<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1998
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
<TABLE>
<S> <C>
COMMERCE CASUALTY GROUP, INC. NORTH CAROLINA
(Name of small business issuer as specified in its (State or jurisdiction of incorporation or
charter) organization)
</TABLE>
<TABLE>
<S> <C>
6331
(Primary Standard Industrial Classification Code 56-1919638
Number) (IRS Employer Identification No.)
</TABLE>
COMMERCE CASUALTY GROUP, INC., 9140 ARROWPOINT BOULEVARD, SUITE 200, CHARLOTTE,
NC 28273,
(704) 525-8478
(Address and telephone number of principal executive offices and principal place
of business)
PAUL V. H. HALTER, III
COMMERCE CASUALTY GROUP, INC.
9140 ARROWPOINT BOULEVARD, SUITE 200
CHARLOTTE, NC 28273
(704) 525-8478
(Name, address, and telephone number of agent for service)
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
CHARLES BARKLEY RICHARD F. DAHLSON
3001 PLANTERS WALK COURT JACKSON WALKER L.L.P.
CHARLOTTE, NC 28210-8025 901 MAIN STREET, SUITE 6000
TELEPHONE: (704) 543-8806 DALLAS, TEXAS 75202-3797
TELECOPIER: (704) 543-8863 TELEPHONE: (214) 953-6000
TELECOPIER: (214) 953-5822
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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- -----------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITY TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE FEE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units(2)..................................... 2,300,000(2) $5.1875 $11,931,250 $ 3,519.72
- -----------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value................ 2,300,000(2) $5.00 (3) (3)
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Series A Common Stock Purchase Warrants(4)... 2,300,000 $ .125 (9) (9)
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Common Stock, Issuable Under Series A Common
Stock Purchase Warrants(5)................. 2,300,000 $6.00 $13,800,000 $ 4,071.00
- -----------------------------------------------------------------------------------------------------------------
Series B Common Stock Purchase Warrants(4)... 2,300,000 $ .0625 (9) (9)
- -----------------------------------------------------------------------------------------------------------------
Common Stock, Issuable Under Series B Common
Stock Purchase Warrants(5)................. 2,300,000 $7.00 $16,100,000 $ 4,749.50
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Representative's Warrants.................... 200,000 .0005 $ 100 $ .03
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Units underlying Representative's Warrants... 200,000 $6.225 $ 1,245,000 $ 367.28
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Common Stock(6)Included in Representative's
Warrants................................... 200,000 $6.00 (3)(8) (3)(8)
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Representatives Series A Common Stock
Purchase Warrants.......................... 200,000 .15 (9) (9)
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Representatives Series B Common Stock
Purchase Warrants.......................... 200,000 .075 (9) (9)
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Representative's Common Stock Issuable Under
Representative's Series A Common Stock
Purchase Warrants(7)....................... 200,000 $6.00 $ 1,200,000 $ 354.00
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Representative's Common Stock Issuable Under
Representative's Series B Common Stock
Purchase Warrants(7)....................... 200,000 $7.00 $ 1,400,000 $ 413.00
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TOTAL................................ $13,474.53
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</TABLE>
(Footnotes on next page)
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
- ---------------
(Footnotes continued from cover)
(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933, as amended.
(2) Includes 300,000 shares of Common Stock issuable pursuant to the
Representative's over-allotment option.
(3) Included in the Units. No additional registration fee is required.
(4) Includes 300,000 Series A and 300,000 Series B Warrants issuable pursuant to
the Representative's over-allotment option.
(5) Represents shares of Common Stock issuable upon exercise of the Series A and
Series B Warrants registered hereby together with such additional
indeterminate number of shares as may be issued upon exercise of such
Warrants by reason of the anti-dilution provisions contained therein.
(6) Represents shares of Common Stock issuable upon exercise of the
Representative's Warrant, together with such additional indeterminate number
of shares of Common Stock as may be issued upon exercise of such
Representative's Warrant by reason of the anti-dilution provisions contained
therein.
(7) Represents Warrants issuable upon exercise of the Representative's Warrant,
together with such additional indeterminate number of Warrants as may be
issued upon exercise of such Representative's Warrant.
(8) Represents shares of Common Stock issuable upon exercise of the Warrants
included within the Representative's Warrant, together with such additional
indeterminate number of shares of Common Stock as may be issued upon
exercise of such Warrants by reason of the anti-dilution provisions
contained therein. No additional filing fee required.
(9) Pursuant to Rule 416 of the Securities Act of 1933, no separate registration
fee is required because the Common Stock underlying the Series A and Series
B Warrants is being registered in the same registration statement.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
SUBJECT TO COMPLETION
DATED: AUGUST , 1998
COMMERCE CASUALTY GROUP, INC.
2,000,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK,
ONE REDEEMABLE SERIES A COMMON STOCK PURCHASE WARRANT,
AND ONE REDEEMABLE SERIES B COMMON STOCK PURCHASE WARRANT
Commerce Casualty Group, Inc. (the "Company" or "Commerce Casualty") is
offering (the "Offering") 2,000,000 units (the "Units"), each Unit consisting of
one share (the "Shares") of common stock, $.001 par value per share (the "Common
Stock"); one Redeemable Series A Common Stock Purchase Warrant (the "Series A
Warrants"); and one Redeemable Series B Common Stock Purchase Warrant (the
"Series B Warrants"). The Series A Warrants and the Series B Warrants may
sometimes be collectively referred to as the "Warrants." The Units, the Shares
and the Warrants offered hereby are referred to collectively as the
"Securities." The Shares and Warrants included in the Units may be not be traded
separately until , 1999 (180 days from the date of this Prospectus)
unless earlier separated upon three days notice from the Representative (as
hereinafter defined) to the Company. The Warrants may not be exercised until
they are separated from the Units. Prior to this Offering, there has been no
public market for the Units, the Common Stock or the Warrants. It is estimated
that the initial public offering price will be $5.1875 per Unit.
Each Series A Warrant entitles the holder to purchase one share of Common
Stock at a price of $ 6.00 per share during the five-year period commencing on
the date of this Prospectus. The Series A Warrants are redeemable by the Company
for $9.00 per Warrant. Each Series B Warrant entitles the holder to purchase one
share of Common Stock at a price of $ 7.00 per share during the five-year period
commencing on the date of this Prospectus. The Series B Warrants are redeemable
by the Company for $10.00 per Warrant. Redemption requires not less than 30 nor
more than 60 days written notice provided there is then in effect a current
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the issuance and sale of the Common Stock
upon the exercise of the Warrants. Any redemption of the Warrants during the
one-year period commencing on the date of this Prospectus shall require the
written consent of First London Securities Corporation, the representative of
the Underwriters (the "Representative"). See "Description of Securities".
The initial public offering prices of the Securities and the exercise price
and other terms of the Warrants have been determined through negotiations
between the Company and the Representative and are not related to the Company's
assets, book value, financial condition or other recognized criteria of value.
Although the Company has applied for the inclusion of the Common Stock and the
Warrants on the Pacific Stock Exchange and on the NASDAQ SmallCap Market, there
can be no assurance that an active trading market in the Company's securities
will develop or be sustained.
THESE SECURITIES ARE HIGHLY SPECULATIVE, INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS
PROSPECTUS AND "DILUTION" BEGINNING ON PAGE 13 OF THIS PROSPECTUS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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- ------------------------------------------------------------------------------------------------------------------------
UNDERWRITING DISCOUNTS PROCEEDS TO THE
PRICE TO THE PUBLIC(1) AND COMMISSION(1) COMPANY(2)(3)
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<S> <C> <C> <C>
Per Unit Total --.................................. $ $
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</TABLE>
(1) Does not include additional underwriting compensation to be received by the
Representative in the form of (i) a non-accountable expense allowance equal
to 2% of the gross proceeds of this Offering, of which $25,000 has been paid
to date, (ii) a warrant issued to the Representative (the "Representative's
Warrant") to purchase up to 200,000 Units, each Unit consisting of one share
of Common Stock, one Series A Warrant and one Series B Warrant exercisable
for a four-year period commencing one year after the effective date of this
Offering at an exercise price of 120% of the initial offering price of the
Shares and Warrants (in each case subject to adjustment). The Company has
agreed to pay the Representative upon the exercise of the Warrants a fee
equal to 5% of the gross proceeds received by the Company, subject to
certain conditions. In addition, the Company has granted to the
Representative certain registration rights with respect to registration of
the Shares and the Warrants underlying the Representative's Warrant (the
"Underlying Warrants") and the shares of Common Stock issuable upon exercise
of the Underlying Warrants. The Company has agreed to indemnify the
underwriters against certain liabilities arising under the Securities Act.
See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $623,496
including the Representative's nonaccountable expense allowance. To date,
the Company has incurred costs of approximately $25,000 and expects to incur
filing, printing, legal, accounting and miscellaneous expenses relating to
the Offering. The Company's officers and directors may purchase up to 10% of
the offered Securities on the same terms and conditions as all other
investors.
(3) The Company has granted the Representative an option (the "Representative's
Over-Allotment Option"), exercisable within 45 days from the date of this
Prospectus, to purchase on the same terms as the Securities offered hereby
up to 300,000 additional Units, each Unit consisting of one share of Common
Stock, one Series A Warrant and one Series B Warrant solely to cover
over-allotments, if any. If the Representative's Over-Allotment Option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting".
---------------------
The Securities offered by this Prospectus are being offered on a firm
commitment basis by the Underwriters when, as and if delivered to and accepted
by the Underwriters subject to prior sale, and certain other conditions. The
Representative reserves the right to withdraw, cancel or modify the Offering
without notice and to reject any order, in whole or in part. It is expected that
delivery of the certificates representing the Securities will be made against
payment therefor at the offices of First London Securities Corporation, Dallas,
Texas on or about , 1998.
FIRST LONDON SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 4
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (the "Registration
Statement") under the Securities Act with respect to the Securities. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and this Offering, reference is made to the Registration Statement,
including the exhibits filed therewith, which may be examined at the
Commission's principal office, Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 where copies may be obtained upon payment of the fees prescribed by
the Commission. Descriptions contained in the Prospectus as to the contents of
any contract or other documents filed as an exhibit to the Registration
Statement are not necessarily complete and each such description is qualified by
reference to such contract or document. The Company will provide without charge
to each person who receives a Prospectus, upon written request of such person, a
copy of any of the information that is incorporated by reference in the
Prospectus.
Upon consummation of this Offering, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and in accordance therewith will file reports and other
information with the Commission. Such reports and other information can be
inspected and copied at the public reference facilities of the Commission at 450
Fifth Street, N.W., Washington D.C. 20549 and at its New York Regional Office,
Room 1300, 7 World Trade Center, New York, New York 10048; and at its Chicago
Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material may also be obtained
from the Public Reference Section of the Commission at prescribed rates. The
Company's Registration Statement on Form SB-2 as well as any reports to be filed
under the Exchange Act can also be obtained electronically after the Company has
filed such documents with the Commission through a variety of databases,
including among others, the Commission's Electronic Data Gathering, Analysis And
Retrieval ("EDGAR") program, Knight-Ridder Information, Inc., Federal
Filings/Dow Jones and Lexis/Nexis. Additionally, the Commission maintains a
Website (at http://www.sec.gov) that contains such information regarding the
Company.
The Company intends to furnish to its stockholders annual reports
containing financial statements which are audited and reported upon by its
independent public accounting firm and such other reports as the Company may
deem appropriate.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE PRICE OF THE COMMON STOCK OR
WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING" AND "PLAN OF DISTRIBUTION."
ii
<PAGE> 5
PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
Prospectus and is qualified in its entirety by the more detailed information and
financial statements (including the notes thereto) appearing elsewhere in the
Prospectus and in the Registration Statement. Unless otherwise indicated, (i)
all information in this Prospectus assumes no exercise of the Warrants, the
Representative's Over-allotment Option or the Representative's Warrant; (ii) all
information in this Prospectus assumes a public offering price of $5.1875 per
Unit ($5.00 per share of Common Stock, $.125 per Series A Warrant, and $0.0625
per Series B Warrant); and (iii) all share and per share data have been adjusted
to give effect to the Company's 3.5 for 1 forward stock split effective July 15,
1998 (the "Stock Split.").
THE COMPANY
The Company is a provider of worker's compensation insurance in the states
of Georgia, North Carolina, South Carolina, and Virginia. The Company has
established a network of approximately 93 independent insurance agents and
agencies in those states, all of whom own an equity interest in the Company. The
Company does not presently accept coverage submitted by agents who are not
shareholders.
Workers compensation coverage is statutorily mandated in some form in all
fifty states of the United States, although not all states require commercial
insurance carriers. The Company established an insurance subsidiary, Commerce
Casualty Insurance Company, Ltd. ("Insurance Subsidiary"), on December 19, 1995
under the laws of Bermuda. The Insurance Subsidiary has contracted with Star
Insurance Company ("Star") to sell worker's compensation insurance under the
Company's name through an arrangement with Star. Star is a property and casualty
insurance carrier licensed in 49 states. Star is rated "A minus" by A. M. Best
Review, the industry rating company.
The Company has established its selected network by choosing member agents
with established clienteles in targeted geographical areas. The Company
successfully obtained member agents by providing a series of benefits that are
not typically associated with its worker's compensation competitors. First, the
Company services its agents by providing broad based worker's compensation
coverage which does not restrict the coverages to certain geographical areas,
certain types of businesses, or to limited insurance class codes, unlike many of
its competitors. Second, the Company provides financing to the agent's insureds
for any shortfall in annual premiums that is revealed after the Company audits
the payrolls of the insureds for the previous year. Third, the Company's policy
is to give its agents a 24 hour response to any request for coverage as opposed
to the typical 2 to 3 week industry response time. Finally, the Company will
give telephone quotations to its member agents. By rendering prompt responses
and telephone quotes, the agent's time and expense in determining eligibility
and costs are reduced.
By expanding its network of member agents, the Company will have a network
for distribution of additional insurance products and services. All of the
member agents sell a wide variety of insurance products and services in addition
to worker's compensation coverage. For example, many of the member agents assist
their insureds by arranging for the financing of insurance premiums through
intermediaries. Though this is an important service to many insureds, most
states restrict the ability of insurance agents to collect fees, commissions or
other payments from premium financing. All states where the Company presently
does business, except Georgia, prohibit all fees, commissions, or payments to a
licensed insurance agent for arranging for or financing insurance premiums.
In early 1998, the Company established Commerce Capital, Inc., a North
Carolina corporation, (the "Finance Subsidiary") to provide financing options
for premiums payable on policies of insurance offered by member agents. In June,
1998, the Finance Subsidiary obtained a Line of Credit from First Union National
Bank in Charlotte, North Carolina. This line of credit provides funds for the
financing of insurance premiums. Since no competitor can lawfully pay
commissions to the Company's member agents for financing premiums (except in
Georgia), the Company believes that its member agents will prefer the Company's
premium finance services instead of a third party. See "Business -- Finance
Subsidiary."
1
<PAGE> 6
Total revenues for the year ended December 31, 1997 increased 350.4%. Total
revenues for the first quarter of 1998 increased by 101.9% from the same quarter
of 1997. This increase reflected the increase in workers compensation insurance
premiums written through independent insurance agents and the expansion of the
Company into Georgia. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PLAN OF OPERATION
The Company has focused its initial efforts on the establishment of a
network of independent insurance agents in the states of North Carolina, South
Carolina, Georgia, and Virginia. The Company intends to continue the expansion
of its network of participating agents in Virginia and Tennessee and may add
agents to new and existing geographical areas. In addition, the Company may
introduce new products and services to the network of agents, such as the
premium finance service, excess & surplus lines, and other insurance products
and services to its agents. See "Business."
The Company intends to expand its insurance business, especially its
workers compensation business, into the state of Virginia. This is expected to
be accomplished by soliciting existing Virginia insurance agents to sell the
Company's insurance products. Additional agents may be marketed in the
geographical areas presently served by the Company. All of the Company's agents
will likely be introduced to the Company's premium financing capabilities.
The Company's address is 9140 Arrowpoint Boulevard, Suite 200, Charlotte,
NC 28273 and its telephone number is (704) 525-8478.
2
<PAGE> 7
THE OFFERING
Securities Offered......... 2,000,000 Units, each Unit consisting of one share
of Common Stock; one Series A Warrant entitling the
holder to purchase one share of Common Stock at
$6.00 per share until , 2003 (five years
from date of this Prospectus) and one Series B
Warrant entitling the holder to purchase one share
of Common Stock at $7.00 per share until
, 2003 (five years from date of this Prospectus).
See "Description of Securities."(1)(2)
Description of the
Warrants................... Each Series A Warrant entitles the holder to
purchase one share of Common Stock at a price of
$6.00 per share during the five-year period
commencing on the date of this Prospectus. The
Series A Warrants are redeemable by the Company for
$9.00 per Warrant. Each Series B Warrant entitles
the holder to purchase one share of Common Stock at
a price of $7.00 per share during the five-year
period commencing on the date of this Prospectus.
The Series B Warrants are redeemable by the Company
for $10.00 per Warrant. See "Description of
Securities".
Common Stock
Outstanding:...............
Before the Offering...... 4,464,021
After the Offering....... 6,464,021 (1)(2)
Warrants Outstanding:
Before the Offering...... None
After the Offering....... 2,000,000 Series A Warrants and 2,000,000 Series B
Warrants. (3)
Estimated Net Proceeds to
the Company (4)............ $8,714,004 if the Securities are sold and
$10,114,629 if the overallotment option is fully
exercised. See "Use of Proceeds."
Risk Factors............... This Offering involves a high degree of risk and
immediate and substantial dilution. See "Risk
Factors" and "Dilution."
Use of Proceeds............ The net proceeds will be used to fund the capital
surplus of the Insurance Subsidiary; to fund the
initial operations of the newly created Finance
Subsidiary; repayment of debt and to expand the
existing network of insurance agents. Additional
amounts will be divided between additional funding
of capital surplus and the balance to the Company
for operations. See "Use of Proceeds."
- ---------------
(1) Does not include (a) up to 300,000 Shares issuable pursuant to the
Representative's Overallotment Option, (b) up to 2,300,000 shares of Common
Stock issuable upon exercise of the Series A Warrants and (c) up to
2,300,000 shares of Common Stock issuable upon exercise of the Series B
Warrants. See "Capitalization."
(2) Does not include (a) up to 200,000 Shares included in the Units issuable
pursuant to the Representative's Warrant and (b) up to 200,000 shares of
Common Stock issuable upon exercise of the Series A Warrants included in the
Representative's Warrant and (c) up to 200,000 shares of Common Stock
issuable upon exercise of the Series B Warrants included in the
Representative's Warrant.
(3) Does not include 300,000 Series A Warrants or 300,000 Series B Warrants
issuable pursuant to the Representative's Overallotment Option. Does not
include up to 200,000 Series A Warrants included in the Representative's
Warrant and up to 200,000 Series B Warrants included in the Representative's
Warrant.
(4) After deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, including a 2% non-accountable
expense allowance payable to the Representative of which $25,000 has been
paid to date. See "Underwriting."
3
<PAGE> 8
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
TWO MONTHS YEARS ENDED THREE MONTHS ENDED
ENDED DECEMBER 31, MARCH 31, (UNAUDITED)
DECEMBER 31, ----------------------- -----------------------
1995 1996 1997 1997 1998
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATIONS STATEMENT
DATA:
Revenues and Income:
Premiums earned................ $ 4,553 $ 818,979 $3,986,105 $ 713,604 $1,410,828
Commission fees................ 15,161 354,271 1,396,533 248,370 535,990
Investment income.............. 5,146 71,370 225,459 38,882 73,996
---------- ---------- ---------- ---------- ----------
TOTAL REVENUE............. 24,860 1,244,620 5,608,097 1,000,856 2,020,814
---------- ---------- ---------- ---------- ----------
Costs and Expenses:
Losses and loss adjustment
expense........................ 2,315 427,008 2,518,938 384,942 1,364,551
Policy acquisition costs.......... 1,120 292,625 1,122,877 239,178 419,952
General and administrative
expenses....................... 191,153 898,609 1,974,042 416,370 671,674
Interest.......................... 2,640 13,081 17,002 4,450 3,172
---------- ---------- ---------- ---------- ----------
TOTAL COSTS AND
EXPENSES................ 197,228 1,631,323 5,632,859 1,044,940 2,459,349
---------- ---------- ---------- ---------- ----------
(Loss) before Preferred Stock
dividend....................... (172,368) (386,703) (24,762) (44,084) (438,535)
Preferred Stock dividend.......... -- (98,280) (98,280) (24,570) (24,570)
---------- ---------- ---------- ---------- ----------
Net loss.......................... $ (172,368) $ (484,983) $ (123,042) $ (68,654) $ (463,105)
========== ========== ========== ========== ==========
Net loss per share................ $ (.05) $ (.14) $ (.03) $ (.02) $ (.11)
========== ========== ========== ========== ==========
Weighted Average:
Number of Common Shares
Outstanding.................. 3,383,520 3,397,477 3,926,442 3,251,883 4,082,753
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, MARCH 31, 1998
------------------------- MARCH 31, 1998 PRO FORMA AS
1996 1997 1998 PRO FORMA(1) ADJUSTED(2)
---------- ------------ ----------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments........... $1,956,603 $5,399,334 $ 6,185,398 $ 6,825,822 $15,539,970
Total assets................... 4,555,327 9,986,666 13,413,153 14,053,577 22,767,725
Total policy liabilities....... 3,249,003 7,178,249 10,178,907 10,178,907 10,178,907
Total shareholders' equity..... 446,328 1,609,044 1,749,339 2,389,763 11,103,911
</TABLE>
- ---------------
(1) Reflects sale of 231,458 common shares and 1,187 Class B NonVoting Common
Shares ("Class B Shares") subsequent to March 31, 1998 (number of shares
adjusted for Stock Split).
(2) Reflects sale of 231,458 common shares and 1,187 Class B Shares subsequent
to March 31, 1998 and gives effect to the consummation of the Offering and
the application of the estimated net proceeds as described under "Use of
Proceeds".
4
<PAGE> 9
RISK FACTORS
Prospective investors should carefully review the following risk factors
together with the other information in this Prospectus in evaluating the Company
and its business prior to purchasing the Securities offered by this Prospectus.
This Prospectus contains forward looking statements that involve risks and
uncertainties. Actual results could differ from those discussed in the forward
looking statements as a result of certain factors, including those set forth
below and elsewhere in the Prospectus.
LIMITED FUNDS AVAILABLE FOR RESERVES
For each policy sold, Bermuda insurance statutes require the Company to set
aside capital surplus for each premium dollar at the present rate of $1.00 of
capital surplus for each $5.00 in assumed premium up to $6 million in premium
dollars. The ratio is reduced to a rate of $1.00 of capital surplus for each
$6.00 in assumed premium for sums in excess of $6 million. Regulations designate
that the premium, even if fully collected, is not deemed to be fully "earned"
except ratably over the life of the policy. Additionally, regulations prohibit
the use of "unearned" portions of the premium for crediting against capital
surplus requirements. Since premiums are earned on a monthly basis, the Company
is able to use a larger portion of premiums sold earlier in the year than it can
on premiums sold later in the year. The unearned premiums are placed in a trust
with Star as collected and are earned monthly thereafter. Therefore, the Company
will continue to require infusions of capital to meet statutory capital surplus
requirements. Since the Company expects to continue its growth, the need for
such additional capital will continue into the foreseeable future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ABSENCE OF LICENSURE; FRONTING ARRANGEMENTS; DEPENDENCE ON STAR INSURANCE
COMPANY
Although the sole initial business purpose of the Company is the sale of
insurance products primarily in the Southeastern United States, neither the
Company nor its Insurance Subsidiary is licensed as an insurance carrier in any
state. Instead, the Company will serve as a Managing General Agent for Star, a
property and casualty insurance company duly licensed and admitted in 49 states.
Under such arrangements, the Company is contractually bound to Star, who in turn
permits the Company to issue the policies it sells. Star is the responsible
party for all purposes under state insurance laws and Star must file all
required reports, maintain statutorily required capital and surplus, and must
otherwise be and remain in good standing to conduct insurance business in the
appropriate jurisdictions. Should the fronting arrangement be terminated, or if
Star should lose its licensure or admission, the Company must either obtain
licensure as an insurance company or find another fronting carrier. Neither of
these possibilities is likely to be practical since both require time and
financial resources. If the Company cannot qualify as an insurance company and
cannot find another fronting company, it would not likely be able to continue
its business. See "Business -- Managing General Agency Agreement."
LICENSURE AS A BERMUDA INSURANCE COMPANY
The Company conducts its insurance business through its Insurance
Subsidiary. To continue operations as an insurance company, the Insurance
Subsidiary must maintain its licensure with the government of Bermuda. As of the
date of this Prospectus, all required filings have been made with the Bermuda
Government and the Company expects uninterrupted licensure. The maintenance of
the Insurance Subsidiary is necessary to maintain the fronting relationship with
Star and permits the Company to do insurance business in Bermuda. The Company
can conduct its insurance business in other jurisdictions only through its
fronting arrangement with Star.
CAPITAL SURPLUS SHORTAGES
As the Company has grown, the requirements to place increasing amounts in
capital surplus has grown commensurately. The Company, from time to time, has
been unable to fund the required capital surplus from cash flow from operations.
The Company has funded those shortfalls through sales of securities and loans
from shareholders. As a result, in June, 1998, the Company borrowed an aggregate
of $500,000 from the Company's
5
<PAGE> 10
Chairman, Ernest E. Tucker, Jr. and his wife, Marian Tucker. Promissory notes
were issued to Mr. and Mrs. Tucker which require repayment by December 31, 1998.
The Company also sold 184,209 restricted shares of Common Stock to an existing
shareholder, William F. Bronson, at a price of $2.71 per share. The Company
intends to utilize a portion of the net proceeds from this Offering to repay Mr.
Tucker and his wife all outstanding principal together with interest at the rate
of prime plus 1% from June 30, 1998. In addition, $2,000,000 of the net proceeds
of this Offering will be contributed to the capital of the Insurance Subsidiary
to support additional premium writings. There can be no assurance in the future
that the Company will be able to fund its capital surplus requirements through
cash flow from operations, from third party financing sources or from loans from
its shareholders. See "Use of Proceeds" and "Certain Relationships and Related
Transactions."
NEED FOR ADDITIONAL CAPITAL
The Company anticipates that the net proceeds of this Offering will be
sufficient to conduct the Company's plan of operations. Numerous unforeseen
difficulties, however, may require additional funds. The Company may encounter
difficulty in obtaining additional funds at favorable rates or at all. Since the
Company's growth and the amount of insurance that it may sell are directly
related to its capital surplus, lack of needed financing could limit the
premiums which the Company can accept, which could impact operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
GENERAL RISKS ASSOCIATED WITH WORKERS COMPENSATION INSURANCE INDUSTRY
Unlike many other types of insurance, workers compensation insurance does
not provide definite dollar limits to different categories of coverage within
the policy. While the states in which the Company presently operates mandates
the use of medical fee schedules and limits claimants to a maximum of 500 weeks
of lost wages, estimating ultimate claim payments is difficult. There may also
be awards for disfigurement, partial or total permanent disabilities, and
attorneys fees. Since the amounts payable under such policies may differ
substantially, the Company's operational success depends on management's skill
in selecting risks to insure and in controlling payouts on claims. The Company
has established guidelines with respect to selecting the underwriting risks that
it accepts, but there can be no assurance that these measures will successfully
limit exposure to catastrophic claims.
The Company is also subject to numerous factors affecting the workers
compensation insurance industry over which the Company has no control. The
property and casualty insurance industry has historically experienced cycles or
fluctuations that are roughly tied to interest rates, particularly with respect
to interest earned on premium reserves. Competition intensifies and premiums are
often reduced when interest rates are high since income from investments can
sometimes offset underwriting losses. As investment income declines, some
insurers raise premiums to cover underwriting losses.
The industry is also subject to general economic conditions, statutory
changes in workers compensation laws, and judicial decisions affecting
compensability of claims. Even though the industry segment targeted by the
Company is highly regulated, management believes that the Company is subject to
the same level of volatility as experienced throughout the property and casualty
insurance industry.
NEW AND UNSEASONED SUBSIDIARY
The Company incorporated the Finance Subsidiary on January 20, 1998 to
engage in the business of financing premiums for a wide array of insurance
products. The Company has no prior experience in the business of financing
premiums and management has only limited experience. While management believes
that the network of agents will forward premium financing prospects to the
Company, the newly created Finance Subsidiary is subject to all of the
uncertainties of any unseasoned, start up business. Such risks include the
dominance of larger, better financed competitors; the need for additional
capital; market fluctuations in the demand for such services; and the relative
lack of barriers to entry. Approximately $2 million of the net proceeds from
this Offering will be used to finance the operations of the newly created
premium Finance Subsidiary. See "Use of Proceeds."
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<PAGE> 11
UNDERWRITING RISKS
Industry data suggests that insurance underwritten by new insurance
businesses often carries higher loss frequencies and loss ratios than more
seasoned risks. Since the Company is less than five years old, much of its
business may be considered "new." The Company must rely upon available
information and the knowledge of the insurance agent submitting the business to
assess the loss experience of the prospect. The Company has therefore adopted
underwriting guidelines which are intended to reduce exposure to adverse loss
experience. It is not possible, however, to eliminate the underwriting risks
inherent in a new insurance business. The Company reinsures all of its policies,
but such reinsurance does not relieve the Company of its liability if the
reinsurer does not or cannot pay its obligations. See "Business -- Underwriting
Criteria."
LIMITED MARKET FOR COMPANY'S PRODUCTS
The Company presently has approximately 90 agent representatives in
Georgia, North Carolina, South Carolina and Virginia and only three elsewhere.
It has limited its insurance products to workers compensation insurance.
Applicable statutory capital requirements will likely prevent the Company from
expanding into other lines of insurance for the foreseeable future, except
through its fronting relationship with Star. In addition, the amount of
insurance that may be sold by a licensed workers compensation carrier is
statutorily related to the amount of its surplus. Based upon the successful
closing of the Offering, management estimates that the Company will have the
capacity to accept approximately $40 million in insurance premiums through its
fronting arrangement with Star. Many of the Company's underwriting and
operational guidelines potentially limit the market for its workers compensation
insurance products. Since the Company is limited to $40 million in premiums the
market potentially available to the Company is small in relation to the overall
market.
REGULATION
Extensive laws and regulations of the states in which the Company conducts
operations govern many aspects of its business, including, but not limited to,
licensing, payment of dividends, establishment of rates, transfer of control and
the Company's participation in residual markets such as assigned risk pools.
Changes in such laws and regulations or the adoption of new laws or consumer
initiatives regarding rates charged for workers compensation insurance coverage
or other matters could have a material adverse affect on the operations of the
Company. State agencies and officials responsible for administering such laws
and regulations have broad powers which they exercise primarily for the
protection of policyholders. See "Business -- Regulation."
EXPANSION
Under the fronting agreement with Star, Star must give prior approval to
the Insurance Subsidiary's expansion into other jurisdictions and other lines of
business. Star has indicated that it will consider giving such approval, but
there can be no assurance that such approval will be granted. Thus, the growth
of the Company's workers' compensation insurance business will depend on its
ability to obtain Star's approval, obtain fronting arrangements through others
or to establish its own insurer authorized to issue policies of insurance.
Accomplishing any of these is contingent on various factors, including the
availability of adequate capital and applicable regulatory approval, including
licensing requirements. Star has no contractual rights to limit the expansion of
the Insurance Subsidiary.
REINSURANCE
When the Insurance Subsidiary underwrites an insurance policy, it does not
generally intend to assume all of the risk of that policy. To reduce its risk
exposure and to reduce the amount of capital surplus necessary to cover risks,
the Insurance Subsidiary expects to maintain reinsurance. Reinsurance is an
arrangement whereby one insurance company (the "assuming reinsurer") agrees to
assume all or part of the risk undertaken by another insurance company (the
"ceding insurer"). Reinsuring risks is a common insurance industry practice. The
parties usually agree upon a division of the risk and a division of the
premiums. In most cases, the ceding
7
<PAGE> 12
insurer agrees to pay all claims up to an agreed upon amount and to pay a
premium to the reinsurer for insuring claims above that amount. Obtaining
reinsurance, however, does not absolve the ceding insurer from liability. If the
reinsurer does not or cannot pay its agreed upon portion, the ceding insurer
would be responsible for the entire loss.
The Insurance Subsidiary is a party to a quota share reinsurance agreement
with Star. Under this Agreement Star reinsures each policy. Star and the Company
share in premiums and claims expenses until such time as the Company has paid $
50,000 of the first $250,000 on any one claim. Once the Company has paid $50,000
per claim, Star and its reinsurers are responsible for the balance of the
liabilities. See "Business -- Reinsurance."
DEPENDENCE ON AGENTS
The Company depends on independent insurance agents and agencies to market
its insurance products. The Company currently has 93 independent insurance
agents in offices marketing its products. The Company intends to expand its
distribution network further into North Carolina and Virginia. Each proposed
relationship will be new and there can be no guarantee that the Company will be
successful in finalizing or maintaining such relationships. The relationship of
the Company with independent insurance agencies and agents and the efforts and
support of independent agencies and agents is critical to the success of the
Company. The Company requires that independent insurance agents be shareholders
of the Company in order to sell its insurance products; however, there will be
no minimum number of the Company's Shares that such agents or agencies will be
required to own in order to act as agents for the Company. In addition,
Management may waive this requirement in its discretion. See
"Business -- Independent Agents and Agencies."
COMPETITION
The workers compensation insurance and premium financing industries are
highly competitive. Many competing companies are larger and have far greater
financial resources, marketing abilities and name recognition than the Company.
The Company will be competing with these companies for potential insureds and
for the support and efforts of independent agents to market its insurance
products. The Company's past success has been highly attributable to its
responsive service to its insurance agent representatives, which the Company
believes is its true customer. The Company also believes this strategic approach
has been essentially ignored by its larger competitors. Although the Company
believes that its business plans are differentiated from the competition and are
particularly well devised, there can be no assurance that current or future
competitors, most of whom are larger and better financed, will not initiate
similar plans and operations. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's success is largely dependent on the skills, experience and
performance of certain key members of its management, including Paul V. H.
Halter, III and Ernest E. Tucker, Jr. The loss of the services of key employees
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company does not maintain key-man
insurance on the lives of any employees other than Mr. James P. Chick, Jr.,
Chief Financial Officer, and Mr. Charles H. Sharpe, Chief Claims Officer. There
are no employment agreements between the Company and any of the executive
officers. The Company's future success and plans for growth also depend on its
ability to attract, train and retain skilled personnel in all areas of its
business. See "Management."
CONFLICTS OF INTEREST
Ernest E. Tucker, Jr. and E. Eugene Tucker, III have other business
interests. The Company's Chief Executive Officer and Chairman, Ernest E. Tucker,
Jr. has loaned moneys to the Company from time to time for capital surplus
infusions to the Insurance Subsidiary. The Company has agreed to repay Mr.
Tucker together with interest at current prime plus one (1%) percent per annum
on a demand note basis. These agreements have not been negotiated at arms
length. Also, any debt owned to Mr. Tucker would likely receive
8
<PAGE> 13
preferable treatment from any distribution made upon dissolution or liquidation.
It is estimated that E. Eugene Tucker, III devotes approximately 30% of his time
to the Company. Ernest E. Tucker, Jr. devotes approximately 70% of his time to
the Company. Such persons could be subject to conflicting interests insofar as
business interests unrelated to the Company require their time and attention.
See "Certain Relationships and Related Transactions."
CONTROL BY EXISTING SHAREHOLDERS
Immediately following the completion of this Offering, there will be
6,464,021 shares of Common Stock issued and outstanding, of which approximately
29.3%, 8.9% and 8.9%, respectively, will be owned by Messrs. Ernest E. Tucker,
Jr., E. Eugene Tucker, III and Paul V. H. Halter, III. The present shareholders
will own 69.1% of the common voting stock and the purchasers in this Offering
will not have sufficient voting power to elect any directors. The Company's
Articles of Incorporation do not provide for cumulative voting. As a result,
such persons will control the election of future directors and management. The
Company's dividend policy, as well as all other major decisions, such as wages,
acquisitions and financing by the Company, will be significantly influenced and
controlled by such persons. See "Principal Shareholders."
DILUTION
Based on an assumed price of $5.1875, purchasers of the Units offered
hereby will experience immediate and substantial dilution of $3.39 per share or
approximately 68% of the net tangible book value of their shares of Common Stock
since the $5.00 of the Unit purchase price attributable to the Common Stock
substantially exceeds the current tangible book value per share of the Common
Stock. See "Dilution."
DIVIDEND POLICY
The Company does not intend to pay dividends on its Common Stock and
intends to retain earnings, if any, to finance the growth of the Company's
business. The ability of the Company to pay dividends on Common Stock in the
future will be dependent upon earnings. State law prohibits payment of
"distributions" if the ensuing result of such payments is to impair creditors.
See "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
6,464,021 shares of Common Stock (6,764,021 shares if the Representative's
Over-allotment Option is exercised in full). Of that amount, the 2,000,000
shares sold to the public in this Offering (2,300,000 if the Representative's
Over-allotment Option is exercised in full) will be freely tradeable without
restriction. The remaining 4,464,021 shares are "restricted shares" and may be
publicly sold only if registered, if eligible for resale under Rule 144 under
the Securities Act, or if an exemption from registration exists. Generally,
under Rule 144, Shares may be sold by non-affiliates after a holding period of
one year. Affiliates may also sell shares under Rule 144 if the holding period
has been met and certain additional requirements have been completed. No
predictions can be made as to the effect, if any, that market sales of such
shares will have on the market price of shares of Common Stock prevailing from
time to time. However, sales of substantial amounts of Common Stock in the open
market or the availability of such Shares for sale following the Offering could
adversely affect the market price for the Common Stock. See "Shares Eligible for
Future Sale," "Description of Securities" and "Principal Shareholders."
NO PRIOR MARKET; POTENTIAL SHAREHOLDERS
There has been no public market for the Securities of the Company and there
can be no assurance that an active public market would develop. Recent history
relating to the market prices of newly public companies indicates that, from
time to time, there may be significant volatility in their market price. There
can be no assurance that the market price of the Units, the Common Stock or the
Warrants will not be volatile as a result of a number of factors, including the
Company's financial results or various matters affecting the stock market
generally.
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<PAGE> 14
ARBITRARY OFFERING PRICE AND EXERCISE OF WARRANTS
The public offering price of the Units and the exercise price of the
Warrants, as well as the exercise price of the Warrants underlying the
Representative's Warrant, have been determined solely by negotiations between
the Company and the Representative. Among the factors considered in determining
these prices were the Company's current financial condition and prospects,
market prices of similar securities of comparable publicly traded companies, and
the general condition of the securities market. However, the public offering
price of the Units as well as the amount of the offering price attributable to
the Common Stock and the Warrants and the exercise price of the Warrants and the
underlying Common Stock do not necessarily bear any relationship to the
Company's assets, book value, earnings or any other established criterion of
value. See "Underwriting."
Holders of the Warrants have the right to exercise the Warrants only if
there is then a current effective registration statement under the Securities
Act and if the underlying shares of Common Stock are qualified, registered or
exempt from registration under applicable securities laws of the states in which
the various holders of the Warrants reside. The Company cannot issue shares of
Common Stock to holders of the Warrants in states where such shares are not
qualified, registered or exempt. It is possible that the Warrants could be held
by persons residing in states where the Company is unable to qualify the Common
Stock underlying the Warrants for sale. The Company has undertaken, however, to
qualify the Warrants for listing on the Pacific Stock Exchange, tier II, which
provides for blue-sky registration in 24 states. The Warrants may expire,
unexercised, which would result in the holders losing all the value of the
Warrants. See "Description of Securities -- Series A and Series B Redeemable
Warrants."
REDEEMABLE WARRANTS AND IMPACT ON INVESTORS
The Warrants are subject to redemption by the Company in certain
circumstances. The Company's exercise of this right would force a holder of the
Warrants to exercise the Warrants and pay the exercise price at a time when it
may be disadvantageous for the holder to do so, to sell the Warrants at the then
current market price when the holder might otherwise wish to hold the Warrants
for possible additional appreciation, or to accept the redemption price, which
is likely to be substantially less than the market value of the Warrants in the
event of a call for redemption. Holders in some jurisdictions may be prohibited
from exercise, in which case the Warrants may expire valueless. Holders who do
not exercise their Warrants prior to redemption by the Company will forfeit
their right to purchase the shares of Common Stock underlying the Warrants. The
foregoing notwithstanding, the Company may not redeem the Warrants at any time
that a current registration statement under the Securities Act is not then in
effect. The Company may be expected to redeem the Warrants at a time when the
market price of the Common Stock exceeds $10.00 per share for more than 10 days.
See "Description of Securities -- Warrants."
REPRESENTATIVES PURCHASE WARRANTS
In connection with this Offering, the Company will sell to the
Representative, for nominal consideration, a Representative's Warrant to
purchase up to 200,000 Units, each unit consisting of one Share of common stock,
one Series A Warrant and one Series B Warrant from the Company. The
Representative's Warrant will be exercisable for a four-year period commencing
one year from the date of this Prospectus at an exercise price of $6.00 per
Share and $0.15 per Series A Warrant, and $.075 per Series B Warrant, subject to
adjustment. The Representative's Warrant may have certain dilutive effects
because the holders thereof will be given the opportunity to profit from a rise
in the market price of the underlying Shares with a resulting dilution in the
interest of the Company's other shareholders. The terms on which the Company
could obtain additional capital during the life of the Representative's Warrant
may be adversely affected because the holders of the Representative's Warrant
might be expected to exercise them at a time when the Company would otherwise be
able to obtain comparable additional capital in a new offering of securities at
a price per share greater than the exercise price of the Representative's
Warrant.
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<PAGE> 15
POTENTIAL INFLUENCE OF REPRESENTATIVE ON TRADING MARKET
It is anticipated that a significant number of the Units will be sold to
customers of the Representative. Although the Representative has advised the
Company that it intends to make a market in the Securities, it will have no
legal obligation to do so. The prices and the liquidity of the Securities may be
significantly affected by the degree, if any, of the Representative's
participation in the market. No assurance can be given that any market making
activities of the Representative, if commenced, will be continued. The Common
Stock and the Warrants may not be traded separately until , 1999,
(180 days from the date of this Prospectus) unless earlier separated upon three
days notice in the sole discretion of the Representative and without the consent
of the Unit holders. The Warrants are not exercisable until separated from the
Units. Factors that the Representative will consider in determining whether to
separate the Units before , 1999 are the trading price and volume
for the Units and the volatility of the trading price for the Units. See
"Underwriting."
POSSIBLE APPLICABILITY OF RULES PERTAINING TO LOW COST SECURITIES; POSSIBLE
FAILURE TO QUALIFY FOR PACIFIC STOCK EXCHANGE OR NASDAQ SMALLCAP MARKET LISTING
The Commission has adopted regulations which generally define a "penny
stock" to be any equity security that has a market price (as defined) of less
than $5.00 per share, subject to certain exceptions. While the price at which
the Units offered to the public pursuant to this Offering will be equal to
$5.1875, there can be no assurance that the Company will be able to satisfy the
listing criteria of the Pacific Stock Exchange or that the Units, the Common
Stock or the Warrants will trade for $5.00 or more after the Offering.
Consequently, the "penny stock" rules may restrict the ability of broker/dealers
to sell the Company's Securities and may affect the ability of purchasers in
this Offering to sell the Company's Securities in a secondary market.
Although the Company has applied for listing of the Units, the Common Stock
and the Warrants on the Pacific Stock Exchange and the Nasdaq SmallCap Market,
there can be no assurance that such application will be approved or that a
trading market for the Units, the Common Stock and the Warrants will develop or,
if developed, will be sustained. Furthermore, there can be no assurance that the
Securities purchased by the public hereunder may be resold at their original
offering price or at any other price.
In order to qualify for initial listing on the Pacific Stock Exchange, a
company must, among other things, have at least $8,000,000 in net worth,
1,000,000 Shares in the "public float," with a public float market value of
$2,000,000, 500 beneficial holders, and a minimum $1.00 bid price. For continued
listing on the Pacific Stock Exchange, a company must maintain $1,000,000 of
total assets, a 150,000 share public float with a $500,000 market value, 250
beneficial owners and a minimum $500,000 of stockholders equity. The failure to
meet these maintenance criteria in the future may result in the discontinuance
of the listing of the Securities on the Pacific Stock Exchange.
In order to qualify for initial listing on the Nasdaq SmallCap Market, a
company must, among other things, have at least $4,000,000 in net tangible
assets, $5 million "public float," and a minimum bid price for its securities of
$4.00 per share. For continued listing on the Nasdaq SmallCap Market, a company
must maintain $2,000,000 in net tangible assets and a $1,000,000 market value of
the public float. In addition, continued inclusion requires two market-makers
and a minimum bid of $1.00 per share. The failure to meet these maintenance
criteria in the future may result in the discontinuance of the listing of the
Common Stock and Warrants on the Nasdaq SmallCap Market.
If the Company is or becomes unable to meet the listing criteria (either
initially or on a continued basis) of the Pacific Stock Exchange or the Nasdaq
SmallCap Market and its Securities are never traded or become delisted
therefrom, trading, if any, in the Common Stock and the Warrants would
thereafter be conducted in the over-the-counter market in the so-called "pink
sheets" or, if then available, "Electronic Bulletin Board" administered by the
National Association of Securities Dealers, Inc. (the "NASD"). In such an event,
the market price of the Securities may be adversely impacted. As a result, an
investor may find it difficult to dispose of or to obtain accurate quotations as
to the market value of the Securities.
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<PAGE> 16
FORWARD LOOKING STATEMENTS
Management believes that this Prospectus includes forward looking
statements, including statements regarding, among other items, the Company's
future plans and growth strategies and anticipated trends in the industry in
which the Company operates. These forward looking statements are based largely
on the Company's expectations and are subject to a number of risks and
uncertainties, many of which are beyond the Company's control. Actual results
could differ materially from these forward looking statements as a result of the
factors described herein, including, among other things, regulatory or economic
influences. In light of these risks and uncertainties, there can be no assurance
that the forward looking information contained in this Prospectus sill in fact
transpire or prove to be accurate.
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<PAGE> 17
DILUTION
The difference between the initial public offering price per share of
Common Stock and the pro forma net tangible book value per share after this
Offering constitutes the dilution to investors in this Offering. Net tangible
book value per share is determined by dividing the net tangible book value of
the Company (total tangible assets less total liabilities) by the number of
outstanding shares of Common Stock adjusted for stock sales subsequent to March
31, 1998 and the Stock Split.
At March 31, 1998, the net tangible book value of the Company was
$1,078,439 or $.25 per share. After giving effect to the sale of 232,645
equivalent shares of Common Stock for $640,424, the pro forma net tangible book
value of the Company was $1,718,863 or $.39 per share. Without taking into
account any changes in net tangible book value attributable to operations after
March 31, 1998, other than the issuance and sale by the Company of 2,000,000
shares of Common Stock offered hereby at the public offering price of $5.00 per
share, 2,000,000 Series A Warrants at the public offering price of $.125 per
Warrant, and 2,000,000 Series B Warrants offered hereby at the public offering
price of $.0625 per Warrant, and the application of the net proceeds as
described under "Use of Proceeds," the pro forma net tangible book value of the
Company as of March 31, 1998 would have been $10,433,011, or $1.61 per share.
This represents an immediate increase in net tangible book value of $1.22 per
share to the existing shareholders and an immediate dilution of $3.39 per share
to new investors (68% of the initial public offering price per share of Common
Stock). The following table illustrates this dilution, on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price of Common Stock............... $5.00
Net tangible book value as of March 31, 1998................ $ .25
Increase in pro forma net tangible book value after giving
effect of private stock sale subsequent to March 31,
1998...................................................... .14
Increase in net tangible book value attributable to new
investors................................................. 1.22
Pro forma net tangible book value after offering............ 1.61
-----
Total dilution to new investors................... $3.39
=====
</TABLE>
If the Representatives' over-allotment option is exercised in full, the pro
forma net tangible book value of the Company as of March 31, 1998 will be
$11,802,511, or $1.74 per share. This represents an immediate increase in net
tangible book value of $1.35 per share to the existing shareholders and an
immediate dilution of $3.26 per share to new investors.
The following table summarizes, as of March 31, 1998, the total number of
shares of Common Stock purchased from the Company, the aggregate consideration
paid and the average price per share paid by the existing shareholders and the
new investors.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders......................... 4,464,021 69.0% 3,689,160 29.7% $ .83
New Investors................................. 2,000,000 31.0% 8,714,148 70.3% $5.00
--------- ----- ----------- ----- -----
Total............................... 6,464,021 100.0% $12,403,308 100.0% $1.92
========= ===== =========== ===== =====
</TABLE>
If the Representative's over-allotment option is exercised in full, the new
investors will have paid $10,083,648 for 2,300,000 shares of Common Stock,
representing 73.2% of the total consideration for 34.0% of the total number of
shares outstanding.
13
<PAGE> 18
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,000,000 Units offered hereby are estimated to be approximately $8,714,004
($10,114,629 if the Representative's Over-allotment Option is exercised in full)
assuming an initial public offering price of $5.125 per Unit and after deducting
the estimated underwriting discounts and offering expenses and a non-accountable
expense allowance payable to the Representative equal to 2% of the gross
proceeds. The Company's offering expenses, in the approximate amount of
$623,496, will be paid from proceeds.
The following table reflects the application of the estimated net proceeds
by the Company:
<TABLE>
<CAPTION>
APPLICATION OF PROCEEDS AMOUNT
- ----------------------- ----------
<S> <C>
Capital Surplus Addition to Insurance Subsidiary(1)......... $2,000,000
Operations of the Company(2)................................ 4,070,625
Capital to Finance Subsidiary(3)............................ 2,000,000
Retire debt owed to Mr. And Mrs. E. E. Tucker, Jr.(4)....... 523,750
Retire outstanding debt to Tucker Administrators, Inc.(5)... 119,629
----------
Total............................................. $8,714,004
==========
</TABLE>
- ---------------
(1) The amount of insurance premiums that the Company may accept is regulated by
the Bermuda Government and is directly related to the amount of surplus
available to the Company. Thus, by establishing higher amounts of surplus,
the Company is able to accept more risks and hence potentially earn more
premium income. Consequently, the Company's funds, including its working
capital, may be considered surplus from time to time in management's
discretion. Also, the Bermuda Government has broad powers to require
additional amounts.
(2) Operations of the Company may include amounts for such items as expansion of
the Company's business, geographical expansions, hiring and training, sales
and office personnel, preparation and printing of marketing and other
materials, telephone, supplies, office rent, office equipment, travel and
entertainment, postage and general office expenses. Management, in its
discretion, may allocate portions of this amount to the capital surplus
needs of its Insurance Subsidiary and to capitalize the financing of
premiums by its Finance Subsidiary.
(3) It is anticipated that this sum will be used to issue loans for the
financing of premiums for various insurance products, although a portion may
be used for general operations of the Finance Subsidiary.
(4) On June 30, 1998, Mr. Ernest E. Tucker, the Company's Chairman and Chief
Executive Officer, and his wife loaned the Company an aggregate of $500,000
at an interest rate of prime plus one percent. All of these sums were added
to the capital surplus of the Bermuda insurance company to maintain
statutory capital surplus requirements under Bermuda law. This sum
anticipates that the Tuckers will be repaid on or before the end of 1998.
See "Certain Relationships and Related Transactions."
(5) Repayment of all outstanding sums to Tucker Administrators, Inc., for
advancements made to the Company during its developmental stage in 1995.
Tucker Administrators, Inc. is owned by Teeco, Inc. which is owned by Ernest
E. Tucker, Jr. and his son, E. Eugene Tucker, III. The Tuckers are officers
and directors of the Company. See "Certain Relationships and Related
Transactions."
The figures set forth above are estimates and cannot be precisely
calculated. The actual expenditure is likely to vary from that described
depending on a number of factors, including changes that may be required by the
Bermuda Government. See "Plan of Distribution."
The balance of the net proceeds will be used for general working capital.
The Company does not have any present agreements or understandings regarding any
acquisitions.
Pending application of the net proceeds of this Offering, the Company may
invest such net proceeds in interest-bearing accounts, United States government
obligations, certificates of deposit or short-term interest bearing securities.
14
<PAGE> 19
DIVIDEND POLICY
The Company does not intend to pay dividends on its Common Stock and
intends to retain earnings, if any, to finance the growth of the Company's
business. The ability of the Company to pay dividends on Common Stock in the
future will be dependent upon earnings. State law prohibits payment of
"distributions" if the ensuing result of such payments is to impair creditors.
15
<PAGE> 20
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
March 31, 1998 (unaudited), (ii) the Pro Forma capitalization of the Company as
of such date after giving effect to the sale of 231,458 shares of Common Stock
and 678 Class B Shares (pre-split) which equaled 1,187 shares of Common Stock
after the conversion and the Stock Split, and (iii) the Pro Forma capitalization
of the Company as of such date after giving effect to the private sale of stock
and the sale by the Company of 2,000,000 shares of Common Stock, 2,000,000
Series A Warrants and 2,000,000 Series B Warrants offered hereby at an assumed
initial public offering price of $5.00 per share of Common Stock, $.125 per
Series A Warrant and $.0625 per Series B Warrant (after deduction of the
underwriting discount and estimated offering expenses) and the application of
the net proceeds as described under "Use of Proceeds." This table should be read
in conjunction with Financial Statements of the Company, including notes
thereto, included elsewhere herein.
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------------
PRO FORMA
PRO AS
ACTUAL FORMA(2) ADJUSTED(3)
----------- ----------- -----------
<S> <C> <C> <C>
Current maturities of long term debt(1)................. $ -- $ -- $ --
Long-term debt(1)....................................... -- -- --
----------- ----------- -----------
Preferred Stock -- $0.001 par value; 1,000,000 Shares
authorized, 109,200 issued or outstanding............. 109 -- --
Common stock -- $.001 par value; 10,000,000 Shares
authorized; 1,068,668 Shares issued and outstanding,
4,464,021 Shares issued and outstanding Pro Forma, and
6,464,021 Shares outstanding Pro Forma, As Adjusted... 1,069 4,464 6,464
Class B Nonvoting Common Stock, $0.001 par value;
authorized 10,000,000 Shares; issued and
outstanding........................................... 10 9,691 --
Additional paid-in-capital.............................. 2,991,649 3,628,797 12,340,945
Retained deficit:
Total stockholders' equity.................... (1,243,498) (1,243,498) (1,243,498)
----------- ----------- -----------
Total capitalization.......................... 1,749,339 2,389,763 11,103,911
----------- ----------- -----------
$ 1,749,339 $ 2,389,763 $11,103,911
=========== =========== ===========
</TABLE>
- ---------------
(1) Reflects the actual short-term and long-term indebtedness and capitalization
of the Company at March 31, 1998.
(2) Reflects the pro forma short-term and long-term indebtedness and
capitalization of the Company after giving effect to the sale of 66,131
pre-split Shares (231,458 after split) of common stock for $635,000 and 678
(1,187 after split) Class B Shares for $5,424 and the conversion of
Preferred Stock and Class B Shares to the Company's common shares and Stock
Split.
(3) Same as (2) above and gives effect to the consummation of the Offering and
the application of the estimated net proceeds as described under "Use of
Proceeds."
16
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The data for the years ended
December 31, 1997 and 1996 are derived from the audited financial statements
included elsewhere in this Prospectus. The data for the three months ended March
31, 1998 and 1997 are derived from unaudited financial statements that are
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31,
TWO MONTHS DECEMBER 31, (UNAUDITED)
ENDED ----------------------- -----------------------
DECEMBER 31, 1995 1996 1997 1997 1998
----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATIONS STATEMENT
DATA:
Revenues and Income:
Premiums earned.............. $ 4,553 $ 818,979 $3,986,105 $ 713,604 $1,410,828
Commission fees.............. 15,161 354,271 1,396,533 248,370 535,990
Investment income............ 5,146 71,370 225,459 38,882 73,996
--------- ---------- ---------- ---------- ----------
TOTAL REVENUE........... 24,860 1,244,620 5,608,097 1,000,856 2,020,814
--------- ---------- ---------- ---------- ----------
Costs and Expenses:
Losses and loss adjustment
expense.................... 2,315 427,008 2,518,938 384,942 1,364,551
Policy acquisition costs..... 1,120 292,625 1,122,877 239,178 419,952
General and administrative
expenses................... 191,153 898,609 1,974,042 416,370 671,674
Interest..................... 2,640 13,081 17,002 4,450 3,172
--------- ---------- ---------- ---------- ----------
TOTAL COSTS AND
EXPENSES.............. 197,228 1,631,323 5,632,859 1,044,940 2,459,349
--------- ---------- ---------- ---------- ----------
(Loss) before Preferred Stock
dividend..................... (172,368) (386,703) (24,762) (44,084) (438,535)
Preferred Stock dividend..... -- (98,280) (98,280) (24,570) (24,570)
--------- ---------- ---------- ---------- ----------
Net loss....................... $(172,368) $ (484,983) $ (123,042) $ (68,654) $ (463,105)
========= ========== ========== ========== ==========
Net loss per share............. $ (.05) $ (.14) $ (.03) $ (.02) $ (.11)
========= ========== ========== ========== ==========
Weighted Average:
Number of Common Shares
Outstanding................ 3,383,520 3,397,477 3,926,442 3,251,883 4,082,753
========= ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, MARCH 31, 1998
----------------------- MARCH 31, 1998 PRO FORMA AS
1996 1997 1998 PRO FORMA(1) ADJUSTED(2)
---------- ---------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments...................... $1,956,603 $5,399,334 $6,185,398 $6,825,822 $15,539,970
Total assets.............................. 4,555,327 9,986,666 13,413,153 14,053,577 22,767,725
Total policy liabilities.................. 3,249,003 7,178,249 10,178,907 10,178,907 10,178,907
Total shareholders' equity................ 446,328 1,609,044 1,749,339 2,389,763 11,103,911
</TABLE>
- ---------------
(1) Reflects sale of 231,458 common shares and 1,187 Class B Shares subsequent
to March 31, 1998 (number of shares adjusted for Stock Split).
(2) Reflects sale of 231,458 common shares and 1,187 Class B Shares subsequent
to March 31, 1998 and gives effect to the consummation of the Offering and
the application of the estimated net proceeds as described under "Use of
Proceeds".
17
<PAGE> 22
MANAGEMENTS' DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in the financial statements, including the notes thereto, and the
other financial information appearing elsewhere in the Prospectus.
Three Months Ended March 31, 1998, as compared to Three Months Ended March 31,
1997
Total revenues for the three months ended March 31, 1998 increased to
$2,021,000 from $1,001,000 for the three months ended March 31, 1997, an
increase of $1,020,000 or 101.9%. This increase in total revenues is due to
continuing growth in the Company's business, which is represented by the
increase in workers compensation insurance premiums written through independent
insurance agents. Direct (gross) written premiums (premiums before any
reinsurance is applied) were $4,905,000 in the first quarter of 1998, compared
to $2,885,000 in the first quarter of 1997, an increase of 70.0%. This increase
in premiums in the first quarter of 1998 was due to the expansion of the Company
into Georgia with the appointment of a number of independent insurance agencies;
the appointment of additional agents in North Carolina; the writing of a
relatively higher proportion of large premium policies; and offset by slowly
declining premiums rates.
Of the revenue items, premiums earned (premiums assumed by the Insurance
Subsidiary as reinsurer of Star through a quota share reinsurance agreement) was
$1,411,000 in the first three months of 1998, compared to $714,000 in the first
three months of 1997, an increase of $697,000 or 97.6%. Insurance premiums (the
written premiums mentioned in the preceding paragraph) are recognized as earned
on a prorata basis over the term of each underlying insurance policy. Almost all
of the policies written by the Company have a one-year term.
Commissions and fees earned from the production, rating, and processing of
insurance policies and the adjusting of related insurance claims was $536,000 in
1998's first quarter, compared to $248,000 for the comparable period of fiscal
1997, an increase of $288,000 or 116.1%. The Company recognizes commission
income in relation to the amount of work done in issuing and maintaining the
policies, where about two-thirds of the work is done by the time a policy is
issued. Claims fees earned from the adjusting of insurance claims is recognized
over the thirty-six months that the Company is required by contract to adjust
claims from each policy. Commissions and fees earned increased due to the
increase in the Company's business as discussed above.
Investment income increased to $74,000 in the first quarter of 1998 from
$39,000 in the same period last year, an increase of $35,000 or 89.7%, which
reflects the almost two-fold increase in total cash and cash equivalents
invested and investments, derived from the Company's increasing business
activity.
Total expenses increased to $2,459,000 in the first quarter of 1998 from
$1,045,000 in the first quarter of 1997, an increase of $1,414,000 or 135.3%.
This increase reflects (1) the growth of the Company's business and (2) a
substantial increase in losses and loss adjustment expenses as discussed below.
Of the expense items, losses and loss adjustment expenses, primarily
medical and indemnity claims payments to medical providers and to claimants for
time lost from work where the claimant was injured on the job, rose to
$1,365,000 in the first quarter of 1998 from $385,000 in 1997, an increase of
$980,000 or 254.5%. Losses and loss adjustment expenses as a percentage of
premiums earned (the loss ratio) was 96.7% in 1998's first quarter, compared to
53.9% in the first quarter of 1997.
The increase in losses and loss adjustment expenses reflects in part the
growth of the Company's business. The increase in the loss ratio in the first
quarter of 1998 is due to increases in the frequency and severity of claims.
Further, a book of business (that is, a group of insurance policies) which is
not seasoned, where the Company has not insured these policies for a number of
years and thus has not yet weeded out all of the policies producing excessive
claims, the loss experience is usually not as good as that of a seasoned book.
In any event, corrective measures being implemented involve a re-evaluation of
the underwriting on each policy; the nonrenewal of policies with poor claims
experience; decisions to not write certain types of business; and the renewal of
certain policies at a higher premium, which results in more premiums available
to offset claims.
18
<PAGE> 23
Reflecting the Company's increase in business, policy acquisition costs
(expenses related to the production of business, i.e., the writing of insurance
policies) increased to $420,000 in the first quarter of 1998 from $239,000 in
the first quarter of 1997, an increase of $181,000 or 75.7%. Policy acquisition
costs consist of expenses incurred for commissions to agents; administration
fees paid to Star; and taxes, licenses, and assessments required to be paid by
statue in the conduct of an insurance business.
General and administrative expenses, primarily salaries and other operating
expenses incurred by the Company in the production of business and claims
adjusting, increased to $672,000 in the first quarter of 1998 from $416,000 in
the first quarter of 1997, an increase of $256,000 or 61.5%. This increase was
less than the increase in policy acquisition costs, as the Company was able to
achieve further economies of scale in 1998 relative to 1997, as income derived
from a substantial increase in business offset fixed expenses to a greater
degree. The Company had 21 employees at the end of the first quarter of 1998,
compared to 11 employees a year earlier.
As a result of the foregoing, the loss before federal income taxes and
preferred stock dividends was $439,000 in the first three months of 1998,
compared to a loss of $44,000 in the first three months of 1997.
Year Ended December 31, 1997, Compared To Year Ended December 31, 1996
Total revenues for the year ended December 31, 1997 increased to $5,608,000
from $1,245,000 for the year ended December 31, 1996, an increase of $4,363,000
or 350.4%. This more than three-fold increase in total revenues was due to the
growth in the Company's business, represented by the increase in workers'
compensation insurance premiums written through independent insurance agents.
Direct (gross) written premiums (premiums before any reinsurance is applied)
were $11,770,000 in 1997, compared to $4,190,000 in 1996. This increase in
premiums in 1997 reflects the expansion of the Company into Georgia with the
appointment of a number of independent insurance agencies; the appointment of
additional agents in North Carolina; the writing of a relatively higher
proportion of larger accounts; offset by slowly declining premiums rates.
Of the revenue items, premiums earned (premiums assumed by the Insurance
Subsidiary as a reinsurer of Star through a quota share reinsurance agreement)
was $3,986,000 in 1997, compared to $819,000 in 1996, an increase of $3,167,000
or 386.7%. Insurance premiums are recognized as earned on a prorata basis over
the term of each underlying insurance policy. Almost all of the policies written
by the Company have a one-year term.
Commissions and fees earned from the production, rating, and processing of
insurance policies and the adjusting of related insurance claims was $1,397,000
in 1997, compared to $354,000 in 1996, an increase of $1,043,000 or 294.6%. The
Company recognizes commission income in relation to the amount of work done in
issuing and maintaining the policies, where about two-thirds of the work is done
by the time a policy is issued. Claims fees earned from the adjusting of
insurance claims is recognized over the thirty-six months that the Company is
required by contract to adjust claims from each policy. Commissions and fees
earned increased due to the increase in the Company's business as discussed
above.
Investment income increased to $225,000 in 1997 from $71,000 in 1996, an
increase of $154,000 or 216.9%, which reflects the additional funds available
for investment as the Company's business has grown.
Total expenses increased to $5,633,000 in 1997 from $1,631,000 in 1996, an
increase of $4,002,000 or 245.4%. This increase reflects the growth of the
Company's business.
Of the expense items, losses and loss adjustment expenses, primarily
medical and indemnity claims payments to medical providers and to claimants for
time lost from work where the claimant was injured on the job, rose to
$2,519,000 in 1997 from $427,000 in 1996, an increase of $2,092,000 or 489.9%.
Losses and loss adjustment expenses as a percentage of premiums earned (the loss
ratio) was 63.2% in 1997, compared to 52.1% in 1996. The higher loss ratio in
1997 was due to an increase in the frequency of claims. Reflecting the Company's
increase in business, policy acquisition costs (expenses related to the
production of business, i.e., the writing of insurance policies) increased to
$1,123,000 in 1997 from $293,000 in 1996, an increase of $830,000 or 283.3%.
Policy acquisition costs consist of expenses incurred for commissions to agents;
19
<PAGE> 24
administration fees paid to Star; and taxes, licenses, and assessments required
to be paid by statue in the conduct on an insurance business.
General and administrative expenses, primarily salaries and other operating
expenses incurred by the Company and its subsidiaries in the production of
business and claims adjusting, increased to $1,974,000 in 1997 from $899,000 in
1996, an increase of $1,075,000 or 119.6%. This increase was less than the
increase in policy acquisition costs, as the Company was able to achieve some
economies of scale in 1997, where income derived from a substantial increase in
business offset the relatively high fixed expenses in 1996, which was the
Company's first full year of operations. The Company had 16 employees at
year-end 1997, compared to nine employees at year-end 1996.
As a result of the foregoing, the loss before federal income taxes and
preferred stock dividends was $25,000 in 1997, as compared to a loss of $387,000
in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from the operating activities of the Company grew to $3,192,000
for the year ended December 31, 1997, compared to $4,979 for the year ended
December 31, 1996. This increase in cash flow was due to the substantial growth
of the Company's business as discussed in the previous section.
Another significant source of funds for the Company in 1997 was the sale of
Common Stock and the sale of Class B Shares, generating aggregate net proceeds
to the Company of $1,208,000. There were no sales of Common Stock in 1996.
During 1997 the Company., was able to meet its cash flow requirements from
the commissions and claims fees it received from the production of insurance
premiums and from its insurance claims adjusting work.
To support the insurance premiums assumed by the Insurance Subsidiary, the
Company allocated $950,000 in 1997 to increase the capital of the Insurance
Subsidiary. Nevertheless, because of the significant growth of the Company's
business and thus the increasing amounts of premiums assumed by the Insurance
Subsidiary, the Insurance Subsidiary did not meet the requirements for minimum
statutory capital and surplus at year-end 1997, which was the greater of
$1,000,000, a percentage of net written premiums, or a given fraction of the
reserve for losses and loss adjustment expenses (as explained further in Note 9
to the consolidated financial statements). The Insurance Subsidiary's statutory
capital and surplus was $872,00 at year-end 1997, less than the required minimum
of $1,000,000. The Company contributed an additional $150,000 on March 19, 1998
to allow the Insurance Subsidiary to meet this deficiency. Because of the
continuing growth expected in the Company's business, additional contributions
will be needed to maintain minimum statutory capital surplus, a portion of such
funds may come from the net proceeds of this Offering. See "Use of Proceeds."
The Company's net cash flows from operating activities result from the
commissions and fees received by the Company in the production of insurance
premiums and from claims adjusting work and the net amount of premiums assumed
less claims payments made by the Insurance Subsidiary. All of the Company's
funds are invested in cash and cash equivalents with little or no exposure to
loss of principal due to fluctuations in interest rates. This conservative
investment strategy is appropriate now because of the Company's obligation to
cover, dollar-for-dollar, in a bank trust account, the unearned premiums and
loss and loss adjustment expense reserves ceded by Star. Without this reserve
funding , insurance regulators would require Star to write down its statutory
surplus by the amount of reserves ceded to the Insurance Subsidiary. The amount
in trust on behalf of Star was $3,864,000 at year-end 1997. If the Insurance
Subsidiary were invested in securities with an exposure to loss of principal due
to interest rate fluctuations, the Company would have to fund the trust account
for any such loss of principal, in order to again bring the amount held in trust
up to the amount of Star's ceded reserves. The Company is not in a position to
fund such deficiencies. The net proceeds of this Offering will allow the Company
to better fund the Insurance Subsidiary, which will allow the Insurance
Subsidiary to invest in securities with a higher yield.
20
<PAGE> 25
BUSINESS
GENERAL
The Company was incorporated in North Carolina on April 19, 1995 as a
holding company for the purpose of engaging in the business of insurance. The
Company established the Insurance Subsidiary on December 19, 1995 under the laws
of Bermuda.
The Company initially devoted its efforts to workers compensation insurance
in certain southeastern states. On January 20, 1998, the Company established a
second subsidiary, the Finance Subsidiary, for the purpose of engaging in the
business of financing insurance premiums The term "Company" means both the
holding company and its subsidiaries, unless the context clearly indicates
otherwise.
The Company initially targeted the workers compensation in North Carolina
and South Carolina. The Company devoted its marketing efforts to selecting and
soliciting certain established insurance brokers and agencies within these
states and offering participation to the selected agents. Shortly thereafter,
the Company expanded its efforts into the State of Georgia. The Company
presently has approximately 27 agents in North Carolina; 30 agents in South
Carolina and 30 agents in Georgia. Recently, the Company has began expanding
solicitations of agents and currently has 3 in Virginia, 2 in Alabama and 1 in
Mississippi. See "-- Residual Markets."
Neither the Company nor the Insurance Subsidiary is licensed as an
insurance company in the United States. The Company sells insurance products
through "fronting" arrangements with other licensed insurance companies. Such
arrangements are common to the insurance industry and permit the issuance of
policies on behalf of the fronting insurer. The Company has entered into a
contract generally known as a fronting agreement, a common industry practice,
with Star which permits the Company to sell insurance policies in Georgia, North
Carolina, South Carolina, and Virginia,. The term of the agreement is seven
years, subject to a 180 day notice of cancellation. Under this arrangement, the
Company issues insurance policies secured by Star but procured by the Company as
if it were a licensed insurance company, subject to the terms and restrictions
of the Company's agreements with Star. To further this arrangement, the Company
must maintain insurance financial requirements for the Bermuda subsidiary. See,
"Business -- Managing General Agency Agreement".
Additionally, the Company is a party to the Star Trust dated October 1,
1995, under which the Company funds from premiums received amounts estimated to
equal its claim liabilities. To limit the Company's overall exposure for claims
liabilities, the Company also entered into a Quota Share reinsurance agreement
(the "Reinsurance Agreement") with Star on the same date. Reinsurance agreements
are pervasive in the industry and reflect the sharing of risks. Through the
fronting relationship, the Insurance Subsidiary engages in the insurance
business, under the auspices of the fronting insurer without the burden of
obtaining and maintaining of licensure as an insurance company. See "-- Managing
General Agency Agreement" and "-- Reinsurance".
INSURANCE SUBSIDIARY
The Company has established the Insurance Subsidiary as a captive insurer
under the insurance laws of Bermuda. The Insurance Subsidiary is a wholly owned
subsidiary of the Company, duly licensed as a Bermuda insurance company. The
Insurance Subsidiary has an agreement with Star to provide management services
necessary to comply with Bermuda insurance laws.
In general, fronting arrangements involve and insurer called a "fronting"
insurer that is licensed to carry on the particular insurance business in the
targeted jurisdiction. The "fronting" insurer enters into a contractual
agreement with another insurance company (generally called the "captive") which
permits the captive to write insurance policies under the auspices of the
fronting insurer. The captive generally establishes a trust or other guaranty
arrangement to cover some or all of the liabilities assumed by the fronting
insurer. By this arrangement, the captive insurer is able to sell insurance
through the fronting insurer in jurisdictions in which the captive insurer is
not licensed.
21
<PAGE> 26
Under the Star Trust, the Company funds the trust to protect Star from some
of the liabilities incurred by Star as a result of the fronting arrangement. The
funding of the Star Trust occurs on a monthly basis. The amounts required
reflect management's estimate of claims incurred, including those incurred but
not yet reported, for the preceding month. Consequently, management is unable to
precisely estimate the amounts that may be required. See "-- Claim, Losses and
Loss Adjustment Expenses and Reserves."
The fronting relationship and Reinsurance Agreement with Star do not create
a joint venture partnership, pooling of interests, or similar sharing of
liabilities. In addition, Star does not serve as a guarantor to any of the
Company's activities. Star has no other responsibilities with respect to the
operations of the Company.
FINANCE SUBSIDIARY
The Company has adopted a policy of generally requiring participating
insurance agents to also maintain ownership in the Company. As a result, the
insurance agents that refer workers compensation insurance to the Company's
Insurance Subsidiary securities holders as well. Practically all of the agents
handle a wide array of insurance products in addition to workers compensation
insurance. The financing of premiums for insurance products is a service that is
routinely offered by insurance agents for many insurance products in addition to
workers compensation insurance.
The Company established the Finance Subsidiary in early 1998 to provide
financing options for premiums payable on policies of insurance offered through
the Company's network of participating agents. Financed premiums can include,
but are not limited to, workers compensation insurance offered by the Company's
Insurance Subsidiary. The Finance Subsidiary became operational in the second
quarter of 1998 and began to finance premiums in late April, 1998.
The Finance Subsidiary has obtained a Line of Credit with First Union
National Bank in Charlotte, North Carolina under the terms of which up to
$2,000,000 may be advanced from time to time. Presently, the interest rate is
8.19% at an interest rate equal to LIBOR plus 250 basis points. These funds are
dedicated to the financing of insurance premiums. The Company generally requires
a prepayment of a portion of the premium and finances the balance at interest
rates competitive in the industry.
PLAN OF OPERATIONS
The Company intends to implement its business plan by continuing to expand
the network of insurance agents that sell the Company's insurance products and
services. These efforts will include the servicing of existing agents in North
Carolina, South Carolina, Georgia and Virginia and an expansion into nearby
states including Alabama, Mississippi and Tennessee.
To expand its agency network, management meets with prospective independent
insurance agents and agencies to describe the Company's philosophy and marketing
objectives. The Company familiarizes them with the Company's specialized
products and services, its marketing approach and its underwriting requirements.
The Company is licensed by the North Carolina, South Carolina, Georgia and
Virginia Insurance Departments as a Managing General Agency and one or more
employees must secure a nonresident agent's license. The Company has met with
officials of various states' Insurance Departments and intends to take the
necessary steps required in connection with each state's licensing requirements.
The Company has also put in place administrative and operating procedures
and policies relating to the Company's business operations. A claims department
has been established with training in the Company's philosophy of claims
management. This philosophy includes prompt intervention and an attempt to
minimize attorney involvement. A significant amount of time and effort is
devoted to the training of agents and agencies and instructing prospective
agents and agencies in the methods by which the Company hopes to control its
claims exposure.
An insurer's capacity to write insurance coverage is affected by such
insurers available capital and surplus. The Company's capacity to write coverage
is related in part to the capital and surplus of Star. Star has agreed to front
for the Company the full amount of premium permitted by Bermuda law. Management
anticipates the Company will have the legal capacity to write insurance premiums
amounting to approximately
22
<PAGE> 27
$40,000,000 upon the successful conclusion of this Offering. The Company's
ability to write new business may require raising additional capital. There can
be no assurance that additional capital will subsequently be available, if it is
needed, or of the terms and conditions upon which additional capital might be
available. See "Risk Factors -- Capital Surplus Shortages."
MARKETING STRATEGY
The Company markets its products through independent insurance agencies
located in Alabama, Georgia, Mississippi, North Carolina, South Carolina, and
Virginia. According to a report in Best's Review, Property/Casualty Edition,
independent agency insurers wrote approximately 70% of the workers compensation
premiums in 1997 issued by insurance companies. A meaningful percentage of
workers' compensation insurance premiums nationally are placed in self-insurance
funds. While there is no industry certified data, estimates place this volume at
approximately 30% of the entire premium countrywide.
Essentially all of the insurance companies (other than the direct writing
companies) compete for the business generated by independent insurance agencies.
Agents are compensated on a commission basis at competitive rates. Management
believes that its commission rate is competitive with those of other insurance
companies. Risks are undertaken which, in the discretion of management, meet the
Company's underwriting criteria. The Company has adopted a policy to require
initial ownership in the Company by participating agents, but that policy may be
altered in the discretion of the board of directors. The Company does not plan
to alter that policy after the Offering. If an aftermarket develops for the
Company's securities, of which there is no assurance, the Company would have no
practical way to verify ownership by agents.
Agents do not have the authority to bind coverage on policies issued. The
Company retains the right to cancel an agent's or agency's right to place
business with the Company if business placed with the Company creates adverse
financial results for the Company. In the event an agent or agency loses the
right to place business with the Company, ownership in the Company's Common
Stock by such agent or agency would not be affected.
For the next year, Management expects that its efforts will be devoted to
expanding the Company's insurance business into the state of Virginia and to add
additional agents to its existing areas. The Company will continue to pursue
arrangements with established agents and agencies. Marketing to prospective
agents in Virginia will likely follow the format developed by the Company in
other states. In addition, the Company intends to market its premium finance
capabilities to its agents.
INSURANCE PRODUCTS
The Company offers policies providing for statutorily prescribed employer's
liability limits and statutorily determined employee benefits. Policies are
written on an annual basis and will have payment options based on the amount of
annual premiums. For accounts whose annual premiums are less than $5,000, the
full annual premium is usually due with the application. For accounts with
annual premiums between $5,001 and $10,000, insureds may pay in two installments
or annually. For accounts between $10,001 and $25,000, insureds may pay in three
installments. Independent agencies do not have the ability to bind insurance
policies without prior approval of the Company and the Company retains the sole
power to commit to providing insurance coverage.
MANAGING GENERAL AGENCY AGREEMENT
The Company has a management agreement (the "Agreement") with Star. Under
that Agreement, the Company performs virtually all of the administrative,
management and clerical functions pertaining to the workers compensation
insurance business written pursuant to the fronting arrangement. The Company's
staff handles all inquiries, customer service and claims management.
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<PAGE> 28
The Company has responsibility with respect to establishing overall
policies and with respect to any other significant matters relating to workers
compensation policies written by Star under the fronting arrangement. Thus, the
Company is directly responsible for:
- Approval or rejection of business (underwriting) submitted by insurance
agents.
- Submitting reinsurance claims.
- Decisions relating to the approving or contesting payments of all workers
compensation claims.
- Selecting and managing agency/agent relations.
- Formulating and implementing marketing and sales strategies.
- Establishing and adjusting claim reserves.
Star prepares required financial reports, annual statements and other
regulatory reports and periodic reports relating to the handling of moneys in
the Star Trust.
Among other things, the Company has administrative and clerical
responsibilities relating to developing underwriting guidelines to facilitate
underwriting decisions, policy issue, policy invoicing, collection of premiums,
return of premiums, cancellations, endorsements, agency commission disbursement,
claims settlement, claim management, and monthly financial reporting. The
Company deducts agents' commissions from remittances to Star and remits such
commissions to agents on a regularly scheduled basis in accordance with its
agency agreements.
The Agreement with Star has a continuous term from the date of its
execution. The Agreement may be cancelled by either party with 180 written
notice. Termination can occur upon insolvency or loss of licensure by either
party. The Agreement can be terminated by Star for, among other things, sale of
all of the Company's assets, failure to maintain staff or "quality" of services,
failure to render reports, failure to maintain premium funds or to make required
payments, failure to permit inspection or audit, fraud, breach of the Agreement,
or the business becomes economically unfeasible due to judicial, legislative or
regulatory changes. Under its terms, practically all provisions of the Agreement
relating to insurance business in force before any termination shall be deemed
to survive termination of the Agreement. See "Risk Factors -- Absence of
Licensure."
During the term of the Agreement, Star has the right at any time during
regular business hours to visit, inspect, examine and verify properties,
accounts, books, records or work papers belonging to or in possession of the
Company pertaining to the subject matter of the Agreement or to the financial
condition of the Company and to make copies and extracts therefrom.
Although the Company's Agreement encompasses all 49 states where Star is
licensed, Star's consent must be first obtained before the Company is permitted
to sell policies in additional states. The Company has the ability to enter into
additional lines of insurance that do not directly compete with Star. As a
practical matter, the Company will not likely engage in business practices that
might jeopardize the existing relationship with Star. Star, as the fronting
carrier, has the ability to alter the types of business that the Company may
write, may dictate underwriting guidelines, may limit the geographical expansion
and even inhibit overall writings. The Company's growth is therefore dependent
upon Star's approval. See "Risk Factors -- Absence of Licensure; Fronting
Arrangements; Dependence on Star Insurance Company."
UNDERWRITING CRITERIA
Businesses participating in the workers' compensation insurance market have
had their job functions evaluated and classified over the years by the National
Council on Compensation Insurance ("NCCI"). The NCCI has developed and maintains
an historical record of loss experience by industry, by state and by workers'
compensation job classification codes.
Management of the Company has developed a list of "eligible class codes"
from which agencies can submit business to the Company for consideration.
Eligible class codes must have, in management's opinion,
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<PAGE> 29
acceptable historical loss experience. Job function descriptions must not
indicate the likelihood of back injury. Industries with potential disease
exposures are excluded. Industries with an excessive amount of driving are
excluded. The Company's typical desired insured is a small to medium sized
service, wholesale, retail, or light manufacturing business with an acceptable
history of risk modification.
An additional strategy intended to reduce the probability of adverse risk
selection is addressed by underwriting documentation which is required with each
new insurance application submitted to the Company. Agents may be required to
submit copies of the applicant's last three years workers' compensation
insurance policy declaration page showing the years effective, experience
modification, and annual payrolls. If an applicant does not have experience
modification for the last three years, the agent may be required to include
prior loss information from the last three years.
CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES AND RESERVES
All insurance companies are required to make estimates of future payouts
and to set aside reserves from which the future payments are made. The term
"loss" refers to amounts that must be paid to insureds for benefits due under
the policy. The term "loss adjustment expenses" refers to the expenses
associated with settling claims, including legal and other fees and expenses,
such as investigation, travel and clerical costs. With respect to these future
payments, the Company's success hinges upon the ability of management to reduce
the amounts payable and to correctly estimate the amount of such payments and
establish appropriate reserves for these amounts.
The Company attempts to minimize the overall claims payouts by establishing
underwriting guidelines. When claims occur, the Company provides prompt and
personal contact between the claims adjuster and the claimant. Management
believes that quality client service and prompt intervention can help reduce
ultimate loss payments. Salaried claims personnel are employed when economically
feasible. Independent adjusters are employed in locations where claims volume
does not support the use of salaried personnel.
Accordingly, the Company provides for a high degree of personal contact
between claims adjusters and claimants. Standard operating procedures require
telephone contact with the claimant and/or next of kin within eight hours after
receiving the first report of injury. With respect to all potential lost time
claims, an adjuster is usually required to make face-to-face contact with the
claimant within seventy-two hours. Claimants are generally contacted by
telephone at least once a week and visited once a month personally by a claims
adjuster until the claim is resolved. It is management's belief that prompt,
informed intervention can result in lower ultimate claim payouts. Close personal
contact is maintained with medical providers to control costs and indemnity
periods.
LOSS ADJUSTMENT EXPENSES ("LAE") RESERVES
Under applicable law, Star must establish reserves to cover losses from
claims and loss adjustment expenses. Under the fronting arrangement with Star,
the Company must establish reserves of equal amount in its Star Trust. Loss
reserves are estimates of what an insurer expects to pay claimants. Loss
adjustment expenses ("LAE") are expenses associated with claims adjustment. The
amounts established for these reserves are estimates of future payouts and
costs. Star is required to maintain these reserves for both reported claims
("case reserves") and claims which have been incurred but not yet reported
("IBNR"). The ultimate liability incurred by Star may be different from reserve
estimates. The policy of the Company is to establish reserves sufficient for the
ultimate final payout for all claims. The Company is required to separately
maintain reserves for such amounts, but adjustments will be made monthly by Star
to the amounts payable to the Company's Star Trust account. If that amount is
not sufficient, Star may obtain reimbursement from the Star Trust. Therefore,
these expenses are ultimately payable by the Company, but are based on Star's
actuarial computations on payouts.
While Star has the right to review the Company's reserving practices, the
Company has responsibility in the establishment of claims reserves. Workers
compensations carriers establish initial reserves for medical only claims based
on historical averages. These averages are reviewed annually for accuracy and
applicability. For lost time, claims reserves are established on a case-by-case
basis, initially under the supervision of the
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<PAGE> 30
Company's Chief Claims Officer. The reserving process takes into account the
types of claims, applicable policy provisions, and historical paid loss and loss
adjustment expense data for similar claims. With respect to LAE, certain formula
calculations are utilized. The Company's claims department regularly monitors
the adequacy of reserves for losses that have been reported to the Company and
adjust such reserves as necessary.
Loss and LAE reserves for claims that have been incurred but not yet
reported are estimated based on many variables, including historical and
statistical information, inflation, legal developments, economic conditions,
general trends in claim severity and frequency and other factors that can affect
the adequacy of loss reserves. The Chief Claims and Financial Officers of the
Company review reserves monthly and IBNR reserves are adjusted quarterly.
Workers compensation claims are of a long-term nature requiring accurate
reserves to establish the Company's ultimate liability. Shortfalls in reserves
would likely have a material adverse impact on the Company's financial condition
and results of operations.
Adjustments in aggregate reserves, if any, are reflected in the operating
results of the period during which such adjustments are made. Although claims
for which reserves are established may not be paid for several years, the
reserves for losses and LAE are not discounted, except as required to calculate
taxable income for Federal income tax purposes.
INVESTMENTS
It is the Company's investment policy to invest in investment-grade fixed
income securities, as defined by the National Association of Insurance
Commissioners. The Company's investment objective is to maximize current yield
while maintaining safety of capital and adequate liquidity for its insurance
operations. The Company's investment guidelines may change as the Company grows.
The investments of the Company are regularly reviewed and approved by its board
of directors.
REINSURANCE
Reinsurance is an arrangement whereby one insurance company (the "assuming
reinsurer") agrees to assume all or part of the risk undertaken by another
insurance company (the "ceding insurer"). Reinsuring risks is a common insurance
industry practice. The parties usually agree upon a division of the risk and a
division of the premiums. In most cases, the ceding insurer agrees to pay all or
an agreed upon percentage of claims up to an agreed upon amount and to pay a
premium to the reinsurer for insuring claims above that amount. Obtaining
reinsurance, however, does not absolve the ceding insurer from liability. If the
reinsurer does not or cannot pay its agreed upon portion, the ceding insurer
would be responsible for the entire loss.
The Insurance Subsidiary has entered into the Reinsurance Agreement with
Star. Under this agreement Star reinsures each policy with the Insurance
Subsidiary. Under the agreement, Star and the Company share equally in premiums
and claims until such time as the Company has paid $ 50,000 of the first
$250,000 on any one claim. Once the Company has paid $50,000 on any one claim,
Star and its reinsurers are responsible for the balance of the liabilities.
RESIDUAL MARKETS
Although regulations vary by state, residual market mechanisms are
generally designed to provide insurance coverage for consumers who are unable to
obtain insurance on the voluntary workers compensation market. Companies
participate in the administration, profit and/or loss associated with those
consumers' policies as provided by state regulations.
REGULATION
The Insurance Subsidiary, is subject to the Insurance laws and regulations
of Bermuda. The Company (including the Insurance Subsidiary) is not licensed as
an insurance company to conduct business in any jurisdiction other than Bermuda,
but is permitted to sell policies as a managing general agent under the Star
fronting arrangement.
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<PAGE> 31
The insurance laws and regulations of the states in which the Company
elects to operate, as well as the level of supervisory authority that may be
exercised by the various insurance departments, vary by jurisdiction but
generally grant broad powers to supervisory agencies or regulators to examine
and supervise insurance companies and insurance holding companies with respect
to every significant aspect of the conduct of its insurance business. See "Risk
Factors -- Regulation."
These laws and regulations generally require insurance companies to
maintain minimum standards of business conduct and solvency, meet certain
financial tests, file certain reports with regulatory authorities, including
information concerning their capital structure, ownership and financial
condition, and require prior approval of certain changes in control of domestic
insurance companies and their direct and indirect parents and the payment of
extraordinary dividends and distributions.
Financial requirements pertaining to casualty insurers imposed by Bermuda
include requirements relating to minimum capital surplus of $1,000,000. In
addition, laws and regulations of the various jurisdictions require approval for
certain intercompany transfers of assets and certain transactions between
insurance companies and their direct and indirect parents and affiliates, and
generally require that all such transactions have terms no less favorable than
terms that would result from transactions between parties negotiating at arm's
length.
Further, many states have enacted laws which restrict an insurer's
underwriting discretion, such as the ability to terminate policies, terminate
agents or reject insurance coverage applications, and many state regulators have
the power to reduce, or to disavow increases in premium rates. These laws may
adversely affect the ability of an insurer to earn a profit on its underwriting
operations. In general, such laws and regulations are for the protection of
policyholders rather than security holders. Additionally, the Company may be
subject to periodic examination by the Insurance Commissioners of the states in
which the Company operates.
Most states have enacted legislation regulating insurance holding
companies. The insurance holding company laws and regulations vary by state, but
generally require an insurance holding company and its insurance company
subsidiary licensed to do business in the state to register and file certain
reports with the regulatory authorities, including information concerning
capital structure, ownership, financial condition, certain inter-company
transactions and general business operations. State holding company laws also
require prior notice or regulatory agency approval of direct or indirect changes
in control of an insurer or its holding company and of certain material
inter-company transfers of assets within the holding company structure. Star is
subject to any such applicable regulations.
The Company conducts business, through Star, in Alabama, Georgia,
Mississippi, North Carolina, South Carolina and Virginia. All states have a
guaranty fund law pursuant to which insurers doing business in the state are
assessed by a state insurance guaranty association in order to fund liabilities
to policyholders and claimants of insolvent insurance companies. Assessments
range from 1% to 2% of direct premiums written. Since the likelihood and amount
of any particular assessment generally cannot be determined until an insolvency
has occurred, potential liabilities for specific assessments are generally not
reflected on the books of insurers.
The property and casualty insurance business has been the subject of much
legislation activity in various states seeking to address the issues of
affordability and availability of different lines of insurance. Many state
legislatures and regulatory authorities are considering workers' compensation
insurance issues in an effort to control premium increases. The enactment of
future legislation could adversely affect the profitability of the Company. See
"Risk Factors -- Regulation."
An insurance company's profitability may be affected by court decisions.
Premium rates are established using actuarial methods in order to permit an
insurer to earn a reasonable underwriting profit. A court decision may undermine
or change the assumptions used in the actuarial analysis so as to impact
projected levels of profitability. The Company carefully considers the
legislative and regulatory climate in states before commencing operations and
will not do business in states where the climate is not conducive to the
operation of its business.
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<PAGE> 32
COMPETITION
The Company competes with both national and regional insurers for agents
and insureds. Many of these competitors are substantially larger, have much
greater financial and marketing resources, and may offer lower rates and higher
commissions than the Company. Since workers compensation insurance is mandated
by state law, competition tends to occur on a state by state basis.
Management believes the principal competitive factors affecting the
Company's business are price, service to agents and policyholders, agents'
commissions and the financial stability of the insurer. The workers compensation
insurance business is price sensitive. The Company is competing successfully
notwithstanding such factors, but such occurrences may nevertheless adversely
affect the Company and cause fluctuations in the Company's results of
operations. Management believes that the Company's prices will continue to be
competitive.
From time to time the larger insurance companies alter their corporate
policies with respect to worker's compensation insurance. A market can be
significantly impacted by a single large insurer's decision to enter or exit the
market. Such insurers may abruptly exit a market by refusing to renew existing
policies or sell new ones and then abruptly reenter the market. These decisions
can occur on a national or a state by state basis. As a result, the profit
margins that the Company experiences are often affected by the decisions of
larger competitors. Though the decisions of such large insurers are undoubtedly
dictated by perceived market conditions, the Company has no ability to predict
when such shifts are likely to occur.
A.M. BEST RATING
The Company's fronting carrier, Star has an "A-" rating from the A M. Best
Company, a nationally recognized insurance rating organization. Best's Ratings
are industry ratings based on a comparative analysis of the financial condition
and operating performance of insurance companies as determined by their publicly
available reports. Agents and prospective insureds often regard a Best's Rating
as one of the criteria they use to evaluate whether to seek to acquire insurance
coverage from a particular insurance company. Best's Ratings are based upon
factors of concern to insureds and are not directed toward the protection of
investors.
PROPERTIES
The corporate headquarters of the Company is located in approximately 2,980
square feet of office space at 9140 ArrowPoint Boulevard, Suite 200, Charlotte,
North Carolina 28273. The space is leased by TEECO, Inc. ("TEECO") and houses
several other business enterprises. TEECO is owned by Mr. Ernest E. Tucker, Jr.,
and Ernest E. Tucker, III, both officers, directors and principal shareholders
of the Company. The Company pays to TEECO its prorata share of the lease paid by
TEECO to the landlord. The Company owns no real property and believes that its
shared facilities are adequate for its present needs. See "Certain Relationships
and Related Transactions."
EMPLOYEES
The Company has 22 full-time employees. The Company, in order to attract
and retain qualified employees, has adopted employee benefit packages including
vacation, sick leave, 401-k plan, life and health insurance plans. The Company's
employees are not subject to a collective bargaining arrangement. There are no
employment contracts.
LEGAL PROCEEDINGS
The Company is routinely named as a party by claimants seeking coverage
under workers compensation policies issued through the Company. There are no
pending legal proceedings against the Company and the Company is not aware of
any threatened legal proceedings to which the Company may be a party outside the
ordinary course of business.
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<PAGE> 33
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Each officer and director of the Company listed below commenced to serve on
April 19, 1995, except for W. K. Woltz and William F. Bronson. Directors will
serve for a term of one year and/or until a successor is elected and qualified.
Officers of the Company will serve for indeterminate terms at the pleasure of
the Company's board of directors. The following table sets forth certain
information with respect to the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Ernest E. Tucker, Jr. ................. 76 Chief Executive Officer, Chairman of
the Board of Directors
Paul V. H. Halter, III................. 39 President, Chief Operating Officer,
Director
E. Eugene Tucker, III*................. 39 Secretary and Treasurer, Director
James P. Chick, Jr. ................... 51 Chief Financial Officer, Vice President
Charles H. Sharpe...................... 57 Chief Claims Officer, Vice President
C. Gregory Hutchinson.................. 34 Executive Vice President of Commerce
Capital, Inc.
Clinton B. Peters...................... 50 Director
Donald R. Johnson, II.................. 40 Director
William K. Woltz, Sr................... 82 Director
William F. Bronson..................... 58 Director
</TABLE>
- ---------------
* E. Eugene Tucker, III is the son of Ernest E. Tucker, Jr.
Ernest E. Tucker, Jr. has been engaged for 53 years in the administration
of insurance plans, primarily in health and accident insurance. Mr. Tucker's
first ten years were spent with Mutual of Omaha in underwriting and claims.
Since 1958, Mr. Tucker has been a third party administrator in the health
insurance industry. He is the Chairman and founder of TEECO, which owns Tucker
Administrators, Inc. Tucker Administrators, Inc. consults, develops, implements
and manages group health self-insurance plans and flexible compensation plans.
See "Certain Relationships and Related Transactions."
Paul V. H. Halter, III began his insurance career in 1981 as owner of an
independent insurance agency, Edisto Underwriters. In 1984, he joined Crum and
Forster as Agency Sales Manager for South Carolina. Mr. Halter joined Marsh &
McLennan, Inc., a large insurance broker, as Vice President and Area Manager in
1986 for North and South Carolina. In 1989, Mr. Halter joined Johnson & Higgins,
a private insurance broker, as Vice President and national manager of its
Private Insurance Division. Mr. Halter has earned the professional designations
of Charter Property Casualty Underwriter (CPCU) and Certified Insurance
Counselor (CIC). Mr. Halter taught at the Insurance School of Chicago from 1989
to 1992 and has served on the National Faculty of the Society of Certified
Insurance Counselors since 1985. He is a member of the Society of CPCU and
Society of CIC.
E. Eugene Tucker, III is President of Tucker Administrators, Inc., a third
party administrator in Charlotte, NC. Tucker Administrators administers
self-funded and partially self-funded group health and welfare benefits plans.
He is also a shareholder of TEECO, an entity that serves as the Company's
landlord. Mr. Tucker has had the underwriting pen for several major European
reinsurers and was a broker at Lloyds of London. Mr. Tucker is a member of the
Society of Professional Benefit Administrators, the Self Insurance Institute of
America, the Employers Council of Flexible Compensation and the Charlotte, State
of North Carolina and National Associations of Health Underwriters.
James P. Chick, Jr. was President, Chief Operating Officer, and director of
Selective Insurance Company of the Southeast and Selective Insurance Company of
South Carolina, two multi-line property and casualty insurers, from 1988 to
1993. After beginning his career with First Union National Bank of North
Carolina, Mr. Chick became Operations Accountant with Selective in 1976. In
1981, he was promoted to Assistant Vice
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<PAGE> 34
President of Selective; became Vice President and Treasurer in 1984; and added
the title of Corporate Secretary in 1985. As Treasurer, Mr. Chick managed the
accounting and financial functions for both the Selective companies.
Charles H. Sharpe was employed, prior to joining the Company, with
Selective Insurance Company of America, where his last position was Senior Vice
President and Director of Claims for all offices in the United States. Mr.
Sharpe has served as a member of the American Insurance Association and on its
claims administration committee. He participated as a member of the board of
directors of Arbitration Forums, Inc. Mr. Sharpe has been an officer of the
Company since its inception.
William K. Woltz has been on the Board since May, 1998. He has been the
Chairman of Page Holding Company since 1996. Page Holding Company acquired
certain assets of Perry Manufacturing Company, a private label manufacturer of
knit and woven sportswear. Mr. Woltz had been Chairman and Chief Executive
Officer of Perry Manufacturing since 1952. Mr. Woltz has also served as a Member
of the Board of Governors of The University of North Carolina and was Vice
Chairman from 1985 to 1989. Mr. Woltz also serves on various other boards of
charities and for profit enterprises. Mr. Woltz resides in Mt. Airy, North
Carolina.
Donald R. Johnson, II, is a board certified orthopaedic surgeon with
offices in Charleston, South Carolina. He received a Bachelor of Science degree
from the College of Charleston in 1980 and a Medical Doctor degree from the
Medical University of South Carolina in 1984. Dr. Johnson has served as a Member
of the Board of Trustees for the Medical University of South Carolina since
1994. Dr. Johnson has been a member of the South Carolina Worker's Compensation
Advisory Board and a visiting professor to the University of Madrid, the
University of Paris, and the London Spine Institute. From 1995 to 1997 Dr.
Johnson was President of the South Carolina Spine Society. He has served on the
Board of the Company since 1995.
Clinton Peters has been Chairman and Chief Executive Officer of Capitol
News Agency, Inc., a wholesale distributor of periodicals with its principal
offices in Richmond, Virginia since 1973. He is a graduate of Virginia
Commonwealth University with a Bachelors of Science in Business.
William F. Bronson was elected to the Board in July, 1998. Mr. Bronson was
the founder and President of B & B X-Ray, Inc. from 1971 until 1995. In 1995,
Mr. Bronson became Chairman of the Board of three additional medical services
companies,: King's X-Ray of Jacksonville, Florida, United X-Ray of Birmingham,
Alabama, and American Medical of Pompano, Florida. In November, 1996, all of
these entities were acquired by Physicians Sales and Service, a publicly traded
company. Mr. Bronson has been retired since that acquisition.
Greg Hutchinson joined the Finance Subsidiary in February, 1998. Mr.
Hutchinson's premium finance career spans thirteen years with such companies as
Afco Credit Corporation, Transamerica Insurance Finance, and Cananwill Consumer
Discount Company. He has a Bachelor of Science degree from Western Carolina
University.
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<PAGE> 35
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid by the Company to executive officers for services during each of the fiscal
years ended December 31, 1997 and 1996, and 1995:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
FISCAL ALL OTHER(3)
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION
- --------------------------- ------- -------- -------- ------------
<S> <C> <C> <C> <C>
Ernest E. Tucker, Jr.(2)..................... 1995(2) $39,807 $ 0 $0
Chairman and CEO 1996(2) 75,000 0 0
1997 75,000 $ 7,200 0
Paul V. H. Halter, III....................... 1995 $12,499 $ 0 $0
President and COO 1996 50,961 0 0
1997 63,013 $17,200 0
E. Eugene Tucker, III(2)..................... 1995(2) $13,269 $ 0 $0
Secretary and Treasurer 1996(2) 25,000 0 0
1997 25,000 $ 5,400 0
Charles H. Sharpe............................ 1995 $14,230 $ 0 $0
Chief Claims Officer 1996 49,999 0 0
1997 54,085 $ 7,250 0
James P. Chick, Jr. ......................... 1995 $12,807 $ 0 $0
Chief Financial Officer 1996 45,865 0 0
1997 47,136 $ 5,600 0
</TABLE>
(1) All employees receive small gifts or bonuses at the end of the year
which are not in excess of $200 in value. None of the officers or directors
received personal benefits in addition to salary and bonuses except in de
minimus amounts.
(2) Salaries for Ernest E. Tucker, Jr. and E. E. Tucker, III were accrued
in 1995, 1996 and part of 1997 in the aggregate amounts of $120,670 and $41,456
respectively, which accrued salaries were paid in first quarter of 1997.
(3) All employees, including Executive Officers, receive employee welfare
benefits such as health insurance, group life, and disability. The Executive
Officers do not receive any benefits not ordinarily provided to other employees.
Except for the payment of salaries, no proceeds of the offering will be paid by
the Company to officers, directors, promoters or their affiliates, except to
repay loans and reimburse expenses advanced. Salaries will be paid by the
Company. See "Use of Proceeds."
BOARD OF DIRECTORS
The Board of Directors of the Company consists of seven members. Each
director will hold office until the annual meeting of the shareholders of the
Company next following his election or until his successor is elected and
qualified.
Directors of the Company who are employed by the Company do not receive
compensation for serving as directors. Outside directors have not been
compensated for their role as directors but will compensated hereafter per board
meeting attended. All directors of the Company are reimbursed for out-of-pocket
expenses incurred in attending meetings of the Board of Directors or committees
thereof, and for other expenses incurred in their capacities as directors of the
Company.
First London Securities Corporation shall have the right for a period of
two years from the Effective Date to nominate one advisory director to the Board
of Directors. The advisory director shall have the same
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<PAGE> 36
privileges as a normal director, including equal compensation, but will not have
the right to vote on issues presented to the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established three committees :an Executive
Committee, a Compensation Committee and an Audit Committee. The Executive
Committee is currently comprised of Ernest E. Tucker, Jr., E. E. Tucker, III and
Paul V. H. Halter, III. This committee oversees the day to day operations of the
Company and is comprised entirely of officers of the Company. The Compensation
Committee, currently comprised of William Bronson, William K. Woltz, Donald
Johnson and Clinton Peters , is responsible for reviewing and making
recommendations to the Board of Directors with respect to compensation of
executive officers and other compensation matters. The Audit Committee,
currently comprised of Paul V. H. Halter, III, E. E. Tucker, III and William
Bronson, is responsible for reviewing the Company's financial statements, audit
reports, internal controls and the services performed by the Company's
independent public accountants, and for making recommendations with respect to
those matters to the Board of Directors. Outside directors have not been
compensated for their role as directors but will be compensated in the
discretion of the Board for service on the Committees of the Board.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation limit the liability of officers and
directors of the Company to the corporation or its shareholders for damages
except for liabilities arising from acts or omissions involving intentional
misconduct, fraud or a knowing violation of the law. The Bylaws of the Company
also provide that the Company may indemnify directors and officers to the
fullest extent permitted by North Carolina law. North Carolina law permits a
corporation to indemnify any officer or director from any liability incurred by
reason of the fact that such person is or was an officer or director if such
person acted in good faith and in a manner which he reasonably believed to be in
the best interests of the corporation and, with respect to a criminal action, if
he had no reason to believe his conduct was unlawful. At present, there is no
pending litigation or proceeding involving any director, officer, employee, or
agent of the Company under circumstances in which indemnification is likely to
be required or permitted.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to officers, directors or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company, since June 20, 1995, subleases approximately 2,980 square feet
of office space from Tucker Administrators, Inc., a company owned by the
Company's Chairman and Chief Executive Officer, Ernest E. Tucker, Jr. and Ernest
E. Tucker, III, the Secretary/Treasurer and a director of the Company. Tucker
Administrators leases approximately 9,000 total square feet. The Company also
uses the telephone systems, and computer systems of Tucker Administrators on an
"as needed" basis at negotiated rates. Tucker Administrators submits a monthly
bill to the Company's controller who reviews the apportionment. Management
believes that the rates paid to Tucker Administrators are at or slightly below
similar rates charged by third parties for similar services. The Company shares
certain employees with Tucker Administrators, Inc. and apportions the costs of
salary and benefits between the Companies. The Company also shares certain
operating expenses and pays its pro-rata share of certain operating expenses,
such as postage, telephone tolls, freight.
In 1995, Tucker Administrators loaned the Company $24,000 which was repaid
in 1997. From the inception of the Company in April, 1995 and continuing through
1996, Tucker Administrators, Inc. paid $167,596 in expenses on behalf of the
Company, which have been repaid at the rate of $5,000 per month
32
<PAGE> 37
together with interest at the annual rate of 8 1/4 percent. As of March 31,
1998, $122,824 of that amount remained unpaid.
At the inception of the Company in 1995, the Company sold 504,000 shares of
Common Stock to Ernest E. Tucker, Jr., 168,000 shares of Common Stock to Paul
Halter and 168,000 shares of Common Stock to Ernest E. Tucker, III, all at a
price of $0.05 per share. After giving effect to the Stock Split, the number of
shares were increased to 1,764,000, 588,000 and 588,000 respectively.
In the second quarter of 1997, the Company issued 6,000 shares of Common
Stock to James P. Chick, Jr., Chief Financial Officer and 12,000 shares of
Common Stock to Charles Sharpe, Chief Claims Officer, for past and future
considerations at a price of $.05 per share. Following the Stock Split in July,
1988, these shares were increased to 21,000 to Mr. Chick and 42,000 to Mr.
Sharpe.
By March 31, 1998, the Company had sold sufficient premiums to be required
under Bermuda law to contribute approximately $1 million in additional capital
surplus. On June 30, 1998, Ernest E. Tucker, Jr. loaned the Company $400,000 and
his wife, Marian Tucker, loaned the Company $100,000 to partially fund capital
surplus shortfalls. Promissory notes in those respective amounts were issued by
the Company bearing interest at the rate of 15%. Payment is due by December 30,
1998. The Company also sold 184,209 restricted shares to an existing
shareholder, William F. Bronson, at a price of $2.71 per share. All of the
proceeds from the loans and the sale of stock were contributed to the capital
surplus of the Company. The Company intends to utilize a portion of the net
proceeds from this Offering to repay Mr. Tucker and his wife together with
interest at the rate of prime plus 1% from June 30, 1998.
33
<PAGE> 38
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of the Company's Common Stock as of June 30, 1998, and as
adjusted to reflect the sale of the securities offered hereby (i) each of the
Company's executive officers and directors, (ii) each person known to the
Company who beneficially owns more than 10% of the outstanding Shares of the
Company's Common Stock, and (iii) all directors and officers of the Company as a
group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE OFFERING AFTER OFFERING(1)
---------------------------------------------- ----------------------------------------------
PERCENTAGE PERCENT PERCENTAGE PERCENT
NUMBER OF OF NUMBER OF OF
NAME AND ADDRESS OF SHARES COMMON STOCK COMMON STOCK OF SHARES COMMON STOCK COMMON STOCK
- ---------------- ---------------- ------------ ------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Ernest E. Tucker, Jr.(2)..... 1,891,680 42.4 29.3
9140 ArrowPoint Boulevard
Charlotte, North Carolina
28273
Paul V. H. Halter, III....... 572,796 12.8 8.9
9140 ArrowPoint Boulevard
Charlotte, North Carolina
28273
E. E. Tucker, III(2)......... 572,796 12.8 8.9
9140 ArrowPoint Boulevard
Charlotte, North Carolina
28273
Charles H. Sharpe............ 53,592 1.2 .8
9140 ArrowPoint Boulevard
Charlotte, North Carolina
28273
James P. Chick, Jr........... 26,418 .6 .4
9140 ArrowPoint Boulevard
Charlotte, North Carolina
28273
William K. Woltz............. 87,500 2.0 1.4
232 South Park Avenue
Mount Airy, NC 27030
Donald R. Johnson, II,
M.D.(3)..................... 133,868 3.0 2.1
#41 25th Avenue
Isle of Palms, SC 29451
Clinton B. Peters............ 55,118 1.2 .9
1529 Sunset Lane
Richmond, VA 23221
William F. Bronson........... 236,709 5.3 3.7
6040 Farm Oak Drive
Charlotte, NC 28227
C. Gregory Hutchinson........ 219 .01 .01
1138 Millwright Lane
Matthews, NC 28105
All directors and officers
as a group (three
persons):................... 3,630,696 Shares 81.3 56.2
</TABLE>
- ---------------
(1) Assumes an aggregate of 6,464,021 shares of Common Stock outstanding after
the offering.
(2) Mr. Ernest E. Tucker, Jr. and Mr. Ernest E Tucker, III are father and son.
Other members of their family also own Shares in the Company. The Tucker
family owns an aggregate of 2,583,256 shares, which will represent 40% of
the total issued and outstanding shares after the Offering.
(3) 87,500 of Dr. Johnson's shares are held by Patient Investors Limited
Partnership, a South Carolina limited partnership, which is beneficially
owned 51% by Dr. Johnson and 49% by his brother, John Johnson, M.D.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, of which 4,464,021 shares of Common Stock were outstanding as of
July 15, 1998. As of that date, there were 89 holders of record of outstanding
shares of the Common Stock.
34
<PAGE> 39
The Company authorized 1,000,000 shares of convertible Preferred Stock, of
which 109,200 was outstanding as of June 30,1998. The Company had also
authorized 1,000,000 shares of Class B Shares, $0.001 par value, of which 9,593
were outstanding as of June 30, 1998. As of July 15, 1998, all outstanding
shares of convertible Preferred Stock and Class B Shares were converted by the
board of directors to shares of Common Stock. Conversion of the convertible
Preferred Stock was at the rate of 6 shares of Common Stock for 5 shares of
convertible Preferred Stock. Shares of Class B Shares were converted to shares
of Common Stock at a rate of one to one. The remaining authorized but unissued
shares of convertible Preferred Stock and Class B Shares were canceled.
As a result of those conversions, 1,275,432 shares of Common Stock were
issued and outstanding. Subsequent to the conversion of all of the outstanding
convertible Preferred Stock and Class B Shares, the Board of Directors caused
all outstanding Common Stock to be forward split at the rate of 3.5 shares to 1
share. Following the Stock Split, the Company had 4,464,021 shares of stock
outstanding.
UNITS
Each Unit consists of one Share; one Series A Warrant; and one Series B
Warrant. It is estimated that the initial public offering price will be $5.1875
per Unit. The Shares and Warrants included in the Units may be not be traded
separately 180 days from the date of this Prospectus unless earlier separated
upon three days notice from the Representative to the Company.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share for
the election of directors and with respect to all matters to be submitted to a
vote of the Company's shareholders. The holders of shares of Common Stock are
entitled to share ratably in such dividends as may be declared by the board of
directors and paid by the Company out of funds legally available therefor. In
the event of dissolution, liquidation or winding up of the Company, holders of
shares of Common Stock are entitled to share ratably in all assets remaining
after payment of all liabilities and liquidation preferences, if any. Holders of
shares of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the Shares to
be issued by the Company in connection with the Offering will be, duly
authorized, validly issued, fully paid and nonassessable.
SERIES A AND SERIES B REDEEMABLE WARRANTS
The Series A and Series B Warrants will be issued in registered form
pursuant to an agreement dated the date of this Prospectus (the "Warrant
Agreement"), between the Company and First Union Transfer Corporation,
Charlotte, North Carolina, as Warrant Agent (the "Warrant Agent"). The following
discussion of certain terms and provisions of the Warrants is qualified in its
entirety by reference to the Warrant Agreement. A form of the certificate
representing the Series A Warrants and a form of the certificate representing
the Series B Warrants which forms a part of the Warrant Agreement have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part
Each Series A Warrant entitles the registered holder to purchase one share
of Common Stock. The Warrants are exercisable at a price of $6.00, which
exercise price has been arbitrarily determined by the Company and the
Representative, subject to certain adjustments. Each Series B Warrant also
entitled the registered holder to purchase one share of Common Stock at an
exercise price of $7.00, subject to the same adjustments. All of the Warrants
are entitled to the benefit of adjustments in their exercise prices and in the
number of shares of Common Stock or other securities deliverable upon the
exercise thereof in the event of a stock dividend, stock split,
reclassification, reorganization, consolidation or merger.
The Warrants may be exercised at any time after separation from the Units
until the close of business five years from the date hereof, unless such period
is extended by the Company. After the expiration date, Warrant holders shall
have no further rights. Warrants may be exercised by surrendering the
certificate evidencing such Warrant, with the form of election to purchase on
the reverse side of such certificate properly completed and executed, together
with payment of the exercise price and any transfer tax, to the Warrant Agent.
If less than
35
<PAGE> 40
all of the Warrants evidenced by a warrant certificate are exercised, a new
certificate will be issued for the remaining number of Warrants. Payment of the
exercise price may be made by cash, bank draft or official bank or certified
check equal to the exercise price.
Warrant holders do not have any voting or any other rights as shareholders
of the Company. The Company has the right at any time beginning six months from
the date hereof to redeem the Series A Warrants, at a price of $9.00 per
Warrant, by written notice to the registered holders thereof, mailed not less
than 30 nor more than 60 days prior to the Redemption Date. The Company has the
right at any time beginning six months from the date hereof to redeem the Series
B Warrants, at a price of $10.00 per Warrant, by written notice to the
registered holders thereof, mailed not less than 30 nor more than 60 days prior
to the Redemption Date. The Company may exercise this right only if the closing
bid price for the Common Stock for seven trading days during a 10 consecutive
trading day period ending no more than 15 days prior to the date that the notice
of redemption is given, equals or exceeds $10, subject to adjustment.
The Company has the right to call either or both series for redemption. If
the Company exercises its right to call the Warrants for redemption, such
Warrants may still be exercised until the close of business on the day
immediately preceding the Redemption Date. If any Warrant called for redemption
is not exercised by such time, it will cease to be exercisable, and the holder
thereof will be entitled only to the repurchase price. Notice of redemption will
be mailed to all holders of Warrants of record at least 30 days, but not more
than 60 days, before the Redemption Date. The foregoing notwithstanding, the
Company may not call the Warrants at any time that a current registration
statement under the Securities Act is not then in effect. Any redemption of the
Warrants during the one-year period commencing on the date of this Prospectus
shall require the written consent of the Representative.
The Warrant Agreement permits the Company and the Warrant Agent without the
consent of Warrant holders to supplement or amend the Warrant Agreement in order
to cure any ambiguity, manifest error or other mistake, or to address other
matters or questions arising thereafter that the Company and the Warrant Agent
deem necessary or desirable and that do not adversely affect the interest of any
Warrant holder. The Company and the Warrant Agent may also supplement or amend
the Warrant Agreement with respect to either Series of Warrant in any other
respect with the written consent of holders of not less than a majority in the
number of the Warrants then outstanding in that Series; however, no such
supplement or amendment may (i) increase the exercise price of the Warrant, (ii)
shorten the time period upon which the Warrants are exercisable or may be
redeemed, or (iii) reduce the percentage interest of the holders of the Warrants
without the consent of each Warrant holder affected thereby.
In order for the holder to exercise a Warrant, there must be an effective
registration statement, with a current prospectus on file with the Commission
covering the shares of Common Stock underlying the Warrants, and the issuance of
such Shares to the holder must be registered, qualified or exempt under the laws
of the state in which the holder resides. If required, the Company will file a
new registration statement with the Commission with respect to the securities
underlying the Warrants prior to the exercise of such Warrants and will deliver
a prospectus with respect to such securities to all holders thereof as required
by Section 10(a)(3) of the Securities Act. See "Risk Factors -- Arbitrary
Offering Price and Exercise of Warrants."
WARRANT SOLICITATION FEE
The Company shall pay to the Representatives upon the exercise of the
Warrants a fee equal to 5% of the gross proceeds received by the Company from
the exercise of the Warrants. Such fee will be paid to the Representatives or
their designees no sooner than 12 months after the Effective Date. Additionally,
the Representatives or their designees must be designated in writing by the
Warrant holder as having solicited the Warrant in order to receive the fee and
such fee shall not be paid with respect to Warrants held in a discretionary
account without the prior written approval of such exercise by the discretionary
account holder.
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company has no super-majority, staggered board or other antitakeover
provisions in either its Articles of Incorporation or Bylaws. The Bylaws of the
Company provide for indemnification of the directors
36
<PAGE> 41
and officers of the Company to the full extent authorized or permitted by the
North Carolina Business Corporation Act. See "Management."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar and Warrant Agent for the Company's Units,
Common Stock and Warrants is First Union National Bank Corporate Trust
Department, 1525 West W.T. Harris Blvd., 3C3, Charlotte, North Carolina
28288-1153.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 6,464,021 shares of
Common Stock outstanding (6,746,021 if the overallotment is sold.). Of these
shares, the 2,000,000 Shares sold to the public hereby will be freely tradable
without restrictions or registration under the Securities Act (2,300,000 if the
Representative's Over-allotment Option is exercised in full), except that any
Shares purchased by "affiliates" of the Company, as that term is defined in Rule
144 ("Rule 144") under the Securities Act ("Affiliates") may generally be sold
only within the limitations of Rule 144 described below. An aggregate of
2,000,000 Shares will be issued upon the exercise of the Series A Warrants and
an aggregate of 2,000,000 Shares will be issued upon the exercise of the Series
B Warrants. The Company has agreed to register these Shares under the Securities
Act in order to permit the resale of such Shares in the open market from time to
time and has agreed to maintain the effectiveness of such registration.
Following the sale of such Shares pursuant to an effective registration
statement filed in connection with such registration, these Shares shall be
freely tradable
A total of 4,464,021 Shares owned by the Company's shareholders prior to
this Offering (the "Restricted shares") will be "restricted shares" within the
meaning of the Securities Act and may be publicly sold only if registered under
the Securities Act or sold in accordance with an applicable exemption from
registration, such as those provided by Rule 144 under the Securities Act. Of
the 4,464,021 shares of Common Stock presently outstanding, 3,630,695 will be
deemed to be "affiliate securities," as that term is defined under Rule 144
promulgated under the Securities Act. In general, under Rule 144, as currently
in effect, a person (or persons whose Shares are aggregated) is entitled to sell
restricted shares if at least one year has passed since the later of the date
such Shares were acquired from the Company or any affiliate of the Company. Rule
144 provides that within any three-month period such person may sell only up to
the greater of one percent (1%) of the then outstanding Shares of the Company's
Common Stock (approximately 56,000 Shares following completion of this Offering)
or the average weekly trading volume in the Company's Common Stock during the
four calendar weeks immediately preceding the date on which the notice of the
sale is filed with the Commission. Sales pursuant to Rule 144 are subject to
certain other requirements relating to manner of sale, notice of sale and
availability of current public information. Any person who has not been an
affiliate of the Company for a period of three months preceding a sale of
restricted shares is entitled to sell such Shares under Rule 144 without regard
to such limitations if at least two years have passed since the later of the
date such Shares were acquired from the Company or any affiliate of the Company.
Shares held by persons who are deemed to be affiliates of the Company are
subject to such volume limitations regardless of how long they have been owned
or how they were acquired. The foregoing is a brief summary of certain
provisions of Rule 144 and is not intended to be a complete description thereof.
The "restricted shares" held by the current shareholders of the Company have
been held longer than two years and are qualified for sale pursuant to Rule 144
beginning 90 days after the date of this Prospectus.
The Company cannot predict the effect, if any, that sales of restricted
securities or the availability of such securities for sale could have on the
market price, if any, prevailing from time to time. Nevertheless, sales of
substantial amounts of the Company's securities, including the securities
offered hereby, could adversely affect prevailing market prices of the Company's
securities and the Company's ability to raise additional capital by occurring at
a time when it would be beneficial for the Company to sell securities.
37
<PAGE> 42
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom First London Securities Corporation is acting
as Representative, have severally agreed to purchase from the Company an
aggregate of 2,000,000 Units. The number of Units which each Underwriter has
agreed to purchase is set forth opposite its name.
<TABLE>
<CAPTION>
NUMBER OF
NAME UNITS
- ---- ---------
<S> <C>
First London Securities Corporation.........................
--------
Total.............................................
========
</TABLE>
The Units are offered by the Underwriters subject to prior sale, when, as
and if delivered to and accepted by the Underwriters and subject to approval of
certain legal matters by counsel and certain other conditions. The Underwriters
are committed to purchase all Units offered by this Prospectus, if any are
purchased.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Units offered hereby to the public at the
offering price set forth on the cover page of this Prospectus. The
Representative has advised the Company that the Underwriters propose to offer
the Units through members of the NASD, and may allow a concession, in their
discretion, to certain dealers who are members of the NASD and who agree to sell
the Units in conformity with the NASD Conduct Rules. Such concessions shall not
exceed the amount of the underwriting discount that the Underwriters are to
receive. The public offering price, concession and reallowance to dealers will
not be reduced by the Representative until after the Offering is complete. No
such reduction shall change the amount of proceeds to be received by the Company
as set forth on the cover page of this Prospectus.
The Company has granted to the Representative an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an additional 300,000
Units at the public offering price less the underwriting discount set forth on
the cover page of this Prospectus. The Representative may exercise the
Over-allotment Option solely to cover over-allotments in the sale of the Units
being offered by this Prospectus.
Officers and directors of the Company may introduce the Representative to
persons to consider the Offering and purchase Units either through the
Representative, other Underwriters, or through participating dealers. The
Underwriters have not reserved any Units for sale to persons introduced to the
Underwriters by officers and directors. In this connection, officers and
directors will not receive any commissions or any other compensation.
The Company has agreed to pay the Representative a commission of 10% of the
gross proceeds of the offering (the "Underwriting Discount"), including the
gross proceeds from the sale of the Over-allotment Option, if exercised. In
addition, the Company has agreed to pay to the Representative a non-accountable
expense allowance of two percent (2%) of the gross proceeds of this Offering,
including proceeds from any Units purchased pursuant to the Over-allotment
Option. The Representative's expenses in excess of the non-accountable expense
allowance will be paid by the Representative. To the extent that the expenses of
the Representative are less than the amount of the non-accountable expense
allowance received, such excess shall be deemed to be additional compensation to
the Representative.
Prior to the Offering, there has been no public market for the Units, the
Shares or Warrants of the Company. Consequently, the initial public offering
price for the Units, and the terms of the Warrants (including the exercise price
of the Warrants), have been determined by negotiation between the Company and
the Representative. Among the factors considered in determining the public
offering price were the history of, and the prospect for, the Company's
business, an assessment of the Company's management, its past and present
operations, the Company's development and the general condition of the
securities market at the time of the Offering. The initial public offering price
does not necessarily bear any relationship to the Company's assets, book value,
earnings or other established criteria of value. Such price is subject to change
as a result of market conditions and other factors, and no assurance can be
given that a public market for the Units, the Shares or Warrants will develop
after the close of the Offering, or if a public market in fact
38
<PAGE> 43
develops, that such public market will be sustained, or that the Securities can
be resold at any time at the offering or any other price. See "Risk Factors."
At the closing of this Offering, the Company will issue to the
Representative or persons related to the Representative, for nominal
consideration, a Representative's Warrant to purchase up to 200,000 Units, each
unit consisting of one Share of common stock, one Series A Warrant and one
Series B Warrant (the "Underlying Warrants"). The Representative's Warrant will
be exercisable for a four-year period commencing one year from the date of this
Prospectus at an exercise price of $6.00 per Share and $0.125 per Series A
Warrant, subject to adjustment, and $0.0625 per Series B Warrant, subject to
adjustment. The number of Shares and Warrants subject to the Representative's
Warrant will not exceed 10% of the Shares and Warrants underlying the Units
offered hereby to the public, excluding the securities subject to the
Representative's Warrant. The Representative's Warrant will not be transferable
for one year from the date of this Prospectus, except (i) to officers of the
Representative or to officers and partners of the other Underwriters or selected
dealers participating in this Offering; (ii) by will; or (iii) by operation of
law.
The Representative's Warrant contains provisions providing for appropriate
adjustment in the event of any merger, consolidation, recapitalization,
reclassification, stock dividend, stock split or similar transaction. The
Representative's Warrant contains net issuance provisions permitting the holders
thereof to elect to exercise the Representative's Warrant in whole or in part
and instruct the Company to withhold from the securities issuable upon exercise
a number of securities, valued at the current fair market value on the date of
exercise, to pay the exercise price. Such net exercise provision has the effect
of requiring the Company to issue shares of Common Stock without a corresponding
increase in capital. A net exercise of the Representative's Warrant will have
the same dilutive effect on the interests of the Company's shareholders as will
a cash exercise. The Representative's Warrant does not entitle the holders
thereof to any rights as a shareholder of the Company until such
Representative's Warrant is exercised and shares of Common Stock are purchased
thereunder.
The Company has granted to the holders of the Representative's Warrant
certain rights with respect to registration of the Shares, the Underlying
Warrants and the Common Stock issuable upon exercise of the Representative's
Warrant (the "Registrable Securities") under the Securities Act. For a period of
four years commencing one year following the date of this Prospectus, the
holders representing more than 50% of the Registrable Securities have the right
at the Representative's or holders' expense to require the Company to prepare
and file one registration statement with respect to the Registrable Securities.
In addition, subject to certain limitations, in the event the Company proposes
to register any of its securities under the Securities Act during the seven year
period following the date of this Prospectus, the holders of the Registrable
Securities are entitled to notice of such registration and may elect to include
the Registrable Securities held by them in such registration statement at the
sole expense of the Company.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement which are filed as exhibits to the Registration
Statement. See "Available Information."
LEGAL MATTERS
Legal matters in connection with the Common Stock and Warrants being
offered hereby will be passed upon for the Company by Charles Barkley,
Charlotte, North Carolina. Certain legal matters will be passed upon for the
Underwriters by Jackson Walker L.L.P, Dallas, Texas.
EXPERTS
The financial statements of Commerce Casualty Group, Inc. as of December
31, 1997 and 1996 and for each of the years then ended, included in this
Prospectus have been audited by Killman, Murrell & Company, P. C. independent
auditors, as stated in their report included therein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
39
<PAGE> 44
COMMERCE CASUALTY GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Certified Public Accountants...................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997
and March 31, 1998 (Unaudited)............................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1997 and the Three Months Ended
March 31, 1997 and 1998 (Unaudited)....................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996 and 1997 and the Three
Months Ended March 31, 1998 (Unaudited)................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1997 and the Three Months Ended
March 31, 1997 and 1998 (Unaudited)....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 45
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Commerce Casualty Group, Inc. and Subsidiaries
9140 Arrowpoint Blvd.
Suite 200
Charlotte, NC 28273
We have audited the accompanying consolidated balance sheets of Commerce
Casualty Group, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Commerce Casualty Group, Inc. and Subsidiaries as of December 31, 1996 and 1997,
and the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Dallas, Texas
April 17, 1998
F-2
<PAGE> 46
COMMERCE CASUALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents -- Note 7....................... $1,342,325 $5,399,334 $ 6,185,398
Investments -- Note 2..................................... 614,278 -- --
Accrued Interest Income................................... 2,771 221 19,566
Premiums Receivable, net of allowance for doubtful
accounts of $41,898, $144,637 and $193,685,
respectively............................................ 1,402,267 2,692,952 4,232,819
Reinsurance Balances Receivable........................... 676,464 801,258 1,381,608
Claims Fees Receivable.................................... 170,186 507,495 726,849
Deferred Policy Acquisition Costs -- Note 3............... 309,445 448,384 670,900
Equipment, at cost, less accumulated depreciation of
$2,308, $13,691 and $20,042, respectively............... 17,261 100,608 130,568
Other Assets.............................................. 7,701 26,971 56,798
Organizational Costs, less accumulated amortization of
$4,299, $7,485 and $8,281, respectively................. 12,629 9,443 8,647
---------- ---------- -----------
TOTAL ASSETS.................................... $4,555,327 $9,986,666 $13,413,153
========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for Losses and Loss Adjustment Expenses -- Note
6....................................................... $ 370,616 $1,978,612 $ 2,903,956
Unearned Premiums......................................... 1,258,558 2,061,501 3,021,350
Payable to Insurance Company.............................. 1,619,829 3,138,136 4,253,601
Unearned Commissions and Fees............................. 130,467 432,577 520,065
Accounts Payable.......................................... 99,108 226,997 311,449
Accrued Liabilities....................................... 160,377 300,273 505,999
Payable to Stockholders and Affiliate -- Note 8........... 371,764 141,246 122,824
Dividends Payable......................................... 98,280 98,280 24,570
Commitment and Contingencies -- Notes 4, 7, 8 and 10...... -- -- --
---------- ---------- -----------
TOTAL LIABILITIES............................... 4,108,999 8,377,622 11,663,814
========== ========== ===========
SHAREHOLDERS' EQUITY -- NOTES 5, 8, 9 AND 11
9% Cumulative Convertible Preferred Stock, $0.001
Par Value. Authorized 1,000,000 Shares; Issued and
Outstanding 109,200 Shares........................... 109 109 109
Common Stock, $0.001 Par Value. Authorized 10,000,000
Shares; Issued and Outstanding 840,000, 1,010,028 and
1,068,668 Shares in 1996, 1997 and 1998, respectively... 840 1,010 1,069
Class B Nonvoting Common Stock, $0.001 Par Value.
Authorized 10,000,000 Shares; Issued and Outstanding
8,191 and 9,691 Shares in 1997 and 1998................. -- 8 10
Paid in Capital........................................... 1,100,427 2,388,310 2,991,649
Retained Deficit.......................................... (657,351) (780,393) (1,243,498)
Unrealized Appreciation on Investments.................... 2,303 -- --
---------- ---------- -----------
TOTAL SHAREHOLDERS' EQUITY...................... 446,328 1,609,044 1,749,339
---------- ---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $4,555,327 $9,986,666 $13,413,153
========== ========== ===========
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
F-3
<PAGE> 47
COMMERCE CASUALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------ -----------------------
1996 1997 1997 1998
----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Premiums Assumed............................... $ 2,002,121 $4,789,048 $1,442,665 $2,370,677
Change in Unearned Premiums.................... (1,183,142) (802,943) (729,061) (959,849)
----------- ---------- ---------- ----------
Premiums Earned................................ 818,979 3,986,105 713,604 1,410,828
Commissions and Fees........................... 354,271 1,396,533 248,370 535,990
Investment Income.............................. 71,370 225,459 38,882 73,996
----------- ---------- ---------- ----------
TOTAL REVENUES....................... 1,244,620 5,608,097 1,000,856 2,020,814
=========== ========== ========== ==========
COSTS AND EXPENSES
Losses and Loss Adjustment Expenses............ 427,008 2,518,938 384,942 1,364,551
Policy Acquisition Costs, including
amortization of deferred policy acquisition
costs -- Note 3.............................. 292,625 1,122,877 239,178 419,952
General and Administrative Expenses............ 898,609 1,974,042 416,370 671,674
Interest....................................... 13,081 17,002 4,450 3,172
----------- ---------- ---------- ----------
TOTAL EXPENSES....................... 1,631,323 5,632,859 1,044,940 2,459,349
=========== ========== ========== ==========
(LOSS) BEFORE FEDERAL INCOME TAXES AND
PREFERRED STOCK DIVIDENDS.................... (386,703) (24,762) (44,084) (438,535)
FEDERAL INCOME TAXES -- Note 3................. -- -- -- --
PREFERRED STOCK DIVIDENDS -- Note 4............ (98,280) (98,280) (24,570) (24,570)
----------- ---------- ---------- ----------
NET (LOSS)........................... $ (484,983) $ (123,042) $ (68,654) $ (463,105)
=========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
ADJUSTED FOR CONVERSION OF PREFERRED STOCK
AND CLASS B SHARES INTO COMMON SHARES AND
1998 STOCK SPLIT -- Note 11.................. 3,397,477 3,926,442 3,251,883 4,082,753
=========== ========== ========== ==========
BASIC LOSS PER SHARE................. $ (.14) $ (.03) $ (.02) $ (.11)
=========== ========== ========== ==========
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
F-4
<PAGE> 48
COMMERCE CASUALTY GROUP, INC. AND SUBSIDIARIES
CHANGES IN CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
CLASS B
NONVOTING UNREALIZED
PREFERRED STOCK COMMON STOCK COMMON STOCK APPRECIATION
---------------- ------------------ --------------- PAID IN RETAINED ON
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INVESTMENTS
------- ------ --------- ------ ------ ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995.... 105,600 $106 840,000 $ 840 -- $-- $1,064,430 $ (172,368) $ --
Sale of Preferred Stock....... 3,600 3 -- -- -- -- 35,997 -- --
Increase in Investment
Appreciation................ -- -- -- -- -- -- -- -- 2,303
Net (Loss).................... -- -- -- -- -- -- -- (484,983) --
------- ---- --------- ------ ----- --- ---------- ----------- -------
Balance, December 31, 1996.... 109,200 109 840,000 840 -- -- 1,100,427 (657,351) 2,303
Sale of Common Stock net of
$23,275 of offering costs,
February 1997............... -- -- 162,000 162 -- -- 1,076,563 -- --
Conversion of Preferred Stock
Dividend Into Common Stock,
February 1997............... -- -- 8,028 8 -- -- 80,272 -- --
Sale of Class B NonVoting
Common Stock................ -- -- -- -- 8,191 8 131,048 -- --
Decrease in Unrealized
Appreciation................ -- -- -- -- -- -- -- -- (2,303)
Net (Loss).................... -- -- -- -- -- -- -- (123,042) --
------- ---- --------- ------ ----- --- ---------- ----------- -------
Balance, December 31, 1997.... 109,200 109 1,010,028 1,010 8,191 8 2,388,310 (780,393) --
Sale of Common Stock in March
1998........................ 50,000 50 499,950
Sale of Class B Common Stock
in January and March 1998... 1,500 2 16,998
Conversion of Preferred Stock
Dividend Into Common Stock,
February 1998............... 8,640 9 86,391
Net (Loss) Unaudited.......... (463,105)
------- ---- --------- ------ ----- --- ---------- ----------- -------
Balance, March 31, 1998....... 109,200 $109 1,068,668 $1,069 9,691 $10 $2,991,649 $(1,243,498) $ --
======= ==== ========= ====== ===== === ========== =========== =======
<CAPTION>
TOTAL
----------
<S> <C>
Balance, December 31, 1995.... $ 893,008
Sale of Preferred Stock....... 36,000
Increase in Investment
Appreciation................ 2,303
Net (Loss).................... (484,983)
----------
Balance, December 31, 1996.... 446,328
Sale of Common Stock net of
$23,275 of offering costs,
February 1997............... 1,076,725
Conversion of Preferred Stock
Dividend Into Common Stock,
February 1997............... 80,280
Sale of Class B NonVoting
Common Stock................ 131,056
Decrease in Unrealized
Appreciation................ (2,303)
Net (Loss).................... (123,042)
----------
Balance, December 31, 1997.... 1,609,044
Sale of Common Stock in March
1998........................ 500,000
Sale of Class B Common Stock
in January and March 1998... 17,000
Conversion of Preferred Stock
Dividend Into Common Stock,
February 1998............... 86,400
Net (Loss) Unaudited.......... (463,105)
----------
Balance, March 31, 1998....... $1,749,339
==========
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
F-5
<PAGE> 49
COMMERCE CASUALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------- -------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss)................................................ $ (484,983) $ (123,042) $ (68,654) $ (463,105)
Adjustments to Reconcile Net Loss to Net Cash Provided by
Operations Increase in Allowance for Doubtful
Accounts................................................ 41,898 102,739 -- 49,048
Depreciation.......................................... 2,346 11,383 1,312 6,351
Amortization.......................................... 4,178 3,186 797 796
Preference Stock Dividend............................. 98,280 98,280 24,570 24,570
Changes in Operating Assets and Liabilities
(Increase) Decrease in:
Investments........................................... (611,975) 611,975 (10,784) --
Accrued Interest Income............................... (482) 2,550 (3,637) (19,345)
Premiums Receivable................................... (1,336,300) (1,393,424) (878,821) (1,588,915)
Reinsurance Balances Receivable....................... (628,315) (124,794) (295,721) (580,350)
Claim Fees Receivable................................. (161,812) (337,309) (119,923) (219,354)
Deferred Policy Acquisition Costs..................... (290,888) (138,939) (163,573) (222,516)
Other Assets.......................................... (725) (19,270) (3,310) (29,827)
Increase (Decrease) in:
Reserve for Losses and Loss Adjustment Expenses....... 368,301 1,607,996 269,726 925,344
Unearned Premium...................................... 1,183,142 802,943 665,294 959,849
Payable to Insurance Company.......................... 1,481,662 1,518,307 819,758 1,115,465
Unearned Commission and Fees.......................... 123,787 302,110 76,230 87,488
Accounts Payable...................................... 73,867 127,889 45,360 84,452
Accrued Liabilities................................... 142,998 139,896 69,296 205,726
----------- ----------- ---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... 4,979 3,192,476 427,920 335,677
----------- ----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment..................................... (12,697) (94,730) (10,672) (36,311)
----------- ----------- ---------- -----------
NET CASH (USED) BY INVESTING ACTIVITIES............. (12,697) (94,730) (10,672) (36,311)
----------- ----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of Common Stock...................................... -- 1,107,781 850,000 517,000
Sale of Preferred Stock................................... 36,000 -- -- --
Shareholders and Affiliate Loans.......................... 197,685 (130,518) (77,910) (18,422)
Payment of Preferred Stock Dividend....................... -- (18,000) (18,000) (11,880)
----------- ----------- ---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES........... 233,685 959,263 754,090 486,698
----------- ----------- ---------- -----------
INCREASE IN CASH............................................ $ 225,967 $ 4,057,009 $1,171,338 $ 786,064
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 1,116,358 1,342,325 1,342,325 5,399,334
----------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 1,342,325 $ 5,399,334 $2,513,663 $ 6,185,398
=========== =========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Year:
Interest Expense........................................ $ 13,081 $ 17,002 $ 20,171 $ 3,172
=========== =========== ========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITY:
Preferred Stock Dividend Conversion to Common Stock....... $ -- $ (80,280) $ 80,280 $ (86,400)
Common Stock.............................................. -- 80,280 -- 86,400
Stockholders Payable...................................... -- (100,000) 100,000 --
Common Stock.............................................. -- 100,000 (180,280) --
----------- ----------- ---------- -----------
$ -- $ -- $ -- $ --
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
F-6
<PAGE> 50
COMMERCE CASUALTY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
DECEMBER 31, 1996 AND 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Commerce
Casualty Group, Inc. (CCG) and its wholly-owned subsidiaries, Commerce Casualty
Insurance Company Ltd. (the Insurance Subsidiary) and Commerce Capital, Inc.
(CCI), collectively referred to as "the Company". All material intercompany
balances and transactions have been eliminated in consolidation.
CCG was incorporated on April 19, 1995, under the laws of the State of
North Carolina. On September 1, 1995, CCG entered into an Agency Agreement with
Star Insurance Company (STAR) (a wholly-owned subsidiary of Meadowbrook
Insurance Group, Inc.) whereby CCG would solicit workers compensation insurance
business in the states of North and South Carolina on behalf of Star. This
agreement can be cancelled by either party with sixty (60) days notice.
Effective October 1, 1995, CCG entered into a Service Agreement with
Meadowbrook, Inc. (a wholly-owned subsidiary of Meadowbrook Insurance Group,
Inc.) which allows CCG to service the workers' compensation claims on policies
sold by CCG and CCG is to be paid a service fee by Meadowbrook, Inc. for the
claim services rendered. The service fees are to be paid to CCG as follows: 50%
of service fees thirty (30) days after STAR has received premiums, 25% within
fifteen (15) months, and 25% within twenty-seven (27) months of the policy month
written.
Effective October 1, 1995, CCG entered into an Insurance Program Agreement
with Meadowbrook, Inc. The agreement set forth CCG's intent to organize a
reinsurance company under the laws of Bermuda, for the purpose of reinsuring a
portion of the liability on insurance policies it sold on behalf of STAR.
Meadowbrook, Inc. agreed to assist CCG in the organization and licensing of a
Bermuda company. On December 19, 1995, Commerce Casualty Insurance Company Ltd.
was incorporated in Bermuda and is registered as a class 3 reinsurer under The
Insurance Act of 1978 and related regulations. the Insurance Subsidiary
participates in a 50% (20% for the three months July to September 1997) quota
share agreement reinsuring a U.S. ceding company which issues workers'
compensation policies under the Commerce Casualty Group Program. The exposure of
the participants to the reinsurance agreement is limited through reinsurance
under the quota share agreement to $250,000 per occurrence. Consequently, the
Insurance Subsidiary's exposure is limited to $125,000 per occurrence. The
agreement is subject to cancellation if notice is given at least 90 days prior
to anniversary date of agreement (October 1) or immediately by mutual consent.
The Insurance Subsidiary entered into a Management and Consulting Agreement
with Meadowbrook Risk Management Ltd. (MRM), a Bermuda company and subsidiary of
Meadowbrook, Inc. MRM will provide the Insurance Subsidiary necessary office
facilities, underwriting, consultation services, preparation of financial
statements and other general corporate functions. The term of the agreement is
for a three (3) year period and can be renewed yearly thereafter. MRM agreed to
charge the Insurance Subsidiary a fixed rated of compensation escalated at 5%
per year.
CCI was incorporated on January 20, 1998, under the laws of the State of
North Carolina. CCI was organized to provide premium finance support for the
insurance agents doing business with CCG. As of March 31, 1998, no premiums had
been financed by CCI.
USE OF ESTIMATES
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles which require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-7
<PAGE> 51
COMMERCE CASUALTY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENTS
Under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company considers its investments as available for sale and
accordingly they are recorded at fair value. Unrealized appreciation or
depreciation in value is included as a separate component of shareholders'
equity.
Realized gains and losses on sales of investments are determined using the
specific identification method and are included in the statement of operations.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, consisting principally of agents' commissions,
taxes and administrative fees, are amortized over the period in which the
related premiums are earned. The method followed in determining deferred
acquisition costs limits the amount of the deferral to its realizable value by
giving consideration to losses and expenses expected to be incurred as premiums
are earned.
EQUIPMENT
Equipment is stated at cost and is depreciated using the straight-line
method over the estimated useful lives of the assets, generally three to ten
years. Upon sale or retirement, the cost of the asset and related accumulated
depreciation are eliminated from their respective accounts, and the resulting
gain or loss is included in income. Repairs and maintenance are charged to
operations when incurred.
ORGANIZATIONAL COSTS
Organization cost is amortized on a straight-line basis over five (5) years
from date of incorporation.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Losses and loss expenses paid are recorded when advised by the ceding
insurance company. Outstanding losses comprise estimates of the amount of
reported losses and loss expenses received from the ceding insurance company
plus a provision for losses incurred but not reported. The provision for losses
incurred but not reported is based on the recommendations of an independent loss
reserve specialist using the Company's limited historical loss experience, loss
experience of the ceding insurance company and other available information.
Management believes that the provision for outstanding losses and loss
expenses will be adequate to cover the ultimate net cost of losses incurred to
the balance sheet date but the provision is necessarily an estimate and claims
may ultimately be settled for greater or lesser amounts. It is at least
reasonably possible that management will revise this estimate significantly in
the near term. Any subsequent differences arising are recorded in the period in
which they are determined.
Significant delays can be experienced in the insurance industry generally
in both the notification and settlement of losses. Accordingly, a substantial
measure of judgement is required in assessing such losses, the ultimate cost of
which cannot be known with certainty.
REVENUE RECOGNITION
Premiums assumed are recognized as earned on a pro rata basis over the life
of the policy term. Unearned premiums represent the portion of premiums written
which are applicable to the unexpired terms of policies in force.
Commission and fee income is recorded on the effective date of the policy
on which it was earned.
F-8
<PAGE> 52
COMMERCE CASUALTY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The claims processing fees are recognized as revenue over the estimated
life of the claims.
Investment income, comprising dividends and interest, is accrued to the
balance sheet date.
FEDERAL INCOME TAXES
The Company accounts for income taxes pursuant to the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"), which requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
CASH AND CASH EQUIVALENTS
The Company considers all cash on hand, deposits with financial
institutions that can be withdrawn without prior notice or penalty, and short
term deposits with an original maturity of ninety days or less as equivalent to
cash.
EARNINGS PER SHARE
The net loss per share is based on the weighted average number of common
Shares outstanding, adjusted for the 1998 stock split. The earnings per share
computation did include the conversion of the 9% Cumulative Convertible
Preferred Stock to common stock and the conversion of Class B common stock to
common stock.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(Statement No. 128), which is required to be adopted for financial statements
issued for annual or interim periods after December 15, 1997. The adoption of
Statement No. 128 required a change in the presentation of earnings per share
(EPS) to replace primary and fully diluted EPS with a presentation of basic and
diluted EPS and to restate EPS for all periods presented. The adoption of
Statement No. 128 did not have a material impact on the Company's financial
statements.
In February 1997, the FASB also issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure"
(Statement No. 129). Statement No. 129 establishes standards for disclosing
information about an entity's capital structure and applies to all entities.
Statement No. 129 continues the previous requirements to disclose certain
information about an entity's capital structure found in APB Opinions No. 10,
"Omnibus Opinion -- 1966", and 15, "Earnings per Share", and FASB Statements of
Financial Accounting Standards No. 47, "Disclosure of Long-Term Obligations",
for entities that were subject to the requirements of APB Opinions 10 and 15 and
Statement No. 47 and consolidates them for ease of retrieval and for greater
visibility to non-public entities. Statement No. 129 is effective for financial
statements for periods ending after December 15, 1997. The Company experienced
no material revision in its disclosures when Statement No. 129 was adopted.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (Statement No. 130). Statement No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. Statement No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an entity display
an amount representing total comprehensive income for the period in that
financial statement. Statement No. 130 is effective for fiscal years
F-9
<PAGE> 53
COMMERCE CASUALTY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. Statement No. 130
had no impact on the financial condition or results of operations of the
Company, but required changes in the Company's disclosure and presentation
requirements, which were not made due to the immaterial effect on the financial
statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 (Statement No. 131), "Disclosures About Segments of an Enterprise and
Related Information." Statement No. 131 establishes standards for disclosures
related to business operating segments. The Company anticipates that Statement
No. 131 will have no significant effect on the disclosures set forth in its
consolidated financial statements.
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3 "Accounting by Insurance and Other Enterprises
for Insurance-related Assessments" (SOP 97-3). SOP 97-3 provides guidance for
determining when an insurance company or other enterprise should recognize a
liability for guaranty-fund assessments and guidance for measuring the
liability. SOP 97-3 is effective for financial statements for fiscal years
beginning after December 15 1998. The Company anticipates that the adoption of
SOP 97-3 will not have a material effect on the Company's financial position or
results of operations.
INTERIM UNAUDITED FINANCIAL STATEMENTS
The accompanying consolidated balance sheet as of March 31, 1998 and
statements of operations, shareholder's equity and cash flows for the three
months ended March 31, 1997 and 1998 are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the audited
consolidated financial statements included herein and include all adjustments,
necessary to present fairly the information set forth therein, which consist
solely of normal recurring adjustments. The results of operations for the
interim periods presented are not necessarily indicative of results for a full
year.
NOTE 2: INVESTMENTS
The Company's investments at December 31, 1996, comprise the following:
<TABLE>
<CAPTION>
UNREALIZED FAIR
COST GAIN VALUE
-------- ---------- --------
<S> <C> <C> <C>
Mutual Fund............................................ $611,975 $2,303 $614,278
======== ====== ========
</TABLE>
The mutual fund invests principally in obligations issued or guaranteed by
the U.S. Government or its agencies or instrumentalities, including
mortgage-backed securities issued by the Government National Mortgage
Association ("GNMA").
There were no investments at December 31, 1997.
F-10
<PAGE> 54
COMMERCE CASUALTY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs and the components of the change in
deferred acquisition costs were as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
MARCH 31, DECEMBER 31,
-------------------- -------------------
1996 1997 1997 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance, beginning of period................. $ 18,557 $309,445 $309,445 $448,384
Agents Commissions........................... 160,170 383,124 115,413 189,654
Administration, taxes, & other............... 260,275 622,576 187,546 308,188
Amortization................................. (129,557) (866,761) (139,386) (275,326)
--------- -------- -------- --------
Balance, end of period....................... $ 309,445 $448,384 $473,018 $670,900
========= ======== ======== ========
</TABLE>
NOTE 4: INCOME TAXES
UNITED STATES
Effective December 19, 1995, the Insurance Subsidiary made an irrevocable
election under Section 953(d) of the Internal Revenue Code of 1986, as amended,
to be treated as a domestic insurance company for United States federal income
tax purposes. As a result of the "domestic election" the Insurance Subsidiary is
subject to U.S. taxation on its worldwide income as if it were a U.S.
corporation.
BERMUDA
Under current Bermuda law, the Insurance Subsidiary is not required to pay
taxes in Bermuda on either income or capital gains. The Company has received an
undertaking from the Minister of Finance in Bermuda that in the event of any
such taxes being imposed the Insurance Subsidiary will be exempted from taxation
until the year 2016.
At December 31, 1997, the following net operating losses are available to
off-set future taxable income:
<TABLE>
<CAPTION>
COMPANY AMOUNT
- ------- --------
<S> <C>
CCG......................................................... $ 76,000
The Insurance Subsidiary.................................... 285,000
--------
$361,000
========
</TABLE>
The net operating losses will begin to expire in 2010.
Federal income tax benefit differs from the statutory rate of 34% as
follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Tax Benefit at Statutory Rate of 34%........................ $131,479 $ 8,419
Meals, Entertainment and Other.............................. (1,141) 4,830
Increase in Valuation Allowance............................. (130,338) (13,249)
-------- --------
Federal Income Tax Benefit.................................. $ -- $ --
======== ========
</TABLE>
F-11
<PAGE> 55
COMMERCE CASUALTY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred tax assets and liabilities as of December 31,
1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred Tax Assets:
Organization and Startup Costs............................ $ 26,729 $ 19,756
Accrued Expenses.......................................... 49,765 60,403
Benefit of Net Operating Loss for Federal Tax Purposes.... 153,134 123,009
--------- ---------
Total Deferred Tax Assets......................... 229,628 203,168
--------- ---------
Deferred Tax Liabilities:
Liabilities Applicable to the Insurance Subsidiary........ 40,845 1,136
--------- ---------
Total Deferred Tax Liabilities.................... 40,845 1,136
--------- ---------
Net Deferred Tax Assets..................................... 188,783 202,032
Less Valuation Allowance.................................... (188,783) (202,032)
--------- ---------
Total Deferred Taxes.............................. $ -- $ --
========= =========
</TABLE>
Realization of the deferred tax assets applicable to temporary timing
difference and the net operating loss carryforward is dependent on the Company's
ability to generate sufficient future taxable income. A valuation allowance
equal to the net deferred tax assets was recognized since the Company's
management believes that there is at least a 50% chance that insufficient
taxable income will be generated to allow for the realization of the deferred
tax assets.
NOTE 5: PREFERRED AND COMMON STOCK
In 1996, the Company sold 3,600 Shares of 9% Preferred Stock, par value
$0.001, at $10 per share. Payment of the dividends on the Preferred Stock is
subject to various provisions of the laws of the State of North Carolina;
however, if not paid annually the dividends will accumulate until such time as
payment is permissible under state law. On December 31, 1996 and 1997, the
Company declared a $98,280 Preferred Stock dividend.
The Preferred Stock is convertible to common stock based on the ratio of 5
Shares of Preferred Stock for 6 Shares of common. The mandatory conversion will
occur on the five (5) year anniversary of the issuance of the Preferred Stock.
In January and February of 1997, the Company sold 162,000 Shares of it's
common stock for an aggregate value of $1,100,000 and incurred offering costs of
$23,275.
On June 26, 1997, the Company's articles of incorporation were amended to
authorize the issuance of 10,000,000 Shares designated as Class B Nonvoting
Common Stock with par value $0.001. In December 1997, the Company sold 8,191
Class B Common Shares for an aggregate value of $131,056.
F-12
<PAGE> 56
COMMERCE CASUALTY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6: OUTSTANDING LOSSES AND LOSS EXPENSES
The summary of changes in outstanding losses and loss expenses is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------- -------------------------
1996 1997 1997 1998
-------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Balance January 1,............................... $ -- $ 370,616 $ 370,616 $1,978,612
-------- ---------- --------- ----------
Incurred losses related to:
Current year................................... 429,740 2,537,238 350,413 747,501
Prior years.................................... -- (18,301) 34,529 617,050
-------- ---------- --------- ----------
429,740 2,518,937 384,942 1,364,551
-------- ---------- --------- ----------
Paid losses related to:
Current year................................... (59,124) (684,739) (7,927) (18,798)
Prior years.................................... -- (226,202) (107,289) (420,409)
-------- ---------- --------- ----------
(59,124) (910,941) (115,216) (439,207)
-------- ---------- --------- ----------
Balance at December 31,.......................... $370,616 $1,978,612 $ 640,342 $2,903,956
======== ========== ========= ==========
</TABLE>
NOTE 7: CONCENTRATION OF RISK
At times the Company's cash balances ($1,079,287 at December 31, 1997)
exceeded the FDIC insurance limit, thus exposing the Company to concentrations
of credit risk. The Company places its cash with what it believes to be high
credit quality financial institutions. Approximately $3,864,000 of the excess
balance is held in escrow in order to indemnify the insurer.
The Meadowbrook Insurance Group, Inc. (Meadowbrook) is the sole source of
workers' compensation insurance sold by the managing general agency and has been
given, by contract, the right to manage the Company's insurance subsidiary in
Bermuda. If the various contracts and agreements with Meadowbrook were
terminated, the Company could be subjected to a severe interruption in its
business operations.
The carrying amounts of receivables and payables approximate their fair
value at December 31, 1997.
F-13
<PAGE> 57
COMMERCE CASUALTY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8: RELATED PARTY TRANSACTIONS
At December 31, 1996 and 1997 and March 31, 1998, the balances due to
stockholders and an affiliate were as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------------------------
DECEMBER 31,
------------------- MARCH 31,
TO WHOM OWED EXPLANATION 1996 1997 1998
- ------------ ----------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Tucker Administrators, Inc. Expenses paid on behalf
of Company......................... $167,596 $141,246 $122,824
Tucker Administrators, Inc. Loans to Company................... 24,000 -- --
E. E. Tucker, Jr. Expenses paid on behalf
of Company......................... 18,042 -- --
E. E.Tucker, Jr. Accrued Salary and Taxes........... 120,670 -- --
E. Eugene Tucker, III Accrued Salary and Taxes........... 41,456 -- --
-------- -------- --------
$371,764 $141,246 $122,824
======== ======== ========
</TABLE>
For the years ended December 31, 1996 and 1997, the Company's results of
operations included general and administrative expenses of $170,641 and $131,720
paid by Tucker Administrators, Inc. on behalf of the Company. For the three
months ended March 31, 1997 and 1998, the results of operations included general
and administrative expenses of $23,413 and $24,578, respectively, paid by Tucker
Administrators, Inc. on behalf of the Company.
NOTE 9: STATUTORY REQUIREMENTS
The Insurance Subsidiary is required by its license to maintain capital and
surplus greater than a minimum statutory amount determined as the greater of
$1,000,000, a percentage of outstanding losses or a given fraction of net
written premiums. At December 31, 1997, the Company is required to maintain a
minimum statutory capital and surplus of $1,000,000. Actual statutory capital
and surplus is $872,124 and accordingly does not meet its minimum capital and
surplus requirement at December 31, 1997. Subsequent to the year end, CCG
contributed $150,000 to allow the Insurance Subsidiary to meet this deficiency.
Actual statutory capital and surplus, as determined using statutory
accounting principles, is as follows:
<TABLE>
<S> <C>
Total shareholders' equity-the Insurance Subsidiary......... $1,692,929
Less non-admitted assets:
Deferred acquisition expenses............................. (811,362)
Deferred organizational costs............................. (9,443)
----------
Statutory capital and surplus............................... $ 872,124
==========
</TABLE>
The Insurance Subsidiary is also required to maintain a minimum liquidity ratio
whereby the value of its relevant assets are not less than 75% of the amount of
its relevant liabilities. Relevant assets include cash and deposits, quoted
investments, investment income, accrued and insurance balances receivable.
Certain categories of assets do not qualify as relevant assets under the
statute. The relevant liabilities are outstanding losses and loss expenses and
unearned premiums and accounts payable and accrued expenses. At December 31,
1997, the Insurance Subsidiary cannot pay any dividends to is shareholder.
At December 31, 1997, the Insurance Subsidiary was required to maintain
relevant assets of approximately $3,181,000 (1996 -- 1,284,000). At that date,
relevant assets were approximately $5,114,000 (1996 -- $2,172,000) and the
minimum liquidity ratio was therefore met.
F-14
<PAGE> 58
COMMERCE CASUALTY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10: IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will not be
required to modify or replace significant portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. The Company believes that the Year 2000 Issue will not pose
significant operational problems for its computer systems.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. However, there can be no guarantee that the systems
of other companies on which the Company's systems rely will be timely converted
and would not have an adverse effect on the Company's systems. The Company has
determined it has no exposure to contingencies related to the Year 2000 Issue
for the insurance policies it has sold.
The total cost of the Year 2000 project is not expected to be significant.
NOTE 11: STOCK TRANSACTIONS (UNAUDITED)
The following summarizes the stock transaction of the Company from January
1, 1998 to July 15, 1998:
<TABLE>
<CAPTION>
MONTH NUMBER PRICE
DESCRIPTION SOLD OF SHARES PER SHARE AMOUNT
- ----------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C>
Sale of Stock Common Stock................. March 50,000 $10.00 $ 500,000
Common Stock............................. April 13,500 10.00 135,000
Common Stock............................. July 52,631 9.50 500,000
Class B Common Stock..................... January 625 16.00 10,000
Class B Common Stock..................... March 875 8.00* 7,000
Class B Common Stock..................... April 678 8.00* 5,424
------- ----------
118,309 1,157,424
Conversion of Preferred Stock Dividend
Common Stock............................. February 8,640 10.00 86,400
------- ----------
126,949 $1,243,824
======= ==========
</TABLE>
- ---------------
* Shares sold to employees of Company
In July 1998, the Company effected the following stock transactions:
- Converted the Preferred Stock to common stock on the basis of five (5)
Shares of Preferred Stock exchanged for six (6) shares of Common Stock.
- Converted the Class B common stock on a one for one basis.
- Split the common Shares on a 3.5 to 1 basis, except for the Shares sold
to its employees for $8.00 which were split 1.75 to 1.
F-15
<PAGE> 59
COMMERCE CASUALTY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At March 31, 1998, the stockholders' equity would be effected as follows:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
OUTSTANDING COMMON TOTAL STOCKHOLDERS' EQUITY
SHARES MARCH 31, 1998
------------------ --------------------------
<S> <C> <C>
Balance, March 31, 1998....................... 1,068,668 $1,749,339
Sale of Common Stock.......................... 66,131 635,000
Class B Common Stock.......................... -- 5,424
Conversion of Preferred Stock................. 131,040 --
Conversion of Class B Common Stock............ 10,369 --
Stock Split................................... 3,187,813 --
--------- ----------
4,464,021 $2,389,763
========= ==========
</TABLE>
Stockholders' equity does not reflect the effect of the results of
operations for the three months ended June 30, 1998.
F-16
<PAGE> 60
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. ii
Prospectus Summary.................... 1
Risk Factors.......................... 5
Dilution.............................. 13
Use of Proceeds....................... 14
Dividend Policy....................... 15
Capitalization........................ 16
Selected Consolidated Financial
Data................................ 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 21
Management............................ 29
Executive Compensation................ 31
Limitation of Directors' and Officers'
Liability and Indemnification....... 32
Certain Relationships and Related
Transactions........................ 32
Principal Shareholders................ 33
Description of Securities............. 34
Underwriting.......................... 38
Legal Matters......................... 39
Experts............................... 39
Table of Contents to Financial
Statements.......................... F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES OFFERED HEREBY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
2,0000,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK,
ONE SERIES A REDEEMABLE COMMON STOCK PURCHASE WARRANT
AND ONE SERIES B REDEEMABLE COMMON STOCK PURCHASE WARRANT
COMMERCE CASUALTY GROUP, INC.
--------------------
PROSPECTUS
, 1998
--------------------
FIRST LONDON SECURITIES
CORPORATION
------------------------------------------------------
------------------------------------------------------
<PAGE> 61
PART II
ITEM 24. INDEMNIFICATION
The Company's Articles of Incorporation limit the liability of officers and
directors of the Company to the corporation or its shareholders for damages
except for liabilities arising from acts or omissions involving intentional
misconduct, fraud or a knowing violation of the law. The Bylaws of the Company
also provide that the Company may indemnify directors and officers to the
fullest extent permitted by North Carolina law. North Carolina law permits a
corporation to indemnify any officer or director from any liability incurred by
reason of the fact that such person is or was an officer or director if such
person acted in good faith and in a manner which he reasonably believed to be in
the best interests of the corporation and, with respect to a criminal action, if
he had no reason to believe his conduct was unlawful. At present, there is no
pending litigation or proceeding involving any director, officer, employee, or
agent of the Company under circumstances in which indemnification is likely to
be required or permitted.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
See "Use of Proceeds." Other Expenses of Issuance and Distribution are
estimated as follows:
<TABLE>
<S> <C>
Registration Fees:.......................................... $ 13,839.70
NASD filing fee:............................................ 5,656.00
NASDAQ Small Cap Market..................................... 25,000.00
Underwriters nonaccountable expense allowance:.............. 200,000.00
Transfer Agent Fees:........................................ 4,000.00
Printing Costs:............................................. 60,000.00
Legal Expenses:............................................. 150,000.00
Accounting Expenses:........................................ 150,000.00
Miscellaneous:.............................................. 15,000.00
-----------
Total Estimated "Other" Expenses.................. $623,496.00
===========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Within the past three years, the Company has sold the securities listed
below pursuant to exemptions from the Securities Act .
1. The Company was incorporated on April 19, 1995 and issued stock
thereafter, representing a total of 840,000 Shares, to its founders, officers
and directors, as set forth below. All such Shares were sold at a subscription
price of $.05. Following the July, 1998 Stock Split, the number of shares was
increased to 2,940,000.
<TABLE>
<S> <C>
Ernest E. Tucker, Jr., Chief Executive Officer, Director.... 504,000
Paul V. H. Halter, III, Chief Operating Officer, Director... 168,000
Ernest E. Tucker, III, Secretary, Treasurer, Director....... 168,000
</TABLE>
With respect to such sales, an exemption under Section 4(2) is claimed as
follows:
a. No general advertising or general solicitation was engaged in nor
were any commissions or similar remuneration, directly or indirectly, paid
with respect to these transactions;
b. Reasonable inquiry was made to determine that the securities were
purchased solely for investment and without a view to their resale or
distribution; subscribers were informed of the restrictions regarding
resale; subscribers received legended stock subject to the absence of
registration under the Securities Act and the restrictions on
transferability and resale;
c. Registrant provided subscribers with all information, requested by
them and with all information believed by Registrant to be relevant. These
persons are afforded continuous access to all such information.
II-1
<PAGE> 62
d. All subscribers had and continue to have sufficient knowledge and
experience in financial and business matters such that they are capable of
evaluating the risks and merits of the investment and similar investments
and all are able to bear the economic risk, including the loss of the
entire investment;
e. The size of the offering was de minimus and the number of offerees
limited.
Accordingly, Registrant claims the transactions described to have been
exempt from the registration requirements of Section 5 of the Securities Act by
reason of the exemption afforded by Section 4(2) in that the transactions did
not involve a public offering of Securities or are otherwise exempt form
registration under the Securities Act.
2. Beginning on August 25, 1995 and continuing through January, 1996, the
Company made a private offering under Rules 505 and 506 of Regulation D
securities and sold 109,200 Shares of Convertible Preferred Stock at a price of
$10.00 per share. In July, 1998 Stock Split, the number of Preferred shares was
converted on a 5 shares of Preferred Stock for 6 shares of Common Stock. After
the conversion, the shares were forward split and the number of common shares
issued was 458,640. The private placement was made pursuant to a private
placement Memorandum dated August 25, 1995 which was filed with the Blue Sky
Administrators in the states of North Carolina, South Carolina, Georgia and
Virginia. A form D was thereafter filed with the Securities & Exchange
Commission. No general advertising or general solicitation was engaged in nor
were any commissions or similar remuneration, directly or indirectly, paid with
respect to these transactions. Reasonable inquiry was made to determine that the
securities were purchased solely for investment and without a view to their
resale or distribution; subscribers were informed of the restrictions regarding
resale; subscribers received legended stock subject to the absence of
registration under the Securities Act and the restrictions on transferability
and resale. Registrant provided each offeree with a private placement
memorandum. All subscribers had and continue to have sufficient knowledge and
experience in financial and business matters such that they are capable of
evaluating the risks and merits of the investment and similar investments and
all are able to bear the economic risk, including the loss of the entire
investment. Accordingly, Registrant claims the transactions described to have
been exempt from the registration requirements of Section 5 of the Securities
Act by reason of the exemption afforded by Section 4(2) in that the transactions
did not involve a public offering of Securities and under Regulation D or are
otherwise exempt form registration under the Securities Act.
3. From January to March, 1997, the Company sold 162,000 shares of Common
Stock to 8 existing shareholders and 11 sophisticated and accredited purchasers
at a price of $6.67. Following the July, 1998 Stock Split, the number of shares
was increased to 567,000. Reasonable inquiry was made to determine that the
securities were purchased solely for investment and without a view to their
resale or distribution; subscribers were informed of the restrictions regarding
resale; subscribers received legended stock subject to the absence of
registration under the Securities Act and the restrictions on transferability
and resale. Registrant provided each offeree with a private placement memorandum
. All subscribers had and continue to have sufficient knowledge and experience
in financial and business matters such that they are capable of evaluating the
risks and merits of the investment and similar investments and all are able to
bear the economic risk, including the loss of the entire investment Accordingly,
Registrant claims the transactions described to have been exempt from the
registration requirements of Section 5 of the Securities Act by reason of the
exemption afforded by Section 4(2) in that the transactions did not involve a
public offering of Securities.
4. From July 13, 1997 until January 31, 1998, the Company sold 8,191 Shares
of Convertible Class B common stock at a price of $16.00 per share to fifteen
purchasers pursuant to a private placement Memorandum dated July 13, 1997, which
was filed with the Blue Sky Administrators in the states of North Carolina,
South Carolina, Georgia and Virginia. The Class B Shares were converted to
common stock in July, 1998. Following the Stock Split in July, 1998, these
shares were increased to a total of 30,856 shares. It is claimed that each of
these placements were exempt from registration under Section 4(2) and under
Regulation D, including Rules 505 and 506, as follows. Reasonable inquiry was
made to determine that the securities were purchased solely for investment and
without a view to their resale or distribution; subscribers were informed of the
restrictions regarding resale; subscribers received legended stock subject to
the absence of registration under the Securities Act and the restrictions on
transferability and resale. Registrant provided
II-2
<PAGE> 63
each offeree with a private placement memorandum. All subscribers had and
continue to have sufficient knowledge and experience in financial and business
matters such that they are capable of evaluating the risks and merits of the
investment and similar investments and all are able to bear the economic risk,
including the loss of the entire investment Accordingly, Registrant claims the
transactions described to have been exempt from the registration requirements of
Section 5 of the Securities Act by reason of the exemption afforded by Section
4(2) in that the transactions did not involve a public offering of Securities
and under Regulation D or are otherwise exempt form registration under the
Securities Act.
5. In March and April, 1998, the Company sold 1,553 Class B shares at a
price of $8.00 per share to four employees of the Company. These shares were
converted in July, 1998 on a 1 to 1 basis to 1,553 shares of common stock. These
shares of common stock were forward split at a rate of 1.75 to 1 for a total of
2,718 shares. Reasonable inquiry was made to determine that the securities were
purchased solely for investment and without a view to their resale or
distribution; subscribers were informed of the restrictions regarding resale;
subscribers received legended stock subject to the absence of registration under
the Securities Act and the restrictions on transferability and resale.
Registrant provided each offeree with a private placement memorandum. All
subscribers had and continue to have sufficient knowledge and experience in
financial and business matters such that they are capable of evaluating the
risks and merits of the investment and similar investments and all are able to
bear the economic risk, including the loss of the entire investment Accordingly,
Registrant claims the transactions described to have been exempt from the
registration requirements of Section 5 of the Securities Act by reason of the
exemption afforded by Section 4(2) in that the transactions did not involve a
public offering of Securities.
6. From March to July, 1998, the Company sold 116,131 restricted shares to
nine existing shareholders and three accredited and sophisticated investors at a
price of $10.00 per share except for shares sold to William F. Bronson at a
price of $9.50. Following the July, 1998 stock split, the number of shares
increased to a total of 406,459. Reasonable inquiry was made to determine that
the securities were purchased solely for investment and without a view to their
resale or distribution; subscribers were informed of the restrictions regarding
resale; subscribers received legended stock subject to the absence of
registration under the Securities Act and the restrictions on transferability
and resale. Registrant provided each offeree with a private placement
memorandum. All subscribers had and continue to have sufficient knowledge and
experience in financial and business matters such that they are capable of
evaluating the risks and merits of the investment and similar investments and
all are able to bear the economic risk, including the loss of the entire
investment Accordingly, Registrant claims the transactions described to have
been exempt from the registration requirements of Section 5 of the Securities
Act by reason of the exemption afforded by Section 4(2) in that the transactions
did not involve a public offering of Securities and Rule 506 in that all
offerees were accredited investors as defined in Regulation D.
ITEM 27. EXHIBITS
The following documents are attached hereto as Exhibits:
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
1.2 -- Form of Selected Dealer Agreement
3.1 -- Articles of Incorporation of Commerce Casualty Group, Inc.,
as amended (1)
3.2 -- Bylaws, as amended and restated, of Commerce Casualty Group,
Inc.
4.1 -- Form of Warrant Agreement
5.1 -- Opinion of Charles Barkley (1)
10.1 -- Loan and Security Agreement by and among the Company and
First Union National Bank
10.3 -- Form of Representative's Warrant Agreement
10.4 -- Managing Agency Agreement Between the Company and Star
Insurance Company (1)
10.5 -- Trust Agreement Between the Company and Star Insurance
Company (1)
10.6 -- Reinsurance Agreement Between the Company and Star Insurance
Company (1)
10.7 -- Promissory note to Ernest E. Tucker, Jr. (1)
</TABLE>
II-3
<PAGE> 64
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <C> <S>
10.8 -- Promissory note to Marian Tucker (1)
21.1 -- List of Subsidiaries
23.1 -- Consent of Charles Barkley (See Exhibit 5.1)
23.2 -- Consent of Killman, Murrell & Company
24.1 -- Power of Attorney (See Page II-5)
27.1 -- Financial Data Schedule
27.2 -- Financial Data Schedule
27.3 -- Financial Data Schedule
27.4 -- Financial Data Schedule
</TABLE>
- ---------------
(1) To be filed by amendment
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) The registrant hereby undertakes (1) to file, during any period in
which it offers or sells securities, a post-effective amendment to this
Registration Statement, to include any prospectus required by section 10(a)(3)
of the Securities Act, to reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the Registration Statements, and to include any additional or changed material
information on the plan of distribution; (2) that, for the purpose of
determining any liability under the Securities Act of 1933, to treat each
post-effective amendment as a new Registration Statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof; and (3) to file a
post-effective amendment to remove from registration any of the securities being
registered which remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising from the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is,therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 65
SIGNATURES
In accordance with the requirement of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Charlotte, State of North Carolina on August 12, 1998.
COMMERCE CASUALTY GROUP, INC.
By: /s/ PAUL V. H. HALTER, III
------------------------------------
Paul V. H. Halter, III
Chief Operating Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Commerce Casualty Group, Inc.
hereby severally constitute and appoint Ernest E. Tucker and Paul V. H. Halter,
III and each of them singly, our true and lawful attorneys, with full power to
them and each of them singly, to sign for us in our names in the capacities
indicated below, all pre-effective and post-effective amendments to this
Registration Statement, including any filings pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, and generally to do all things in our names
and on our behalf in such capacities to enable Commerce Casualty Group, Inc. to
comply with the provisions of the Securities Act of 1933, as amended, and all
requirements of the Securities and Exchange Commission.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities on August 12, 1998.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
/s/ ERNEST E. TUCKER Chairman of the Board and Director
- ------------------------------------------------
Ernest E. Tucker
/s/ PAUL V. H. HALTER, III Chief Operating Officer and Director (Principal
- ------------------------------------------------ Executive Officer)
Paul V. H. Halter, III
/s/ JAMES P. CHICK Vice President of Finance and Chief
- ------------------------------------------------ Financial Officer (Principal Financial Officer)
James P. Chick
And a Majority of Its Board of Directors:
/s/ ERNEST E. TUCKER Chairman of the Board and Director
- ------------------------------------------------
Ernest E. Tucker
/s/ PAUL V. H. HALTER, III Director
- ------------------------------------------------
Paul V. H. Halter, III
/s/ E. E. TUCKER, III Director
- ------------------------------------------------
E. E. Tucker, III
Director
- ------------------------------------------------
Clinton Peters
/s/ WILLIAM K. WOLTZ Director
- ------------------------------------------------
William K. Woltz
Director
- ------------------------------------------------
William F. Bronson
Director
- ------------------------------------------------
Donald Johnson
</TABLE>
II-5
<PAGE> 1
EXHIBIT 1.1
COMMERCE CASUALTY GROUP, INC.
2,000,000 UNITS, EACH UNIT CONSISTING OF
ONE SHARE OF COMMON STOCK,
ONE SERIES A REDEEMABLE COMMON STOCK PURCHASE WARRANT, AND
ONE SERIES B REDEEMABLE COMMON STOCK PURCHASE WARRANT,
(AND 4,000,000 SHARES OF COMMON STOCK ISSUABLE UNDER THE WARRANTS)
UNDERWRITING AGREEMENT
Dallas, Texas
______, 1998
First London Securities Corporation
As Representative of the Several
Underwriters named in Schedule A
c/o First London Securities Corporation
2600 State Street
Dallas, Texas 75204
Gentlemen:
Commerce Casualty Group, Inc. (the "Company"), on the basis of the
representations, warranties, covenants and conditions contained herein, hereby
proposes to issue and sell to such Underwriters as named in Schedule A (the
"Underwriters") to this Underwriting Agreement (the "Agreement"), for whom First
London Securities Corporation ("First London") is acting as the Representative
(the "Representative"), pursuant to the terms of this Agreement, on a"firm
commitment" basis, 2,000,000 Units (the "Units") at $5.1875 per Unit (the
"Initial Public Offering Price"). Each Unit consists of one share (the "Shares")
of Common Stock, $.001 par value per share (the "Common Stock"); one Redeemable
Series A Common Stock Purchase Warrant (the "Series A Warrants"); and one
Redeemable Series B Common Stock Purchase Warrant (the "Series B Warrants"). The
Series A Warrants and the Series B Warrants may sometimes be collectively
referred to as the "Warrants." The Units, the Shares and the Warrants offered
hereby are referred to collectively as the "Securities." The Shares and Warrants
included in the Units may be not be traded separately until ________, 1999 (180
days from the date of this Prospectus) unless earlier separated upon three days
notice from the Representative (as hereinafter defined) to the Company. The
Warrants may not be exercised until they are separated from the Units.
Each Series A Warrant entitles the holder to purchase one share of
Common Stock at a price of $ 6.00 per share during the five-year period
commencing on the date of the Prospectus. The Series A Warrants are redeemable
by the Company for $9.00 per Warrant. Each Series B Warrant entitles the holder
to purchase one share of Common Stock at a price of $ 7.00 per share during the
five-year period commencing on the date of the Prospectus. The Series B Warrants
are redeemable by the Company for $10.00 per Warrant. Redemption requires not
less than 30 nor more than 60 days written notice provided there is then in
effect a current registration statement under the Securities
<PAGE> 2
Act of 1933, as amended (the "Act"), with respect to the issuance and sale of
the Common Stock upon the exercise of the Warrants. Any redemption of the
Warrants during the one-year period commencing on the date of this Prospectus
shall require the written consent of First London. In addition, the Company
proposes to grant to the Underwriters (or, at the option of the Representative,
to the Representative, individually) the option referred to in Section 2(b) to
purchase all or any part of an aggregate of 300,000 additional Units (the
"Option Securities").
You have advised the Company that you and the other Underwriters desire
to purchase, severally, the Securities, and that you have been authorized by the
Underwriters to execute this Agreement on their behalf. The Company confirms the
agreements made by it with respect to the purchase of the Securities by the
several Underwriters on whose behalf you are signing this Agreement, as follows:
1. Representations and Warranties of the Company.
The Company, jointly and severally with each of its wholly owned
subsidiaries, represents and warrants to, and agrees with each of the
Underwriters as of the Effective Date (as defined above), the date of this
Agreement, the Closing Date (as hereinafter defined) and the Option Closing Date
(as hereinafter defined) that:
(a) A registration statement (File No. 333-______) on Form SB-2
relating to the public offering of the Securities, including a preliminary form
of the prospectus, copies of which have heretofore been delivered to you, has
been prepared by the Company in conformity with the requirements of the Act, and
the rules and regulations (the "Rules and Regulations") of the Commission
thereunder, and has been filed with the Commission under the Act. The Company
has prepared in the same manner and proposes to file, prior to the Effective
Date of such registration statement, an additional amendment or amendments to
such registration statement, including a final form of Prospectus, copies of
which shall be delivered to you. "Preliminary Prospectus" shall mean each
prospectus filed pursuant to the Rules and Regulations under the Act prior to
the Effective Date. The registration statement (including all financial
schedules and exhibits) as amended at the time it becomes effective and the
final prospectus included therein are respectively referred to as the
"Registration Statement" and the "Prospectus," except that (i) if the prospectus
first filed by the Company pursuant to Rule 424(b) of the Rules and Regulations
shall differ from said prospectus as then amended, the term "Prospectus" shall
mean the prospectus first filed pursuant to Rule 424(b), and (ii) if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement and prior
to the Option Closing Date (as hereinafter defined), the terms "Registration
Statement" and "Prospectus" shall include such registration statement and
prospectus as so amended, and the term "Prospectus" shall include the prospectus
as so supplemented, or both, as the case may be.
(b) At the Effective Date and at all times subsequent thereto up to the
Option Closing Date, if any, and during such longer period as the Prospectus may
be required to be delivered in connection with sales by the Underwriters or any
selected dealers: (i) the Registration Statement and Prospectus will in all
respects conform to the requirements of the Act and the Rules and Regulations;
and (ii) neither the Registration Statement nor the Prospectus will include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make statements therein, in light of the
circumstances under which they are made, not misleading;
2
<PAGE> 3
provided, however, that the Company makes no representations, warranties or
agreement as to information contained in or omitted from the Registration
Statement or Prospectus in reliance upon, and in conformity with, written
information furnished to the Company by the Underwriters specifically for use in
the preparation thereof. It is understood that the statements set forth in the
Prospectus with respect to stabilization, under the heading "Underwriting" and
regarding the identity of counsel to the Underwriters under the heading "Legal
Matters" constitute the only information furnished in writing by the
Underwriters for inclusion in the Prospectus.
(c) The Company and each subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with full power and authority (corporate and
other) to own its properties and conduct its business as described in the
Prospectus and is duly qualified to do business as a foreign corporation and is
in good standing in all other jurisdictions in which the nature of its business
or the character or location of its properties requires such qualification,
except where failure to so qualify will not materially affect the Company's
business, properties or financial condition.
(d) The authorized, issued and outstanding securities of the Company as
of the date of the Prospectus is as set forth in the Prospectus under
"Capitalization;" all of the issued and outstanding securities of the Company
have been, or will be when issued as set forth in the Prospectus, duly
authorized, validly issued and fully paid and non-assessable; the issuances and
sales of all such securities complied in all material respects with applicable
federal and state securities laws; the holders thereof have no rights of
rescission against the Company with respect thereto, and are not subject to
personal liability by reason of being such holders; none of such securities were
issued in violation of the preemptive rights of any holders of any security of
the Company or similar contractual rights granted by the Company; except as set
forth in the Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or agreements or other rights to
convert any obligation into, any securities of the Company have been granted or
entered into by the Company; and all of the securities of the Company, issued
and to be issued as set forth in the Registration Statement, conform to all
statements relating thereto contained in the Registration Statement and
Prospectus.
(e) The Shares are duly authorized, and when issued, delivered and paid
for pursuant to this Agreement, will be duly authorized, validly issued, fully
paid and non-assessable and free of preemptive rights of any security holder of
the Company. Neither the filing of the Registration Statement nor the offering
or sale of the Shares as contemplated in this Agreement gives rise to any
rights, other than those which have been waived or satisfied, for or relating to
the registration of any securities of the Company, except as described in the
Registration Statement and Prospectus.
The Warrants have been duly authorized and, when issued, delivered and
paid for pursuant to this Agreement, will have been duly authorized, issued and
delivered and will constitute valid and legally binding obligations of the
Company enforceable in accordance with their terms and entitled to the benefits
provided by the warrant agreement pursuant to which such Warrants are to be
issued (the "Warrant Agreement"), which will be substantially in the form filed
as an exhibit to the Registration Statement. The shares of Common Stock issuable
upon exercise of the Warrants have been reserved for issuance and when issued in
accordance with the terms of the Warrants and Warrant Agreement, will be duly
and validly authorized, validly issued, fully paid and non-assessable, free of
preemptive rights and no personal liability will attach to the ownership
thereof.
3
<PAGE> 4
The Warrant exercise period and the Warrant exercise price may not be changed or
revised by the Company without the prior written consent of First London. The
Warrant Agreement has been duly authorized and, when executed and delivered
pursuant to this Agreement will constitute the valid and legally binding
obligation of the Company enforceable in accordance with its terms.
The Units underlying the Representative Warrants and the Securities
constituting a part thereof, (each of which as defined in the Representative's
Warrant Agreement described in Section 12 herein and all of which shall be
collectively referred to as the "Representative's Warrants") have been duly
authorized and, when issued, delivered and paid for pursuant to the
Representative's Warrant Agreement, will have been duly authorized, issued and
delivered and will constitute valid and legally binding instruments of the
Company enforceable in accordance with their terms and entitled to the benefits
provided by the Representative's Warrant Agreement. The Shares and the Warrants,
as well as the Shares of Common Stock underlying the Warrants, have been
reserved for issuance and when issued in accordance with the terms thereof, will
be duly and validly authorized, validly issued, fully paid and non-assessable,
free of preemptive rights and no personal liability will attach to the ownership
thereof. The exercise period and the exercise price for each of the
Representatives Warrants and the Underlying Warrants may not be changed or
revised by the Company without the prior written consent of First London.
(f) This Agreement, the Warrant Agreement and the Representative's
Warrant Agreement have been duly and validly authorized, executed and delivered
by the Company, and assuming due execution of this Agreement by the other party
hereto, constitute valid and binding obligations of the Company enforceable
against the Company in accordance with their terms, except as enforceability may
be limited by bankruptcy, insolvency or other laws affecting the rights of
creditors generally. The Company has full power and lawful authority to
authorize, issue and sell the Securities to be sold by it hereunder on the terms
and conditions set forth herein, and no consent, approval, authorization or
other order of any third party or any governmental authority is required in
connection with such authorization, execution and delivery or with the
authorization, issuance and sale of the Securities or the securities to be
issued pursuant to the Representative's Warrant Agreement, except such as may be
required under the Act or state securities laws, or as otherwise have been
obtained.
(g) Except as described in the Prospectus, the Company is not in
material violation, breach of or default under, and consummation of the
transactions herein contemplated and the fulfillment of the terms of this
Agreement will not conflict with, or result in a breach of, or constitute a
material default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any of the property or assets of the Company or any
of the terms or provisions of any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company is a party or by
which the Company may be bound or to which any of the property or assets of the
Company is subject, nor will such action result in any material violation of the
provisions of the certificate of incorporation or bylaws as amended of the
Company, or any statute or any order, rule or regulation applicable to the
Company of any court or of any regulatory authority or other governmental body
having jurisdiction over the Company.
(h) Subject to the qualifications stated in the Prospectus, the Company
have good and marketable title to all properties and assets described in the
Prospectus as owned by each of them, free and clear of all liens, charges,
encumbrances or restrictions, except such as are not materially
4
<PAGE> 5
significant or important in relation to its business; all of the material leases
and subleases under which the Company is the lessor or sublessor of properties
or assets or under which the Company holds properties or assets as lessee or
sublessee as described in the Prospectus are in full force and effect, and,
except as described in the Prospectus, the Company is not in default in any
material respect with respect to any of the terms or provisions of any of such
leases or subleases, and no claim has been asserted by anyone, adverse to rights
of the Company as lessor, sublessor, lessee, or sublessee under any of the
leases or subleases mentioned above, or affecting or questioning the right of
the Company to continued possession of the leased or subleased premises or
assets under any such lease or sublease except as described or referred to in
the Prospectus; and the Company own or lease all such properties described in
the Prospectus as are necessary to its operations as now conducted and, except
as otherwise stated in the Prospectus, as proposed to be conducted as set forth
in the Prospectus.
(i) Killman, Murrell & Company, P.C., which has examined the financial
statements, together with the related schedules and notes, for the Company and
any subsidiary of it for the periods therein stated, which have been filed with
the Commission as a part of the Registration Statement, which are included in
the Prospectus, are with respect to the Company independent accountants within
the meaning of the Act and the Rules and Regulations.
(j) The financial statements, together with the related notes and
schedules forming a part of the Registration Statement and the Prospectus,
fairly present the financial position and the results of operations of the
Company at the respective dates and for the respective periods to which they
apply; and all audited financial statements, together with the related notes and
schedules, and the unaudited financial consolidated financial information of the
Company have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved except as may be
otherwise stated therein. The selected and summary financial and statistical
data included in the Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules are
required to be included in the Registration Statement. The Company's internal
accounting controls and procedures are sufficient to cause the Company to
prepare financial statements which comply in all material respects with
generally accepted accounting principles applied on a basis which is consistent
during the periods involved. Since the inception of the Company, nothing has
been brought to the attention of the Company's management that would result in
any reportable condition relating to the Company's internal accounting
procedures, weaknesses or controls.
(k) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and the Prospectus and to and including the
Option Closing Date, except as set forth in or contemplated by the Registration
Statement and the Prospectus, (i) the Company has not incurred and will not have
incurred any material liabilities or obligations, direct or contingent, and has
not entered into and will not have entered into any material transactions other
than in the ordinary course of business and/or as contemplated in the
Registration Statement and the Prospectus; (ii) the Company has not and will not
have paid or declared any dividends or have made any other distribution on its
capital stock; (iii) there has not been any change in the capital stock of, or
any incurrence of long-term debt by the Company; (iv) the Company has not issued
any options, warrants or other rights to purchase the capital stock of the
Company; and (v) there has not been and will not have been any material adverse
change in the business, financial condition or results of
5
<PAGE> 6
operations of the Company, or in the book value of the assets of the Company,
arising for any reason whatsoever.
(l) Except as set forth in the Prospectus, there is not pending or, to
the knowledge of the Company, threatened, any material action, suit, proceeding,
inquiry, arbitration or investigation against the Company, or any of the
officers or directors of the Company, or any material action, suit, proceeding,
inquiry, arbitration, or investigation, which might result in any material
adverse change in the condition (financial or other), business prospects, net
worth, or properties of the Company.
(m) Except as disclosed in the Prospectus, the Company has filed all
necessary federal, state and foreign income and franchise tax returns and has
paid all taxes shown as due thereon; and there is no tax deficiency which has
been or to the knowledge of the Company might be asserted against the Company
that has not been provided for in the financial statements.
(n) Except as set forth in the Prospectus, each of the Company has
material licenses, permits and other governmental authorizations currently
required for the conduct of its business or the ownership of its property as
described in the Prospectus and is in all material respects in compliance
therewith and owns or possesses adequate right to use all material patents,
patent applications, trademarks, service marks, trade-names, trademark
registrations, service mark registrations, copyrights, and licenses necessary
for the conduct of such business and has not received any notice of conflict,
with the asserted rights of others in respect thereof. To the best of the
Company's knowledge, none of the activities or business of the Company are in
violation of, or cause the Company to violate, any law, rule, regulation or
order of the United States, any state, county or locality, or of any agency or
body of the United States or of any state, county or locality, the violation of
which would have a material adverse impact upon the condition (financial or
otherwise), business, property, prospective results of operations, or net worth
of the Company.
(o) The Company has not, directly or indirectly, at any time (i) made
any contributions to any candidate for political office, or failed to disclose
fully any such contribution, in violation of law or (ii) made any payment to any
state, federal or foreign governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law.
(p) On the Closing Dates (herein defined) all transfer or other taxes
(including franchise, capital stock or other tax, other than income taxes,
imposed by any jurisdiction), if any, that are required to be paid in connection
with the sale and transfer of the Securities to the several Underwriters will
have been fully paid or provided for by the Company and all laws imposing such
taxes will have been fully complied with.
(q) All contracts and other documents which are required to be
described in or filed as exhibits to the Registration Statement have been so
described and/or filed.
(r) Except as described in the Registration Statement and Prospectus,
no holders of Common Stock or of any other securities of the Company have the
right to include such Common Stock or other securities in the Registration
Statement and Prospectus.
(s) Except as set forth in or contemplated by the Registration
Statement and the
6
<PAGE> 7
Prospectus, the Company has not any material contingent liabilities.
(t) Except for its subsidiaries, the Company has no equity interest in
any corporation, limited liability company, partnership, joint venture, trust or
other entity and has not entered into any binding agreements to obtain any such
equity interest.
(u) The Commission has not issued an order preventing or suspending the
use of any Preliminary Prospectus with respect to the offer and sale of the
Securities and each Preliminary Prospectus, as of its date, has conformed fully
in all material respects with the requirements of the Act and the Rules and
Regulations and did not include any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein not
misleading.
(v) The Company, nor, to the Company's knowledge, any of its officers,
directors, employees or stockholders, have taken or will take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any of the securities of the Company.
(w) Item 26 of Part II of the Registration Statement accurately
discloses all unregistered securities sold by the Company within the three year
period prior to the date as of which information is presented in the
Registration Statement. All of such securities were sold in transactions which
were exempt from the registration provisions of the Act and not in violation of
Section 5 thereof.
(x) Other than as set forth in the Prospectus, the Company has not
entered into any agreement pursuant to which any person is entitled, either
directly or indirectly, to compensation from the Company for services as a
finder in connection with the proposed offering, and the Company agrees to
indemnify and hold harmless the Underwriters against any losses, claims, damages
or liabilities, joint or several, which shall include, but not be limited to,
all costs to defend against any such claim, so long as such claim arises out of
agreements made or allegedly made by the Company.
(y) Based upon written representations received by the Company, no
officer, director or 5% or greater stockholder of the Company has any direct or
indirect affiliation or association with any member of the National Association
of Securities Dealers, Inc. ("NASD"), except as disclosed to the Representative
in writing, and no beneficial owner of the Company's unregistered securities has
any direct or indirect affiliation or association with any NASD member except as
disclosed to the Representative in writing. The Company will advise the
Representative and the NASD if any 5% or greater shareholder of the Company is
or becomes an affiliate or associated person of an NASD member participating in
the distribution.
(z) The Company is in compliance in all material respects with all
federal, state and local laws and regulations respecting the employment of its
employees and employment practices, terms and conditions of employment and wages
and hours relating thereto. There are no pending investigations involving the
Company by the U.S. Department of Labor, or any other governmental agency
responsible for the enforcement of such federal, state or local laws and
regulations. There is no unfair labor practice charge or complaint against the
Company pending before the National Labor Relations Board or any strike,
picketing, boycott, dispute, slowdown or stoppage pending or to the knowledge of
the Company, threatened against or involving the Company or any predecessor
7
<PAGE> 8
entity. No question concerning representation exists respecting the employees of
the Company and no collective bargaining agreement or modification thereof is
currently being negotiated by the Company. No grievance or arbitration
proceeding is pending under any expired or existing collective bargaining
agreements of the Company.
(aa) The Company maintains, sponsors and contributes to a program or
arrangement that is an "employee pension benefit plan" an "employee welfare
benefit plan," or a "multi-employer plan" as such terms are defined in Sections
3(2), 3(i) and 3(37), respectively, of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company has not
maintained or contributed to a defined benefit plan, as defined in Section 3(35)
of ERISA. All requirements and obligations of the Company have been fulfilled
thereunder.
(bb) Based upon written representations received from the officers and
directors of the Company, except as disclosed in the Prospectus, during the past
five years, none of the officers or directors of the Company have been:
(1) The subject of a petition under the federal bankruptcy
laws or any state insolvency law filed by or against them, or by a
receiver, fiscal agent or similar officer appointed by a court for
their business or property, or any partnership in which either or them
was a general partner at or within two years before the time of such
filing, or any corporation or business association of which either of
them was an executive officer at or within two years before the time of
such filing;
(2) Convicted in a criminal proceeding or a named subject of a
pending criminal proceeding (excluding traffic violations and other
minor offenses);
(3) The subject of any order, judgment, or decree not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining either of them from,
or otherwise limiting, any of the following activities:
(i) acting as a futures commission merchant,
introducing broker, commodity trading advisor, commodity pool
operator, floor broker, leverage transaction merchant, any
other person regulated by the Commodity Futures Trading
Commission, or an associated person of any of the foregoing,
or as an investment adviser, underwriter, broker or dealer in
securities, or as an affiliated person, director or employee
of any investment company, bank, savings and loan association
or insurance company, or engaging in or continuing any conduct
or practice in connection with any such activity;
(ii) engaging in any type of business practice; or
(iii) engaging in any activity in connection with the
purchase or sale of any security or commodity or in connection
with any violation of federal or state securities law or
federal commodity laws.
(4) The subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated of any federal or state
authority barring, suspending or otherwise limiting for more than 60
days either of their right to engage in any activity described in
paragraph (3)(i) above, or be associated with persons engaged in any
such activity;
8
<PAGE> 9
(5) Found by any court of competent jurisdiction in a civil
action or by the Commission to have violated any federal or state
securities law, and the judgment in such civil action or finding by the
Commission has not been subsequently reversed, suspended or vacated; or
(6) Found by a court of competent jurisdiction in a civil
action or by the Commodity Futures Trading Commission to have violated
any federal commodities law, and the judgment in such civil action or
finding by the Commodity Futures Trading Commission has not been
subsequently reversed, suspended or vacated.
(cc) Based upon written representations received from the officers and
directors of the Company, each of the officers and directors of the Company has
reviewed the sections in the Prospectus relating to their biographical data and
equity ownership position in the Company, and all information contained therein
is true and accurate.
2. Purchase, Delivery and Sale of the Securities.
(a) Subject to the terms and conditions of this Agreement and upon the
basis of the representations, warranties and agreements herein contained, the
Company hereby agrees to issue and sell to the Underwriters an aggregate of
2,000,000 Units at $4.67 per Unit, (the public offering price less 10%), at the
place and time hereinafter specified, in accordance with the number of Units set
forth opposite the names of the Underwriters in Schedule A attached hereto plus
any additional Securities which such Underwriters may become obligated to
purchase pursuant to the provisions of Section 9 hereof. The Securities shall
consist of 2,000,000 Units, (each Unit of which consisting of One Share, One
Series A Warrant and One Series B Warrant) to be purchased from the Company, and
the price at which the Underwriters shall sell the Securities to the public
shall be $5.1875 per Unit (consisting of $5.00 per share, $.125 per Series A
Warrant and $.0625 per Series B Warrant.).
Delivery of the Securities against payment therefor shall take place at
the offices of First London Securities Corporation, 2600 State Street, Dallas,
Texas 75204 (or at such other place as may be designated by the Representative)
at 10:00 a.m., Eastern Time, on such date after the Effective Date as the
Representative shall designate, but not later than ten business days (holidays
excepted) following the first date that any of the Securities are released to
you, such time and date of payment and delivery for the Securities being herein
called the "Closing Date."
(b) In addition, subject to the terms and conditions of this Agreement,
and upon the basis of the representations, warranties and agreements herein
contained, the Company hereby grants the "Option" to the Underwriters (or, at
the option of the Representative, to the Representative, individually) to
purchase all or any part of an aggregate of an additional 300,000 Units at the
same price per Unit as the Underwriters shall pay for the Securities being sold
pursuant to the provisions of subsection (a) of this Section 2 (such additional
Securities being referred to herein as the "Option Securities"). This Option may
be exercised within 45 days after the Effective Date upon notice by the
Underwriters (or the Representative, individually) to the Company advising as to
the amount of
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<PAGE> 10
Option Securities as to which the Option is being exercised, the names and
denominations in which the certificates for such Option Securities are to be
registered and the time and date when such certificates are to be delivered.
Such time and date shall be determined by the Underwriters (or the
Representative, individually) but shall not be later than ten full business days
after the exercise of the Option, nor in any event prior to the Closing Date,
and such time and date is referred to herein as the "Option Closing Date."
Delivery of the Option Securities against payment therefor shall take place at
the offices of First London Securities Corporation. The Option granted hereunder
may be exercised only to cover over-allotments in the sale by the Underwriters
of the Securities referred to in subsection (a) above. In the event the Company
declares or pays a dividend or distribution on its Common Stock, whether in the
form of cash, shares of Common Stock or any other consideration, prior to the
Option Closing Date, such dividend or distribution shall also be paid on the
Option Securities on the Option Closing Date.
(c) The Company will make the certificates for the Securities to be
sold hereunder available to you for inspection at least two full business days
prior to the Closing Date and the Option Closing Date, respectively, at the
offices of First London, and such certificates shall be registered in such names
and denominations as you may request. Time shall be of the essence and delivery
at the time and place specified in this Agreement is a further condition to the
obligations of the Company to each Underwriter.
Definitive certificates in negotiable form for the Securities to be
purchased by the Underwriters hereunder will be delivered by the Company to you
for the accounts of the several Underwriters against payment of the respective
purchase prices by the several Underwriters, by certified or bank cashier's
checks in New York Clearing House funds, payable to the order of the Company or
by wire transfer in New York Clearing House funds.
In addition, in the event the Underwriters (or the Representative,
individually) exercise the Option to purchase from the Company all or any
portion of the Option Securities pursuant to the provisions of subsection (b)
above, payment for such Securities shall be made payable in New York Clearing
House funds at the offices of First London Securities Corporation, or by wire
transfer, at the time and date of delivery of such Securities as required by the
provisions of subsection (b) above, against receipt of the certificates for such
Securities by the Representative for the respective accounts of the several
Underwriters registered in such names and in such denominations as the
Representative may request.
It is understood that the Representative, individually and not as
Representative of the several Underwriters, may (but shall not be obligated to)
make any and all payments required pursuant to this Section 2 on behalf of any
Underwriters whose check or checks shall not have been received by the
Representative at the time of delivery of the Securities to be purchased by such
Underwriter or Underwriters. Any such payment by the Representative shall not
relieve any such Underwriter or Underwriters of any of its or their obligations
hereunder. It is also understood that the Representative individually, rather
than all of the Underwriters, may (but shall not be obligated to) purchase the
Option Securities referred to in subsection (b) of this Section 2, but only to
cover over-allotments.
It is understood that the several Underwriters propose to offer the
Securities to be purchased hereunder to the public upon the terms and conditions
set forth in the Registration Statement, after the Registration Statement is
declared effective by the Commission.
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<PAGE> 11
3. Covenants of the Company. The Company covenants and agrees with the
several Underwriters that:
(a) The Company, upon notification from the Commission that the
Registration Statement has become effective, will so advise you and will not at
any time, whether before or after the Effective Date, file any amendment to the
Registration Statement or supplement to the Prospectus of which you shall not
previously been advised and furnished with a copy or to which you or your
counsel shall have objected in writing, acting reasonably, or which is not in
compliance with the Act and the Rules and Regulations. At any time prior to the
later of (i) the completion by the Underwriters of the distribution of the
Securities as contemplated hereby; or (ii) 25 days after the date on which the
Registration Statement shall have become or been declared effective, the Company
will prepare and file with the Commission, promptly upon your request, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary or advisable in connection with the distribution of the Securities
and as mutually agreed to by the Company and the Representative.
After the Effective Date and as soon as the Company is advised thereof,
the Company will advise you, and confirm the advice in writing, of the receipt
of any comments of the Commission, of the effectiveness of any post-effective
amendment to the Registration Statement, of the filing of any supplement to the
Prospectus or any amended Prospectus, of any request made by the Commission for
amendment of the Registration Statement or for supplementing of the Prospectus
or for additional information with respect thereto, of the issuance by the
Commission or any state or regulatory body of any stop order or other order
suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus, or of the
suspension of the qualification of the Securities for offering in any
jurisdiction, or of the institution of any proceedings for any of such purposes,
and will use its best efforts to prevent the issuance of any such order, and, if
issued, to obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each
Preliminary Prospectus and Prospectus, and the Company has consented and hereby
consents to the use of such copies for the purposes permitted by the Act. The
Company authorizes the Underwriters and the selected dealers to use the
Prospectus in connection with the sale of the Securities for such period as in
the opinion of counsel to the Underwriters the use thereof is required to comply
with the applicable provisions of the Act and the Rules and Regulations. In case
of the happening, at any time within such period as a Prospectus is required
under the Act to be delivered in connection with sales by the Underwriters or
the selected dealers, of any event of which the Company has knowledge and which
materially affects the Company or the securities of the Company, or which in the
opinion of counsel for the Company or counsel for the Underwriters, should be
set forth in an amendment to the Registration Statement or a supplement to the
Prospectus, in order to make the statements therein not then misleading, in
light of the circumstances existing at the time the Prospectus is required to be
delivered to a purchaser of the Securities, or in case it shall be necessary to
amend or supplement the Prospectus to comply with law or with the Act and the
Rules and Regulations, the Company will notify you promptly and forthwith
prepare and furnish to you copies of such amended Prospectus or of such
supplement to be attached to the Prospectus, in such quantities as you may
reasonably request, in order that the Prospectus, as so amended or supplemented,
will not contain any untrue
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<PAGE> 12
statement of a material fact or omit to state any material facts necessary in
order to make the statements in the Prospectus, in the light of the
circumstances under which they are made, not misleading. The preparation and
furnishing of any such amendment or supplement to the Registration Statement or
amended Prospectus or supplement to be attached to the Prospectus shall be
without expense to the Underwriters.
The Company will comply with the Act, the Rules and Regulations
thereunder, the Securities Exchange Act of 1934 (the "1934 Act"), and the rules
and regulations thereunder in connection with the offering and issuance of the
Securities.
(b) The Company will qualify to register the Securities for sale under
the securities or "blue sky" laws of such jurisdictions as the Representative
may designate and will make such applications and furnish such information as
may be required for that purpose and to comply with such laws, provided the
Company shall not be required to qualify as a foreign corporation or a dealer in
securities or to execute a general consent to service of process in any
jurisdiction in any action other than one arising out of the offering or sale of
the Securities. The Company will, from time to time, prepare and file such
statements and reports as are or may be required to continue such qualification
in effect for so long a period as the Underwriters may reasonably request.
(c) If the sale of the Securities provided for herein is not
consummated, the Company shall pay all costs and expenses incident to the
performance of the Company's obligations hereunder, including, but not limited
to, all such expenses itemized in Section 8(a) and 8(c) hereof, and the
out-of-pocket expenses of $25,000 previously paid to the Representative, if the
offering for any reason is terminated. For the purposes of this sub-paragraph,
the Representative shall be deemed to have assumed such expenses when they are
billed or incurred, regardless of whether such expenses have been paid. The
Representative shall not be responsible for any expenses of the Company or
others, or for any charges or claims relative to the proposed public offering
whether or not consummated.
(d) The Company will deliver to you at or before the Closing Date two
signed copies of the Registration Statement, including all financial statements
and exhibits filed therewith, and of each amendment or supplement thereto. The
Company will deliver to or upon the order of the several Underwriters, from time
to time until the Effective Date of the Registration Statement, as many copies
of any Preliminary Prospectus filed with the Commission prior to the Effective
Date of the Registration Statement as the Underwriters may reasonably request.
The Company will deliver to the Underwriters on the Effective Date of the
Registration Statement and thereafter for so long as a Prospectus is required to
be delivered under the Act, from time to time, as many copies of the Prospectus,
in final form, or as thereafter amended or supplemented as the several
Underwriters may from time to time reasonably request.
(e) For so long as the Company is a reporting company under either
Section 12 or 15 of the 1934 Act, the Company, at its expense, will furnish to
the Representative during the period ending five years from the Effective Date,
(i) as soon as practicable after the end of each fiscal year, a balance sheet of
the Company and any of its subsidiaries as at the end of such fiscal year,
together with statements of income, surplus and cash flow of the Company and any
subsidiaries for such fiscal year, all in reasonable detail and accompanied by a
copy of the certificate or report thereon of independent accountants; (ii) as
soon as they are available, a copy of all reports (financial or other) mailed to
security holders; (iii) as soon as they are available, a copy of all
non-confidential
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<PAGE> 13
documents, including annual reports, periodic reports and financial statements,
furnished to or filed with the Commission under the Act and the 1934 Act; (iv)
copies of each press release, news item and article with respect to the
Company's affairs released by the Company; and (v) such other information as you
may from time to time reasonably request.
(f) In the event the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its stockholders
generally.
(g) The Company will make generally available to its stockholders and
to the registered holders of its Warrants and deliver to you as soon as it is
practicable, but in no event later than the first day of the sixteenth full
calendar month following the Effective Date, an earnings statement (which need
not be audited) covering a period of at least twelve consecutive months
beginning with the Effective Date of the Registration Statement, which shall
satisfy the requirements of Section 11(a) of the Act.
(h) On the Closing Date, the Company shall have taken the necessary
action to become a reporting company under Section 12 of the 1934 Act, and the
Company will make all filings required to, and will have obtained approval for,
the listing of the Shares and Warrants on The Nasdaq SmallCap Market, the
Pacific Tier II Exchange or a listing on a national market, and will use its
best efforts to maintain such listing for at least five years from the date of
this Agreement.
(i) For such period as the Company's securities are registered under
the 1934 Act, the Company will hold an annual meeting of stockholders for the
election of directors within 180 days after the end of each of the Company's
fiscal years and, within 150 days after the end of each of the Company's fiscal
years will provide the Company's stockholders with the audited financial
statements of the Company as of the end of the fiscal year just completed prior
thereto. Such financial statements shall be those required by Rule 14a-3 under
the 1934 Act and shall be included in an annual report pursuant to the
requirements of such Rule.
(j) The Company will apply the net proceeds from the sale of the
Securities substantially in accordance with its statement under the caption "Use
of Proceeds" in the Prospectus, and will file such reports with the Commission
with respect to the sale of the Securities and the application of the proceeds
therefrom as may be required by Sections 12, 13 and/or 15 of the 1934 Act and
pursuant to Rule 463 under the Act.
(k) The Company will, promptly upon your request, prepare and file with
the Commission any amendments or supplements to the Registration Statement,
Preliminary Prospectus or Prospectus and take any other action, which in the
reasonable opinion of counsel to the Underwriters and the Company may be
reasonably necessary or advisable in connection with the distribution of the
Securities and will use its best efforts to cause the same to become effective
as promptly as possible.
(l) On the Closing Date the Company shall execute and deliver to you
the Representative" Warrant Agreement. The Representative's Warrant Agreement
and Warrant Certificates will be substantially in the form of the
Representative's Warrant Agreement and Warrant Certificates filed as an exhibit
to the Registration Statement.
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<PAGE> 14
(m) The Company will reserve and keep available for issuance that
maximum number of its authorized but unissued securities which are issuable upon
exercise of the warrants issuable pursuant to the Representative's Warrant
Agreement outstanding from time to time.
(n) Each beneficial owner of the Company's securities (including
Warrants, Options and Common Stock of the Company), as of the Effective Date,
shall agree in writing, in a form satisfactory to the Representative and Nasdaq,
not to sell, transfer or otherwise dispose of any of such securities or
underlying securities (except in a transaction other than on the open market
with a transferee who agrees to be bound by this provision) during the period of
time, commencing on the Effective Date, stated for each such beneficial owner on
Schedule B (the "lock-up period"), or any longer period required by any state or
required by Nasdaq as a condition to listing on The Nasdaq SmallCap Market,
without the prior written consent of First London and Nasdaq. Without the prior
written consent of Nasdaq, the Company shall not, directly or indirectly,
release any individual from his lock-up agreement or effect the transfer on its
books of any shares sold in contravention of a lock-up agreement. Any of such
securities that are originally registered in a name of a original beneficial
owner and are subsequently registered under a different name will be subject to
such original beneficial owner's lock-up period. Sales of the Company's
securities by officers and/or directors of the Company prior to the expiration
of their respective lock-up periods shall be effected through the
Representative.
(o) The Company shall pay to the Representative upon the exercise of
Warrants a fee equal to 5% of the gross proceeds received by the Company from
the exercise of the Warrants. Such fee will be paid to the Representative or
their designees no sooner than 12 months after the Effective Date. Additionally,
the Representative or their designees must be designated in writing by the
Warrant holder as having solicited the Warrant in order to receive the fee and
such fee shall not be paid with respect to Warrants held in a discretionary
account without the prior written approval of such exercise by the discretionary
account holder.
(p) Prior to the Closing Date, the Company shall at its own expense,
undertake to list the Company's securities in the appropriate recognized
securities manual or manuals published by Standard & Poor's Corporation and such
other manuals as the Representative may designate, such listings to contain the
information required by such manuals and the Uniform Securities Act. The Company
hereby agrees to use its best efforts to maintain such listing for a period of
not less than five years unless the Company's securities otherwise qualify for a
secondary market trading exemption. The Company shall take such action as may be
reasonably requested by the Representative to obtain a secondary market trading
exemption in such states as may be reasonably requested by the Representative.
(q) During the one year period commencing on the Closing Date, the
Company will not, without the prior written consent of First London, offer,
sell, contract to sell grant options or warrants to purchase or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock except for securities issued in
connection with an acquisition or merger by the Company or upon the issuance of
Common Stock upon the exercise of Warrants.
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<PAGE> 15
(r) Prior to the Closing Date, the Company will not issue, directly or
indirectly, without the prior consent of First London, any press release or
other communication or hold any press conference with respect to the Company or
its activities or the offering of the Securities other than routine customary
advertising of the Company's products and services, and except as required by
any applicable law or the directives of any relevant regulatory authority in any
relevant jurisdiction.
(s) The Company shall employ the services of a firm of independent
certified public accountants in connection with the preparation of the financial
statements to be included in any registration statement or similar disclosure
document to be filed by the Company hereunder, or any amendment or supplement
thereto. For a period of five years from the Effective Date, the Company, at its
expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit) the Company's financial statements for
each of the first three fiscal quarters prior to the announcement of quarterly
financial information, the filing of the Company's quarterly report and the
filing of quarterly financial information to stockholders.
(t) The Company shall retain First Union Transfer & Trust Company as
the transfer agent for the securities of the Company, or such other transfer
agent as First London may agree to in writing. In addition, the Company shall
direct such transfer agent to furnish the Representative with daily transfer
sheets as to each of the Company's securities as prepared by the Company's
transfer agent and copies of lists of stockholders and warrantholders as
reasonably requested by the Representative, for a five year period commencing
from the Closing Date.
(u) The Company shall cause the Depository Trust Company, or such other
depository of the Company's securities, to deliver a "special security position
report" to the Representative on a daily and weekly basis at the expense of the
Company, for a five year period from the Effective Date.
(v) Following the Effective Date, the Company shall, at its sole cost
and expense, prepare and file such Blue Sky applications with such jurisdictions
as the Representative shall designate and the Company may reasonably agree.
(w) On the Effective Date and for a period of three years thereafter,
the Company's Board of Directors shall consist of a minimum of seven persons,
two of whom shall be independent and not otherwise affiliated with the Company
or associated with any of the Company's affiliates. First London Securities
Corporation shall have the right for a period of two years from the Effective
Date to nominate one advisory director to the Board of Directors. The advisory
director shall have the same privileges as a normal director, including equal
compensation, but will not have the right to vote on issues presented to the
Board of Directors.
(x) For such period as any Warrants are outstanding, the Company shall
use its best efforts to cause post-effective amendments to the Registration
Statement or a new Registration Statement to become effective in compliance with
the Act and without any lapse of time between the effectiveness of any such
post-effective amendments and cause a copy of each Prospectus, as then amended,
to be delivered to each holder of record of a Warrant and to furnish to each of
the Underwriters and each dealer as many copies of each such Prospectus as such
Underwriter or such dealer may reasonably request. Such post-effective
amendments or new Registration Statements shall also register the
Representative" Warrant and all the securities underlying the Representative'
Warrant. The Company shall not call for redemption of any of the Warrants unless
a Registration Statement covering the securities underlying the Warrants or
Representative'
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<PAGE> 16
Warrant has been declared effective by the Commission and remains current at
least until the date fixed for redemption. In addition, the Warrants or
Representative' Warrant shall not be redeemable during the first year after the
Effective Date without the written consent of First London.
(y) Until such time as the securities of the Company are listed or
quoted on either the New York Stock Exchange, Nasdaq National Market or the
American Stock Exchange, the Company shall engage the Company's legal counsel to
deliver to the Representative a written opinion detailing those states in which
the Shares and Warrants of the Company may be traded in non-issuer transactions
under the Blue Sky laws of the fifty states ("Secondary Market Trading
Opinion"). The initial Secondary Market Trading opinion shall be delivered to
the Representative on the Effective Date, and the Company shall continue to
update such opinion and deliver same to the Representative on a timely basis,
but in any event at the beginning of each fiscal year, for a five year period,
if requested.
4. Conditions of Underwriters, Obligations. The obligations of the
several Underwriters to purchase and pay for the Securities which they have
agreed to purchase hereunder from the Company are subject, as of the date hereof
and as of the Closing Date and the Option Closing Date, as the case may be, to
the continuing accuracy of, and compliance with, the representations and
warranties of the Company herein, to the accuracy of statements of officers of
the Company made pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder, and to the following conditions:
(a) (i) The Registration Statement shall have become effective not
later than 5:00 p.m., Eastern Time, on the date of this Agreement, or at such
later time or on such later date as you may agree to in writing; (ii) at or
prior to the Closing Date or Option Closing Date, as the case may be, no stop
order suspending the effectiveness of the Registration Statement shall have been
issued by the Commission and no proceeding for that purpose shall have been
initiated or pending, or shall be threatened, or to the knowledge of the
Company, contemplated by the Commission; (iii) no stop order suspending the
effectiveness of the qualification or registration of the Securities under the
securities or "blue sky" laws of any jurisdiction (whether or not a jurisdiction
which you shall have specified) shall be threatened or to the knowledge of the
Company contemplated by the authorities of any such jurisdiction or shall have
been issued and in effect; (iv) any request for additional information on the
part of the Commission or any such authorities shall have been complied with to
the satisfaction of the Commission and any such authorities, and to the
satisfaction of counsel to the Underwriters; and (v) after the date hereof no
amendment or supplement to the Registration Statement or the Prospectus shall
have been filed unless a copy thereof was first submitted to the Underwriters
and the Underwriters did not object thereto.
(b) At the Closing Date, since the respective dates as of which
information is presented in the Registration Statement and the Prospectus, (i)
there shall not have been any material change in the capital stock or other
securities of the Company or any material adverse change in the long-term debt
of the Company except as set forth in or contemplated by the Registration
Statement, (ii) there shall not have been any material adverse change in the
general affairs, business, properties, condition (financial or otherwise),
management, or results of operations of the Company, whether or not arising from
transactions in the ordinary course of business, in each case other than as set
forth
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<PAGE> 17
in or contemplated by the Registration Statement or Prospectus; (iii) the
Company shall not have sustained any material interference with its business or
properties from fire, explosion, flood or other casualty, whether or not covered
by insurance, or from any labor dispute or any court or legislative or other
governmental action, order or decree, which is not set forth in the Registration
Statement and Prospectus; and (iv) the Registration Statement and the Prospectus
and any amendments or supplements thereto shall contain all statements which are
required to be stated therein in accordance with the Act and the Rules and
Regulations, and shall in all material respects conform to the requirements
thereof, and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto shall contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstance under
which they are made, not misleading.
(c) Except as set forth in the Prospectus, there is not pending or, to
the knowledge of the Company, threatened, any material action, suit, proceeding,
inquiry, arbitration or investigation against the Company, or any of the
officers or directors of the Company, or any material action, suit, proceeding,
inquiry, arbitration, or investigation, which might result in any material
adverse change in the condition (financial or other), business prospects, net
worth, or properties of the Company.
(d) Each of the representations and warranties of the Company contained
herein shall be true and correct as of this date and at the Closing Date as if
made at the Closing Date, and all covenants and agreements herein contained to
be performed on the part of the Company and all conditions herein contained to
be fulfilled or complied with by the Company at or prior to the Closing Date and
Option Closing Date shall have been duly performed, fulfilled or complied with.
(e) At each Closing Date, you shall have received the opinion, together
with copies of such opinion for each of the other several Underwriters, dated as
of each Closing Date, from Charles Barkley, counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, to the effect that:
(i) The Company and any subsidiaries have been duly
incorporated and are validly existing as corporations in good standing
under the laws of their jurisdictions of incorporation with full
corporate power and authority to own their properties and conduct their
business as described in the Registration Statement and Prospectus and
are duly qualified or licensed to do business as a foreign corporation
and are in good standing in each other jurisdiction in which the
ownership or leasing of their properties or conduct of their business
requires such qualification except for jurisdictions in which the
failure to so qualify would not have a material adverse effect on the
Company as a whole;
(ii) the authorized capitalization of the Company is as set
forth under "Capitalization" in the Prospectus; all shares of the
Company's outstanding stock and other securities requiring
authorization for issuance by the Company's Board of Directors have
been duly authorized, validly issued, are fully paid and non-assessable
and conform to the description thereof contained in the Prospectus; the
outstanding shares of Common Stock of the Company and other securities
have not been issued in violation of the preemptive rights of any
shareholder and the shareholders of the Company do not have any
preemptive rights or, to such counsel's knowledge, other rights to
subscribe for or to purchase securities of the Company, nor, to such
counsel's knowledge, are there any restrictions upon the voting or
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<PAGE> 18
transfer of any of the securities of the Company, except as disclosed
in the Prospectus; the Common Stock, the Shares, the Warrants, and the
securities contained in the Representative' Warrant Agreement conform
to the respective descriptions thereof contained in the Prospectus; the
Common Stock, the Shares, the Warrants, the Representative Warrants,
the shares of Common Stock to be issued upon exercise of the Warrants,
and the Securities underlying the Representative's Warrants, have been
duly authorized and, when issued, delivered and paid for, will be duly
authorized, validly issued, fully paid, non-assessable, free of
preemptive rights and no personal liability will attach to the
ownership thereof; all prior sales by the Company of the Company's
securities have been made in compliance with or under an exemption from
registration under the Act and applicable state securities laws and no
shareholders of the Company have any rescission rights against the
Company with respect to the Company's securities; a sufficient number
of shares of Common Stock has been reserved for issuance upon exercise
of the Warrants, the Representative Warrants, and the Warrants
underlying the Representative's Warrants, and to the best of such
counsel's knowledge, neither the filing of the Registration Statement
nor the offering or sale of the Securities as contemplated by this
Agreement gives rise to any registration rights or other rights, other
than those which have been waived or satisfied or described in the
Registration Statement;
(iii) this Agreement, the Representative' Warrant Agreement
and the Warrant Agreement have been duly and validly authorized,
executed and delivered by the Company and, assuming the due
authorization, execution and delivery of this Agreement by the
Representative, are the valid and legally binding obligations of the
Company, enforceable in accordance with their terms, except (a) as such
enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws from time to time in effect
which effect creditors, rights generally; and (b) no opinion is
expressed as to the enforceability of the indemnity provisions or the
contribution provisions contained in this Agreement;
(iv) the certificates evidencing the outstanding securities
of the Company, the Shares, the Common Stock, the Warrants and the
Representative' Warrants are in valid and proper legal form;
(v) to the best of such counsel's knowledge, except as set
forth in the Prospectus, there is not pending or threatened, any
material action, suit, proceeding, inquiry, arbitration or
investigation against the Company or any of the officers or directors
of the Company, nor any material action, suit, proceeding, inquiry,
arbitration, or investigation, which might materially and adversely
affect the condition (financial or otherwise), business prospects, net
worth, or properties of the Company;
(vi) the execution and delivery of this Agreement, the
Representative' Warrant Agreement, the Warrant Agreement, and the
incurrence of the obligations herein and therein set forth and the
consummation of the transactions herein or therein contemplated, will
not result in a violation of, or constitute a default under (a) the
Articles of Incorporation or Bylaws of the Company; (b) to the best of
such counsel's knowledge, any material obligations, agreement, covenant
or condition contained in any bond, debenture, note or other evidence
of indebtedness or in any contract, indenture, mortgage, loan
agreement,
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<PAGE> 19
lease, joint venture or other agreement or instrument to which the
Company is a party or by which it or any of its properties is bound; or
(c) to the best of such counsel's knowledge, any material order, rule,
regulation, writ, injunction, or decree of any government, governmental
instrumentality or court, domestic or foreign;
(vii) the Registration Statement has become effective under
the Act, and to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for that purpose have been instituted or are
pending before, or threatened by, the Commission; the Registration
Statement and the Prospectus (except for the financial statements and
other financial data contained therein, or omitted therefrom, as to
which such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the
Rules and Regulations;
(viii) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in
connection with the authorization, issuance, transfer, sale or delivery
of the Securities by the Company, in connection with the execution,
delivery and performance of this Agreement by the Company or in
connection with the taking of any action contemplated herein, or the
issuance of the Representative' Warrants or the securities underlying
the Representative' Warrants, other than registrations or
qualifications of the securities under applicable state or foreign
securities or Blue Sky laws and registration under the Act; and
Such opinion shall also cover such matters incident to the transactions
contemplated hereby as the Representative or counsel for the Representative
shall reasonably request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact; and may rely as to all matters of law, upon opinions of counsel
satisfactory to you and counsel to the Underwriters. The opinion of such counsel
to the Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel and that the Representative and they are justified
in relying thereon.
Such counsel shall also include a statement to the effect that such
counsel has participated in the preparation of the Registration Statement and
the Prospectus and nothing has come to the attention of such counsel to lead
such counsel to believe that the Registration Statement or any amendment thereto
at the time it became effective contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading or that the Prospectus or any supplement
thereto contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to make
statements therein, in light of the circumstances under which they are made, not
misleading (except, in the case of both the Registration Statement and any
amendment thereto and the Prospectus and any supplement thereto, for the
financial statements, notes thereto and other financial information and
statistical data contained therein, as to which such counsel need express no
opinion).
(f) You and the several Underwriters shall have received on each
Closing Date a certificate dated as of each Closing Date, signed by the Chief
Executive Officer and the Chief Financial Officer of the Company and such other
officers of the Company as the Underwriters may request, certifying that:
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(i) No order suspending the effectiveness of the
Registration Statement or stop order regarding the sale of the
Securities in effect and no proceedings for such purpose are pending or
are, to their knowledge, threatened by the Commission;
(ii) To their knowledge there is no litigation instituted or
threatened against the Company, or any officer or director of the
Company of a character required to be disclosed in the Registration
Statement which is not disclosed therein; to their knowledge there are
no contracts which are required to be summarized in the Prospectus
which are not so summarized; and to their knowledge there are no
material contracts required to be filed as exhibits to the Registration
Statement which are not so filed;
(iii) They have each carefully examined the Registration
Statement and the Prospectus and, to the best of their knowledge,
neither the Registration Statement nor the Prospectus nor any amendment
or supplement to either of the foregoing contains an untrue statement
of any material fact or omits to state any material fact required to be
stated therein or necessary to make the statement therein, in light of
the circumstances under which they are made, not misleading; and since
the Effective Date, to the best of their knowledge, there has occurred
no event required to be set forth in an amended or supplemented
Prospectus which has not been so set forth;
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any material adverse change in the condition of the Company,
financial or otherwise, or in the results of its operations, except as
reflected in or contemplated by the Registration Statement and the
Prospectus and except as so reflected or contemplated since such date,
there has not been any material transaction entered into by the
Company;
(v) The representations and warranties set forth in this
Agreement are true and correct in all material respects and the Company
has complied with all of its agreements herein contained;
(vi) Neither the Company nor any subsidiary is delinquent in
the filing of any federal, state and municipal tax return or the
payment of any federal, state or municipal taxes; they know of no
proposed re-determination or reassessment of taxes, adverse to the
Company, and the Company has paid or provided by adequate reserves for
all known tax liabilities except such delinquency that will not have a
material adverse affect on the Company;
(vii) They know of no material obligation or liability of the
Company, contingent or otherwise, not disclosed in the Registration
Statement and Prospectus;
(viii) This Agreement, the Representative' Warrant Agreement
and the Warrant Agreement, the consummation of the transactions herein
or therein contemplated, and the fulfillment of the terms hereof or
thereof, will not result in a breach by the Company of any terms of, or
constitute a default under, its Certificate of Incorporation or Bylaws,
any
20
<PAGE> 21
indenture, mortgage, lease, deed of trust, bank loan or credit
agreement or any other material agreement or undertaking of the Company
including, by way of specification but not by way of limitation, any
agreement or instrument to which the Company is now a party or pursuant
to which the Company has acquired any right and/or obligations by
succession or otherwise;
(ix) The financial statements, together with the related
notes and schedules forming a part of the Registration Statement and
the Prospectus, fairly present the financial position and the results
of operations of the Company at the respective dates and for the
respective periods to which they apply; and all audited financial
statements, together with the related notes and schedules, and the
unaudited financial consolidated financial information of the Company
have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved except
as may be otherwise stated therein. The selected and summary financial
and statistical data included in the Registration Statement present
fairly the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein.
Since the respective dates of such financial statements, there have
been no material adverse change in the condition or general affairs of
the Company, financial or otherwise, other than as referred to in the
Prospectus;
(x) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus,
except as may otherwise be indicated therein, the Company has not,
prior to the Closing Date, either (i) issued any securities or incurred
any material liability or obligation, direct or contingent, for
borrowed money, or (ii) entered into any material transaction other
than in the ordinary course of business. The Company has not declared,
paid or made any dividend or distribution of any kind on its capital
stock;
(xi) Based upon written representation from the officers and
directors of the Company they have reviewed the sections in the
Prospectus relating to their biographical data and equity ownership
position in the Company, and all information contained therein is true
and accurate; and
(xii) Based upon written representation from the officers and
directors of the Company except as disclosed in the Prospectus, during
the past five years, they have not been:
(1) Subject of a petition under the federal
bankruptcy laws or any state insolvency law filed by or
against them, or by a receiver, fiscal agent or similar
officer appointed by a court for their business or property,
or any partnership in which any of them was a general partner
at or within two years before the time of such filing, or any
corporation or business association of which any of them was
an executive officer at or within two years before the time of
such filing;
(2) Convicted in a criminal proceeding or a named
subject of a pending criminal proceeding (excluding traffic
violations and other minor offenses);
(3) The subject of any order, judgment, or decree not
subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining
either of them from, or otherwise limiting, any of the
following activities:
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<PAGE> 22
(i) acting as a futures commission
merchant, introducing broker, commodity trading
advisor, commodity pool operator, floor broker,
leverage transaction merchant, any other person
regulated by the Commodity Futures Trading
Commission, or an associated person of any of the
foregoing, or as an investment adviser, underwriter,
broker or dealer in securities, or as an affiliated
person, director or employee of any investment
company, bank, savings and loan association or
insurance company, or engaging in or continuing any
conduct or practice in connection with any such
activity;
(ii) engaging in any type of business
practice; or
(iii) engaging in any activity in connection
with the purchase or sale of any security or
commodity or in connection with any violation of
federal or state securities law or federal commodity
laws.
(4) The subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated of any federal or
state authority barring, suspending or otherwise limiting for
more than 60 days any of their right to engage in any activity
described in paragraph (3) (i) above, or be associated with
persons engaged in any such activity;
(5) Found by any court of competent jurisdiction in a
civil action or by the Commission to have violated any federal
or state securities law, and the judgment in such civil action
or finding by the Commission has not been subsequently
reversed, suspended or vacated; or
(6) Found by a court of competent jurisdiction in a
civil action or by the Commodity Futures Trading Commission to
have violated any federal commodities law, and the judgment in
such civil action or finding by the Commodity Futures Trading
Commission has not been subsequently reversed, suspended or
vacated.
(g) The Underwriters shall have received from Killman, Murrell &
Company, P.C., independent auditors to the Company, certificates or letters, one
dated and delivered on the date hereof and one dated and delivered on the
Closing Date, in form and substance satisfactory to the Underwriters, stating,
that:
(i) they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
Rules and Regulations;
(ii) the financial statements and the schedules included in
the Registration Statement and the Prospectus were examined by them
and, in their opinion, comply as to form in all material respects with
the applicable accounting requirements of the Act, the Rules and
Regulations and instructions of the Commission with respect to
Registration Statements on Form SB-2;
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<PAGE> 23
(iii) on the basis of inquiries and procedures conducted by
them (not constituting an examination in accordance with generally
accepted auditing standards), including a reading of the latest
available unaudited interim financial statements or other financial
information of the Company (with an indication of the date of the
latest available unaudited interim financial statements), inquiries of
officers of the Company who have responsibility for financial and
accounting matters, review of minutes of all meetings of the
shareholders and the Board of Directors of the Company and other
specified inquiries and procedures, nothing has come to their attention
as a result of the foregoing inquiries and procedures that causes them
to believe that:
(a) during the period from (and including) the date
of the financial statements in the Registration Statement and
the Prospectus to a specified date not more than five days
prior to the date of such letters, there has been any change
in the Common Stock, long-term debt or other securities of the
Company (except as specifically contemplated in the
Registration Statement and Prospectus) or any material
decreases in net current assets, net assets, shareholder's
equity, working capital or in any other item appearing in the
Company's financial statements as to which the Underwriters
may request advice, in each case as compared with amounts
shown in the balance sheet as of the date of the financial
statement in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have
occurred or will occur;
(b) during the period from (and including) the date
of the financial statements in the Registration Statement and
the Prospectus to such specified date there was any material
decrease in revenues or in the total or per share amounts of
income or loss before extraordinary items or net income or
loss, or any other material change in such other items
appearing in the Company's financial statements as to which
the Underwriters may request advice, in each case as compared
with the corresponding period in the preceding year, except in
each case for increases, changes or decreases which the
Prospectus discloses have occurred or will occur;
(iv) they have compared specific dollar amounts, numbers of
shares, percentages of revenues and earnings, statements and
other financial information pertaining to the Company set
forth in the Prospectus in each case to the extent that such
amounts, numbers, percentages, statements and information may
be derived from the general accounting records, including work
sheets, of the Company and excluding any questions requiring
an interpretation by legal counsel, with the results obtained
from the application of specified readings, inquiries and
other appropriate procedures (which procedures do not
constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter and found
them to be in agreement.
Such letters shall also set forth such other information as may be
requested by counsel for the Underwriters. Any changes, increases or decreases
in the items set forth in such letters which, in the judgment of the several
Underwriters, are materially adverse with respect to the financial position or
results of operations of the Company shall be deemed to constitute a failure of
the Company to comply with the conditions of the obligations to the several
Underwriters hereunder.
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<PAGE> 24
(h) Upon exercise of the Option provided for in Section 2(b) hereof,
the obligation of the several Underwriters (or, at its option, the
Representative, individually) to purchase and pay for the Option Securities
referred to therein will be subject (as of the date hereof and as of the Option
Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at the
Option Closing Date, and no stop order suspending the effectiveness
thereof shall have been issued and no proceedings for that purpose
shall have been instituted or shall be pending, or, to your knowledge
or the knowledge of the Company, shall be contemplated by the
Commission, and any reasonable request on the part of the Commission
for additional information shall have been complied with to the
satisfaction of counsel to the Underwriters.
(ii) At the Option Closing Date, there shall have been
delivered to you the signed opinion from counsel for the Company, dated
as of the Option Closing Date, in form and substance satisfactory to
counsel to the Underwriters, which opinion shall be substantially the
same in scope and substance as the opinion furnished to you at the
Closing Date pursuant to Section 4 (e) hereof, except that such
opinion, where appropriate, shall cover the Option Securities.
(iii) At the Option Closing Date, there shall have been
delivered to you a certificate of the Chief Executive Officer and Chief
Financial Officer of the Company, dated the Option Closing Date, in
form and substance satisfactory to counsel to the Underwriters,
substantially the same in scope and substance as the certificate
furnished to you at the Closing Date pursuant to Section 4(f) hereof.
(iv) At the Option Closing Date, there shall have been
delivered to you a letter in form and substance satisfactory to you
from Killman, Murrell & Company, P.C., independent auditors to the
Company, dated the Option Closing Date and addressed to the several
Underwriters confirming the information in their letter referred to in
Section 4(g) hereof and stating that nothing has come to their
attention during the period from the ending date of their review
referred to in said letter to a date not more than five business days
prior to the Option Closing Date, which would require any change in
said letter if it were required to be dated the Option Closing Date.
(v) All proceedings taken at or prior to the Option Closing
Date in connection with the sale and issuance of the Option Securities
shall be satisfactory in form and substance to the Underwriters, and
the Underwriters and counsel to the Underwriters shall have been
furnished with all such documents, certificates, and opinions as you
may request in connection with this transaction in order to evidence
the accuracy and completeness of any of the representations, warranties
or statements of the Company or its compliance with any of the
covenants or conditions contained herein.
(i) No action shall have been taken by the Commission or the NASD, the
effect of which would make it improper, at any time prior to the Closing Date,
for members of the NASD to execute transactions (as principal or agent) in the
Common Stock and no proceedings for the taking of such action shall have been
instituted or shall be pending, or, to the knowledge of the several Underwriters
or the Company, shall be contemplated by the Commission or the NASD. The
24
<PAGE> 25
Company represents that at the date hereof it has no knowledge that any such
action is in fact contemplated by the Commission or the NASD. The Company shall
advise the Representative of any NASD affiliations of any of its officers,
directors, or stockholders or their affiliates in accordance with paragraph 1(y)
of this Agreement.
(j) At the date of this Agreement, you shall have received from counsel
to the Company, dated as of the date hereof, in form and substance satisfactory
to counsel for the Underwriter, a written Secondary Market Trading Opinion
detailing those states in which the Shares and Warrants may be traded in
non-issuer transactions under the Blue Sky laws of the 50 states after the
Effective Date, in accordance with Section 3(y) of this Agreement.
(k) The authorization and issuance of the Securities and delivery
thereof, the Registration Statement, the Prospectus, and all corporate
proceedings incident thereto shall be satisfactory in all respects to counsel
for the several Underwriters, and such counsel shall be furnished with such
documents, certificates and opinions as they may reasonably request to enable
them to pass upon the matters referred to in this subparagraph.
(l) Prior to the Effective Date, the Representative shall have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Representative, as described in the Registration Statement.
(m) If any of the conditions herein provided for in this Section shall
not have been fulfilled as of the date indicated, this Agreement and all
obligations of the several Underwriters under this Agreement may be canceled at,
or at any time prior to, the Closing Date and/or the Option Closing Date by the
Representative and/or the Underwriters notifying the Company of such
cancellation in writing or by telegram at or prior to the applicable Closing
Date. Any such cancellation shall be without liability of the several
Underwriters to the Company.
5. Conditions of the Obligations of the Company. The obligation of the
Company to sell and deliver the Securities is subject to the following
conditions:
(i) The Registration Statement shall have become effective not
later than 5:00 p.m., Eastern Time, on the date of this Agreement, or
on such later time or date as the Company and the Representative may
agree in writing; and
(ii) At the Closing Date and the Option Closing Date, no stop
orders suspending the effectiveness of the Registration Statement shall
have been issued under the Act or any proceedings therefore initiated
or threatened by the Commission.
If the conditions to the obligations of the Company provided for in
this Section have been fulfilled on the Closing Date but are not fulfilled after
the Closing Date and prior to the Option Closing Date, then only the obligation
of the Company to sell and deliver the Securities on exercise of the Option
provided for in Section 2(b) hereof shall be affected.
6. Indemnification. (a) The Company indemnifies and holds harmless each
Underwriter and each person, if any, who controls the Underwriter within the
meaning of the Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this
25
<PAGE> 26
Agreement, include but not be limited to, all reasonable costs of defense and
investigation and all attorneys' fees), to which the Underwriter or such
controlling person may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in (i) the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
(ii) any blue sky application or other document executed by the Company
specifically for that purpose or based upon written information furnished by the
Company and filed in any state or other jurisdiction in order to qualify any or
all of the Securities under the securities laws thereof (any such application,
document or information being hereinafter called a "Blue Sky Application"), or
arise out of or are based upon the omission or alleged omission to state in the
Registration Statement, any Preliminary Prospectus, Prospectus, or any amendment
or supplement thereto, or in any Blue Sky Application, a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such cases to the
extent, but only to the extent, that any such losses, claim, damages or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
the Underwriters specifically for use in the preparation of the Registration
Statement or any such amendment or supplement thereof or any such Blue Sky
Application or any such Preliminary Prospectus or the Prospectus or any such
amendment or supplement thereto. Notwithstanding the foregoing, the Company
shall have no liability under this Section if such untrue statement or omission
made in a Preliminary Prospectus is cured in the Prospectus and the Prospectus
is not delivered within the time required by the Act to the person or persons
alleging the liability upon which indemnification is being sought. This
indemnity will be in addition to any liability which the Company may otherwise
have.
(b) Each Underwriter, severally, but not jointly, indemnifies and holds
harmless the Company, each of its directors, each nominee (if any) for director
named in the Prospectus, each of its officers who have signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of the Act, against any losses, claims, damages or liabilities (which shall, for
all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees) to which the Company or any
such director, nominee, officer or controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statements or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished to the Company by you or by any Underwriter through you specifically
for use in the preparation thereof. Notwithstanding the foregoing, the
Underwriters shall have no liability under this Section if such untrue statement
or omission made in a Preliminary Prospectus is cured in the Prospectus and the
Prospectus is not delivered to the person or persons alleging the liability upon
which indemnification is being sought through no fault of the Underwriter. This
indemnity will be in addition to any liability which the Underwriter may
otherwise have.
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<PAGE> 27
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify in writing the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that if the indemnified party is an Underwriter
or a person who controls such Underwriter within the meaning of the Act, the
fees and expenses of such counsel shall be at the expense of the indemnifying
party if (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both the Underwriter or such
controlling person and the indemnifying party and in the reasonable judgment of
the Representative, it is advisable for the Representative or such Underwriters
or controlling persons to be represented by separate counsel (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the Underwriter or such controlling person, it being understood,
however, that the indemnifying party shall not, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys for all such Underwriters and controlling persons, which firm shall be
designated in writing by you). No settlement of any action against an
indemnified party shall be made without the consent of the indemnifying party,
which shall not be unreasonably withheld in light of all factors of importance
to such indemnifying party.
7. Contribution. In order to provide for just and equitable
contribution under the Act in any case in which (i) each Underwriter makes claim
for indemnification pursuant to Section 6 but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case, notwithstanding the fact
that the express provisions of Section 6 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
Underwriter, then the Company and each person who controls the Company, in the
aggregate, and any such Underwriter shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys, fees) in either
such case (after contribution from others) in such proportions that all such
Underwriters are responsible in the aggregate for that portion of such losses,
claims, damages or liabilities represented by the percentage that the
underwriting discount per Share appearing on the cover page of the Prospectus
bears to the public offering price appearing thereon,
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<PAGE> 28
and the Company shall be responsible for the remaining portion, provided,
however, that (a) if such allocation is not permitted by applicable law then the
relative fault of the Company and the Underwriter and controlling persons, in
the aggregate, in connection with the statements or omissions which resulted in
such damages and other relevant equitable considerations shall also be
considered. The relative fault shall be determined by reference to, among other
things, whether in the case of an untrue statement of a material fact or the
omission to state a material fact, such statement or omission relates to
information supplied by the Company, or the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if the respective obligations of
the Company and the Underwriters to contribute pursuant to this Section 7 were
to be determined by pro rata or per capita allocation of the aggregate damages
(even if the Underwriters and their controlling persons in the aggregate were
treated as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to in the
first sentence of this Section; and (b) that the contribution of each
contributing Underwriter shall not be in excess of its proportionate share
(based on the ratio of the number of Securities purchased by such Underwriter to
the number of Securities purchased by all contributing Underwriters) of the
portion of such losses, claims, damages or liabilities for which the
Underwriters are responsible. No person ultimately determined to be guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not ultimately
determined to be guilty of such fraudulent misrepresentation. As used in this
paragraph, the term "Underwriter" includes any officer, director, or other
person who controls the Underwriter within the meaning of Section 15 of the Act,
and the word "Company" includes any officer, director, or person who controls
the Company within the meaning of Section 15 of the Act. If the full amount of
the contribution specified in this Section is not permitted by law, then the
Underwriter and each person who controls the Underwriter shall be entitled to
contribution from the Company, its officers, directors and controlling persons
to the full extent permitted by law. This foregoing agreement shall in no way
affect the contribution liabilities of any persons having liability under
Section 11 of the Act other than the Company and the Underwriter. No
contribution shall be requested with regard to the settlement of any matter from
any party who did not consent to the settlement; provided, however, that such
consent shall not be unreasonably withheld in light of all factors of importance
to such party.
8. Costs and Expenses. (a) Whether or not this Agreement becomes
effective or the sale of the Securities to the Underwriters is consummated, the
Company will pay all costs and expenses incident to the performance of this
Agreement by the Company including but not limited to the fees and expenses of
the counsel to the Company or of the Company's accountants; the costs and
expenses incident to the preparation, printing, filing and distribution under
the Act of the Registration Statement (including the financial statements
therein and all amendments and exhibits thereto), Preliminary Prospectus and the
Prospectus, as amended or supplemented; the fee of the NASD in connection with
the filing required by the NASD relating to the offering of the Securities
contemplated hereby; all state filing fees, expenses and disbursements and legal
fees of counsel to the Company who shall serve as Blue Sky counsel to the
Company in connection with the filing of applications to register the Securities
under the state securities or blue sky laws; the cost of printing and furnishing
to the several Underwriters copies of the Registration Statement, each
Preliminary Prospectus, the Prospectus, this Agreement, the Selected Dealers
Agreement, the Agreement Among Underwriters, Underwriters Questionnaire,
Underwriters Power of Attorney and the Blue Sky Memorandum; the cost of printing
the certificates evidencing the securities comprising the
28
<PAGE> 29
Securities; the cost of preparing and delivering to the Underwriters and its
counsel of their bound volumes containing copies of all documents and
appropriate correspondence filed with or received from the Commission and the
NASD and all closing documents; and the fees and disbursements of the transfer
agent for the Company's securities. The Company shall pay any and all taxes
(including any original issue, transfer, franchise, capital stock or other tax
imposed by any jurisdiction) on sales to the Underwriters hereunder. The Company
will also pay all costs and expenses incident to the furnishing of any amended
Prospectus or of any supplement to be attached to the Prospectus. The Company
shall also engage the Company's counsel to provide the Representative with a
written Secondary Market Trading Opinion in accordance with paragraphs 3(y) and
4(j) of this Agreement.
(b) In addition to the foregoing expenses, the Company shall at the
Closing Date pay to the Representative a non-accountable expense allowance equal
to 2% of the gross proceeds received from the sale of the Securities, of which
an advance of $25,000 has been paid to date. In the event the over-allotment
option is exercised, the Company shall pay to the Representative at the Option
Closing Date an additional amount equal to 2% of the gross proceeds received
upon exercise of the over-allotment option.
(c) Other than as disclosed in the Registration Statement, no person is
entitled either directly or indirectly to compensation from the Company, from
the Representative or from any other person for services as a finder in
connection with the proposed offering, and the Company agrees to indemnify and
hold harmless the Representative and the other Underwriters against any losses,
claims, damages or liabilities, joint or several which shall, for all purposes
of this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys, fees, to which the Representative or such other
Underwriter may become subject insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon the
claim of any person (other than an employee of the party claiming indemnity) or
entity that he or it is entitled to a finder's fee in connection with the
proposed offering by reason of such person's or entity's influence or prior
contact with the indemnifying party.
9. Substitution of Underwriters. If any of the Underwriters shall for
any reason not permitted hereunder cancel their obligations to purchase the
Securities hereunder, or shall fail to take up and pay for the number of
Securities set forth opposite their respective names in Schedule A hereto upon
tender of such Securities in accordance with the terms hereof, then:
(a) If the aggregate number of Securities which such Underwriter or
Underwriters agreed but failed to purchase does not exceed 10% of the total
number of Securities, the other Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Securities
which such defaulting Underwriter or Underwriters agreed but failed to purchase.
(b) If any Underwriter or Underwriters so default and the agreed number
of Securities with respect to which such default or defaults occurs is more than
10% of the total number of Securities, the remaining Underwriters shall have the
right to take up and pay for (in such proportion as may be agreed upon among
them) the Securities which the defaulting Underwriter or Underwriters agreed but
failed to purchase. If such remaining Underwriters do not, at the Closing Date,
take up and pay for the Securities which the defaulting Underwriter or
Underwriters agreed but failed to purchase, the time for delivery of the
Securities shall be extended to the next business day to allow the several
Underwriters the privilege of substituting within twenty-four hours (including
non-
29
<PAGE> 30
business hours) another Underwriter or Underwriters satisfactory to the Company.
If no such Underwriter or Underwriters shall have been substituted as aforesaid,
within such twenty-four period, the time of delivery of the Securities may, at
the option of the Company, be again extended to the next following business day,
if necessary, to allow the Company the privilege of finding within twenty-four
hours (including non-business hours) another Underwriter or Underwriters to
purchase the Securities which the defaulting Underwriter or Underwriters agreed
but failed to purchase. If it shall be arranged for the remaining Underwriters
or substituted Underwriters to take up the Securities of the defaulting
Underwriter or Underwriters as provided in this Section, (i) the Company or the
Representative shall have the right to postpone the time of delivery for a
period of not more than seven business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees promptly to
file any amendments to the Registration Statement or supplements to the
Prospectus which may thereby be made necessary; and (ii) the respective numbers
of Securities to be purchased by the remaining Underwriters or substituted
Underwriters shall be taken at the basis of the underwriting obligation for all
purposes of this Agreement.
If in the event of a default by one or more Underwriters and the
remaining Underwriters shall not take up and pay for all the Securities agreed
to be purchased by the defaulting Underwriters or substitute another Underwriter
or Underwriters as aforesaid, and the Company shall not find or shall not elect
to seek another Underwriter or Underwriters for such Securities as aforesaid,
then this Agreement shall terminate.
If, following exercise of the Option provided in Section 2(b) hereof,
any Underwriter or Underwriters shall for any reason not permitted hereunder
cancel their obligations to purchase Option Securities at the Option Closing
Date, or shall fail to take up and pay for the number of Option Securities,
which they become obligated to purchase at the Option Closing Date upon tender
of such Option Securities in accordance with the terms hereof, then the
remaining Underwriters or substituted Underwriters may take up and pay for the
Option Securities of the defaulting Underwriters in the manner provided in
Section 9(b) hereof. If the remaining Underwriters or substituted Underwriters
shall not take up and pay for all Option Securities, the Underwriters shall be
entitled to purchase the number of Option Securities for which there is no
default or, at their election, the option shall terminate, the exercise thereof
shall be of no effect.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. In the event of termination,
there shall be no liability on the part of any non-defaulting Underwriter to the
Company, provided that the provisions of this Section 9 shall not in any event
affect the liability of any defaulting Underwriter to the Company arising out of
such default.
10. Effective Date. The Agreement shall become effective upon its
execution except that you may, at your option, delay its effectiveness until
11:00 a.m., Eastern time, on the first full business day following the effective
date of the Registration Statement, or at such earlier time after the effective
date of the Registration Statement as you in your discretion shall first
commence the public offering by the Underwriters of any of the Securities. The
time of the public offering shall mean the time after the effectiveness of the
Registration Statement when the Securities are first generally offered by you to
the other Underwriters and the selected dealers. This Agreement may be
terminated by you at any time before it becomes effective as provided above,
except that Sections 3(c), 6, 7, 8, 13, 14, 15, 16, 17 and 18 shall remain in
effect notwithstanding such termination.
30
<PAGE> 31
11. Termination. (a) This Agreement, except for Sections 3(c), 6, 7, 8,
13, 14, 15, 16, 17, and 18 hereof, may be terminated at any time prior to the
Closing Date, and the Option referred to in Section 2(b) hereof, if exercised,
may be canceled at any time prior to the Option Closing Date, by you if in your
judgment it is impracticable to offer for sale or to enforce contracts made by
the Underwriters for the resale of the Securities agreed to be purchased
hereunder by reason of: (i) the Company having sustained a material adverse
loss, whether or not insured, by reason of fire, earthquake, flood, accident or
other calamity, or from any labor dispute or court or government action, order
or decree; (ii) trading in securities on the New York Stock Exchange or the
American Stock Exchange having been suspended or limited; (iii) material
governmental restrictions having been imposed on trading in securities generally
(not in force and effect on the date hereof); (iv) a banking moratorium having
been declared by federal or New York or Florida state authorities; (v) an
outbreak of major international hostilities or other national or international
calamity having occurred which is reasonably believed likely by the
Representative to have a material adverse impact on the business, financial
condition or financial statements of the Company or the market for the
securities offered hereby; (vi) the passage by the Congress of the United States
or by any state legislative body of similar impact, of any act or measure, or
the adoption of any orders, rules or regulations by any governmental body or any
authoritative accounting institute or board, or any governmental executive;
(vii) any material adverse change in the financial or securities markets beyond
normal market fluctuations having occurred since the date of this Agreement;
(viii) a pending or threatened legal or governmental proceeding or action
relating generally to the Company's business, or a notification having been
received by the Company of the threat of any such proceeding or action, which
could, in the reasonable judgment of the Representative, materially adversely
affect the Company; (ix) except as contemplated by the Prospectus, the Company
is merged or consolidated into or acquired by another company or group or there
exists a binding legal commitment for the foregoing or any other material change
of ownership or control occurs; or (x) the Company shall not have complied in
all material respects with any term, condition or provisions on its part to be
performed, complied with or fulfilled (including but not limited to those set
forth in this Agreement) within the respective times therein provided.
(b) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section, the Company shall be
promptly notified by you, by telephone, telegram or facsimile, confirmed by
letter.
12. Representative' Warrant Agreement. At the Closing Date, the Company
will issue to the Representative and/or persons related to the Representative,
for an aggregate purchase price of $100, and upon the terms and conditions set
forth in the form of Representative' Warrant Agreement annexed as an exhibit to
the Registration Statement, Representative' Warrants to purchase up to an
aggregate of 200,000 Units, in such denominations as the Representative shall
designate. In the event of conflict in the terms of this Agreement and the
Representative' Warrant Agreement, the language of the form of Representative'
Warrant Agreement shall control.
13. Representations, Warranties and Agreements to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company and its principal officers, where appropriate, and the
Underwriters set forth in or made pursuant to this
31
<PAGE> 32
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of the Underwriters, the Company or any of its officers or
directors or any controlling person and will survive delivery of and payment for
the Securities and the termination of this Agreement.
14. Notice. All communications hereunder will be in writing and, except
as otherwise expressly provided herein, will be mailed, delivered or telegraphed
and confirmed:
If to the Underwriters: First London Securities Corporation
2600 State Street
Dallas, Texas 75204
Attention: Douglas R. Nichols
Copy to: Richard F. Dahlson
Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202-3797
If to the Company: Commerce Casualty Group, Inc.
9140 ArrowPoint Boulevard, Suite 200
Charlotte, North Carolina 28273
Attention: Paul V. H. Halter, III, Chief Operating
Officer
Copy to: Charles Barkley
7808 Pineville Matthews Road
Suite 11
Charlotte, North Carolina 28226
15. Parties in Interest. This Agreement herein set forth is made solely
for the benefit of the several Underwriters, the Company and, to the extent
expressed, any person controlling the Company or any of the Underwriters, and
directors of the Company, nominees for directors (if any) named in the
Prospectus, its officers who have signed the Registration Statement, and their
respective executors, administrators, successors, assigns and no other person
shall acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser of the Securities, as
such purchaser, from the several Underwriters. All of the obligations of the
Underwriters hereunder are several and not joint.
16. Applicable Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Texas applicable to contracts made and
to be performed entirely within the State of Texas.
17. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counter-parts shall together constitute but one and the
same instrument.
18. Entire Agreement. This Agreement and the agreements referred to
within this Agreement constitute the entire agreement of the parties, and
supersedes all prior agreement, understanding, negotiations and discussions,
whether written or oral, of the parties hereto.
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<PAGE> 33
19. Representative as Underwriter. In the event the Representative act
as the sole Underwriters ("Underwriters") in connection with the underwriting of
the securities being offered pursuant to the Registration Statement, all
references to the Representative in this Agreement shall be replaced by
reference to the "Underwriters," and (i) any consents required to be obtained
from the Representative shall be required to be obtained solely from the
Underwriters; (ii) all compensation to be received by the Representative shall
instead be received by the Underwriters; and (iii) the provisions of Section 9
of this Agreement shall not apply.
<PAGE> 34
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this Agreement, whereupon it will become a
binding Agreement between the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
Commerce Casualty Group, Inc.
BY:
------------------------------------------
Paul V. H. Halter, III
Chief Operating Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted
as of the date first above written.
FIRST LONDON SECURITIES CORPORATION
BY:
------------------------------------------
Douglas R. Nichols, President
For themselves and as Representative of the
several Underwriters
<PAGE> 1
EXHIBIT 1.2
COMMERCE CASUALTY GROUP, INC.
2,000,000 UNITS, EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK,
ONE SERIES A REDEEMABLE COMMON STOCK PURCHASE WARRANT, AND
ONE SERIES B REDEEMABLE COMMON STOCK PURCHASE WARRANTS
(AND 4,000,000 SHARES OF COMMON STOCK ISSUABLE UNDER THE WARRANTS)
SELECTED DEALER AGREEMENT
Dallas, Texas
___, 1998
Gentlemen:
1. First London Securities Corporation (the "Representative") and the
other Underwriters named in the Prospectus (collectively the "Underwriters"),
acting through us as the Representative, are severally offering for sale on a
"firm commitment" basis, 2,000,000 Units (the "Units") at $5.1875 per Unit (the
"Initial Public Offering Price). Each Unit consists of one share (the "Shares")
of Common Stock, $.001 par value per share (the "Common Stock"); one Redeemable
Series A Common Stock Purchase Warrant (the "Series A Warrants"); and one
Redeemable Series B Common Stock Purchase Warrant (the "Series B Warrants"). The
Series A Warrants and the Series B Warrants may sometimes be collectively
referred to as the "Warrants." The Units, the Shares and the Warrants offered
hereby are referred to collectively as the "Securities." The Shares and Warrants
included in the Units may be not be traded separately until ________, 1999 (180
days from the date of this Prospectus) unless earlier separated upon three days
notice from the Representative (as hereinafter defined) to the Company. The
Warrants may not be exercised until they are separated from the Units.
Each Series A Warrant entitles the holder to purchase one share of
Common Stock at a price of $ 6.00 per share during the five-year period
commencing on the date of the Prospectus. The Series A Warrants are redeemable
by the Company for $9.00 per Warrant. Each Series B Warrant entitles the holder
to purchase one share of Common Stock at a price of $ 7.00 per share during the
five-year period commencing on the date of the Prospectus. The Series B Warrants
are redeemable by the Company for $10.00 per Warrant. Redemption requires not
less than 30 nor more than 60 days written notice provided there is then in
effect a current registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the issuance and sale of the
Common Stock upon the exercise of the Warrants. Any redemption of the Warrants
during the one-year period commencing on the date of this Prospectus shall
require the written consent of First London Securities Corporation. In addition,
the Company proposes to grant to the Underwriters (or, at the option of the
Representative, to the Representative, individually) the option referred to in
Section 2(b) to purchase all or any part of an aggregate of 300,000 additional
Units (the "Option Securities").
<PAGE> 2
2. The Securities are to be offered to the public by the several
Underwriters at the price per Unit set forth on the cover page of the Prospectus
(the "Public Offering Price"), in accordance with the terms of offering set
forth in the Prospectus.
3. Some or all of the several Underwriters are severally offering,
subject to the terms and conditions hereof, a portion of the Securities for sale
to certain dealers who are actually engaged in the investment banking or
securities business and who are either (a) members in good standing of the
National Association of Securities Dealers, Inc. (the "NASD"), or (b) dealers
with their principal places of business located outside the United States, its
territories and its possessions and not registered as brokers or dealers under
the Securities Exchange Act of 1934, as amended (the "1934 Act"), who have
agreed not to make any sales within the United States, its territories or its
possessions or to persons who are nationals thereof or residents therein (such
dealers who shall agree to sell Securities hereunder being herein called
"Selected Dealers") at the public offering price, less a selling concession
(which may be changed) of not in excess of $_______ per Share and/or $________
per Warrant payable as hereinafter provided, out of which concession an amount
not exceeding $_________ per Share and/or $__________ per Warrant may be
reallowed by Selected Dealers to members of the NASD or foreign dealers
qualified as aforesaid. We reserve the right not to pay such selling commission
on any of the Securities purchased by any of the Selected Dealers from us and
repurchased by us at or below the price stated above prior to termination of
this Agreement. The Selected Dealers who are members of the NASD agree to comply
with all of the provisions of the NASD Conduct Rules. Foreign Selected Dealers
agree to comply with the provisions of Rule 2740 of the NASD Conduct Rules, and,
if any such dealer is a foreign dealer and not a member of the NASD, such
Selected Dealer also agrees to comply with the NASD?s Interpretation with
Respect to Free-Riding and Withholding, and to comply, as though it were a
member of the NASD, with the provisions of Rules 2730 and 2750 of the NASD
Conduct Rules, and to comply with Rule 2420 of the NASD Conduct Rules as that
Rule applies to non-member foreign dealers. Some or all of the Underwriters may
be included among the Selected Dealers. Each of the Underwriters has agreed
that, during the term of this Agreement, it will be governed by the terms and
conditions hereof whether or not such Underwriter is included among the Selected
Dealers.
4. First London Securities Corporation shall act as Representative on
behalf of the Underwriters and shall have full authority to take such action as
we may deem advisable in respect to all matters pertaining to the public
offering of the Securities.
5. If you desire to act as a Selected Dealer, and purchase any of the
Securities, your application should reach us promptly by telefax or telegraph at
the offices of First London Securities Corporation, 2600 State Street, Dallas,
Texas 75204, facsimile (214) 220-0695. We reserve the right to reject
subscriptions in whole or in part, to make allotments, and to close the
subscription books at any time without notice. The Securities allotted to you
will be confirmed, subject to the terms and conditions of this Agreement.
6. The privilege of subscribing for the Securities is extended to you
only on behalf of such of the Underwriters, if any, as may lawfully sell the
Securities to Selected Dealers in your state or other applicable jurisdiction.
2
<PAGE> 3
7. Payment for the Securities sold to you hereunder is to be made at
the Public Offering Price or, if we shall so advise you, at the Public Offering
Price less the above mentioned selling concession on such time and date as we
may advise, at the office of First London Securities Corporation, 2600 State
Street, Dallas, Texas 75204, by wire transfer to the account of First London
Securities Corporation, as Representative, or by a certified or official bank
check in current New York Clearing House funds, payable to the order of First
London Securities Corporation, as Representative, against delivery of
certificates for the Securities so purchased. If such payment is not made at
such time, you agree to pay us interest on such funds at the prevailing broker?s
loan rate.
8. Any Securities to be purchased by you under the terms of this
Agreement may be immediately re-offered to the public in accordance with the
terms of offering as set forth herein and in the Prospectus, subject to the
securities or Blue Sky laws of the various states or other jurisdictions.
In the event that Securities purchased by you under the terms of this
Agreement are purchased at the Public Offering Price less the selling
commission, you agree to pay us on demand for the accounts of the several
Underwriters an amount equal to the Selected Dealer concession as to any
Securities purchased by you hereunder which, prior to the completion of the
public offering as defined in Section 9 below, we may purchase or contract to
purchase for the account of any Underwriter and, in addition, we may charge you
with any broker?s commission and transfer tax paid in connection with such
purchase or contract to purchase. Certificates for Securities delivered on such
repurchases need not be the identical certificates originally purchased.
You agree to advise us from time to time, upon request, of the number
of Securities purchased by you hereunder and remaining unsold at the time of
such request, and, if in our opinion any such Securities shall be needed to make
delivery of the Securities sold or over-allotted for the account of one or more
of the Underwriters, you will, forthwith upon our request, grant to us for the
account or accounts of such Underwriter or Underwriters the right, exercisable
promptly after receipt of notice from you that such right has been granted, to
purchase, at the price you paid for such Securities or such part thereof as we
shall determine, such number of Securities owned by you as shall have been
specified in our request.
No expenses shall be charged to Selected Dealers. A single transfer
tax, if payable, upon the sale of the Securities by the respective Underwriters
to you will be paid when such Securities are delivered to you. However, you
shall pay any transfer tax on sales of Securities by you and you shall pay your
proportionate share of any transfer tax (other than the single transfer tax
described above) in the event that any such tax shall from time to time be
assessed against you and other Selected Dealers as a group or otherwise.
Neither you nor any other person is or has been authorized to give any
information or to make any representation in connection with the sale of the
Securities other than as contained in the Prospectus.
9. The Section 7 and the first three paragraphs of Section 8 will
terminate when we shall have determined that the public offering of the
Securities has been completed and upon telefax notice to you of such
termination, but, if not theretofore terminated, they will terminate at the
close of business on the 30th full business day after the date hereof; provided,
however, that we shall have
3
<PAGE> 4
the right to extend such provisions for a further period or periods, not
exceeding an additional 30 days in the aggregate upon telefax notice to you.
10. For the purpose of stabilizing the market in the Securities, we
have been authorized to make purchases and sales of the Securities of the
Company, in the open market or otherwise, for long or short account, and, in
arranging for sales, to over-allot.
11. On becoming a Selected Dealer, and in offering and selling the
Securities, you agree to comply with all the applicable requirements of the
Securities Act and the 1934 Act. You confirm that you are familiar with Rule
15c2-8 under the 1934 Act relating to the distribution of preliminary and final
prospectuses for securities of an issuer (whether or not the issuer is subject
to the reporting requirements of Section 13 or 15(d) of the 1934 Act) and
confirm that you have complied and will comply therewith.
We hereby confirm that we will make available to you such number of
copies of the Prospectus (as amended or supplemented) as you may reasonably
request for the purposes contemplated by the Securities Act or the 1934 Act, or
the rules and regulations thereunder.
12. Upon request, you will be informed as to the states and other
jurisdictions in which we have been advised that the Securities are qualified
for sale under the respective securities or Blue Sky laws of such states and
other jurisdictions, but neither we nor any of the Underwriters assume any
obligation or responsibility as to the right of any Selected Dealer to sell the
Securities in any state or other jurisdiction or as to the eligibility of the
Securities for sale therein. We will, if requested, file a Further State Notice
in respect of the Securities pursuant to Article 23-A of the General Business
Law of the State of New York.
13. No Selected Dealer is authorized to act as our agent or as agent
for the Underwriters, or otherwise to act on our behalf or on behalf of the
Underwriters, in offering or selling the Securities to the public or otherwise
or to furnish any information or make any representation except as contained in
the Prospectus.
14. Notices to us should be addressed to us at the offices of First
London Securities Corporation, 2600 State Street, Dallas, Texas 75204,
Attention: Douglas Nichols. Notices to you shall be deemed to have been duly
given if telephoned, telefaxed, telegraphed or mailed to you at the address to
which this letter is addressed.
15. This Agreement shall be governed by and construed in accordance
with the laws of the State of Texas without giving effect to the choice of law
or conflicts of law principles thereof.
16. If you desire to purchase any Securities and act as a Selected
Dealer, please confirm your application by signing and returning to us your
confirmation on the duplicate copy of this letter enclosed herewith, even though
you may have previously advised us thereof by telephone or telegraph. Our
signature hereon may be by facsimile.
Very truly yours,
FIRST LONDON SECURITIES CORPORATION
As Representative of the Several Underwriters
By:
--------------------------------------
Authorized Officer
<PAGE> 5
<PAGE> 6
FIRST LONDON SECURITIES CORPORATION
As Representative of the Several Underwriters
c/o First London Securities Corporation
2600 State Street
Dallas, Texas 75204
We hereby subscribe for _____________ Units of Commerce Casualty Group,
Inc. in accordance with the terms and conditions stated in the foregoing
Selected Dealer Agreement. We hereby acknowledge receipt of the Prospectus
referred to in the Selected Dealer Agreement. We further state that in
purchasing said Units we have relied upon said Prospectus and upon no other
statement whatsoever, whether written or oral. We confirm that we are a dealer
actually engaged in the investment banking or securities business and that we
are either (i) a member in good standing of the National Association of
Securities Dealers, Inc. ("NASD"); or (ii) a dealer with its principal place of
business located outside the United States, its territories and its possessions
and not registered as a broker or dealer under the Securities Exchange Act of
1934, as amended, who hereby agrees not to make any sales within the United
States, its territories or its possessions or to persons who are nationals
thereof or residents therein. As a member of the NASD, we hereby agree to comply
with all of the provisions of NASD Conduct Rules. If we are a foreign Selected
Dealer, we agree to comply with the provisions of Rule 2740 of the Conduct
Rules, and if we are a foreign dealer and not a member of the NASD, we agree to
comply with the NASD?s interpretation with respect to free-riding and
withholding, and agree to comply, as though we were a member of the NASD, with
provisions of Rules 2730 and 2750 of such Conduct Rules, and to comply with Rule
2420 thereof, as that Rule applies to non-member foreign dealers.
Firm:
--------------------------------------
By:
--------------------------------------
(Name and Position)
Address:
-----------------------------------------
Telephone No.:
-----------------------------------------
Dated: ___, 1998
<PAGE> 1
EXHIBIT 3.2
STATE OF NORTH CAROLINA
COUNTY OF MECKLENBURG
BY-LAWS
OF
COMNIERCE CASUALTY GROUP, INC.
(A North Carolina Corporation)
ARTICLE I
OFFICES
Section 1. Principal Office. The principal office of the corporation
shall be located at 9140 ArrowPoint Boulevard, Suite 200, Charlotte, NC 28273 or
at such other place as the Board of Directors shall establish.
Section 2. Registered Office. The registered office of the corporation
required by law to be maintained in the State of North Carolina may be, but need
not be, identical with the principal office.
Section 3. Other Offices. The corporation may have offices at such
other places, either within or without the State of North Carolina, as the Board
of Directors may designate or as the affairs of the corporation may require
from time to time.
ARTICLE II
MEEETINGS OF SHAREHOLDERS
Section 1. Place of Meetings. All meetings of the shareholders shall be
held at the principal office of the corporation, or at such other places, either
within or without the State of North Carolina, as shall be designated on the
notice of the meeting or agreed upon by a majority of the shareholders entitled
to vote thereat.
Section 2. Annual Meetings. The annual meeting of the shareholders
shall be held at a time fixed by the Board of Directors on the tenth Friday
following the end of the fiscal year, if such is not a legal holiday, or on the
first following business day thereafter that is not a legal holiday. Failure to
hold the annual meeting of shareholders shall not invalidate or affect any
action thereafter taken by the shareholders or incumbent directors.
<PAGE> 2
Section 3. Substitute Annual Meeting. If the annual meeting shall not
be held on the day designated by these By-Laws, a substitute annual meeting may
be called in accordance with the provisions of Section 4 of this Article II. A
meeting so called shall be designated and treated for all purposes as the annual
meeting.
Section 4. Special Meetings. Special meetings of the shareholders may
be called at any time by the President, Secretary or Board of Directors of the
corporation, or by any shareholder pursuant to the written request of the
holders of not less than one-tenth of all the shares entitled to vote at the
meeting.
Section 5. Notice of Meetings. Written or printed notice stating the
time and place of the meeting shall be delivered not less than ten nor more than
fifty days before the date of any shareholders' meeting, either personally or by
mail, by or at the direction of the President, the Secretary, or other person
calling the meeting, to each shareholder of record entitled to vote at such
meeting; provided that such notice must be given not less than twenty days
before the date of any meeting at which a merger or consolidation is to be
considered. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, addressed to the shareholder at this
address as it appears on the record of shareholders of the corporation, with
postage thereon prepaid.
In the case of a special meeting, the notice of meeting shall
specifically state the purpose or purposes for which the meeting is called; but,
in the case of an annual or substitute annual meeting, the notice of meeting
need not specifically state the business to be transacted thereat unless such a
statement is required by the provisions of the North Carolina Business
Corporation Act.
When a meeting is adjourned for thirty days or more, notice of the
adjourned meeting shall be given as in the case of an original meeting. When a
meeting is adjourned for less than thirty days in any one adjournment, it is not
necessary to give any notice of the adjournment is taken.
Section 6. Voting Lists. At least ten days before each meeting of
shareholders the Secretary of the corporation shall prepare an alphabetical list
of the shareholders entitled to vote at such meeting or any adjournment thereof
with the address of and number of shares held by each, which list shall be kept
on file at the registered office of the corporation for a period of ten days
prior to such meeting, and shall be subject to inspection by any shareholder at
any time during the usual business hours. This list shall also be produced and
kept open at the time and place of the meeting and shall be subject to
inspection by any shareholders during the whole time of the meeting.
Section 7. Quorum. A majority of the outstanding shares of the
corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders, except that at a substitute
annual meeting of shareholders the number of shares there represented either in
person or by proxy, even though less than a majority, shall constitute a quorum
for the purpose of such meeting.
<PAGE> 3
The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawing of enough
shareholders to leave less than a quorum.
In the absence of a quorum at the opening of any meeting of
shareholders, such meeting may be adjourned from time to time by a vote of the
majority of the shares voting on the motion to adjourn, and at any adjourned
meeting at which a quorum is present, any business may be transacted which might
have been transacted at the original meeting.
Section 8. Proxies. Shares may be voted either in person or by one or
more agents authorized by a written proxy executed by the shareholder or by his
duly authorized attorney in fact. A proxy is not valid after the expiration,
unless the person executing it specifies therein the length of time for which it
is to continue in force, or limits its use to a particular meeting, but no
proxy shall be valid after ten years from the date of its execution.
Section 9. Voting of Shares. Subject to the provisions of Section 4 of
Article III, each outstanding share entitled to vote shall be entitled to one
vote on each matter submitted to a vote at a meeting of shareholders.
Except in the election of directors as governed by the provisions of
Section 3 of Article III, the vote of a majority of the shares voted on any
matter at a meeting of shareholders at which a quorum is present shall be the
act of the shareholders on that matter, unless the vote of a greater number is
required by law or by the charter or By-Laws of this corporation.
Shares of its own stock owned by the corporation, directly or
indirectly, through a subsidiary corporation or otherwise, shall not be voted
and shall not be counted in determining the total number of shares entitled to
vote, except that shares held in a fiduciary capacity may be voted and shall be
counted to the extent provided by law.
Section 10. Informal Action by Shareholders. Any action which may be
taken at a meeting of the shareholders may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
the persons who would be entitled to vote upon such action at a meeting, and
filed with the Secretary of the corporation to be kept as part of the corporate
records.
ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers. The Incorporator has been vested with all
duties of the Board of Directors pursuant to North Carolina General Statute
55-8-01(c) and (d), as amended, until such time as a Board of Directors has been
elected, pursuant to the Articles of Incorporation. Upon appointment of the
Board of Directors, the business and affairs of the corporation shall be managed
by its Board of Directors.
<PAGE> 4
Section 2. Number, Term and Qualifications. The number of directors
constituting the Board of Directors shall be not less than the minimum number
required by law. The corporation may have one director for so long as it has
only one shareholder; the corporation must have at least two directors for so
long as it has two shareholders; and, in the event the corporation has three or
more shareholders, the corporation shall have a minimum of three directors. Each
director shall hold office until his death, resignation, retirement, removal,
disqualification or his successor shall have been elected and qualified.
Directors need not be residents of the State of North Carolina or shareholders
of the corporation.
Section 3. Election of Directors. Except as provided in Section 6 of
this Article III, the directors shaft be elected at the annual meeting of
shareholders; and those persons who receive the highest number of votes shall be
deemed to have been elected. If any shareholder so demands, the election of
directors shall be by ballot.
Section 4. No Cumulative Voting. There shall be no rights for any
shareholder entitled to vote at an election of directors to have the right to
vote the number of shares standing of record in his name for as many persons as
there are directors to be elected and for whose election he has a right to vote,
or to cumulate his votes by giving one candidate as many votes as the number of
such candidates.
Section 5. Removal. Any director may be removed at any time with or
without cause by a vote of the shareholders holding a majority of the
outstanding shares entitled to vote at an election of directors. However, unless
the entire Board is removed, an individual director shall not be removed when
the number of shares voting against the proposal for removal would be sufficient
to elect a director if such shares could be voted cumulatively at an annual
election. If any directors are so removed, new directors may be elected at the
same meeting.
Section 6. Vacancies. Any vacancy occurring in the Board of Directors
may be filled by the affirmative vote of a majority of the remaining directors
even though less than a quorum, or by the sole remaining director. A director
elected to fill a vacancy shall be elected for the unexpired term of his
predecessor in office. Any directorship to be filled by reason of an increase in
the authorized number of directors shall be filled only by election at an annual
meeting or at a special meeting of shareholders called for that purpose.
Section 7. Chairman of Board. There may be a Chairman of the Board of
Directors elected by the directors from their number at any meeting of the
Board. The Chairman shall preside at all meetings of the Board of Directors and
perform such other duties as may be directed by the Board.
Section 8. Compensation. The Board of Directors may compensate
directors for their services as such and may provide for the payment of any or
all expenses incurred by directors in attending regular and special meetings of
the Board.
<PAGE> 5
ARTICLE IV
MEETING OF DIRECTORS
Section 1. Regular Meetings. A regular meeting of the Board of
Directors shall be held immediately after, and at the same place as, the annual
meeting of shareholders. Failure to hold the annual meeting shall not invalidate
or affect any action thereafter taken by the shareholders or directors. In
addition, the Board of Directors may provide, by resolution, the time and place,
either within or without the State of North Carolina, for the holding of
additional regular meetings.
Section 2. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the President or any two directors. Such a
meeting may be held either within or without the State of North Carolina, as
fixed by the person or persons calling the meeting.
Section 3. Notice of Meetings. Regular meetings of the Board of
Directors may be held without notice. The person or persons calling a special
meeting of the Board of Directors shall, at least two days before the meeting,
give notice thereof by any usual means of communication. Such notice need not
specify the purpose for which the meeting is called.
Section 4. Waiver of Notice. Any director may waive notice of any
meeting. The attendance by a director at a meeting shall constitute a waiver of
notice of such meeting, except where a director attends a meeting for the
purpose of objecting to the transaction of any business because the meeting is
not lawfully called or convened.
Section 5. Quorum. A majority of the number of directors fixed by these
By-Laws shall constitute a quorum for the transaction of business at any meeting
of the Board of Directors.
Section 6. Manner of Acting. Except as otherwise provided in these
By-Laws, the act of the majority of the directors present at a meeting at which
a quorum is present shall be the act of the Board of Directors.
Section 7. Presumption of Assent. A director of the corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his contrary vote is recorded or his dissent is otherwise entered in the minutes
of the meeting or unless he shall file his written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the Secretary of the
corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
<PAGE> 6
Section 8. Informal Action by Directors. Action taken by a majority of
the directors without a meeting is nevertheless Board action if written consent
to the action in question is signed by all the directors and filed with the
minutes of the proceedings of the Board, whether done before or after the action
so taken.
Section 9. Committees of the Board. The Board of Directors, by
resolution adopted by a majority of the number of directors fixed by these
By-Laws, may designate three or more directors to constitute an Executive
Committee and other committees, each of which, to the extent authorized by law
and provided in such resolution, shall have and may exercise all of the
authority of the Board of Directors in the management of the corporation. The
designation of any committee and the delegation thereto of authority shall not
operate to relieve the Board of Directors, or any member thereof, of any
responsibility or liability imposed upon it or him by law.
ARTICLE V
OFFICERS
Section 1. Officers of the Corporation. The Incorporator has been
vested with all duties of the Board of Directors pursuant to North Carolina
General Statute 55-8-01(c) and (d), as amended, until such time as a Board of
Directors has been elected under the Articles of Incorporation. Prior to
appointment of a Board of Directors, the Incorporator shall have all duties
typically associated with officers of the corporation. Upon appointment of a
Board of Directors, the Board may appoint officers. The officers of the
corporation may consist of a President, a Secretary, a Treasurer and such
officers as the Board of Directors may from time to time elect. Any two or more
offices may be held by the same person, but no officer may act in more than one
capacity where action of two or more officers is required.
Section 2. Election and Term. The officers of the corporation shall be
elected by the Board of Directors and each officer shall hold office until his
death, resignation, retirement, removal, disqualification or his successor shall
have been elected and qualified.
Section 3. Compensation of Officers. The compensation of all officers
of the corporation shall be fixed by the Board of Directors and no officer shall
serve the corporation in any other capacity and receive compensation therefor
unless such additional compensation be authorized by the Board of Directors.
Section 4. Removal. Any officer or agent elected or appointed by the
Board of Directors may be removed by the Board of Directors whenever in its
judgment the best interest of the corporation will be served thereby; but such
removal shall be without prejudice to the contract rights, if any, of the
person so removed.
Section 5. Bonds. The Board of Directors may by resolution require any
officer, agent or employee of the corporation to give bond to the corporation,
with sufficient sureties, conditioned the faithful performance of the duties of
his respective office or position, and to comply such other conditions as may
from time to time be required by the Board of Directors.
<PAGE> 7
Section 6. President. The President shall be the principal executive
officer of the corporation and, subject to the control of the Board of
Directors, shall in general supervise and control all of the business and
affairs of the corporation. He shall, when present, preside at all meetings of
the shareholders. He shall sign, with the Secretary, and Assistant Secretary, or
any other proper officer of the corporation thereunto authorized by the Board of
Directors, certificates for shares of the corporation, any deeds, mortgages,
bonds, contracts, or other instruments which the Board of Directors has
authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the corporation, or shall be required by
law to be otherwise signed or executed; and in general he shall perform all
duties incident to the office of President and such other duties as may be
prescribed by the Board of Directors from time to time.
Section 7. Vice-President. In the absence of the President or in the
event of his death, inability or refusal to act, the Vice-Presidents in the
order of their length of service as Vice-Presidents, unless otherwise determined
by the Board of Directors, shall perform the duties of the President, and when
so acting shall have all the powers of and be subject to all the restrictions
upon the President. Any Vice-President may sign, with the Secretary or an
Assistant Secretary, certificates for shares of the corporation; and shall
perform other duties as from time to time may be assigned to him by the
President or Board of Directors.
Section 8. Secretary. The Secretary shall: (a) keep the minutes of the
meetings of shareholders, of the Board of Directors and of all Executive
Committees in one or more books provided for the purpose; (b) see that all
notices are duly given in accordance with the provisions of these By-Laws or as
required by law; (c) be custodian of the corporate records and of the seal of
the corporation and see that the seal of the corporation is affixed to all
documents the execution of which on behalf of the corporation under its seal is
duly authorized; (d) keep a register of the post office address of each
shareholder which shall be furnished to the Secretary by such shareholder; (e)
sign with the President, or a Vice-President, certificates for shares of the
corporation, the issuance of which shall have been authorized by resolution of
the Board of Directors; (f) keep or cause to be kept in the State of North
Carolina at the corporation's registered office or principal place of business a
record of the corporation's shareholders, giving the names and addresses of all
shareholders and the number and class of shares held by each, and prepare or
cause to be prepared voting lists prior to each meeting of shareholders as
required by law; and (g) in general perform all duties incident to the office of
secretary and such other duties as from time to time may be assigned to him by
the President or by the Board of Directors.
Section 9. Assistant Secretaries. In the absence of the Secretary or in
the event of his death, inability or refusal to act, the Assistant Secretaries
in the order of their length of service as Assistant Secretary, unless otherwise
determined by the Board of Directors, shall perform the duties of the Secretary,
and when so acting shall have all the powers of and be subject to all the
restrictions upon the Secretary. They shall perform such other duties as may be
assigned to them by the Secretary, by the President or by the Board of
Directors. Any Assistant Secretary may sign, with the President or a
Vice-President, certificates for shares of the corporation.
<PAGE> 8
Section 10. Treasurer. The Treasurer shall (a) have charge and custody
of and be responsible for all funds and securities of the corporation; receive
and give receipts for moneys due and payable to the corporation from any source
whatsoever, and deposit all such moneys in the name of the corporation in such
depositories as shall be selected in accordance with the provisions of Section 4
of Article VII of these By-Laws; (b) prepare, or cause to be prepared, a true
statement of the corporation's assets and liabilities as of the close of each
fiscal year, all in reasonable detail, which statement shall be made and filed
at the corporation's registered office or principal place of business in the
State of North Carolina within four months after the end of such fiscal year and
thereat kept available for a period of at least ten years; and (c) in general
perform all of the duties incident to the office of treasurer and such other
duties as from time to time may be assigned to him by the President or by the
Board of Directors, or by these By-Laws.
Section 11. Assistant Treasurers. In the absence of the Treasurer or in
the event of his death, inability or refusal to act, the Assistant Treasurers in
the order of their length of service as Assistant Treasurer, unless otherwise
determined by the Board of Directors, shall perform the duties of the Treasurer,
and when so acting shall have all the powers of and be subject to all the
restrictions upon the Treasurer. They shall perform such other duties as may be
assigned to them by the Treasurer, by the President, or by the Board of
Directors.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. The Board of Directors may authorize any officer
or officers, agent or agents, to enter into any contract or execute or deliver
any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
corporation and no evidence of indebtedness shall be issued in its name unless
authorized by a resolution of the Board of Directors. Such authority may be
general or confined to specific instances.
Section 3. Checks and Drafts. All checks, drafts or other orders for
the payment of money, issued in the name of the corporation, shall be signed by
such officer or officers, agent or agents, of the corporation and in such manner
as shall from time to time be determined by resolution of the Board of
Directors.
Section 4. Deposits. All funds of the corporation not otherwise
employed shall be deposited from time to time to the credit of the corporation
in such depositories as the Board of Directors may select.
<PAGE> 9
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares. The Board of Directors (or persons
acting in similar capacities pursuant to North Carolina General Statute 55-8-01)
shall have authority to issue uncertificated shares if it chooses to do so. If
the Board determines that certificates should be issued, certificates
representing shares of the corporation shall be in such form as shall be
determined by the Board of Directors. If certificates are used, the corporation
shall issue and deliver to each shareholder certificates representing all fully
paid shares owned by him. Certificates shall be signed by the President or a
Vice-President and by the Secretary or Treasurer or an Assistant Secretary or an
Assistant Treasurer. All certificates for shares shall be consecutively numbered
or otherwise identified. The name and address of the person to whom the shares
represented thereby are issued, with the number and class of shares and the date
of issue, shall be entered on the stock transfer books of the corporation.
Section 2. Transfer of Shares. Transfer of shares of the corporation
shall be made only on the stock transfer books of the corporation by the holder
of the record thereof or by his legal representative, who shall furnish proper
evidence of authority to transfer, or by his attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary, and on surrender
for cancellation of the certificate for such shares, if certificates have been
issued.
Section 3. Lost Certificate. The Board of Directors may direct a new
certificate to be issued in place of any certificate therefore issued by the
corporation claimed to have been lost or destroyed, upon receipt of an affidavit
of such fact from the person claiming the certificate of stock to have been lost
or destroyed. When authorizing such issue of a new certificate, the Board of
Directors shall require that the owner of such lost or destroyed certificate, or
his legal representative, give the corporation a bond in such sum as the Board
may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate claimed to have been lost or
destroyed, except where the Board of Directors by resolution finds that in the
judgment of the directors the circumstances justify omission of a bond.
Section 4. Closing Transfer Books and Fixing Record Date. For the
purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or entitled to receive
payment of any dividend, or in order to make a determination of shareholders for
any other proper purpose, the Board of Directors may provide that the stock
TRANSFER BOOKS SHALL BE CLOSED FOR a STATED PERIOD BUT NOT TO EXCEED, IN any
case, fifty days. If the stock TRANSFER BOOKS SHALL BE CLOSED FOR THE PURPOSE OF
DETERMINING SHAREHOLDERS entitled to notice of or to vote at a meeting of
shareholders, such books shall be closed for at least ten days immediately
preceding such meeting.
In lieu of closing the stock transfer books, the Board of Directors may
fix in advance a date as the record date for any such determination of
shareholders, such record date in any case to be not more than fifty days and,
in case of a meeting of shareholders, not less than ten days immediately
preceding the date on which the particular action, requiring such determination
of shareholders, is to be taken.
If the stock transfer books are not closed and no record date is fixed
for the determination of shareholders entitled to notice of or to vote at a
meeting of shareholder or shareholders entitled to receive payment of a
dividend, the date on which notice of the meeting is mailed or the date on which
the resolution of the Board of Directors declaring such dividend is adopted, as
the case may be, shall be the record date for such determination of
shareholders.
<PAGE> 10
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, such determination shall
apply to any adjournment thereof except where the determination has been made
through the closing of the stock transfer books and the stated period of closing
has expired.
Section 5. Holder of Record. The corporation may treat as absolute
owner of shares the person in whose name the shares stand of record on its books
just as if that person had full competency, capacity and authority to exercise
all rights of ownership irrespective of any knowledge or notice to the contrary
or any description indicating a representative, pledge or other fiduciary
relation or any reference to any other instrument or to the rights of any other
person appearing upon its record or upon the share certificate except that any
person furnishing to the corporation proof of his appointment as a fiduciary
shall be treated as if he were a holder of record of its shares.
Section 6. Treasuty Shares. Treasury shares of the corporation shall
consist of such shares as have been issued and thereafter acquired but not
canceled by the corporation. Treasury shares shall not carry voting or dividend
rights.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. Dividends. The Board of Directors may from time to time
declare, and the corporation may pay, dividends on its outstanding shares in
cash, property or its own shares pursuant to law and subject to the provisions
of its char-ter.
Section 2. Seal. The corporate seal of the corporation shall consist of
concentric circles between which is the name of the corporation and in the
center of which is inscribed SEAL; and such seal, as impressed on the margin
hereof, is hereby adopted as the corporate seal of the corporation.
Section 3. Waiver of Notice. Whenever any notice is required to be
given to any shareholder or director by law, by the charter or by these By-Laws,
a waiver thereof in writing signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be equivalent to
the giving of such notice.
Section 4. Indemnification. Any person who at any time serves or has
served as an incorporator, director, officer, employee or agent of the
corporation, or in such capacity at the request of the corporation for any other
corporation, partnership, joint venture, trust or other enterprise, shall have a
right to be indemnified by the corporation to the fullest extent permitted by
the North Carolina Business Corporations Act. Such indemnification may include
indemnification against (a) reasonable expenses, including attomeys'fees,
actually and necessarily incurred by him in connection with any threatened,
pending or completed action, suit or proceedings, whether civil, criminal,
administrative or investigative, and whether or not brought by or on behalf of
the corporation, seeking to hold him liable by reason of the fact that he is or
was acting in such
<PAGE> 11
capacity, and (b) reasonable payments made by him in satisfaction of any
judgment, money decree, fine, penalty or settlement for which he may have become
liable in any such action, suit or proceeding.
The Board of Directors of the corporation shall take all such action as
may be necessary and appropriate to authorize the corporation to pay the
indemnification required by this By-Law, including without limitation, to the
extent needed, making a good faith evaluation of the manner in which the
claimant for indemnity acted and of the reasonable amount of indemnity due him
and giving notice to, and obtaining approval by, the shareholders of the
corporation.
Any person who at any time after the adoption of this By-Law serves or
has served in any of the aforesaid capacities for or on behalf of the
corporation shall be deemed to be doing or to have done so in reliance upon, and
as consideration for, the right of indemnification provided herein. Such right
shall inure to the benefit of the legal representatives of any such person and
shall not be exclusive of any other rights to which such person may be entitled
apart from the provision of this By-Law.
Section 5. Fiscal Year. The fiscal year of the corporation shall be
fixed by the Board of Directors.
Section 6. Amendments. Except as otherwise provided herein, these
By-Laws may be amended or repealed and new by-laws may be adopted by the
affirmative vote of a majority of the directors at any regular or special
meeting of the Board of Directors.
No by-law adopted or amended by the shareholders shall be amended or
repealed by the Board of Directors, except to the extent that such by-law
expressly authorizes its amendment or repeal by the Board of Directors.
These bylaws have been adopted this 24 day of April , 1995.
---- ----------
/s/ E.E. Tucker, Jr.
-----------------------------------
Incorporator
<PAGE> 12
CORPORATE RESOLUTION
OF THE
BOARD OF DIRECTORS
OF
COMMERCE CASUALTY GROUP, INC.
The undersigned directors hereby waive notice of meeting and adopt the following
resolution at a meeting of the board of directors held at the home office in
Charlotte, North Carolina on November 30, 1995.
RESOLVED, that the resolutions included in Centura Bank's Resolution
and Agreement For Deposit and Bank/Corporate Services, a copy of which
is kept in the minute books of the company, are hereby adopted.
This resolution shall remain in ffl force and effect until rescinded or modified
by resolution of the board of directors.
/s/ E.E. Tucker, Jr.
-----------------------------------
E.E. Tucker, Jr.
/s/ E.E. Tucker, III
-----------------------------------
E.E. Tucker, III
/s/ Paul V.H. Halter, III
-----------------------------------
Paul V.H. Halter, III
<PAGE> 13
WAIVER OF NOTICE
AND
MINUTES OF MEETING
OF THE
BOARD OF DIRECTORS
OF
COMMERCE CASUALTY GROUP, INC.
The undersigned directors hereby waive notice of meeting and adopt the following
resolution at a meeting of the board of directors held at the home office in
Charlotte, North Carolina on November 8, 1995.
RESOLVED, that any one of the following officers, the chairman,
president, secretary, treasurer, or vice president of the company, is
authorized to open a bank depository for the funds of the company;
RESOLVED, that on checks, drafts, or other orders for the payment of
money drawn in the name of the company against funds of the company on
deposit with such bank~ the checks, drafts, or other orders for payment
must bear the signatures of two of the above officers;
RESOLVED, that such bank is authorized and directed to honor all
checks, drafts, or other orders for payment which bear the facsimile or
mechanically produced signatures of any two of the above officers, in
the same manner as if the checks, drafts, or other orders for payment
had been originally signed by these two officers;
RESOLVED, that any one of the following officers, the chairman,
president, or the vice president designated as chief financial officer,
may initiate a wire transfer of funds by telephone if this officer
sends the bank as soon as practical a written confirmation of such wire
transfer. The confirmation must be signed by two officers who are
authorized signatures on the bank account from which the wire was
drawn.
TIds resolution shall remain in fall force and effect until rescinded or
modified by resolution of the board of directors.
/s/ E.E. Tucker, Jr.
-----------------------------------
E.E. Tucker, Jr.
/s/ E.E. Tucker, III
-----------------------------------
E.E. Tucker, III
/s/ Paul V.H. Halter, III
-----------------------------------
Paul V.H. Halter, III
<PAGE> 14
PAUL V.H. HALTER, III /s/ Paul V.H. Halter, III
- ------------------------------------ ----------------------------------------
Whose signature appears above is hereby authorized, directed and empowered for
an on behalf of this corporation and in its name to execute a Vehicle Lease
Agreement with World Omni Financial Corp., ("Lessor") on such terms as may be
agreed to by said person.
I, ERNEST E. TUCKER, III Secretary of COMMERCE CASUALTY GROUP, INC. a
corporation. do hereby certify that the resolution appearing above is a full,
true and correct copy of a resolution of the Board of Directors of said
corporation duly and regularly passed and adopted at a meeting of the Board of
Directors of said corpration which has duly and regularly called and held in all
respects as required by law and by the bylaws of said corporation on the 24TH
day of APRIL, 1996, and that the signatures on the above mentioned copy of said
resolutions are the genuine signatures of the persons mentioned in said
resolution and authorized to on behalf of said corporation as set forth in said
resolution.
(SEAL) I further certify that said resolution has not been
amended or revoked and is still in force and effect,
IN WITNESS WHEREOF, I have hereunto set my hand as
such Secretary this 24TH day of APRIL, 1996.
/s/ Ernest E. Tucker, III
<PAGE> 15
RESOLUTION OF THE BOARD OF DIRECTORS OF
COMMERCE CASUALTY GROUP, INC.
WHEREAS, the Board of Directors of this Corporation deems it to be in
the best interests of the employees and officers to commence the operation of a
flexible benefit plan under Section 125 of the Internal Revenue Code, be it
RESOLVED, that the Board of Directors hereby adopts and approves this
flexible benefit plan to become effective March 1, 1996, a copy of which is
attached hereto;
RESOLVED FURTHER, that the president of the Corporation shall have the
authority to appoint a plan administrator for such plan, and change such
administrator from time to time with the advice and consent of the Board of
Directors; and
RESOLVED FURTHER, that the Secretary of this Corporation is directed to
enter a copy of this flexible benefit plan into the records of this Corporation,
and into the minutes of this meeting.
CERTIFICATE OF SECRETARY
I certify that I am the duly qualified and acting Secretary of Commerce
Casualty Group, Inc., a Corporation organized and existing under the laws of the
State of North Carolina. The foregoing is a true copy of a resolution duly
adopted by the Board of Directors at a meeting held on March 1 1996 , and
entered into the minutes of such meeting in the Corporation's minute book. The
resolution is now in accordance with the Articles of Incorporation and Bylaws of
this Corporation and is now in full force and effect.
Dated: March 1, 1996
/s/ E.E. Tucker, III
- ---------------------------------------
Secretary
(Corporate Seal)
<PAGE> 1
EXHIBIT 4.1
WARRANT AGREEMENT
THIS WARRANT AGREEMENT ("Agreement") is made and entered into as of the
____th day of _______________, 1998, by and between Commerce Casualty Group,
Inc., a North Carolina corporation ("Company"), and First Union National Bank
Corporate Trust Group, a North Carolina corporation, as warrant agent ("Warrant
Agent").
WHEREAS, the Company proposes to offer and sell a maximum of 2,300,000
Units, (which includes 300,000 Units pursuant to the Underwriters'
over-allotment option) at a purchase price of $5.1875 per Unit, each Unit
consisting of one share of common stock ("Common Stock"), $.001 par value per
share, one Series A Redeemable Common Stock Purchase Warrant and one Series B
Redeemable Common Stock Purchase Warrant, (the warrants identified above being
collectively referred to herein as the "Warrants") pursuant to a Registration
Statement on Form SB-2 (the "Prospectus"), File Number 333-__________, filed
with the Securities and Exchange Commission; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, registration, registration of transfer, exchange and exercise of the
Warrants;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
1. Appointment of Warrant Agent. The Company hereby appoints the
Warrant Agent to act as agent for the Company in accordance with the
instructions hereinafter set forth in this Agreement, and the Warrant Agent
hereby accepts such appointment.
2. Form of Warrants. The text and the terms of the Warrants, and the
form of election to purchase shares of Common Stock appearing on the reverse
side thereof shall be substantially as set forth in Exhibit A attached hereto
and made a part hereof. The Warrants shall be executed on behalf of the Company
by the manual or facsimile signature of the Chairman, Vice Chairman of the
Company or President or Chief Executive Officer and by the manual or facsimile
signature of the secretary or assistant secretary of the Company under its
corporate seal, affixed or in facsimile.
The Warrants shall be dated by the Warrant Agent as of the initial date
of issuance thereof, and upon transfer or exchange, the Warrant shall be dated
as of such subsequent issuance date.
The Warrants shall expire at 5:00 p.m. (New York time) on ____________,
2003. If such date shall, in the State of New York, be a holiday or a day in
which banks are authorized to close, then the Warrants shall expire the next
following day which in the State of New York is not a holiday or a day on which
banks are authorized to close.
<PAGE> 2
3. Registration and Countersignature. The Warrant Agent shall maintain
books for the transfer and registration of the Warrants. Upon the initial
issuance of the Warrants, the Warrant Agent shall issue and register the
Warrants in the names of the respective registered holders, and upon subsequent
issuance, such Warrants shall be registered in the names of the respective
succeeding registered holders. The Warrants shall be countersigned by the
Warrant Agent (or by any successor to the Warrant Agent then acting as warrant
agent under this Agreement) and shall not be valid for any purpose unless so
countersigned. Warrants may be so countersigned, however, by the Warrant Agent
(or by its successor as warrant agent) and be delivered by the Warrant Agent,
notwithstanding that the persons whose manual or facsimile signature appear
thereon as proper officers of the Company shall have ceased to be such officers
at the time of such countersignature or delivery. Until a Warrant is transferred
on the books of the Warrant Agent, the Company and the Warrant Agent may treat
any registered holder of Warrants as the absolute owner thereof for all
purposes, notwithstanding any notice to the contrary.
4. Registration of Transfers and Exchanges. The Warrant Agent shall
transfer any outstanding Warrants on the books to be maintained by the Warrant
Agent for that purpose, upon surrender thereof for transfer, properly endorsed
or accompanied by appropriate instructions for transfer with proper documentary
stamps affixed thereto, if requested. Upon any such transfer, a new Warrant
shall be issued to the transferee, and the surrendered Warrant shall be canceled
by the Warrant Agent. Warrants so canceled shall be delivered by the Warrant
Agent to the Company from time to time. Warrants may be exchanged at the option
of the holder thereof when surrendered at the office of the Warrant Agent, for
another Warrant, or other Warrants of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of shares of
Common Stock. The Warrant Agent is hereby irrevocably authorized to countersign
and deliver the Warrants in accordance with the provisions of this Paragraph 4,
and the Company, whenever required by the Warrant Agent, will supply the Warrant
Agent with Warrants duly executed on behalf of the Company for such purpose.
5. Exercise of Warrants. Subject to the provisions of this Agreement,
each registered holder of Warrants shall have the right, which right may be
exercised as in such Warrants as expressed, to purchase from the Company, and
the Company shall issue and sell to such registered holder of Warrants, the
number of fully paid and nonassessable shares of Common Stock specified in such
Warrants, upon surrender to the Company at the office of the Warrant Agent, with
the form of election to purchase on the reverse side thereof duly completed and
signed, and upon payment to the Warrant Agent for the account of the Company of
the Exercise Price for the number of shares of Common Stock in respect of which
such Warrants are then exercised. Payment of such Exercise Price may be made in
cash or by certified check, bank draft, or postal or express money order,
payable in United States dollars, to the order of the Company. Subject to the
provisions of Paragraph 8 hereof, upon such surrender of Warrants and payment of
the Exercise Price as aforesaid, the Company, acting through the Warrant Agent,
shall issue and cause to be delivered with all reasonable dispatch to or upon
the written order of the registered holder of such Warrants and in such name or
names as such registered holder may designate, a certificate or certificates for
the number of full shares of Common Stock so purchased upon the exercise of such
Warrants. Such certificates shall be deemed to have been issued, and any person
so designated to be named therein shall be deemed to have become a holder of
record of such Common Stock, as of the date of surrender of such Warrants and
payment of the Exercise Price, as aforesaid; provided, however, that if, at the
date of surrender of
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<PAGE> 3
such Warrants and the payment of such Exercise Price, the transfer books for the
Common Stock purchasable upon the exercise of such Warrants shall be closed, the
certificates for the Common Stock in respect of which such Warrants are then
exercised shall be issuable as of the date on which such books shall next be
opened, and until such date the Company shall be under no duty to deliver any
certificate for such shares; provided further, however, that the transfer books
aforesaid, unless otherwise required by law, shall not be closed at any one time
for a period longer than 20 days. The right of purchase represented by the
Warrants shall be exercisable, at the election of the registered holders
thereof, either as an entirety or, from time to time, for only part of the
Common Stock specified therein, and in the event that any Warrant is exercised
in respect of less than all of the Common Stock specified therein at any time
prior to the date of expiration of the Warrants, a new Warrant or Warrants will
be issued for the remaining number of Common Stock specified in the Warrant so
surrendered, and the Warrant Agent is hereby irrevocably authorized to
countersign and to deliver the required new Warrants pursuant to the provisions
of this Paragraph 5 and of Paragraph 3 of this Agreement, and the Company,
whenever required by the Warrant Agent, will supply the Warrant Agent with
Warrants duly executed on behalf of the Company for such purposes.
Notwithstanding anything contained herein to the contrary, no Warrant
may be exercised if the issuance of Common Stock in connection therewith would
constitute a violation of the registration provisions of federal or state
securities laws.
Upon 30 days prior written notice to all holders of the Warrants, the
Company shall have the right to reduce the exercise price and/or extend the term
of the Warrants in compliance with the requirements of Rule 13e-4 to the extent
applicable.
The "Exercise Price" of the Warrants shall mean the exercise price
specified in the Warrants until the occurrence of a recapitalization or
reclassification that, pursuant to the provisions hereof, shall require an
increase or decrease in the exercise price of the Warrants, and thereafter shall
mean said price as adjusted from time to time in accordance with the provisions
hereof. No such adjustment shall be made unless such adjustment would change the
then purchase price per share by ten cents ($.10) or more; provided, however,
that all adjustments not so made shall be deferred and made when the aggregate
thereof would change the then purchase price per share by ten cents ($.10) or
more. No adjustment made pursuant to any provision hereof shall have the effect
of increasing the total consideration payable upon exercise of any of the
Warrants.
6. Adjustments in Certain Cases. In case the Company shall at any time
prior to the exercise or termination of any of the Warrants effect a
recapitalization or reclassification of such character that its Common Stock
shall be changed into or become exchangeable for a larger or smaller number of
shares, then, upon the effective date thereof, the number of shares of Common
Stock that the holders of the Warrants shall be entitled to purchase upon
exercise thereof shall be increased or decreased, as the case may be, in direct
proportion to the increase or decrease in such number of shares of Common Stock
by reason of such recapitalization or reclassification, and the purchase price
per share of such recapitalized or reclassified Common Stock shall, in the case
of an increase in the number of shares, be proportionately decreased and, in the
case of a decrease in the number of shares, be proportionately increased.
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<PAGE> 4
In case the Company shall at any time prior to the exercise or
termination of any of the Warrants distribute to holders of its Common Stock
cash, evidences of indebtedness, or other securities or assets, other than as
dividends or distributions payable out of current or accumulated earnings, then,
in any such case, the holders of the Warrants shall be entitled to receive, upon
exercise thereof, with respect to each share of Common Stock issuable upon such
exercise, the amount of cash or evidences of indebtedness or other securities or
assets that such holder would have been entitled to receive with respect to the
Common Stock as a result of the happening of such event, had the Warrants been
exercised immediately prior to the record date or other date fixing shareholders
to be affected by such event (without giving effect to any restriction upon such
exercise).
In case the Company shall at any time prior to the exercise or
termination of any of the Warrants consolidate or merge with any other
corporation or transfer all or substantially all of its assets to any other
corporation preparatory to a dissolution, then the Company shall, as a condition
precedent to such transaction, cause effective provision to be made so that the
holders of the Warrants, upon the exercise thereof after the effective date of
such transaction, shall be entitled to receive the kind and amount of shares,
evidences of indebtedness, and/or other property receivable on such transaction
by a holder of the number of shares of Common Stock as to which the Warrants
were exercisable immediately prior to such transaction (without giving effect to
any restriction upon such exercise); and, in any such case, appropriate
provision shall be made with respect to the rights and interests of the holders
thereof to the effect that the provisions of the Warrants shall thereafter be
applicable (as nearly as may be practicable) with respect to any shares,
evidences of indebtedness, or other securities or assets thereafter deliverable
upon exercise of the Warrants.
Whenever the number of shares of Common Stock or other types of
securities or assets purchasable upon exercise of any of the Warrants shall be
adjusted as provided herein, the Company shall forthwith obtain and file with
its corporate records a certificate or letter from a firm of independent public
accountants of recognized standing setting forth the computation and the
adjusted number of shares of Common Stock or other securities or assets
purchasable hereunder resulting from such adjustments, and a copy of such
certificate or letter shall be mailed to each of the registered holders of the
Warrants. Any such certificate or letter shall be conclusive evidence as to the
correctness of the adjustment or adjustments referred to therein and shall be
available for inspection by the holders of the Warrants on any day during normal
business hours.
In the event that at any time as a result of an adjustment made
pursuant hereto the holders of the Warrants shall become entitled to purchase
upon exercise thereof shares, evidences of indebtedness, or other securities or
assets (other than Common Stock), then, wherever appropriate, all references
herein to Common Stock shall be deemed to refer to and include such shares,
evidences of indebtedness, or other securities or assets, and thereafter the
number of such shares, evidences of indebtedness, or other securities or assets
shall be subject to adjustment from time to time in a manner and upon terms as
nearly equivalent as practicable to the provisions hereof.
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<PAGE> 5
7. Redemption. The Series A Warrants may be redeemed at the option of
the Company, at a redemption price of $9.00 per Warrant, upon not less than 30
days nor more than 60 days prior written notice, if the closing price of the
Common Stock, as reported by the principal exchange on which the Common Stock is
traded, the Nasdaq SmallCap Market or the National Quotation Bureau,
Incorporated, as the case may be, for seven days during any 10 consecutive
trading day period ending not more than 15 days prior to the date the notice of
redemption is mailed equals or exceeds $10.00 per share (200% of the Share
Offering Price), subject to adjustment under certain circumstances and provided
there is a current registration statement under the Securities Act of 1933, as
amended, with respect to the issuance and sale of Common Stock upon the exercise
of the Warrants. The Series B Warrants may be redeemed at the option of the
Company, at a redemption price of $10.00 per Warrant, upon not less than 30 days
nor more than 60 days prior written notice, if the closing price of the Common
Stock, as reported by the principal exchange on which the Common Stock is
traded, the Nasdaq SmallCap Market or the National Quotation Bureau,
Incorporated, as the case may be, for seven days during any 10 consecutive
trading day period ending not more than 15 days prior to the date the notice of
redemption is mailed equals or exceeds $10.00 per share (200% of the Share
Offering Price), subject to adjustment under certain circumstances and provided
there is a current registration statement under the Securities Act of 1933, as
amended, with respect to the issuance and sale of Common Stock upon the exercise
of the Warrants. Any redemption of the Warrants during the one-year period
commencing on _________, 1998 shall require the written consent of First London
Securities Corporation, as representative of the Underwriters. On and after the
date fixed for redemption, the Registered Holder shall have no rights with
respect to the Warrants except to receive the $.05 per Warrant upon surrender of
this Warrant Certificate.
If any Warrant called for redemption is not exercised within the
prescribed time, it will cease to be exercisable, and will become valueless.
Notice of redemption will be mailed to all holders of Warrants of record at
least 30 days, but not more than 60 days, before the Redemption Date. The
foregoing notwithstanding, the Company may not call the Warrants at any time
that a current registration statement under the Act is not then in effect. Any
redemption of the Warrants during the one-year period commencing on the date of
this Prospectus shall require the written consent of the Representative.
8. Payment of Taxes. The Company will pay all documentary stamp taxes,
if any, attributable to the initial issuance of securities upon the exercise of
the Warrants; provided, however, that the Company shall not be required to pay
any tax or taxes that may be payable in respect of any transfer involved in the
issuance or delivery of any securities in a name other than that of the
registered holder of Warrants in respect of which such securities are issued
and, in such case, neither the Company nor the Warrant Agent shall be required
to issue or deliver any certificate representing such securities or any Warrant
until the person requesting the same has paid to the Company or the Warrant
Agent the amount of such tax or has established to the Company's satisfaction
that such tax has been paid.
9. Mutilated or Missing Warrants. In case any of the Warrants shall be
mutilated, lost, stolen or destroyed, the Warrant Agent may countersign and
deliver in exchange and substitution for and upon cancellation of the mutilated
Warrant or in lieu of and substitution for the Warrant lost,
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<PAGE> 6
stolen or destroyed, a new Warrant of like tenor and representing an equivalent
right or interest, but only upon receipt of evidence satisfactory to the Warrant
Agent of such loss, theft or destruction of such Warrants and indemnity, if
requested, also satisfactory to them. Applicants for such substitute Warrants
shall also comply with such other reasonable regulations and pay such other
reasonable charges as the Company or the Warrant Agent may prescribe.
10. Reservation of Common Stock. Prior to the issuance of any Warrants,
there shall have been reserved, and the Company shall at all times keep reserved
out of the authorized and unissued Common Stock, a number of shares of Common
Stock sufficient to provide for the exercise of the rights of purchase
represented by the Warrants, and the transfer agent for the Common Stock and
every subsequent transfer agent for any of the Company's Common Stock issuable
upon the exercise of any of the rights of purchase aforesaid are hereby
irrevocably authorized and directed at all times to reserve such number of
authorized and unissued Common Stock as shall be requisite for such purpose. The
Company agrees that all Common Stock issued upon exercise of the Warrants shall
be, at the time of delivery of the certificates representing such Common Stock,
validly issued and outstanding, fully paid and non-assessable. The Company will
keep a copy of this Agreement on file with the transfer agent for the Common
Stock and with every subsequent transfer agent for the Company's Common Stock
issuable upon the exercise of the right of purchase represented by the Warrants.
The Warrant Agent is hereby irrevocably authorized to requisition from time to
time from such transfer agent stock certificates required to honor outstanding
Warrants that have been exercised. The Company will supply such transfer agent
with duly executed stock certificates for such purpose. All Warrants surrendered
in the exercise of the rights thereby evidenced shall be canceled by the Warrant
Agent and shall thereafter be delivered to the Company, and such canceled
Warrants shall constitute sufficient evidence of the number of shares of Common
Stock that have been issued upon the exercise of such Warrants. All Warrants
surrendered for transfer, exchange or partial exercise shall be canceled by the
Warrant Agent and delivered to the Company. Promptly after the date of
expiration of the Warrants, the Warrant Agent shall certify to the Company the
total aggregate amount of Warrants then outstanding and, thereafter, no Common
Stock shall be subject to reservation in respect of such Warrants.
11. Disposition of Proceeds on Exercise of Warrants. Unless otherwise
instructed by the Company in writing, the Warrant Agent shall account promptly
to the Company with respect to Warrants exercised and shall promptly deposit in
an account for the benefit of the Company, in a bank designated by the Company,
all moneys received by the Warrant Agent for the purchase of Common Stock
through the exercise of such Warrants.
12. Merger or Consolidation or Change of Name of Warrant Agent. Any
corporation or company that may succeed to the business of the Warrant Agent by
merger or consolidation or otherwise to which the Warrant Agent shall be a
party, or any corporation or company or otherwise succeeding to the business of
the Warrant Agent shall be the successor to the Warrant Agent hereunder without
the execution or filing of any paper or any further act on the part of any of
the parties hereto; provided, however, that such corporation would be eligible
for appointment as a successor Warrant Agent under the provisions of Paragraph
14 of this Agreement. In case at the time such successor to the Warrant Agent
shall succeed to the agency created by this Agreement or in case at any time the
name of the Warrant Agent shall be changed, and any of the Warrants shall have
6
<PAGE> 7
been countersigned but not delivered, any such successor to the Warrant Agent
may adopt the countersignature of the original Warrant Agent and deliver such
Warrants so countersigned; and in case at the time any of the Warrants shall not
have been countersigned, the successor to the Warrant Agent may countersign such
Warrants, either in the name of the predecessor Warrant Agent or in the name of
the successor Warrant Agent; and in all such cases, such Warrants shall have the
full force provided in the Warrants and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrants shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Warrants so countersigned; and if at that time any of the Warrants
shall not have been countersigned, the Warrant Agent may countersign such
Warrants either in its prior name or in its changed name; and in all such cases,
such Warrants shall have the full force provided in the Warrants and this
Agreement.
13. Duties of the Warrant Agent.
(a) The Warrant Agent undertakes the duties and obligations
imposed by this Agreement upon the following terms and conditions, by all of
which the Company shall be bound:
(i) The statements contained herein and in the
Warrants shall be taken as statements of the Company, and the Warrant Agent
assumes no responsibility for the correctness of any of the same, except such as
describe the Warrant Agent or action or actions taken or to be taken by it. The
Warrant Agent assumes no responsibility with respect to the distribution of the
Warrants, except as herein otherwise provided.
(ii) The Warrant Agent shall not be responsible for
any failure of the Company to comply with any of the covenants contained in this
Agreement or in the Warrants to be complied with by the Company.
(iii) The Warrant Agent may execute and exercise any
of the rights or powers hereby
vested in it or perform any duty hereunder, either itself, or by or through its
attorneys, agents or employees.
(iv) The Warrant Agent may consult at any time with
counsel satisfactory to it (who may be counsel for the Company), and the Warrant
Agent shall incur no liability or responsibility to the Company or to any holder
of any Warrant in respect of any action taken, suffered or omitted by it
hereunder in good faith and in accordance with the opinion or advice of such
counsel, provided the Warrant Agent shall have exercised reasonable care in the
selection and continued employment of such counsel.
(v) The Warrant Agent shall incur no liability or
responsibility to the Company or to any holder of any Warrant for any action
taken in reliance upon any notice, resolution, waiver, consent, order,
certificate or other paper, document or instrument reasonably believed by it to
have been signed, sent or presented by the proper party or parties.
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<PAGE> 8
(vi) The Company agrees to pay the Warrant Agent
reasonable compensation for all services rendered by the Warrant Agent in the
execution of this Agreement; to reimburse the Warrant Agent for all expenses,
taxes, governmental charges and other charges of any kind and nature incurred by
the Warrant Agent in the execution of this Agreement; and to indemnify the
Warrant Agent and save it harmless from and against any and all liabilities,
including judgments, costs and reasonable attorneys' fees for anything done or
omitted by the Warrant Agent in the execution of this Agreement, except as a
result of the Warrant Agent's negligence or bad faith.
(vii) The Warrant Agent shall be under no obligation
to institute any action, suit or legal proceeding, or to take any other action
likely to involve expense, unless the Company or one or more registered holders
of Warrants shall furnish the Warrant Agent with reasonable security and
indemnity. All rights of action under this Agreement or under any of the
Warrants or in the production thereof at any trial or other proceeding relative
thereto, and any such action, suit or proceeding instituted by the Warrant Agent
shall be brought in its name as Warrant Agent, and any recovery of judgment
shall be for the benefit of the registered holders of the Warrants, as their
respective rights or interests may appear.
(viii) The Warrant Agent and any shareholder,
director, officer, partner or employee of the Warrant Agent may buy, sell or
deal in any of the Warrants or other securities of the Company or become
pecuniarily interested in any transaction in which the Company may be
interested, or contract with or lend money to or otherwise act as fully and
freely as though it were not the Warrant Agent under this Agreement. Nothing
herein shall preclude the Warrant Agent from acting in any other capacity for
the Company or for any other legal entity.
(ix) The Warrant Agent shall act hereunder solely
as agent, and its duties shall be determined solely by the provisions hereof.
The Warrant Agent shall not be liable for anything that it may do or refrain
from doing in connection with this Agreement, except for liabilities that arise
out of its negligence or bad faith.
(x) The Warrant Agent shall keep copies of this
Agreement available for inspection by holders of the Warrants during normal
business hours at its principal office in New York.
14. Change of Warrant Agent. The Warrant Agent may resign and be
discharged from its duties under this Agreement by giving notice in writing to
the Company and by giving notice by mailing to holders of the Warrants at their
addresses as such addresses appear on the Warrant register of such resignation,
specifying a date when such resignation shall take effect, which date shall not
be less than 30 days after the mailing of said notice. The Warrant Agent may be
removed at the discretion of the Company by like notice to the Warrant Agent
from the Company and by like mailing of notice to the holders of the Warrants.
If the Warrant Agent shall resign or be removed or otherwise become incapable of
acting, the Company shall appoint a successor to the Warrant Agent. If the
Company shall fail to make such appointment within a period of 30 days after
such removal, or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Warrant Agent or by the registered
holder of a Warrant (who shall, with such notice, submit his Warrant for
inspection by the Company), then the registered holder of any Warrant may
8
<PAGE> 9
apply to any court of competent jurisdiction for the appointment of a successor
to the Warrant Agent. After appointment, any successor Warrant Agent shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named as Warrant Agent without further act or deed, but the
former Warrant Agent shall deliver and transfer to the successor Warrant Agent
any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall give notice
thereof to the predecessor Warrant Agent and each transfer agent for the Common
Stock, and shall forthwith give notice to the holders of the Warrants in the
manner prescribed in this section. Failure to file or mail any notice provided
for in this Section 14, however, or any defect therein, shall not affect the
legality or validity of the resignation or removal of the Warrant Agent or the
appointment of any successor Warrant Agent, as the case may be.
15. Identity of Transfer Agent. Forthwith upon the appointment of any
transfer agent other than the Warrant Agent for the Common Stock of the Company
issuable upon the exercise of the rights of purchase represented by the
Warrants, the Company will file with the Warrant Agent a statement setting forth
the name and address of such transfer agent.
16. Notices. Any notice pursuant to this Agreement to be given or made
by the Warrant Agent or by the registered holder of any Warrant to the Company
shall be deemed to have been sufficiently given or made if sent by certified
mail, return receipt requested, postage prepaid, addressed (until another
address is filed in writing by the Company with the Warrant Agent) as follows:
To the Company: Commerce Casualty Group, Inc.
9140 ArrowPoint Boulevard
Suite 200
Charlotte, North Carolina 28273
Attention: Paul V. H. Halter, III
To the Warrant Agent: First Union National Bank Corporate Trust Group
1525 West W.T. Harris Boulevard, 3C3
Charlotte, North Carolina 28288-1153
Attention: Jim Clark, Administrator
Any notice pursuant to this Agreement to be given or made by the Company or by
the registered holder of any Warrant to the Warrant Agent shall be deemed to
have been sufficiently given or made if sent by certified mail, return receipt
requested, postage prepaid, addressed (until another address is filed in writing
by the Warrant Agent with the Company) to the Warrant Agent as set forth above.
17. Standard of Conduct. Notwithstanding any implication to the
contrary elsewhere herein, whenever the Company or the Warrant Agent are
required or permitted to make any judgment or to take any action, no such
judgment or action shall be made or taken in bad faith or in any arbitrary or
capricious fashion.
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<PAGE> 10
18. Supplements and Amendments. The Company and the Warrant Agent may,
from time to time, supplement or amend this Agreement without the approval of
any of the holders of the Warrants in order to cure any ambiguity or to correct
or supplement any provision contained herein that may be defective or
inconsistent with any other provision herein, or to make any other provisions in
regard to matters or questions arising hereunder that the Company and the
Warrant Agent may deem necessary or desirable, that shall not be inconsistent
with the provisions of the Warrants, and that shall not materially adversely
affect the rights of the holders of the Warrants.
19. Successors. All of the covenants and provisions hereof by or for
the benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.
20. Merger or Consolidation of the Company. The Company will not merge
or consolidate with or into any other corporation, unless the corporation
resulting from such merger or consolidation (if not the Company) shall expressly
assume, by supplemental agreement satisfactory in form to the Warrant Agent and
executed and delivered to the Warrant Agent, the due and punctual performance
and observance of each and every covenant and condition of this Agreement to be
performed and observed by the Company.
21. North Carolina Contract. This Agreement and each Warrant issued
hereunder shall be deemed to be a contract made under the laws of the State of
North Carolina and for all purposes shall be construed in accordance with the
laws of said state.
22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give any person or corporation, other than the Company, the Warrant
Agent and the registered holders of the Warrants, any legal or equitable right,
remedy or claim under this Agreement, but this Agreement shall be for the sole
and exclusive benefit of the Company and the Warrant Agent and their respective
successors and of the holders of the Warrant Certificates.
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<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
COMMERCE CASUALTY GROUP, INC.
By:
--------------------------------------------
Paul V. H. Halter, III
Chief Operating Officer
ATTEST:
- -------------------------
___ Secretary
FIRST UNION NATIONAL BANK
CORPORATE TRUST GROUP
By:
--------------------------------------------
Ken Staab
Its: Vice President of Shareholder Services
ATTEST:
- -------------------------
11
<PAGE> 12
EXHIBIT A
<PAGE> 13
NO. W _____________ VOID AFTER _____________, 2003
_________ WARRANTS
SERIES A REDEEMABLE COMMON STOCK PURCHASE WARRANT
CERTIFICATE TO PURCHASE ONE SHARE OF COMMON STOCK
COMMERCE CASUALTY GROUP, INC.
CUSIP
THIS CERTIFIES THAT, FOR VALUE RECEIVED the holder hereof or registered assigns
(the "Registered Holder") is the owner of the number of Series A Redeemable
Common Stock Purchase Warrants (the "Warrants") specified above. Each Warrant
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and nonassessable share of Common Stock,
$.01 par value, of Commerce Casualty Group, Inc., a North Carolina corporation
(the "Company"), at any time between _______, 1998 (the "Initial Warrant
Exercise Date"), and the Expiration Date (as hereinafter defined) upon the
presentation and surrender of this Warrant Certificate with the Election to
Purchase on the reverse hereof duly executed, at the corporate office of First
Union National Bank Corporate Trust Group, a North Carolina corporation , as
Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of
$6.00 subject to adjustment (the "Purchase Price"), in lawful money of the
United States of America in cash or by check made payable to the Warrant Agent
for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated __________,
1998, by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
_________, 2003. If such date shall in the State of New York be a holiday or a
day on which the banks are authorized to close, then the Expiration Date shall
mean 5:00 p.m. (New York time) the next following day which in the State of New
York is not a holiday or a day on which banks are authorized to close.
13
<PAGE> 14
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act"), with respect to such securities
is effective or an exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the Federal
securities laws, use its best efforts to cause the same to become effective, use
its best efforts to keep such registration statement current, if required under
the Act, while any of the Warrants are outstanding, and deliver a prospectus
which complies with Section 10(a)(3) of the Act to the Registered Holder
exercising this Warrant. This Warrant shall not be exercisable by a Registered
Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
of Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, at the redemption price of $9.00 per
Warrant, on not less than 30 nor more than 60 days written notice ("Notice of
Redemption") if the closing price for the Common Stock for seven trading days
during a 10 consecutive trading day period ending not more than 15 days prior to
the date notice of redemption is mailed equals or exceeds $10.00 per share (200%
of the initial offering price to the public) subject to adjustment under certain
circumstances and provided there is then a current registration statement under
the Act with respect to the issuance and sale of Common Stock upon the exercise
of the Warrants. On and after the date fixed for redemption, the Registered
Holder shall have no rights with respect to the Warrants.
Under certain circumstances, the Representatives (as that term is
defined in the Warrant Agreement) or their designees collectively shall be
entitled upon the exercise or redemption of the Warrants to receive a fee equal
to 5% of the gross proceed received by the Company from the exercise of the
Warrants represented hereby.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
14
<PAGE> 15
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of North Carolina without giving effect to
the conflicts of laws principles thereof.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated: ___, 1998
[SEAL] COMMERCE CASUALTY GROUP, INC.
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
By:
Name:
--------------------------------
Title:
--------------------------------
COUNTERSIGNED:
FIRST UNION NATIONAL BANK
CORPORATE TRUST GROUP
as Warrant Agent
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
15
<PAGE> 16
ELECTION TO PURCHASE
(To be signed only upon exercise of Series A Warrant)
TO: Commerce Casualty Group, Inc.
9140 ArrowPoint Boulevard
Suite 200
Charlotte, North Carolina 28273
The undersigned, the Holder of Warrant Certificate Number ____ (the
"Warrant"), representing ______________ Series A Warrants of Commerce Casualty
Group, Inc. (the "Company"), which Warrant Certificate is being delivered
herewith, hereby irrevocably elects to exercise the purchase right provided by
the Series A Warrant Certificate for, and to purchase thereunder, _____________
shares of Common Stock of the Company, and herewith makes payment of
$____________ therefor, and requests that the certificates for such securities
be issued in the name of, and delivered to, ____________________ whose address
is _________________________, all in accordance with the Warrant Agreement and
the Warrant Certificate.
Dated:
-------------------
---------------------------------------
(Signature must conform in all
respects to name of Holder as
specified on the face of the
Warrant Certificate)
---------------------------------------
---------------------------------------
(Address)
16
<PAGE> 17
(FORM OF ASSIGNMENT)
(To be exercised by the registered holder if
such holder desires to transfer the Warrant
Certificate.)
FOR VALUE RECEIVED ____________________________________________________________
hereby sells, assigns and transfers unto
(Print name and address of transferee)
this Series A Warrant Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint
_______________________________________________ Attorney, to transfer the within
Warrant Certificate on the books of the within-named Company, and full power of
substitution.
Dated: Signature:
- ----------------------- ------------------------------------
(Signature must conform in all
respects to name of holder as
specified on the fact of the
Warrant Certificate)
------------------------------------
(Insert Social Security or
Other Identifying Number of
Assignee)
17
<PAGE> 18
EXHIBIT
NO. W _____________ VOID AFTER _____________, 2003
_________ WARRANTS
SERIES B REDEEMABLE COMMON STOCK PURCHASE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
COMMERCE CASUALTY GROUP, INC.
CUSIP
THIS CERTIFIES THAT, FOR VALUE RECEIVED the holder hereof or registered assigns
(the "Registered Holder") is the owner of the number of Series B Redeemable
Common Stock Purchase Warrants (the "Warrants") specified above. Each Warrant
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and nonassessable share of Common Stock,
$.01 par value, of Commerce Casualty Group, Inc., a North Carolina corporation
(the "Company"), at any time between _______, 1998 (the "Initial Warrant
Exercise Date"), and the Expiration Date (as hereinafter defined) upon the
presentation and surrender of this Warrant Certificate with the Election to
Purchase on the reverse hereof duly executed, at the corporate office of First
Union National Bank Corporate Trust Group, a North Carolina corporation , as
Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of
$7.00 subject to adjustment (the "Purchase Price"), in lawful money of the
United States of America in cash or by check made payable to the Warrant Agent
for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated __________,
1998, by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
_________, 2003. If such date shall in the State of New York be a holiday or a
day on which the banks are authorized to close, then the Expiration Date shall
mean 5:00 p.m. (New York time) the next following day which in the State of New
York is not a holiday or a day on which banks are authorized to close.
18
<PAGE> 19
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act"), with respect to such securities
is effective or an exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the Federal
securities laws, use its best efforts to cause the same to become effective, use
its best efforts to keep such registration statement current, if required under
the Act, while any of the Warrants are outstanding, and deliver a prospectus
which complies with Section 10(a)(3) of the Act to the Registered Holder
exercising this Warrant. This Warrant shall not be exercisable by a Registered
Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
of Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, at the redemption price of $10.00 per
Warrant, on not less than 30 nor more than 60 days written notice ("Notice of
Redemption") if the closing price for the Common Stock for seven trading days
during a 10 consecutive trading day period ending not more than 15 days prior to
the date notice of redemption is mailed equals or exceeds $10.00 per share (200%
of the initial offering price to the public) subject to adjustment under certain
circumstances and provided there is then a current registration statement under
the Act with respect to the issuance and sale of Common Stock upon the exercise
of the Warrants. On and after the date fixed for redemption, the Registered
Holder shall have no rights with respect to the Warrants.
Under certain circumstances, the Representatives (as that term is
defined in the Warrant Agreement) or their designees collectively shall be
entitled upon the exercise or redemption of the Warrants to receive a fee equal
to 5% of the gross proceed received by the Company from the exercise of the
Warrants represented hereby.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of North Carolina without giving effect to
the conflicts of laws principles thereof.
19
<PAGE> 20
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated: ___, 1998
[SEAL] COMMERCE CASUALTY GROUP, INC.
By:
------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
By:
------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
COUNTERSIGNED:
FIRST UNION NATIONAL BANK
CORPORATE TRUST GROUP
as Warrant Agent
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
20
<PAGE> 21
ELECTION TO PURCHASE
(To be signed only upon exercise of Series B Warrant)
TO: Commerce Casualty Group, Inc.
9140 ArrowPoint Boulevard
Suite 200
Charlotte, North Carolina 28273
The undersigned, the Holder of Warrant Certificate Number ____ (the
"Warrant"), representing ______________ Series B Warrants of Commerce Casualty
Group, Inc. (the "Company"), which Warrant Certificate is being delivered
herewith, hereby irrevocably elects to exercise the purchase right provided by
the Series B Warrant Certificate for, and to purchase thereunder, _____________
shares of Common Stock of the Company, and herewith makes payment of
$____________ therefor, and requests that the certificates for such securities
be issued in the name of, and delivered to,__________________ whose address is
________________, all in accordance with the Warrant Agreement and the Warrant
Certificate.
Dated:____________________________
--------------------------------------
(Signature must conform in all
respects to name of Holder as
specified on the face of the
Warrant Certificate)
--------------------------------------
--------------------------------------
(Address)
21
<PAGE> 22
(FORM OF ASSIGNMENT)
(To be exercised by the registered holder if
such holder desires to transfer the Warrant
Certificate.)
FOR VALUE RECEIVED_____________________________________________________________
hereby sells, assigns and transfers unto
(Print name and address of transferee)
this Series B Warrant Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint
________________________________________________ Attorney, to transfer the
within Warrant Certificate on the books of the within-named Company, and full
power of substitution.
Dated: Signature:
- ----------------------- ---------------------------------------
(Signature must conform in all
respects to name of holder as
specified on the fact of the
Warrant Certificate)
(Insert Social Security or
Other Identifying Number of
Assignee)
22
<PAGE> 1
First Union
Capital Marketing Group
Premium Finance Lending Group
MD5203
7 St. Paul Street, 5th Floor
Baltimore, Maryland 21202
410 332-5728
Fax 410 ???-???? June 10, 1998
Mr. Eric M. Halter, Controller
Mr. C Gresz Hutchinson, EVP
Commerce Casualty Group, Inc.
9140 ArrowPoint Blvd., Suite 200
Charlotte, NC 28273
RE: LOAN DOCUMENTATION FOR REVOLVING CREDIT
Dear Eric and Greg:
Enclosed are duplicate. executed originals of the Loan and Securltv
Agreement and Line of Credit Note for Commerce Capital. At long last, all of
our "due diligence" items have been received back, with clear records all
around.
Along with this, I've enclosed three additional documents. First is the
Borrowing Base Certificate, which you discussed with Janice a couple of weeks
ago. You will see some detail differences from what you received earlier,
because this form has now been updated to tie in better to the language of the
Loan & Security Agreement. Second is a document entitled "Collateral Monitoring
and Support Requirements". We have attempted to lay out as clearly as possible
all reporting requirements. What's enclosed is a generic version: some of the
reports may not apply to Commerce Capital. Third is a sample Covenant Compliance
Certificate, which will be sent along with your monthly financial statements.
Again, we have tried to make everything as simple and self-explanatory as
possible. Both this last form and the Borrowing Base Certificate are on the
diskette as files so you may automate them.
As I mentioned on the phone yesterday, some elements of your DDA
account and cash management setup as I understand them are not compatible with
how they'11 need to be set tip to interface with Capital Markets' automated
loan advance and repayment system. I'm talking with Andy Basinger and Carol
Hampy to see how we can most easily make the necessary changes, and will be back
to you on this as quickly as possible.
Very truly yours,
/s/ David A. Bauereis
David A. Bauereis
VICE PRESIDENT
Premium Finance Lending Group
<PAGE> 2
LOAN AND SECURITY AGREEMENT
THIS AGREEMENT is made as of the 22nd day of May 1998, by and between
FIRST UNION COMMERCIAL CORPORATION ("Bank") and Commerce Capital, Inc.
("Borrower"), whose chief executive office is located at 9140 ArrowPoint Blvd.,
Suite 200, Charlotte, NC 28273.
SECTION 1. CONSTRUCTION OF AGREEMENT AND DEFINITIONS
Unless the context otherwise requires, all of the terms used herein
without definition which are defined by the Maryland Uniform Commercial Code
shall have the meanings assigned to them by the Maryland Uniform Commercial Code
except to the extent varied by this Agreement. Unless the context otherwise
requires, all of the accounting terms used herein without definition shall have
the meanings assigned to them as determined by GAAP except to the extent varied
by this Agreement. The use of the singular herein shall also refer to the plural
and vice versa, and the use herein of any gender, including the neuter, shall
also refer to each of the other genders, including the neuter. In addition to
terms defined elsewhere in this Agreement, the following terms shall have the
following meanings when used herein:
"Additional Audit Fee" shall mean $600.00 per Field Audit.
"Advance Termination Date" shall mean the Business Day immediately
prior to the Maturity Date.
"Affiliate" shall mean: (a) any person in which Borrower legally or
beneficially owns or holds, directly or indirectly, any capital stock or other
equity interest; (b) any person that is a partner in or of Borrower, a
partnership in which Borrower is a partner, a joint venture in which Borrower is
a joint venturer, or a joint venturer in or of Borrower; (c) any person that is
a director, officer, employee, stockholder (legally or beneficially) or other
affiliate of any of the foregoing or of Borrower; and (d) any person that
directly or indirectly controls, is under the control of, or is under common
control with, Borrower, including, without limitation, any person that directly
or indirectly has the right or power to direct the management or policies of
Borrower and any person whose management or policies Borrower directly or
indirectly has the right or power to direct.
"Borrowing Base" shall mean, as determined by Bank from time to time
(a) 80% times (b) the aggregate amount of Eligible Receivables less Eligible
Receivables Premium Related Liabilities.
"Business Day" shall mean any day that is not a Saturday, Sunday or
other day on which banking institutions in the State of Maryland are authorized
or obligated to remain closed.
"Certified" shall mean that the information, statement, schedule,
report or other document required to be 'Certified" contains a representation by
Borrower that, to Borrower's knowledge and belief after diligent inquiry, such
information, statement, schedule, report or other document is true and complete
in all material respects.
"Closing Fee" shall mean $ 10,000.00.
"Collateral" shall mean: (a) all Receivables and, in addition, all
other property of Borrower in which Bank has, or may in the future acquire or be
granted, a security interest hereunder or under any of the Other Agreements; (b)
all amounts now or in the future owed by Bank to Borrower and all property and
funds of Borrower (including deposit accounts, certificates of deposit, and
investments made or managed by Bank on behalf of Borrower), now owned or
hereafter acquired by Borrower and now or hereafter in Bank's possession or
control; (c) all present and future substitutions, ,replacements, appurtenances,
accessories, accessions and materials and supplies RELATING TO ANY OF THE
FOREGOING; (D) ALL OF BORROWER'S present and future books and records in any
form, in or on any media, including data processing materials in any form
(including software, tapes, discs and the like), whether in the possession of
Borrower or any other person; and (e) all present and future proceeds and
products of all of the foregoing in any form whatsoever and all rights,
including rights to the payment of money for any reason, arising on account of
any sale, assignment, lease, rental, license, exchange, liquidation,
condemnation, taking, theft or any disposition of any nature of, or any damage
or casualty to, or any loss with respect to, any of the foregoing or any rights
or interests of Borrower in any of the foregoing, including, vAthout limitation,
cash proceeds (including all payments under any indemnities, warranties or
guaranties payable with respect to any of the foregoing), non-cash proceeds and
proceeds acquired with cash proceeds, whether any such proceeds constitute
consumer goods, farm products, equipment, inventory, documents of title, chattel
paper. accounts, instruments or general intangibles, and all proceeds of
insurance policies insuring any of the foregoing or any risks to Borrower
associated with any of the foregoing.
<PAGE> 3
"Compliance Advance" shall mean an advance made by Bank under the Line
of Credit pursuant to Subsection 2.2 of this Agreement.
"Compliance Certificate" shall mean a certificate executed by
Borrower's chief financial officer, or other officer or person acceptable to
Bank, certifying that the representations and warranties set forth in this
Agreement are true and correct as of the date of the certificate and further
certifying that, as of the date of the certificate, no Event of Default exists
under this Agreement and no event has occurred or circumstance exists which,
with the giving of notice or lapse of time (or both), would constitute an Event
of Default.
"Eligible Carrier" shall mean a property and casualty insurance company
having an A. M. Best rating of not less than "B" or Standard and Poors. rating
of not less than "BBBq".
"Eligible Receivables" shall mean shall mean any bona fide Receivable
that is created by Borrower in the ordinary course of its business and that
satisfies, and continues to satisfy, the following requirements:
(a) The Receivable was created pursuant to a Premium Finance Agreement
that is in form and substance acceptable to Bank;
(b) The insurance carrier issuing the underlying insurance relating to
the Receivable (i) is not a debtor in any case under any chapter of the
Bankruptcy Code, is insolvent, has made an assignment for the benefit of
creditors or is the subject of any insolvency, liquidation, reorganization,
dissolution, receivership, conservatorship, trusteeship or other such
proceeding, and (ii) is an Eligible Carrier-, provided, however, that a
Receivable may be an Eligible Receivable even if the insurance carrier is not an
Eligible Carrier provided (A) such Receivable otherwise meets the criteria of an
Eligible Receivable, and (B) insurance carriers who are not Eligible Carriers do
not issue underlying insurance which relates to more than five percent (5%) of
all Eligible Receivables;
(c) The broker or agent of the underlying insurance relating to the
Receivable is not a debtor in any case under any chapter of the Bankruptcy Code,
is not insolvent, has not made an assignment for the benefit of creditors, and
is not the subject of any insolvency, liquidation, reorganization, dissolution,
receivership, conservatorship, trusteeship or other such proceeding;
(d) The underlying insurance relating to the Receivable is cancelable
by Borrower and its assignees at any time and provides for the return of
unearned premiums and commissions upon cancellation;
(e) The rights to the return of unearned premiums and commissions upon
cancellation of the underlying insurance relating to the Receivable may be
validly assigned to Borrower and to assignees of Borrower;
(f) The amount of unearned premiums or commissions payable upon
cancellation of the underlying insurance relating to the Receivable is
calculable at all times;
(g) The Premium Finance Agreement giving rise to the Receivable is in
compliance with, and was created, solicited and entered into in compliance with,
all applicable laws, statutes, regulations, rules, orders, decrees or
injunctions of any governmental body, including all applicable insurance and
consumer laws and regulations;
(h) The Receivable, the related Premium Finance Agreement and the
related underlying insurance are each valid, binding and enforceable against
each party thereto;
(i) The Premium Finance Agreement giving rise to the Receivable is
fully and properly completed and contains a valid, binding and enforceable
assignment to Borrower of all unearned premiums and commissions payable upon
cancellation of the related underlying insurance and such assignment grants
Borrower a perfected first-priority security interest in such unearned premiums
and commissions without the necessity of filing any financing statement or of
making any other filing or taking any other action,-
(j) The Premium Finance Agreement giving rise to the Receivable gives
Borrower and its assignees a power of attorney or other legal authority that
enables Borrower and its assignees to cancel the underlying insurance;
(k) The Premium Finance Agreement giving rise to the Receivable is in
the possession of Bank;
-2-
<PAGE> 4
(1) The Receivable is in compliance with all representations and
warranties made with respect thereto in this Agreement, including all
representations and warranties made by Borrower with respect to the Premium
Finance Agreement giving rise to the Receivable and with respect to the
underlying insurance relating to the Receivable:
(m) Payments for the related underlying insurance policies have been
disbursed in one of the following manners: to the agenYbroker/MGAIGA
representing the insurance carrier, and where the Borrower has on file updated
copies of the carriers authorization to the Borrower to pay the
agent/broker/MGA/GA directly, to the agent representing the insurance carrier,
without such authorization, when such agent is a shareholder of Commerce
Casualty Group, or directly to the carrier;
(n) If the related underlying insurance is canceled, cancellation was
made before any payment on the Receivable became more than 45 days past due;
(o) If the underlying insurance has been canceled, not more than 90
days have elapsed since the date of cancellation;
(p) If the underlying insurance has been canceled, the unearned
premiums and commissions have not been paid:
(q) Except for security interests securing the Obligations and security
interests in favor of Borrower, the Receivable is not subject to any lien or
security interest; and
(r) The Receivable has been entered into and tracked by a premium
finance software system acceptable to Bank.
Bank may determine from time to time, in its sole discretion and notwithstanding
any previous determinations made by it, to exclude from Eligible Receivables
specific Receivables or specific categories or types of Receivables, specific
components of Receivables, Receivables with respect to which the related
underlying insurance is issued by a specific issuer or by specific categories or
types of issuers, Receivables arising out of specific Premium Finance Agreements
or specific categories or types of Premium Finance Agreements, Receivables with
respect to which the related underlying insurance was produced by a specific
agent, broker or other producer or by specific categories or types of agents,
brokers or other producers, or otherwise to limit Receivables, or the amount of
Receivables, which shall constitute Eligible Receivables. Such determinations
may be based upon evaluations of risk or any other factors considered relevant
by Bank, whether such factors have or have not heretofore been used,
contemplated or foreseen as bases for defining or limiting Eligible Receivables.
Any such determination by Bank to modify Eligible Receivables will be promptly
communicated to Borrower in writing. In order to enable Bank to make such
determinations, Borrower agrees to furnish, or cause to be furnished, to -Bank
from time to time such information and documentation that has been requested and
is reasonably available concerning Receivables, Premium Finance Agreements,
underlying insurance, issuers of underlying insurance, agents, brokers and other
producers of underlying insurance, premium downpayments made by insureds with
respect to underlying insurance and other matters as Bank may from time to time
request.
"Eligible Receivables Premium Related Liabilities" shall mean, at any
time, the amount which at such time bears the same proportion to the aggregate
amount of Eligible Receivables at such time as the aggregate amount of Premium
Related Liabilities at such time bears to the aggregate amount of Receivables at
such time.
"Environmental Laws" shall mean all federal, State, local and foreign
laws, whether now or hereafter enacted, and as amended from time to time,
relating to pollution or protection of the environment, including, without
limitation, laws relating to emissions, discharges, releases or threatened
releases of Hazardous Substances into the environment (including, without
limitation, ambient air, surface water, ground water or land), or otherwise
relating to the manufacture, generation, production, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous
Substances, and any and all regulations, codes, plans. orders, decrees,
judgments, injunctions, notices or demand letters issued, entered, promulgated
or approved thereunder.
"ERISA" SHALL mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, and any successor legislation, and all
regulations, codes, plans, orders, decrees, judgments, injunctions, notices or
demand letters issued, entered, promulgated or approved thereunder.
"Event of Default" shall mean any of the events set forth in Subsection
7.1 of this Agreement.
"Fee Due Date" shall mean the 1st day of each month.
-3-
<PAGE> 5
"Field Audit" shall mean any audit of Borrower's Receivables, books,
records and operations performed any place of business of Borrower or wherever
any of its books and records are stored, kept or maintained.
"GAAP" shall mean generally accepted accounting principles in the
United States of America in effect from time to time.
"good faith" shall mean, with respect to a determination to be made by
Bank "in good faith," that Bank shall make such determination honestly and not
maliciously.
"Hazardous Substance" shall mean any flammable explosives, radon,
radioactive materials, asbestos, urea formaldehyde foam insulation,
polychlorinated biphenyls, petroleum and petroleum-based products, methane and
all other pollutants, contaminates, chemicals, industrial substances, industrial
wastes, toxic substances, toxic wastes, toxic materials, hazardous substances,
hazardous wastes and hazardous materials. The meaning of each term used in this
definition shall include, without limitation, the meaning or meanings assigned
to such term by any Environmental Laws.
"Line of Credit" shall mean the line of credit established by Bank for
Borrower pursuant to Subsection 2.1 of this Agreement.
"Maturity Date" shall mean May 31, 2000.
"Maximum Loan Amount" shall mean, at any time, the lesser of (a)
$2,000,000.00, or (b) the Borrowing Base.
"Note" shall mean and include without limitation Borrower's promissory
note or notes, if any, in favor of Bank, further evidencing Borrower's
obligations with respect to advances made under the Line of Credit, as well as
any substitute, replacement or refinancing note or notes therefor.
"Obligations" shall mean, as the same may be amended, modified,
extended, renewed, supplemented, increased, refinanced, consolidated or replaced
from time to time, all present and future obligations, indebtedness and
liabilities of Borrower to Bank of every kind and nature, whether arising under
this Agreement, the Other Agreements or otherwise (including, without
limitation, all principal amounts, including future advances, interest charges,
service charges, late charges, fees and all other charges and sums, as well as
all costs and expenses, including attorneys'fees and expenses, payable or
reimbursable by Borrower under or pursuant to this Agreement, the Other
Agreements and otherwise), whether direct or indirect, joint or several,
contingent or noncontingent, matured or unmatured, accrued or not accrued,
liquidated or unliquidated, secured or unsecured, related or unrelated to this
Agreement, whether or not now contemplated, whether arising in contract, tort or
otherwise, whether or not any instrument or agreement relating thereto
specifically refers to this Agreement, and whether or not of the same character
or class as Borrower's obligations under this Agreement, reimbursement
obligations of Borrower in connection with letters of credit issued by Bank,
OBLIGATIONS OF BORROWER in connection with overdrafts in any checking or other
account of Borrower at Bank, all claims against Borrower acquired by assignment
to Bank, and all claims of Bank against Borrower arising or re-arising on
account of or as a result of any payment made by Borrower or any Other Obligor
with respect to any obligations included in this definition which is rescinded
or recovered from or restored or returned by Bank under authority of any law,
rule, regulation, order of court or governmental agency, or in connection with
any compromise or settlement relating thereto or relating to any pending or
threatened action, suit or proceeding relating thereto, whether arising out of
any proceedings under the United States Bankruptcy Code or otherwise.
"Other Agreements" shall mean, as the same may be amended,
modified, extended, renewed, supplemented or replaced from time to time, all
agreements, contracts, promissory notes and other instruments (including,
without limitation, the Note), drafts, checks, bankers acceptances, security
agreements, assignments, pledge agreements, hypothecation agreements,
indemnification agreements, letters of credit and applications and agreements
relating thereto, subordination agreements, mortgages, deeds of trust, leases,
guaranties and other documents (a) now and hereafter existing between Bank and
Borrower, (b) executed and/or delivered in connection with this Agreement or any
of the Obligations, or (c) evidencing, guaranteeing, securing (directly or
indirectly), subordinating other obligations of Borrower or any other obligor
to, containing any warranties, covenants, agreements or representations of any
person relating to, or in any other manner relating to, any of the Obligations
or any obligation of any Other Obligor in connection with any of the
obligations. Without limitation of the foregoing, the Other Agreements shall
include: N/A
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<PAGE> 6
"Other Obligor" shall mean any person that is now or hereafter
primarily or secondarily, or contingently or noncontingently, liable for or
obligated upon or in connection with any of the Obligations, or, whether or not
so liable, that has granted any lien or security interest to or for the benefit
of Bank as security for any of the Obligations or any obligations of any Other
Obligor in connection with any of the Obligations.
"Permitted Liens" shall mean: (a) any lien or security interest of
Bank; and (b) any lien or security interest specifically consented to by Bank in
writing.
"person" shall mean any individual, corporation, partnership, joint
venture, association, trust, government (or subdivision, agency or department
thereof) or other entity of any kind.
"Premium Finance Agreement" shall mean any written agreement signed by
an insured or prospective insured or, if permitted under applicable state law,
signed by the agent or broker or another authorized person for such insured or
such prospective insured by which the insured or prospective insured promises or
agrees to pay to Borrower an amount advanced or to be advanced under the
agreement by Borrower on behalf of the insured or prospective insured to an
insurer, agent or broker in payment of premiums on insurance contracts and which
contains an assignment of, or is otherwise secured by, the unearned premium or
refund obtainable from the insurer, agent, broker or other parties upon
cancellation of the insurance contract.
"Premium Related Liabilities" shall mean, at any time, the aggregate
amount of Borrower's liabilities created pursuant to the financing of insurance
premiums, excluding any indebtedness for credit extended to Borrower relating to
the financing of such insurance premiums, but including (a) amounts due to
insurance carriers, insureds, agents and brokers (including an estimated amount
with respect to outstanding checks payable to such Persons, (b) escrow accounts,
and (c) overdrafts.
"Receivables" shall mean: (a) all of Borrower's present and future
accounts, contract rights, receivables, promissory notes and other instruments,
chattel paper, general intangibles and investment property; (b) all present and
future tax refunds of Borrower and all present and future rights of Borrower to
refunds or returns of prepaid expenses, including unearned insurance premiums-,
(c) all present and future cash of Borrower; (d) all deposit accounts now or
hereafter maintained or established by, for or on behalf of Borrower with any
bank or other institution, and all balances of funds now or hereafter on deposit
in all such accounts, including, without limitation, all checking accounts,
collection accounts, lockbox accounts, disbursement accounts, concentration
accounts and all other deposit accounts of every kind and nature; (e) all
present and future judgments, orders, awards and decrees in favor of Borrower
and causes of action in favor of Borrower, (~ all present and future claims,
rights of indemnification and other rights of Borrower under or in connection
with any contracts or agreements to which Borrower is or becomes a party or
third party beneficiary; (9) all rights and claims of Borrower with respect to
any deposits of money or other property made with any lessors of any property,
insurers, bonding agents or any other persons; (h) all present and future rights
and claims which Borrower may now or hereafter have under any insurance
policies, contracts or coverages now or hereafter in effect; (i) all rights
WHICH BORROWER MAY NOW OR AT ANY TIME hereafter HAVE, BY LAW OR AGREEMENT,
AGAINST ANY ACCOUNT DEBTOR OR OTHER OBLIGOR OF BORROWER, AND ALL rights, liens
and security interests which Borrower may now or at any time hereafter have, by
law or agreement, against any property of any account debtor or other obligor of
Borrower; 0) all present and future customer lists of Borrower; (k) all present
and future contingent and noncontingent rights of Borrower to the payment of
money for any reason whatsoever, whether arising in contract, tort or otherwise,
whether or not such rights are otherwise included in this definition; and (1)
all present and future rights of Borrower with respect to licenses, patents,
copyrights, franchises, trade names and trademarks. Wrthout limitation of the
foregoing, it is specifically understood and agree that the Receivables shall
include all right, title and interest of Borrower in and to all Premium Finance
Agreements, whether now existing or hereafter arising, and all amounts due or to
become due thereunder.
"Service Fee" shall mean $650.00 per month payable on the 1st day of
each month.
"State" shall mean any State of the United States and the District of
Columbia.
"Subordinated Indebtedness" shall mean indebtedness of Borrower for
borrowed money payable to any person (other than Bank) which has been
subordinated to the Obligations pursuant to a written agreement in form and
substance acceptable to Bank.
"Subsidiary" shall mean any corporation at least a majority of the
outstanding voting stock of which, now or in the future, is owned or controlled
by Borrower, directly or indirectly through one or more intermediaries.
"Unused Line Fee Rate" shall mean 1/8% per annum.
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<PAGE> 7
SECTION 2. LINE OF CREDIT
2.1 REQUESTED ADVANCES. (a) Bank hereby establishes a Line of Credit in
favor of Borrower subject to all of the terms and conditions set forth herein.
Subject to all of the terms and conditions set forth herein, Borrower is
authorized to request, and Bank agrees to make, advances to Borrower from time
to time under the Line of Credit until the Advance Termination Date. Advances
under the Line of Credit, as well as directions for payment from Borrower's
accounts, may be requested orally or in writing by authorized persons. Bank may,
but need not, require that all oral requests be confirmed in writing. Each
advance shall be conclusively deemed to have been made at the request of and for
the benefit of Borrower (i) when credited to any deposit account of Borrower
maintained with Bank, or (ii) when advanced in accordance with the instructions
of a person believed in good faith by Bank to have been authorized for such
purpose. Bank, at its option, may set a cutoff time, after which all requests
for advances will be treated as having been requested on the next succeeding
Business Day. Under no circumstances shall Bank be required to make any advance
in an amount less than $1,000.00. Each advance, including each Compliance
Advance, shall bear interest at the rate and calculated in the manner provided
in the Note. Borrower covenants that it will not request, and Bank shall have no
obligation to make, any advance under the Line of Credit if the making of the
advance would cause the aggregate amount of advances, including Compliance
Advances, made and outstanding under the Line of Credit to exceed, or to exceed
by a greater amount, the Maximum Loan Amount. Even if the aggregate amount of
advances, including Compliance Advances, made and outstanding shall at any time
and for any reason exceed the Maximum Loan Amount, Borrower shall nonetheless be
liable for the entire amount outstanding, with interest thereon in accordance
with this Agreement, and shall nonetheless be liable and responsible for
observance of, compliance with and performance of, all warranties, covenants,
conditions and agreements on Borrower's part to be observed, complied with or
performed under this Agreement. If the aggregate amount of advances, including
Compliance Advances, made and outstanding under the Line of Credit shall at any
time and for any reason exceed the Maximum Loan Amount, Borrower shall pay to
Bank, upon written demand by Bank, the amount of such excess, together with all
unpaid interest thereon. Subject to all of the other terms and conditions set
forth herein, all advances, including Compliance Advances, made and outstanding
under the Line of Credit, and all other sums owing to Bank by Borrower under
this Agreement, together with all unpaid interest thereon, shall be due and
payable on the Maturity Date without necessity for demand.
(b) Notwithstanding the foregoing, Bank's obligation to make any
advance to or for the account of Borrower under the Line of Credit is subject to
the following conditions precedent, with all documents, instruments, opinions,
reports, and other items required under this Agreement to be in form and
substance satisfactory to Bank:
(i) Bank shall have received evidence that this Agreement
and all Other Agreements have been duly authorized, executed, and delivered by
Borrower to Bank.
(ii) Bank shall have received such opinions of counsel,
supplemental opinions, and documents as Bank may request.
(iii) The security interests in the Collateral shall have
been duly authorized, created, and perfected with first lien priority and shall
be in full force and effect.
(iv) All Other Agreements required by Bank in connection
with the Line of Credit shall have been executed by each Other Obligor,
delivered to Bank, and be in full force and effect.
(v) Bank, at its option and for its sole benefit, shall
have conducted a Field Audit of Borrower's Receivables, books. records, and
operations, and Bank shall be satisfied as to their condition.
(vi) Borrower shall have paid to Bank all fees, costs, and
expenses specified in this Agreement and the Other Agreements as are then due
and payable.
(vii) There shall not exist an Event of Default, and no event
shall have occurred or circumstance exists which, with the giving of notice or
lapse of time (or both), would be an Event of Default.
(viii) Borrower shall have delivered to Bank a Compliance
Certificate.
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<PAGE> 8
(c) Bank shall maintain on its books a record of account in which Bank
shall make entries for each advance under the Line of Credit and such, other
debits and credits as shall be appropriate in connection with the Line of
Credit. Bank shall provide Borrower with periodic statements of Borrower's
account which statements shall be considered to be correct and conclusively
binding on Borrower unless Borrower notifies Bank to the contrary within thirty
(30) days after Borrower's receipt of any such statement which Borrower deems to
be incorrect.
2.2 COMPLIANCE ADVANCES. Before or after the Maturity Date and without
prior notice to or request from Borrower, and regardless of the Maximum Loan
Amount, Bank is irrevocably authorized by Borrower to, and may from time to
time, make Compliance Advances and apply the proceeds thereof in order to (a)
cause Borrower or any Other Obligorto be in compliance with any of the terms of
this Agreement or any of the Other Agreements, (b) protect Bank's rights or
interests under this Agreement or any of the Other Agreements (for example, but
not by way of limitation, by paying premiums for required insurance or by
satisfying tax obligations of Borrower or liens upon the Collateral or other
assets of Borrower), (c) pay overdrafts in any checking or other account of
Borrower at Bank, or (d) pay interest charges, service charges, late charges,
fees, expenses or any other sums or charges due and unpaid under this Agreement
or any of the Other Agreements. Each outstanding Compliance Advance shall bear
interest at the rate and calculated in the manner provided in the Note. Except
as otherwise agreed by Bank in writing, the making of any Compliance Advance
shall not constitute a waiver by Bank of any event or circumstance, or any
rights of Bank consequent thereupon, with respect to which such Compliance
Advance is made. All Compliance Advances made and outstanding, together with all
unpaid interest thereon, shall be due and payable upon written demand by Bank.
2.3 FEES. In consideration of Bank entering into this Agreement, on the
date of this Agreement, Borrower shall pay to Bank the Closing Fee. As
compensation to Bank for the administration and servicing of the Collateral by
Bank, Borrower shall pay to Bank (a) on each Fee Due Date, a monthly fee equal
to the Service Fee (b) upon the demand of Bank, all travel and lodging expenses
of Bank, its employees and agents, in connection with . any Field Audit, and (c)
upon the demand of Bank, an Additional Audit Fee for each Field Audit in excess
of two performed in any twelve-month period. In addition to the foregoing,
Borrower shall also pay to Bank any fees, charges and other sums which may be
payable in connection with any cash management services to be performed for
Borrower by Bank, as Bank and Borrower may agree from time to time. In
consideration of Bank's making credit available to Borrower under the Line of
Credit, Borrower shall pay to Bank, on each Fee Due Date, a monthly fee
calculated at the Unused Line Fee Rate (based upon a year of 360 days and paid
for the actual number of days elapsed) on the daily average, for the prior
calendar month, of the amount, if any, by which the Maximum Loan Amount exceeded
the aggregate amount of advances outstanding under the Line of Credit.
2.4 CHANGES IN LAWS. In the event that, at any time or from time to
time after the date of this Agreement, the implementation of, or any change in,
any law or regulation, or any guideline or directive (whether or not having the
force of law), or the interpretation or administration thereof by any central
bank or other authority charged with the administration thereof, imposes,
modifies or deems applicable any capital adequacy, reserve or similar
requirement (including, without limitation, a request or requirement which
affects the manner in which Bank allocates capital resources to its commitments,
including, without limitation, its obligations hereunder), and, as a result
thereof, in the sole opinion of Bank, the rate of return on Bank's capital as a
consequence of its obligations hereunder, is reduced to a level below that which
Bank could have achieved but for such circumstances, then, in each such case,
within 10 days after written demand by Bank from time to time, Borrower shall
pay to Bank such additional amount or amounts as shall compensate Bank for such
reduction in rate of return. A certificate of Bank as to any such additional
amount or amounts, in the absence of manifest error, shall be fina! and
conclusive. In determining such amount or amounts, Bank may use any reasonable
averaging and attribution methods.
SECTION 3. SECURITY INTEREST AND COLLATERAL
3.1 GRANT OF SECURITY INTEREST. As security for all of the Obligations,
whether or not any agreement or instrument relating to any Obligations
specifically refers to this Agreement or the security interest created
hereunder, Borrower hereby grants to Bank a lien and continuing security
interest in, and pledges and assigns to Bank, the Collateral. EVEN IF THE
Obligations shall at any time or from time to time be paid in full, Bank's
security interest shall continuously exist until all of the Obligations have
been paid in full and there exists no commitment by Bank which could give rise
to any Obligations. Borrower shall make appropriate notations on Borrower's
books and records indicating the existence of Bank's security interest in the
Collateral. Neither the granting to Bank of the security interest granted to
Bank under this Agreement, nor the filing by Bank of financing statements to
perfect such security interest, shall in any way limit, diminish, impair or
otherwise affect the extent to which any security interests, liens or
assignments heretofore granted to Bank by Borrower, as security for future
obligations, indebtedness or liabilities of Borrower to Bank, shall secure
obligations, indebtedness and liabilities of Borrower to Bank heretofore or
hereafter arising under this Agreement.
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<PAGE> 9
3.2 NOTICES, ADDITIONAL DOCUMENTS. Borrower agrees to execute and
deliver to Bank. or cause to be executed and delivered ank, from time to time
promptly after request by Bank and in form and content satisfactory to Bank, in
Bank's discretion exercised in good faith, such security agreements, financing
statements, amendments of financing statements, assignments of financing
statements, security interest filing statements, mortgages, deeds of trust,
assignments, notices, consents and other documents as Bank may request in good
faith in order to confirm, supplement. preserve, protect or perfect, or to
maintain the perfection of, Bank's security interest in the Collateral and
Bank's rights under this Agreement.
3.3 ADDITIONAL WARRANTIES, AGREEMENTS CONCERNING COLLATERAL. Borrower
warrants and agrees that: (a) no financing statement, assignment, notice of lien
or other security document publicizing a security interest in or lien upon any
of the Collateral is or will be on file in any recording or filing office,
except for financing statements or other security documents publicizing
Permitted Liens, and the Collateral is and shall remain free and clear of all
liens, security interests and encumbrances of every kind, except for Permitted
Liens; (b) Borrower will promptly deliver to Bank, with such indorsements and/or
assignments as Bank may from time to time request in good faith, all Premium
Finance Agreements, promissory notes and other instruments, chattel paper,
guaranties, documents of title, certificates of origin and certificates of
title, as well as other documents requested by Bank, previously or hereafter
coming into Borrower's possession or control and constituting, evidencing.
securing, guaranteeing or otherwise relating to, any of the Collateral or
proceeds of any of the Collateral; (c) a carbon, photographic or other
reproduction of this Agreement or any financing statement signed by Borrower in
connection with this Agreement shall be sufficient as a financing statement; (d)
immediately upon learning thereof, the Borrower shall notify Bank of any event
or circumstance that disqualifies any Receivable as an Eligible Receivable and
any event or circumstance that the Borrower has reason to believe would cause
any Receivable to be unacceptable to Bank: (e) Borrower shall not report or
schedule to Bank as an Eligible Receivable any Receivable that Borrower knows or
should know is not an Eligible Receivable; (f) without prior written consent of
Bank, Borrower shall not permit or agree to any payment extension with respect
to any Receivable or any unearned premiums or commissions payable upon
cancellation of any underlying insurance nor permit or agree to any modification
or compromise with respect to any Receivable or any unearned premiums or
commissions payable upon cancellation of any underlying insurance, other than in
the ordinary course of business; (g) each Receivable and Premium Finance
Agreement entered into by the Borrower shall be genuine and valid, binding and
enforceable against the insured and in all respects what it purports to be and
shall represent a bona fide transaction entered into in the ordinary course of
Borrower's business; (h) no Receivable created by Borrower shall be subject to
any deduction, offset, counterclaim, lien, security interest or other condition
resulting from an action or omission on the part of Borrower or any of its
Subsidiaries; (i) to Borrower's knowledge, all underlying insurance will comply
with, and will be solicited, produced and issued in compliance with, all
applicable insurance, consumer and other laws, rules and regulations; (j) all
Premium Finance Agreements will comply with, and will be solicited and entered
into in compliance with, all applicable insurance, consumer and other laws,
rules and regulations: (k) no policy of underlying insurance shall be the
subject of more than one Premium Finance Agreement; (1) Borrower shall deliver
to Bank the original of each Premium Finance Agreement promptly following 'he
execution thereof; and (m) each Premium Finance Agreement shall be completely
and correctly completed and shall be duly and validly signed by all required
parties in accordance with all applicable statutory and regulatory requirements
and the internal standards and policies of Borrower.
3.4 COLLATERAL COLLECTIONS. Except as otherwise agreed by Bank from
time to time, Borrower will deliver to Bank, not later than the first Business
Day following the day on which the same are received by Borrower, all cash,
checks, drafts, money orders and other items of payment constituting Collateral,
or collections or other proceeds of Collateral, with such indorsements and/or
assignments as Bank may from time to time request in good faith, together with a
Certified activity report in form and content satisfactory to Bank. Bank may at
any time or from time to time, in its discretion: (a) notify, and/or require
Borrower to notify, any or all account debtors and other obligors of Borrower in
connection with any or all accounts, promissory notes or other instruments,
guaranties, chattel paper, security agreements, contract rights, tax refunds or
general intangibles of Borrower, or in connection with any or all other debts,
liabilities or obligations payable to Borrower, to make payments thereon
directly to Bank or in care of a post office lock box which shall be maintained
by Bank subject to Bank's customary arrangements and charges to borrowers
therefor as established by Bank from time to time and which shall be under the
exclusive control of Bank; (b) establish and maintain at Bank, subject to Bank's
customary arrangements and charges to borrowers therefor as established by Bank
from time to time, a repayment account (the 'Repayment Account"), which shall be
under the exclusive control of and subject to the sole order of Bank, and
require Borrower to deposit in the Repayment Account, not later than the first
Business Day following the day on which the same are received by Borrower, as a
tender of payment of the Obligations or as security for any contingent or future
Obligations, all cash, checks, drafts, money orders and other items of payment
constituting Collateral, or collections or other proceeds of Collateral; and/or
(c) demand, compromise, collect, sue for and receive any money or property at
any time due, payable or receivable on account of any or all accounts,
promissory notes or other instruments, guaranties, chattel paper, security
agreements, contract rights, tax refunds or general intangibles of Borrower, or
on account of any or all other debts, liabilities or obligations payable to
Borrower. Except as may be otherwise specifically provided in this Agreement,
all Collateral and proceeds of Collateral delivered to Bank or coming into
Bank's possession or control from time to time, as well as all funds from time
to time credited to the Repayment Account, may be applied by Bank from time to
time to any of the Obligations or held by Bank as security for any contingent or
future Obligations. In the case of any check, draft, money order or other item
of payment constituting Collateral, or collections or other proceeds of
Collateral, deposited in the Repayment Account or otherwise delivered to Bank or
coming into Bank's possession or control pursuant to this Agreement, Borrower
shall not
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<PAGE> 10
and properties, prior to the date on which penalties attach thereto, unless the
same are being diligently contested by Borrower or a Subsidiary, as the case may
be, in good faith by appropriate proceedings, provided that Borrower or such
Subsidiary gives Bank prior written notice of intention to contest and
establishes appropriate reserves therefor in accordance with GAAP, and provided
that no notice of lien with respect thereto is filed in any recording office;
(b) maintain Borrower's corporate, partnership or limited liability company
existence, as the case may be, in good standing, and cause each Subsidiary to
maintain its corporate existence in good standing, and maintain, and cause each
Subsidiary to maintain, in good standing its qualification to do business in
each jurisdiction in which such qualification is required by law; (c) continue,
and cause each Subsidiary which is an Other Obligor to continue, its business
operations; (d) comply with, and cause each Subsidiary to comply with, all
federal, State, local and foreign laws, rules, regulations and orders,
including, without limitation, ERISA, Environmental Laws and all laws, rules,
regulations and orders relating to the collection, payment and deposit of
employees' income, unemployment or social security taxes or of sales, use or
excise taxes, or relating to occupational safety and health, or relating to
public health; (e) keep and maintain, and cause each Subsidiary to keep and
maintain, proper and current books and records (reflecting such specific
information as may from time to time be requested by Bank in good faith) in
accordance with GAAP consistently applied, and at all reasonable times permit
access by Bank to, reproduction by Bank of, copying by Bank from, and
verification (by such means, including audits, as Bank may determine) by Bank of
any information contained in, such books and records; (f) at all reasonable
times, permit Bank, and its agents and designees, to enter upon and inspect all
business premises owned, leased, subleased, occupied, operated or used by
Borrower or any Subsidiary and to conduct thereon, at Borrower's expense, such
audit tests and examinations, including subsurface exploration and testing, as
Bank may deem necessary to determine whether Borrower's or such Subsidiary's
ownership, tenancy, occupation, operation and/or use of the premises, as the
case may be, and the conduct of the activities engaged in thereon, are in
compliance with Environmental Laws; (g) at all reasonable times, permit Bank,
and its agents and designees, to inspect all assets of Borrower and
Subsidiaries, and to discuss Borrower's or any Subsidiary's business, assets,
operations, business prospects or financial condition with any directors,
officers, employees or agents of Borrower or any Subsidiary, including
accountants previously or hereafter engaged by Borrower or any Subsidiary; (h)
maintain, and cause each Subsidiary to maintain, all of the Collateral, and all
proper-ties and improvements necessary to the conduct of Borrower's or any
Subsidiary's business, in good order and condition, ordinary wear and tear
excepted, and use, operate and maintain, and cause to be used, operated and
maintained, all of the Collateral and all such properties and improvements in
compliance with all laws, regulations and ordinances and in compliance with all
applicable insurance requirements and regulations, and cause replacements and
repairs to be made when necessary for the proper conduct of its or any
Subsidiary's business; (i) maintain, and cause all operators, tenants,
subtenants, licensees and occupants of all property owned, leased, subleased,
occupied, used or operated by Borrower or any Subsidiary to maintain, all such
property free of all Hazardous Substances, and prevent all such property from
being used for the manufacture, generation, production, processing,
distribution, use, treatment, storage, disposal, transport or handling of any
Hazardous Substances; (j) maintain an off-site electrcnic data storage and
backup system with a third party selected from time to time by Borrower in the
exercise of its reasonable business judgment providing for a, least weekly
backups of all electronic customer, insurance carrier, billing and other data
material to the conduct of the business operations of borrower; and (k) deliver
to Bank copies of all reports prepared by any governmental authority, any
environmental auditor or engineer, or any other person, relating to or in
connection witn Borrower's, any Subsidiary's or any Other Obligor's compliance
with any Environmental Laws, unless Borrower cannot obtain such reports or
copies thereof.
5.3 INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Bank may from time to time reasonably
require with respect to Borrower's properties and operations, in form, amounts,
coverages and with insurance companies acceptable to Bank. Borrower, upon
request of Bank, will deliver to Bank from time to time the policies or
certificates of insurance in form satisfactory to Bank, including stipulations
that coverages will not be canceled or diminished without at least thirty (30)
days prior written notice to Bank. Each insurance policy also shall include an
endorsement providing that coverage in favor of Bank will not be impaired in any
way by any act, omission or default of Borrower or any other person. In
connection with all policies covering assets in which Bank holds or is offered a
security interest for the Line of Credit, Borrower will provide Bank with such
loss payable or other endorsements as Bank may require.
5.4 NOTICES. Borrower covenants and agrees that Borrower will, except
as otherwise agreed by Bank from time to time in writing; (a) if any financial
statement, schedule, report, certificate or information previously or hereafter
supplied to Bank by or on behalf of Borrower, any Subsidiary or any Other
Obligor, including, without limitation, any of the same previously or hereafter
supplied to Bank pursuant to or in connection with this Agreement or any of the
Other Agreements or any transaction involving or affecting Borrower, any
Subsidiary or any Other Obligor, shall, to Borrower's knowledge or belief,
subsequently become inaccurate or misleading in any material respect, promptly
notify Bank thereof in writing; (b) promptly after learning thereof, notify Bank
in writing of (i) any claim, action, suit or proceeding, at law or in equity,
commenced or threatened against Borrower, any Subsidiary or any Other Obligor,
or any property of Borrower, any Subsidiary or any Other Obligor, (ii) the
occurrence of any material adverse change in Borrower's, any Subsidiary's or any
Other Obligor's business, assets, operations, business prospects or financial
condition, (iii) any extraordinary loss suffered by Borrower, any Subsidiary or
any Other Obligor, whether or not insured, or any extraordinary
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depreciation of the value of Borrower's, any Subsidiary's or any Other Obligor's
assets, (iv) any destruction of, or substantial damage to, any books or records
of Borrower, any Subsidiary or any Other Obligor, (v) any representation or
warranty contained in Subsection 3.3 hereof being or becoming untrue in any
material respect, and (vi) any fact, including, without limitation, any
reportable event under Section 4043(b) of ERISA, arising in connection with any
plan of Borrower, any Subsidiary or any Other Obligor subject to ERISA which
might constitute grounds for the termination thereof by the Pension Benefit
Guaranty Corporation (or any successor thereto); (c) promptly after learning
thereof, notify Bank in writing of (i) any notice that Borrower, any Subsidiary
or any Other Obligor is not in compliance with any Environmental Laws or any
permits, licenses or authorizations which are required under any Environmental
Laws, and (ii) any civil, criminal or administrative action, or notice thereof,
or any suit, hearing, claim or demand, or notice thereof, or any violation,
investigation or proceeding, or notice thereof, pending or threatened against
Borrower, any Subsidiary or any Other Obligor, relating in any way to any
Environmental Laws; and (d) promptly after learning thereof, notify Bank in
writing of the occurrence of any Event of Default or any event or circumstance
which, with the giving of notice and/or the lapse of time, would constitute an
Event of Default.
5.5 FINANCIAL COVENANTS. Borrower covenants and agrees that Borrower
will, except as otherwise agreed by Bank from time to time in writing:
(a) Not cause or permit the sum of the Obligations plus the
Subordinated Indebtedness at any time to exceed total Eligible Receivables.
(b) Not cause or permit advances under the Line of at any time
to exceed the Borrowing Base.
(c) Maintain at all times a Capitalization Ratio of not less
than 5.0 to 1.0. For purposes of this Agreement, "Capitalization Ratio" shall
mean the ratio of (a) total liabilities of Borrower minus Subordinated
Indebtedness, to (b) the sum of (i) the tangible net worth of Borrower, (ii)
Subordinated Indebtedness, and (iii) thirty percent (30%) of Borrower's current
year-to-date net profit before income taxes.
(d) Maintain at all times stockholders' equity of not less
than $250,000.00, and Subordinated Indebtedness of not less than $ N/A.
(e) Maintain at all times a Cash Flow Coverage Ratio of not
less than 1. 15 to 1.0. For purposes of this Agreement, "Cash Flow Coverage
Ratio" shall mean the ratio of (a) net profit after tax plus interest expense
for the most recently completed four fiscal quarters of Borrower for which
financial statements are available, to (b) interest expense for such four fiscal
quarters.
(f) Limit the payment of dividends to 50% of net profit after
tax for the most recently completed fiscal year, or will pay no dividends if
operations for the most recently completed fiscal year resulted in a net loss on
a pre-tax or after-tax basis.
5.6 USE OF PROCEEDS. Borrower covenants and agrees that Borrower will
use proceeds of the advances under the Line o edit solely to fund premium
finance contract receivables.
5.7 YEAR 2000. Borrower covenants and agrees that Borrower will take
all action necessary to assure that Borrower's computer based systems are able
to operate and effectively process data including dates on and after January 1,
2000. At the request of Bank, Borrower shall provide to Bank assurance
acceptable to Bank, to include if requested written plans, progress against
plans, and/or test results, of Borrower's compliance with the provisions of this
Section.
SECTION 6. ADDITIONAL NEGATIVE COVENANTS
6.1 FUNDAMENTAL CHANGES, TRANSACTIONS. Borrower covenants and agrees
that Borrower will not, directly or indirectly, witho, ank's prior written
consent: (a) enter into or be a party to any merger, consolidation or share
exchange, or suffer or permit to occur any merger, consolidation or share
exchange to which any Subsidiary or any Other Obligor is a party, or suffer or
permit any of Borrower's or any Subsidiary's business, assets, operations or
books and records to be merged, consolidated or commingled with any business,
assets, operations or books and records of any other person; (b) materially
change, or suffer or permit to occur any material change in, the scope or nature
of Borrower's, any Subsidiary's or any Other Obligor's business or business
operations; (c) enter into, or suffer or permit any Subsidiary or any Other
Obligor to enter into, any agreement which is inconsistent with Borrower's, any
Subsidiary's or any Other Obligor's obligations under this Agreement or any of
the Other Agreements; (d) enter into any transaction with any Affiliate except
for
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<PAGE> 12
transactions with Affiliates entered into in the ordinary course of Borrower's
business on terms no less favorable to Borrower than would apply in a comparable
arm's length transaction with a person that is not an Affiliate; (e) change
Borrower's fiscal year; (f) form or acquire any Subsidiary; (g) change, or
suffer or permit to be changed, the name of Borrower, any Subsidiary or any
Other Obligor, or use any trade name other than Borrower's true corporate or
partnership name as indicated in the first sentence of this Agreement and trade
names, if any, listed after Borrower's name in the first sentence of this
Agreement; (h) change, or suffer or permit to be changed, the location of the
chief executive office of Borrower, any Subsidiary or any Other Obligor that is
not an individual, or the location of the books and records of Borrower, any
Subsidiary or any Other Obligor that is not an individual, or the location of
any business or storage location of Borrower, any Subsidiary or any Other
Obligor that is not an individual, or have or maintain, or suffer or permit any
Subsidiary or any Other Obligor that is not an individual to have or maintain,
any new business or storage location; (i) suffer or permit any Other Obligor
that is an individual to change such Other Obligor's residence to any location
outside the State where such Other Obligor's residence is presently located; (j)
pay any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, during any period
that there is in effect with respect to Borrower an election pursuant to Section
1362 of the Internal Revenue Code of 1986, as amended, and any successor
thereto, to be taxed as a Small Business Corporation, Borrower shall be
permitted, without Bank's prior written consent, to make distributions to its
stockholders in an aggregate amount equal to the amount, if any, by which the
aggregate liability of its stockholders for federal and State income tax exceeds
the aggregate liability for federal and State income tax which its stockholders
would be incurred if such election were not in effect and Borrower had not
declared a dividend; (k) make or permit to exist any loan to any person; (1)
guaranty or otherwise in any way become or be responsible for obligations or
indebtedness of any person; or (m) with respect to any plan of Borrower, any
Subsidiary or any Other Obligor subject to ERISA (i) engage in, suffer or permit
to be engaged in, knowingly permit any party in interest or any disqualified
person to engage in, or suffer or permit any Subsidiary or any Other Obligor to
permit knowingly any party in interest or any disqualified person to engage in,
any prohibited transaction, (ii) knowingly incur, or suffer or permit any
Subsidiary or any Other Obligor to incur knowingly, any accumulated funding
deficiency, whether or not waived, (iii) terminate, or suffer or permit any
Subsidiary or any Other Obligor to terminate, any such plan in a manner which
could result in the imposition of a lien on any property of Borrower, any
Subsidiary or any Other Obligor pursuant to Section 4068 of ERISA, (iv) incur
withdrawal liability under any multiemployer plan, or (v) take, or suffer or
permit any Subsidiary or any Other Obligor to take, any action which would
adversely affect the qualification of any such plan.
6.2 ASSETS. Borrower covenants and agrees that Borrower will not,
directly or indirectly, without Bank's prior written consent; (a) sell, assign,
transfer, convey or lease, or suffer or permit to occur any sale, assignment,
transfer, conveyance or lease of, any assets of Borrower, any Subsidiary or any
Other Obligor that is not an individual, or any interest therein, except for
transactions in the ordinary course of business and except for dispositions of
obsolete or worn-out equipment in exchange for, at least, the fair market value
thereof; (b) mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets (excluding Permitted Liens); (c) except for
leases in existence on the date hereof and previously disclosed to Bank in
writing, and renewals or extensions thereof, become or be, or suffer or permit
any Subsidiary or any Other Obligor to become or be, liable as lessee with
respect to any lease of any property (real, personal or mixed) which has been or
is to be sold or transferred by Borrower, such Subsidiary or such Other Obligor
to any person in connection with such lease or which Borrower, such Subsidiary
or such Other Obligor intends to use for substantially the same purpose as any
other property which has been or is to be sold or transferred by Borrower, such
Subsidiary or such Other Obligor to any person in connection with such lease;
(d) purchase or otherwise acquire, or suffer or permit to occur the purchase or
other acquisition by any Subsidiary or any Other Obligor of, all or
substantially all of the assets of any other person, or any assets of any other
person in a transaction which is subject to the Bulk Transfers Title of the
Uniform Commercial Code of any jurisdiction; (e) purchase, redeem or otherwise
acquire or retire for value, any shares of Borrower's capital stock or any
partnership or member interest in Borrower (as applicable) or any other equity
interest in Borrower, or suffer or permit any Subsidiary to purchase, redeem or
otherwise acquire or retire for value any shares of such Subsidiary's capital
stock or any other equity interest in such Subsidiary.
6.3 INDEBTEDNESS. Borrower covenants and agrees that Borrower will not,
directly or indirectly, without Bank's prior written consent, create, incur,
assume or permit to exist indebtedness for borrowed money, including capital
leases, except for the Obligations and trade debt incurred in the normal course
of business.
6.4 PREMIUM FINANCE AGREEMENTS; OPERATIONS. Borrower covenants and
agrees that Borrower will not, directly or indirectly, without Bank's prior
written consent: (a) use any form of Premium Finance Agreement other than one
containing all of the material provisions set forth in the general form approved
by Bank as of the date hereof, or change, alter or modify the terms or substance
of the Premium Finance Agreements approved by Bank as of the date hereof unless
required to do so by statute or regulation and concerning which prior written
notice has been provided to Bank, or (b) modify in any material respect any
underwriting criteria with respect to persons to become obligated under Premium
Finance Agreements and/or any operating procedures of Borrower which could
reasonably be expected to adversely effect collection levels or default rates
under Premium Finance Agreements, the collectibility thereof, or in any other
manner adversely affect the Collateral.
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<PAGE> 13
SECTION 7. DEFAULT
7.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following events shall constitute an Event of Default: (a) failure of Borrower
to pay any of the Obligations when and as the same shall become due, whether at
the due date thereof, by demand, by acceleration or otherwise; (b) any
representation or information previously or hereafter made or supplied to Bank
by or on behalf of Borrower, any Subsidiary or any Other Obligor, including,
without limitation, any representation or information previously or hereafter
made or supplied to Bank pursuant to or in connection with this Agreement or any
of the Other Agreements or any transaction involving or affecting Borrower, any
Subsidiary or any Other Obligor, shall prove to have been, when made or
supplied, false or misleading in any respect deemed material by Bank in good
faith; (c) failure of Borrower, any Subsidiary or any Other Obligor to observe,
comply with or perform any warranty, covenant, condition or agreement to be
observed, complied with or performed by Borrower, such Subsidiary or such Other
Obligor under this Agreement or any of the Other Agreements; (d) occurrence of a
default or event of default by Borrower, any Subsidiary or any Other Obligor
with respect to, or acceleration or demand for payment prior to maturity of, any
indebtedness, liability or obligation of Borrower, any Subsidiary or any Other
Obligor to any person which is deemed material by Bank in good faith, or with
respect to any security interest or lien securing any indebtedness, liability or
obligation of Borrower, any Subsidiary or any Other Obligor to any person which
is deemed material by Bank in good faith; (e) Borrower, any Subsidiary or any
Other Obligor shall become a debtor in any case under any chapter of the United
States Bankruptcy Code; (f) Borrower, any Subsidiary or any Other Obligor shall
(i) admit in writing its insolvency or its inability to pay its debts generally
as they mature, (ii) make a general assignment for the benefit of creditors,
whether conditional or unconditional and whether or not such assignment is filed
in any court and whether or not any court assumes jurisdiction thereof, or (iii)
become the subject, or permit any of its property to become the subject, of any
bankruptcy, reorganization, insolvency, readjustment of debt, trusteeship,
receivership, dissolution or liquidation law, statute or proceeding; (g)
dissolution or liquidation of, or the entry of any unstayed judgment, order,
award or decree for the dissolution or liquidation of, Borrower, any Subsidiary
or any Other Obligor; (h) existence of any unstayed judgment, order, award or
decree against Borrower, any Subsidiary or any Other Obligor which is uninsured
to an extent deemed material by Bank in good faith, or which Bank determines in
good faith, when aggregated with all other such judgments, orders, awards and
decrees outstanding against Borrower, Subsidiaries and Other Obligors, could
have a material adverse effect on the business, assets, operations, business
prospects or financial condition of Borrower, any Subsidiary or any Other
Obligor, or on any rights of Bank with respect to any of the Collateral or any
of the Obligations, or on the prospect for payment in full of the Obligations:
(i) injunction or restraint of Borrower, any Subsidiary or any Other Obligor in
any manner from conducting its business in whole or in part deemed material by
Bank in good faith; (j) any assets of Borrower, any Subsidiary or any Other
Obligor shall be attached, levied upon, seized or repossessed; (k) Borrower, any
Subsidiary or any Other Obligor shall be insolvent (as defined in Section 101 of
the United States Bankruptcy Code, or any successor legislation) or unable to
pay its debts as they mature; (1) death of any Other Obligor that is an
individual; (m) an adverse change deemed material by Bank in good faith shall
occur with respect to the business, assets, operations, business prospects or
financial condition of Borrower, any Subsidiary or any Other Obligor, or
otherwise with respect to the risks to Bank attending the Collateral, any
commitments of Bank which could give rise to any Obligations or the prospect for
payment in full of the Obligations, whether or not such adverse change otherwise
constitutes an Event of Default; (n) termination of any contract, franchise,
license, permit, authorization, certificate or right of Borrower, any Subsidiary
or any Other Obligor which Bank in good faith deems material to its business,
assets, operations, business prospects or financial condition; (o) suspension or
revocation of any license, permit, certification, approval or the like required
to be held by Borrower, any Subsidiary or any Other Obligor that is not an
individual by federal, State, local or foreign laws; (p) occurrence of any
change in Borrower's management personnel which Bank determines in good faith
could materially adversely affect the business, assets, operations, business
prospects or financial condition of Borrower; (q) occurrence of any default or
event of default under or as defined in any of the Other Agreements; (r)
Borrower, any Other Obligor or any other person shall revoke or terminate, or
attempt to revoke or terminate, or notify Bank of revocation or termination of,
any continuing obligations or agreements of Borrower, such Other Obligor or such
other person relating in any way to any of the Obligations, including, without
limitation, any continuing obligations or agreements of Borrower, such Other
Obligor or such other person under any guaranty or subordination AGREEMENT; (s)
Borrower or any Other Obligor shall be convicted of an offense punishable under
any domestic or foreign criminal statute or law, or Borrower or any Other
Obligor shall be subjected to charges under any domestic or foreign law for
which forfeiture of property is a potential penalty; (t) the aggregate amount of
advances, including Compliance Advances, made and outstanding under the Line of
Credit shall exceed the Maximum Loan Amount; (u) any change shall occur in the
ownership of twenty-five percent (25%) or more of the common stock of Borrower,
measured against the ownership as of the date hereof; or (v) Borrower shall fail
to perform or observe any of its obligations under any Premium Finance
Agreement or fail to pay when due all of its liabilities with respect to
premiums relating to any underlying insurance.
7.2 REMEDIES. Upon the occurrence of an Event of Default described in
Subsections 7.1 (e), 7.1 (f) or 7.1(g) of this Agreement, all of the
Obligations shall automatically and immediately be due and payable. Upon and at
any time after the occurrence of any Event of Default, Bank may, without notice
or demand, exercise in any jurisdiction in which enforcement hereof is sought,
the following rights and remedies, in addition to the rights and remedies
available to Bank under the Other Agreements, the rights and remedies of a
secured party under the Uniform Commercial Code and all other
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<PAGE> 14
rights and remedies available to Bank under law, all such rights and remedies
being cumulative and enforceable alternatively, successively or concurrently:
(a) declare any or all of the Obligations not already due to be immediately due
and payable; (b) take exclusive possession of any or all of the Collateral from
time to time and/or place a custodian in exclusive possession of any or all of
the Collateral from time to time and, so far as Borrower may give authority
therefor, enter upon any premises on which any of the Collateral may be situated
and remove the same therefrom, Borrower hereby waiving any and all rights to
prior notice and to judicial hearing with respect to repossession of Collateral,
and/or require Borrower, at Borrower's expense, to assemble and deliver any or
all of the Collateral to such place or places as Bank may reasonably request;
(c) enforce the liens and security interests granted to Bank hereunder and under
the Other Agreements by collecting or liquidating all or any part of the
Collateral or selling, assigning, leasing, renting, licensing or otherwise
disposing of all or any part of the Collateral or any interest therein, in one
or more parcels, at the same or different times, at public or private sale or
disposition, or otherwise; (d) institute any proceeding or proceedings to
enforce any of the Obligations and any security interests, liens or other rights
or interests of Bank; (e) notify postal authorities to change the address for
delivery of mail addressed to Borrower to such address as Bank may designate;
(f) receive, open and dispose of all mail addressed to Borrower; (g) inclorse
Borrower's name on any promissory notes or other instruments, acceptances,
checks, drafts, money orders or other items of payment constituting Collateral,
or collections or other proceeds of Collateral, that may come into Bank's
possession or control from time to time; (h) sign Borrower's name on any
invoices to, drafts against and other notices and documents to account debtors
or other obligors of Borrower and requests for verification of accounts and
other amounts which may be due to Borrower; (i) execute proofs of claim and
loss on behalf of Borrower; (j) apply all Collateral and proceeds of Collateral
delivered to Bank or coming into Bank's possession or control from time to time,
as well as all funds from time to time credited to any Repayment Account, to any
of the Obligations, or hold the same as security for any contingent or future
Obligations; (k) at Borrower's expense, continue or complete, or cause to be
continued or completed, performance of Borrower's obligations under any
contracts of Borrower; (1) use, operate, manage, control and exercise all rights
of Borrower relating to, the Collateral and any other assets of Borrower, and
collect all income and revenues therefrom; (m) make one or more advances from
time to time under the Line of Credit, and regardless of the Maximum Loan
Amount, and apply the proceeds thereof, in order to pay any or all of the
Obligations as Bank may determine in its discretion;(n) terminate, or cease
extending credit under, any or all outstanding commitments or credit
accommodations of Bank to Borrower, any Subsidiary or any Other Obligor; and/or
(o) reduce the Maximum Loan Amount.
7.3 COLLATERAL DISPOSITIONS. Borrower agrees that commercial
reasonableness and good faith require Bank to give Borrower no more than ten
days prior written notice of the time and place of any public disposition of
Collateral or of the time after which any private disposition or any other
intended disposition is to be made. All sales or other dispositions of
Collateral may be made for cash, upon credit or for future delivery. In no event
shall Borrower be credited with any part of the proceeds of liquidation, sale or
other disposition of any Collateral until final payment thereon has been
received by Bank in immediately available funds, and Bank shall have no
obligation to delay any liquidation, sale or other disposition because the same
may result in the imposition of any forfeiture, premium or penalty.
7.4 EXPENSES. Borrower agrees to pay to Bank, upon written demand by
Bank from time to time, the amount of all expenses, including attorneys'fees and
expenses, paid or incurred by Bank (a) in exercising or enforcing or consulting
with counsel conceming any of its rights hereunder, under the Other Agreements
or under law, or (b) in defending any and all non-meritorious or previously
waived demands, claims, counterclaims, cross-claims, causes of action,
litigation and proceedings of every kind and nature asserted, commenced or
instituted against Bank, or any of Bank's officers, directors or employees, by
Borrower, any Subsidiary or any Other Obligor on account of, as a result of or
relating to, any action taken or not taken by Bank in connection with the Line
of Credit, any other of the Obligations, the Collateral or enforcement or
exercise by Bank of any rights or remedies of Bank under this Agreement, under
any of the Other Agreements or under law. Borrower also agrees to pay to Bank,
upon written demand by Bank from time to time, interest on the outstanding
amount of such expenses paid by Bank, from the date of Bank's demand for payment
of such expenses until the same are paid in full, at the highest rate provided
in the Note and calculated in the manner provided therein.
SECTION 8. ADDITIONAL PROVISIONS
8.1 Expenses, Indemnifications. Borrower agrees tc pay to Bank, upon
written demand by Bank from time to time, the amount of all expenses, including
attorneys' fees and expenses, paid or incurred by Bank in connection with the
preparation, or the amendment, modification, extension, renewal, refinancing,
supplementation, replacement, waiver, release or termination, of this Agreement
or any of the Other Agreements or any terms or conditions hereof or thereof or
any rights or interests of Bank, Borrower or any other person relating to any of
the foregoing, or otherwise in connection with the extension of credit hereunder
and preparing for the extension of credit hereunder. Borrower agrees to pay all
expenses in connection with the filing or recordation of all financing
statements and other documents as may be required by Bank at the time of, or
subsequent to, the execution of this Agreement, including, without limitation,
all documentary stamps, recordation and transfer taxes, filing fees and other
costs and taxes incident to recordation of any document in connection herewith,
and, if any such expenses shall be paid or incurred by Bank, to pay to Bank upon
written demand the amount of such expenses. Borrower also agrees to pay to Bank,
upon written demand by
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<PAGE> 15
Bank from time to time, interest on the outstanding amount of all expenses paid
by Bank referred to in this Subsection, from the date of Bank's demand for
payment of such expenses until the same are paid in full, at the highest rate
provided in the Note and calculated in the manner provided therein. Borrower
represents and warrants to Bank that no broker's or finder's fee or commission
which Bank did not directly contract to pay is or will be payable by Bank in
connection with this Agreement or the transactions contemplated hereby, and
Borrower agrees to indemnify, protect and defend Bank, and save Bank harmless,
from and against any and all claims, demands, damages, losses, liabilities,
obligations, penalties, litigation, defenses, judgments, suits, actions,
proceedings, costs and expenses (including, without limitation, attorneys' fees
and expenses) of any kind or nature whatsoever which may at any time be imposed
upon, paid or incurred by or asserted or awarded against Bank relating to,
resulting from or arising out of any such fee or commission. Borrower also
agrees to indemnify, protect and defend Bank, and save Bank harmless, from and
against any and all claims, demands, damages, losses, liabilities, obligations,
penalties, litigation, defenses, judgments, suits, actions, proceedings, costs
and expenses (including, without limitation, attorneys' fees and expenses and
experts' fees and expenses) of any kind or nature whatsoever which may at any
time be imposed upon, paid or incurred by or asserted or awarded against Bank
relating to, resulting from or arising out of (a) the use of any property owned,
leased, subleased, occupied, used or operated by Borrower or any Subsidiary for
the manufacture, generation, production, processing, distribution, use,
treatment, storage, disposal, transport or handling of any Hazardous Substances,
(b) the presence of any Hazardous Substances in or upon any such property, or
(c) any violation of any Environmental Law.
8.2 FURTHER ASSURANCES, POWER OF AFTORNEY. Borrower agrees promptly to
do, make, execute and deliver all such additional and further acts, things,
deeds, assurances, instruments and documents as Bank may request in good faith
to vest in and assure to Bank its rights hereunder or under any of the Other
Agreements or in any of the Collateral. Borrower hereby appoints Bank and its
designees as attorney-in-fact of Borrower, irrevocably and with power of
substitution, with authority to execute and deliver from time to time, in the
name and stead of Borrower, all documents which Borrower is required to, but has
failed or refused to, execute and deliver to Bank pursuant to this Agreement or
any of the Other Agreements, and with authority to take all of the actions from
time to time on behalf of Borrower, and in the name and stead of Borrower, which
Bank is authorized to take under this Agreement and the Other Agreements or
which Bank in its good faith discretion deems necessary or advisable in order to
cause Borrower to be in compliance with any of the terms of this Agreement or
any of the Other Agreements or in order to carry out and enforce this Agreements
and the Other Agreements. Said attorney or designee shall not be liable for any
acts of commission or omission nor for any error of judgment or mistake of fact
or law which does not arise from its gross negligence or willful misconduct.
This power of attorney is coupled with an interest and is irrevocable so long as
any of the Obligations remain unpaid or unperformed or there exists any
commitment by Bank which could give rise to any Obligations.
8.3 WAIVER OF TRIAL BY JURY. Borrower and Bank each agrees that any
action, suit or proceeding involving any claim, counterclaim or cross-claim
arising out of or in any way relating, directly or indirectly, to this Agreement
or the Other Agreements, or any liabilities, rights or interests of Borrower,
Bank or any other person arising out of or in any way relating, directly or
indirectly, to any of the foregoing, shall be tried by a court and not by a
jury. Borrower and Bank each hereby waives any right to trial by jury in any
such action, suit or proceeding, with the understanding and agreement that this
waiver constitutes a waiver of trial by jury of all claims, counterclaims and
cross-claims against all parties to such actions, suits or proceedings,
including claims, counterclaims and cross-claims against parties who are not
parties to this Agreement or the Other Agreements. This waiver is knowingly,
willingly and voluntarily made by Borrower and Bank, and Borrower and Bank each
acknowledges and agrees that this waiver of trial by jury is a material aspect
of the agreements between Borrower and Bank and that no representations of fact
or opinion have been made by any person to induce this waiver of trial by jury
or to modify, limit or nullify its effect.
8.4 ADDITIONAL WAIVERS. Borrower hereby waives, to the extent the same
may be waived under applicable law; (a) notice ceptance by Bank of this
Agreement and the Other Agreements;(b) all claims, causes of action and rights
of Borrower against Bank on account of actions taken or not taken by Bank in the
exercise of Bank's rights or remedies hereunder or under any of the Other
Agreements, or under law, provided that the same did not arise from Bank's gross
negligence or willful misconduct; (c) all claims and causes of action of
Borrower against Bank for punitive, exemplary or other non-compensatory damages;
(d) all rights of redemption of Borrower with respect to any of the Collateral;
(e) in the event Bank seeks to repossess any or ali of the Collateral by
judicial proceedings, any bonds or demands for possession which otherwise may be
required; (f) all rights of Borrower to have marshalled the Collateral or any
other security for any of the Obligations; (g) presentment, protest, notice of
protest and notice of non-payment with respect to all of the Obligations; (h)
settlement, compromise or release of the obligations of any Other Obligor or any
other person primarily or secondarily liable upon or obligated with respect to
any of the Obligations; (i) substitution, impairment, exchange or release of any
direct or indirect security for any of the Obligations; and (j) any duty or
obligation of Bank to disclose to Borrower any information concerning any other
customer or client, or prospective customer or client, of Bank Borrower agrees
that Bank may exercise any or all of its rights and/or remedies hereunder, under
the Other Agreements and under law without resorting to, without regard to, and
regardless of the adequacy of, any security or other sources of liability with
respect to any of the Obligations. Neither any failure nor any delay on the par!
of Bank in exercising any right, power or
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<PAGE> 16
remedy hereunder, under any of the Other Agreements or under law shall operate
as a waiver thereof, nor shall a single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
remedy.
8.5 EXTENSION OF PAYMENTS, SETOFF. All payments required to be made by
Borrower hereunder or under any of the Other Agreements shall be made by
Borrower without setoff, counterclaim or deduction and shall be made to Bank in
lawful money of the United States of America at Bank's principal office (or at
such other address as Bank may specify to Borrower in writing from time to
time). If any payment required to be made by Borrower hereunder or under any of
the Other Agreements shall be due on any day that is not a Business Day, such
payment may be made by Borrower without default on the next succeeding Business
Day but any interest-bearing portions of such payment shall continue to accrue
interest during such extension of time. Bank shall have the right from time to
time to charge and deduct from any deposit accounts of Borrower at Bank any
amounts credited to such accounts and apply the same in order to pay principal
amounts, interest charges, service charges, fees, expenses or any other sums or
charges due and unpaid under this Agreement, or any of the Other Agreements.
Bank shall have the right, in addition to all other rights and remedies
available to it, to set off against any Obligations due and unpaid any sums or
property owing to Borrower by Bank or held or controlled by Bank for Borrower.
Borrower hereby confirms Bank's right to banker's lien and setoff, and nothing
in this Agreement or any of the Other Agreements shall be deemed to replace,
supersede, limit, waive or prohibit Bank's right of banker's lien and setoff.
8.6 CONFESSION OF JUDGMENT. Borrower hereby authorizes any clerk of
court or any attomey-at-law to appear for Borrower be any court, having
jurisdiction, within the United States or elsewhere, and, after one or more
complaints filed, confess judgment against Borrower as of any time after any of
the Obligations are due (whether by demand, stated maturity, acceleration or
otherwise) for the unpaid balance of the Obligations, including principal,
interest, fees, court costs, late charges and expenses, together with attorneys'
fees equal to fifteen percent (15%) of the amount of such Obligations, for
collection and release of all errors, and without stay of execution, and
inquisition and extension upon any levy on real estate is hereby waived and
condemnation agreed to, and the exemption of personal property from levy and
sale is also hereby expressly waived, and no benefit of exemption shall be
claimed under any exemption law now in force or which may be hereafter adopted.
The foregoing authorities and powers to confess judgment shall not be exhausted
by one or more exercises of any of them or by any imperfect exercise of any of
them, shall not be extinguished by any judgment entered because of any of them
and may be exercised before, during or after sale, liquidation or other
disposition by Bank of any property directly or indirectly securing any of the
Obligations or exercise or enforcement by Bank of any other right or remedy of
Bank with respect to the Obligations. Borrower agrees that any agreements of
Borrower contained in this Agreement or any of the Other Agreements to pay any
costs or expenses, including attorneys' fees and expenses, paid or incur-red by
Bank shall not be merged into, or otherwise impaired by, any such judgment by
confession, but Bank shall not be entitled to recover on account of such costs
or expenses any amount in excess of the greater of (a) such costs or expenses
included in any judgments by confession (without duplication), or (b) such costs
or expenses actually paid or incurred by Bank.
8.7 MODIFICATIONS, NOTICES. No modification or waiver of any provision
of this Agreement or any of the Other Agreements, an consent by Bank to any
failure of Borrower or any other person to comply with any provision of this
Agreement or any of the Other Agreements, shall in any event be effective unless
the same shall be in writing and signed by the person against whom enforcement
thereof is sought, and then such waiver or consent shall be effective only in
the specific instance and for the purpose for which given. No notice to or
demand upon Borrower in any circumstance shall entitle Borrower to any other or
further notice or demand in the same, similar or other circumstances. All
written communications in connection with this Agreement and the Other
Agreements, including demands for payment by Bank, shall be deemed to have been
given when hand-delivered to the party to whom directed, or, if transmitted by
telex, by facsimile transmission or by mail (whether or not registered or
certified), when telexed or transmitted by facsimile transmission or deposited
in the mail postage prepaid, respectively, provided that any such notice or
communication to Borrower shall be hand-delivered or transmitted to Borrower at
the address specified in the first sentence of this Agreement (or at such other
address as Borrower may specify to Bank in writing from time to time), and any
such notice or communication to Bank shall be hand-delivered or transmitted to
Bank at 7 Saint Paul Street, 5th Floor, Baltimore, Maryland 21202 (or at such
other address as Bank may specify to Borrower in writing from time to time).
8.8 DISCLOSURE OF INFORMATION. Borrower consents and agrees that Bank
may issue press releases concerning, and otherwise publicly announce or
publicize, financings provided by Bank to Borrower or Subsidiaries. Borrower
hereby authorizes Bank to disclose to any subsidiary or affiliate of Bank, to
any fiduciary institution (as "fiduciary institution* is defined in Subtitle 3
of Title 1 of the Financial Institutions Article of the Annotated Code of
Maryland, or any successor legislation) or to any banking institution, credit
union or savings and loan association organized under the laws of any State, and
hereby authorizes all subsidiaries and affiliates of Bank, all fiduciary
institutions (as defined as above provided) and all banking institutions, credit
unions and savings and loan associations organized under the laws of any
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<PAGE> 17
State to disclose to Bank, the financial record of Borrower (as "financial
record' is defined in Subtitle 3 of Title 1 of the Financial Institutions
Article of the Annotated Code of Maryland, or any successor legislation).
8.9 SURVIVAL, MERGER AND COUNTERPARTS. All representations, warranties,
covenants, conditions and agreements contained herein and in the Other
Agreements shall survive the execution and delivery hereof and thereof. Borrower
shall continue to observe, comply with and perform all warranties, covenants,
conditions and agreements to be observed, complied with or performed by Borrower
under this Agreement and the Other Agreements until all of the Obligations have
been paid in full and there exists no commitment by Bank which could give rise
to any Obligations. This Agreement and Other Agreements executed in connection
with this Agreement contain the entire agreement of the parties with respect to
the matters covered and the transactions contemplated hereby and thereby, and no
agreement, statement or promise made by any party hereto, or by any employee,
officer, agent or attorney of any party hereto, which is not contained herein or
therein, shall be valid or binding. This Agreement and Other Agreements executed
in connection with this Agreement may be executed in any number of counterparts
and by different parties on 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 agreement.
8.10 LAW, JURISDICTION, TRANSFERS OF INTERESTS AND UNENFORCEABILITY.
The performance and construction of this Agreement and the Other Agreements
shall be governed by the internal laws of the State of Maryland (exclusive of
principles of conflicts of laws). Borrower agrees that any suit, action or
proceeding instituted by Bank with respect to any of the Obligations, the
Collateral, this Agreement or any of the Other Agreements may be brought in any
State or federal court located in the State of Maryland (in addition to such
other courts in which jurisdiction and venue may be appropriate), and Borrower
consents to the in personam jurisdiction of such courts. Borrower irrevocably
waives any objection to, and any right of immunity from, the jurisdiction of
such courts or the execution of judgments resulting therefrom, on the grounds of
venue or the convenience of the forum. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, and each reference in this Agreement to any of the parties hereto shall
be deemed to include the successors and assigns of such party, including, in the
case of Borrower, the debtor in possession or trustee in any case under any
chapter of the United States Bankruptcy Code in which Borrower is debtor.
Borrower may not assign this Agreement or any of its rights hereunder without
Bank's prior written consent. Bank may at any time, in its discretion, assign,
transfer or pledge to any person, or grant to any person a security interest in,
this Agreement, any of the Other Agreements or any of its rights hereunder or
thereunder. In addition, Bank may sell, in such amounts, upon such terms and to
such persons as Bank may determine, participations in its interests under this
Agreement and/or any of the Other Agreements. In the case of each such
assignment, transfer, pledge, grant or sale, Bank may from time to time provide
to the assignee, transferee, pledgee, secured party or participant, any
information and documents (or copies thereol) relating to this Agreement and the
Other Agreements and related transactions, and relating to the business, assets,
operations, business prospects or financial condition of Borrower, Subsidiaries
and Other Obligors. If any term, provision or condition, or any part thereof, of
this Agreement or any of the Other Agreements shall for any reason be found or
held invalid or unenforceable by any court or governmental agency, such
invalidity or unenforceability shall not affect the remainder of such term,
provision or condition, nor any other term, provision or condition, and this
Agreement and the Other Agreements shall survive and be construed as if such
invalid or unenforceable term, provision or condition had not been contained
herein or therein; provided, however, that if any rate of interest provided
under the Note does or shall exceed the maximum interest rate which Borrower is
permitted by law to contract or agree to pay, then such rate of interest shall
immediately be deemed to be reduced to such maximum rate and all previous
payments of interest in excess of the maximum rate shall be deemed to have been
payments in reduction of principal and not of interest. All books and records of
Bank and statements of account rendered by Bank to Borrower relating to the
Obligations shall be presumed to be accurate, absent manifest error.
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<PAGE> 18
IN WITNESS WHEREOF, Borrower and Bank have duly executed this Agreement
under seal as of the day and year first written above.
ATTEST/WITNESS: FIRST UNION COMMERCIAL CORPORATION
/s/ By: /s/ David A. Bauereis (SEAL)
- --------------------------------- -----------------------------------
Name: David A. Bauereis
Title: Vice President
/s/ Paul V.H. Halter, III
--------------------------------------
/s/ By: (SEAL)
- --------------------------------- -----------------------------------
Name: Paul V.H. Halter, III
------------------------------
Title: President
-----------------------------
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<PAGE> 19
LINE OF CREDIT NOTE
MAY 22nd, 1998
FOR VALUE RECEIVED, COMMERCE CAPITAL, INC. ('Maker), promises to pay to
the order of FIRST UNION COMMERCIAL CORPORATION ("Bank") the lesser of (i) the
principal sum of $2,000,000.00, or (ii) the aggregate phncipal amount advanced
and outstanding under the "Line of Credit" as defined in that certain Loan and
Security Agreement of even date herewith between Maker and Bank (the
"Agreement"), together with interest on the unpaid principal balance outstanding
from time to time, all as hereinafter set forth. Capitalized terms used in this
Note without definition which are defined in the Agreement shall have the
meanings assigned to them in the Agreement.
Interest from the date hereof on the principal amount outstanding from
time to time until the occurrence of an Event of Default shall be payable at a
fluctuating rate of interest equal to the Prime Rate minus thirty-five
one-hundredths percent (P - .35%) per annum. After the occurrence of an Event of
Default until this Note is paid in full, interest on the principal amount
outstanding from time to time shall be payable at a fluctuating rate of interest
equal to the Prime Rate plus one and 65/100 percent (P + 1.65%) per annum. From
the date hereof, interest accrued shall be paid by Maker to Bank on or before
the first (1 st) day of each month, commencing July 1, 1998. As used herein, the
term "Prime Rate" means the interest rate declared in internal publications by
First Union National Bank from time to time as its prime rate, whether or not
such rate is otherwise published or announced. The prime rate is not necessarily
the lowest rate charged by Bank to borrowers. As the rate of interest hereunder
is based upon the Prime Rate, the rate of interest shall increase or decrease
automatically and contemporaneously with every increase or decrease in the Prime
Rate. Interest shall be calculated on a year of 360 days based upon the actual
number of days elapsed.
Principal shall be repaid from time to time as may be necessary to
bring the principal amount outstanding into conformity with Subsection 2.1 of
the Agreement. The entire amount of the unpaid principal balance, together with
all accrued and unpaid interest thereon, shall be due and payable on the
Maturity Date. Bank may, in its sole discretion, agree, but only in writing, to
extend the Maturity Date for such time and upon such conditions as Bank shall
determine in its sole discretion.
Payments of both principal and interest shall be paid in lawful money
of the United States of America in immediately available funds at the principal
office of Bank or at such other place as Bank may from time to time designate.
If any payment of principal and/or interest due hereunder is not paid within 15
days after its due date, Maker shall pay to Bank on demand a late charge equal
to 10% of the amount of such payment.
This Note may be prepaid in whole at any time or in part from time to
time without premium or penalty, provided, however, that each such prepayment
shall be accompanied by payment of accrued and unpaid interest on the principal
balance hereof to the date of prepayment.
If any payment of principal or interest shall be due on a Saturday,
Sunday or any other day on which banking institutions in the State of Maryland
are required or permitted to be closed, such payment shall be made on the next
succeeding business day and such extension of time shall be included in
computing interest hereunder. All payments hereunder may, in Bank's sole
discretion, be applied first to the payment of outstanding late charges (if
any), then to accrued and unpaid interest and the balance to the payment of
principal.
If any payment of principal and/or interest due hereunder is not paid
on or before its due date then, and at any time thereafter, Bank may declare the
entire unpaid principal balance hereof, together with all accrued and unpaid
interest thereon, to be immediately due and payable. This Note is given pursuant
to the Agreement, which contains, among others, provisions for securing this
Note and for accelerating the maturity hereof upon the happening of certain
specified events.
Maker agrees to pay to Bank and reimburse Bank for any and all costs
and expenses, including attorney's fees and court costs, if any, incurred by
Bank in connection with the enforcement or collection hereof, both before and
after the commencement of any action to enforce or collect this Note, but
whether or not any such action is commenced by Bank. Maker waives presentment,
protest and demand, notice of protest, notice of dishonor and nonpayment of this
Note and expressly agrees that this Note or any payment hereunder may be
extended from time to time without in any way affecting the liability of Maker
hereunder.
Page 1
<PAGE> 20
Maker acknowledges and warrants that the debt evidenced hereby is a
"commercial loan" within the meaning of Title 12 of the Commercial Law Article
of the Annotated Code of Maryland (1990 ed.). Maker warrants that all loan
proceeds will be used solely to carry on a business or commercial enterprise.
The rights and remedies of Bank hereunder and under the Agreement shall
be cumulative and concurrent and may be pursued singularly, successively or
together at the sole discretion of Bank, and may be exercised as often as
occasion therefor shall occur, and the failure to exercise any such right or
remedy shall in no event be construed as a waiver or release of the same or any
other right or remedy.
Maker hereby authorizes any clerk of court or any afforney-at-law to
appear for Maker before any court, having jurisdiction, within the United States
or elsewhere, and, after one or more complaints filed, confess judgment against
Maker as of any time after any sum is due hereunder (whether by demand, stated
maturity, acceleration or otherwise) for the unpaid balance of this Note and all
sums due in connection herewith, including principal, interest, fees, court
costs, late charges and expenses, together with attorneys' fees equal to fifteen
percent (15%) of the total amount then due, for collection and release of all
errors, and without stay of execution, and inquisition and extension upon any
levy on real estate is hereby waived and condemnation agreed to, and the
exemption of personal property from levy and sale is also hereby expressly
waived, and no benefit of exemption shall be claimed under any exemption law now
in force or which may be hereafter adopted. The foregoing authorities and powers
to confess judgment shall not be exhausted by one or more exercises of any of
them or by any imperfect exercise of any of them, shall not be extinguished by
any judgment entered because of any of them and may be exercised before, during
or after sale, liquidation or other disposition by Bank of any property directly
or indirectly securing this Note or exercise or enforcement by Bank of any other
right or remedy of Bank with respect hereto. Maker agrees that any agreement of
Maker contained in this Note to pay any costs or expenses, including
afforneys'fees and expenses, paid or incurred by Bank shall not be merged into,
or otherwise impaired by, any such judgment by confession, but Bank shall not be
entitled to recover on account of such costs or expenses any amount in excess of
the greater of (a) such costs or expenses included in any judgments by
confession (without duplication), or (b) such costs or expenses actually paid or
incurred by Bank.
This Note, having been executed and delivered under seal in the State
of Maryland, is to be governed by, construed under and enforced in all respects
according to the internal laws of the State of Maryland.
ATTEST/WITNESS: COMMERCE CAPITAL, INC.
/s/ By: /s/ Paul V.H. Halter, III (SEAL)
- --------------------------------- -----------------------------------
Name: Paul V.H. Halter, III
------------------------------
Title: President
-----------------------------
Page 2
<PAGE> 21
GUARANTY
[CORPORATE]
THIS GUARANTY is made this 22nd day of May, 1998 by Commerce Casualty
Group, Inc., a North Carolina corporation ("Guarantor"), in favor of FIRST UNION
COMMERCIAL CORPORATION ("Bank") pursuant to, and in order to induce Bank to
extend credit to Commerce Capital, Inc., a North Carolina corporation and
wholly-owned subsidiary of Guarantor C'Borrower"), pursuant to, that certain
Loan and Security Agreement between Bank and Borrower of even date herewith (as
the same may be amended, modified, extended, renewed or replaced from time to
time, the "Loan Agreement"), which shall be fair and sufficient consideration
for the execution of this Guaranty.
1. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise requires,
all of the terms used herein without definition w h are defined by the Maryland
Uniform Commercial Code shall have the meanings assigned to them by the Maryland
Uniform Commercial Code except to the extent varied by this Guaranty. Unless the
context otherwise requires, all of the accounting terms used herein without
definition shall have the meanings assigned to them as determined by GAAP except
to the extent varied by this Agreement. The use of the singular herein shall
also refer to the plural and vice versa, and the use of the neuter or any gender
herein shall also refer to the other gender and to the neuter. In addition to
terms defined elsewhere in this Guaranty, the following terms shall have the
following meanings when used herein:
1.1 "Affiliate" shall mean: (a) any person in which Guarantor
legally or beneficially owns or holds any capital stock, member interest or
other equity interest; (b) any person that is a partner of Guarantor, a
partnership in which Guarantor is a partner, a joint venture in which Guarantor
is a joint venturer, or a joint venturer of Guarantor; (c) any person that is a
director, officer, employee, stockholder (legally or beneficially) or other
affiliate of any of the foregoing or of Guarantor; and (d) any person that
directly or indirectly controls, is under the control of, or is under common
control with, Guarantor, including, without limitation, any person that directly
or indirectly has the right or power to direct the management or policies of
Guarantor and any person whose management or policies Guarantor directly or
indirectly has the right or power to direct.
1.2 "Bank Notice Address" shall mean 7 St. Paul Street,
Baltimore, Maryland 21202.
1.3 "Certified" shall mean that the information, statement,
schedule, report or other document required to be "Certified" contains a
representation by Guarantor that, to Guarantor's knowledge and belief after
diligent inquiry, such information, statement, schedule, report or other
document is true and complete in all material respects.
1.4 "Environmental Laws" shall mean all federal, State, local
and foreign laws, whether now or hereafter enacted, and as amended from time to
time, relating to pollution or protection of the environment, including, without
limitation, laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminates, chemicals or industrial, toxic or
hazardous substances or wastes, into the environment (including, without
limitation. ambient air, surface water, ground water or land), or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminates, chemicals or
industrial, toxic or hazardous substances or wastes, and any and all
regulations, codes, plans, orders, decrees, judgments, injunctions, notices or
demand letters issued, entered, promulgated or approved thereunder.
1.5 "ERISA" shall mean the Employee Retirement
Income Security Act of 1974, as amended from time
to time, and any successor legislation, and all regulations, codes, plans,
orders, decrees, judgments, injunctions, notices or demand letters issued,
entered, promulgated or approved thereunder.
1.6 "Fiscal Year End" shall mean, in the case of each fiscal
year of Guarantor, December 31st of such year.
1.7 "GAAP" shall mean generally accepted accounting
principles.
1.8 "good faith" shall mean, with respect to a determination
to be made by Bank "in good faith," that Bank shall make such determination
honestly and not maliciously.
1.9 "Guarantor Business Premises" shall mean 9140 ArrowPoint
Blvd., Chariotte, NC 28273
<PAGE> 22
1.10 "Investment" shall mean legal or beneficial ownership of
any capital stock or security of' any class of, or any other equity interest of
any class in, any Corporation, or legal or beneficial ownership of any
partnership interest or joint venture interest in, security of any class of, or
any other equity interest of any class in, any partnership or joint venture, or
legal or beneficial ownership of any equity interest of any class in any other
person.
1.11 "Loan Documents" shall mean, individually and
collectively, the Loan Agreement, all promissory notes previously or hereafter
issued or assumed by Borrower thereunder, and all other agreements, contracts,
promissory notes and other instruments, and other documents previously or
hereafter issued, executed or delivered evidencing or creating any obligations,
indebtedness or liabilities of Borrower to Bank, as all of the same may be
amended, extended, renewed or replaced from time to time.
1.12 "Obligations" shall mean all present and future
obligations, indebtedness and liabilities of Borrower to Bank for the payment of
money under the Loan Documents and otherwise (including, without limitation, all
principal amounts, including present and future advances made under the Loan
Agreement, interest charges, late charges, fees and all other charges and sums,
as well as all costs and expenses, including attorney's fees and expenses,
payable or reimbursable by Borrower under or pursuant to the Loan Documents and
otherwise), whether direct or indirect, contingent or noncontingent, matured or
unmatured, accrued or not accrued, liquidated or unliquidated, related or
unrelated to the Loan Agreement, whether or not now contemplated, whether
arising in contract, tort or otherwise, whether or not any instrument or
agreement relating thereto specifically refers to this Guaranty, and whether or
not of the same character or class as Borrower's obligations under the Loan
Agreement, including, without limitation, overdrafts in any checking or other
account of Borrower at Bank, and claims against Borrower acquired by assignment
to Bank, as well as all modifications, renewals, extensions, refinancings,
consolidations and replacements of any of the foregoing.
1.13 "person" shall mean any individual, corporation, limited
liability company, partnership, joint venture, association, trust or entity of
any kind.
1.14 "State" shall mean any State of the United States and the
District of Columbia.
1.15 "Subsidiary" shall mean any person at least a majority of
the outstanding Voting Stock of which is owned or controlled, directly or
indirectly, now or in the future, by Guarantor.
1.16 "Voting Stock" shall mean (a) the shares of any class of
capital stock of a corporation having ordinary voting power to elect the
directors, officers or trustees thereof, including such shares that shall or
might have voting power by reason of the occurrence of one or more conditions or
contingencies, (b) any limited liability Company interests, membership interests
or other equivalent interests or participations (however designated) of any
limited liability company, and (c) any general or limited partnership interests
or other interests or participations in any partnership, joint venture, trust or
similar entity, in each Case whether or not evidenced by stock certificates or
similar instruments.
2. GUARANTY. Guarantor hereby unconditionally, directly and absolutely
guarantees to Bank, its successors and assigns, payment by Borrower when due of
all of the Obligations. This shall be a continuing guaranty and Guarantor hereby
waives notice of acceptance of this Guaranty with regard to each of the
Obligations that may now exist or may hereafter come into existence. If any of
the Obligations are not paid when due or if a default or event of default under
any of the Loan Documents shall occur, all of the Obligations shall at Bank's
option be due and payable for the purposes of this Guaranty and the liability of
Guarantor hereunder. Guarantor further agrees that any claim which Guarantor may
now or hereafter have against Bank, Borrower or any other person for any reason
whatsoever shall not affect Guarantor's obligations under this Guaranty and
shall not be used or asserted against Bank as a defense to the performance of
said obligations or as a setoff, counterclaim or deduction against any sums due
hereunder. The liability of Guarantor shall not be conditioned upon or subject
to a defense of reliance upon the guaranty of any other person. Notwithstanding
any partial or entire payment of all or any of the Obligations, this Guaranty
shall remain in effect or be reinstated, as the case may be, as though such
payment had never been made, with respect to any such payment which is rescinded
or recovered from or restored or returned by Bank under authority of any law,
rule, regulation, order of court or governmental agency, whether arising out of
any proceedings under the United States Bankruptcy Code or otherwise.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS. Guarantor represents,
warrants and Covenants THAT, EXCEPT as heretofore closed by Guarantor to Bank in
writing: (a) Guarantor is a corporation duly organized, legally existing and in
good standing under the laws of the State of North Carolina, has the power to
own its property and to conduct its business, and is duly qualified to do
business, and is in good standing, in each jurisdiction in which such
qualification is required by law; (b) Guarantor has full power and authority to
enter into this Guaranty and to incur and perform the obligations provided for
herein, all of which have been duly authorized by all necessary corporate and
other action, and no consent or approval of any person, including, without
limitation, its stockholders and any governmental
-2-
<PAGE> 23
authority, which has not been obtained, is required as a condition to the
validity or enforceability hereof; (c) this Guaranty has been duly and properly
executed by Guarantor and constitutes, and will continue to constitute, the
valid and legally binding obligations of Guarantor, and is, and will continue to
be, fully enforceable against Guarantor in accordance with its terms, subject to
bankruptcy and other laws affecting the rights of creditors generally; (d) the
execution, delivery and performance by Guarantor of this Guaranty will not
violate (i) any provision of law or any order, rule or regulation of any court
or governmental authority, (ii) the corporate charter or bylaws of Guarantor, or
(iii) any instrument, contract, agreement, indenture, mortgage, deed of trust or
other document or obligation to which Guarantor is a party or by which
Guarantor, or any of its property, is bound; (e) Guarantor is not in default
under any instrument, contract, agreement, indenture, mortgage, deed of trust or
other document or obligation to which Guarantor is a party or by which
Guarantor, or any of its property, is bound; (f) there are no judgments,
injunctions or similar orders or decrees outstanding against Guarantor and there
are no claims, actions, suits or proceedings pending or threatened against
Guarantor, or any of its property, at law or in equity, by or before any court
or governmental authority; (g) Guarantor is not insolvent (as defined in Section
101 (32) of the United States Bankruptcy Code), unable to pay its debts
generally as they mature or engaged in business for which its property is an
unreasonably small capital; (h) Guarantor has filed all federal, State, local
and foreign tax returns which are required to be filed by it, and Guarantor has
paid all federal, State, local and foreign taxes shown to be due on such tax
returns or which have been assessed against it; (i) Guarantor is not in
violation of, or, to Guarantor's knowledge and belief after diligent inquiry,
under investigation with respect to or threatened to be charged with or given
notice of a violation of, any law, rule, regulation or order, including, without
limitation, ERISA, any Environmental Laws or any law, rule, regulation or order
relating to the collection, payment and deposit of employees' income,
unemployment or social security taxes or of sales, use or excise taxes, or
relating to occupational safety and health, or relating to public health; (j)
there are no strikes, work stoppages, material grievance proceedings or other
material controversies pending or, to Guarantor's knowledge and belief,
threatened between Guarantor and any employees of Guarantor or between Guarantor
and any union or other collective bargaining unit representing employees of
Guarantor; (k) Guarantor is not, and has not been, the subject of any
bankruptcy, reorganization, insolvency, readjustment of debt, trusteeship,
receivership, dissolution or liquidation law, statute or proceeding; (1) all
representations and information heretofore made or supplied to Bank by or on
behalf of Guarantor or any Subsidiary were, at the time made or supplied to
Bank, true and complete in all material respects, and all representations and
information hereafter made or supplied to Bank by or on behalf of Guarantor or
any Subsidiary will be, at the time made or supplied to Bank, true and complete
in all material respects; (m) Guarantor has duly obtained and now holds all
licenses, permits, cerlifications, approvals and the like which it is required
to hold by FEDERAL, STATE, local and foreign laws, and each remains valid and in
full force and effect; (n) Guarantor's chief executive office and only place of
business is located at the Guarantor Business Premises, and Guarantor's books
and records are located at the Guarantor Business Premises; and (o) there is no
existing indebtedness of Guarantor to officers of Guarantor, except for accrued
salaries, benefits and the like.
4. ADDITIONAL AFFIRMATIVE COVENANTS. Guarantor covenants and agrees
that Guarantor will, except as otherwise agree Bank from time to time in
writing, (a) deliver to Bank in writing, as soon as available but not later than
45 days after the end of each quarterly accounting period of Guarantor, a
Certified consolidating statement of income and retained earnings of Guarantor
and Subsidiaries for such accounting period, and a Certified consolidating
statement of cash flows of Guarantor and Subsidiaries for such accounting
period, and a Certified consolidating balance sheet of Guarantor and
Subsidiaries as at the end of such accounting period, all prepared in accordance
with GAAP consistently applied; (b) deliver to Bank in writing, as soon as
available but not later than 120 days after the end of each fiscal year of
Guarantor, a consolidating statement of income and retained earnings of
Guarantor and Subsidiaries for such fiscal year, and a consolidating statement
of cash flows of Guarantor and Subsidiaries for such fiscal year, and a
consolidating balance sheet of Guarantor and Subsidiaries as at the end of such
fiscal year, all prepared in accordance with GAAP consistently applied and
examined and audited by independent certified public accountants satisfactory to
Bank, accompanied by a report of such independent certified public accountants
with respect to such financial statements which is satisfactory to Bank; (c) in
addition to information required to be delivered to Bank pursuant to other
provisions of this Guaranty, deliver to Bank in writing from time to time,
promptly after request by Bank and periodically if Bank shall so REQUEST, such
written statements, schedules or reports (which shall be Certified if requested
by Bank) in such form, containing such information and accompanied by such
documents as Bank may reasonably request from time to time concerning any assets
of Guarantor or any assets of any Subsidiary, the financial condition, business,
operations or business prospects of Guarantor or any Subsidiary, or any other
matter or matters, including, without limitation, copies of FEDERAL, STATE,
local and foreign tax returns of Guarantor and Subsidiaries; (d) if any
financial statement, schedule, report, certificate or information previously or
hereafter supplied to Bank by or on behalf of Guarantor or any Subsidiary,
including, without limitation, any of the same previously or hereafter supplied
to Bank pursuant to or in connection with this Guaranty, shall, to Guarantor's
knowledge or belief, subsequently become inaccurate or misleading in any
material respect, promptly notify Bank thereof in writing; (e) deliver to Bank
from time to time, promptly after request by Bank, copies of any agreements,
contracts or instruments to which Guarantor or any Subsidiary is a party or by
which Guarantor or any Subsidiary, or any of their property, is bound; (f) file,
and cause each Subsidiary to file, all federal, State, local and foreign tax
returns which are required to be filed by Guarantor and each Subsidiary, and pay
and discharge, and cause each Subsidiary to pay and discharge, all taxes,
assessments and governmental charges upon Guarantor and each Subsidiary,
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<PAGE> 24
its income and properties, prior to the date on which penalties attach thereto,
unless the same are being diligently contested by Guarantor or a Subsidiary, as
the case may be, in good faith by appropriate proceedings, provided that
Guarantor or such Subsidiary establishes appropriate reserves therefor in
accordance with GAAP, and provided that no notice of lien with respect thereto
is filed in any recording office; (g) maintain Guarantor's corporate existence
in good standing, and cause each Subsidiary to maintain its corporate existence
in good standing, and maintain, and cause each Subsidiary to maintain, in good
standing its qualification to do business in each jurisdiction in which such
qualification is required by law; (h) continue its business operations; (i)
comply with, and cause each Subsidiary to comply with, all federal, State, local
and foreign laws, rules, regulations and orders, including, without limitation,
ERISA, Environmental Laws and all laws, rules, regulations and orders relating
to the collection, payment and deposit of employees' income, unemployment or
social security taxes or of sales, use or excise taxes, or relating to
occupational safety and health, or relating to public health; (j) keep and
maintain, and cause each Subsidiary to keep and maintain, proper and current
books and records (reflecting such specific information as may from time to time
be reasonably requested by Bank) in accordance with GAAP consistently applied,
and at all reasonable times permit access by Bank to, reproduction by Bank of,
copying by Bank from, and verification (by such means, including audits, as Bank
may determine) by Bank of any information contained in, such books and records;
(k) at all reasonable times, permit Bank, and its agents and designees, to enter
upon and inspect all business premises of Guarantor and Subsidiaries and all
assets of Guarantor and Subsidiaries, and to discuss Guarantor's or any
Subsidiary's business, assets, operations, business prospects or financial
condition with any directors, officers, employees or agents of Guarantor or any
Subsidiary, including accountants previously or hereafter engaged by Guarantor
or any Subsidiary; (1) maintain, and cause each Subsidiary to maintain, all
properties and improvements necessary to the conduct of Guarantor's or any
Subsidiary's business in good order and condition, ordinary wear and tear
excepted, and use, operate and maintain, and cause to be used, operated and
maintained, all such properties and improvements in compliance with all laws,
regulations and ordinances and in compliance with all applicable insurance
requirements and regulations, and cause replacements and repairs to be made when
necessary for the proper conduct of its or any Subsidiary's business; (m)
maintain, preserve and protect all trademark rights and license rights of
Guarantor, and all similar rights of each Subsidiary, free of any conflict with
the rights of any other person; (n) maintain, or cause to be maintained
comprehensive casualty insurance policies insuring all property of Guarantor and
all property of each Subsidiary against loss by fire, theft, explosion,
collision and such other risks, in such amounts, subject to such loss deductible
amounts and with such insurance companies as may be satisfactory to Bank, in
Bank's discretion reasonably exercised, and, in all events, against such risks,
in such amounts and subject to such loss deductible amounts as are customary in
Guarantor's or a Subsidiary's industry, as applicable, and in such minimum
amounts that neither Guarantor nor any Subsidiary will be deemed a co-insurer
under applicable insurance laws, regulations, policies or practices; (o)
maintain or cause to be maintained, in the maximum amount available, flood
insurance policies insuring property of Guarantor or any Subsidiary which is
located in an area that has been, or subsequently is, identified as having
special flood or mudslide hazards and in which the sale of flood insurance has
been made available under the National Flood Insurance Act of 1968, as amended;
(p) maintain, and cause each Subsidiary to maintain, with insurance companies
and in amounts satisfactory to Bank, in Bank's discretion reasonably exercised,
such additional insurance against such risks and subject to such loss deductible
amounts as may be satisfactory to Bank, in Bank's discretion reasonably
exercised, including, without limitation, personal injury and property damage
liability insurance, automobile liability insurance, worker's compensation
insurance, business interruption insurance, employee dishonesty insurance, and
directors' and officers' liability insurance, all such insurance in all events
to insure against such risks, in such amounts and subject to such loss
deductible amounts as are customary in Guarantoes or such Subsidiary's industry,
as applicable; (q) deliver to Bank from time to time promptly after request by
Bank and periodically if Bank shall so request, evidence satisfactory to Bank,
in Bank's discretion reasonably exercised, that all insurance and insurance
endorsements required pursuant to this Guaranty are in effect; (r) promptly
after learning thereof, notify Bank in writing of (i) any claim, action, suit or
proceeding, at law or in equity, commenced or threatened against Guarantor or
any Subsidiary, or any property of Guarantor or any Subsidiary, (ii) the
occurrence of any material adverse change in Guarantor's or any Subsidiary's
business, assets, operations, business prospects or financial condition, (iii)
any extraordinary loss suffered by Guarantor or any Subsidiary, whether or not
insured, or any extraordinary depreciation of the value of Guarantor's or any
Subsidiary's assets, (iv) any destruction of, or substantial damage to, any
books or records of Guarantor or any Subsidiary, and (v) any fact, including,
without limitation, any reportable event under Section 4043(B) of ERISA, arising
in connection with any plan of Guarantor or any Subsidiary subject to ERISA
which might constitute grounds for the termination thereof by the Pension
Benefit Guaranty Corporation (or any successor thereto); and (s) promptly do,
make, execute and deliver all such additional and further acts, things, deeds,
assurances, instruments and documents as Bank may reasonably request to vest in
and assure to Bank its rights hereunder.
5. ADDITIONAL NEGATIVE COVENANTS. Guarantor covenants and agrees that
Guarantor will not, directly or indirectly, without Bank's prior written consent
(a) enter into or be a party to any merger, consolidation or share exchange, or
suffer or permit to occur any merger, consolidation or share exchange to which
any Subsidiary is a party; (b) sell, assign, transfer, convey or lease, or
suffer or permit to occur any sale, assignment, transfer, conveyance or lease
of, any assets of Guarantor or any Subsidiary, or any interest therein, except
for transactions in the ordinary course of business and except for dispositions
of obsolete or worn-out equipment in exchange for, at least, the fair market
value thereof; (c) except for leases in existence on the date hereof and
previously disclosed to Bank in writing, and renewals or
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<PAGE> 25
extensions thereof, become or be, or suffer or permit any Subsidiary to become
or be, liable as lessee with respect to any lease of any property (real,
personal or mixed) which has been or is to be sold or transferred by Guarantor
or such Subsidiary to any person in connection with such lease or which
Guarantor or such Subsidiary intends to use for substantially the same purpose
as any other property which has been or is to be sold or transferred by
Guarantor or such Subsidiary to any person in connection with such lease-, (d)
purchase or otherwise acquire, or suffer or permit to occur the purchase or
other acquisition by any Subsidiary of, all or substantially all of the assets
of any other person, or any assets of any other person in a transaction which is
subject to the Bulk Transfers Title of the Uniform Commercial Code of any
jurisdiction; (e) purchase, redeem or otherwise acquire or retire for value any
shares of Guarantor's capital stock or any OTHER EQUITY interest in Guarantor,
or suffer or permit any Subsidiary to purchase, redeem or otherwise acquire or
retire for value any shares of such Subsidiary's capital stock; (f) materially
change, or suffer or permit to occur any material change in, the scope or nature
of Guarantors or any Subsidiary's business or business operations; (g) enter
into, or suffer or permit any Subsidiary to enter into, any agreement which is
inconsistent with Guarantors obligations under this Guaranty: (h) enter into any
transaction with any Affiliate except for transactions with Affiliates entered
into in the ordinary course of Guarantors business on terms no less favorable to
Guarantor than would apply in a comparable arm's length transaction with a
person that is not an Affiliate; (i) change Guarantor's fiscal year-, 0) form or
acquire any Subsidiary other than those the prospective formation of which have
previously been disclosed to Bank; (k) change, or suffer or permit to be
changed, the name of Guarantor or any Subsidiary, or use any trade name other
than Guarantors true corporate name as indicated in the first sentence of this
Guaranty; (1) change, or suffer or permit to be changed, the location of the
chief executive office of Guarantor or any Subsidiary, or the location of the
books and records of Guarantor or any Subsidiary, or the location of any
business or storage location of Guarantor or any Subsidiary, or have or
maintain, or suffer or permit any Subsidiary to have or maintain, any new
business or storage location; (m) with respect to any plan of Guarantor or any
Subsidiary subject to ERISA (i) engage in, suffer or permit to be engaged in,
knowingly permit any party in interest or any disqualified person to engage in,
or suffer or permit any Subsidiary to permit knowingly any party in interest or
any disqualified person to engage in, any prohibited transaction, (ii) knowingly
incur, or suffer or permit any Subsidiary to incur knowingly, any accumulated
funding deficiency, whether or not waived, (iii) terminate, or suffer or permit
any Subsidiary to terminate, any such plan in a manner which could result in the
imposition of a lien on any property of Guarantor or any Subsidiary pursuant to
SECTION 4068 of ERISA, or (iv) take, or suffer or permit any Subsidiary to take,
any action which would adversely affect the qualification of any such plan; (n)
guarantee or otherwise in any way become or be responsible for obligations,
liabilities or indebtedness of any other person, whether by agreement to
purchase the indebtedness of any other person, by agreement for the furnishing
of funds to any other person for the purchase of goods, supplies or services, or
by way of stock purchase, capital contribution, advance or loan for the purpose
of paying or discharging indebtedness of any other person, or otherwise, except
for endorsements by Guarantor of negotiable drafts for collection in the
ordinary course of business; (o) make or permit to exist any loan to any person,
not including travel advances and other similar expense advances made to
officers and employees in the ordinary course of business, except for loans by
Guarantor to Borrower; (p) purchase or otherwise acquire for value, or permit
any Subsidiary to purchase or otherwise acquire for value, any Investment; or
(q) enter into or assume any lease or sublease of any real property, other than
leases of the Guarantor Business Premises.
6. WAIVERS. In consideration of Bank's agreement to extend credit to
Borrower under the Loan Documents, Guarantor hereby waives notice of each and
every one of the following acts, events and/or conditions and agrees that the
creation or existence of any such act, event or condition or the performance
thereof by Bank (in any number of instances) shall in no way release or
discharge Guarantor from liability hereunder, in whole or in part: (a) the
renewal, extension, modification, refinancing or granting of any indulgence of
any nature whatsoever with respect to any or all of the Obligations; (b) the
addition of or partial or entire release of any guarantor, maker, surety,
endorser, indemnitor or other PARTY or parties primarily or secondarily liable
for the payment and/or performance of any of the Obligations; (c) assumption of
any of the Obligations by any other person, whether by assignment, sale,
sublease, conveyance or otherwise; (d) the institution of any suit or the
obtaining of any judgment against Borrower, any guarantor, maker, surety,
endorser, indemnitor or other party primarily or secondarily liable for the
payment and/or performance of any of the Obligations; (e) the sale, exchange,
pledge, release, disposition, surrender, loss, destruction, damage to or
impairment of any collateral now or hereafter granted or received to secure any
of the Obligations; (f) the obtention, perfection, continuation, amendment,
release, waiver or modification of any security interest or lien with respect to
any of the Obligations or the settlement, subordination, compromise or discharge
of same; or (g) any other event, circumstance or condition which might otherwise
constitute a legal or equitable discharge of a surety or a guarantor. It is
expressly agreed that Bank shall have no obligation to obtain, perfect or
continue in effect any security interest or lien with respect to any of the
Obligations and that the obligations of Guarantor hereunder shall in no way be
diminished, impaired, affected or released by Bank's commission of or omission
to do any of the above-described acts or by the invalidity, unenforceability,
loss or change in priority of any of the Obligations or any security interest or
lien with respect to any of the Obligations. Also in consideration of Bank's
agreement to extend credit to Borrower under the Loan Documents, Guarantor
hereby waives, to the extent the same may be waived under applicable law: (a)
trial by jury in any action or proceeding of any kind or nature in connection
with this Guaranty; (b) all claims, causes of action and rights of Guarantor
against Bank on account of actions taken or not taken by Bank in the exercise of
Bank's rights or remedies hereunder or under law, provided that the same did not
arise from Bank's gross negligence or willful misconduct; (c) all claims and
causes of action of Guarantor against Bank for punitive, exemplary
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<PAGE> 26
or other non-compensatory damages; (d) all rights of redemption of Guarantor
with respect to any property securing any of the Obligations or this Guaranty;
(e) all rights of Guarantor to have marshalled any property securing any of the
Obligations or this Guaranty; (f) diligence in the enforcement or collection of
any of the Obligations, presentment, demand, protest, notice of protest and
notice of default with respect to all of the Obligations, and all other notices
of any kind whatsoever; (g) any duty or obligation of Bank to disclose to
Guarantor any information concerning any other customer or client, or
prospective customer or client, of Bank; and (h) all subrogation and other
rights and claims of Guarantor against Borrower arising on account of this
Guaranty or any sums paid by Guarantor collected by Bank pursuant to this
Guaranty. Any money or other property that Bank may receive in respect of or as
security for any of the Obligations from any source whatsoever may be applied to
any of the Obligations, whether secured or unsecured, as Bank shall determine in
its sole discretion. In the event that Bank shall be granted a security interest
in or lien upon any real or personal property in respect of or as security for
any of the Obligations, the same shall be for the sole and exclusive benefit of
Bank, and not for the benefit, whether direct or indirect, by subrogation or
otherwise, of Guarantor.
7. EXPENSES. Guarantor agrees to pay to Bank, on demand by Bank from
time to time, the amount of all expenses, including attorney's fees and
expenses, paid or incurred by Bank (a) in exercising or enforcing or consulting
with counsel concerning any of its rights hereunder or under law, or (b) in
defending any and all non-meritorious or previously waived demands, claims,
counterclaims, cross-claims, causes of action, litigation and proceedings of
every kind and nature asserted, commenced or instituted against Bank, or any of
Bank's officers, directors or employees, by Guarantor or any Subsidiary on
account of, as a result of or relating to any action taken or not taken by Bank
in connection with the Obligations or enforcement or exercise by Bank of any
rights or remedies of Bank under this Guaranty or the Loan Agreement. Guarantor
also promises to pay to Bank, on demand by Bank from time to time, interest on
the outstanding amount of such expenses paid by Bank, from the date of Bank's
demand for payment of such expenses until the same are paid in full, at a rate
equal to eighteen percent (18%) per annum and calculated based upon a year of
360 days and the actual number of days elapsed.
8. PERFORMANCE BY GUARANTOR. Guarantor shall continue to observe,
comply with and perform all warranties, covenants, con ons and agreements to be
observed, complied with or performed by Guarantor under this Guaranty until all
of the Obligations have been paid in full and there exists no commitment by Bank
which could give rise to any Obligations.
9. SETOFF. Bank shall have the right from time to time to charge and
deduct from any deposit accounts of Guarantor at First Union National Bank (or
any other affiliate of Bank) any amounts credited to such accounts and apply the
same in order to pay any sums due and unpaid under this Guaranty. Bank shall
have the right, in addition to all other rights and remedies available to it, to
set off against any sums due Bank under this Guaranty any sums or property owing
to Guarantor by Bank or held or controlled by Bank for Guarantor. Guarantor
hereby confirms Bank's right to setoff as set forth in this Paragraph 9, and
nothing in this Guaranty shall be deemed to limit, waive or prohibit Bank's
right of setoff.
10. CONFESSION OF JUDGEMENT. Guarantor hereby authorizes any
attorney-at-law to appear for Guarantor before any court, having jurisdiction,
within the United States or elsewhere, and, after one or more complaints filed,
confess judgment against Guarantor as of any time after any sums are payable
hereunder for the amount of such sums, together with attorney's fees equal to
fifteen percent (15%) of the amount of such sums, for collection and release of
all errors, and without stay of execution, and inquisition and extension upon
any levy on real estate is hereby waived and condemnation agreed to, and the
exemption of personal property from levy and sale is also hereby expressly
waived, and no benefit of exemption shall be claimed under any exemption law now
in force or which may be hereafter adopted. The foregoing authorities and powers
to confess judgment shall not be exhausted by one or more exercises of any of
them, or by any imperfect exercise of any of them, and shall not be extinguished
by any judgment entered because of any of them. Guarantor agrees that any
agreements of Guarantor contained in this Guaranty to pay any costs or expenses,
including attorney's fees and expenses, paid or incurred by Bank shall not be
merged into, or otherwise impaired by, any such judgment by confession, but Bank
shall not be entitled to recover on account of such costs or expenses any amount
in EXCESS of the greater of (a) such costs or expenses included in any judgments
by confession (without duplication), or (b) such costs or expenses actually paid
or incurred by Bank.
11. MODIFICATIONS, NOTICES. No modification or waiver of any provision
of this Guaranty, and no consent by Bank to any noncompliance by Guarantor
therewith, shall in any event be effective unless the same shall be in writing,
and then such waiver or consent shall be effective only in the specific instance
and for the purpose for which given. No notice to or demand upon Guarantor in
any circumstance shall entitle Guarantor to any other or further notice or
demand in the same, similar or other circumstances. All written communications
in connection with this Guaranty shall be deemed to have been given when
hand-delivered to the party to whom directed, or, if transmitted by telex, by
far-simile transmission or by mail (whether or not registered or certified),
when telexed or transmitted by facsimile transmission or deposited in the
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<PAGE> 27
mail postage prepaid, respectively, provided that any such notice or
communication to Guarantor shall be hand-delivered or transmitted to Guarantor
at the Guarantor Business Premises (or at such other address as Guarantor may
specify to Bank in writing from time to time), and any such notice or
communication to Bank shall be hand-delivered or transmitted to Bank at the Bank
Notice Address (or at such other address as Bank may specify to Guarantor in
writing from time to time).
12. APPLICABLE LAW, JURISDICTION. The performance and construction of
this Guaranty shall be governed by the internal laws of the State of Maryland
(exclusive of principles of conflicts of laws). Guarantor agrees that any suit,
action or proceeding instituted by Bank with respect to this Guaranty may be
brought in any State or federal court located in the State of Maryland (in
addition to such other courts in which jurisdiction and venue may be
appropriate), and Guarantor consents to the in personam jurisdiction of such
courts. Guarantor irrevocably waives any objection and any right of immunity on
the ground of venue, the convenience of the forum or the jurisdiction of such
courts or from the execution of judgments resulting therefrom.
13. SUCCESSORS AND ASSIGNS, INVALIDITY. This Guaranty shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns, and each reference in this Guaranty to any of the
parties hereto shall be deemed to include the successors and assigns of such
party, including, in the case of Guarantor, the debtor in possession in any case
under any chapter of the United States Bankruptcy Code in which Guarantor is
debtor. If any term, provision or condition, or any part thereof, of this
Guaranty shall for any reason be found or held invalid or unenforceable by any
court or governmental agency, such invalidity or unenforceability shall not
affect the remainder of such term, provision or condition, nor any other term,
provision or condition, and this Guaranty shall survive and be construed as if
such invalid or unenforceable term, provision or condition had not been
contained herein or therein. This Guaranty shall not impair, diminish or
otherwise affect any obligation or liability of Guarantor to Bank under or on
account of any guaranties heretofore issued by Guarantor in favor of Bank
relating to any of the Obligations.
14. MERGER. This Guaranty contains the entire agreement of the parties
with respect to the matters covered and the transactions contemplated hereby,
and no agreement, statement or promise made by any party hereto, or by any
employee, officer, agent or attorney of any party hereto, which is not contained
herein, shall be valid or binding.
IN WITNESS WHEREOF, Guarantor, intending to be legally bound hereby and
intending this to be a sealed instrument, has caused this Guaranty to be duly
executed under seal the day and year first above written.
ATTEST/WITNESS: COMMERCE CASUALTY GROUP, INC.
/s/ By: /s/ Paul V.H. Halter, III (SEAL)
-----------------------------------
Name: Paul V.H. Halter, III
------------------------------
Title: President
-----------------------------
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<PAGE> 1
REPRESENTATIVE'S WARRANT AGREEMENT
REPRESENTATIVE'S WARRANT AGREEMENT (the "Representative's Warrant
Agreement" or "Agreement"), dated as of _________ 1998, between COMMERCE
CASUALTY GROUP, INC.. (the "Company"), and FIRST LONDON SECURITIES CORPORATION
(the "Representative").
W I T N E S S E T H:
WHEREAS, the Representative has agreed, pursuant to that certain
underwriting agreement dated as of the date hereof by and between the Company
and the Representative (the "Underwriting Agreement"), to act as the
Representative of the Underwriters in connection with the Company's proposed
public offering (the "Public Offering") of 2,000,000 Units (the "Units") at
$5.1875 per Unit (the "Initial Public Offering Price), each Unit consisting of
one share (the "Shares") of Common Stock, $.001 par value per share (the "Common
Stock"); one Redeemable Series A Common Stock Purchase Warrant (the "Series A
Warrants"); and one Redeemable Series B Common Stock Purchase Warrant (the
"Series B Warrants")(the "Public Warrants");
WHEREAS, each Series A Warrant entitles the holder to purchase one
share of Common Stock at a price of $ 6.00 per share during the five-year period
commencing on the date of the Prospectus. The Series A Warrants are redeemable
by the Company for $9.00 per Warrant. Each Series B Warrant entitles the holder
to purchase one share of Common Stock at a price of $ 7.00 per share during the
five-year period commencing on the date of the Prospectus. The Series B Warrants
are redeemable by the Company for $10.00 per Warrant. Redemption requires not
less than 30 nor more than 60 days written notice provided there is then in
effect a current registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the issuance and sale of the
Common Stock upon the exercise of the Warrants;
WHEREAS, 2,000,000 Units shall be offered for sale at the Initial
Public Offering Price with each Share being sold $5.00 per share (the "Common
Stock IPO Price"), each Series A Warrant being sold at $.125 per Series A
Warrant and each Series B Warrant being sold at $.0625 per Series B Warrant
(collectively, the "Warrant IPO Price");
WHEREAS, the Company proposes to issue to the Representative and/or
persons related to the Representative as those persons are defined in Rule 2710
of the NASD Conduct Rules (the "Holder"), 200,000 warrants ("Representative's
Warrants") to purchase 200,000 Units, each of which is identical to those
offered to the public; and
WHEREAS, the Representative's Warrants to be issued pursuant to this
Agreement will be issued on the Closing Date (as such term is defined in the
Underwriting Agreement) by the Company to the holders ("Holders") in
consideration for, and as part of the compensation in connection with, the
Representative acting as Representative pursuant to the Underwriting Agreement.
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of ONE HUNDRED DOLLARS AND NO CENTS ($100.00), the
agreements
<PAGE> 2
herein set forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Grant and Period.
The Public Offering has been registered under a Registration Statement
on Form SB-2 (File No. 333-________) (the "Registration Statement") and declared
effective by the Securities and Exchange Commission (the "SEC" or "Commission")
on _______________________ (the "Effective Date"). This Agreement is entered
into pursuant to the Underwriting Agreement between the Company and the
Representative, as Representative of the Underwriters, in connection with the
Public Offering.
Pursuant to the Representative Warrants, the Holders are hereby granted
the right to purchase from the Company, at any time during the four year period
commencing ______, 1998 (one year from the Effective Date) (the "Purchase Date")
and expiring at 5:00 New York time on _____, 2003, (four years after the
Purchase Date) (the "Expiration Time"), up to 200,000 Units at an initial
exercise price (subject to adjustment as provided in Article 8) of $6.225 per
Unit (120% of the Initial Public Offering Price) (the "Unit Exercise Price"),
subject to the terms and conditions of this Agreement. Each Representative's
Warrant is exercisable to purchase one Underlying Unit at an initial exercise
price (subject to adjustment as provided in Article 8) during the four year
period commencing on the Purchase Date and ending on the Expiration Time.
Except as specifically otherwise provided herein, the Units, the
Underlying Shares, the shares underlying Series A Warrants and underlying Series
B Warrants constituting the Warrant Securities shall bear the same terms and
conditions as such securities described under the caption "Description of
Securities" in the Registration Statement, and as designated in the Company's
Certificate of Incorporation and any amendments thereto, and the Underlying
Warrants shall be governed by the terms of the Warrant Agreement executed in
connection with the Public Offering (the "Warrant Agreement"), except as
provided herein, and the Holders shall have registration rights under the Act,
for the Shares, the Underlying Warrants, and the Underlying Warrant Shares, as
more fully described in paragraph Article 7 of this Representative's Warrant
Agreement. In the event of any extension of the expiration date or reduction of
the exercise price of the Public Warrants, the same such changes to the
Underlying Warrants shall be simultaneously effected, except that the Underlying
Warrants shall expire no later than five years from the Effective Date.
2. Warrant Certificates.
The warrant certificates (the "Warrant Certificate") delivered and to
be delivered pursuant to this Agreement shall be in the form set forth in the
form of Warrant Certificate, attached hereto and made a part hereof, with such
appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
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3. Exercise of Warrant.
3.1 Full Exercise.
(a) A Holder may effect a cash exercise of any of the Representative's
Warrants by surrendering the Warrant Certificate, together with a Subscription
in the form of Exhibit 1 attached thereto, duly executed by such Holder to the
Company, at any time prior to the Expiration Time, at the Company's principal
office, accompanied by payment in cash or by certified or official bank check
payable to the order of the Company in the amount of the aggregate purchase
price of such Warrant Securities, subject to any adjustments provided for in
this Agreement. The aggregate purchase price hereunder for each Holder shall be
equal to the exercise price for each Unit (as adjusted as hereinafter provided).
(b) In lieu of the payment of the Representative Warrant Exercise Price
in the manner required by Section 3.1(a), the Holder shall have the right to pay
such exercise price for the shares of Units being so purchased by the surrender
to the Company of any exercisable but unexercised portion of such Holder's
Representative's Warrants having a then Value (as defined below) equal to such
exercise price multiplied by the number of Units being purchased upon such
exercise ("Cashless Exercise Right"). The sum of (i) the number of Units being
purchased upon exercise of the non-surrendered portion of the Common Stock
Representative's Warrants or the Underlying Warrants, as the case may be,
pursuant to this Cashless Exercise Right and (ii) the number of shares of Common
Stock underlying the portion of the warrants being so surrendered, shall not in
any event be greater than the total number of shares of Common Stock purchasable
upon the complete exercise of the warrants being so surrendered, if the Share
Exercise Price or the Underlying Warrant Share Exercise Price, as the case may
be, were paid in cash. The Value of the portion of the Common Stock
Representative's Warrants or Underlying Warrants, as the case may be, being
surrendered shall equal the remainder derived from subtracting (1) the Share
Exercise Price or the Underlying Share Exercise Price, as the case may be,
multiplied by the number of shares of Common Stock underlying the portion of the
warrants being so surrendered from (2) the Market Value (as defined below) of a
share of Common Stock multiplied by the number of shares of Common Stock
underlying the portion of the warrants being so surrendered. The Market Value
shall be determined on a per share basis as of the close of the business day
preceding the exercise, which determination shall be made as follows: (x) if the
Common Stock is listed for trading on a national or regional stock exchange or
is included on the Nasdaq National Market or SmallCap Market, the average
closing sale price quoted on such exchange or the Nasdaq National Market or
SmallCap Market that is published in The Wall Street Journal for the ten trading
days immediately preceding the date of exercise, or if no trade of the Common
Stock shall have been reported during such period, the last sale price so quoted
for the next day prior thereto on which a trade in the Common Stock was so
reported; or (y) if the Common Stock is not so listed, admitted to trading or
included, the average of the closing highest reported bid and lowest reported
ask price as quoted on the National Association of Securities Dealer's OTC
Bulletin Board or in the "pink sheets" published by the National Daily Quotation
Bureau for the first day immediately preceding the date of exercise on which the
Common Stock is traded. The Cashless Exercise Right may be exercised by the
Holder by delivering the Warrant Certificate to the Company together with a
Subscription in the form of Exhibit 2 attached thereto, duly executed by such
Holder, in which case no payment of cash will be required.
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3.2 Partial Exercise.
The Warrant Securities referred to in Section 3.1 above also may be
exercised from time to time in part by surrendering the Warrant Certificate in
the manner specified in Section 3.1, except that with respect to a cash
exercise, the purchase price payable with respect to such exercise shall be
equal to the number of Warrant Securities being purchased hereunder multiplied
by the exercise price for such Warrant Security, subject to any adjustments
provided for in this Agreement. Upon any such partial exercise, the Company, at
its expense, will forthwith issue to the Holder hereof a new Warrant Certificate
or Warrants of like tenor calling in the aggregate for the number of securities
(as constituted as of the date hereof) for which the Warrant Certificate shall
not have been exercised, issued in the name of the Holder hereof or as such
Holder (upon payment by such Holder of any applicable transfer taxes) may
direct.
4. Issuance of Certificates.
Upon the exercise of the Warrants or the Underlying Units, the issuance
of certificates for the underlying shares of Common Stock or other securities,
as applicable, shall be made forthwith (and in any event within three business
days thereafter) without charge to the Holder thereof including, without
limitation, any tax which may be payable in respect of the issuance thereof, and
such certificates shall (subject to the provisions of Articles 5 and 7) be
issued in the name of, or in such names as may be directed by, the Holder
thereof; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificates in a name other than that of the Holder and
the Company shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the shares
of Common Stock or other securities, as applicable, shall be executed on behalf
of the Company by the manual or facsimile signature of the then present Chairman
or Vice Chairman of the Board of Directors or Chairman or Vice Chairman of the
Company under its corporate seal reproduced thereon, attested to by the manual
or facsimile signature of the then present Secretary or Assistant Secretary of
the Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
5. Restriction On Transfer of Warrants.
The Holder of a Warrant Certificate, by acceptance thereof, covenants
and agrees that the Warrants may not be sold, transferred, assigned,
hypothecated or otherwise disposed of, in whole or in part, except (a) to
officers of the Representative or to officers and partners of the other
Underwriters or Selected Dealers participating in the Public Offering; (b) by
will; or (c) by operation of law.
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6. Exercise Price.
6.1 Initial and Adjusted Exercise Prices.
The initial Share Exercise Price of each Representative's Warrant shall
be $6.225 per Unit (120% of the IPO Price). The adjusted exercise price of any
Warrant Security shall be the price which shall result from time to time from
any and all adjustments of the initial exercise price in accordance with the
provisions of Article 8. The Warrant Representative's Warrants and the
Underlying Warrants are exercisable during the four year period commencing on
the Purchase Date.
6.2 Exercise Price.
The term "exercise price" herein shall mean the initial exercise price
or the adjusted exercise price, depending upon the context.
7. Registration Rights.
7.1 Registration Under the Securities Act of 1933.
The Shares, the Underlying Series A Warrants, the Underlying Series B
Warrants and the Underlying Warrant Shares (collectively the "Registrable
Securities") have been registered under the Securities Act of 1933, as amended
(the "Act"). Upon exercise, in part or in whole, of the Warrants, certificates
representing the Shares, the Underlying Warrants or the Underlying Warrants
Shares, as the case may be, shall bear the following legend in the event there
is no current registration statement effective with the Commission at such time
as to such securities:
The securities represented by this certificate may not be offered or
sold except pursuant to (i) an effective registration statement under
the Securities Act of 1933, as amended (the `Act'), (ii) to the extent
applicable, Rule 144 under the Act (or any similar rule under such Act
relating to the disposition of securities) , or (iii) an opinion of
counsel, if such opinion shall be reasonably satisfactory to counsel to
the issuer, that an exemption from registration under such Act and
applicable state securities laws is available.
7.2 Piggyback Registration.
If, at any time commencing after the Effective Date of the Public
Offering and expiring seven (7) years thereafter, the Company prepares and files
a post-effective amendment to the Registration Statement, or a new registration
statement, under the Act, or files a Notification on Form 1-A or otherwise
registers securities under the Act, or files a similar disclosure document with
the Commission (collectively the "Registration Documents") as to any of its
securities under the Act (other than under a registration statement pursuant to
Form S-8 or Form S-4 or small business issue equivalent), it will give written
notice by registered mail, at least 30 days prior to the filing of each such
Registration Document, to the Representative and to all other Holders of the
Registrable Securities of its intention to do so. If the Representative or other
Holders of the Registrable
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Securities notify the Company within 20 days after receipt of any such notice of
its or their desire to include any such Registrable Securities in such proposed
Registration Documents, the Company shall afford the Representative and such
Holders of such Registrable Securities the opportunity to have any Registrable
Securities registered under such Registration Documents or any other available
Registration Document.
Notwithstanding the provisions of this Section 7.2, the Company shall
have the right at any time after it shall have given written notice pursuant to
this Section 7.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
7.3 Demand Registration.
(a) At any time commencing one year after the Effective Date of the
Public Offering, and expiring four years thereafter, the Holders of Registrable
Securities representing more than 50% of such securities at that time
outstanding shall have the right (which is in addition to the registration
rights under Section 7.2), exercisable by written notice to the Company, to have
the Company prepare and file with the Commission at the sole expense of the
Company, on one occasion, a registration statement and/or such other documents,
including a prospectus, and/or any other appropriate disclosure document as may
be reasonably necessary in the opinion of both counsel for the Company and
counsel for the Representative and Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale of their
respective Registrable Securities for nine consecutive months (or such longer
period of time as permitted by the Act) by such Holders and any other Holders of
any of the Registrable Securities who notify the Company within ten days after
being given notice from the Company of such request (a "Demand Registration"). A
Demand Registration shall not be counted as a Demand Registration hereunder
until such Demand Registration has been declared effective by the SEC and
maintained continuously effective for a period of at least nine months , subject
to reasonable "black-out" periods in which event such nine months shall be
extended by a number of days equal to the duration and the "black-out" periods,
or such shorter period when all Registrable Securities included therein have
been sold in accordance with such Demand Registration, provided that a Demand
Registration shall be counted as a Demand Registration hereunder if the Company
ceases its efforts in respect of such Demand Registration at the request of the
majority Holders making the demand for a reason other than a material and
adverse change in the business, assets, prospects or condition (financial or
otherwise) of the Company and its subsidiaries taken as a whole.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by the majority of the Holders to
all other registered Holders of any of the Registrable Securities within ten
days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section 7.2 and
subsection (a) of this Section 7.3, at any time commencing one year after the
Effective Date of the Public Offering, and expiring four years thereafter, the
Holders of any Registrable Securities representing more than 50% of such
securities shall have the right, exercisable by written request to the Company,
to have the
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Company prepare and file, on one occasion, with the Commission a registration
statement or any other appropriate disclosure document so as to permit a public
offering and sale for nine consecutive months (or such longer period of time as
permitted by the Act) by any such Holder of Registrable Securities; provided,
however, that the provisions of Section 7.4(b) shall not apply to any such
registration request and registration and all costs incident thereto shall be at
the expense of the Holder or Holders participating in the offering pro-rata.
(d) Any written request by the Holders made pursuant to this Section
7.3 shall:
(i) Specify the number of Registrable Securities which the
Holders intend to offer and sell and the minimum price at which the
Holders intend to offer and sell such securities;
(ii) State the intention of the Holders to offer such
securities for sale;
(iii) Describe the intended method of distribution of such
securities; and
(iv) Contain an undertaking on the part of the Holders to
provide all such information and materials concerning the Holders and
take all such action as may be reasonably required to permit the
Company to comply with all applicable requirements of the Commission
and to obtain acceleration of the effective date of the registration
statement.
(e) In the event the Company receives from the Holders of any
Registrable Securities representing more than 50% of such securities at that
time outstanding, a request that the Company effect a registration on Form S-3
with respect to the Registrable Securities and if Form S-3 is available for such
offering, the Company shall, as soon as practicable, effect such registration as
would permit or facilitate the sale and distribution of the Registrable
Securities as are specified in the request. All expenses incurred in connection
with a registration requested pursuant to this Subsection (e) shall be borne by
the Company. Registrations effected pursuant to this Subsection (e) shall not be
counted as registrations pursuant to Sections 7.3 (a) and 7.3 (c).
7.4 Covenants of the Company With Respect to Registration.
In connection with any registration under Section 7.2 or 7.3, the
Company covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within 45 days of receipt of any demand pursuant to Section 7.3, and
shall use its best efforts to have any such registration statement declared
effective at the earliest practicable time. The Company will promptly notify
each seller of such Registrable Securities, and confirm such advice in writing,
(i) when such registration statement becomes effective, (ii) when any
post-effective amendment to such registration statement becomes effective, and
(iii) of any request by the SEC for any amendment or supplement to such
registration statement or any prospectus relating thereto or for additional
information.
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The Company shall furnish to each seller of such Registrable Securities
such number of copies of such registration statement and of each such amendment
and supplement thereto (in each case including each preliminary prospectus and
summary prospectus) in conformity with the requirements of the Act, and such
other documents as such seller may reasonably request in order to facilitate the
disposition of the Registrable Securities by such seller.
(b) The Company shall pay all costs (excluding transfer taxes, if any,
and fees and reasonable expenses of Holder's counsel (such costs of counsel not
to exceed $10,000)), fees and expenses in connection with all registration
statements filed pursuant to Sections 7.2 and 7.3(a) including, without
limitation, the Company's legal and accounting fees, printing expenses, blue sky
fees and expenses. If the Company shall fail to comply with the provisions of
Section 7.3(a), the Company shall, in addition to any other equitable or other
relief available to the Holder, be liable for any or all special and
consequential damages sustained by the Holder requesting registration of their
Registrable Securities.
(c) The Company shall prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be reasonably necessary to keep such registration statement
effective for at least nine months, and to comply with the provisions of the Act
with respect to the disposition of all securities covered by such registration
statement during such period in accordance with the intended methods of
disposition by the seller or sellers of Registrable Securities set forth in such
registration statement. If at any time the SEC should institute or threaten to
institute any proceedings for the purpose of issuing a stop order suspending the
effectiveness of any such registration statement, the Company will promptly
notify each seller of such Registrable Securities and will use all reasonable
efforts to prevent the issuance of any such stop order or to obtain the
withdrawal thereof as soon as possible. The Company will use its good faith
reasonable efforts and take all reasonably necessary action which may be
required in qualifying or registering the Registrable Securities included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are required by the Holder, provided that the
Company shall not be obligated to execute or file any general consent to service
of process or to qualify as a foreign corporation to do business under the laws
of any such jurisdiction. The Company shall use its good faith reasonable
efforts to cause such Registrable Securities covered by such registration
statement to be registered with or approved by such other governmental agencies
or authorities of the United States or any state thereof as may be reasonably
necessary to enable the seller or sellers thereof to consummate the disposition
of such Registrable Securities.
(d) The Company shall indemnify the Holder of the Registrable
Securities to be sold pursuant to any registration statement and each person, if
any, who controls such Holders within the meaning of Section 15 of the Act or
Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), against all loss, claim, damage, expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only to
the same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify the Representative as contained in the
Underwriting Agreement.
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(e) If requested by the Company prior to the filing of any registration
statement covering the Registrable Securities, each of the Holders of the
Registrable Securities to be sold pursuant to a registration statement, and
their successors and assigns, shall severally, and not jointly, indemnify the
Company, its officers and directors and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against all loss, claim, damage or expense or liability (including
all expenses reasonably incurred in investigating, preparing or defending
against any claim whatsoever) to which they may become subject under the Act,
the Exchange Act or otherwise, arising from written information furnished by
such Holder, or their successors or assigns, for specific inclusion in such
registration statement to the same extent and with the same effect as the
provisions contained in the Underwriting Agreement pursuant to which the
Representative have agreed to indemnify the Company, except that the maximum
amount which may be recovered from each Holder pursuant to this paragraph or
otherwise shall be limited to the amount of net proceeds received by the Holder
from the sale of the Registrable Securities.
(f) Nothing contained in this Agreement shall be construed as requiring
the Holders to exercise their Warrants or Underlying Warrants prior to the
filing of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Registrable Securities to be included in any registration statement
filed pursuant to Section 7.3 without the prior written consent of the Holders
of the Registrable Securities representing a majority of such securities.
(h) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the Underwriting Agreement), and (ii) a "cold comfort" letter
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the Underwriting Agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
(i) The Company shall deliver promptly to each Holder participating in
the offering requesting the correspondence and memoranda described below and the
managing underwriter copies of all correspondence between the Commission and the
Company, its counsel or auditors and all memoranda relating to discussions with
the Commission or its staff with respect to the registration statement and
permit each Holder and underwriter to do such investigation, upon reasonable
advance notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access
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to books, records and properties and opportunities to discuss the business of
the Company with its officers and independent auditors, all to such reasonable
extent and at such reasonable times and as often as any such Holder shall
reasonably request.
(j) With respect to a registration statement filed pursuant to Section
7.3, the Company, if requested, shall enter into an Underwriting Agreement with
the managing underwriter, reasonably satisfactory to the Company, selected for
such underwriting by Holders holding a majority of the Registrable Securities
requested to be included in such underwriting. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter. The Holders, if required by the
underwriter to be parties to any underwriting agreement relating to an
underwritten sale of their Registrable Securities, may, at their option, require
that any or all the representations, warranties and covenants of the Company to
or for the benefit of such underwriters shall also be made to and for the
benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders and their intended
methods of distribution.
(k) Notwithstanding the provisions of Section 7.2 or Section 7.3 of
this Agreement, the Company shall not be required to effect or cause the
registration of Registrable Securities pursuant to Section 7.2 or Section 7.3 if
and to the extent that, within 30 days after its receipt of a request to
register such Registrable Securities (i) counsel for the Company delivers an
opinion to the Holders requesting registration of such Registrable Securities,
in form and substance satisfactory to counsel to such Holder, to the effect that
the entire number of Registrable Securities proposed to be sold by such Holders
may otherwise be sold, in the manner proposed by such Holder, without
registration under the Securities Act, or (ii) the SEC shall have issued a
no-action position, in form and substance reasonably satisfactory to counsel for
the Holder requesting registration of such Registrable Securities, to the effect
that the entire number of Registrable Securities proposed to be sold by such
Holder may be sold by it, in the manner proposed by such Holder, without
registration under the Securities Act.
(l) After completion of the Public Offering, the Company shall not,
directly or indirectly, enter into any merger, business combination or
consolidation in which (i) the Company shall not be the surviving corporation
and (ii) the stockholders of the Company are to receive, in whole or in part,
capital stock or other securities of the surviving corporation, unless the
surviving corporation shall, prior to such merger, business combination or
consolidation, agree in writing to assume the obligations of the Company under
this Agreement, and for that purpose references hereunder to "Registrable
Securities" shall be deemed to include the securities which the Holders would be
entitled to receive in exchange for Registrable Securities under any such
merger, business combination or consolidation, provided that to the extent such
securities to be received are convertible into shares of Common Stock of the
issuer thereof, then any such shares of Common Stock as are issued or issuable
upon conversion of said convertible securities shall also be included within the
definition of "Registrable Securities".
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8. Adjustments to Exercise Price and Number of Securities.
8.1 Adjustment for Dividends, Subdivisions, Combinations or
Reclassification.
In case the Company shall (a) pay a dividend or make a distribution in
shares of its capital stock (whether shares of Common Stock or of capital stock
of any other class), (b) subdivide its outstanding shares of Common Stock into a
greater number of shares, (c) combine its outstanding shares of Common Stock
into a smaller number of shares, or (d) issue by reclassification of its shares
of Common Stock any shares of capital stock of the Company; then, and in each
such case, the Share Exercise Price, the Underlying Warrant Exercise Price and
the number of Warrants in effect immediately prior to such action shall be
adjusted so that the Holder thereafter upon the exercise hereof shall be
entitled to receive the number and kind of shares of the Company which such
Holder would have owned immediately following such action had this warrant been
exercised immediately prior thereto. An adjustment made pursuant to this Section
shall become effective immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
If, as a result of an adjustment made pursuant to this Section, the Holder shall
become entitled to receive shares of two or more classes of capital stock of the
Company, the Board of Directors of the Company (whose determination shall be
conclusive) shall determine the allocation of the adjusted Share Exercise Price
and Underlying Warrant Exercise Price between or among shares of such class of
capital stock.
Immediately upon any adjustment of the exercise price of any Warrant
pursuant to this Section, the Company shall send written notice thereof to the
Holder of Warrant Certificates (by first class mail, postage prepaid), which
notice shall state the exercise price of such Warrant resulting from such
adjustment, and any increase or decrease in the number of Warrant Securities to
be acquired upon exercise of the Warrants, setting forth in reasonable detail
the method of calculation and the facts upon which such calculation is based.
8.2 Adjustment For Reorganization, Merger or Consolidation.
In case of any reorganization of the Company or consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental Warrant agreement providing that the Holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of shares of Common Stock of the Company for which such Warrant might have been
exercised immediately prior to such reorganization, consolidation, merger,
conveyance, sale or transfer. Such supplemental Warrant agreement shall provide
for adjustments which shall be identical to the adjustments provided in Section
8.1 and such registration rights and other rights as provided in this Agreement.
The Company shall not effect any such consolidation, merger, or similar
transaction as contemplated by this Section 8.2, unless prior to or
simultaneously with the consummation thereof, the successor corporation (if
other than the Company) resulting from such consolidation or
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merger or the corporation purchasing, receiving, or leasing such assets or other
appropriate corporation or entity shall assume, by written instrument executed
and delivered to the Holders, the obligation to deliver to the Holders, such
shares of stock, securities, or assets as, in accordance with the foregoing
provisions, such holders may be entitled to purchase, and to perform the other
obligations of the Company under this Agreement. The above provision of this
Subsection shall similarly apply to successive consolidations or successively
whenever any event listed above shall occur.
8.3 Dividends and Other Distributions.
In the event that the Company shall at any time prior to the exercise
of all of the Warrants and Underlying Warrants distribute to its stockholders
any assets, property, rights, evidences of indebtedness, securities (other than
a distribution made as a cash dividend payable out of earnings or out of any
earned surplus legally available for dividends under the laws of the
jurisdictions of incorporation of the Company), whether issued by the Company or
by another, the Holders of the unexercised Warrants shall thereafter be
entitled, in addition to the shares of Common Stock or other securities and
property receivable upon the exercise thereof, to receive, upon the exercise of
such Warrants, the same property, assets, rights, evidences of indebtedness,
securities or any other thing of value that they would have been entitled to
receive at the time of such distribution as if the Warrants had been exercised
immediately prior to such distribution. At the time of any such distribution,
the Company shall make appropriate reserves to ensure the timely performance of
the provisions of this subsection or an adjustment to the exercise price of such
Warrants, which shall be effective as of the day following the record date for
such distribution.
8.4 Adjustment in Number of Securities.
Upon each adjustment of the exercise price of Warrants pursuant to the
provisions of this Article 8, the number of securities issuable upon the
exercise of each Warrant and Underlying Warrant shall be adjusted to the nearest
full amount by multiplying a number equal to the exercise price in effect
immediately prior to such adjustment by the number of securities issuable upon
exercise of the Warrants and the Underlying Warrants immediately prior to such
adjustment and dividing the product so obtained by the adjusted exercise price.
8.5 No Adjustment of Exercise Price in Certain Cases.
No adjustment of the exercise price of any Warrant shall be made if the
amount of said adjustment would be less than $.05 per security; provided,
however, that in any such case any adjustment that would otherwise be required
then to be made shall be carried forward and shall be made at the time of and
together with the next subsequent adjustment which, together with any adjustment
so carried forward, shall amount to at least $.05 per security.
12
<PAGE> 13
8.6 Accountant's Certificate of Adjustment.
In each case of an adjustment or readjustment of the Share Exercise
Price, Underlying Warrant Exercise Price or the number of any securities
issuable upon exercise of the Warrants or the Underlying Warrants, the Company,
at its expense, shall cause independent certified public accountants of
recognized standing selected by the Company (who may be the independent
certified public accountants then auditing the books of the Company) to compute
such adjustment or readjustment in accordance herewith and prepare a certificate
showing such adjustment or readjustment, and shall mail such certificate, by
first class mail, postage prepaid, to any Holder of the Warrants or the
Underlying Warrants, as the case may be, at the Holder's address as shown on the
Company's books. The certificate shall set forth such adjustment or
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based including, but not limited to, a statement of (i) the
Share Exercise Price or the Underlying Warrant Share Exercise Price at the time
in effect, and (ii) the number of additional securities and the type and amount,
if any, of other property which at the time would be received upon exercise of
the Warrants or Underlying Warrants, as the case may be.
8.7 Adjustment of Underlying Warrant Exercise Price.
With respect to any of the Underlying Warrants whether or not the
Underlying Warrants have been exercised (or are exercisable) and whether or not
the Underlying Warrants are issued and outstanding, the Underlying Warrant Share
Exercise Price and the number of Underlying Warrant Shares shall be
automatically adjusted in accordance with the Warrant Agreement between the
Company and the Company's transfer agent, upon occurrence of any of the events
relating to adjustments described therein. Thereafter, the Underlying Warrants
shall be exercisable at such adjusted Underlying Warrant Share Exercise Price
for such adjusted number of Underlying Warrant Shares or other securities,
properties or rights.
9. Exchange and Replacement of Warrant Certificates.
Each Warrant Certificate is exchangeable without expense, upon the
surrender thereof by the registered Holder at the principal executive office of
the Company, for a new Warrant Certificate of like tenor and date representing
in the aggregate the right to purchase the same number of securities in such
denominations as shall be designated by the Holder thereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
13
<PAGE> 14
10. Elimination of Fractional Interest.
The Company shall not be required to issue certificates representing
fractions of shares of Common Stock upon the exercise of the Warrants or
Underlying Warrants, nor shall it be required to issue script or pay cash in
lieu of fractional interests, it being the intent of the parties that all
fractional interests may be eliminated, at the Company's option, by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights, or in lieu thereof paying cash equal to such
fractional interest multiplied by the current value of a share of Common Stock.
11. Reservation and Listing.
The Company shall at all times reserve and keep available out of its
authorized shares of Common Stock, solely for the purpose of issuance upon the
exercise of the Warrants and the Underlying Warrants, such number of shares of
Common Stock or other securities, properties or rights as shall be issuable upon
the exercise thereof. The Company covenants and agrees that, upon exercise of
the Warrants or the Underlying Warrants, and payment of the exercise price
therefor, all shares of Common Stock and other securities issuable upon such
exercise shall be duly and validly issued, fully paid, non-assessable and not
subject to the preemptive rights of any stockholder. As long as the Warrants and
Underlying Warrants shall be outstanding, the Company shall use its best efforts
to cause all shares of Common Stock issuable upon the exercise of the Warrants
and the Underlying Warrants to be listed and quoted (subject to official notice
of issuance) on all securities exchanges and systems on which the Common Stock
and/or the Public Warrants may then be listed and/or quoted, including Nasdaq.
12. Notices to Warrant Holders.
Nothing contained in this Agreement shall be construed as conferring
upon the Holders of the Warrants or the Underlying Warrants the right to vote or
to consent or to receive notice as a stockholder in respect of any meetings of
stockholders, for the election of directors or any other matter, or as having
any rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and the Underlying Warrants and their
exercise, any of the following events shall occur:
(a) The Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) The Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
14
<PAGE> 15
(c) A dissolution, liquidation or winding up of the Company (other than
in connection with a consolidation or merger) or a sale of all or substantially
all of its property, assets and business as an entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least 15 days prior to the date fixed as a record date of the
date of closing the transfer books for the determination of the stockholders
entitled to such dividend, distribution, convertible or exchangeable securities
or subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notices shall specify such record date or
the date of closing the transfer books, as the case may be. Failure to give such
notice or any defect therein shall not affect the validity of any action taken
in connection with the declaration or payment of any such dividend, or the
issuance of any convertible or exchangeable securities, or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
13. Underlying Warrants.
The form of the certificate representing the Underlying Warrants (and
the form of election to purchase shares of Common Stock upon the exercise of the
Underlying Warrants and the form of assignment printed on the reverse thereof)
shall be substantially as set forth in the exhibits to the Warrant Agreement.
Subject to the terms of this Agreement, one Underlying Warrant shall evidence
the right to initially purchase one fully paid and nonassessable share of Common
Stock at an initial purchase price of $7.8125 during the four year period
commencing on the Purchase Date and ending at the Effective Time, at which time
the Underlying Warrants Share shall expire. The Underlying Warrant Share
Exercise Price and the number of Underlying Warrant Shares issuable upon the
exercise of the Underlying Warrants are subject to adjustment, whether or not
the Warrants have been exercised and the Underlying Warrants have been issued,
in the manner and upon the occurrence of the events set forth in the Warrant
Agreement, which is hereby incorporated herein by reference and made a part
hereof as if set forth in its entirety herein. Subject to the provisions of this
Agreement and upon issuance of the Underlying Warrants, each registered holder
of such Underlying Warrant shall have the right to purchase from the Company
(and the Company shall issue to such registered holders) up to the number of
fully paid and nonassessable shares of Common Stock (subject to adjustment as
provided in the Warrant Agreement) set forth in such Warrant Certificate, free
and clear of all preemptive rights of stockholders, provided that such
registered Holder complies with the terms governing exercise of the Underlying
Warrant set forth in the Warrant Agreement, and pays the applicable Underlying
Warrant Share Exercise Price, determined in accordance with the terms of the
Warrant Agreement. Upon exercise of the Underlying Warrants, the Company shall
forthwith issue to the registered holder of any such Underlying Warrant in his
name or in such name as may be directed by him, certificates for the number of
shares of Common Stock so purchased. Except as otherwise provided herein and in
this Agreement, the Underlying Warrants shall be governed in all respects by the
terms of the Warrant Agreement. The Underlying Warrants shall be transferable in
the manner provided in the Warrant Agreement, and upon any such transfer, a new
Underlying Warrant certificate shall be issued promptly to the transferee. The
Company covenants to send to each Holder, irrespective of whether or not the
Warrants have been exercised, any and all notices required by the Warrant
Agreement to be sent to holders of Underlying Warrants.
15
<PAGE> 16
14. Notices.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly given when personally
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of any of the Registrable
Securities, to the address of such Holder as shown on the books of the Company;
or
(b) If to the Underwriters:
First London Securities Corporation
2600 State Street
Dallas, Texas 75204
Attention: Douglas R. Nichols
Copy to: Richard F. Dahlson
Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202-3797
If to the Company: Commerce Casualty Group, Inc.
9140 ArrowPoint Boulevard, Suite 200
Charlotte, North Carolina 28273
Attention: Paul V. H. Halter, III, Chief Operating Officer
Copy to: Charles Barkley
7808 Pineville Matthews Road
Suite 11
Charlotte, North Carolina 28226
15. Entire Agreement: Modification.
This Agreement (and the Underwriting Agreement and Warrant Agreement to
the extent applicable) contain the entire understanding between the parties
hereto with respect to the subject matter hereof, and the terms and provisions
of this Agreement may not be modified, waived or amended except in a writing
executed by the Company and the Holders of at least a majority of Registrable
Securities (based on underlying numbers of shares of Common Stock). Notice of
any modification, waiver or amendment shall be promptly provided to any Holder
not consenting to such modification, waiver or amendment.
16
<PAGE> 17
16. Successors.
All the covenants and provisions of this Agreement shall be binding
upon and inure to the benefit of the Company, the Holders and their respective
successors and assigns hereunder.
17. Termination.
This Agreement shall terminate at 5:00 New York time on December 31,
2002. Notwithstanding the foregoing, the indemnification provisions of Section 7
shall survive such termination.
18. Governing Law; Submission to Jurisdiction.
This Agreement and each Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of Texas and for all
purposes shall be construed in accordance with the laws of said State without
giving effect to the rules of said State governing the conflicts of laws.
19. Severability.
If any provision of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision of this Agreement.
20. Captions.
The caption headings of the Sections of this Agreement are for
convenience of reference only and are not intended, nor should they be construed
as, a part of this Agreement and shall be given no substantive effect.
21. Benefits of this Agreement.
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and the Representative and any other
registered Holder of the Warrant Certificates or Registrable Securities any
legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and the
Representative and any other Holder of the Warrant Certificates or Registrable
Securities.
22. Counterparts.
This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and
such counterparts shall together constitute but one and the same instrument.
17
<PAGE> 18
IN WITNESS HEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
Commerce Casualty Group, Inc.
By:
---------------------------------------
Paul V. H. Halter, III
Chief Operating Officer
Attest:
- ------------------------
___ Secretary
FIRST LONDON SECURITIES CORPORATION
By:
---------------------------------------
Douglas R. Nichols, President
EXHIBIT A
<PAGE> 19
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M, NEW YORK TIME ON __________, 2002
NO. W-______
___________ Common Stock ___________ Warrant
Representative's Representative's
Warrants Warrants
or
__________ Underlying
Warrants
This Warrant Certificate certifies that ___________________, or
registered assigns, is the registered holder (the "Holder") of _____________
Common Stock Representative's Warrant, ________ Warrant Representative's
Warrants and _________________ Underlying Warrants of Commerce Casualty Group,
Inc. (the "Company"). Each Common Stock Representative's Warrant permits the
Holder to purchase initially, at any time from December 31, 1998 (the "Purchase
Date") until 5:00 p.m. New York Time on December 31, 2002 (the "Expiration
Time"), one share of the Company's Common Stock at the initial exercise price,
subject to adjustment in certain events (the "Share Exercise Price"), of $8.25
per share (165% of the Common Stock IPO Price). Each Warrant Representative's
Warrant permits the Holder to purchase initially, at any time from the Purchase
Date until the Expiration Time, one Underlying Warrant at the initial exercise
price, subject to adjustment in certain events, of $.15625 per Underlying
Warrant (125% of the Warrant IPO Price) (the "Underlying Warrant Exercise
Price"). Each Underlying Warrant permits the Holder thereof to purchase, at any
time from the Purchase Date until the Expiration Time, one share of the
Company's Common Stock at the initial exercise price, subject to adjustment in
certain events, of $7.8125 per share.
<PAGE> 20
Any exercise of Common Stock Representative's Warrants, Warrant
Representative's Warrants, or Underlying Warrants shall be effected by surrender
of this Warrant Certificate and payment of the exercise price thereof at an
office or agency of the Company, but subject to the conditions set forth herein
and in the Representative's Warrant Agreement dated as of December 31, 1997,
between the Company and First London Securities Corporation (the
"Representative's Warrant Agreement"). Payment of the exercise price shall be
made by certified check or official bank check in New York Clearing House funds
payable to the order of the Company in the event there is no cashless exercise
pursuant to Section 3.1(b) of the Representative's Warrant Agreement. The Common
Stock Representative's Warrants, the Warrant Representative's Warrants, and the
Underlying Warrants are collectively referred to as "Warrants".
No Warrant may be exercised after the Expiration Time, at which time
all Warrants evidenced hereby, unless exercised prior thereto, hereby shall
thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Representative's Warrant
Agreement, which Representative's Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation or rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Warrants.
The Representative's Warrant Agreement provides that upon the
occurrence of certain events, the exercise price, the type and the number of the
Company's securities issuable thereupon may, subject to certain conditions, be
adjusted. In such event, the Company will, at the request of the holder, issue a
new Warrant Certificate evidencing the adjustment in the exercise price and the
number or type of securities, as the case may be, issuable upon the exercise of
the Warrants; provided, however, that the failure of the Company to issue such
new Warrant Certificates shall not in any way change, alter, or otherwise
impair, the rights of the holder as set forth in the Representative's Warrant
Agreement.
Upon due presentment for registration or transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferees in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the
Representative's Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
2
<PAGE> 21
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the Holder, and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
All terms used in this Warrant Certificate which are defined in the
Representative's Warrant Agreement shall have the meanings assigned to them in
the Representative's Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of January 15, 1998
COMMERCE CASUALTY GROUP, INC.
By:
------------------------------------
Mark D. Mastrini, President
(Seal)
Attest:
- --------------------------------
Jerrold B. Sendrow, Secretary
3
<PAGE> 22
EXHIBIT 1
FORM OF SUBSCRIPTION (CASH EXERCISE)
(To be signed only upon exercise of Warrant)
TO: Commerce Casualty Group, Inc.
4802 Gunn Highway
Tampa, Florida 33624
The undersigned, the Holder of Warrant Certificate number ____ (the
"Warrant"), representing ______________ Common Stock Representative's Warrants,
__________ Warrant Representative's Warrants and _______________ Underlying
Warrants of Commerce Casualty Group, Inc. (the "Company"), which Warrant
Certificate is being delivered herewith, hereby irrevocably elects to exercise
the purchase right provided by the Warrant Certificate for, and to purchase
thereunder, _____________ Shares, _____________ Underlying Warrants __________
underlying Warrant Shares of the Company, and herewith makes payment of
$____________ therefor, and requests that the certificates for such securities
be issued in the name of, and delivered to, _________________________________
_____________________________ whose address is
____________________________________, all in accordance with the
Representative's Warrant Agreement and the Warrant Certificate.
Dated:____________________________
-------------------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant Certificate)
-------------------------------------------
-------------------------------------------
(Address)
4
<PAGE> 23
EXHIBIT 2
FORM OF SUBSCRIPTION (CASHLESS EXERCISE)
TO: Commerce Casualty Group, Inc.
4802 Gunn Highway
Tampa, Florida 33624
The undersigned, the Holder of Warrant Certificate number ____ (the
"Warrant"), representing ___________ Common Stock Representative's Warrants and
_________________ Underlying Warrants of Commerce Casualty Group, Inc. (the
"Company"), which Warrant is being delivered herewith, hereby irrevocably elects
the cashless exercise of the purchase right provided by the Representative's
Warrant Agreement and the Warrant Certificate for, and to purchase thereunder,
shares of the Company Common Stock in accordance with the formula provided at
Article 3 of the Representative's Warrant Agreement. The undersigned requests
that the certificates for such shares be issued in the name of, and delivered
to _______, whose address is _________, all in accordance with the Warrant
Certificate.
Dated:____________________
-------------------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant Certificate)
-------------------------------------------
-------------------------------------------
(Address)
5
<PAGE> 24
(FORM OF ASSIGNMENT)
(To be exercised by the registered holder if such holder desires to
transfer the Warrant Certificate.)
FOR VALUE RECEIVED ___________________________________________________________
hereby sells, assigns and transfers unto
(Print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint___________________________
________________________________________________ Attorney, to transfer the
within Warrant Certificate on the books of the within-named Company, and full
power of substitution.
Dated:______________________
Signature:
-------------------------------------------
(Signature must conform in all respects to
name of holder as specified on the fact of
the Warrant Certificate)
-------------------------------------------
(Insert Social Security or Other Identifying
Number of Assignee)
6
<PAGE> 1
Exhibit 21.1
LIST OF SUBSIDIARIES
Pursuant to Item 601 of Regulation S-K, Company lists the following
subsidiaries:
1. Commerce Casualty Insurance Company Ltd." incorporated on December 19, 1995
under the laws of Bermuda.
2. Commerce Capital, Inc., incorporated on January 20, 1998 under the laws of
North Carolina.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form SB-2 of
Commerce Casualty Group, Inc. (the "Company") of our report dated April 17, 1998
on the Financial Statements of the Company for the years ended as of December
31, 1996 and 1997. We also consent to the reference to our Firm under the
caption "Experts" in the Prospectus which is part of the Registration Statement.
KILLMAN, MURRELL & COMPANY, P.C.
Certified Public Accountants
Dallas, Texas
August 11, 1998
<TABLE> <S> <C>
<ARTICLE> 7
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THE SCHEDULE BELOW CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF COMMERCE CASUALTY GROUP INC. AND
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
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<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
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<RECOVER-REINSURE> 676
<DEFERRED-ACQUISITION> 309
<TOTAL-ASSETS> 4,555
<POLICY-LOSSES> 370
<UNEARNED-PREMIUMS> 1,259
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 1
<OTHER-SE> 446
<TOTAL-LIABILITY-AND-EQUITY> 4,555
819
<INVESTMENT-INCOME> 71
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<OTHER-INCOME> 354
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<NET-INCOME> (485)
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<LEGEND>
THE SCHEDULE BELOW CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF COMMERCE CASUALTY GROUP INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
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<MULTIPLIER> 1,000
<S> <C>
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<PERIOD-START> JAN-01-1997
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<CASH> 5,399
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0
0
<COMMON> 1
<OTHER-SE> 1,608
<TOTAL-LIABILITY-AND-EQUITY> 9,987
3,986
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<OTHER-INCOME> 1,397
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<INCOME-TAX> 0
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<DISCONTINUED> 0
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<CHANGES> (98)
<NET-INCOME> (123)
<EPS-PRIMARY> (.03)
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<LEGEND>
THE SCHEDULE BELOW CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF COMMERCE CASUALTY GROUP INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
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<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 0
714
<INVESTMENT-INCOME> 39
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<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
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<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE BELOW CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF COMMERCE CASUALTY GROUP INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 0
<CASH> 6,185
<RECOVER-REINSURE> 1,382
<DEFERRED-ACQUISITION> 671
<TOTAL-ASSETS> 13,413
<POLICY-LOSSES> 2,904
<UNEARNED-PREMIUMS> 3,021
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 1
<OTHER-SE> 1,448
<TOTAL-LIABILITY-AND-EQUITY> 13,413
1,411
<INVESTMENT-INCOME> 74
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 536
<BENEFITS> 1,365
<UNDERWRITING-AMORTIZATION> 420
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (439)
<INCOME-TAX> 0
<INCOME-CONTINUING> (439)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (25)
<NET-INCOME> (464)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
