TIG is a party or by which TIG or any of its assets or
properties is bound.
(b) Except for compliance with Section 628.461 of the Florida Statutes,
no consent, approval or action of, filing with or notice to any Governmental or
Regulatory Authority or other public or private third party is necessary or
required under any of the terms, conditions or provisions of any Law or Order of
any Governmental or Regulatory Authority or any Contract to which TIG is a party
or by which TIG or any of its assets or properties is bound for the execution
and delivery of this Agreement by TIG, the performance by TIG of its obligations
hereunder or the consummation of the transactions contemplated hereby, other
than such consents, approvals, actions, filings and notices which the failure to
make or obtain, as the case may be, individually or in the aggregate, could not
be reasonably
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expected to materially impair the ability of TIG to consummate the transactions
contemplated by this Agreement.
3.04 NATURE OF PURCHASE. TIG is purchasing the shares to be purchased
by it hereunder for its own account for investment, not as a nominee or agent,
and not with a view to the resale or distribution of such shares or any portion
thereof, and TIG has no present intention of selling, granting any participation
in, or otherwise distributing the same.
3.05 BROKERS. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by TIG directly with the
Company and the Founders without the intervention of any Person on behalf of TIG
in such manner as to give rise to any claim for a finder's fee, brokerage
commission or similar payment.
ARTICLE IV
AGREEMENTS OF THE PARTIES
4.01 RESTRICTIONS ON CERTAIN TRANSFERS; RIGHTS OF FIRST REFUSAL;
PARTICIPATION RIGHTS.
(a) Until such time (the "TERMINATION DATE") as the TIG Group
(as defined below) ceases to own at least ten percent (10%) of the Number of
Shares Outstanding (as defined below) and any Series I Preferred Shares, neither
TIG nor any Founder shall, directly or indirectly, assign, sell, pledge,
hypothecate or otherwise transfer or dispose of ("DISPOSE" or a "DISPOSITION")
any shares of Common Stock, Class B Common Stock or Series I Preferred Shares
beneficially owned by it, except that the foregoing restriction shall not apply
to (A) a Disposition to TIG Holdings, Inc., a Delaware corporation ("TIG
HOLDINGS"), or any other Person directly or indirectly controlled by or under
common control with TIG Holdings (collectively, the "TIG GROUP"), (B) (i) any
transfer or assignment for consideration or any gift of shares of Common Stock
by any Founder to any spouse, child, parent, sibling or grandchild of such
Founder, or to a trust of which there are no principal beneficiaries other than
such Founder or one or more of such relatives; (ii) any transfer by a Founder to
a legal representative in the event such Founder becomes mentally incompetent,
(iii) any transfer by a Founder by will or the laws of descent and distribution
(the Persons described in subclauses (i), (ii) and (iii) being referred to
herein as "PERMITTED FOUNDERS' TRANSFEREES"); or (iv) any Disposition by a
Founder or any Permitted Founders' Transferee to any other Founder or Permitted
Founders' Transferee; (C) a Disposition of Common Stock through a BONA FIDE
underwritten public offering registered under the Securities Act, (D) a sale by
the TIG Group of all of the Series I Preferred Shares as part of a transaction
in which all the shares of Common Stock owned by
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the TIG Group are being sold to any Person or group of Persons in accordance
with clause (G) below, (E) pursuant to a merger or consolidation of the Company
or a recapitalization of any shares of Common Stock, Class B Common Stock or
Series I Preferred Shares, (F) any sale of shares of Class B Common Stock to the
Company by TIG in accordance with SECTIONS 1.04(E) or 1.05 or (G) a cash sale of
shares of Common Stock or Class B Common Stock effected in accordance with the
provisions of paragraph (b) below; PROVIDED that in the case of, and as a
condition to, any Disposition to any Person pursuant to clauses (A), (B) or (G),
such Person (unless already a party hereto) shall simultaneously with such
Disposition agree in a written instrument, in form and substance satisfactory to
the other parties hereto, to be bound by the provisions of this Agreement to the
same extent as the transferor of the shares to such Person as though an original
signatory hereto. For purposes of this Agreement, "NUMBER OF SHARES OUTSTANDING"
means, as of any date, the aggregate number of shares of Common Stock and Class
B Common Stock actually outstanding on such date.
(b) Until the Termination Date, in the event that any Founder or group
of Founders, on the one hand, or any member or group of members of the TIG
Group, on the other hand (in either case, an "OFFEROR"), intends to sell any or
all of the shares of Common Stock or Class B Common Stock owned by it, in a
transaction to which none of clauses (A) through (F) of SECTION 4.01(A) is
applicable, such sale shall be subject to the terms and conditions set forth in
this SECTION 4.01(B).
(i) The Offeror shall first deliver:
(x) a written notice (the "SALE NOTICE") (1) in the case of any
intended sale by a Founder or group of Founders, to TIG, or (2) in the
case of any intended sale by any member or group of members of the TIG
Group, to the Founders (in each case, the "OFFEREE"), specifying the
number of shares of Common Stock or Class B Common Stock proposed to be
sold (the "OFFERED SECURITIES"), the identity of the proposed
transferee (the "PURCHASER") and the price and the other BONA FIDE
terms and conditions for such sale (the "SALE TERMS"), and attaching a
copy of the contract entered into with such Purchaser, which contract
shall be expressly subject to the Offeree's right of first refusal
hereunder, and such Sale Notice shall constitute an irrevocable offer
(subject to the satisfaction of all regulatory requirements) to the
Offeree, for the period of time set forth below, to sell the Offered
Securities on the Sale Terms, and
(y) concurrently with the Sale Notice, an irrevocable written offer
(the "OFFER TO
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PARTICIPATE") signed by the Purchaser offering to purchase from the
Offeree on the Sale Terms the number of shares of Common Stock or Class
B Common Stock obtained by multiplying the number of Offered Securities
by a fraction, the numerator of which is the aggregate number of shares
of Common Stock and Class B Common Stock owned by the Offeree on the
date of the Sale Notice, and the denominator of which is the aggregate
number of shares of Common Stock and Class B Common Stock owned by the
Offeree and the Offeror on the date of the Sale Notice; PROVIDED,
HOWEVER, that if any member of the TIG Group is the Offeror, in no
event shall the Founders be entitled to sell more than a number of
shares equal to 50% of the Offered Securities.
(ii) For a period of thirty (30) days following receipt of the Sale
Notice (the "OFFER PERIOD"), the Offeree (which, in the case of the
Founders, shall mean all of the Founders acting collectively through an
agent designated among them and, in the case of the TIG Group, shall mean
all members of the TIG Group acting collectively through an agent
designated among them) may (but shall not be obligated to) elect either:
(x) to purchase all, but not less than all, of the Offered Securities
on the Sale Terms by delivering to the Offeror an irrevocable written
notice stating (i) that the Offeree wishes to purchase such Offered
Securities, subject to the satisfaction of all regulatory requirements
(the "ACCEPTANCE NOTICE"), and (ii) in the case of a purchase by one or
more of the Founders, the name of each Founder purchasing Offered
Securities and the amount of Offered Securities being purchased by such
Founder; or
(y) to accept the Offer to Participate, in whole or in part, pursuant
to the terms and conditions set forth therein, by delivering written
notice of such acceptance (the "PARTICIPATION NOTICE") to the Offeror
and the Purchaser, stating the number of shares that the Offeree
desires to sell, which Participation Notice shall constitute an
agreement, binding on the Offeree, to sell the number of shares
specified in the Participation Notice to the Purchaser.
(iii) If, within the Offer Period, the Offeree has not delivered an
Acceptance Notice, then the Offeror shall have a period of thirty (30)
days (the "SELLING PERIOD") in which it shall be free to sell all, but not
less than all, of the Offered Securities (subject to the rights of any
Offeree that has delivered a Participation Notice to
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sell shares to the Purchaser) to the Purchaser on the Sale Terms; PROVIDED
that if such sale shall not have been consummated within the Selling
Period, none of such Offered Securities may be sold and all such Offered
Securities shall again be subject to the provisions of this SECTION 4.01
and may be sold only in the manner, and subject to the provisions, set
forth in this SECTION 4.01; and PROVIDED further, that the Selling Period
will be extended automatically until such time as each applicable
Governmental or Regulatory Authority has given a final determination
permitting or prohibiting or otherwise denying necessary authorization for
such purchase and sale and, in the case of a favorable determination, for
an additional five (5) business days.
(iv) Any purchase and sale pursuant to an Acceptance Notice shall
occur on the date designated by the Offeree, which date shall be within
thirty (30) days following the date of delivery of the Acceptance Notice,
at the principal offices of the Company unless otherwise agreed, subject
to the satisfaction of all applicable regulatory requirements. At the
closing of such purchase and sale, the Offeror will deliver certificates
evidencing the Offered Securities to be so purchased against delivery by
the Offeree of the price included in the Sale Terms. The Offeree and the
Offeror will use their reasonable best efforts to accomplish the
satisfaction of all applicable regulatory requirements with respect to
such purchase, and the date on which such purchase and sale must be
completed in accordance with this paragraph will be extended automatically
until such time as each applicable Governmental or Regulatory Authority
has given a final determination permitting or prohibiting or otherwise
denying necessary authorization for such purchase and sale and, in the
case of a favorable determination, for an additional five (5) business
days.
(c) The failure of any Offeree to deliver an Acceptance Notice or a
Participation Notice in connection with any one Sale Notice delivered by an
Offeror will not, in any manner, waive or otherwise impair the rights of such
Offeree to deliver an Acceptance Notice or a Participation Notice in connection
with any other Sale Notice.
4.02 PREEMPTIVE RIGHTS. (a) Unless any shares of Series I Preferred
Stock are outstanding, and for so long as (i) the TIG Group continues to own at
least ten percent (10%) of the Number of Shares Outstanding and (ii) the closing
date of the sale of any shares of Common Stock pursuant to an initial public
offering registered under the Securities Act has not occurred, in the event that
the Company shall issue any shares of Common Stock or Class B Common Stock
(including upon the exercise of any Option to acquire shares of Common Stock or
Class B Common Stock,
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other than the loan outstanding under the Term Loan Agreement) to any Person
other than a member of the TIG Group (a "TRIGGERING ISSUANCE"), TIG shall
thereafter have the right to purchase, in accordance with the terms of the next
succeeding paragraph, up to such number of shares of (i) unless the Exchange has
occurred, Class B Common Stock or (ii) if the Exchange has occurred, Common
Stock, which, together with the number of shares of Class B Common Stock or
Common Stock held by the TIG Group on the date of such purchase by TIG, will not
exceed the percentage of the Number of Shares Outstanding which was held by the
TIG Group immediately prior to such Triggering Issuance. The Company shall
promptly give TIG written notice of any Triggering Issuance.
(b) Any purchase by TIG pursuant to the provisions of the preceding
paragraph shall occur on the date designated in a written notice to the Company
by TIG, which date shall be within ninety (90) days following the date of
delivery of the notice of a Triggering Issuance, at the principal offices of the
Company unless otherwise agreed, subject to the satisfaction of all applicable
regulatory requirements. The purchase price to be paid by TIG in any such
purchase shall be equal to the price paid to the Company in connection with the
applicable Triggering Issuance. The Company and TIG will use their reasonable
best efforts to accomplish the satisfaction of all applicable regulatory
requirements with respect to such purchase, and the date on which such purchase
and sale is scheduled will be extended automatically until such time as each
applicable Governmental or Regulatory Authority has given a final determination
permitting or prohibiting or otherwise denying necessary authorization for such
purchase and sale and, in the case of a favorable determination, for an
additional five (5) business days.
4.03 DESIGNEE DIRECTOR. (a) Effective as of the date hereof, the Board
of Directors shall elect a designee of TIG to serve on the Board of Directors
from the date hereof until the end of the designee's term.
(b) Thereafter, until such time as (i) there ceases to be outstanding
any indebtedness of the Company under the Term Loan Agreement and (ii) the TIG
Group ceases to own any shares of Common Stock or Class B Common Stock or Series
I Preferred Shares, the Board of Directors shall, at each meeting of
stockholders of the Company at which the term of the director designated by TIG
expires, nominate for election as a director of the Company, in accordance with
the Company's procedures for nomination of directors as provided for in its
By-Laws, a designee of TIG to stand for election for a succeeding term, and
shall vote all management proxies in favor of such nominee, except for such
proxies that specifically indicate to the contrary.
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(c) If any director designated by TIG in accordance with this SECTION
4.03 shall decline or be unable to serve for any other reason, the Board of
Directors shall promptly upon the request of TIG nominate or elect, as the case
may be, another designee of the TIG Group recommended by TIG to replace such
designee.
(d) In the event that the director designated by TIG is to be absent
from any Board of Directors meeting, a representative designated by TIG may
attend the meeting in the place of such director (but shall not have any of the
powers of a director). The Company shall reimburse the reasonable travel
expenses of the director designated by TIG or designated representative in
connection with his attendance at Board of Directors meetings.
(e) For so long as TIG has the right, pursuant to this SECTION 4.03,
to designate a member of the Board of Directors, the Company shall limit the
size of the Board of Directors to the number of directors as of the date hereof,
not including any director designated by TIG or Underwriters Reinsurance Company
("URC").
(f) Each of the Founders agrees to vote, in person or by proxy, all of
the shares of Common Stock owned by such Founder, at any annual or special
meeting of stockholders of the Company called for the purpose of voting on the
election of directors or by consensual action of stockholders without a meeting
with respect to the election of directors, in favor of the election of the
designee of TIG in accordance with this SECTION 4.03.
4.04 INDEMNIFICATION AND EXPENSES. (a) The Company shall indemnify TIG
and its officers, directors, employees, agents and affiliates in respect of, and
hold each of them harmless against, any loss, liability, cost or expense
(including, but not limited to, reasonable attorneys' fees) suffered, incurred
or sustained by any one of them or to which any of them becomes subject,
resulting from, arising out of or relating to (i) any misrepresentation, breach
of warranty or nonfulfillment of or failure to perform any covenant or agreement
on the part of the Company contained in this Agreement or (ii) any action
brought by any Person in connection with the transactions contemplated by this
Agreement; PROVIDED that the Company shall not be required to indemnify any such
Person in respect of any such loss, liability, cost or expense arising as a
result of such Person's breach of any provision of this Agreement, gross
negligence or wilful misconduct.
(b) The Company shall, promptly upon request therefor, reimburse TIG
for its reasonable out-of-pocket costs and expenses (including reasonable fees
and expenses of counsel not to exceed, together with such fees which are
reimbursed
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pursuant to Section 9.03 of the Term Loan Agreement, $40,000) incurred in
connection with its purchase of securities of the Company pursuant to this
Agreement, including the preparation of this Agreement, the Term Loan Agreement,
the Registration Rights Agreement and the Reinsurance Agreement, and any related
documentation.
4.05 ACCESS. In addition to, and not in limitation of, the rights that
the director designated by TIG has under the FBCA to inspect the books and
records of the Company and its Subsidiaries, for so long as TIG has the right,
pursuant to SECTION 4.03, to designate a member of the Board of Directors, the
Company will permit TIG, or any representatives designated by it, to visit and
inspect, at TIG's expense, any of the properties of the Company or any of its
Subsidiaries, including its books and records (and to make photocopies thereof
or make extracts therefrom), and to discuss its affairs, finances and accounts
with its officers, employees and accountants, all to such reasonable extent and
at such reasonable times and intervals as TIG may reasonably request in
connection with the investment of TIG in the Company or to the extent required
by the director designated by TIG in order to carry out his fiduciary duties as
a director; PROVIDED, HOWEVER, that TIG and its representatives will keep
confidential any confidential or proprietary information obtained in connection
with the rights granted under this SECTION 4.05 that is not otherwise (a)
publicly available, (b) known or becomes known to the TIG Group on a
non-confidential basis from a source not bound by a confidentiality obligation
to the Company or (c) required to be disclosed under applicable law.
4.06 LOST SECURITIES. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of any
certificate evidencing shares of Class B Common Stock or Common Stock or Series
I Preferred Shares owned by any member of the TIG Group, and (in case of loss,
theft or destruction) of the agreement by TIG to indemnify the Company in
respect thereof, and upon reimbursement to the Company of all reasonable
expenses incidental thereto, and upon surrender and cancellation of such
certificate, if mutilated, the Company will deliver in lieu of such certificate
a new certificate of the same type and the same aggregate number of shares
evidenced by the certificate so lost, stolen, destroyed or mutilated.
4.07 ISSUANCE OF CAPITAL STOCK. Until the Termination Date, neither
the Company nor Associated Business & Commerce Insurance Corporation ("ABC
INSURANCE") will authorize or issue any additional series of capital stock
without the prior written consent of TIG, except as permitted pursuant to
Section 6.13 of the Term Loan Agreement.
4.08 PUBLIC OFFERING. Until the earlier of the fourth anniversary of
the date hereof and the Termination Date, neither the Company nor ABC Insurance
shall complete an
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<PAGE>
underwritten public offering of its securities without the prior written consent
of TIG, other than shares of ABC Insurance's 6% Cumulative Convertible Preferred
Stock, Series A, issued to secure premium payments.
4.09 USE OF PROCEEDS. The Company shall use the proceeds from the sale
of the Purchased Shares solely for (i) the repayment of indebtedness owing by
the Company to URC, (ii) the purchase of equivalent amounts of Convertible
Preferred Stock, Series B, of ABC Insurance, when necessary to increase the
capital of ABC Insurance, (iii) loan repayment or prepayment to TIG, (iv)
redemption of Series I Preferred Stock and (v) reasonable operating expenses of
the Company.
4.10 CHARTER AND BY-LAW AMENDMENTS. The Company and each of the
Founders covenants and agrees that, for so long as TIG is entitled to designate
a member of the Board of Directors pursuant to SECTION 4.03, the Company shall
not amend its Articles of Incorporation or By-Laws without the prior written
consent of TIG.
4.11 LEGEND ON CERTIFICATES. Each certificate representing shares of
Common Stock or Class B Common Stock or Series I Preferred Shares beneficially
owned by any member of the TIG Group or any Founder shall be imprinted with a
legend in the following form until such time as all restrictions on the
Disposition of such shares hereunder are terminated:
"THESE SHARES MAY ONLY BE TRANSFERRED PURSUANT TO THE PROVISIONS OF
ARTICLE IV OF A CERTAIN SECURITIES PURCHASE AGREEMENT DATED AS OF
DECEMBER 4, 1996, BY AND AMONG ASSOCIATED BUSINESS & COMMERCE
HOLDINGS, INC., A FLORIDA CORPORATION, ERROL BADER, LAWRENCE J.
MARCHBANKS, FREDERICK R. PROUT, DANIEL J. WEBBER AND JAMES L. WILSON,
AND TIG REINSURANCE COMPANY, A CONNECTICUT CORPORATION, A COPY OF
WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY."
The Company shall not (i) give effect on its books to an attempted Disposition
of any shares of Common Stock or Class B Common Stock or Series I Preferred
Shares which shall have been Disposed of in violation of any provision of this
Agreement, or (ii) treat any transferee who obtains any shares of Common Stock
or Class B Common Stock or Series I Preferred Shares in violation of any
provision of this Agreement as the owner of such shares or accord any transferee
thereof the right to vote or to receive dividends in respect of such shares. The
Company will issue new certificates not imprinted with the foregoing legend to
any holder of shares of Common Stock or Class B Common Stock or Series I
Preferred Shares not subject to the restrictions on Disposition contained in
this Agreement. Certificates representing Class B Shares, Series I Preferred
Shares and shares of Common Stock issued in the Exchange shall also bear such
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<PAGE>
legends as the Company reasonably determines are required to ensure compliance
with the Securities Act and applicable state securities or blue sky laws.
4.12 URC OPTIONS. For thirty (30) days after the date on which any
option to purchase shares of Common Stock or Class B Common Stock held by URC
pursuant to the Option Agreement, dated as of December 5, 1995, as amended,
among the Company, URC and the Founders (the "URC OPTION AGREEMENT") expires,
TIG shall have the right to purchase the number of shares of Common Stock or
Class B Common Stock, at TIG's option, which URC was entitled to purchase upon
exercise of such option, at a purchase price of $1.00 per share. Any purchase by
TIG pursuant to the preceding sentence shall occur on the date designated in a
written notice to the Company by TIG, which date shall be within such thirty
(30) day period, at the principal offices of the Company unless otherwise
agreed, subject to the satisfaction of all applicable regulatory requirements.
The Company and TIG will use their reasonable best efforts to accomplish the
satisfaction of all applicable regulatory requirements with respect to such
purchase, and the date on which such purchase and sale is scheduled will be
extended automatically until such time as each applicable Governmental or
Regulatory Authority has given a final determination permitting or prohibiting
or otherwise denying necessary authorization for such purchase and sale and, in
the case of a favorable determination, for an additional five (5) business days.
ARTICLE V
ADDITIONAL COVENANTS OF THE COMPANY
For so long as the TIG Group owns any Series I
Preferred Shares:
5.01 AFFIRMATIVE COVENANTS. The Company covenants and agrees that,
regardless of whether there remains outstanding any indebtedness of the Company
under the Term Loan Agreement, it shall comply with each of the covenants of the
Company set forth in Article V of the Term Loan Agreement.
5.02 NEGATIVE COVENANTS. The Company covenants and agrees that,
regardless of whether there remains outstanding any indebtedness of the Company
under the Term Loan Agreement, it shall not take any of the actions, or permit
to occur any of the events, set forth in Article VI of the Term Loan Agreement.
5.03 FINANCIAL COVENANTS. The Company covenants and agrees that,
regardless of whether there remains outstanding any indebtedness of the Company
under the Term Loan Agreement, it shall comply with each of the financial
covenants of the Company set forth in Article VII of the Term Loan Agreement.
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<PAGE>
ARTICLE VI
GENERAL PROVISIONS
6.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. The representations, warranties, covenants and agreements contained
in this Agreement or any other instrument delivered pursuant to this Agreement
shall survive the First and Second Closings hereunder.
6.02 AMENDMENT AND WAIVER. This Agreement may be amended, supplemented
or modified only by a written instrument duly executed by or on behalf of each
party hereto. Any term or condition of this Agreement may be waived at any time
by the party that is entitled to the benefit thereof, but no such waiver shall
be effective unless set forth in a written instrument duly executed by or on
behalf of the party waiving such term or condition. No waiver by any party of
any term or condition of this Agreement, in any one or more instances, shall be
deemed to be or construed as a waiver of the same or any other term or condition
of this Agreement on any future occasion. All remedies, either under this
Agreement or by Law or otherwise afforded, will be cumulative and not
alternative.
6.03 NOTICES. All notices, requests and other communications hereunder
must be in writing and will be deemed to have been duly given only if delivered
personally or by facsimile transmission or mailed (first class postage prepaid)
to the parties at the following addresses or facsimile numbers:
(a) IF TO THE COMPANY:
Associated Business & Commerce Holdings, Inc.
c/o Marchbanks, Daiello & Leider, PA
4800 N. Federal Highway, Suite 101E
Boca Raton, Florida 33431
Attention: Lawrence J. Marchbanks
Facsimile No.: (407) 750-9624
- 20 -
<PAGE>
with a copy to:
Morgan, Lewis & Bockius LLP
5300 First Union Financial Center
200 South Biscayne Boulevard
Miami, Florida 33131-2339
Attention: John S. Fletcher, Esq.
Facsimile No.: (305) 579-0321
(b) IF TO TIG:
TIG Reinsurance Company
300 First Stamford Place
Stamford, Connecticut 06902
Attention: Allen Binder
Facsimile No.: (203) 356-0196
with copies to:
TIG Holdings, Inc.
65 East 55th Street, 28th Floor
New York, New York 10022
Attention: General Counsel
Facsimile No.: (212) 371-8574
and
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
Attention: Robert S. Reder, Esq.
Facsimile No.: (212) 530-5219
(c) If to the Founders, to the addresses set forth on the signature pages
hereto.
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number as
provided in this Section, be deemed given upon receipt, and (iii) if delivered
by mail in the manner described above to the address as provided in this
Section, be deemed given upon receipt (in each case regardless of whether such
notice, request or other communication is received by any other Person to whom a
copy of such notice, request or other communication is to be delivered pursuant
to this Section). Any party from time to time may change its address, facsimile
number or other information for the purpose of notices to that party by giving
notice specifying such change to the other parties hereto.
6.04 ENTIRE AGREEMENT. (a) This Agreement supersedes all prior
discussions and agreements among the parties
- 21 -
<PAGE>
hereto with respect to the subject matter hereof and thereof, including without
limitation, the term sheet entered into on November 15, 1996, and contains the
sole and entire agreement among the parties hereto with respect to the subject
matter hereof and thereof. To the extent that this Agreement conflicts with any
provision of any agreement among some or all of the Founders, the provisions of
this Agreement shall control. In addition, each Founder agrees that, on and
after the date of this Agreement, he shall not enter into any agreement or
understanding with any Person which would conflict with or be inconsistent with
the provisions of this Agreement.
(b) The Company Disclosure Letter is hereby incorporated into this
Agreement and made a part hereof for all purposes as if fully set forth herein.
6.05 PUBLIC ANNOUNCEMENTS. The parties hereto will consult in good
faith concerning the timing and content of any press release or other public
statement relating to this Agreement or the transactions contemplated hereby.
6.06 NO THIRD PARTY BENEFICIARY. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and their
respective successors or permitted assigns. It is not the intention of the
parties to confer third-party beneficiary rights upon any other Person other
than a Person entitled to indemnity under.
6.07 NO ASSIGNMENT; BINDING EFFECT. Neither this Agreement nor any
right, interest or obligation hereunder may be assigned by any party hereto
without the prior written consent of the other parties hereto and any attempt to
do so will be void, except that TIG may assign any or all of its rights,
interests and obligations hereunder to a member of the TIG Group, PROVIDED that
any such member agrees in writing to be bound by all of the terms, conditions
and provisions contained herein. Subject to the preceding sentence, this
Agreement is binding upon, inures to the benefit of and is enforceable by the
parties hereto and their respective successors and assigns.
6.08 HEADINGS. The headings used in this Agreement have been inserted
for convenience of reference only and do not define or limit the provisions
hereof.
6.09 INVALID PROVISIONS. If any provision of this Agreement is held to
be illegal, invalid or unenforceable under any present or future law, and if the
rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (i) such provision will be fully
severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof
and (iii) the remaining provisions of this Agreement will remain in full force
and effect and will not
- 22 -
<PAGE>
be affected by the illegal, invalid or unenforceable provision or by its
severance herefrom.
6.10 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to a contract
executed and performed in such State, without giving effect to the conflicts of
laws principles thereof, except for matters relating to the internal corporate
affairs of the Company, which shall be governed by and construed in accordance
with the FBCA.
6.11 CONSENT TO JURISDICTION AND SERVICE OF PROCESS.
(a) Each party hereby irrevocably submits to the jurisdiction of any
State of New York or United States Federal court sitting in the Borough of
Manhattan, New York over any action or proceeding arising out of or relating to
this Agreement, the securities purchased hereunder or the Registration Rights
Agreement and irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such State of New York or Federal
court. Each party irrevocably consents to the service of any and all process in
any such action or proceeding by the mailing of copies of such process to such
party at its address specified in this Agreement. Each party agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Each party further waives any objection to venue in such State
and any objection to an action or proceeding in such State on the basis of forum
non conveniens. Each party agrees that any action or proceeding brought against
TIG shall be brought only in a State of New York or United States Federal court
sitting in the Borough of Manhattan, New York.
(b) Nothing in this SECTION 6.11 shall affect the right of any party
to serve legal process in any other manner permitted by law or affect the right
of any party to bring any action or proceeding against any other party hereto,
or their respective property, in the courts of any other jurisdictions.
(c) To the extent that any party has or hereafter may acquire immunity
from jurisdiction of any court or from any legal process (whether from service
or notice, attachment prior to judgment, attachment in aid of execution,
execution or otherwise) with respect to itself or its property, such party
hereby irrevocably waives such immunity in respect of its obligations under this
Agreement, the securities purchased hereunder and the Registration Rights
Agreement.
6.12 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be deemed an
- 23 -
<PAGE>
original, but all of which together will constitute one and the same instrument.
- 24 -
<PAGE>
IN WITNESS WHEREOF, each party hereto has signed this Agreement, or
caused this Agreement to be signed by its officer thereunto duly authorized, as
of the date first written above.
ASSOCIATED BUSINESS & COMMERCE
HOLDINGS, INC.
By: /s/Lawrence J. Marchbanks
----------------------------
Name: Lawrence J. Marchbanks
Title: Chairman
TIG REINSURANCE COMPANY
By: /s/ Allen D. Binder
----------------------------
Name: Allen D. Binder
Title: Vice President
FOUNDERS
/S/ ERROL BADER
----------------------------
Name: Errol Bader
Address for Notices:
Associated Business & Commerce
Holdings, Inc.
c/o Marchbanks, Daiello & Leider, PA
4800 N. Federal Highway, Suite 101E
Boca Raton, Florida 33431
Attention: Errol Bader
Facsimile No.: (407) 750-9624
/s/ Lawrence J. Marchbanks
-----------------------------
Name: Lawrence J. Marchbanks
Address for Notices:
Associated Business & Commerce
Holdings, Inc.
c/o Marchbanks, Daiello & Leider, PA
4800 N. Federal Highway, Suite 101E
Boca Raton, Florida 33431
Attention: Lawrence J. Marchbanks
Facsimile No.: (407) 750-9624
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<PAGE>
/s/ Frederick R. Prout
------------------------------
Name: Frederick R. Prout
Address for Notices:
Associated Business & Commerce
Holdings, Inc.
c/o Marchbanks, Daiello & Leider, PA
4800 N. Federal Highway, Suite 101E
Boca Raton, Florida 33431
Attention: Frederick R. Prout
Facsimile No.: (407) 750-9624
/s/ DANIEL J. WEBBER
------------------------------
Name: Daniel J. Webber
Address for Notices:
Associated Business & Commerce
Holdings, Inc.
c/o Marchbanks, Daiello & Leider, PA
4800 N. Federal Highway, Suite 101E
Boca Raton, Florida 33431
Attention: David J. Weber
Facsimile No.: (407) 750-9624
/s/ JAMES L. WILSON
------------------------------
Name: James L. Wilson
Address for Notices:
Associated Business & Commerce
Holdings, Inc.
c/o Marchbanks, Daiello & Leider, PA
4800 N. Federal Highway, Suite 101E
Boca Raton, Florida 33431
Attention: James L. Wilson
Facsimile No.: (407) 750-9624
- 26 -
EXHIBIT 10.20
TERM LOAN AGREEMENT
dated as of December 4, 1996
between
ASSOCIATED BUSINESS & COMMERCE HOLDINGS, INC.,
as Borrower,
and
TIG REINSURANCE COMPANY,
as Lender
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I. DEFINITIONS, ACCOUNTING TERMS AND RULES OF
CONSTRUCTION.................................................. 1
Section 1.01. Definitions.......................................... 1
Section 1.02. Accounting Terms..................................... 11
Section 1.03. Computation of Time Periods.......................... 11
Section 1.04. Rules of Construction................................ 12
ARTICLE II. AMOUNT AND TERMS OF THE TERM LOAN.............................. 12
Section 2.01. Term Loan............................................ 12
Section 2.02. Delivery of Term Loan Proceeds....................... 12
Section 2.03. Interest............................................. 12
Section 2.04. Fees................................................. 13
Section 2.05. Term Loan Notes...................................... 13
Section 2.06. Optional Prepayments................................. 13
Section 2.07. Mandatory Prepayments................................ 13
Section 2.08. Use of Proceeds...................................... 14
Section 2.09. Method of Payment.................................... 14
Section 2.10. Application of Payments.............................. 14
Section 2.11. Taxes................................................ 14
Section 2.12. Discharge of B Loan Note............................. 15
ARTICLE III. CONDITIONS PRECEDENT.......................................... 15
Section 3.01. Conditions Precedent to Making of the Term Loan...... 15
ARTICLE IV. REPRESENTATIONS AND WARRANTIES................................. 17
Section 4.01. Incorporation, Good Standing and Due Qualification... 17
Section 4.02. Corporate Power and Authority; No Conflicts.......... 17
Section 4.03. Legally Enforceable Agreements....................... 18
Section 4.04. Litigation........................................... 18
Section 4.05. Financial Statements................................. 18
Section 4.06. Ownership and Liens.................................. 19
Section 4.07. Taxes................................................ 20
Section 4.08. ERISA................................................ 20
Section 4.09. Operation of Business................................ 20
Section 4.10. No Default on Outstanding Judgments or Orders.........20
Section 4.11. No Defaults on Other Agreements...................... 21
Section 4.12. Subsidiaries......................................... 21
Section 4.13. No Restriction on Transfers.......................... 21
Section 4.14. Governmental Regulation.............................. 21
<PAGE>
Section 4.15. Partnerships......................................... 21
Section 4.16. Environmental Protection............................. 21
Section 4.17. Solvency............................................. 22
Section 4.18. Governmental Approvals............................... 22
Section 4.19. Material Agreements and Liens........................ 22
Section 4.20. Capitalization....................................... 22
Section 4.21. No Brokers or Finders................................ 23
ARTICLE V. AFFIRMATIVE COVENANTS........................................... 23
Section 5.01. Maintenance of Existence............................. 23
Section 5.02. Conduct of Business.................................. 23
Section 5.03. Maintenance of Properties............................ 23
Section 5.04. Maintenance of Records............................... 23
Section 5.05. Maintenance of Insurance............................. 23
Section 5.06. Compliance with Laws................................. 24
Section 5.07. Right of Inspection.................................. 24
Section 5.08. Reporting Requirements............................... 24
Section 5.09. Compliance With Environmental Laws................... 29
Section 5.10. Independent Actuary.................................. 29
Section 5.11. Use of Proceeds...................................... 29
ARTICLE VI. NEGATIVE COVENANTS............................................. 29
Section 6.01. Debt................................................. 30
Section 6.02. Guaranties........................................... 30
Section 6.03. Liens................................................ 30
Section 6.04. Sale of Assets....................................... 32
Section 6.05. Transactions with Affiliates..........................32
Section 6.06. Mergers.............................................. 32
Section 6.07. Leases............................................... 32
Section 6.08. Dividends............................................ 33
Section 6.09. Investments.......................................... 33
Section 6.10. Changes, Amendments or Modifications................. 33
Section 6.11. Changes in Business.................................. 33
Section 6.12. Subsidiaries......................................... 33
Section 6.13. Issuance of Stock.................................... 34
ARTICLE VII. FINANCIAL COVENANTS........................................... 34
Section 7.01. Consolidated Net Worth............................... 34
Section 7.02. ABCIC's Statutory Surplus............................ 35
Section 7.03. Loss Reserves........................................ 35
Section 7.04. Risk Based Capital Ratio............................. 35
Section 7.05. Net Premiums Written Ratio........................... 35
ii
<PAGE>
Section 7.06. Debt to Equity Ratio................................. 35
Section 7.07. TIG Interest Coverage Ratio.......................... 37
ARTIVLE VIII. EVENTS OF DEFAULT............................................ 37
Section 8.01. Events of Default.................................... 38
Section 8.02. Remedies............................................. 41
Section 8.03. Conversion........................................... 41
ARTICLE IX. MISCELLANEOUS.................................................. 42
Section 9.01. Amendments and Waivers............................... 42
Section 9.02. Usury................................................ 43
Section 9.03. Expenses and Indemnification......................... 43
Section 9.04. Assignment; Participation............................ 44
Section 9.05. Notices.............................................. 44
Section 9.06. Setoff............................................... 44
Section 9.07. Jurisdiction; Immunities............................. 44
Section 9.08. Governing Law........................................ 45
Section 9.09. Counterparts......................................... 45
Section 9.10. Exhibits and Schedules............................... 45
Section 9.11. Table of Contents; Headings.......................... 45
Section 9.12. Severability......................................... 45
Section 9.13. Integration.......................................... 46
Section 9.14. Waiver of Jury Trial................................. 46
iii
<PAGE>
Exhibits
Exhibit A-1 Form of A Loan Note
Exhibit A-2 Form of B Loan Note
Exhibit B Form of Pledge Agreement
Exhibit C Form of Security Agreement
Exhibit D Form of Agreement as to Reinsurance
Schedules
4.04 Litigation
4.20 Capitalization
6.13 Options
iv
<PAGE>
TERM LOAN AGREEMENT dated as of December 4, 1996 between ASSOCIATED
BUSINESS & COMMERCE HOLDINGS, INC. ("Borrower"), and TIG REINSURANCE COMPANY
("Lender").
The Borrower has requested that the Lender make loans to it in the
aggregate principal amount of $3,912,908 and the Lender is prepared to make such
loans upon the terms and conditions hereof. Accordingly, the parties hereto
agree as follows:
ARTICLE I. DEFINITIONS, ACCOUNTING TERMS AND RULES OF CONSTRUCTION
Section 1.01. DEFINITIONS. As used in this Agreement the following
terms have the following meanings (terms defined in the singular to have a
correlative meaning when used in the plural and VICE VERSA):
"ABCIC" means Associated Business & Commerce Insurance Corporation.
"ABCIC-Lender Reinsurance Agreement" means each Reinsurance Agreement
between ABCIC, as the ceding company, and Lender, as the reinsurer.
"ABCIC Preferred" means ABCIC's 6% Cumulative Convertible Preferred
Stock, Series A.
"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is controlled by, or is under common control with such
Person. The term "control" (including, with its correlative meanings "controlled
by" and "under common control with") means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of securities or partnership
or other ownership interests, by contract, or otherwise.
"Agreement" means this Term Loan Agreement.
"Agreement as to Reinsurance" means the Agreement as to Reinsurance in
substantially the form of Exhibit D hereto, to be delivered by Borrower under
the terms of this Agreement.
"A Loan" has the meaning specified in Section 2.01.
"A Loan Default Rate" has the meaning specified in Section 2.03.
"A Loan Note" has the meaning specified in Section 2.05.
"Annual Statement" means the annual financial statement of ABCIC as
required to be filed with the insurance commissioner (or similar authority) in
ABCIC's state
<PAGE>
of domicile, together with all exhibits or schedules filed therewith, prepared
in conformity with SAP.
"Applicable Insurance Regulatory Authority" means, when used with
respect to ABCIC, the insurance department or similar administrative authority
or agency located in (1) each state in which ABCIC is domiciled and (2) to the
extent asserting regulatory jurisdiction over ABCIC, the insurance department,
authority or agency in each state in which ABCIC is licensed, and shall include
any Federal insurance regulatory department, authority or agency that may be
created and that asserts regulatory jurisdiction over ABCIC.
"Benchmark Statement" means, as of any date, with respect to ABCIC, the
quarterly financial statement of ABCIC as filed with the insurance commissioner
(or similar authority) in ABCIC's state of domicile, with each page, line item
and column of a Benchmark Statement to contain the same type of information,
computed in the same manner, as contained in the identically numbered page, line
item and column of such 1995 Annual Statement.
"B Loan" has the meaning specified in Section 2.01.
"B Loan Default Rate" has the meaning specified in Section 2.03.
"B Loan Note" has the meaning specified in Section 2.05.
"Board of Governors" means the Board of Governors of the Federal
Reserve System.
"Borrower" has the meaning specified in the preamble of this Agreement.
"Business Day" means any day other than a Saturday, Sunday, or other
day on which commercial banks in New York or Florida are authorized or required
to close under the laws of the state of New York or Florida, as applicable.
"Capital Lease" means any lease which has been or should be capitalized
on the books of the lessee in accordance with GAAP.
"Class B Common Stock" has the meaning specified in Section 3.01(15).
"Closing Date" means December 4, 1996.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, including any rules and regulations promulgated thereunder.
2
<PAGE>
"Collateral" means, collectively, any and all of the securities pledged
pursuant to the Pledge Agreement and any and all assets in which Lender is
granted a Lien pursuant to the Security Agreement.
"Common Stock" has the meaning specified in Section 4.20.
"Company Action Level RBC" has the meaning specified in the Risk-Based
Capital for Insurers Model Act as adopted by the Florida Department of
Insurance.
"Consolidated Net Worth" means as of the date of determination, all
items which in conformity with GAAP would be included under shareholders' equity
on a consolidated balance sheet of the Borrower and its Subsidiaries at such
date.
"Consolidated Subsidiary" means each Subsidiary of Borrower that should
be included in Borrower's consolidated financial statements, all as determined
in accordance with GAAP.
"Consolidated Total Stockholders' Equity" means, on any date, total
stockholders equity of Borrower and its Consolidated Subsidiaries, on a
consolidated basis, all as determined in accordance with GAAP.
"Debt" means: (1) obligations created, issued or incurred for borrowed
money (whether by loan, the issuance and sale of debt securities or the sale of
property to another Person subject to any understanding or agreement to
repurchase such property from such Person), or for the deferred purchase price
or acquisition price of property or services (including trade obligations); (2)
obligations as lessee under Capital Leases; (3) current liabilities in respect
of unfunded vested benefits under any Plan; (4) obligations under or related to
letters of credit issued for the account of any Person; (5) all obligations
arising under bankers' or trade acceptance facilities of any Person; (6) all
guarantees, endorsements (other than for collection or deposit in the ordinary
course of business), and other contingent obligations to purchase any of the
items included in this definition, to provide funds for payment, to supply funds
to invest in any Person, or otherwise to assure a creditor against loss; (7) all
obligations secured by any Lien on property owned by such Person, whether or not
the obligations have been assumed; (8) all obligations under any agreement
providing for a swap, ceiling rates, ceiling and floor rates, contingent
participation or other hedging mechanisms with respect to interest payable on
any of the items described above in this definition; and (9) all forward foreign
exchange contracts.
"Default" means any event which with the giving of notice or lapse of
time, or both, would become an Event of Default.
"Deposit Account" has the meaning specified in 2.02.
"Deposit Account Bank" means the bank maintaining the Deposit Account.
3
<PAGE>
"Dollars" and the sign "$" mean lawful money of the United States of
America.
"EBITDA" means, for any period, the sum, for the Borrower and its
Subsidiary (determined on a consolidated basis without duplication in accordance
with GAAP), of net operating income (calculated before taxes, Interest Expense,
depreciation and amortization) for such period.
"Environmental Discharge" means any discharge or release of any
Hazardous Materials in violation of any applicable Environmental Law.
"Environmental Law" means any Law relating to the regulation or
protection of human health, safety or the environment or to emissions,
discharges, releases or threatened releases of pollutants, contaminants,
chemicals or toxic or hazardous substances or wastes into the indoor or outdoor
environment, including, without limitation, ambient air, soil, surface water,
ground water, wetlands, land or subsurface strata, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, chemicals or toxic or
hazardous substances or wastes.
"Environmental Notice" means any complaint, order, citation, letter,
inquiry, notice or other written communication from any Person (1) affecting or
relating to the Borrower's compliance with any Environmental Law in connection
with any activity or operations at any time conducted by the Borrower, (2)
relating to the occurrence or presence (as defined below) of or exposure to or
possible or threatened or alleged occurrence or presence (as defined below) of
or exposure to Environmental Discharges or Hazardous Materials at any of the
Borrower's locations or facilities, including, without limitation: (a) the
existence of any contamination or possible or threatened contamination at any
such location or facility; and (b) remediation of any Environmental Discharge or
Hazardous Materials at any such location or facility or any part thereof; and
(3) any violation or alleged violation of any relevant Environmental Law.
"Equity Rights" means, with respect to any Person, any subscriptions,
options, warrants, commitments, preemptive rights or agreements of any kind
(including, without limitation, any stockholders' or voting trust agreements)
for the issuance, sale, registration or voting of, or securities convertible
into, any additional shares of capital stock of any class, or partnership or
other ownership interests of any type in, such Person.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time including any rules and regulations promulgated
thereunder.
"ERISA Affiliate" means any corporation or trade or business that is a
member of any group of organizations (i) described in Section 414(b) or (c) of
the Code of which the Borrower is a member and (ii) solely for purposes of
potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of
the Code and the lien created under
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Section 302(f) of ERISA and Section 412(n) of the Code, described in Section
414(m) or (o) of the Code of which the Borrower is a member.
"Existing Loan Agreement" has the meaning specified in Section 2.08.
"Event of Default" has the meaning specified in Section 8.01.
"FDOI" has the meaning specified in Section 5.12.
"Fiscal Year" means each period from January 1 to December 31.
"Fully Diluted Book Value" as of any date means the book value per
share of the Common Stock on a fully diluted basis calculated using the
consolidated shareholders equity of the Borrower, including the Borrower's
ownership interest in its Subsidiaries, determined in accordance with GAAP and
with proper consideration of all potential dilutive securities, including
assuming all outstanding options to purchase Common Stock are exercised and all
convertible preferred stock of the Borrower is converted, but not including any
potential conversion of preferred stock of any of the Borrower's Subsidiaries,
as of the last day of the calendar quarter ended prior to the date as of which
such book value is being determined, adjusted to reflect any dividends or other
distributions or sale of securities for less than fair market value made after
the last day of such calendar quarter.
"Fund" means the Associated Business and Commerce Workers' Compensation
Self-Insurance Fund.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time, applied on a basis consistent
with those used in the preparation of the financial statements referred to in
Section 4.05.
"Good Faith Contest" means the contest of an item if: (1) the item is
diligently contested in good faith by appropriate proceedings timely instituted;
(2) adequate reserves are available if payment is required to be made on the
contested item; (3) during the period of such contest, the enforcement of any
contested item is effectively stayed; and (4) the failure to pay or comply with
the contested item could not result in a Material Adverse Change.
"Governmental Approvals" means any authorization, consent, approval,
license, permit, certification, ruling of, or exemption of, registration or
filing with order from, judgment from decree of, publication by or report or
notice to, any Governmental Authority.
"Governmental Authority" means any nation or government, any state or
other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of government.
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"Hazardous Materials" means collectively, (a) any petroleum or
petroleum products, flammable materials, explosives, radioactive materials,
asbestos, urea formaldehyde foam insulation, and transformers or other equipment
that contain polychlorinated biphenyls ("PCB'S"), (b) any chemicals or other
materials or substances that are now or hereafter become defined as or included
in the definition of "hazardous substances", "hazardous wastes", "hazardous
materials", "extremely hazardous wastes", "restricted hazardous wastes", "toxic
substances", "toxic pollutants", "contaminants", "pollutants" or words of
similar import under any Environmental Law and (c) any other chemical or other
material or substance, exposure to which is now or hereafter prohibited, limited
or regulated under any Environmental Law.
"Incurred Losses" has, with respect to each ABCIC-Lender Reinsurance
Agreement, the same definition of such term as provided in the applicable
ABCIC-Lender Reinsurance Agreement.
"Independent Actuary" means Milliman & Robertson, Inc. or such other
independent actuarial firm reasonably acceptable to Lender that will perform the
actuarial review of the gross, ceded and net Loss and LAE Incurred, and unearned
premium reserves for inclusion in the Annual Statement of ABCIC.
"Insurance Business" means the providing of workmens compensation
insurance and employers liability insurance.
"Interest Expense" means, for any period, for the Borrower and its
Subsidiary (determined on a consolidated basis without duplication in accordance
with GAAP), all interest in respect of Debt (including, without limitation, the
interest component of any payments in respect of all Capital Leases) accrued or
capitalized during such period (whether or not actually paid during such
period).
"Investment" shall mean, for any Person: (a) the acquisition (whether
for cash, property, services or securities or otherwise) of capital stock,
bonds, notes, debentures, partnership or other ownership interests or other
securities of any other Person or any agreement to make any such acquisition
(including, without limitation, any "short sale" or any sale of any securities
at a time when such securities are not owned by the Person entering into such
sale); (b) the making of any deposit with, or advance, loan or other extension
of credit to, any other Person (including the purchase of property from another
Person subject to an understanding or agreement, contingent or otherwise, to
resell such Property to such Person), but excluding any such advance, loan or
extension of credit having a term not exceeding 90 days representing the
purchase price of inventory or supplies sold by such Person in the ordinary
course of business); (c) the entering into of any guarantee of, or other
contingent obligation with respect to, Debt or other liability of any other
Person and (without duplication) any amount committed to be advanced, lent or
extended to such Person; or (d) the entering into of any interest rate
protection or similar Agreement.
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"Law" means any federal, state or local statute, law, rule, regulation,
ordinance, order, code, or rule of common law, now or hereafter in effect, and
any judicial or administrative interpretation thereof by a Governmental
Authority or otherwise, including any judicial or administrative order, consent
decree, judgment or circular letter.
"Lender" has the meaning specified in the preamble to this Agreement.
"Lien" means any mortgage, deed of trust, pledge, security interest,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
other), or preference, priority, or other security agreement or preferential
arrangement, charge, or encumbrance of any kind or nature whatsoever (including,
without limitation, any conditional sale or other title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, and the filing of any financing statement under the Uniform
Commercial Code or comparable Law of any jurisdiction to evidence any of the
foregoing).
"Loan Documents" means this Agreement, the Term Loan Notes, the Pledge
Agreement and the Security Agreement.
"Loss and LAE Incurred" means, for any period, with respect to ABCIC,
the sum of net losses incurred (the amount as shown on line 2, page 4 of a
Benchmark Statement of ABCIC by ABCIC), plus net loss expenses incurred (the
amount as shown on line 3, page 4 of the Benchmark Statement of ABCIC) of ABCIC.
"Loss Portfolio Transfer" means the acquisition by ABCIC of all or
substantially all of the assets and the assumption of all or substantially all
of the claim liabilities of the Fund under and pursuant to the terms of the Loss
Portfolio Transfer Agreement.
"Loss Portfolio Transfer Agreement" means the Loss Portfolio Transfer
Agreement dated October 11, 1995 between ABCIC and the Fund.
"Loss Reserves" means, at any date, with respect to ABCIC, the sum of
the following items: (1) net losses, including incurred but unreported losses
(the total amount as shown on line 1, page 3, column 1 of a Benchmark Statement
for ABCIC) plus (ii) net loss adjustment expenses (the total amount as shown on
line 2, page 3, column 1 of a Benchmark Statement of ABCIC), all as determined
in accordance with SAP.
"Management Agreement" means the Management Agreement dated March 23,
1995 between Borrower and ABCIC.
"Management Fee" means the fee payable by ABCIC to Borrower pursuant to
the Management Agreement.
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"Material Adverse Change" means (1) a material adverse change in the
status of the business, assets, liabilities, results of operations, condition
(financial or otherwise), property or prospects of Borrower or its Subsidiary,
(2) any event or occurrence of whatever nature which could have a material
adverse effect on Borrower's ability to perform its obligations under the Loan
Documents or (3) a material adverse effect on the validity or enforceability of
the Lender's Lien on the Collateral.
"Maturity Date" has the meaning specified in Section 2.05.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Multiemployer Plan" means a multiemployer plan defined as such in
Section 3(37) of ERISA.
"NAIC" means the National Association of Insurance Commissioners or any
successor organization thereto.
"NAIC Tests" means the ratios and other financial measurements
developed by the NAIC under its Insurance Regulatory Information System, as
adopted by the Florida Insurance Department and as in effect from time to time.
"Net Premiums Written" means, for any period, with respect to ABCIC,
the aggregate net amount of premiums written by ABCIC during such period, as
same would be shown on line 32, page 9, column 4, Part 2B of a Benchmark
Statement for ABCIC covering such period, all as determined in accordance with
SAP; provided, that, in any case, Net Premiums Written shall be net of ceded
written premiums in respect of all reinsurances (quota share, specific and
aggregate) inuring to ABCIC.
"Obligations" means (1) each and every obligation, covenant and
agreement of Borrower now or hereafter existing contained in this Agreement, and
any of the other Loan Documents, whether for principal, interest, fees,
expenses, indemnities or otherwise, and any amendments or supplements thereto,
extensions or renewals thereof or replacements therefor, including but not
limited to all Indebtedness, obligations and liabilities of Borrower to Lender
now existing or hereafter incurred under or arising out of or in connection with
the Term Loan Notes, this Agreement, the other Loan Documents, and any documents
or instruments executed in connection therewith, (2) all sums advanced in
accordance with the Pledge Agreement or Security Agreement, as the case may be,
by or on behalf of Lender to protect any of the Collateral purported to be
covered thereby, (3) any amounts paid by Lender as to which Lender has the right
to reimbursement from Borrower, and (4) any amounts paid by Lender in
preservation of any of Lender's rights or interest in the Collateral, together
with interest on such amounts from the date such amounts are paid until
reimbursement in full at a rate per annum equal at all times to the A Loan
Default Rate; in each case whether direct or indirect, joint or several,
absolute or contingent, liquidated or unliquidated, now or hereafter existing,
renewed or restructured, whether or not from time to time decreased or
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extinguished and later increased, created or incurred, and including all
indebtedness of the Borrower under any instrument now or hereafter evidencing or
securing any of the foregoing.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Permitted Investments" means (1) direct obligations of the United
States of America or any agency thereof backed by the full faith and credit of
the United States government, (2) all open market commercial paper of any
corporation incorporated under the laws of the United States of America or any
state thereof and not an Affiliate of the Borrower and which commercial paper is
rated "P-1" or better by Moody's or "A-1" or better by S&P maturing not more
than 90 days from the date of acquisition thereof, (3) U.S. Dollar denominated,
long term, publicly traded fixed-income securities rated not less than "BBB-" by
S&P and "Baa3" by Moody's and (4) investments in money market funds or other
corporate funds of entities having a rating of "A" or higher by S&P or "A2" or
higher by Moody's, or money market mutual funds sponsored by any securities
broker dealer, or investment adviser registered under the United States
Investment Advisors Act of 1940, as amended, of recognized national standing (or
an Affiliate thereof), having an investment policy that requires substantially
all the invested assets of such fund to be invested in investments described in
either or both of clauses (i) and (2) having a rating of "A" or higher by S&P or
"A2" or higher by Moody's; provided that at no time shall the obligation of any
single obligor (other than those specified in clause (1) above) constitute more
than 5% of the total assets of the Borrower and its Subsidiary.
"Person" means an individual, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, joint venture, limited
liability company, limited liability partnership, Governmental Authority or
other entity of whatever nature.
"Plan" means any plan, agreement, arrangement or commitment which is an
employee benefit plan, as defined in Section 3(3) of ERISA, maintained by
Borrower or any ERISA Affiliate or with respect to which Borrower or any ERISA
Affiliate at any relevant time has any liability or obligation to contribute.
"Pledge Agreement" means the Pledge Agreement, substantially in the
form of Exhibit B hereto, to be delivered by Borrower under the terms of this
Agreement.
"presence", when used in connection with any Environmental Discharge or
Hazardous Materials, means and includes presence, generation, manufacture,
installation, treatment, use, storage, handling, repair, encapsulation,
disposal, transportation, spill, discharge and release.
"Principal Office" means the then principal office of Lender, which is
currently located at 300 First Stamford Place, Stamford, CT 06902.
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"Prohibited Transaction" means any transaction prohibited under Section
406 of ERISA or Section 4975 of the Code.
"Quarterly Date" means each March 31, June 30, September 30 and
December 31 occurring on or after the Closing Date.
"Quarterly Period" means each period from the day after a Quarterly
Date to the next Quarterly Date.
"Reinsurance Premium" has, with respect to each ABCIC-Lender
Reinsurance Agreement, the same definition of such term as provided in the
applicable ABCIC-Lender Reinsurance Agreement.
"Reportable Event" means any of the events set forth in Section 4043(b)
of ERISA or in the regulations thereunder.
"Risk Based Capital" has the meaning specified in the Risk-Based
Capital for Insurers Model Act as adopted by the Florida Department of
Insurance.
"SAP" means with respect to ABCIC, the accounting procedures and
practices prescribed or permitted by the Applicable Insurance Regulatory
Authority of the state in which ABCIC is domiciled.
"S&P" means Standard & Poor's Ratings Group, a division of the
McGraw-Hill Corporation and its successors.
"Securities Purchase Agreement" means the Securities Purchase Agreement
dated as of December 4, 1996 by and among the Borrower, Errol Bader, Lawrence J.
Marchbanks, Frederick R. Prout, Daniel J. Webber and James L. Wilson and the
Lender.
"Security Agreement" means the Security Agreement substantially in the
form of Exhibit C hereto, to be delivered by Borrower under the terms of this
Agreement.
"Series I Preferred Stock" means the Cumulative Convertible Preferred
Stock, Series I, $.01 par value, of Borrower.
"Solvent" means, when used with respect to any Person, that (1) the
fair value of the property of such Person, on a going concern basis, is greater
than the total amount of liabilities (including, without limitation, contingent
liabilities) of such Person, (2) the present fair saleable value of the assets
of such Person, on a going concern basis, is not less than the amount that will
be required to pay the probable liabilities of such Person on its debts as they
become absolute and matured, (3) such Person does not intend to, and does not
believe that it will, incur debts or liabilities beyond such Person's ability to
pay as such debts and liabilities mature, and (4) such Person is not engaged in
business or a transaction, and is not about to
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engage in business or a transaction, for which such Person's property would
constitute unreasonably small capital after giving due consideration to the
prevailing practice in the industry in which such Person is engaged. Contingent
liabilities will be computed at the amount that, in light of all the facts and
circumstances existing at such time, represents the amount that can reasonably
be expected to become an actual or matured liability.
"Statutory Surplus" means, at any date, with respect to ABCIC, the
surplus as regards policyholders of ABCIC (the total amount as would be shown on
line 25, page 3, column 1 of a Benchmark Statement for ABCIC prepared as of such
date), all as determined in accordance with SAP.
"Subsidiary" means, as to any Person, 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, or the
management of which is otherwise controlled, directly, or indirectly through one
or more intermediaries, or both, by such Person.
"Term Loan" has the meaning specified in Section 2.01.
"Term Loan Arrangement Fee" has the meaning specified in Section 2.04.
"Term Loan Notes" has the meaning specified in Section 2.05.
"URC" means Underwriter's Reinsurance Company.
Section 1.02. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP, and all financial
data required to be delivered hereunder shall be prepared in accordance with
GAAP, except as otherwise specifically provided herein. To enable the ready and
consistent determination of compliance with the covenants set forth in Section 4
hereof, the Borrower will not change the last day of its fiscal year from
December 31 of each year, or the last days of the first three fiscal quarters in
each of its fiscal years from March 31, June 30 and September 30 of each year,
respectively.
References in the Annual Statements to amounts on particular exhibits,
schedules, lines, pages and columns of the Annual Statement are based on the
format promulgated by the NAIC for 1995 Annual Statements. If such format is
changed in future years so that different information is contained in such items
or they no longer exist, it is understood that the reference is to information
consistent with that reported in the referenced item in the 1995 Annual
Statement.
Section 1.03. COMPUTATION OF TIME PERIODS. Except as otherwise provided
herein, in this Agreement, in the computation of periods of time from a
specified date to a
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later specified date, the word "from" means "from and including" and words "to"
and "until" each means "to but excluding".
Section 1.04. RULES OF CONSTRUCTION. When used in this Agreement: (1)
"or" is not exclusive; (2) a reference to a Law includes any amendment or
modification to such Law; (3) a reference to a Person includes its permitted
successors and permitted assigns; and (4) a reference to an agreement,
instrument or document shall include such agreement, instrument or document as
the same may be amended, modified or supplemented from time to time in
accordance with its terms and as permitted by the Loan Documents.
ARTICLE II. AMOUNT AND TERMS OF THE TERM LOAN
Section 2.01. TERM LOAN. Subject to the terms and conditions of this
Agreement, Lender agrees to make (a) a loan in the amount of Three Million
Dollars ($3,000,000) (the "A Loan") and (b) a loan in the amount of Nine Hundred
Twelve Thousand Nine Hundred Eight Dollars ($912,908) (the "B Loan" and,
together with the A Loan, the "Term Loan") to Borrower on the Closing Date. In
the event that Lender sells shares of Class B Common Stock to Borrower pursuant
to Section 1.04(e) of the Securities Purchase Agreement, the outstanding
principal amount of the B Loan will be automatically increased by an amount
equal to the aggregate purchase price for such shares. Any principal amount of
the Term Loan which is prepaid or repaid cannot be reborrowed.
Section 2.02. DELIVERY OF TERM LOAN PROCEEDS. On the Closing Date and
upon fulfillment of the applicable conditions set forth in this Agreement,
Lender will make the Term Loan available to Borrower by wiring the amount
thereof in immediately available funds to an account designated by the Borrower
("Deposit Account").
Section 2.03. INTEREST. Borrower shall pay interest to Lender on the
outstanding and unpaid principal amount of (a) the A Loan at a rate per annum
equal to ten percent (10%) and (b) the B Loan at a rate per annum equal to six
percent (6%). Any principal amount and any interest not paid when due (at
maturity, by acceleration or otherwise) and any fees and expenses not paid when
due, shall bear interest thereafter, payable on demand, at a rate per annum
equal to fourteen percent (14%), with respect to the A Loan (the "A Loan Default
Rate") and 10%, with respect to the B Loan (the "B Loan Default Rate").
Interest on the Term Loan shall not exceed the maximum amount permitted
under applicable Law and shall be calculated on the basis of a year of three
hundred sixty-five or three hundred sixty-six (365-366) days, as applicable, for
the actual number of days elapsed.
Accrued interest shall be due and payable on each Quarterly Date.
Interest accruing at the A Loan Default Rate or B Loan Default Rate shall be due
and payable on demand.
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Section 2.04. FEES. Borrower agrees to pay to Lender on the Closing
Date an arrangement fee of Forty-Five Thousand Dollars ($45,000) plus such
additional fees and expenses as set forth in a letter from Borrower to Lender
dated November 15, 1996 ("Term Loan Arrangement Fee").
Section 2.05. TERM LOAN NOTES. The A Loan shall be evidenced by, and
repaid with interest in accordance with, a single promissory note of Borrower,
in substantially the form of Exhibit A-1 hereto, duly completed, in the
principal amount equal to the A Loan, dated the Closing Date, and payable to
Lender (the "A Loan Note"). The B Loan shall be evidenced by, and repaid with
interest in accordance with, a single promissory note of Borrower, in
substantially the form of Exhibit A-2 hereto, duly completed, in the principal
amount equal to the B Loan, dated the Closing Date, and payable to Lender (the
"B Loan Note" and, together with the A Loan Note, the "Term Loan Notes"). Each
Term Loan Note shall be repaid in full, together with unpaid accrued interest,
on December 4, 2003 (the "Maturity Date").
Section 2.06. OPTIONAL PREPAYMENTS. (a) Borrower may, upon at least
five (5) Business Days' notice to Lender at any time on or after December 4,
2001, prepay the A Loan Note or the B Loan Note, in whole or in part with
accrued interest to the date of such prepayment on the amount prepaid; provided,
that each partial prepayment shall be in a principal amount of not less than One
Hundred Thousand Dollars ($100,000). Such prepayments shall be applied as set
forth in Section 2.10.
(b) From and after the earlier of (i) the date of issuance of a final
nonappealable order of the FDOI denying approval of the transactions
contemplated by Section 1.04(a) of the Securities Purchase Agreement and (ii)
March 4, 1997, in the event that the Second Closing (as defined in the
Securities Purchase Agreement) has not occurred on or prior to such date,
Borrower may, upon at least five (5) Business Days' notice to Lender, prepay the
Term Loan Notes, in whole with accrued interest to the date of such prepayment
on the amount prepaid, so long as simultaneously therewith, the Borrower has
purchased the shares of Class B Common Stock owed by Lender in accordance with
Section 1.05 of the Securities Purchase Agreement. Such prepayments shall be
applied as set forth in Section 2.10.
Section 2.07. MANDATORY PREPAYMENTS. To the extent permitted by
applicable Law, within five (5) Business Days after the receipt by Borrower, or
its Subsidiary of any cash proceeds from any issuance or sale (other than any
issuances or sales (x) by Borrower to or from its Subsidiary or (y) of ABCIC
Preferred) of any stock, shares, voting trust certificates, bonds, debentures,
options, warrants, notes, or other evidences of indebtedness, secured or
unsecured, convertible, subordinated or otherwise, or in general any instruments
commonly know as "securities" or any certificates of interest, shares or
participations in temporary or interim certificates for the purchase or
acquisition of, or any right to subscribe to, purchase or acquire, any of the
foregoing, Borrower shall prepay the Term Loan in an amount equal to one hundred
percent (100%) of such cash proceeds, less the amount of any
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and all income taxes required to be paid by Borrower in connection with or as a
result of such transaction. Such prepayments shall be applied as set forth in
Section 2.10.
Section 2.08. USE OF PROCEEDS. The proceeds of the Term Loan shall be
used by Borrower to repay outstanding amounts under an Amended and Restated Term
Loan Agreement dated as of December 5, 1995 between the Borrower and
Underwriters Reinsurance Company (the "Existing Loan Agreement"). Borrower will
not, directly or indirectly, use any part of such proceeds for the purpose of
purchasing or carrying any margin stock within the meaning of Regulation G, T, U
or X of the Board of Governors or to extend credit to any Person for the purpose
of purchasing or carrying any such margin stock.
Section 2.09. METHOD OF PAYMENT. Borrower shall make each payment under
this Agreement and under the Term Loan Notes by wire transfer not later than
3:00 P.M. (New York time) on the date when due in Dollars to Lender at the
Principal Office in immediately available funds.
Section 2.10. APPLICATION OF PAYMENTS. All payments received under this
Agreement will be applied as follows: first, to fees, expenses or indemnity
payments owed to the Lender, second, to accrued and unpaid interest on the A
Loan and B Loan, pro rata, third, to the remaining outstanding principal amount
of the B Loan and fourth, to the remaining outstanding principal amount of the A
Loan.
Except to the extent provided in this Agreement, whenever any payment
to be made under this Agreement or under either Term Loan Note shall be stated
to be due on any day other than a Business Day, such payment shall be made on
the next succeeding Business Day, and such extension of time shall in such case
be included in the computation of the payment of interest.
Section 2.11. TAXES. All payments made by Borrower under this Agreement
and the other Loan Documents shall be made free and clear of, and without
deduction or withholding for or on account of, any present or future income,
stamp or other taxes, levies, imposts, duties, charges, fees, deductions or
withholdings, now or hereafter imposed, levied, collected, withheld or assessed
by any Governmental Authority, excluding any net income taxes and franchise
taxes (imposed in lieu of net income taxes) imposed on Lender by the United
States or any state, local or foreign taxing authority (all such non- excluded
taxes, levies, imposts, duties, charges, fees, deductions and withholdings being
hereinafter called "Taxes"). If any Taxes are required to be withheld from any
amounts payable to Lender hereunder or under the other Loan Documents, the
amounts so payable to Lender shall be increased to the extent necessary to yield
to Lender (after payment of Taxes) interest or any such other amounts payable
hereunder at the rates or in the amounts specified in this Agreement and the
other Loan Documents. Whenever any Taxes are payable by Borrower, as promptly as
possible thereafter Borrower shall send to Lender a certified copy of an
original official receipt received by Borrower showing payment thereof. If
Borrower fails to
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pay any Taxes when due to the appropriate taxing authority or fails to remit to
Lender the required receipts or other required documentary evidence, Borrower
shall indemnify Lender for any incremental taxes, interest or penalties that may
become payable by Lender as a result of any such failure.
Section 2.12. DISCHARGE OF B LOAN NOTE. In the event that the Second
Closing (as defined in the Securities Purchase Agreement) occurs and Lender has
delivered the B Loan Note to Borrower as partial consideration for the purchase
of shares of Series I Preferred Stock pursuant to Section 1.04(a) of the
Securities Purchase Agreement, the B Loan Note will be deemed cancelled and
discharged in full.
ARTICLE III. CONDITIONS PRECEDENT
Section 3.01. CONDITIONS PRECEDENT TO MAKING OF THE TERM LOAN. The
obligation of Lender to make the Term Loan on the Closing Date is subject to the
condition precedent that Lender shall have received on or before the Closing
Date each of the following documents, in form and substance satisfactory to
Lender and its counsel, and each of the following requirements shall have been
fulfilled:
(1) EVIDENCE OF DUE ORGANIZATION AND ALL CORPORATE ACTIONS BY BORROWER.
A certificate of the Secretary or Assistant Secretary of Borrower (dated
the Closing Date) attesting to the certificate of incorporation and by-laws
of Borrower and all amendments thereto and to all corporate actions taken
by Borrower, including resolutions of its board of directors, authorizing
the execution, delivery and performance of the Loan Documents, and each
other document to be delivered pursuant to the Loan Documents;
(2) INCUMBENCY AND SIGNATURE CERTIFICATES OF BORROWER. A certificate of
the Secretary or Assistant Secretary of Borrower (dated the Closing Date)
certifying the names and true signatures of the officers of Borrower
authorized to sign the Loan Documents to which it is a party, and the other
documents to be delivered pursuant to the Loan Documents;
(3) GOOD STANDING CERTIFICATES. A Certificate (dated reasonably near
the Closing Date) from the Secretary of State (or other appropriate
official) of the jurisdiction of incorporation of each of Borrower and its
Subsidiary certifying as to the due incorporation and good standing of each
of Borrower and its Subsidiary and certificates (dated reasonably near the
Closing Date) from the Secretary of State (or other appropriate official)
of each other jurisdiction where each of Borrower and its Subsidiary is
required to be qualified to conduct business, certifying that each of
Borrower and its Subsidiary is duly qualified to do such business and is in
good standing in such state;
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(4) TERM LOAN NOTES. Each Term Loan Note duly executed and delivered by
Borrower;
(5) PLEDGE AGREEMENT. The Pledge Agreement duly executed by Borrower,
together with the certificates representing the shares pledged pursuant to
the Pledge Agreement and undated stock powers executed in blank for each
such certificate;
(6) SECURITY AGREEMENT. The Security Agreement duly executed by
Borrower together with (a) duly executed financing statements (UCC-1) to be
filed under the Uniform Commercial Code of all jurisdictions necessary or,
in the opinion of Lender, desirable to perfect the security interest
created by the Security Agreement; (b) duly executed copies of the
financing statements (UCC-3) (including the termination statement of URC)
to be filed under the Uniform Commercial Code of all jurisdictions
necessary, or in the opinion of Lender, desirable to terminate any Liens in
favor of any party other than Lender; and (c) Uniform Commercial Code
searches identifying all of the financing statements on file with respect
to such party in all jurisdictions referred to under (a), including the
financing statements filed by Lender against such party, indicating that no
party other than URC (with respect to Liens covered by the termination
statement referred to above) and other than Lender claims an interest in
any of the Collateral;
(7) OPINION OF COUNSEL FOR BORROWER. A favorable opinion of Morgan,
Lewis & Bockius LLP, counsel for Borrower and ABCIC (dated the Closing
Date);
(8) PAYMENT OF FEES. Payment in full of all fees required to be paid in
accordance with the Loan Documents, including but not limited to the Term
Loan Arrangement Fee;
(9) OFFICER'S CERTIFICATE. The following statements shall be true and
Lender shall have received a certificate signed by a duly authorized
officer of Borrower (dated the Closing Date) stating that:
(a) The representations and warranties contained in this Agreement
and in each of the other Loan Documents are correct on and as of the
date hereof as though made on and as of such date; and
(b) No Default or Event of Default has occurred and is continuing
or would result from the making of the A Loan or B Loan;
(10) REPAYMENT OF EXISTING LOAN. Evidence satisfactory to the Lender
that upon wiring of the proceeds of the Term Loan to the Deposit Account,
the Existing Loan Agreement will be terminated and all amounts payable
thereunder shall be paid in full;
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(11) LIEN SEARCHES. The results of lien searches against Borrower and
ABCIC in the State of Florida with respect to filings regarding Liens,
including tax Liens, shall have been received by Lender, and such results
shall be satisfactory to Lender;
(12) MANAGEMENT AGREEMENT. The delivery to Lender of a certified copy
of the Management Agreement;
(13) AGREEMENT AS TO REINSURANCE. The execution and delivery of the
Agreement as to Reinsurance;
(14) ABCIC-LENDER REINSURANCE AGREEMENTS. The execution and delivery of
the ABCIC-Lender Reinsurance Agreements effective on January 1, 1997;
(15) PURCHASE OF CLASS B COMMON STOCK. Borrower shall (x) execute and
deliver the Securities Purchase Agreement, and (y) tender to Lender for
purchase, subject only to payment of the purchase price set forth in the
Securities Purchase Agreement, 87,092 shares of the Borrower's Class B
Common Stock, $.01 par value ("Class B Common Stock"); and
(16) ADDITIONAL DOCUMENTATION. Such other approvals, opinions or
documents as Lender may reasonably request.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants that:
Section 4.01. INCORPORATION, GOOD STANDING AND DUE QUALIFICATION.
Borrower and its Subsidiary are duly incorporated, validly existing and in good
standing under the laws of the respective jurisdictions of their incorporation,
have the corporate power and authority to own their assets and to transact the
business in which they are now engaged or proposed to be engaged, and are duly
qualified as foreign corporations and in good standing under the laws of each
other jurisdiction in which such qualification is required, except to the extent
that its failure to be so qualified could not result in a Material Adverse
Change.
Section 4.02. CORPORATE POWER AND AUTHORITY; NO CONFLICTS. Borrower has
the power to execute, deliver and perform its obligations under each Loan
Document, to borrow hereunder, to grant Liens pursuant to the Loan Documents and
to deliver the Term Loan Notes. The execution, delivery and performance by
Borrower of the Loan Documents have been duly authorized by all necessary
corporate action and do not and will not: (1) require any consent or approval of
its stockholders; (2) contravene its certificate of incorporation or by-laws;
(3) violate any provision of, or require any filing, registration, consent or
approval under, any Law (including, without limitation, Regulations G, T, U and
X of the Board of Governors), order, writ, judgment, injunction, decree,
determination or
17
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award presently in effect having applicability to Borrower or its Subsidiary;
(4) result in a breach of or constitute a default under or require any consent
under any indenture or loan or credit agreement or any other agreement, lease or
instrument to which Borrower or its Subsidiary is a party or by which it or its
Subsidiary's properties may be bound or affected; (5) result in, or require, the
creation or imposition of any Lien (other than as created under the Pledge
Agreement and Security Agreement), upon or with respect to any material
properties now owned or hereafter acquired by Borrower or its Subsidiary; or (6)
cause Borrower or its Subsidiary to be in default under any such Law, order,
writ, judgment, injunction, decree, determination or award or any such
indenture, agreement, lease or instrument.
Section 4.03. LEGALLY ENFORCEABLE AGREEMENTS. Each Loan Document to
which Borrower is a party has been duly executed and delivered by Borrower and
is a legal, valid and binding obligation of Borrower, enforceable against
Borrower in accordance with its terms, except to the extent that such
enforcement may be limited by applicable bankruptcy, insolvency and other
similar laws affecting creditor's rights generally.
Section 4.04. LITIGATION. There are no actions, suits or proceedings
(private or governmental) pending or, to the knowledge of Borrower, threatened,
against or affecting Borrower or its Subsidiary before any Governmental
Authority or arbitrator, which could, in any one case or in the aggregate,
result in a Material Adverse Change. Except for the litigation disclosed on
Schedule 4.04, there are no actions, suits or proceedings (private or
governmental) pending or, to the knowledge of Borrower, threatened, against or
affecting the Fund before any Governmental Authority or arbitrator, which could,
in any one case or in the aggregate, result in a material adverse change in the
status of the business, assets, liabilities, results of operation (financial or
otherwise), property or prospects of the Fund.
Section 4.05. FINANCIAL STATEMENTS. The balance sheets of ABCIC as of
December 31, 1995, the related statement of operations, statement of changes in
stockholders' equity, and statement of cash flows of ABCIC for the Fiscal Year
then ended, and the accompanying footnotes, together, with the opinion thereon,
dated March 20, 1996, of Schmidt, Raines, Trieste, Dickenson & Adams, P.L.,
independent certified public accountants, copies of which have been furnished to
Lender, fairly present the financial condition of ABCIC as at such date and the
results of the operations of ABCIC for the periods covered by such statements,
all in accordance with GAAP consistently applied.
The balance sheet of ABCIC as of September 30, 1996, the related
statements of operations, and statement of cash flow, for the nine (9) month
period then ended, and the accompanying footnotes, copies of which have been
furnished to the Lender, fairly present the financial condition of ABCIC as of
such dates and the results of the operations of ABCIC for the periods covered by
such statements, all in accordance with GAAP consistently applied (subject to
normal year end adjustments).
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The statements of operations and the statements of cash flows of the
Fund for the years ended December 31, 1995, 1994 and 1993 and the accompanying
footnotes, together with the opinion thereon, dated March 20, 1996, of Schmidt,
Raines, Trieste, Dickenson & Adams, P.L. independent certified public
accountants, copies of which have been furnished to Lender, fairly present the
results of the operations of the Fund for the periods covered by such
statements, all in accordance with GAAP consistently applied.
The balance sheet of Borrower as of September 30, 1996, copies of which
have been furnished to Lender, fairly presents the financial condition of
Borrower as of such date, all in accordance with GAAP consistently applied.
Except for the litigation disclosed on Schedule 4.04, there are no
liabilities of ABCIC, the Fund or Borrower, fixed or contingent, which are
material but are not reflected in the most recent financial statements referred
to above or in the notes thereto, other than liabilities arising in the ordinary
course of business since December 31, 1995. The information, reports, financial
statements, exhibits and schedules furnished in writing by or on behalf of the
Borrower, ABCIC and the Fund to the Lender in connection with the negotiation,
preparation or delivery of this Agreement and the other Loan Documents or
included herein or delivered pursuant hereto or thereto, when taken as a whole
do not contain any untrue statement of material fact or omit to state any
material fact necessary to make the statements herein or therein, in light of
the circumstances under which they were made, not misleading. All written
information furnished after the date hereof by the Borrower and the Subsidiary
to the Lender in connection with this Agreement and the other Loan Documents
will be true, complete and accurate in every material respect, or (in the case
of projections) based on reasonable estimates, on the date as of which such
information is stated or certified. There is no fact known to the Borrower that
could have a Material Adverse Effect that has not been disclosed herein or in a
report, financial statement, exhibit, schedule, disclosure letter or other
writing furnished to the Lender for use in connection with the transactions
contemplated hereby.
Since December 31, 1995, there has been no material adverse change in
the status of the business, assets, liabilities, results of operations
(financial or otherwise), property or prospects of Borrower or its Subsidiary or
the Fund.
Section 4.06. OWNERSHIP AND LIENS. Borrower and its Subsidiary have
title to, or valid leasehold interests in, all of their properties and assets,
real and personal, including the properties and assets, and leasehold interests
reflected in the financial statements referred to in Section 4.05 (other than
any properties or assets disposed of in the ordinary course of business), and
none of the properties and assets owned by Borrower or its Subsidiary and none
of its leasehold interests are subject to any Lien, except as may be permitted
under this Agreement. The Fund does not own or otherwise have any interest in
any properties or assets, real or personal.
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Section 4.07. TAXES. The Borrower and its Subsidiary are members of an
affiliated group of corporations filing separate returns for Federal income tax
purposes. The Borrower and its Subsidiary have filed all Federal income tax
returns and all other material tax returns and information statements that are
required to be filed by them and have paid all taxes due pursuant to such
returns or pursuant to any assessment received by the Borrower or its
Subsidiary. The charges, accruals and reserves on the books of the Borrower and
its Subsidiary in respect of taxes and other governmental charges are, in the
opinion of the Borrower, adequate. The Borrower has not given or been requested
to give a waiver of the statute of limitations relating to the payment of
Federal, state, local and foreign taxes or other impositions. The Fund has filed
all tax returns and reports (federal, state, local and foreign) required to be
filed and has paid all taxes, assessments and governmental charges and levies
reported thereon to be due, including interest and penalties.
Section 4.08. ERISA. Each Plan is administered in compliance in all
material respects with its terms and all applicable provisions of ERISA and the
Code. No Plan is subject to Title IV of ERISA; neither Borrower nor any other
Person, including any fiduciary, has engaged in any Prohibited Transaction which
could subject Borrower or its Subsidiary, or any entity which they have an
obligation to indemnify, to any material tax or penalty imposed under Section
4975 of the Code or Section 502(i) of ERISA; no Plan has been terminated and, to
the best knowledge of the Borrower, no notice of intent to terminate a Plan has
been filed which, as a result thereof could result in liability to Borrower or
its Subsidiary; no Plan is a Multiemployer Plan and neither Borrower nor any
ERISA Affiliate has completely or partially withdrawn under Section 4201 or 4204
of ERISA from a Multiemployer Plan which, as a result thereof could result in
liability to Borrower or its Subsidiary, or incurred liability with respect to
Section 515 of ERISA; Borrower has met the applicable minimum funding
requirements under ERISA with respect to all of its Plans and there has been no
material failure on the part of the Borrower's ERISA Affiliates to meet such
requirements; a favorable determination letter from the IRS has been received
with respect to each Plan intended to be qualified under Section 401(a) or
401(k) of the Code and nothing has occurred which could adversely affect such
determination; there are no Liens outstanding or given in connection with a
Plan; and neither Borrower nor any ERISA Affiliate has liability for retiree
medical, life insurance or other death benefits (contingent or otherwise).
Section 4.09. OPERATION OF BUSINESS. Borrower and its Subsidiary
possess all licenses, permits, franchises, and trade names, or rights thereto,
to conduct its business substantially as now conducted and as presently proposed
to be conducted, and neither Borrower nor its Subsidiary is in violation of any
valid rights of others with respect to any of the foregoing, except to the
extent such failure or violation could not result in a Material Adverse Change.
No licenses or permits are necessary or required in order for the Fund to wind
down its business.
Section 4.10. NO DEFAULT ON OUTSTANDING JUDGMENTS OR ORDERS. Borrower
and its Subsidiary each has satisfied all judgments and neither Borrower nor its
Subsidiary is in
20
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default with respect to any judgment, writ, injunction, decree, rule or
regulation of any court, arbitrator or federal, state, municipal or other
Governmental Authority, commission, board, bureau, agency or instrumentality,
domestic or foreign.
The Fund has satisfied all judgments and the Fund is not in default
with respect to any judgment, writ, injunction, decree, rule or regulation of
any court, arbitrator or federal, state, municipal or other Governmental
Authority, commission, board, bureau, agency or instrumentality, domestic or
foreign.
Section 4.11. NO DEFAULTS ON OTHER AGREEMENTS. Neither Borrower nor its
Subsidiary is a party to any indenture, loan or credit agreement or any lease or
other agreement, including, without limitation, any undertaking with any state
insurance department or other Governmental Authority, or instrument or subject
to any certificate of incorporation or corporate restriction the compliance with
which could result in a Material Adverse Change. Neither Borrower nor its
Subsidiary is in default in any respect in the performance, observance or
fulfillment of any of the obligations, covenants or conditions contained in any
agreement or instrument where such failure to perform, observe or fulfill could
result in a Material Adverse Change.
Section 4.12. SUBSIDIARIES. The only Subsidiary of Borrower is ABCIC.
ABCIC does not have any Subsidiaries. All of the outstanding capital stock of
ABCIC has been validly issued, is fully paid and nonassessable, and, except for
the ABCIC Preferred, is owned by Borrower free and clear of Liens.
Section 4.13. NO RESTRICTION ON TRANSFERS. There are no restrictions on
Borrower or its Subsidiary which prohibit or otherwise restrict the transfer of
cash or other assets owned by its Subsidiary to Borrower, other than
prohibitions or restrictions existing under or by reason of this Agreement or
the other Loan Documents or the Law.
Section 4.14. GOVERNMENTAL REGULATION. (a) Neither the Borrower nor its
Subsidiary is an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.
(b) Neither the Borrower nor its Subsidiary is a "holding company", or
an "affiliate" of a "holding company" or a "subsidiary company" of a "holding
company", within the meaning of the Public Utility Holding Company Act of 1935,
as amended.
Section 4.15. PARTNERSHIPS. Neither Borrower nor its Subsidiary is a
partner of any partnership or a member of any entity taxed as a partnership.
Section 4.16. ENVIRONMENTAL PROTECTION. Borrower and its Subsidiary
have all permits, licenses and other authorizations which are required under all
Environmental Laws, except to the extent failure to have any such permit,
license or authorization could not result in a Material Adverse Change. As of
the date hereof, neither Borrower nor its Subsidiary is
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required to obtain any permits, licenses, or other authorizations under any
Environmental Law. Each of such permits, licenses and other authorizations is in
full force and effect and borrower and its Subsidiary are in compliance with all
Environmental Laws and the terms and conditions of the required permits,
licenses and authorizations, and is also in compliance with all other
limitations, restrictions, obligations, schedules and timetables contained in
those Laws or contained in any plan, order, decree, judgment, injunction, notice
or demand letter issued, entered, promulgated or approved thereunder, except to
the extent failure to comply could not result in a Material Adverse Change. In
addition, no notice, notification, demand, request for information, citation,
summons or order has been issued, no complaint has been filed, no penalty has
been assessed and no investigation or review is pending or threatened by an
governmental or other entity with respect to any alleged failure by the Borrower
or its Subsidiary to have any environmental, health or safety permit, license or
other authorization required under any Environmental Law in connection with the
conduct of the business of the Borrower or its Subsidiary.
Section 4.17. SOLVENCY. Borrower and its Subsidiary each are Solvent.
Section 4.18. GOVERNMENTAL APPROVALS. No Governmental Approval is
required to authorize or is required in connection with (i) the execution,
delivery and performance of this Agreement or any other Loan Document, or any of
the transactions contemplated hereby or thereby, or (ii) the legality, validity,
binding effect or enforceability of this Agreement or any other Loan Document,
except for compliance with Section 628.461 of the Florida Statutes.
Section 4.19. MATERIAL AGREEMENTS AND LIENS.
(a) Neither Borrower nor its Subsidiary is a party to any credit
agreement, loan agreement, indenture, purchase agreement, guarantee, letter of
credit or other arrangement providing for or otherwise relating to any Debt or
any extension of credit (or commitment for any extension of credit) to, or
guarantee by, the Borrower or its Subsidiary the aggregate principal or face
amount of which equals or exceeds (or may equal or exceed) $100,000.
(b) There is no outstanding Lien securing Debt of any Person the
aggregate principal or face amount of which equals or exceeds (or may equal or
exceed) $100,000 and covering any property of the Borrower or its Subsidiary.
Section 4.20. CAPITALIZATION. The authorized capital stock of the
Borrower consists, on the date hereof, of an aggregate of 26,000,000 shares
consisting of (i) 15,000,000 shares of common stock, par value $.01 per share
("Common Stock"), of which 102,501 shares are duly and validly issued and
outstanding (and no shares of which are held in treasury), each of which shares
is fully paid and nonassessable, (ii) 1,000,000 shares of Class B Common Stock,
none of which has ever been issued and (iii) 10,000,000 shares of preferred
stock, par value $.01 per share, 2,912,908 shares of which have been
22
<PAGE>
designated Cumulative Convertible Preferred Stock, Series I, none of which has
ever been issued. As of the date hereof such issued and outstanding shares of
common stock are owned beneficially and of record as set forth on Schedule 4.20.
As of the date hereof, except as set forth on Schedule 4.20, there are no
outstanding Equity Rights with respect to the Borrower and there are no
outstanding obligations of the Borrower or its Subsidiary to repurchase, redeem,
or otherwise acquire any shares of capital stock of the Borrower nor are there
any outstanding obligations of the Borrower or its Subsidiary to make payments
to any Person, such as "phantom stock" payments, where the amount thereof is
calculated with reference to the fair market value or equity value of the
Borrower or its Subsidiary.
Section 4.21. NO BROKERS OR FINDERS. The Borrower and its Subsidiary
have not engaged any broker or finder in connection with the transactions
contemplated hereby, other than Pegasus Advisors, Inc., which acted solely as a
reinsurance intermediary.
ARTICLE V. AFFIRMATIVE COVENANTS
So long as the A Loan or B Loan shall remain unpaid, or any other
amount is owing by Borrower to Lender hereunder or under any other Loan
Document, Borrower shall:
Section 5.01. MAINTENANCE OF EXISTENCE. Preserve and maintain, and
cause its Subsidiary to preserve and maintain, its corporate existence and good
standing in the jurisdiction of its incorporation, qualify and remain qualified
as a foreign corporation in each jurisdiction in which such qualification is
required, maintain its licenses in its jurisdiction of incorporation and in each
other jurisdiction where any such license is required for the conduct of its
business, except to the extent that its failure to so qualify or maintain such
licenses could not result in a Material Adverse Change.
Section 5.02. CONDUCT OF BUSINESS. Cause its Subsidiary to continue to
engage in an efficient and economical manner in the Insurance Business.
Section 5.03. MAINTENANCE OF PROPERTIES. Maintain, keep and preserve,
and cause its Subsidiary to maintain, keep and preserve, all of its properties,
(tangible and intangible) necessary or used in the proper conduct of its
business in good working order and condition, ordinary wear and tear excepted.
Section 5.04. MAINTENANCE OF RECORDS. Keep, and cause its Subsidiary to
keep, adequate records and books of account, in which complete entries will be
made in accordance with GAAP and, as applicable, SAP, reflecting all of its and
their respective financial transactions.
Section 5.05. MAINTENANCE OF INSURANCE. Maintain, and cause its
Subsidiary to maintain, insurance with financially sound and reputable insurance
companies or associations in such amounts and covering such risks as are usually
carried by companies engaged in the
23
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same or a similar business and similarly situated and such other insurance as is
reasonably required by the Lender.
Section 5.06. COMPLIANCE WITH LAWS. Comply, and cause its Subsidiary to
comply, in all respects with all applicable Laws (including without limitation
all Laws pertaining to the regulation of entities engaged in the Insurance
Business), such compliance to include, without limitation, paying before the
same become delinquent all taxes, assessments and governmental charges imposed
upon it or upon its property, except (1) in the case of the failure to pay
taxes, such taxes which are the subject of a Good Faith Contest, and (2) to the
extent that its failure to so comply could not result in a Material Adverse
Change.
Section 5.07. RIGHT OF INSPECTION. During normal business hours and
upon reasonable notice, permit Lender or any agent or representative thereof, to
examine or make copies and abstracts from the records and books of account of,
and visit the properties of, Borrower or its Subsidiary, and to discuss the
affairs, finances and accounts of Borrower or its Subsidiary with any of their
respective officers and directors and independent accountants.
Section 5.08. REPORTING REQUIREMENTS. Furnish to Lender:
(1) ANNUAL FINANCIAL STATEMENTS. As soon as available and in any event
within ninety (90) days after the end of each Fiscal Year of Borrower, (a)
the consolidated balance sheet of the Borrower and its Consolidated
Subsidiary as at the end of such Fiscal Year and the related consolidated
statements of income, of stockholders' equity and of cash flows for such
Fiscal Year, (b) the balance sheet of the Borrower (on a stand alone basis)
as at the end of such Fiscal Year and the related statements of income, of
stockholder's equity and of cash flows for such Fiscal Year, and (c) the
consolidating balance sheet of the Borrower and its Consolidated Subsidiary
as at the end of such Fiscal Year and the related consolidating statements
of income, of stockholders' equity and of cash flows for such Fiscal Year;
in each case prepared in accordance with GAAP consistently applied and
setting forth comparative figures for the preceding Fiscal Year, and, in
the case of such consolidated financial statements, examined by Schmidt,
Raines, Trieste, Dickenson & Adams, P.L. or another firm of independent
certified public accountants satisfactory to Lender whose opinion shall not
be qualified as to the scope of audit or as to the status of Borrower or of
its Consolidated Subsidiary as a going concern, together with a certificate
of such accounting firm stating that in the course of its regular audit of
business of Borrower and its Subsidiary, which audit was conducted in
accordance with generally accepted auditing standards, such accounting firm
has obtained no knowledge of any Default or Event of Default which has
occurred and is continuing or, if in the opinion of such accounting firm
such a Default or Event of Default has occurred and is continuing, a
statement as to the nature thereof.
As soon as available and in any event (a) within ninety (90) days after
the close of each Fiscal Year of ABCIC, the Annual Statement of ABCIC for
such Fiscal
24
<PAGE>
Year as filed with the insurance commissioner (or similar authority) in
ABCIC's state of domicile, together with within ninety (90) days after the
close of each Fiscal Year of ABCIC, the opinion thereof of the Chief
Financial officer of Borrower stating that such Annual Statement presents
the financial condition and results of operations of ABCIC in accordance
with SAP, (b) within thirty (30) days of a receipt of an actuarial report
but in no event later than one hundred fifty (150) days after the close of
each Fiscal Year of ABCIC, the opinion of Schmidt, Raines, Trieste,
Dickenson & Adams, P.L. or another firm of certified public accountants
satisfactory to Lender, who shall have examined such Annual Statement and
whose opinion shall not be qualified as to the scope of audit or as to the
status of ABCIC as a going concern.
(2) UARTERLY FINANCIAL STATEMENTS. (i) As soon as available and in any
event within fifty-five (55) days after the close of each of the first
three Fiscal Quarters in each Fiscal Year of Borrower, (a) the consolidated
balance sheet of the Borrower and its Consolidated Subsidiary as at the end
of such Fiscal Quarter and the related consolidated statements of income,
of stockholders' equity and of cash flows for such Fiscal Quarter and for
the elapsed portion of the Fiscal Year ended with the last day of such
Fiscal Quarter, (b) the balance sheet of Borrower (on a stand alone basis)
as at the end of such Fiscal Quarter and the related statements of income,
of stockholder's equity and of cash flows for such Fiscal Quarter and for
the elapsed portion of the Fiscal Year ended with the last day of such
Fiscal Quarter and (c) the consolidating balance sheet of the Borrower and
its Consolidated Subsidiary as at the end of such Fiscal Quarter and the
related consolidating statements of income, of stockholder's equity and of
cash flows for such Fiscal Quarter and for the elapsed portion of the
Fiscal Year ended with the last day of the Fiscal Quarter; in each case
prepared in accordance with GAAP consistently applied and setting forth
comparative figures for the related periods in the prior Fiscal Year, and
all of which shall be certified by the Chief Financial Officer of Borrower,
subject to changes resulting from normal year-end audit adjustments.
As soon as available and in any event within (a) fifty-five (55) days
after the close of each of the first three Fiscal Quarters in each Fiscal
Year of ABCIC, quarterly financial statements of ABCIC (prepared in
accordance with SAP) for such Fiscal Quarter and as filed with the
insurance commissioner (or similar authority) in ABCIC's state of domicile,
together with the opinion thereon of the Chief Financial Officer of
Borrower stating that such financial statements present the financial
condition and results of operations of ABCIC in accordance with SAP and (b)
a certificate of the Chief Financial Officer of ABCIC affirming the
adequacy of Loss Reserves of ABCIC as at the end of such Fiscal Quarter (as
shown on its financial statements prepared in accordance with SAP).
(3) Borrower will furnish to Lender, at the time it furnishes each set
of financial statements pursuant to paragraph (1) and (2) of this Section
5.08, a certificate of the Chief Financial Officer of Borrower, setting
forth in reasonable
25
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detail the computations necessary to determine whether Borrower and its
Subsidiary are in compliance with Article VII as of the end of the
respective quarterly fiscal period or fiscal year.
(4) REPORTS AND MANAGEMENT LETTERS. Promptly upon receipt thereof,
copies of any reports, including but not limited to internal control
reports, or management letters submitted to Borrower or ABCIC by
independent certified public accountants in connection with the examination
of the financial statements of the Borrower and its Consolidated Subsidiary
made by such accountants.
(5) CERTIFICATE OF NO DEFAULT. Within sixty (60) days after the end of
each Fiscal Quarter of Borrower, a certificate of the Chief Financial
Officer of Borrower (a) certifying that no Default or Event of Default has
occurred and is continuing or, if a Default or Event of Default has
occurred and is continuing, a statement as to the nature thereof and the
action which is proposed to be taken with respect thereto, and (b) with
computations demonstrating compliance with the covenants contained in
Article VII.
(6) SEC AND OTHER REPORTS. Promptly upon their becoming publicly
available, a copy of each report (including Forms 8-K, 10-K and 10-Q) or
other document, proxy statement and registration statement or prospectus
relating to securities of the Borrower or ABCIC filed with or delivered to
any securities exchange, the Securities and Exchange Commission or any
successor agency.
(7) NOTICE OF LITIGATION. Promptly after the commencement thereof,
notice of all actions, suits, and proceedings before any Governmental
Authority, affecting Borrower or its Consolidated Subsidiary which, if
determined adversely to Borrower or its Consolidated Subsidiary, could
result in a material Adverse Change.
(8) NOTICES OF DEFAULTS AND EVENTS OF DEFAULT. As soon as possible and
in any event within five (5) Business Days after the occurrence of each
Default or Event of Default a written notice setting forth the details of
such Default or Event of Default and the action which is proposed to be
taken by Borrower with respect thereto.
(9) ERISA REPORTS. As soon as possible and in any event within ten (10)
days after Borrower knows or has reason to know that any Reportable Event
has occurred with respect to any Plan or that a Prohibited Transaction has
occurred resulting in material liability to Borrower or its Subsidiary or
to any entity which they have an obligation to indemnify or that the PBGC
or Borrower or its Subsidiary has instituted or will institute proceedings
under Title IV of ERISA to terminate any Plan or to appoint a trustee to
administer any Plan or that Borrower or its Subsidiary or any ERISA
Affiliate has completely or partially withdrawn from a Multiemployer Plan
or that a Plan which is a Multiemployer Plan is in reorganization (within
the meaning of Section 4241 of ERISA), is insolvent (within the meaning of
Section 4245
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of ERISA) or is terminating, or that a plan intended to qualify under
Section 401(a) or 401(k) of the Code fails to so qualify or that the waiver
of the minimum funding standard under Section 412 of the Code has been
applied for with respect to a Plan or that there has been a material
failure to make a required payment or contribution to any Plan or that a
Plan has been amended which has resulted or would result in the imposition
of a Lien or requires the granting of a Lien, Borrower will deliver to
Lender a certificate of the Chief Financial Officer of Borrower setting
forth details as to such Reportable Event or Prohibited Transaction or Plan
termination or appointment or withdrawal or reorganization or insolvency or
qualification failure or waiver or payment or contribution failure or
amendment and the action Borrower proposes to take with respect thereto.
(10) REPORTS TO OTHER CREDITORS. Promptly after the furnishing thereof,
copies of any statement or report furnished by Borrower or its Subsidiary
to any other party pursuant to the terms of any indenture, loan, or credit
or similar agreement and not otherwise required to be furnished to Lender
under this Agreement.
(11) STRATEGIC AND BUSINESS PLAN. As soon as possible and in any event
no later than December 1 in each year, commencing December 1, 1997, a copy
of a three (3) year strategic and business plan, detailed on a quarterly
basis for the first year of the plan and on an annual basis for the
remaining years of the plan, and such plan shall include balance sheets,
income statements, cash flow statements, operating budgets, staffing and
investment strategy (quality, maturity, duration, taxable/tax exempt by
asset sector, compilation, strategy, classes of business, and so forth). On
or about each August 1, a copy of any and all revisions to the then current
strategic and business plan. As soon as available and in any event within
thirty (30) days of delivery of each strategic and business plan and
revision thereof, copies of the resolutions of the board of directors of
Borrower approving such plans or revisions. Any material changes made to
the plan during the year will be provided by Borrower as soon as possible.
Lender acknowledges that Borrower has delivered to Lender a strategic and
business plan for the three (3) year period commencing January 1, 1997.
(12) INSURANCE. Upon the occurrence of any casualty, damage or loss,
whether or not giving rise to a claim under any insurance policy insuring
Borrower or its Subsidiary (other than an insurance policy issued by ABCIC
to Persons other than Borrower or its Subsidiary in the ordinary course of
ABCIC's business), in an amount greater than Two Hundred Fifty Thousand
Dollars ($250,000), notice thereof, together with copies of any document
relating thereto (including copies of any such claim) in possession or
control of Borrower or any agent of Borrower; and immediately after the
occurrence thereof, written notice of any cancellation of any insurance
policy required to be maintained by Borrower or its Subsidiary pursuant to
Section 5.05.
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(13) MATERIAL ADVERSE CHANGE. As soon as possible and in any event
within five (5) Business Days after the occurrence of any event or
circumstance which could result in or has resulted in a Material Adverse
Change, written notice thereof.
(14) ENVIRONMENTAL NOTICES. As soon as practicable and in any event
within ten (10) Business Days after receipt, copies of all Environmental
Notices received by Borrower.
(15) LOSS RESERVE REPORT. Within one hundred twenty (120) days after
the close of each Fiscal Year of ABCIC, a report, including a written
review of and favorable opinion on methodology and assumptions, prepared by
an Independent Actuary reviewing the adequacy of Loss Reserves of ABCIC,
which firm shall be provided access to or copies of all reserve analyses
and valuations relating to the insurance business of ABCIC in the
possession of or available to the Borrower or ABCIC.
Upon the occurrence thereof, a notice from the Chief Financial Officer
of the Borrower of any event which could cause an increase or decrease of
the Loss Reserves of ABCIC of more than ten percent (10%) from the amount
thereof reflected in the most recent annual or quarterly statutory
financial statements of ABCIC delivered pursuant to this Section.
(16) REGULATORY AND OTHER STATEMENTS AND REPORTS. Promptly (a) after
their becoming available, copies of any statutory financial statements that
the Borrower or ABCIC periodically files with the Applicable Insurance
Regulatory Authority of the state in which it is domiciled or any state in
which it is deemed to be commercially domiciled or any governmental agency
or agencies substituted therefor (including all exhibits and schedules
thereto), (b) after receipt thereof, copies of all regular and periodic
reports of reviews or examinations (including, without limitation,
triennial examinations and risk adjusted capital reports) of ABCIC,
delivered to ABCIC in draft or final form by any Applicable Insurance
Regulatory Authority, insurance commission or similar regulatory authority,
(c) after receipt thereof, written notice of any assertion by any
Applicable Insurance Regulatory Authority, or any governmental agency or
agencies substituted therefor, as to a violation of any requirement of Law
by ABCIC, (d) after receipt thereof, a copy of the final report to ABCIC
from the NAIC for each Fiscal Year, as to ABCIC's compliance or
noncompliance with each of the NAIC Tests, (e) after receipt thereof, a
copy of A.M. Best's rating analysis for each Fiscal Year, (f) not later
than seven (7) days after the making of any such filing, copies of all
insurance holding company system act filings with governmental authorities
by ABCIC, including, without limitation, filings which seek approval of
governmental authorities with respect to transactions between ABCIC and any
of its Affiliates, (g) within five (5) Business Days after receipt thereof,
copies of any notice of actual suspension, termination, revocation or
limitation of any license of ABCIC by any Applicable Insurance Regulatory
Authority, including any request by an
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Applicable Insurance Regulatory Authority which commits ABCIC to take or
refrain from taking any action or which otherwise affects the authority of
ABCIC to conduct its business (h) after Borrower has reason to believe that
ABCIC is or may be deemed to be "commercially domiciled" (or the
substantial equivalent) in a state other than its state of domicile, under
the insurance Law of such state, notice to that effect identifying the
applicable state, and in any event within five (5) Business Days after
Borrower or ABCIC obtains knowledge thereof, notice of any actual changes
in the insurance laws enacted in any state in which ABCIC is domiciled
which could cause a Material Adverse Change.
(17) RISK BASED CAPITAL. As soon as available and in any event within
the time period required by the National Association of Insurance
Commissioners, a calculation of ABCIC's Risk Based Capital as of the end of
each Fiscal Year.
(18) GENERAL INFORMATION. Such other information respecting the
condition or operations, financial or otherwise, of Borrower or its
Subsidiary as Lender may from time to time reasonably request.
Section 5.09. COMPLIANCE WITH ENVIRONMENTAL LAWS. Comply, and cause its
Subsidiary to comply, in all respects with all applicable Environmental Laws
where the failure to comply could result in a Material Adverse Effect and
immediately pay or cause to be paid, and cause its Subsidiary to immediately pay
or cause to be paid, all costs and expenses incurred in connection with such
compliance.
Section 5.10. INDEPENDENT ACTUARY. Cause its Subsidiary to cause the
Independent Actuary to make a determination of the Loss Reserves of ABCIC as of
each December 31st.
Section 5.11. USE OF PROCEEDS. The Borrower will use the proceeds of
the Term Loan solely to repay amounts outstanding under the Existing Loan
Agreement; PROVIDED that the Lender shall not have any responsibility as to the
use of any of such proceeds.
Section 5.12. DIVIDENDS TO BORROWER. At the request of the Lender,
ABCIC shall pay a dividend to the Borrower in an amount necessary to ensure
timely payment of interest and principal under each of the A Loan and B Loan,
subject to any limitations imposed by applicable law and the rules and
regulations of the Florida Department of Insurance ("FDOI") relating to
dividends by insurance companies.
ARTICLE VI. NEGATIVE COVENANTS
So long as the A Loan Note or B Loan Note shall remain unpaid, or any
other amount is owing by Borrower to Lender hereunder or under any other Loan
Document, Borrower shall not and shall not permit its Subsidiary to:
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Section 6.01. DEBT. Create, incur, assume or suffer to exist, or permit
Subsidiary to create, incur, assume, or suffer to exist, any Debt, except:
(1) Debt of Borrower under this Agreement, the A Loan Note, B Loan Note
or any other Loan Document;
(2) Accounts payable to any Person, and not overdue by more than
forty-five (45) days (unless the subject of a Good Faith Contest), for goods and
services supplied to Borrower or its Subsidiary by such Person in the ordinary
course of business;
(3) Debt secured by purchase money Liens permitted by Section 6.03(8);
(4) Guaranties permitted under Section 6.02; and
(5) Debt, in form and substance, and containing such provisions,
including subordination provisions, satisfactory to the Lender, the net proceeds
of which Debt are used solely to repay the Term Loan or redeem the preferred
stock held by the Lender.
Section 6.02. GUARANTIES. Assume, guarantee, endorse, or furnish funds
for the payment or maintenance of, or otherwise be or become contingently liable
under or with respect to, the Debt, other obligations, net worth, working
capital or earnings of any Person, or guarantee the payment of dividends or
other distributions upon the stock or equity interests of any Person, or agree
to purchase, sell or lease (as lessee or lessor) property, products, materials,
supplies or services primarily for the purpose of enabling a debtor to make
payment of such debtor's obligations or agree to assure a creditor against loss,
including, without limitation, causing a bank or other financial institution to
issue a letter of credit or other similar instrument for the benefit of another
Person, or permit its Subsidiary to do so, except (1) guaranties by endorsement
of negotiable instruments for deposit or collection or similar transactions in
the ordinary course of business, and (2) for the obligations of ABCIC under
insurance policies issued and reinsurance agreements entered into in the
ordinary course of business consistent with the terms of this Agreement.
Section 6.03. LIENS. Create, incur, assume or suffer to exist, or
permit its Subsidiary to create, assume, or suffer to exist, any Lien, upon or
with respect to any of its real or personal properties (including, without
limitation, leasehold interests, leasehold improvements and any other interest
in real property or fixtures), now owned or hereafter acquired, except:
(1) Liens granted to Lender under and pursuant to the Loan Documents;
(2) Liens for taxes or assessments or other government charges or
levies if not yet due and payable or if due and payable if they are the subject
of a Good Faith Contest;
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(3) Liens imposed by Law, such as mechanic's, materialmen's,
landlord's, warehousemen's and carrier's Liens, and other similar Liens,
securing obligations incurred in the ordinary course of business which are not
past due for more than forty-five (45) days, or which are the subject of a Good
Faith Contest;
(4) Liens under workmen's compensation, unemployment insurance, social
security or similar legislation (other than ERISA);
(5) Liens, deposits or pledges to secure the performance of bids,
tenders, contracts (other than contracts for the payment of money), leases
(permitted under the terms of this Agreement), public or statutory obligations,
surety, stay, appeal, indemnity, performance or other similar bonds, or other
similar obligations arising in the ordinary course of business;
(6) judgment and other similar Liens arising in connection with court
proceedings; provided, that the execution or other enforcement of such Liens is
effectively stayed and the claims secured thereby are the subject of a Good
Faith Contest;
(7) easements, rights-of-way, restrictions, zoning and other similar
encumbrances which, in the aggregate, do not materially interfere with the
occupation, use and enjoyment by Borrower or its Subsidiary of the property or
assets encumbered thereby in the normal course of its business or materially
impair the value of the property subject thereto;
(8) purchase money Liens on any real property, fixtures or equipment
hereafter acquired or the assumption of any Lien on real property, fixtures or
equipment existing at the time of such acquisition, or a Lien incurred in
connection with any conditional sale or other title retention agreement or a
Capital Lease; provided, that:
(a) any property subject to any of the foregoing is acquired by
Borrower or its Subsidiary in the ordinary course of its business and the
Lien on any such property is created contemporaneously with such
acquisition;
(b) the Debt secured by any Lien so created, assumed or existing shall
not exceed eighty-five percent (85%) of the lesser of cost or fair market
value as of the time of acquisition of the property covered thereby;
(c) each such Lien shall attach only to the property so acquired and
fixed improvements thereon;
(d) the aggregate amount of all such Debt secured by all such Liens at
any time shall be equal to or less than Two Hundred Fifty Thousand Dollars
($250,000); and
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(9) in the case of ABCIC, deposits of cash or securities with or on
behalf of state insurance departments.
Section 6.04. SALE OF ASSETS. Sell, lease, assign, transfer or
otherwise dispose of, or permit its Subsidiary to sell, lease, assign, transfer,
or otherwise dispose of, any of its now owned or hereafter acquired assets,
except for: (1) cash and investment securities disposed of for purposes of
reinvestment or to pay claims, taxes and expenses in the ordinary course of
business or, in the case of ABCIC, to pay a dividend; or (2) the sale or other
disposition of tangible personal property which has become economically obsolete
or which has been replaced.
Section 6.05. TRANSACTIONS WITH AFFILIATES. Except as expressly
permitted by this Agreement, the Borrower will not, nor will it permit its
Subsidiary to, directly or indirectly: (a) make any investment in an Affiliate;
(b) transfer, sell, lease, assign or otherwise dispose of any property to an
Affiliate; (c) merge into or consolidate with or purchase or acquire property
from an Affiliate; (d) make any contribution towards, or reimbursement for, any
Federal income taxes payable by its Subsidiary in respect of income of the
Borrower; or (e) enter into any other transaction directly or indirectly with or
for the benefit of an Affiliate (including, without limitation, guarantees and
assumptions of obligations of an Affiliate), except (1) in the ordinary course
of and pursuant to the reasonable requirements of Borrower's or its Subsidiary's
business and upon fair and reasonable terms no less favorable to Borrower or its
Subsidiary, as the case may be, than it would obtain in a comparable
arm's-length transaction with a Person not an Affiliate of Borrower or its
Subsidiary, as the case may be and (2) under and pursuant to the terms of the
Management Agreement.
Section 6.06. MERGERS. (x) Enter into a merger or consolidate with,
wind up, liquidate or dissolve its affairs, or sell, assign, lease or otherwise
dispose of (whether in one transaction or in a series of transactions) all or
substantially all of its assets (whether now owned or hereafter acquired) to,
any Person, or (y) acquire (whether by purchase, lease or otherwise) any of the
assets or the business of any Person (or enter into any agreement to do any of
the foregoing) (other than in the ordinary course of business), or permit its
Subsidiary to do any of the foregoing.
Section 6.07. LEASES. Create, incur, assume, or suffer to exist, or
permit its Subsidiary to create, incur, assume, or suffer to exist, any
obligation as lessee for the rental or hire of any real or personal property
except: (1) Capital Leases permitted under Section 6.03(8), and (2) in addition
to leases permitted under exception (1), leases that do not in the aggregate
require Borrower and its Subsidiary to make payments (including taxes,
insurance, maintenance, and similar expenses which Borrower or its Subsidiary is
required to pay under the terms of the lease) in any Fiscal Year in excess of
one percent (1%) of direct earned normal premium.
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Section 6.08. DIVIDENDS. Declare or pay any dividends; or purchase,
redeem, retire, or otherwise acquire for value any of the capital stock or
securities convertible into capital stock of Borrower or its Subsidiary now or
hereafter outstanding; or make any distribution of assets to its stockholders as
such whether in cash, assets, or in obligations of Borrower, or allocate or
otherwise set apart any sum for the payment of any dividend or distribution on,
or for the purchase, redemption, or retirement of any shares of its capital
stock.
Permit its Subsidiary to declare or pay any dividends other than
dividends on the ABCIC Preferred; or purchase, redeem, retire, or otherwise
acquire for value any of the capital stock or securities convertible into
capital stock of Borrower or such Subsidiary now or hereafter outstanding (other
than ABCIC Preferred reacquired on foreclosure which were pledged to secure
premium payments); or make any distribution of assets, or in obligations of
Subsidiary, or allocate or otherwise set apart any sum for the payment of any
dividend or distribution on, or for the purchase, redemption, or retirement of
any shares of its capital stock, except Subsidiary can declare and pay dividends
on its common stock.
Create or otherwise cause or suffer to exist, or permit its Subsidiary
to create or otherwise cause or suffer to exist, any encumbrance or restriction
which prohibits or otherwise restricts the ability of its Subsidiary to (1) pay
dividends or make other distributions or pay any Debt owed to Borrower, (2) make
loans or advances to Borrower, (3) transfer any of its properties or assets to
Borrower or (4) guarantee the obligations of Borrower under this Agreement and
the other Loan Documents and/or secure such guarantee with its assets, other
than prohibitions or restrictions existing under or by reason of (1) this
Agreement, the other Loan Documents, (2) the Law, (3) the terms of the ABCIC
Preferred.
Section 6.09. INVESTMENTS. Permit its Subsidiary to make any
Investment, except for Permitted Investments managed by a nationally recognized
investment advisor with assets under management in excess of $1 billion or other
investment advisor reasonably acceptable to Lender.
Section 6.10. CHANGES, AMENDMENTS OR MODIFICATIONS. Change, amend,
modify or supplement any of the following: (1) its certificate of incorporation
or (2) its by-laws.
Section 6.11. CHANGES IN BUSINESS. Engage in any business other than
(1) the ownership of the capital stock of ABCIC, (2) provisions of management
services to ABCIC pursuant to the Management Agreement, and (3) entering into
and performing its obligations under this Agreement and the other Loan
Documents, or permit ABCIC to engage in any business other than the Insurance
Business.
Section 6.12. SUBSIDIARIES. Sell or otherwise dispose of (including the
granting of any security interest in) any shares of capital stock of its
Subsidiary other than pursuant to
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the Pledge Agreement. The Borrower will at no time have any Subsidiaries other
than ABCIC and ABCIC will at no time have any Subsidiaries.
Section 6.13. ISSUANCE OF STOCK. Issue or permit its Subsidiary to
issue, additional shares of capital stock, except (1) the minimum number of
directors' qualifying shares required by Law, (2) Borrower may issue shares of
its common stock if the proceeds thereof are used to prepay the Term Loan in
accordance with the provisions of Section 2.07, (3) ABCIC may issue shares of
the ABCIC Preferred or other series of preferred stock (i) having terms
(including, without limitation, dividend rate and conversion rate) substantially
similar to the ABCIC Preferred or (ii) having a dividend rate no greater than,
and a conversion rate no lesser than, the ABCIC Preferred, to its policy holders
and sales agents, (4) upon exercise of any of the stock options set forth in
Schedule 6.13 hereto, (5) upon conversion of any shares of Series I Preferred
Stock or (6) at the closing of any underwritten public offering permitted under
Section 4.08 of the Securities Purchase Agreement.
Section 6.14. MANAGEMENT AGREEMENT. Terminate the Management Agreement
without the Lender's approval. Payments under the Management Agreement shall be
used by the Borrower solely for ordinary and customary operating expenses of the
Borrower and its Subsidiary, payment (including prepayment) of the Term Loan and
payment or redemption of the preferred stock of the Borrower held by the Lender.
The Borrower shall promptly furnish to the Lender copies of all modifications,
supplements and waivers relating to the Management Agreement.
Section 6.15. LIMITATION ON DIRECTORS FEES AND MANAGEMENT SALARIES.
ABCIC shall not pay any compensation to any of its directors or executive
officers. The Borrower shall pay directors' and executive officers' compensation
in amounts not in excess of the amounts set forth in the Prospectus relating to
the issuance of 1,000,000 shares of ABCIC Preferred, under captions
"Compensation of Directors" and "Executive Compensation".
ARTICLE VII. FINANCIAL COVENANTS
So long as the A Loan Note or B Loan Note shall remain unpaid, or any
other amount is owing by Borrower to Lender hereunder or under the other Loan
Documents:
Section 7.01. CONSOLIDATED NET WORTH. Borrower and its Consolidated
Subsidiary shall have at all times Consolidated Net Worth of not less than Two
Million Dollars ($2,000,000) or, in the event the Second Closing has not
occurred on or prior to March 4, 1997, then following such date, One Million
Five Hundred Thousand Dollars ($1,500,000).
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Section 7.02. ABCIC'S STATUTORY SURPLUS. Borrower will not permit the
Statutory Surplus of ABCIC at any time to be less than the greater of (1) Four
Million Dollars ($4,000,000), or (2) the minimum Statutory Surplus required by
the Florida Insurance Department PLUS Five Hundred Thousand Dollars ($500,000);
PROVIDED, that in the event the Second Closing has not occurred on or prior to
March 4, 1997, then following such date, Borrower will not permit the Statutory
Surplus of ABCIC at any time to be less than the greater of (1) Four Million
Dollars ($4,000,000), or (2) the minimum Statutory Surplus required by the
Florida Insurance Department.
Section 7.03. LOSS RESERVES. On each Quarterly Date, commencing with
December 31, 1996, Borrower will not permit the Loss Reserves of ABCIC to be
outside the actuarial range determined annually by an Independent Actuary. To
illustrate, if the Loss Reserve is determined by the Independent Actuary for
December 31, 1996 then such Reserve will be used to determine compliance with
this provision as of December 31, 1995. if such Loss Reserve is not redetermined
by the Independent Actuary until December 31, 1997 then the Loss Reserve for
December 31, 1996 will be used to determine compliance with this covenant for
the Quarterly Dates of March 31, 1997, June 30, 1997 and September 30, 1997.
Section 7.04. RISK BASED CAPITAL RATIO. The Borrower will not permit
the Risk-Based Capital Ratio of ABCIC at any time to be less than one hundred
twenty percent (120%) of the Company Action Level Risk Based Capital Ratio as
determined by the Florida Department of Insurance.
Section 7.05. NET PREMIUMS WRITTEN RATIO. During each Quarterly Period,
commencing with the Quarterly Period from January 1, 1997 to March 31, 1997,
Borrower will not permit the result of ABCIC's annualized Net Premiums Written
during such period to exceed three hundred twenty percent (320%) of the
Statutory Surplus of ABCIC as of the last day of such Quarterly Period.
Section 7.06. DEBT TO EQUITY RATIO. Borrower will maintain the ratio of
(x) outstanding Debt to Lender hereunder to (y) Consolidated Net Worth PLUS
outstanding Debt to Lender hereunder at no greater than the respective amounts
for the periods set forth below:
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PERIOD AMOUNT
------ ------
From the closing date 3:7.00
to December 31, 1998
From January 1, 1999 to 3:8.04
December 31, 1999
From January 1, 2000 to 3:8.33
December 31, 2000
From January 1, 2001 and 3:9.23;
all years thereafter
PROVIDED, that in the event the Second Closing has not occurred on or prior to
March 4, 1997, then following such date, Borrower will maintain such ratio at no
greater than the respective amounts for the periods set forth below:
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PERIOD AMOUNT
------ ------
From the closing date 4:5.20
to December 31, 1998
From January 1, 1999 to 4:5.70
December 31, 1999
From January 1, 2000 to 4:6.50
December 31, 2000
From January 1, 2001 and 4:8.00;
all years thereafter
Section 7.07. TIG INTEREST COVERAGE RATIO. Borrower will not permit the
ratio of (x) EBITDA to (y) interest payable under this Agreement to be less than
the respective ratio (calculated as of the end of any fiscal quarter) for the
years set forth below:
YEAR RATIO
---- -----
1999 3.00:1
2000 5.00:1
2001 and all years 7.25:1;
thereafter
PROVIDED, that in the event the Second Closing has not occurred on or prior to
March 4, 1997, then following such date, Borrower will not permit such ratio to
be less than the respective ratio (calculated as of the end of any fiscal
quarter) for the years set forth below:
YEAR RATIO
---- -----
1999 2.50:1
2000 4.50:1
2001 and all years 6.75:1
thereafter
ARTICLE VIII. EVENTS OF DEFAULT
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Section 8.01. EVENTS OF DEFAULT. Any of the following events shall be
an "Event of Default":
(1) Borrower shall: (a) fail to pay the principal of or interest on
either of the A Loan Note or B Loan Note as and when due and payable; or (b)
fail to pay within ten (10) days after the request for payment is made any fees
or expenses required to be paid under the terms of any of the Loan Documents;
(2) any representation or warranty made by Borrower in this Agreement
or in any other Loan Document or which is contained in any certificate,
document, opinion, financial or other statement furnished at any time under or
in connection with any Loan Document shall prove to have been incorrect or
misleading in any material respect on or as of the date made;
(3) Borrower shall fail to perform or observe any other term, covenant
or agreement contained in Article VI on its part to be performed or observed; or
Borrower shall fail to perform or observe any term, covenant or agreement
contained in Article VII and such failure shall remain unremedied for ninety
(90) days after the giving of notice thereof by Lender; or the Borrower shall
fail to perform or observe any other term, covenant or agreement contained in
this Agreement or any Loan Document (other than obligations specifically
referred to elsewhere in this Section 8.01) to which it is a party on its part
to be performed or observed and such failure shall remain unremedied for thirty
(30) days after the giving of notice thereof by Lender;
(4) Borrower or its Subsidiary shall: (a) fail to pay all or any
portion of a Debt (other than the payment obligations described in (1) above or
any trade obligations which are the subject of a Good Faith Contest) of the
Borrower or Subsidiary when due (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise); (b) fail to perform or observe
any term, covenant or condition on its part to be performed or observed under
any agreement or instrument relating to any of the Debt described in the
immediately preceding clause (a), when required to be performed or observed, if
the effect of such failure to perform or observe is to accelerate, or to permit
the acceleration of, after the giving of notice or the lapse of time, or both,
of the maturity of such Debt, whether or not such failure to perform or observe
shall be waived by the holder of such Debt; or any such Debt shall be declared
to be due and payable, or required to be prepaid (other than by a regularly
scheduled required prepayment), prior to the stated maturity thereof; or (c)
fail to redeem any of its Series I Preferred Stock at any time that such
redemption is required pursuant to the terms thereof;
(5) Borrower or its Subsidiary: (a) shall generally not, or be unable
to, or shall admit in writing its inability to, pay its debts as such debts
become due; or (b) shall make an assignment for the benefit of creditors,
petition or apply to any tribunal for the appointment of a custodian, receiver
or trustee for it or a substantial part of its assets; or (c) shall commence any
proceeding under, or file any petition seeking to take advantage of any
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bankruptcy, reorganization, arrangement, readjustment of debt, rehabilitation,
dissolution or liquidation law or statute of any jurisdiction, whether now or
hereafter in effect; or (d) shall have had any such petition or application
filed or any such proceeding shall have been commenced, against it, in which an
adjudication or appointment is made or order for relief is entered, or which
petition, application or proceeding remains undismissed or unstayed for a period
of sixty (60) days or more; or shall be the subject of any proceeding under
which its assets may be subject to seizure, forfeiture or divestiture; or (e) by
any act or omission shall indicate its consent to, approval of or acquiescence
in any such petition, application or proceeding or order for relief or the
appointment of a custodian, receiver, rehabilitator, liquidator or trustee for
all or any substantial part of its property; or (f) shall suffer any such
custodianship, receivership, rehabilitation, liquidation or trusteeship to
continue undischarged for a period of sixty (60) days or more; or take any
corporate action for the purpose of effecting any of clauses (a), (b), (c) or
(e);
(6) one or more judgments, decrees or orders for the payment of money
in excess of Fifty Thousand Dollars ($50,000) in the aggregate shall be rendered
against Borrower or its Subsidiary, and such judgments, decrees or orders shall
continue unsatisfied and in effect for a period of thirty (30) days without
being vacated, discharged, satisfied or stayed or bonded pending appeal;
(7) any of the following events shall occur or exist with respect to
Borrower or its Subsidiary or any ERISA Affiliate: (a) any Prohibited
Transaction which could subject Borrower or its Subsidiary, or any entity which
they have an obligation to indemnify, to any tax or penalty imposed under
Section 4975 of the Code or Section 502(i) of ERISA; (b) any Reportable Event
shall occur with respect to any Plan; (c) the filing under Section 4041 of ERISA
of a notice of intent to terminate any Plan or the termination of any Plan; (d)
any event or circumstance exists which might constitute grounds entitling the
PBGC to institute proceedings under Section 4042 of ERISA for the termination
of, or for the appointment of a trustee to administer, any Plan, or the
institution by the PBGC of any such proceedings; (e) complete or partial
withdrawal under Section 4201 or 4204 of ERISA from a Multiemployer Plan or the
reorganization (within the meaning of Section 4241 of ERISA), insolvency (within
the meaning of Section 4245 of ERISA), or termination of any Multiemployer Plan;
(f) (within the meaning of Section 4241 of ERISA) an accumulated funding
deficiency (as defined in Section 302 of ERISA or section 412 of the Code)
exists with respect to a Plan, whether or not waived; (g) the imposition of
liability to enforce Section 515 of ERISA; (h) the failure of a Plan intended to
qualify under Section 401(a) or 401(k) of the Code to so qualify; (i) a Lien
arises or is given in connection with a Plan; and in each case above, such event
or condition, together with all other events or conditions, if any, could in the
opinion of the Lender subject Borrower or any ERISA Affiliate to any tax,
penalty, or other liability to a Plan, Multiemployer Plan, the PBGC, or
otherwise (or any combination thereof) which in the aggregate exceeds or could
reasonably be expected to exceed Fifty Thousand Dollars ($50,000);
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(8) the Pledge Agreement shall at any time and for any reason cease:
(a) to create a valid and perfected first priority Lien in and to the property
purported to be subject to the Pledge Agreement; or (b) to be in full force and
effect or shall be declared null and void, or the validity or enforceability
thereof shall be contested by Borrower, or Borrower shall deny it has any
further liability or obligation under the Pledge Agreement, or Borrower shall
fail to perform any of its obligations under the Pledge Agreement; or any Lien
under the Pledge Agreement shall at any time and for any reason cease to be a
first priority Lien on the property subject to such Lien;
(9) the Security Agreement shall at any time and for any reason cease:
(a) to create a valid and perfected first priority Lien in and to the property
purported to be subject to such Security Agreement; or (b) to be in full force
and effect or shall be declared null and void, or the validity or enforceability
thereof shall be contested by Borrower, or Borrower shall deny it has any
further liability or obligation under the Security Agreement, or Borrower shall
fail to perform any of its obligations under the Security Agreement; or any Lien
under the Security Agreement shall at any time and for any reason cease to be a
perfected Lien on the property subject to such Lien;
(10) any two of James Nau, Errol Bader, Frederick R. Prout or Lawrence
Marchbanks shall cease to be actively engaged in the management of the affairs
of the Borrower or its Subsidiary, respectively, in their respective capacities
as President, ABCIC; President, Borrower; Director of and consultant to Borrower
and ABCIC; and Chairman of the Board of and legal counsel to Borrower and ABCIC,
unless within ninety (90) days of such event Borrower hires or promotes a Person
with the skills and abilities to perform the functions previously performed by
such Person, and such Person is approved by the Lender in its sole discretion;
(11) if at any time Borrower or its Subsidiary incurs or becomes
subject to action or threatened action of any Governmental Authority, including,
without limitation, a fine, penalty, cease and desist order or revocation,
suspension or limitation of a License, the effect of which could result in a
Material Adverse Change;
(12) there shall occur a Material Adverse Change;
(13) if for any reason any of the Management Agreement, the Agreement
as to Reinsurance, the Securities Purchase Agreement or, after its execution and
delivery, any ABCIC-Lender Reinsurance Agreement expires in accordance with its
terms or otherwise ceases to be in full force and effect, is declared null and
void pursuant to a final, nonappealable judgment of a court of competent
jurisdiction, or the validity or enforceability thereof shall be contested by
Borrower or its Subsidiary, or Borrower or its Subsidiary shall deny it has any
further liability or obligation under or shall fail to perform or observe its
obligations under any such Agreement; or
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(14) the Borrower shall fail to perform or observe its obligations
under its Series I Preferred Stock.
Section 8.02. REMEDIES. If any Event of Default shall occur and be
continuing, Lender may by notice to Borrower, (1) declare each outstanding Term
Loan Note, all interest thereon, and all other amounts payable under this
Agreement, and any other Loan Documents to be forthwith due and payable,
whereupon such Term Loan Note, all such interest, and all such amounts due under
this Agreement, and under any other Loan Document shall become and be forthwith
due and payable, without presentment, demand, protest, or further notice of any
kind, all of which are hereby expressly waived by Borrower; (2) exercise any
remedies provided in any of the Loan Documents (including without limitation its
option to convert all or a portion of the outstanding Term Loan into common
stock in accordance with Section 8.03); and/or (3) exercise any remedies
provided by Law; PROVIDED, HOWEVER, that upon the occurrence of an Event of
Default referred to in Section 8.01(5), each Term Loan Note and any other
amounts payable under this Agreement or any of the other Loan Documents, and all
interest on any of the foregoing, shall be forthwith due and payable without
presentment, demand, protest or further notice of any kind, all of which are
hereby expressly waived by Borrower.
Section 8.03. CONVERSION. (a) At any time following the occurrence and
during the continuance of an Event of Default, Lender shall have the right to
convert all or any portion of the then outstanding principal of the Term Loan,
together with interest thereon, for shares of Common Stock or, unless the
Exchange has occurred pursuant to Section 1.04 of the Securities Purchase
Agreement, Class B Common Stock. The number of shares of Common Stock or Class B
Common Stock issuable upon conversion of any such unpaid principal and interest
shall be determined by dividing the aggregate amount of unpaid principal and
interest being converted by (i) in the case of an Event of Default pursuant to
Section 8.01(1) (whether occurring at maturity, upon acceleration or otherwise),
$1.00, and (ii) in the case of any other Event of Default, the Fully Diluted
Book Value as of the date of occurrence of such Event of Default.
(b) In case Borrower shall be a party to any transaction (including,
without limitation, a merger, consolidation, sale of all or substantially all of
Borrower's assets or recapitalization of the Common Stock or Class B Common
Stock) in which the previously outstanding Common Stock or Class B Common Stock
shall be changed into or, pursuant to the operation of law or the terms of the
transaction to which Borrower is a party, exchanged for different securities of
Borrower or common stock or other securities of another corporation or interests
in a noncorporate entity or other property (including cash) or any combination
of any of the foregoing, then, as a condition of the consummation of such
transaction, lawful and adequate provision shall be made so that Lender shall
thereafter be entitled to conversion rights comparable to those contained in
paragraph (a) of this Section 8.03, as nearly as may be reasonably practicable,
in relation to the stock, securities, cash and/or any other property (payable in
kind), as the case may be, into which or for which each share of Common Stock or
Class B Common Stock is changed or exchanged.
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(c) Lender may exercise its conversion right pursuant to paragraph (a)
of this Section 8.03 by delivering to Borrower at its principal office a written
notice stating that Lender elects to convert all or a specified portion of the
outstanding principal of the A Loan and/or the B Loan, together with interest
thereon, in accordance with the provisions of this Section 8.03 and specifying
the name or names in which Lender wishes the certificate or certificates for
shares of Common Stock or Class B Common Stock to be issued. In case such notice
shall specify a name or names other than that of Lender, such notice shall be ac
companied by payment of all transfer taxes payable upon the issuance of shares
of Common Stock or Class B Common Stock in such name or names. Other than such
taxes, Borrower will pay any and all issue and other taxes (other than taxes
based on income) that may be payable in respect of any issue or delivery of
shares of Common Stock or Class B Common Stock pursuant hereto. As promptly as
practicable, and in any event within three (3) Business Days after the receipt
of such notice and, if applicable, payment of all transfer taxes (or the
demonstration to the satisfaction of Borrower that such taxes have been paid),
Borrower shall deliver or cause to be delivered a certificate or certificates
representing the number of validly issued, fully paid and nonassessable full
shares of Common Stock or Class B Common Stock to which Lender shall be
entitled. Such exchange shall be deemed to have been made at the close of
business on the date of giving of such notice, and the person entitled to
receive the shares of Common Stock or Class B Common Stock shall be treated for
all purposes as having become the record holder of such shares of Common Stock
or Class B Common Stock at such time. The portion of the outstanding principal
converted pursuant to this Section 8.03 shall be deemed to be paid and shall
cease to be outstanding upon such conversion.
(d) Borrower shall at all times reserve and keep available out of its
authorized and unissued Common Stock and Class B Common Stock, solely for the
purpose of effecting the exchange contemplated by this Section 8.03, such number
of shares of Common Stock and Class B Common Stock as shall from time to time be
sufficient to effect the conversion of all of the principal and interest then
outstanding under the Term Loan. Borrower shall from time to time, subject to
and in accordance with the Florida Business Corporation Act, increase the
authorized amount of Common Stock and Class B Common Stock if at any time the
number of authorized shares of Common Stock and Class B Common Stock remaining
unissued shall not be sufficient to permit the conversion at such time of all
principal and interest then outstanding under the Term Loan.
ARTICLE IX. MISCELLANEOUS
Section 9.01. AMENDMENTS AND WAIVERS. No amendment or waiver of any
provision of this Agreement or any other Loan Document or consent to any
departure by Borrower therefrom, shall in any event be effective unless the same
shall be in writing and signed by the Lender and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given. No failure on the part of the Lender to exercise, and no delay
in exercising, any right hereunder shall operate as a waiver thereof or preclude
any other or further exercise thereof or the exercise of any other right. The
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remedies herein provided are cumulative and not exclusive of any remedies
provided by Law.
The Borrower irrevocably waives, to the fullest extent permitted by
applicable law, any claim that any action or proceeding commenced by the Lender
relating in any way to this Agreement should be dismissed or stayed by reason,
or pending the resolution, of any action or proceeding commenced by the Borrower
relating in any way to this Agreement whether or not commenced earlier. To the
fullest extent permitted by applicable law, the Borrower shall take all measures
necessary for any such action or proceeding commenced by the Lender to proceed
to judgment prior to the entry of judgment in any such action or proceeding
commenced by the Borrower.
Section 9.02. USURY. Anything herein to the contrary notwithstanding,
the obligations of Borrower under this Agreement and the Term Loan Notes shall
be subject to the limitation that payments of interest shall not be required to
the extent that receipt thereof would be contrary to provisions of Law
applicable to Lender limiting rates of interest which may be charged or
collected by Lender.
Section 9.03. EXPENSES AND INDEMNIFICATION. The Borrower agrees to pay
or reimburse the Lender for: (a) all reasonable out-of-pocket costs and expenses
of the Lender (including, without limitation, the reasonable fees and expenses
of counsel to the Lender, not to exceed $40,000), in connection with (i) the
negotiation, preparation, execution and delivery of this Agreement and the other
Loan Documents and the making of the Term Loan hereunder and (ii) the
negotiation or preparation of any modification, supplement or waiver of any of
the terms of this Agreement or any of the other Loan Documents (whether or not
consummated); (b) all reasonable out-of-pocket costs and expenses of the Lender
(including, without limitation, the reasonable fees and expenses of legal
counsel) in connection with (i) any Default and any enforcement or collection
proceedings resulting therefrom, including, without limitation, all manner of
participation in or other involvement with (x) bankruptcy, insolvency,
receivership, foreclosure, winding up or liquidation proceedings, (y) judicial
or regulatory proceedings and (z) workout, restructuring or other negotiations
or proceedings (whether or not the workout, restructuring or transaction
contemplated thereby is consummated) and (ii) the enforcement of this Section
9.03; and (c) all transfer, stamp, documentary or other similar taxes,
assessments or charges levied by any governmental or revenue authority in
respect of this Agreement or any of the other Loan Documents.
The Borrower hereby agrees to indemnify the Lender and its directors,
officers, employees, attorneys and agents from, and hold each of them harmless
against, any and all losses, liabilities, claims, damages or expenses incurred
by any of them arising out of or by reason of any investigation or litigation or
other proceedings (including any threatened investigation or litigation or other
proceedings) relating to the Term Loan hereunder or any actual or proposed use
by the Borrower or its Subsidiary of the proceeds of the Term Loan hereunder,
including, without limitation, the reasonable fees and disbursements of counsel
incurred in connection with any such investigation or litigation or other
proceedings (but
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excluding any such losses, liabilities, claims, damages or expenses incurred by
reason of the gross negligence or willful misconduct of the Person to be
indemnified). Without limiting the generality of the foregoing, the Borrower
will indemnify the Lender from, and hold the Lender harmless against, any
losses, liabilities, claims, damages or expenses described in the preceding
sentence (but excluding, as provided in the preceding sentence, any loss,
liability, claim, damage or expense incurred by reason of the gross negligence
or willful misconduct of the Person to be indemnified) arising under any
Environmental Law as a result of the past, present or future operations of the
Borrower or its Subsidiary (or any predecessor in interest to the Borrower or
its Subsidiary), or the past, present or future condition of any site or
facility owned, operated or leased at any time by the Borrower or its Subsidiary
(or any such predecessor in interest).
The obligations of Borrower under this Section 9.03 shall survive the
repayment of the Term Loan and all amounts due under or in connection with any
of the Loan Documents.
Section 9.04. ASSIGNMENT; PARTICIPATION. This Agreement shall be
binding upon, and shall inure to the benefit of, Borrower, Lender and their
respective successors. Borrower may not assign or transfer its rights or
obligations hereunder. Lender may assign its rights, duties and obligations
under this Agreement and any of the other Loan Documents. Lender may sell
participations in its rights, duties and obligations under this Agreement or any
of the other Loan Documents.
Section 9.05. NOTICES. Unless the party to be notified otherwise
notifies the other party in writing as provided in this Section 9.05, and except
as otherwise provided in this Agreement, notices shall be given to Lender by
telephone, confirmed in writing and delivered by hand or confirmed telecopier,
and to Borrower by written notice delivered by hand, overnight courier service
or confirmed telecopier addressed to such party at its address on the signature
page of this Agreement. Notices shall be effective upon receipt.
Section 9.06. SETOFF. Borrower agrees that, in addition to (and without
limitation of) any right of setoff or counterclaim a Lender may otherwise have,
Lender shall be entitled, to the extent provided in the Agreement as to
Reinsurance, at its option, to offset (x) balances (general or special, time or
demand, provisional or final) held by it for the account of Borrower at any of
Lender's offices and (y) amounts held by it under any reinsurance agreement
between the Lender and ABCIC, in Dollars or in any other currency, against any
amount payable by Borrower to Lender under this Agreement or the Term Loan
Notes, or any other Loan Document which is not paid when due (regardless of
whether such balances are then due to Borrower), in which case it shall promptly
notify Borrower thereof; provided, that Lender's failure to give such notice
shall not affect the validity thereof.
Section 9.07. JURISDICTION; IMMUNITIES. Borrower hereby irrevocably
submits to the jurisdiction of any State of New York or United States Federal
court sitting in the Borough of Manhattan, New York over any action or
proceeding arising out of or relating to
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this Agreement, either Term Loan Note or any other Loan Document, and Borrower
hereby irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such State of New York or Federal
court. Borrower irrevocably consents to the service of any and all process in
any such action or proceeding by the mailing of copies of such process to
Borrower at its address specified on the signature page hereof. Borrower agrees
that a final judgment in any such action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. Borrower further waives any objection to venue in such
State and any objection to an action or proceeding in such State on the basis of
forum non convenience. Borrower agrees that any action or proceeding brought
against the Lender shall be brought only in State of New York or United States
Federal court sitting in the Borough of Manhattan, New York.
Nothing in this Section 9.07 shall affect the right of the Lender to
serve legal process in any other manner permitted by Law or affect the right of
Lender to bring any action or proceeding against Borrower or its property in the
courts of any other jurisdictions.
To the extent that Borrower has or hereafter may acquire any immunity
from jurisdiction of any court or from any legal process (whether from service
or notice, attachment prior to judgment, attachment in aid of execution,
execution or otherwise) with respect to itself or its property, Borrower hereby
irrevocably waives such immunity in respect of its obligations under this
Agreement, the Term Loan Notes, and any other Loan Document.
Section 9.08. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
Section 9.09. COUNTERPARTS. This Agreement may be executed by the
parties hereto in separate counterparts, each of which, when so executed and
delivered, shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a number
of copies hereof, each signed by less than all, but together signed by all of
the parties hereto.
Section 9.10. EXHIBITS AND SCHEDULES. The Exhibits and Schedules hereto
are a part of this Agreement as if fully set forth herein. All references herein
to Sections, subsections, clauses, Exhibits and Schedules shall be deemed
references to such parts of this Agreement, unless the context shall otherwise
require.
Section 9.11. TABLE OF CONTENTS; HEADINGS. The headings in the Table of
Contents and in this Agreement are for reference only, and shall not affect the
interpretation or construction of this Agreement.
Section 9.12. SEVERABILITY. If any word, phrase, sentence, paragraph,
provision or section of this Agreement shall be held, declared, pronounced or
rendered invalid, void, unenforceable or inoperative for any reason by any court
of competent
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jurisdiction, governmental authority, statute or otherwise, such holding,
declaration, pronouncement or rendering shall not adversely affect any other
word, phrase, sentence, paragraph, provision or section of this Agreement, which
shall otherwise remain in full force and effect and be enforced in accordance
with its terms.
Section 9.13. INTEGRATION. The Loan Documents, the Management
Agreement, the Agreement as to Reinsurance, each ABCIC-Lender Reinsurance
Agreement and the Securities Purchase Agreement set forth the entire agreement
among the parties hereto relating to the transactions contemplated thereby and
supersede any prior oral or written statements or agreements with respect to
such transactions.
Section 9.14. WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
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THE BORROWER WAIVES ANY RIGHT IT MAY HAVE TO JURY TRIAL.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
ASSOCIATED BUSINESS & COMMERCE
HOLDINGS, INC.,
as Borrower
By: /s/LAWRENCE J. MARCHBANKS
--------------------------------
Name: Lawrence J. Marchbanks
Title: Chairman
Address for Notices:
Associated Business & Commerce
Holdings, Inc.
c/o Marchbanks, Daiello
& Leider, PA
4800 N. Federal Highway
Suite 101E
Boca Raton, Florida 33431
Attention: Larry Marchbanks
Telecopy No.: 407-750-9624
With a Copy to:
Morgan, Lewis & Bockius LLP
5300 First Union Financial Center
200 South Biscayne Boulevard
Miami, Florida 33131-2339
Attention: John S. Fletcher
Telecopy No.: 305-579-0321
TIG REINSURANCE COMPANY,
as Lender
By: /s/ALLEN B. BINDER
------------------------------
Name: Allen B. Binder
Title: Vice President
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Address for Notices:
300 First Stamford Place
Stamford, CT 06902
Attention:
Telecopy No.: (203) 356-0196
With a copy to:
TIG Holdings, Inc.
65 East 55th Street
New York, New York 10022
Attention: General Counsel
Telecopy No.: 212-371-8574
48
EXHIBIT 10.21
PLEDGE AGREEMENT
PLEDGE AGREEMENT dated as of December 4, 1996 (this "Pledge
Agreement"), made by Associated Business & Commerce Holdings, Inc. ("Borrower")
to TIG Reinsurance Company ("Lender").
PRELIMINARY STATEMENTS. 1. Reference is made to the Term Loan Agreement
dated as of December 4, 1996 between Borrower and Lender (the Term Loan
Agreement, as it may hereafter be amended or otherwise modified from time to
time, being the "Term Loan Agreement"). The terms defined in the Term Loan
Agreement and not otherwise defined in this Pledge Agreement which are used in
this Pledge Agreement shall have the meanings set forth in the Term Loan
Agreement.
2. It is a condition precedent to the obligation of Lender to make the
Term Loan to Borrower as provided in the Term Loan Agreement that Borrower shall
have granted the security interest contemplated by this Pledge Agreement.
NOW, THEREFORE, in consideration of the premises and in order to induce
Lender to make the Term Loan under and in accordance with the terms of the Term
Loan Agreement, Borrower hereby agrees as follows:
SECTION 1. PLEDGE. Borrower hereby pledges and grants a continuing
security interest to Lender in all of the following (the "Pledged Collateral"):
(a) all of the stock described in Schedule I hereto (the "Pledged
Shares") and the certificates representing the Pledged Shares, and all
dividends, cash, instruments and other property from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or
all of the Pledged Shares;
(b) all shares, securities, moneys or property representing a dividend
on any of the Pledged Shares, or representing a distribution or return of
capital upon or in respect of the Pledged Shares, or resulting from a
split-up, revision, reclassification or other like change of the Pledged
Shares or otherwise received in exchange therefor, and any subscription
warrants, rights or options issued to the holders of, or otherwise in
respect of, the Pledged Shares;
(c) in the event of any consolidation or merger in which the ABCIC is
not the surviving corporation, all shares of each class of the capital
stock of the successor corporation formed by or resulting from
suchconsolidation or merger;
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(d) all proceeds of and to any of the property of the Borrower
described in the preceding clauses of this Section 1 (including, without
limitation, all causes of action, claims and warranties now or hereafter
held by the Borrower in respect of any of the items listed above) and, to
the extent related to any property described in said clauses or such
proceeds, all books, correspondence, credit files, records, invoices and
other papers.
SECTION 2. SECURITY FOR OBLIGATIONS. The Pledged Collateral secures the
prompt and complete payment when due of all the Obligations.
SECTION 3. DELIVERY OF PLEDGED COLLATERAL. All certificates or
instruments representing or evidencing the Pledged Collateral shall be delivered
to and held by Lender pursuant hereto and shall be in suitable form for transfer
by delivery, or shall be accompanied by duly executed instruments of transfer or
assignment in blank, all in form and substance satisfactory to Lender. Lender
shall have the right, at any time after the occurrence of a Default or Event of
Default in its discretion and without notice to Borrower, to transfer to or to
register in the name of Lender or any of its nominees any or all of the Pledged
Collateral, subject only to the revocable rights specified in Section 6(a). In
addition, Lender shall have the right at any time to exchange certificates or
instruments representing or evidencing Pledged Collateral for certificates or
instruments of smaller or larger denominations.
SECTION 4. REPRESENTATIONS AND WARRANTIES. Borrower represents and
warrants to Lender as follows:
(a) The Pledged Shares have been duly authorized and validly issued and
are fully paid and non-assessable.
(b) Borrower is the sole legal and beneficial owner of the Pledged
Collateral free and clear of any Lien, option or other charge or encumbrance,
except for the security interest created by this Pledge Agreement.
(c) The pledge of the Pledged Shares pursuant to this Pledge Agreement
creates a valid and perfected first priority security interest in the Pledged
Collateral securing the payment of the obligations.
(d) The execution, delivery and performance by the Borrower of this
Pledge Agreement does not and will not result in any violation of any agreement,
indenture or other instrument, license, judgment, decree, order or Law
applicable to it.
(e) No authorization, approval or other action by, and no notice to or
filing with, any Governmental Authority is required either (i) for the pledge by
Borrower of the Pledged Collateral pursuant to this Pledge Agreement or for the
execution, delivery or performance of the Pledge Agreement by Borrower, or (ii)
for the exercise by Lender of the
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voting or other rights provided for in this Pledge Agreement or the remedies in
respect of the Pledged Collateral pursuant to this Pledge Agreement (except,
with respect to such performance or exercise of rights, as may be required in
connection with such disposition by laws affecting the offering and sale of
securities generally, and except for approval of the Florida Insurance
Department and/or one or more other state insurance departments).
(f) Except for the ABCIC Preferred, the Pledged Shares constitute all
of the issued and outstanding shares of stock of ABCIC.
(g) There are no restrictions upon the voting rights associated with or
the transfer of, any of the Collateral except as provided by any applicable
federal or state securities Law. Borrower has (i) the right to vote the
Collateral, and (ii) the legal right and corporate power and authority to pledge
and grant a security interest in, and to otherwise transfer, the Collateral in
the manner provided herein.
SECTION 5. FURTHER ASSURANCES. Borrower agrees
(a) that at any time and from time to time, at the expense of Borrower,
it will promptly execute and deliver all further instruments and documents, and
take all further action, that may be necessary or desirable, or that Lender may
request, in order to perfect and protect any security interest granted or
purported to be granted hereby or to enable Lender to exercise and enforce its
rights and remedies hereunder with respect to any Pledged Collateral;
(b) keep full and accurate books and records relating to the Pledged
Collateral, and stamp or otherwise mark such books and records in such manner as
the Lender may reasonably require in order to reflect the security interests
granted by this Agreement; and
(c) permit representatives of the Lender, upon reasonable notice, at
any time during normal business hours to inspect and make abstracts from the
Borrower's books and records pertaining to the Pledged Collateral, and permit
representatives of the Lender to be present at the Borrower's place of business
to receive copies of all communications and remittances related to the
Collateral, and forward copies of any notices or communications received by the
Borrower with respect to the Collateral, all in such manner as the Lender shall
require.
SECTION 6. VOTING RIGHTS; DIVIDENDS; ETC. (a) So long as no Default or
Event of Default shall have occurred:
(i) Borrower shall be entitled to exercise any and all voting and other
consensual rights pertaining to the Pledged Collateral or any part thereof
for any purpose not inconsistent with the terms of this Pledge Agreement or
the Term Loan Agreement; PROVIDED, HOWEVER, that Borrower shall not
exercise or refrain from
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<PAGE>
exercising any such right if, in Lender's judgment, such action would
modify or in any way adversely change Borrower's rights under the Pledged
Collateral or any part thereof.
(ii) Borrower shall be entitled to receive and retain any and all
dividends paid in respect of the Pledged Collateral; PROVIDED, HOWEVER,
that any and all
(A) dividends paid or payable, other than in cash, in respect of,
and instruments and other property received, receivable or otherwise
distributed in respect of, or in exchange for, any Pledged Collateral,
(B) dividends and other distributions paid or payable in cash (a)
in respect of any Pledged Collateral in connection with a total
liquidation or dissolution or (b) from capital, capital surplus or paid
in surplus, and
(C) cash paid, payable or otherwise distributed in respect of
principal of, or in redemption of, or in exchange for, any Pledged
Collateral,
shall be, and shall be forthwith delivered to Lender to hold as, Pledged
Collateral and shall, if received by Borrower, be received in trust for the
benefit of Lender, be segregated from the other property or funds of
Borrower, and be forthwith delivered to Lender as Pledged Collateral in the
same form as so received (with any necessary endorsement).
(iii) Lender hereby authorizes Borrower to exercise all voting and
other rights which it is entitled to exercise pursuant to paragraph (i)
above and to receive the dividends which it is authorized to receive and
retain pursuant to paragraph (ii) above.
(b) Upon the occurrence of a Default or an Event of Default:
(i) Upon the request of Lender, all rights of Borrower to exercise the
voting and other consensual rights which it would otherwise be entitled to
exercise pursuant to Section 6(a)(i) and to receive the dividends which it
would otherwise be authorized to receive and retain pursuant to Section
6(a)(ii) shall cease, and all such rights shall thereupon become vested in
Lender, and Lender shall thereupon have the sole right to exercise such
voting and other consensual rights and to receive and hold as Pledged
Collateral such dividends.
(ii) All dividends which are received by Borrower contrary to the
provisions of paragraph (i) of this Section 6(b) shall be received in trust
for the benefit of Lender, shall be segregated from other funds of Borrower
and shall be
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<PAGE>
forthwith paid over to Lender as Pledged Collateral in the same form as so
received (with any necessary endorsement).
SECTION 7. TRANSFERS AND OTHER LIENS; ADDITIONAL SHARES. (a) Borrower
agrees that it will neither (i) sell or otherwise dispose of, or grant any
option with respect to, any of the Pledged Collateral, (ii) create or permit to
exist any Lien, security interest, or other charge or encumbrance upon or with
respect to any of the Pledged Collateral or proceeds thereof, nor (iii) file or
suffer to be on file, or authorize or permit to be filed or to be on file, in
any jurisdiction, any financing statement or like instrument with respect to the
Pledged Collateral except in the case of clauses (ii) and (iii) for the security
interest under and any financing statements filed pursuant to this Pledge
Agreement.
(b) Borrower agrees that it will (i) cause ABCIC not to issue any stock
or other securities in addition to or in substitution for the Pledged Shares
except for the ABCIC Preferred and (ii) pledge hereunder, immediately upon its
acquisition (directly or indirectly) thereof, any and all additional shares of
stock or other securities of each issuer of the Pledged Shares.
SECTION 8. LENDER APPOINTED ATTORNEY-IN-FACT. Borrower hereby appoints
Lender as Borrower's attorney-in-fact, with full authority in the place and
stead of Borrower and in the name of Borrower or otherwise, to take any action
and to execute any instrument which Lender may deem necessary or advisable to
accomplish the purposes of this Pledge Agreement, including, without limitation,
to receive, endorse and collect all instruments made payable to Borrower
representing any dividend or other distribution in respect of the Pledged
Collateral or any part thereof and to give full discharge for the same, which
appointment is irrevocable and coupled with an interest; PROVIDED, HOWEVER,
Lender agrees it will only exercise such rights upon the occurrence and during
the continuance of an Event of Default.
Without limiting the generality of the foregoing, the Lender shall have
the right, upon the occurrence and during the continuance of an Event of
Default, with full power of substitution either in the Lender's name or in the
name of the Borrower, to (i) ask for, demand, sue for, collect, receive receipt
and give acquittance for any and all moneys due or to become due and under and
by virtue of any Pledged Collateral, (ii) endorse checks, drafts, orders and
other instruments for the payment of money payable to the Borrower representing
any interest or dividend, or other distribution payable on or with respect to
the Pledged Collateral or any part thereof or on account thereof and give full
discharge for the same, (iii) settle, compromise, prosecute or defend any
action, claim or proceeding with respect to any of the foregoing, and (iv) sell,
assign, endorse, pledge, transfer and make any agreement respecting, or
otherwise deal with, the same; PROVIDED, HOWEVER, that nothing herein contained
shall be construed as requiring or obligating the Lender to make any commitment
or to make any inquiry as to the nature or sufficiency of any payment received
by the Lender, or to present or file any claim or notice, or to take any action
with
B-5
<PAGE>
respect to the Pledged Collateral or any part thereof or the moneys due or to
become due on or with respect thereto or any property covered thereby, and no
action taken by the Lender or omitted to be taken with respect to the Pledged
Collateral or any party thereof shall give rise to any defense, counterclaim or
offset in favor of the Borrower or to any claim or action against the Lender,
except in the case of the gross negligence or willful misconduct of the Lender.
SECTION 9. LENDER MAY PERFORM. If Borrower fails to perform any
agreement contained herein, Lender may itself perform or cause performance of,
such agreement, and the expenses of Lender incurred in connection therewith
shall be payable by Borrower under Section 12.
SECTION 10. LENDER'S DUTIES AND REASONABLE CARE. The powers conferred
on Lender hereunder are solely to protect its interests in the Pledged
Collateral and shall not impose any duty upon it to exercise any such powers.
Lender shall be deemed to have exercised reasonable care in the custody and
preservation of the Pledged Collateral in its possession if the Pledged
Collateral is accorded treatment substantially equal to that which Lender
accords its own property, it being understood that Lender shall not have any
responsibility for (a) ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relative to any
Pledged Collateral, whether or not Lender has or is deemed to have knowledge of
such matters, or (b) taking any necessary steps to preserve rights against any
parties with respect to any Pledged Collateral.
SECTION 11. REMEDIES. Subject to Section 13, if any Event of Default
shall have occurred:
(a) Lender may exercise in respect of the Pledged Collateral, in
addition to other rights and remedies provided for herein or otherwise available
to it, all the rights and remedies of a secured party on default under the
Uniform Commercial Code in effect in the State of New York at that time (the
"UCC"), and Lender may also, without notice, except as specified below, collect,
receive, appropriate and realize upon the Pledged Collateral, or any part
thereof, and may forthwith sell, assign, give an option or options, purchase,
contracts to sell or otherwise dispose and deliver the Pledged Collateral or any
part thereof in one or more parcels at public or private sale, at any exchange,
broker's board or at any of Lender's offices or elsewhere, for cash, on credit
or for future delivery, and upon such other terms as Lender may deem
commercially reasonable, with the right of Lender or any purchaser upon any such
sale or sales, public or private, to purchase the whole or any part of the
Pledged Collateral sold free of any right or equity of redemption in the Pledged
Collateral, which right or equity is hereby expressly waived and released.
Borrower agrees that, to the extent notice of sale shall be required by Law, at
least ten (10) days' notice to Borrower of the time and place of any public sale
or the time after which any private sale is to be made shall constitute
reasonable notification. Lender shall not be obligated to make any sale of
Pledged Collateral regardless of notice of sale having been given. Lender may
adjourn any public or private sale from time to time by announcement at the time
and place
B-6
<PAGE>
fixed therefor, and such sale may, without further notice, be made at the time
and place to which it was so adjourned.
(b) Any cash held by Lender as Pledged Collateral and all cash proceeds
received by Lender in respect of any sale of, collection from, or other
realization upon all or any part of the Pledged Collateral shall first be
applied to satisfy all of Borrower's obligations under Section 12 and then be
applied in whole or in part by Lender against, all or any part of the
obligations in such order as Lender shall elect. Any surplus of such cash or
cash proceeds held by Lender and remaining after payment in full of all
Obligations shall be paid over to Borrower or to whosoever may be lawfully
entitled to receive such surplus. If the proceeds of the sale of the Collateral
are insufficient to pay all the Obligations Borrower agrees to pay upon demand
any deficiency to Lender.
The Borrower recognize that, by reason of certain prohibitions
contained in the Securities Act of 1933, as amended, and applicable state
securities laws, the Lender may be compelled, with respect to any sale of all or
any part of the Pledge Collateral, to limit purchasers to those who will agree,
among other things, to acquire the Pledged Collateral for their own account, for
investment and not with a view to the distribution or resale thereof. The
Borrower acknowledges that any such private sales may be at prices and on terms
less favorable to the Lender than those obtainable through a public sale without
such restrictions, and notwithstanding such circumstances, agree that any such
private sale shall be deemed to have been made in a commercially reasonable
manner and that the Lender shall have no obligation to engage in public sales
and no obligation to delay the sale of any Pledged Collateral for the period of
time necessary to permit the Borrower or ABCIC or issuer thereof to register it
for public sale.
SECTION 12. INDEMNITY AND EXPENSES. (a) Borrower hereby indemnifies
Lender from and against any and all claims, losses, damages and liabilities
growing out of or resulting from this Pledge Agreement (including, without
limitation, enforcement of this Pledge Agreement), except claims, losses,
damages or liabilities resulting from Lender's gross negligence and willful
misconduct.
(b) Borrower will upon demand pay to Lender the amount of any and all
expenses, including the fees and expenses of its counsel and of any experts and
agents, which Lender may incur in connection with (i) any amendment to this
Pledge Agreement; (ii) the administration of this Pledge Agreement; (iii) the
custody or preservation of, or the sale of, collection from, or other
realization upon, any of the Pledged Collateral; (iv) the exercise or
enforcement of any of the rights of Lender hereunder; or (v) the failure by
Borrower to perform or observe any of the provisions hereof.
SECTION 13. PRIOR REGULATORY APPROVALS. Notwithstanding any provision
of this Pledge Agreement to the contrary, the Lender may not exercise control
over ABCIC without the prior approval of the Florida Department of Insurance in
accordance with the Florida Insurance Law.
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<PAGE>
SECTION 14. PRIVATE SALE. The Lender shall incur no liability as a
result of the sale of the Pledged Collateral, or any part thereof, at any
private sale pursuant to Section 11 hereof conducted in a commercially
reasonable manner. The Borrower hereby waives any claims against the Lender
arising by reason of the fact that the price at which the Pledged Collateral may
have been sold at such a private sale was less than the price which might have
been obtained at a public sale or was less than the aggregate amount of the
Obligations, even if the Agent accepts the first offer received and does not
offer the Pledged Collateral to more than one offeree.
SECTION 15. AMENDMENTS, ETC. No amendment or waiver of any provision of
this Pledge Agreement, nor consent to any departure by Borrower herefrom, shall
in any event be effective unless the same shall be in writing and signed by
Lender, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
SECTION 16. ADDRESSES FOR NOTICES. All notices and other communications
to any party hereto provided for hereunder shall be in writing and mailed or
delivered by messenger or sent by facsimile, addressed to such party at the
address of such party specified in the Term Loan Agreement. Notices shall be
effective upon receipt.
SECTION 17. CONTINUING SECURITY INTEREST; TRANSFER OF TERM LOAN
FACILITIES. This Pledge Agreement shall create a continuing security interest in
the Pledged Collateral and shall (i) remain in full force and effect until
payment in full of the Obligations, (ii) be binding upon Borrower, its
successors and assigns, and (iii) inure to the benefit of Lender and its
successors. Upon the payment in full of the Obligations, Borrower shall be
entitled to the return, upon its request and at its expense, of such of the
Pledged Collateral as shall not have been sold or otherwise applied pursuant to
the terms hereof.
SECTION 18. GOVERNING LAW; TERMS. This Pledge Agreement shall be
governed by and construed in accordance with the laws of the State of New York.
Unless otherwise defined herein or in the Term Loan Agreement, terms defined in
Article 9 of the UCC are used herein as therein defined.
SECTION 19. SEVERABILITY. In the event any one or more of the
provisions of this Pledge Agreement should be held invalid, illegal or
unenforceable in any respect in any jurisdiction, such provision or provisions
shall be automatically deemed amended, but only to the extent necessary to
render such provision or provisions valid, legal and enforceable in such
jurisdiction, and the validity, legality and enforceability of the remaining
provisions of this Pledge Agreement shall not in any way be affected or impaired
thereby.
SECTION 20. RIGHTS CUMULATIVE. The rights and remedies herein provided
and in all other agreements, instruments and documents delivered concurrently
herewith are cumulative and are in addition to and not exclusive of any rights
or remedies provided by
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<PAGE>
Law, including, without limitation, the rights and remedies of a secured party
under the UCC of New York.
SECTION 21. MISCELLANEOUS. This Pledge Agreement is in addition to and
not in limitation of any other rights and remedies Lender may have by virtue of
any other instrument or agreement heretofore, contemporaneously herewith or
hereafter executed by Borrower or any other Person or by law or otherwise. If
any provision of this Pledge Agreement is contrary to applicable law, such
provision shall be deemed ineffective without invalidating the remaining
provisions hereof. Lender shall not, by any act, delay, omission or otherwise,
be deemed to have waived any of their rights or remedies hereunder.
SECTION 22. COUNTERPARTS. This Pledge Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and any of the parties hereto may execute this Pledge Agreement
by signing any such counterpart.
SECTION 23. WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
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<PAGE>
IN WITNESS WHEREOF, Borrower has caused this Pledge Agreement to be
duly executed and delivered by its officer thereunto duly authorized as of the
date first above written.
ASSOCIATED BUSINESS & COMMERCE
HOLDINGS, INC.
By /S/ LAWRENCE J. MARCHBANKS
-----------------------------
Name: Lawrence J. Marchbanks
Title: Chairman of the Board
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<PAGE>
SCHEDULE I
Attached to and forming a part of that certain
Pledge Agreement dated as of December 4, 1996,
by Borrower to Lender.
<TABLE>
<CAPTION>
CLASS CERTIFICATE % OF TOTAL PAR VALUE NUMBER OF
STOCK ISSUER OF STOCK NO(S). STOCK OF ISSUER OF SHARES SHARES
- ------------ ---------- ----------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Associated Business & Commerce Common 100% $1.00 102,501
Insurance Corporation
Associated Business & Commerce Convertible 100% $1.00 3,200,000
Insurance Corporation Preferred,
Series B
</TABLE>
B-11
EXHIBIT 10.22
SECURITY AGREEMENT dated as of December 4, 1996 ("Security Agreement"),
made by Associated Business & Commerce Holdings, Inc. ("Borrower") to TIG
Reinsurance Company ("Lender").
PRELIMINARY STATEMENTS. 1. Reference is made to the Term Loan Agreement
dated as of December 4, 1996 between Borrower and Lender (the Term Loan
Agreement, as it may hereafter be amended or otherwise modified from time to
time, being the "Term Loan Agreement"). The terms defined in the Term Loan
Agreement and not otherwise defined in this Security Agreement which are used in
this Security Agreement shall have the meanings set forth in the Term Loan
Agreement.
2. It is a condition precedent to the obligation of the Lender to make
the Term Loan to Borrower as provided in the Term Loan Agreement that Borrower
shall have granted the security interest contemplated by this Security
Agreement.
NOW, THEREFORE, in consideration of the premises and in order to induce
Lender to make the Term Loan in accordance with the terms of the Term Loan
Agreement, Borrower hereby agrees as follows:
SECTION 1. GRANT OF SECURITY. Borrower hereby grants a continuing
security interest to Lender, in and to all of Borrower's right, title and
interest in and to all of the following, whether now owned or hereafter acquired
or existing (all of the following, the "Collateral"):
(1) all of Borrower's present and future right, title and interest in
the Management Agreement, including, but not limited to, all of its claims,
rights, powers, privileges and remedies under such Agreement, and all of
its rights under such Agreement to make determinations, to exercise any
election (including, but not limited to, election of remedies) or option or
to give or receive any notice, consent, waiver or approval, together with
full power and authority with respect to such Agreement to demand, receive,
enforce, or collect for any of the foregoing rights or any property the
subject of such Agreement, to enforce or execute any checks, or other
instruments or orders, to file any claims and to take any action thereunder
or in connection therewith (the "Assigned Agreement"); and
(2) all proceeds of any and all of the foregoing Collateral.
SECTION 2. SECURITY FOR BORROWER'S OBLIGATIONS. This Security
Agreementsecures the prompt and complete payment when due of all Obligations.
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SECTION 3. BORROWER REMAINS LIABLE. Anything herein to the contrary
notwithstanding, (1) Borrower shall remain liable under the contract[s] and
agreement[s] included in the Collateral to the extent set forth therein to
perform all of its duties and obligations thereunder to the same extent as if
this Security Agreement had not been executed, (2) the exercise by Lender of any
of the rights hereunder shall not release Borrower from any of its duties or
obligations under the contract[s] and agreement[s] included in the Collateral,
and (3) Lender shall not have any obligation or liability under the contract[s]
and agreement[s] included in the Collateral by reason of this Security
Agreement, nor shall Lender be obligated to perform any of the obligations or
duties of Borrower thereunder or to take any action to collect or enforce any
claim for payment assigned hereunder.
SECTION 4. REPRESENTATIONS AND WARRANTIES. Borrower represents and
warrants to Lender as follows:
(1) LIENS. The Collateral is free and clear of any Lien or encumbrance
except for the security interest created by this Security Agreement. No
effective financing statement or other instrument similar in effect covering all
or any part of the Collateral is on file in any recording office, except those
filed in favor of Lender relating to this Security Agreement.
(2) PERFECTION OF LIEN. This Security Agreement creates a legal, valid
and enforceable security interest in the Collateral under the Uniform Commercial
Code of New York (the "UCC") securing the payment of the Obligations and all
actions necessary to perfect such security interest have been duly taken. The
security interest constitutes a fully- perfected first priority security
interest in, and lien on, the Collateral, prior to all other Liens and rights of
others therein.
(3) AUTHORIZATION AND APPROVAL. Except for the filings contemplated
herein under the UCC and the approval by the Florida Insurance Department of any
transfer of the Management Agreement, no authorization, approval or other action
by, and no notice to or filing with, any Governmental Authority is required
either (a) for the grant by Borrower of the security interest granted hereby or
for the execution, delivery or performance of this Security Agreement by
Borrower, or (b) for the perfection of or the exercise by Lender of its
respective rights and remedies hereunder.
SECTION 5. COVENANTS AND AGREEMENTS. Borrower covenants and agrees
that:
(1) FURTHER ASSURANCES. (a) Borrower will from time to time, at the
expense of Borrower, promptly execute and deliver all further instruments and
documents, and take all further action that Lender may request, in order to
perfect and protect any security interest granted or purported to be granted
hereby or to enable Lender to exercise and enforce their respective rights and
remedies hereunder with respect to any Collateral.
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<PAGE>
(b) Without limiting the generality of the foregoing, Borrower will
execute and file such financing or continuation statements, or amendments
thereto, and such other instruments or notices as Lender may request in order to
perfect and preserve the security interest granted or purported to be granted
hereby.
(c) Borrower hereby authorizes Lender to file one or more financing
statements, and amendments thereto, relative to all or any part of the
Collateral without the signature of Borrower where permitted by Law. Borrower
hereby authorizes Lender to file one or more continuation statements relative to
all or any part of the Collateral without the signature of Borrower where
permitted by Law. A carbon, photographic or other reproduction of this Security
Agreement or any financing statement covering the Collateral or any part thereof
shall be sufficient as a financing statement where permitted by Law.
(d) Borrower will furnish to Lender from time to time statements and
schedules further identifying and describing the Collateral and such other
reports in connection with the Collateral as Lender may request, all in
reasonable detail. Borrower's failure, however, to promptly give such statements
or schedules to Lender shall not affect, diminish, modify or otherwise limit
Lender's security interests in the Collateral.
(e) If requested by Lender, Borrower will at its cost and expense
obtain the consent of any Person or Governmental Authority to the assignment
hereunder of any Collateral if such consent may be required by the terms of any
such Collateral or by any Governmental Approval.
(2) PROTECTION AGAINST LIENS. Borrower will defend the Collateral
against all claims and demands of all Persons (other than Lender) claiming an
interest therein. Borrower will pay promptly when due all property and other
taxes, assessments and governmental charges or levies imposed upon, and all
claims (including claims for labor, materials and supplies) against, the
Collateral, except to the extent the validity thereof is the subject of a Good
Faith Contest.
(3) ASSIGNED AGREEMENT. Borrower will perform and comply in all
respects with the terms and conditions of the Assigned Agreement. Borrower will
not, without the consent of Lender (a) cancel or terminate the Assigned
Agreement or consent to or accept any cancellation or termination thereof, (b)
amend, supplement or otherwise modify the Assigned Agreement (as in effect on
the date hereof), (c) waive any default under or breach of the Assigned
Agreement or waive, fail to enforce, forgive or release any right, interest, or
entitlement of any kind, howsoever arising, under or in respect of the Assigned
Agreement, or vary or agree to the variation of any of the provisions of the
Assigned Agreement or of the performance of any other Person under any of such
Assigned Agreement, or (d) petition, request or take any other legal or
administrative action which seeks, or may reasonably be expected, to rescind,
terminate or suspend, the Assigned Agreement or amend or modify any thereof.
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SECTION 6. TRANSFER AND OTHER LIENS. Except as permitted in the Term
Loan Agreement, Borrower shall not:
(1) Sell, assign (by operation of Law or otherwise) transfer or
otherwise dispose of any interest in the Collateral;
(2) Create or suffer to exist any Lien upon or with respect to any of
the Collateral other than the Lien hereof; or
(3) File or suffer to be on file in any jurisdiction, any financing
statement or like instrument with respect to the Collateral in which the
Lender is not named as sole secured party.
SECTION 7. LENDER APPOINTED ATTORNEY-IN-FACT. Borrower hereby
irrevocably appoints Lender as Borrower's attorney-in-fact, with full authority
in the place and stead of Borrower and in the name of Borrower, to take any
action and to execute any instrument which Lender may deem necessary or
advisable to accomplish the purposes of this Security Agreement, including,
without limitation:
(1) to ask, demand, collect, sue for, recover, settle, compromise,
receive and give acquittance and receipts for moneys due and to become due
under or in respect of any of the Collateral;
(2) to receive, endorse, assign, and collect any and all checks, notes,
drafts and other negotiable and non-negotiable instruments, documents and
chattel paper, in connection with clause (1) above, and Borrower waives
notice of presentment, protest and non-payment of any instrument, document
or chattel paper so endorsed or assigned;
(3) to file any claims or to take any action or institute any
proceedings which Lender may deem necessary or desirable for the
enforcement of any of the Collateral or otherwise to enforce the rights of
Lender with respect to any of the Collateral;
(4) to sell, transfer, assign or otherwise deal in or with the
Collateral or the proceeds or avails thereof, as a secured party;
(5) to make any reasonable allowances and other reasonable adjustments
with respect to any of the Collateral;
(6) to pay or discharge taxes, Liens, or other encumbrances levied or
placed on or threatened against the Collateral; and
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<PAGE>
(7) to direct any party liable for any payment under any Collateral to
make payment of any and all moneys due and to become due thereunder
directly to Lender for Lender's benefit and to receive payment of and
receipt for any and all money, claims and other amounts due and to become
due at any time in respect of or arising out of any Collateral.
Borrower hereby ratifies and approves all acts of Lender, as its
attorney-in-fact, pursuant to this Section 7, and Lender, as its
attorney-in-fact, will not be liable for any acts of commission or omission, nor
for any error of judgment or mistake of fact or Law other than acts constituting
gross negligence or wilful misconduct. This power, being coupled with an
interest, is irrevocable so long as this Security Agreement remains in effect.
Borrower also authorizes Lender, at any time and from time to time, to
communicate in its own name with any party to any contract, agreement or
instrument included in the Collateral with regard to the assignment of such
contract, agreement or instrument and other matters relating thereto.
All amounts received by Lender in the exercise of its rights
under this Section 7 shall be applied by Lender in reduction of the Obligations
in the order as selected by Lender.
SECTION 8. LENDER MAY PERFORM. If Borrower fails to perform any
agreement contained herein, Lender may (but is not obligated to) itself perform,
or cause performance of, such agreement, and the expenses of Lender incurred in
connection therewith shall be payable by Borrower.
SECTION 9. REMEDIES. If any Event of Default shall have occurred,
Lender may exercise in respect of the Collateral, in addition to other rights
and remedies provided for herein or otherwise available to it, all the rights
and remedies of a secured party on default under the UCC (whether or not the UCC
applies to the affected Collateral) and without notice, except as specified
below, sell the Collateral at public or private sale, at any of Lender's offices
or elsewhere, for cash, on credit or for future delivery and upon such other
terms as Lender deems to be commercially reasonable. Borrower agrees that, to
the extent notice of sale shall be required by Law, at least ten (10) days'
notice to Borrower of the time and place of any public or private sale is to be
made shall constitute reasonable notification. Lender shall not be obligated to
make any sale of Collateral regardless of notice of sale having been given.
Lender may adjourn any public or private sale from time to time by announcement
at the time and place fixed therefor, and such sale may, without further notice,
be made at the time and place it was so adjourned.
SECTION 10. APPLICATION OF PROCEEDS. All cash proceeds received by
Lender in respect of any sale of, collection from, or other realization upon all
or any part of the Collateral shall be applied first, to satisfy all of
Borrower's obligations under Section 11, and then against all or any part of the
Obligations in the order as selected by Lender. If the
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proceeds of the sale of the Collateral are insufficient to pay all obligations,
Borrower agrees to pay upon demand any deficiency to Lender.
SECTION 11. INDEMNITY AND EXPENSES. (a) Borrower agrees to indemnify
Lender from and against any and all claims, losses and liabilities growing out
of or resulting from this Security Agreement (including, without limitation,
enforcement of this Security Agreement), except claims, losses or liabilities
resulting from Lender's gross negligence or willful misconduct.
(b) Borrower will upon demand pay to Lender the amount of any and all
expenses, including the fees and out-of-pocket disbursements of its counsel and
of any experts and agents, which Lender may incur in connection with (1) filing
or recording fees incurred in connection with this Security Agreement, (2) the
custody, preservation, use or operation of, or the sale of, collection from, or
other realization upon, any of the Collateral, (3) the exercise or enforcement
of any of the rights of Lender hereunder, or (4) the failure by Borrower to
perform or observe any of the provisions hereof. Lender shall not be liable to
Borrower for damages as a result of delays or other causes other than those
caused by Lender's gross negligence or willful misconduct.
SECTION 12. AMENDMENTS; ETC. No amendment or waiver of any provision of
this Security Agreement nor consent to any departure by Borrower herefrom shall
in any event be effective unless the same shall be in writing and signed by
Lender and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
SECTION 13. ADDRESSES FOR NOTICES. All notices and other communications
to any party hereunder shall be in writing, addressed or transmitted to such
Person at such Person's address or transmission number as provided in or
pursuant to the Term Loan Agreement.
SECTION 14. CONTINUING SECURITY INTEREST. This Security Agreement shall
create a continuing security interest in the Collateral and shall (1) remain in
full force and effect until payment in full of all of the obligations, (2) be
binding upon each of Borrower, Lender and their respective successors and
assigns, and (3) inure to the benefit of Lender and its respective successors,
transferees and permitted assigns.
SECTION 15. GOVERNING LAW; TERMS. This Security Agreement shall be
governed by and construed in accordance with the laws of the State of New York.
Unless otherwise defined herein or in the Term Loan Agreement terms used in
Article 9 of the UCC are used herein as therein defined.
SECTION 16. MISCELLANEOUS. This Security Agreement is in addition to,
and not in limitation of, any other rights and remedies Lender may have by
virtue of any other instrument securing obligations or agreement heretofore, or
contemporaneously herewith
C-6
<PAGE>
executed by Borrower or by Law or otherwise. If any provision of this Security
Agreement is contrary to applicable Law, such provision shall be deemed
ineffective without invalidating the remaining provisions hereof. If and to the
extent that applicable Law confers any rights or imposes any duties inconsistent
with or in addition to any of the provisions of this Security Agreement, the
affected provision shall be considered amended to conform thereto.
Lender shall not by any act, delay, omission or otherwise be deemed to
have waived any of its rights or remedies hereunder. A waiver by Lender of any
right or remedy hereunder on any one occasion shall not be construed as a bar to
or waiver of any such right or remedy which Lender would have had on any future
occasion nor shall Lender be liable for exercising or failing to exercise any
such right or remedy.
SECTION 17. RIGHTS CUMULATIVE. The rights and remedies herein provided
and in all other agreements, instruments and documents delivered concurrently
herewith are cumulative and are in addition to and not exclusive of any rights
or remedies provided by Law, including, without limitation, the rights and
remedies of a secured party under the UCC of New York.
SECTION 18. COUNTERPARTS. This Pledge Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and any of the parties hereto may execute this Pledge Agreement
by signing any such counterpart.
SECTION 19. WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
C-7
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Security
Agreement to be duly executed and delivered by its representative thereunto duly
authorized as of the date first above written.
ASSOCIATED BUSINESS & COMMERCE
HOLDINGS, INC.
By: /s/ LAWRENCE J. MARCHBANKS
---------------------------
Name: Lawrence J. Marchbanks
Title: Chairman of the Board
TIG REINSURANCE COMPANY
By: /s/ ALLEN B. BINDER
----------------------------
Name: Allen B. Binder
Title: Vice President
C-8
EXHIBIT 10.23
AGREEMENT AS TO REINSURANCE
AGREEMENT AS TO REINSURANCE, dated as of December [ ], 1996 (this
"Agreement"), made by and among Associated Business & Commerce Holdings, Inc.
("Borrower"), Associated Business & Commerce Insurance Company ("ABCIC") and TIG
Reinsurance Company ("Lender").
PRELIMINARY STATEMENTS. 1. Reference is made to the Term Loan Agreement
dated as of December [ ], 1996 between Borrower and Lender (the Term Loan
Agreement, as it may hereafter be amended or otherwise modified from time to
time, being referred to as the "Term Loan Agreement"). The terms defined in the
Term Loan Agreement and not otherwise defined in this Agreement which are used
in this Agreement shall have the meanings set forth in the Term Loan Agreement.
2. It is a condition precedent to the obligation of Lender to make the
Term Loan to Borrower as provided in the Term Loan Agreement that Borrower,
ABCIC and Lender shall have executed and delivered this Agreement.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt of which is hereby acknowledged, Borrower,
ABCIC and Lender hereby agree as follows:
SECTION 1. LENDER'S RIGHT TO REINSURE. For so long as the Term Loan
Note shall remain unpaid, or any other amount is owed by Borrower to Lender
under the Term Loan Agreement or under any other Loan Document, ABCIC shall,
upon the election of Lender, reinsure with Lender (on a quota share basis and
substantially in accordance with the terms contained in the Cover Note executed
by ABCIC for the period December [ ], 1996 through December [ ], 1997, a copy of
which is attached as Schedule 1 hereto (the "Cover Note")) all Policies (as
defined in the Cover Note) issued by ABCIC and classified by ABCIC as workers
compensation or employers liability insurance (the "Covered Business").
Subsequent to [1996], such reinsurance shall be provided by Lender to ABCIC for
one-year terms on a calendar year basis. Lender's election to provide such
reinsurance shall be made in a written notice delivered by Lender to ABCIC on or
before [November 1] of the calendar year prior to the year in which such
reinsurance will be effective. ABCIC shall have the right to designate the
percentage of the Lender's quota share participation in connection with such
reinsurance for each such calendar year, in a written notice delivered to Lender
on or before [December 1] of the prior calendar year, provided that such quota
share percentage shall be no lower than [50%] and no higher than [80%]. During
the period specified in the first sentence of this Section 1, ABCIC shall not
reinsure the Covered Business on a quota share or other proportional basis with
any party other than Lender.
D-1
<PAGE>
SECTION 2. RIGHT OF FIRST REFUSAL. During the period commencing with
the date as of which the Term Loan Note has been paid in full, and all other
amounts owed by Borrower to Lender under the Term Loan Agreement or any other
Loan Document have been paid in full, and ending on December [ ], 2003, ABCIC
shall, before entering into any quota share or other proportional reinsurance
arrangement or agreement in which ABCIC is the ceding party, notify Lender in
writing that it proposes to enter into such a reinsurance arrangement or
agreement and shall furnish Lender with all information with respect thereto as
is reasonably requested by Lender, including the material terms and conditions
thereof.
Lender shall, within 21 days following receipt of such notice and
information from ABCIC, notify ABCIC that it either elects or declines to
exercise a "right of first refusal" to enter into any such reinsurance
arrangement or agreement with ABCIC. If Lender elects to pursue such arrangement
or agreement, ABCIC and Lender will negotiate in good faith to execute
definitive cover notes and/or agreements with respect thereto. If Lender
declines to pursue any such arrangement or agreement or fails to reach
definitive agreements with ABCIC with respect thereto within 45 days of ABCIC's
receipt of Lender's notice to pursue such arrangement or agreement, ABCIC may,
within the three-month period thereafter, enter into a reinsurance arrangement
or agreement with any other reinsurer, provided that the terms and conditions of
any such arrangement or agreement with such reinsurer are no more favorable to
such reinsurer than the terms and conditions offered by ABCIC to Lender.
If ABCIC has not entered into such reinsurance arrangement or agreement
with any such reinsurer during such three-month period, ABCIC may not thereafter
enter into any such arrangement or agreement with any such reinsurer unless the
procedures set forth above in this Section 2 again shall have been complied
with.
SECTION 3. AMENDMENTS, ETC. No amendment or waiver of any provision of
this Agreement, or consent to any departure by any party herefrom, shall in any
event be effective unless the same shall be in writing and signed by the party
against which enforcement thereof is being sought, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
SECTION 4. ADDRESSES FOR NOTICES. All notices and other communications
to any party hereto provided for hereunder shall be in writing and mailed or
delivered by messenger or sent by facsimile, addressed to such party, in the
case of Lender and Borrower, at the address of such party specified in the Term
Loan Agreement, and in the case of ABCIC at the address of Borrower specified in
the Term Loan Agreement. Notices shall be effective upon receipt.
SECTION 5. SPECIFIC PERFORMANCE. Borrower and ABCIC acknowledge and
agree that in the event of any breach of this Agreement or any ABCIC-Lender
Reinsurance Agreement, Lender would be irreparably harmed. It is accordingly
agreed that Lender, in
D-2
<PAGE>
addition to any other right to which it may be entitled in law or equity, shall
be entitled to an injunction or injunctions to prevent breaches of this
Agreement or any ABCIC-Lender Reinsurance Agreement and/or to compel specific
performance of this Agreement or any ABCIC-Lender Reinsurance Agreement.
Borrower and ABCIC agree to waive, to the maximum extent permitted by applicable
law, any requirement for the securing or posting of any bond in connection with
such remedy. The remedies herein provided are cumulative and not exclusive of
any remedies provided by law.
SECTION 6. GOVERNING LAW; TERMS. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York.
SECTION 7. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by different parties to this Agreement in separate
counterparts, each which when so executed shall be deemed to be an original and
all of which taken together shall constitute one and the same agreement.
D-3
<PAGE>
IN WITNESS WHEREOF, each of Borrower, ABCIC and Lender has caused this
Agreement as to Reinsurance to be duly executed and delivered by its officer
thereunto duly authorized as of the date first above written.
ASSOCIATED BUSINESS & COMMERCE
HOLDINGS, INC.
By: /s/ LAWRENCE J. MARCHBANKS
---------------------------
Name: Lawrence J. Marchbanks
Title: Chairman of the Board
ASSOCIATED BUSINESS & COMMERCE
INSURANCE COMPANY
By: /s/ LAWRENCE J. MARCHBANKS
---------------------------
Name: Lawrence J. Marchbanks
Title: Chairman of the Board
TIG REINSURANCE COMPANY
By: /s/ ALLEN B. BINDER
----------------------------
Name: Allen B. Binder
Title: Vice President
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Form 10-K of Associated Business & Commerce
Insurance Corporation for the year ended December 31, 1996, of our report dated
April 11, 1997 upon the financial statements of Associated Business & Commerce
Insurance Corporation as of December 31, 1996 and 1995, and for the years ended
December 31, 1996, 1995, and 1994 and our report dated March 20, 1996 upon the
financial statements of Associated Business and Commerce Workers' Compensation
Self-Insurance Fund for the years ended December 31, 1995, 1994, and 1993.
/s/ SCHMIDT, RAINES, TRIESTE, DICKENSON & ADAMS, P.L.
-------------------------------------------------
Schmidt, Raines, Trieste, Dickenson & Adams, P.L.
April 14, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE
BALANCE SHEET AS IF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-30-1996
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 8,708,519
<DEBT-MARKET-VALUE> 8,585,556
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,708,519
<CASH> 2,155,583
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 260,004
<TOTAL-ASSETS> 42,282,454
<POLICY-LOSSES> 31,982,392
<UNEARNED-PREMIUMS> 2,443,710
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
6,100,701
<COMMON> 102,501
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 42,282,454
8,149,806
<INVESTMENT-INCOME> 860,171
<INVESTMENT-GAINS> (27,740)
<OTHER-INCOME> 0
<BENEFITS> 5,656,627
<UNDERWRITING-AMORTIZATION> 1,371,000
<UNDERWRITING-OTHER> 3,021,125
<INCOME-PRETAX> (1,177,620)
<INCOME-TAX> (254,991)
<INCOME-CONTINUING> (922,629)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (922,629)
<EPS-PRIMARY> (10.12)
<EPS-DILUTED> (10.12)
<RESERVE-OPEN> 28,306,416
<PROVISION-CURRENT> 5,732,000
<PROVISION-PRIOR> (75,373)
<PAYMENTS-CURRENT> 1,170,000
<PAYMENTS-PRIOR> 7,857,000
<RESERVE-CLOSE> 31,982,392
<CUMULATIVE-DEFICIENCY> (1,698,000)
</TABLE>
EXHIBIT 28.1
<TABLE>
<CAPTION>
ANNUAL STATEMENT FOR THE YEAR 1996 OF THE ASSOCIATED BUSINESS & COMMERCE
INSURANCE CORPORATION
SCHEDULE P - ANALYSIS OF LOSSES AND LOSS EXPENSES
NOTES TO SCHEDULE P
<S> <C>
(1) The Parts of Schedule P: (3) Reinsurance A,B,C, and D (lines N to Q) are:
Part 1 - detailed information as losses and loss expenses Reinsurance A = nonproportional property (1988 and subsequent)
Part 2 - history of incurred losses and allocated expenses. Reinsurance B = nonproportional liability (1988 and subsequent)
Part 3 - history of loss and allocated expense payments. Reinsurance C = financial lines (1988 and subsequent)
Part 4 - history of bulk and incurred-but-not reported Reinsurance D = old Schedule D line 30 (1987 and prior)
reserves.
Part 5 - history of claims.
Part 6 - history of premiums earned (4) Parts 2 and 4 are gross of all discounting, including tabular
Part 7 - history of loss sensitive contracts. discounting. Part 1 is gross of only non-tabular discounting,
Schedule P Interrogatories which was reported in Columns 31 and 32 of Part 1. The tabular
discount, if any, is reported in the Notes to Financial Statements
(2) Lines of Business A through N,R, and S are groupings of which will reconcile Part 1 with Parts 2 and 4.
the lines of business used on the state page.
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE P - PART 1 - SUMMARY
($000 OMMITTED)
PREMIUMS EARNED LOSS AND LOSS EXPENSE PAYMENTS
--------------- ------------------------------
1
YEARS 2 3 4 LOSS PAYMENTS ALLOCATED LOSS 9 10 11
IN WHICH EXPENSE PAYMENTS
PREMIUMS WERE -------------------- -------------------- SALVAGE UNALLOCATED TOTAL
EARNED AND DIRECT NET 5 6 7 8 AND LOSS NET PAID
LOSSES WERE AND CEDED (2-3) DIRECT DIRECT SUBROGATION EXPENSES (5-6 + 7
INCURRED ASSUMED AND ASSUMED CEDED AND ASSUMED CEDED RECEIVED PAYMENTS -8 + 10)
- ------------- ------ ------ ------ ----------- ----- ----------- ----- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior XXX XXX XXX
2. 1987
3. 1988
4. 1989
5. 1990
6. 1991
7. 1992
8. 1993
9. 1994
10. 1995 16,098 1,807 14,291 11,374 3,902 1,835 221 1,331 276 9,362
11. 1996 28,479 20,171 8,308 5,442 3,712 716 476 8 393 2,363
------ ------ ------ ------ ----- ----- --- ----- --- ------
12. Totals XXX XXX XXX 16,816 7,614 2,551 697 1,339 669 11,725
====== ====== ====== ====== ===== ===== === ===== === ======
</TABLE>
1 12
YEARS
IN WHICH NUMBER
PREMIUMS WERE CLAIMS
EARNED AND REPORTED-
LOSSES WERE DIRECT
INCURRED ASSUMED
- ------------- ---------
1. Prior XXX
2. 1987 XXX
3. 1988 XXX
4. 1989 XXX
5. 1990 XXX
6. 1991 XXX
7. 1992 XXX
8. 1993 XXX
9. 1994 XXX
10. 1995 XXX
11. 1996 XXX
----
12. Totals XXX
====
<TABLE>
<CAPTION>
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID
--------------------------------------- ---------------------------------------- 21 22
CASE BASIS BULK + IBNR CASE BASIS BULK + IBNB
-------------------- ---------------- ------------------ ------------------ SALVAGE UNALLOCATED
13 14 15 16 17 18 19 20 AND LOSS
DIRECT DIRECT DIRECT DIRECT SUBROGATION EXPENSES
AND ASSUMED CEDED AND ASSUMED CEDED AND ASSUMED CEDED AND ASSUMED CEDED ANTICIPATED UNPAID
------------ ----- ----------- ----- ----------- ----- ----------- ----- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988
4. 1989
5. 1990
6. 1991
7. 1992
8. 1993
9. 1994
10. 1995 4,880 1,356 4,577 5,385 861 149 1,327 908 2,941 280
11. 1996 9,444 7,180 3,985 4,032 1,934 1,220 1,059 589 1,185 274
----- ----- ----- ----- ----- ----- ----- ----- ----- ---
12. Totals 14,324 8,536 8,562 9,417 2,795 1,369 2,386 1,497 4,126 554
====== ===== ===== ===== ===== ===== ===== ===== ===== ===
</TABLE>
23 24
NUMBER
TOTAL CLAIMS
NET LOSSES OUTSTANDING-
AND EXPENSES DIRECT
UNPAID AND ASSUMED
------------ ------------
1. Prior XXX
2. 1987 XXX
3. 1988 XXX
4. 1989 XXX
5. 1990 XXX
6. 1991 XXX
7. 1992 XXX
8. 1993 XXX
9. 1994 XXX
10. 1995 4,127 XXX
11. 1996 3,675 XXX
----- ----
12. Totals 7,802 XXX
===== ====
<TABLE>
<CAPTION>
TOTAL LOSSES AND LOSS AND LOSS EXPENSES PERCENTAGE
LOSS EXPENSES INCURRED (INCURRED/PREMIUMS EARNED NONTABULAR DISCOUNT 33
--------------------------- --------------------------------- ------------------- INTER-COMPANY
25 26 27 28 29 30 31 32 POOLING
DIRECT DIRECT LOSS PARTICIPATION
AND ASSUMED CEDED NET AND ASSUMED CEDED NET LOSSES EXPENSE PERCENTAGE
----------- ----- --- ----------- ----- ------ ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior XXX XXX XXX XXX XXX XXX XXX
2. 1987
3. 1988
4. 1989
5. 1990
6. 1991
7. 1992
8. 1993
9. 1994
10. 1995 25,410 11,921 13,489 157.8 659.7 94.4
11. 1996 23,247 17,209 6,038 81.6 85.3 72.7
12. Totals XXX XXX XXX XXX XXX XXX XXX
=== === === === === === ===
</TABLE>
NET BALANCE SHEET RESERVED
AFTER DISCOUNT
---------------------------
34 35
LOSSES LOSS EXPENSED
UNPAID UNPAID
---------- --------------
1. Prior
2. 1987
3. 1988
4. 1989
5. 1990
6. 1991
7. 1992
8. 1993
9. 1994
10. 1995 2,716 1,411
11. 1996 2,217 1,458
12. Totals 4,933 2,869
===== =====
74
<PAGE>
<TABLE>
<CAPTION>
ANNUAL STATEMENT FOR THE YEAR 1996 OF THE ASSOCIATED BUSINESS & COMMERCE
INSURANCE CORPORATION
SCHEDULE P - PART 2 - SUMMARY
1 INCURRED LOSSES AND ALLOCATED EXPENSES REPORTED AT YEAR END ($000 OMMITTED) DEVELOPMENT
YEARS IN WHICH -------------------------------------------------------------------------- ------------------
LOSSES WERE 2 3 4 5 6 7 8 9 10 11 12 13
INCURRED 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ONE YEAR TWO YEAR
- -------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX 12,579 12,933 354 XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX 5,371 XXX XXX
--- --- --- --- --- --- --- --- --- ----- --- ---
12. Totals 354
===
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE P - PART 3 - SUMMARY
12 13
NUMBER OF NUMBER OF
1 CUMULATIVE PAID LOSSES AND ALLOCATED EXPENSES AT YEAR END ($000 OMITTED) CLAIMS CLAIMS
YEARS IN WHICH ------------------------------------------------------------------------ CLOSED WITH CLOSED
LOSSES WERE 2 3 4 5 6 7 8 9 10 11 LOSS WITHOUT LOSS
INCURRED 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 PAYMENT PAYMENT
- -------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior 000 XXX XXX
2. 1987 XXX XXX
3. 1988 XXX XXX XXX
4. 1989 XXX XXX XXX XXX
5. 1990 XXX XXX XXX XXX XXX
6. 1991 XXX XXX XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX 1,056 9,085 XXX XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX 1,970 XXX XXX
--- --- --- --- --- --- --- --- ----- ----- --- ---
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE P - PART 4 - SUMMARY
1 BULK AND INCURRED BUT NOT REPORTED RESERVES ON LOSSES AND ALLOCATED EXPENSES
AT YEAR END ($000 OMITTED)
YEARS IN WHICH ----------------------------------------------------------------------------
LOSSES WERE 2 3 4 5 6 7 8 9 10 11
INCURRED 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- -------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX 2,389 (389)
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX 423
--- --- --- --- --- --- --- --- ----- ---
</TABLE>
75
<PAGE>
ANNUAL STATEMENT FOR TH YEAR 1996 OF THE ASSOCIATED BUSINESS & COMMERCE
INSURANCE CORPORATION
<TABLE>
<CAPTION>
SCHEUDLE P - PARTY 1D - WORKERS' COMPENSATION
($000 OMITTED)
1 PREMIUM EARNED LOSS AND LOSS EXPENSE PAYMENTS
------------------------------ -----------------------------------------------------
YEARS 2 3 4 LOSS PAYMENTS ALLOCATED LOSS
IN WHICH EXPENSE PAYMENTS
PREMIUM WERE -------------------- ----------------
EARNED AND DIRECT CEDED 5 6 7 8
LOSSES WERE AND NOT DIRECT DIRECT CEDED
INCURRED ASSURED (2-3) AND ASSURED CEDED AND ASSURED
- -------- ------- ----- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1. Prior XXX XXX XXX
2. 1987
3. 1988
4. 1989
5. 1990
6. 1991
7. 1992
8. 1993
9. 1994
10. 1995 16,098 1,807 14,291 11,374 3,902 1,835 221
11. 1996 28,479 20,171 8,308 5,442 3,712 716 476
------- ------ ------ ------ ----- ----- ----
12. Totals XXX XXX XXX 16,816 7,614 2,551 697
======= ====== ====== ====== ====== ===== ====
(RESTUBBED PREVIOUS TABLE)
1
LOSS AND LOSS EXPENSE PAYMENTS
----------------------------------------
YEARS 9 10 11 12
IN WHICH NUMBER OF
PREMIUM WERE SALVAGE UNALLOCATED TOTAL CLAIMS
EARNED AND AND LOSS NET PAID REPORTED
LOSSES WERE SUBROGATION EXPENSE (5-6 + 7 DIRECT AND
INCURRED RECEIVED PAYMENTS -8 + 10) ASSURED
- ----------- ----------- ------------ -------- ----------
1. Prior XXX
2. 1987
3. 1988
4. 1989
5. 1990
6. 1991
7. 1992
8. 1993
9. 1994
10. 1995 1,331 276 9,362 1,778
11. 1996 8 393 2,363 2,501
12. Totals 1,339 669 11,725 XXX
===== === ====== ======
</TABLE>
<TABLE>
<CAPTION>
LOSSES UNPAID ALLOOCATED LOSS EXPENSES UNPAID
-------------------------------------------------------- ------------------------------------------------
CASE BASIS BULK + IBMR CASE BASIS BULK + IBMR
------------------------ ------------------------- ------------------------------------------------
13 14 15 16 17 18 19 20
DIRECT DIRECT DIRECT DIRECT
AND ASSUMED CEDED AND ASSUMED CEDED AND ASSUMED CEDED AND ASSUMED CEDED
----------- ----- ----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988
4. 1989
5. 1990
6. 1991
7. 1992
8. 1993
9. 1994
10. 1995 4,880 1,356 4,577 5,385 861 149 1,327 908
11. 1996 9,444 7,180 3,985 4,032 1,934 1,220 1,059 589
- --- ---- ------ ------ ------ ------ ----- ----- ----- ---
12 Totals 14,324 8,536 8,562 9,417 2,795 1,369 2,386 1,497
====== ====== ====== ====== ====== ===== ===== =====
(RESTUBBED PREVIOUS TABLE)
21 22 23 24
NUMBER OF
SALVAGE UNALLOCATED TOTAL CLAIMS
AND LOSS NET LOSSES OUTSTANDING
SUBROGATION EXPENSES AND EXPENSES DIRECT AND
ANTICIPATED UNPAID UNPAID ASSURED
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988
4. 1989
5. 1990
6. 1991
7. 1992
8. 1993
9. 1994
10. 1995 2,941 280 4,127 349
11. 1996 1,185 274 3,675 706
----- --- ----- ---
12. Totals 4,126 554 7,802 1,055
===== === ===== =====
</TABLE>
<TABLE>
<CAPTION>
TOTAL LOSES AND LOSS AND LOSS EXPENSE PERCENTAGE
LOSS EXPENSES INCURR (INCURRED/PREMIUMS EARNED)
------------------------------------- -----------------------------------
25 26 27 28 29 30
DIRECT DIRECT
AND ASSURED CEDED NET AND ASSUMED CEDED NET
----------- ----- --- ----------- ----- ---
<S> <C> <C> <C> <C> <C> <C>
1. Prior XXX XXX XXX XXX XXX XXX
2. 1987
3. 1988
4. 1989
5. 1990
6. 1991
7. 1992
8. 1993
9. 1994
10. 1995 25,410 11,921 13,489 157.8 659.7 94.4
11. 1996 23,247 17,209 6,038 81.6 85.3 72.7
------ ------ ------ ----- ----- ----
12. Totals XXX XXX XXX XXX XXX XXX
====== ====== ====== ===== ===== =====
(RESTUBBED PREVIOUS TABLE)
NET BALANCE SHEET RESERVES
NONTABULAR DISCOUNT 33 AFTER DISCOUNT
---------------------------- --------------------------
31 32 INTER-COMPANY 34 35
POOLING LOSS
LOSS PARTICIPATION LOSSES EXPENSES
LOSS EXPENSES PERCENTAGE UNPAID UNPAID
----------- ----------- ------------- ------- --------
1. Prior XXX
2. 1987
3. 1988
4. 1989
5. 1990
6. 1991
7. 1992
8. 1993
9. 1994
10. 1995 2,716 1,411
11. 1996 2,217 1,458
----- -----
12. Totals XXX 4,933 2,869
====== ===== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ANNUAL STATEMENT FOR THE YEAR 1996 OF THE ASSOCIATED BUSINESS & COMMERCE INSURANCE CORPORATION
SCHEDULE P - PART 2A - HOMEOWNERS/FARMOWNERS
1 INCURRED LOSSES AND ALLOCATED EXPENSES REPORTED AT YEAR END ($000 OMITTED) DEVELOPMENT
------------------------------------------------------------------------- -----------
YEARS IN WHICH 2 3 4 5 6 7 8 9 10 11 12 13
LESSOR WERE 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 One Year Two Year
INCURRED ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -------- --------
- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX
12. TOTALS
======= =======
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE P - PART 2B - PRIVATE PASSENGER AUTO LIABILITY/MEDICAL
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX
12. TOTALS ===== ====
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE P - PART 2C - COMMERCIAL AUTO/TRUCK LIABILITY/MEDICAL
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX
12. TOTALS ===== ====
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE P - PART 2D - WORKERS' COMPENSATION
--------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX 12,579 12,933 354 XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX 5,871 XXX XXX
12. TOTALS 354
==== ====
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE P - PART 2E - COMMERCIAL MULTIPLE PERIL
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX
12. TOTALS
====== ======
</TABLE>
98
<PAGE>
<TABLE>
<CAPTION>
ANNUAL STATEMENT FOR THE YEAR 1996 OF THE ASSOCIATED BUSINESS & COMMERCE
INSURANCE CORPORATION
SCHEDULE P - PART 3A - HOMEOWNERS/FARMOWNERS
--------------------------------------------
1 CUMULATIVE PAID LOSSES AND ALLOCATED EXPENSES AT YEAR END ($000 OMITTED)
-------------------------------------------------------------------------------------------------------
YEARS IN WHICH
LOSSES WERE 2 3 4 5 6 7 8 9 10 11
INCURRED 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- --------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior 000
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX
</TABLE>
1 12 13
YEARS IN WHICH NUMBER OF NUMBER OF
LOSSES WERE CLAIMS CLAIMS
INCURRED CLOSED CLOSED
- -------------- WITH LOSS WITHOUT
PAYMENT LOSS PAYMENT
1. Prior --------- ------------
2. 1987
3. 1988
4. 1989
5. 1990
6. 1991
7. 1992
8. 1993
9. 1994
10. 1995
11. 1996
<TABLE>
<CAPTION>
SCHEDULE P - PART 3B - PRIVATE PASSENGER AUTO LIABILITY/MEDICAL
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior 000
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE P - PART 3C - COMMERCIAL AUTO/TRUCK LIABILITY/MEDICAL
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior 000
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE P - PART 3D - WORKERS' COMPENSATION
--------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior 000
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX 1,056 9,086 1,429
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX 1,970 1,795
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE P - PART 3E- COMMERCIAL MULTIPLE PERIL
-----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior 000
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
ANNUAL STATEMENT FOR THE YEAR 1996 OF THE ASSOCIATED BUSINESS & COMMERCE
INSURANCE CORPORATION
SCHEDULE P - PART 4A - HOMEOWNERS/FARMOWNERS
--------------------------------------------
1 BULK AND INCURRED BUT NOT REPORTED RESERVES ON LOSSES AND ALLOCATED EXPENSES AT YEAR END ($000 OMITTED)
-------------------------------------------------------------------------------------------------------
YEARS IN WHICH
LOSSES WERE 2 3 4 5 6 7 8 9 10 11
INCURRED 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- --------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX
7. 1992 XXX XXX XXX
8. 1993 XXX XXX XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE P - PART 4B - PRIVATE PASSENGER AUTO LIABILITY/MEDICAL
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX
7. 1992 XXX XXX XXX
8. 1993 XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE P - PART 4C - COMMERCIAL AUTO/TRUCK LIABILITY/MEDICAL
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX
7. 1992 XXX XXX XXX
8. 1993 XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE P - PART 4D - WORKERS' COMPENSATION
--------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX 2,389 (389)
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX 423
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE P - PART 4E - COMMERCIAL MULTIPLE PERIL
-----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX
7. 1992 XXX XXX XXX
8. 1993 XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX
</TABLE>
108
<PAGE>
<TABLE>
<CAPTION>
ANNUAL STATEMENT FOR THE YEAR 1996 OF THE ASSOCIATED BUSINESS & COMMERCE
INSURANCE CORPORATION
SCHEDULE P - PART 5D - WORKERS' COMPENSATION
--------------------------------------------
SECTION 1
---------
CUMULATIVE NUMBER OF CLAIMS CLOSED WITH LOSS PAYMENT DIRECT
AND ASSUMED AT YEAR END
-----------------------------------------------------------
1
YEARS
IN WHICH
PREMIUMS WERE
EARNED AND
LOSSES WERE 2 3 4 5 6 7 8 9 10 11
INCURRED 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX 452
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX
</TABLE>
<TABLE>
<CAPTION>
SECTION 2
---------
NUMBER OF CLAIMS OUTSTANDING DIRECT AND ASSUMED AT YEAR END
-----------------------------------------------------------
1
YEARS
IN WHICH
PREMIUMS WERE
EARNED AND
LOSSES WERE 2 3 4 5 6 7 8 9 10 11
INCURRED 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX 1,150
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX
</TABLE>
<TABLE>
<CAPTION>
SECTION 3
---------
CUMULATIVE NUMBER OF CLAIMS REPORTED DIRECT AND ASSUMED AT YEAR
END
---------------------------------------------------------------
1
YEARS
IN WHICH
PREMIUMS WERE
EARNED AND
LOSSES WERE 2 3 4 5 6 7 8 9 10 11
INCURRED 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX 1,665
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX
</TABLE>
116
<PAGE>
<TABLE>
<CAPTION>
ANNUAL STATEMENT FOR THE YEAR 1996 OF THE ASSOCIATED BUSINESS & COMMERCE
INSURANCE CORPORATION
SCHEDULE P - PART 6C - AUTO/TRUCK LIABILITY/MEDICAL
SECTION 1
---------
1 CUMULATIVE PREMIUMS EARNED DIRECT AND ASSUMED AT YEAR END ($000 OMITTED)
YEARS ------------------------------------------------------------------------------------------------
IN WHICH 12
PREMIUMS WERE
EARNED AND 2 3 4 5 6 7 8 9 10 11 CURRENT YEAR
LOSSES WERE PREMIUMS
INCURRED 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 EARNED
- ------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX
--- --- --- --- --- --- --- --- ---
12. Total
13. Earned Premiums
(Sch. P. Part 1) XXX
---
</TABLE>
<TABLE>
<CAPTION>
SECTION 2
---------
CUMULATIVE PREMIUMS EARNED CEDED AT YEAR END ($000 OMITTED) 12
-----------------------------------------------------------
1 CURRENT YEAR
2 3 4 5 6 7 8 9 10 11 PREMIUMS
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 EARNED
- ------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX
- -------- --- --- --- --- --- --- --- --- -----
12. Total
13. Earned Premiums
(Sch. P. Part 1) XXX
---
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE P - PART 6D - WORKERS' COMPENSATION
SECTION 1
---------
1 CUMULATIVE PREMIUMS EARNED DIRECT AND ASSUMED AT YEAR END ($000 OMITTED)
YEARS ------------------------------------------------------------------------------------------------
IN WHICH 12
PREMIUMS WERE
EARNED AND 2 3 4 5 6 7 8 9 10 11 CURRENT YEAR
LOSSES WERE PREMIUMS
INCURRED 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 EARNED
- ------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX 16,098 16,098
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX 28,479 28,479
--- --- --- --- --- --- --- --- ------ ------ ------
12. Total 28,479
- --- ------
13. Earned Premiums
(Sch. P. Part 1) 16,098 28,479 XXX
---------------- ------ ------ ---
</TABLE>
<TABLE>
<CAPTION>
SECTION 2
---------
CUMULATIVE PREMIUMS EARNED CEDED AT YEAR END ($000 OMITTED) 12
-----------------------------------------------------------
1 CURRENT YEAR
2 3 4 5 6 7 8 9 10 11 PREMIUMS
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 EARNED
- ------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1987
3. 1988 XXX
4. 1989 XXX XXX
5. 1990 XXX XXX XXX
6. 1991 XXX XXX XXX XXX
7. 1992 XXX XXX XXX XXX XXX
8. 1993 XXX XXX XXX XXX XXX XXX
9. 1994 XXX XXX XXX XXX XXX XXX XXX
10. 1995 XXX XXX XXX XXX XXX XXX XXX XXX 1,807 1,807
11. 1996 XXX XXX XXX XXX XXX XXX XXX XXX XXX 20,171 20,171
- -------- --- --- --- --- --- --- --- --- ----- ----- ------
12. Total 20,171
------
13. Earned Premiums
(Sch. P. Part 1) 1,807 20,171 XXX
----- ------ ---
</TABLE>
124
<PAGE>
ANNUAL STATEMENT FOR THE YEAR 1996 OF THE ASSOCIATED BUSINESS & COMMERCE
INSURANCE CORPORATION
SCHEDULE P INTERROGATORIES
1. Computation of excess statutory reserves over statement reserves.
a. Auto Liability (private pasenger and commercial)
1996 (60.0%) 1995 (60.0%) 1994 (60.0%)
------- ------- -------
Total ______
b. Other Liability and Products Liability
1996 (60.0%) 1995 (60.0%) 1994 (60.0%)
------- ------- -------
Total ______
c. Medical Malpractice
1996 (60.0%) 1995 (60.0%) 1994 (60.0%)
------- ------- -------
Total ______
d. Worker's Compensation
1996 (65.0%) 1995 (65.0%) 1994 (65.0%)
------- ------- -------
Total ______
e. Credit
Total ______
f. All Lines Total (Report here and Page 3) Total ______
2. What is the extended losss and expense reserve - direct and assumed - for the
following classes? An example of an extended loss and expense reserve is the
actuarial reserve for the free-tail coverage arising upon death, disability
or retirement in most medical malpractice policies. Such a libility is to be
reported here even if it was not reported elsewhere in schedule P, but
otherwise reported as a liability line on page 3. Show the full reserve
amount, not just the change during the current year.
YEAR IN WHICH PREMIUMS 1 2 3
WERE EARNED AND LOSSES MEDICAL OTHER PRODUCTS
WERE INCURRED MALPRACTICE LIABILITY LIABILITY
---------------------- ----------- --------- ---------
a. 1987
b. 1988
c. 1989
d. 1990
e. 1991
f. 1992
g. 1993
h. 1994
i. 1995
j. 1996
--------
k. Total
3. The term "Loss expense" includes all payments for legal expenses, including
attorney's and witness fees and court costs, salaries and expenses of
investigators, adjustors and field men, rents, stationery, telegraph and
telephone charges, postage, salaries and expenses of office employees, home
office expenses and all other payments under or on account of such injuries,
whether the payments are allocated to specific claims or are unallocated. Are
they so reported in this statement? Answers Yes [X] No[ ]
4. The unallocated loss expense payments paid during the most recent calendar
year should be distributed to the various years in which losses were incurred
as follows: (1) 45% to the most recent year, (2) 5% to the next most recent
year, and (3) the balance to all years, including the most recent, in
proportion to the amount of loss payments paid for each year during the most
recent calendar year. If the distribution in (1) or (2) produces an
accumulated distribution to such year in excess of 10% of the premiums earned
for such year, disregarding all distributions made under (3), such
accumulated distribution should be limited to 10% of premiums earned and the
balance distributed in accordance with (3). Are they so reported in this
Statement? Answers Yes [X] No[ ]
5. Do any lines in Schedule P include reserves which are reported gross of any
discount to present value of future payments, but are reported net of such
discounts on page 11? Answers Yes [ ] No[X]
If yes, proper reporting must be made in the Notes to Financial Statements,
as specified in the Instructions, Also, the discounts must be reported in
Schedule P - Part 1, Column 31 and 32.
Schedule P must be completed gross of non-tabular discounting. Work papers
relating to discount calculations must be available for examination upon
request.
Discounting is allowed only if expressly permitted by the state insurance
department to which this Annual Statement is being filed.
6. What were the net premiums in force at the end of the year for:
(in thousands of dollars)
a. Fidelity $0
b. Surety $0
7. Claim count information is
reported (check one) a. per claim X
-----
If not the same in all years,
explain in Question 8. b. per claimant
------
8. The information provided in schedule P will be used by many persons to
estimate the adequacy of the current loss and expense reserves, among other
things. Are there any especially significant events, coverage, retention or
accounting charges which have occurred which must be considered when making
such analyses? (An extended statement may be attached.) On December 7, 1995,
Associated Business and Commerce Insurance Corporation assumed all of the
unearned premium............................................................
and loss and loss adjustment expense liabilities of Associated Business and
Commerce Self-Insurance Fund. Associated Business and Commerce
Self-Insurance..............................................................
fund wrote business between late 1991 and December 7, 1995. The amount
reported as premium from that transaction is the book value of the
transferred.................................................................
assets which was greater that the transferred liabilities on the transfer
date. Accident Year 1995 paid loses and allocated loss adjustment
expenses....................................................................
include all payments made after December 7, 1995 on the transferred claims
and on claims occurring after December 7, 1995. Case and IBNR reserves for...
Accident Year 1995 include unpaid liabilities emanating from the transferred
claims and from claims occurring after December 7, 1995,....................
.............................................................................
.............................................................................
133
